Monday, 22 February 2010
I had an appointment to interview legendary financier George Soros who was in town recently. A colleague asked me to get some financial tips from the man who made billions in the stock market during past crises while others got burnt. If anyone got any fail proof investment strategies, this veteran market player would certainly be the man. Since the world is still reeling in the midst of a global financial crisis (I just got back from Europe where the Euro is taking a beating from the debt crisis in Greece), I thought I better acquaint myself with the wherefores and hows of the recent financial market meltdown.
So I got hold of George Soros’ book with the suitably cogent title ‘The new paradigm for financial markets: the credit crisis of 2008 and what it means’ and was ready for an expounder on supply and demand, bullish and bearish market sentiment and so on and so forth that reflects the workings of a capitalist economic theory, or something along those lines. Soros after all should know. He has made so much money in the market he is now happy to spread it around in philanthropic activities.
The ‘what happened’ part of the credit crisis is relatively straightforward. There was a credit crisis because people who were given credits to buy houses in the US, couldn’t pay their loans back. Why was there a whole financial market meltdown? Because the banks that gave the loans to those people sold their debts to the global financial markets as investment products with the belief that house prices would continue to rise. Why did financial institutions invest in the stocks? Because stock prices were on the up and up investors were feeling pretty bullish about making piles of money.
Why did the market collapse? Because the debtors couldn’t pay their housing loans back and suddenly there were a lot of houses in the market which brought down house prices so the credits went toxic and blew up taking the real economy along with it. Those caught up in the game, which was practically everybody in the US who had debts, got affected.
In other words, that’s the way the market works. People buy or sell. Make money or lose money. The trick is in knowing when to buy or sell. We have had booms and then busts in the past and will continue to have them in the future because the economy is very scientific and a knowledge privy only to smart economists who created the theories.
While the government, who don’t feel as smart as the economist, are afraid to interfere in the free market because those theories have formed the very definition of capitalism since the days of their grandfathers.
At least, that’s my poor naïve understanding of what went on.
Getting advice directly from the financial wizard who had succeeded in using the market rules to his advantage and who managed to survive busts with relatively few bruises if not downright profit, was a priceless opportunity. What are the secrets of a successful speculator? How to get perfect knowledge of the market and make accurate predictions about the future?
Reading the book and then finally meeting the person however, I got a revelation: In the sense that the encounter revealed less about the workings of the financial markets but more about the mind of George Soros. The financial markets according to him, do not function according to prevailing theories of economic scientists that set out that markets behave in a certain way that could be predicted.
On the contrary, most of the time both the markets and the regulators don’t really know what’s going on. This is because financial markets are human activities and humans can’t really make generalization about their activities without bias or subjectivity. In other words, nobody can make accurate predictions about how markets will behave. So how could economists make theories or governing laws about something that are based on misconceptions.
The new paradigm he offers is one based on accepting that markets are fallible because we’re humans and humans, even though we think and analyse a lot, are fallible. He calls the concept ‘reflexivity’. Or something like that. After all, I’m human too and my understanding is most likely imperfect.
Is this a new economic theory? No. It’s a philosophy. Take note people, George Soros is not an economist or even a financial guru. He is a philosopher. Now, we know.
So how about that investment advice that could make one as successful as him?
I suppose since the only certain thing about financial markets is uncertainty, trusting your luck, hunches and making guesses are just as good tips when investing in the market as any expert financial advice. After all, the small print always says that past performances are not indicators of future performances and prices can down as well as up. Which is a clear indication that the free market really is blind.
Which makes me think the safest place to invest my money at the moment is in my piggy bank and the best place to borrow money from is my sister.
(Desi Anwar: First published in The Jakarta Globe)