Staying Ahead of the Curve George Soros with Byron Wien and Krisztina Koenen To all the people, in and out of my foundation network, who are working to create an open society. PREFACE This book has its origin in an extended interview conducted by Krisztina Koenen, a journalist working for the Frankfurter Allgemeine Zeitung and published in German. Originally John Wiley & Sons wanted to publish an English translation but I decided to embark on an entirely new version. I found the interview format congenial and the project grew into a major undertaking. The outcome is a summing up of my life's work: The first part deals with my personal background and my career as a fund manager, in interviews conducted by Byron Wien, an old friend who is the investment strategist for Morgan Stanley. The second part deals with my political views and my career as a philanthropist in interviews with Krisztina Koenen; and the concluding part with the philosophy which guided me both in making and spending money, again with Byron Wien. I reworked the material until it became like a Socratic dialogue. I tried to explain who I am and what I stand for. The philosophy is not about money, it is about the human condition. I have used financial markets as a laboratory for testing my theories. I also got an opportunity to put my ideas to the test in connection with the collapse of the Soviet empire. I believe I have something important to say. It is also important that I should be able to communicate it because my belief in what I call "open society" does not make sense unless it is widely shared. As I finish the book, I feel I have succeeded. My editor, Myles Thompson, wanted to steer me towards an audience interested in financial markets and I did not resist him unduly because I am very interested in financial markets myself-especially at the present juncture when dynamic disequilibria abound. But I am aiming at a wider audience. I very much hope that those not interested in the financial markets will also find the book worth reading. I have shown the manuscript to the following people: Ken Anderson, Stan Druckenmiller, Dan Eule, Arminio Fraga, Sue Frunzi, Gary Gladstein, Karen Greenberg, Bohdan Hawrylyshyn, Julia Jurys, Ari Korpi-vaara, Annette Laborey, Aryeh Neier, Bill Newton Smith, Istvan Rev, Nick Roditi, Susan Weber Soros, Paul Soros, Jonathan Soros, Miklos Vasarhelyi, Bill Zabel, John Zwaanstra. I want to thank them for their comments but I take sole responsibility for the contents of the book. I would like to thank Emily Loose for her editorial assistance, as well as Frances Abouzeid, Sheila Otner, and Shawn Pattison for their help. GEORGE SOROS July 1995 CONTENTS PART ONE Investing and Global Finance with Byron Wien Chapter 1 The Investor 3 Life at the top with Warren Buffett • Strengths of Quantum Fund • Derivatives • Leveraged to the hilt • Measuring risk • The first hedge fund • Intuition as an investment tool • Soros as the insecurity analyst • The making of a money manager • Going against the herd • Characteristics of good investors: character and intelligence The messianic complex • Risk taking as the essential ingredient • Formulating a thesis for investing • Different ways to skin a cat • Finding the right management team for Quantum Fund Maintaining performance and monitoring the thesis Damage control-correcting a loss • Disengaging from active money management • Who really runs Quantum Fund? Netting $1 billion on sterling • Losing big on yen Attracting the best talent Chapter 2 The Guru in Training 25 Parents as personal influences • Tension as a driving force in life • Family history Nazi persecution-the communist regime in Hungary • Assuming a false identity to stay alive The journey to England • Other influences: his brother, Karl Popper, Andrei Sakharov, Vaclav Havel, Bronislaw Geremek, Grigory Yavlinsky • Soros as salesman • Working in the "box" • Getting to Wall Street • International arbitrage The first big career breakthrough-trading European securities • The Interest equalization tax-an end to trading European securities • Impact of his philosophical ideas on investing and politics • The beginning of Quantum Fund Chapter 3 The Story of Quantum Fund 47 The early years of Quantum Fund-starting out with $12 million • Working with Jim Rogers • Early investments • Breaking up the partnership • Dealing with a life crisis Coming to terms with success Loosening the constraints Growing the fund from $100 million to $400 million Taking the first big loss • Searching for a management team • Dropping the guilt and hangups • The Real Time Experiment explained-conducting a study to influence the results • The Alchemy of Finance • The Plaza Accord Taking a hit on Black Monday • Building an effective management team • Stanley Druckenmiller • The second worst year in history • Quantum Fund today Chapter 4 The Theory of Investing 65 A framework for investing-reflexivity • Far-from- equilbrium conditions • Reflexivity defined • Boom/bust sequences • The boom/bust pattern explained • The pattern applied to the Soviet Union and the U.S. banking system Chapter 5 Theory in Action 79 Boom/bust applied to today's financial markets • The Sterling crisis as a pointed example • How it happened • Breakdown of the Exchange Rate Mechanism (ERM) • Thoughts on currency speculation • Another period of currency volatility • Playing the Japanese market • Ministry of Finance (MOF)-the kingpin of the power struggle • The U.S. market: good and getting better • Thoughts on the Mexican currency crisis-Explaining the peso crash Argentina and Brazil • Risk and reward in China • Today's weak dollar • Excessive volatility with no constituency to deal with it Regulating derivatives PART Two Geopolitics, Philanthropy, and Global Change with Krisztina Koenen 109 Chapter 6 The Philanthropist 111 Giving away millions in Europe • The motivation behind the philanthropy • The Open Society Fund Philanthropy with a policy purpose • A commitment to South Africa • Supporting Eastern European dissidents Foundation reach into Hungary • Balancing Foundation efforts and Quantum Fund activity • Foundations in 25 countries • Notable successes and huge failures Adapting to the changing political climate • The danger of becoming too strong • The Soros Foundation of today Central European University • Conflicts of interest in Eastern Europe • Redefining Foundation purpose Chapter 7 The Stateless Statesman 151 The economic future of Eastern Europe • Optimism for Central Europe • The Soviet demise • The future of Russia • Ukraine and Macedonia Poland as a model for economic growth and social reform Observing the process of change • The fate of Romania • Redesigning Western assistance programs • Changing the course of history in Eastern Europe-marginally Chapter 8 The Future of the United States and Open Society 177 Switching focus • Adjusting to the new world order • A disappointing response to the crisis in Bosnia • An amended version of freedom • Open society versus laissez faire • The coming disintegration of Europe • An identity crisis for the U.S. • The failure of the United Nations and NATO • The role of the U.N. in today's conflicts • A looming crisis • The collapse of international financial markets • The meaning of money • Exploring the drug debate • Project on death Having too much power PART THREE Philosophy with Byron Wien 207 Chapter 9 The Failed Philosopher 209 A belief in your own fallibility • Flawed mental constructs • Reflexivity • Participants cannot act on the basis of knowledge • A new theory of truth • Heisenberg's Uncertainty Principle • Uncertainty in human affairs Social science as a false metaphor Near-equilibrium and far-from-equilibrium conditions • The boundary lines Open and closed societies • No grand pattern of history Regime change • Deficiency of values in open societies Fallibility as a basis for values Chapter 10 The Power and the Myth 237 Finding a forum • Gaining access to the policy makers • George Soros as a Jew • The power to move markets • Panned in the press • The adventure of ideas • An actor on the stage of history Dealing with the complexity of world problems • A last chance for self-revelation Appendix Selected Writings by George Soros 251 Open and Closed Societies • Prospect for European Disintegration • Hedge Funds and Dynamic Hedging Index 323