Quantum Leap

By 1975 George Soros was beginning to be noticed within the Wall Street community. More precisely, his talent for making money was attracting attention. Few had any doubts that he was destined for greatness.

As Allan Raphael, who worked with Soros in the 1980s, noted: "He worked hard. He saw things. He was aggressive. He just excelled at his profession. This is a business that doesn't necessarily lend itself to logical, rational thinking. It's an intuitive process. It's a business where the sum of your experience can make the difference and I think George is endowed with those skills."

Though some on Wall Street were getting to know him, Soros remained virtually anonymous to the outside world.

With good reason.

Unlike the late 1980s and 1990s, marquee investors went almost unnoticed in those days. At that time, however, the business media was far less zealous in charting every twist and turn on Wall Street. Consequently, it was much less interested in the major personalities in the financial markets-unlike today, when their careers along with their personal lives are intensely scrutinized.

Even if the media had acted more persistently, Soros and most of his colleagues on Wall Street harbored great suspicion toward the media. They wanted as little publicity as possible. Investing was considered a very private act.

Moreover, it was widely assumed on Wall Street that the mere act of attracting publicity would prove a jinx, a kiss of death that, while initially seductive would lead eventually to the abyss. The conventional wisdom had it that the worst fate that could befall a Wall Street investor would be to get his or her face on the cover of a widely circulated magazine. Fame not only had its price, it could be fatal.

So George Soros stayed out of the limelight, a posture with which he seemed perfectly comfortable. "George," said his longtime friend Byron Wien, "has never in my experience with him been selfpromoting even when it would have done him some good to be self-promoting."

But on May 28, 1975, The Wall Street Journal beamed a bright light on George Soros in a largely laudatory front-page story. The headline gave Soros an early taste of public glory:

Bucking Trends: Securities Fund Shuns Wall Street's Fashions, Prospers in Hard Years

Soros Fund Gives Foreigners Big Profits by Spotting Basic Shifts in Industries: Israeli Weapons Yield Clues

Would the Journal article doom Soros? Would he find his luck changing? He himself had a premonition that the media attention would prove damaging-though actually, Soros had every reason to be pleased about the Journal article. Its thrust was to tout Soros for his independent financial mind, asserting that this independence had garnered huge profits for the Soros Fund.

The preparation for the article had put Soros in a foul mood. When the Journal reporter sat down with him for an interview, the investor complained of a chronic bad back, which, he said, grew worse whenever the Soros Fund ran into difficulty. "Money management is about the most merciless business around," he asserted, sounding bitter. "You can't fake it or even let up because the score is kept every single day."

Then, in an intriguing comment, given the incredible and enduring success his fund later achieved, Soros sounded a pessimistic note about the future.

"Who knows how long the Fund will continue to do well? History shows that fund managers all eventually burn out, and I'm sure we will, too, someday. I just hope that it isn't this afternoon."

The story led off with Soros smiling into his stock-quote machine. He was in the midst of selling short numerous shares of a wellknown building-products firm. He expected the stock price to drop. The big institutions were trying to buy all the stock he sold.

"Look at the bank trust departments go after it," Soros smiled. "Why, I just offered to sell some of the stock half a point above the price of the last sale and somebody jumped the gap to grab it."

Over the next few weeks, the stock declined, providing Soros with a nice paper profit. The eager buyers took a loss on that trade. Point of the story? This kind of independence on George Soros's part was standard operating procedure.

In praise of Soros and Rogers, the Journal intoned:

"Over the years the pair has shown a knack for buying stocks before they come into vogue and unloading them at the peak of their popularity. They generally ignore stocks widely held by the major mutual funds, bank trust departments and other institutionsexcept as short-sale opportunities."

Then it was Soros's turn to blow his horn:

"We start with the assumption that the stock market is always wrong, so that if you copy everybody else on Wall Street, you're doomed to do poorly. Most Wall Street security analysts are mere propagandists for company managements, cribbing their investment reports from company annual reports or each other, and rarely uncover anything worthwhile."

Where does that leave George Soros?

Free to engage in his own brand of independent thinking. And was he ever successful!

The large institutions watched in dismay as the value of their holdings was sliced in half in 1973 and 1974. Soros, meanwhile, had marvelous years, showing gains of 8.4 percent in 1973 and 17.5 percent in 1974.

Robert Miller, a close associate of Soros at the time, remembers that Soros "had a knack for finding ideas before they were wellknown and being able to see through all the gray clouds to where the silver linings were He would know exactly why he should or shouldn't buy. The other great ability George has is that when he finds he's in the wrong situation, he'll get out."

One of the Soros Fund's favorite games was shorting. He admitted that he took "malicious pleasure" in making money by selling short stocks that had been institutional favorites. The fund bet against sev

"The stock market is always wrong, so that it you copy everybody else on Wall Street, you're doomed to do poorly."

eral large institutions and shorted a number of favorites. Ultimately these stocks nosedived, making a good deal of money for the fund.

Soros's play on Avon has been considered a classic example of reaping benefits from going short. To sell the shares short, the Soros Fund borrowed 10,000 Avon shares at the market price of $120. Then the stock plummeted. Two years later, Soros bought the shares back ... at $20 each, turning on its head the old saw by selling a nickel for a quarter. That $100-a-share profit earned the fund $1 million. He did it by spotting a cultural trend: Long before Avon's earnings started to plunge, he recognized that an aging population would mean far less sales for the cosmetics industry.

Soros gleefully explained: "In the case of Avon, the banks failed to realize that the post-World War II boom in cosmetics was over because the market was finally saturated and the kids aren't using the stuff. It was another basic change that they just missed."

Soros was able to anticipate mergers in the American railroad industry. And, when others were predicting that New York City would go bankrupt, Soros earned profits in New York City-related bonds. But there were failures, to be sure. At times he placed too much store in the upbeat assessments of company managers during factory tours. The only reason he purchased Olivetti stock was a meeting he held with company officers. He regretted the session. The stock did not fare well.

Speculating in foreign currencies also turned out to be a losing proposition; so did the purchase of stock options. The Soros-Rogers team lost $750,000 on Sprague Electric, believing mistakenly that semiconductor stocks would grow bullish. Explained Rogers: "It was just a case of poor analysis plus the fact that we bought a fringe company in the semiconductor industry rather than one of the major concerns."

Still, their system worked. If the early 1970s proved hazardous for many on Wall Street, George Soros was one of the remarkable exceptions. From January 1969 to December 1974, the fund's shares nearly tripled in value, going from $6.1 million to $18 million. For each of those years it showed a positive record.

Compare this with Standard & Poor's 500 stock index, which, during that period, fell 3.4 percent.

In 1976, the Soros Fund was up 61.9 percent. Then in 1977, while the Dow was losing 13 percent, the Soros Fund was up 31.2 percent.

In late 1977 and early 1978, Soros and Rogers decided again to take positions on technology and defense stocks, a most contrarian view, since most Wall Street traders would not touch those issues. "Remember," said Morgan and Stanley's Barton Biggs, "you had Jimmy Carter as president talking about human rights. George was talking about those stocks 18 months before the street was." Soros faulted himself for arriving late to these stocks, but still he was virtually alone.

In 1978, the fund posted a return of 55.1 percent as its assets grew to $103 million; the following year, 1979, it had a 59.1 percent hike with assets of $178 million. Soros's high-tech strategy was still very much alive-and showing no signs of burning out.

In 1979, Soros renamed his fund. It was now called the Quantum Fund, in tribute to Heisenberg's uncertainty principle in quantum mechanics. That principle asserts that it is impossible to predict the behavior of subatomic particles in quantum mechanics, an idea that meshed with Soros's conviction that markets were always in a state of uncertainty and flux and that it was possible to make money by discounting the obvious, betting on the unexpected. The fund did so well that it charged a premium based on the supply of and demand for its shares.

Inevitably, when someone makes as much money as George Soros has, questions arise as to whether all of his ffnancial activities have been above board. Now and then over the years he has had his runins with the Securities and Exchange Commission, none signiffcant setbacks.

One, however, in the late 1970s, seemed serious.

The SEC brought charges against him in United States District Court in New York alleging stock manipulation. The speciffc charges were civil fraud and violating antimanipulation provisions of federal securities law.

According to the SEC's complaint, Soros drove the price of Computer Sciences stock down 50 cents a share the day before a public offering in October 1977. He allegedly urged a broker to sell Computer Sciences shares aggressively, the SEC said. The broker sold 22,400 of the fund's 40,100 shares, accounting for 70 percent of the activity in Computer Sciences that day, October 11, 1977, according to the suit.

The SEC added that the price of the previously announced offering had been based on the "artificially low" price of trading at the end of the day, $8.375 a share. The Jones Foundation, a California-based nonprofit corporation, had made the offering, agreeing in June 1977 to sell 1.5 million of its shares to the public and another 1.5 million shares to Computer Sciences at the same price as the public offering.

Thus the alleged manipulation could have cost the foundation about $7.5 million.

The SEC said that the Soros Fund bought 155,000 shares from the manager of the offering and another 10,000 shares from other brokers at the lower prices. On the day of the offering and later that month, Soros ordered the purchase of another 75,000 shares of Computer Sciences stock to keep the price at or above $8.375 a share and to induce "others to purchase" the stock, the SEC charged.

The case concluded when Soros signed a consent decree in which he neither admitted nor denied the charges. He contended that it would have cost him too much time and money to fight the SEC. Soros was quoted in a 1981 magazine article, arguing that "the SEC can't believe that one can perform as well as I did without doing something wrong, so they looked for something to latch on to."

The Fletcher Jones Foundation of California also brought suit against Soros, claiming it had suffered a substantial loss because of the declining stock value. Soros and the foundation eventually reached a $1 million settlement.

The case did not shut Soros down. Indeed, it had no discernible effect on his earnings.

Soros did well in the British currency market. He sold the British pound short at the top. He made large moves into British giltsbonds, then in large demand, that could be bought for a mere fraction of their full value. Soros bought a huge number of them, reportedly $1 billion worth. He eventually earned $100 million from that move.

In 1980, 10 years after the Soros fund started, it had an incredible year, with an increase of 102.6 percent; by this time, the fund had grown to $381 million. Soros's personal wealth by the end of 1980 was put at $100 million.

Ironically, the major beneficiaries of Soros's investment prowess, apart from George Soros himself, were a few wealthy Europeans, the same people who had provided the capital for the Soros Fund at its start. "These people didn't need us to make them rich," Jimmy Rogers declared. "But we made them stinking rich."

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