Chapter 7 Chapter 7 Seeing Flowers in the Mist

"Fundamentally, all our views of the world are flawed and distorted to some extent." Approaching the feeling in the first quarter In the early 1950s, when George Soros was a student in London.He was fascinated by how the world works.His ambition is not only to think deeply about the major issues of life, but also to make a major contribution to the understanding of the world. His instructor, Karl Popper, encouraged him to think big questions and come up with a grandiose way of learning.This approach may be beneficial not only to humanity as a whole, but also to the person who proposed it.Soros began to believe in the words of his close friend Bo Rongwen: "The more you can limit your efforts to an abstract field, the better you can do in practice."

Soros' interest in the abstract timely led him to the substantive question of how financial markets work.To understand his theories about financial markets, the best entry point is his general theories about life and society.There is one key word in his thought: Feel. Many people have the same question: what is the meaning of life?Why am I here?How do things—large objects like the universe, brains, humans—move? After thinking about these issues, people return to their own lives, to more practical issues, such as supporting the family, earning a living, remembering to take out the trash, and so on.

Philosophers, however, make these questions their lifelong research subjects.George Soros aspired to be a philosopher. Although no event sparked Soros's philosophical interest, he maintained this enthusiasm for a long time. "Since I have become aware of my own existence," he wrote in the introduction to his 1987 book The Touchstone, "I have had a strong passion to understand it. And I have put my own understanding as the central question to be understood". However, the account given by the young Soros is only the beginning, and the task of solving the mysteries of life is almost impossible.

The reason is simply that even when we begin to examine who or what we are, we must look at ourselves objectively. The difficulty is that we can't. This is Soros' great discovery: "What one thinks is part of one's mind. Therefore, one's mind lacks an independent reference point from which to judge what one does—a lack of objectivity." Soros wrote in his "The Touchstone".This single sentence forms the core of his theoretical analysis.Since no independent reference point can be reached, people cannot grasp the essence and see the world through the undistorted seven-color spectrum.In the early 1950s, Soros concluded that "fundamentally, all our views of the world are somehow flawed and distorted." His focus became how this distortion things.

Chapter Two Armed with a general idea of ​​how the world works, Soros' attention was ripe for the Wall Street district. "To some extent, all our views of the world are flawed or distorted." The problem is that most of those who have attempted to do stock market analysis have concluded that there must be some logic in determining stock prices.This is too disturbing, not to mention, in market operations, if you want to do this, it will give people a lot of mental pressure to take risks. Those who agree with this rational thinking argue that because investors can fully understand a company, there can be a precise price for the value of each share.With this understanding as a weapon, every investor will act rationally and automatically, and when a large number of stocks appear, he can choose the best one.Moreover, the price of the stock can also be kept reasonable by estimating the company's earnings.

This is the high-efficiency stock market hypothesis, and it is also the most popular theory about the operation of the stock market.This assumes a perfect, rational world and that all stocks reflect available dividends. However, when classical economists taught the idea of ​​equilibrium, assuming perfect competition and perfect knowledge, Soros believed he understood better.In the real world, he argued, any theory that can be derived from an assumed perfect knowledge is flawed.In the real world, decisions to buy or sell are based—not on the ideals of classical economists—but on people's expectations.Moreover, in the real world, people's understanding of anything is incomplete.

"My main insight in understanding things in general is that incomplete understanding is at work in forming how we think about things. Traditional economists, based on the theory of equilibrium, hold that supply and demand are in balance. But if You realize the important role played by incomplete understanding, and you realize that you are dealing with problems using disequilibrium theory. Likewise, on another occasion, he wrote that he was "obsessed with chaos. This is how I make money: understanding how revolutions happen in financial markets." In those summers in Ba Island, George Soros gambled like monopoly capital, and since then, he has been completely immersed in the world of money.However, he also occasionally roamed freely in the realm of knowledge, and the practice forced him to study economics at the London School of Economics.

To his dismay, however, he found the knowledge seemed shallow. The professors wanted to convince him that economics was—or at least tried to be—a science.You can develop theories and discover the laws that govern the economic world. But George Soros saw it all.He concluded that if economics is a science, then it should be objective.That is to say, people can observe it without disturbing its range of activities.However, Soros concluded that this was impossible. How can it be possible for economists to think that human beings—who are, after all, the center of all economic activity—lack objectivity?How can economists think that these same human beings are objective when they are included in economic life from the point of view of character and cannot but influence economic life?

The third quarter killer Those who assume rationality and logic in economic life argue that financial markets are always right in the sense that market prices tend to discount — or take into account — future developments, even if these are ambiguous. That's not true, Soros said. He once explained that most investors believe that they can deduct future interest from the market, that is, take into account future developments before they happen.In Soros' view, this is impossible.He argues that "any view of what the future will look like is bound to be biased and one-sided. I am not claiming that facts and beliefs exist spontaneously. On the contrary, I elaborate on the theory of feedback to demonstrate that What beliefs do change facts."

"Market participants not only operate with opinions, but this opinion affects the development process of events." In fact, market prices are incorrect because they ignore the likely and imminent impact of future developments. Market prices are generally wrong because they provide not a rational view of the future, but a biased view. "However, this distortion works in two directions," Soros insisted. "Not only are market participants operating with a bias, but their bias can also affect the course of events. This will give There is an impression that the market participates precisely in future developments. But, in fact, the market provides a current expectation that is not responsible for future events, but future events that are generated by current expectations. The participants feel that inherently defective, and there is a bilateral connection between the feeling of defectiveness and the actual course of events, which lacks correspondence between the two. I call this two-way connection feedback" .

"Investors' perceptions of a stock, whether positive or negative, can cause stock prices to rise or fall." This two-way feedback between perception and reality—what Soros called "feedback"—became the crux of his theory.Soros firmly believed that it was not the efficient market hypothesis that could explain the behavior of financial markets, but the rebound relationship that existed between investors' perceptions and the factual process he called events.The true course of events is another maxim of the economic foundation of the company. Soros believes that investors' opinions on a certain stock, whether positive or negative, will cause the stock price to rise or fall.This bias operates as a "self-reinforcing factor" that interacts with "fundamental tendencies" to affect investor expectations and thereby cause stock price movements, which may lead operators to buy more shares or to Acquisitions, acquisitions, or shorting of inventories, in turn affect the fundamentals of the stock. The price of a stock, then, is not determined by reacting sharply to the information it receives.Rather, it's the result of feeling as much emotion as hardware.As Soros wrote in "The Midas Touch": "When there are thinking participants in the event. The subjective matter is no longer limited to the facts, but also includes the participants' feelings. The causal chain is not directly from fact to fact. , but from fact to feeling and from feeling fact." Soros's theory includes the argument that the price investors pay is not a simple negative response to the value of the stock but takes into account an active combination of stock values. The second key to Soros's theory is to grasp the role of illusion in shaping an event.I feel that, at times, what Soros calls them, the discrepancies between the minds of the participants and the real state of things are often present. Sometimes the difference is small and self-correcting, a situation Soros calls quasi-equilibrium. Sometimes the difference is large but self-correcting, a situation he calls far from equilibrium. When the discrepancy is great, and perception and reality are far apart, there is no artifice to bring the two closer together; in fact, external forces can only separate them. This far-from-equilibrium situation takes two forms.At one extreme, the situation is stable even though the perception is far from reality.A stable situation does not appeal to investors like Soros in the slightest.At the other extreme, however, the situation is fluid and events move so rapidly that the minds of the participants cannot keep up with the situation.This situation held particular appeal for Soros. The gap between perception and reality is very wide, because the situation has gotten out of control, which is a typical "boom and bust sequence" in financial markets.Soros sees these sequences as manias, "these processes are at first self-reinforcing, become intolerable, and thus eventually reverse. "Because markets are often in a state of volatility and instability, rich-bust sequences tend to arise. The potential for such a "boom-bust sequence" is often present.Soros's investment philosophy believes that because the market is often in a state of volatility and instability, a "boom-bust" sequence is prone to occur.The way to make money is to find ways to capitalize on this instability, to seek unexpected developments. The hard part, of course, is identifying a "boom-bust sequence".To identify this sequence, investors must understand how other investors hold the fundamentals of the economy.It is the essence of Soros' investing technique to be able to read the market -- all of these investors -- and think at any given time. Once an investor understands the market, it is possible for him to branch out and bet on the unexpected, assuming that a "boom-bust cycle" is about to happen or has already begun. How to grasp a "boom-bust sequence"? On April 13, 1994, Soros made a brief note, such as disagreeing with "general wisdom," before appearing at a meeting of the Banking, Finance, and Urban Affairs Group.Most people believe that financial markets tend toward equilibrium and can accurately discount the future.Soros argued that financial markets cannot accurately discount the future because they not only discount the future but also contribute to its formation. " "Once you understand what's going on in the market, you can be aggressive in other ways and bet on those unexpected events." At times, financial markets can influence the basis of equity offerings, although the market should only reflect them, he said. "When this happens, the market enters a dynamic state of disequilibrium in which behavior is radically different from the general state envisaged by efficient market theory." This "boom-bust sequence" doesn't happen very often.And when it does, because they affect the fundamentals of the economy because they're destructive.The "boom-bust sequence" occurs only when the market is dominated by the following inclination behavior. "Trend-following behavior, and here I mean people acting in a self-reinforcing way, buying when prices go up and selling when prices go down." "Trend-following behavior on one side of the trend is necessary to produce a strong market failure, but not sufficient to make it happen. At this point, the key question you have to ask is, how did trend-following behavior occur?" George Soros' answer: A sense of flaw causes the market to breed itself. Market self-cultivation is another way of saying investors fall into blind mania or blind herd mentality. The market's feverish self-cultivation often overreacts and often goes to extremes.This overreaction—going to extremes—caused a "boom-bust sequence." "The sense of inadequacy causes the market to breed itself, and the market's frenetic self-cultivation often overreacts." Therefore, the key to investment success is to grasp the opportunity when the market starts to cultivate itself, because by identifying this opportunity, investors will know whether a round of "boom-bust sequence" is about to start or has already been carried out.As Soros said: "The reason why the projection process follows a dialectical pattern can be explained in general terms: the more unstable the market situation, the more easily people are affected by the market trend; the greater the investment affected by the market trend." , the more unstable the market situation." The main stages of a typical boom-bust sequence are: ● an as yet unrecognized tendency; The beginning of the self-reinforcing process; ● Successful testing of market direction; ●Self-confidence is getting stronger and stronger; ●The gap between the perception of reality; • Eventually, the initiation of self-reinforcing sequence mapping in the opposite direction. Soros also argued that investment transactions make more sense when a tendency persists.Moreover, we see that tendencies follow closely, so that the stronger the tendencies, the stronger the prejudices.Finally, the process begins when a certain tendency becomes fixed. Bo Rong.Wen is an American equity investment strategist in the Morgan Stanley area of ​​New York and a close friend of Soros. He expresses Soros' theory in simple language: "His point is that things go well, and then, they go bad. You should know that when things go well, it's going to go bad. Simplify his theory, the bottom line is Recognizing that this change in trend is inevitable. The key point is to identify the turning point." Money goes to other buyers, which in turn leads to higher prices.Finally, prices climbed high.The same is true of the market, which is unstable and exceeds the face value, and the price is still not rising.According to Soros' feedback theory, collapse becomes inevitable. The fourth node stone into gold George Soros was an unorthodox investor. He does not operate financial markets according to traditional rules. While others do.They believe that the world and everything in it is rational. including financial markets. Soros was only interested in the rules of the game if he wanted to know when those rules were going to change. , because when these rules change, they can trigger a feedback relationship that can start a "boom-bust sequence." George Soros constantly monitors financial markets, searching for a "boom-bust sequence".Knowing that financial markets occasionally characterize these feedback relationships, Soros felt he was better equipped than anyone else in the investment community to weather the storm. Despite this investment secret, it may not be guaranteed that Soros will always make a profit.From time to time, questions arise that have nothing to do with his investment potential.From time to time, questions arise that are closely related to his investment potential. For example, sometimes.This feedback process simply does not exist.Or, those processes existed, but Soros did not discover them in time.Worst of all, Soros sometimes searches for this feedback process and finds it, only to find that the moment of identification has been missed. Occasionally, Soros made investments without regard to how a particular market worked—that is, whether or not the feedback process was going on.However, he is always looking for a feedback process.When he found one and was able to exploit it, he made a huge profit. Soros admits that his theory doesn't quite apply.He doesn't think his feedback theory promises to explain how to make money in financial markets.Its aim was more ambitious, and he thought that his feedback theory could explain more clearly how the world worked. This is the philosophical thinking of George Soros, not the investor-like thinking of George Soros. "I believe that participant bias is a key to understanding the entire course of human history as a thinking participant. Just as genetic variation is the key to understanding biological evolution." Soros knew, however, that taking his theory to such heights was an illusion.However much he wanted to be different, he was greatly disappointed that he could not deliver a monumental discovery. This theory is still flawed.He himself was not sure what "participants' imperfect understanding" meant.Moreover, his theory does not help to make correct predictions. In the end, Soros ruefully admits that his theory, while "workable and interesting," does not yet qualify as a true theory for his ideas about the causality of participants' biases.It's too broad.If his theory is to be useful, it must explain when the "boom-bust sequence" occurs.However, it cannot do this. Is Soros not being honest about the scope of his theory, nor is he.He expected too much from his theory.And when those expectations didn't materialize, he should have kept quiet, but he didn't.Although he didn't propose a one-size-fits-all theory, he did believe his findings were partly useful. "My approach helps describe the uncertain state of the current financial system." Responses to Soros' feedback theory have varied - some find it complex and difficult to understand, others understand and are impressed.Among the perplexed were some who had worked with Soros for many years.One of them was Robert Miller, a senior vice president at Idhold Brechelder who had been working with Soros since the 1960s. Biographers have attempted to understand Miller's understanding of Soros' theories. The results are frustrating. Biographer: Did you discuss this theory with him? Miller: Not much talked about. Biographer: Have you read "The Touchstone"? Miller: I saw part of it. Biographer: Can you talk about what this theory has to offer people? Miller: (suddenly laughing) Probably not. When it comes to this theory, others find it plausible. William Dorge, senior vice president of Impartial Investigations and director of investment strategy at New York City-based Dian Anwitt Reroud, admits he hasn't read Touchstone, but he believes Soros's feedback theory is perfectly valid. Believable. "What George is pointing out is that the price of the stock is far from the real value, so there is an opportunity to make money." In May 1994, seven years after "The Touchstone" was published, Soros' profile in the business world was higher than ever.As a result, the paperback edition of the book was reissued with a new preface.In this preface, Soros said that he wanted to give a new explanation of feedback theory to make his original meaning clearer and easier to understand. " "In "The Midas Touch", he writes, the theory of feedback I've come up with seems to apply at all times.In terms of two-way feedback dynamics, this is a sign that feedback theory is at work at any time, and in this respect it is correct.But to say that feedback theory works at all times is not true in another sense.In fact, in many cases, it is so pale that it can be completely ignored. Soros also made a second elaboration: "The general point of my book is that the value judgments of the participants are often biased, and that this prevailing bias affects market prices." Not worth a whole book. "My point is that there are cases where these biases affect not just market prices, but the so-called fundamentals of the stock, which is when feedback becomes important. It doesn't happen very often, but, when it does, the market The price then becomes a different model. The market price also plays a different role, it not only reflects the so-called basis; it also becomes the basis itself, forming the new price." Soros blames those who have read the book in part or in whole for grasping only the first point—that popular prejudices affect market prices—and ignoring the second—that popular prejudices, under certain circumstances, also Affects the so-called basis, and changes in market prices themselves cause changes in market prices. Soros blamed himself. What he should have done, he conceded, was not to come up with a general theory that what was lacking in feedback was a particular case.Instead, feedback should be treated as a special case.Because the main characteristic of feedback is that it occurs only sometimes. His main excuse is that he has observed feedback; not first in financial markets, but first as a philosophical category.He concedes that he might go too far by sticking to a general theory of feedback.He went on to write that he was wrong to regard economic theory as wrong.If the feedback happens only intermittently, then it should be true that economic theory is only occasionally wrong. george.What is the value of Soros' feedback theory?If Soros does not gloss over this argument by admitting that he does not sometimes adhere to it; that sometimes people respond to financial markets in a way that animals in the bush respond to their environment, then the question much easier to answer.It is not clear to him himself what he really meant by these statements.And, on other occasions, he testified that financial market conditions were about to deteriorate as the pain in the lower back kicked in!Episodes of low back pain appear to have only a limited purpose, as an early reward system.This does not help identify what events will befall the market.However, once Soros identified impending trouble, it was as if he had taken an aspirin. His back pain suddenly disappeared!