This Revolutionary Idea Took One Man From Nothing To $8 Billion

Written By
Paul Tracy
Updated January 16, 2021

What if your parents were well off, but they lost it all? 

Would you be able to fight back from that situation and make a lot of money later on? 

Would the lessons you learned early in life help you make money even if you had to start from scratch?

Many of the billionaires we look to for investment ideas had a lot of help getting started because they had rich parents. Rich parents can provide you with a solid foundation -- or even with a fallback plan -- and the stability needed to build even greater wealth.

But things change if your family loses it all. 

George Soros was in this situation. But he managed to find a support system and then develop an investment style (based on speculation) that has led to his becoming a billionaire and one of the most famous investors in history.

How Soros' Family Lost It All

George Soros was born György Schwartz in Budapest, Hungary, in 1930. His mother's family owned a successful silk shop, and his father was a lawyer. However, as Jews (mostly non-observant), things got bad during the Nazi occupation of Hungary during World War II. The family business suffered as the Soros family split up. With fake identities, they each went to live in separate quarters. Soros' father reportedly helped many Jews avoid death by providing them with false identities. Soros posed as the godson of a Hungarian official, and even survived the Battle of Budapest in 1945.

After the war, Soros moved to England in 1947 and attended the London School of Economics. He lived with his uncle, who paid many of his expenses. In addition, he received charitable aid to help him pay for school, and he held different jobs to help pay his tuition. 

He ended up getting a job at a merchant bank, and he completed a Ph.D. in philosophy in 1954.

As part of his coursework, Soros studied under the philosopher Karl Popper. As a result of his studies, Soros developed the idea of reflexivity in markets and began using it as part of his investment strategy.

Reflexivity, Speculation, And Breaking The Bank Of England

Reflexivity, the theory George Soros developed, suggests that the valuation of a market results in a "virtuous or vicious" cycle that can, in turn, affect the market. His philosophy is that the irrational behaviors of market participants influence fundamentals, leading to booms and busts. Soros speculates based on these principles and has, for the most part, been very successful at it.

The biggest trade that Soros is known for was a huge currency bet involving the pound. Back in 1992, Soros borrowed billions of pounds and converted them to German marks. He expected that the pound would crash -- and it did. Because Soros had such a big position, and because his fund sold the pound short, the Bank of England found itself in a tough spot.

Soros was banking on the fact that the Bank of England didn't want to raise rates to match other countries that were a part of the European Exchange Rate Mechanism (precursor to the unified currency, the euro, in 1999). Nor did the BOE want to float its currency. In the end, the Bank of England was forced to withdraw from the Exchange Rate Mechanism and devalue the pound.

Soros was able to repay his lenders based on the lower value of the pound, and he pocketed the difference between the pound and mark. He reportedly made more than $1 billion in profit on his trade, gaining the nickname "the man who broke the Bank of England."

He's made similar moves with other currencies, including being part of the speculation that led to the crash of the Thai baht in 1997. In fact, some countries get a little antsy when they hear that Soros is interested in their currencies. His reputation as a currency speculator -- and one with the wealth to be truly influential -- has governments around the world on notice.

But it's not just currencies that Soros speculates on. He speculates on stocks and commodities as well, and develops hedge funds based on shorting markets he thinks are about to crash. (He also had funds based on expectations of growth.)

While Soros' successes have led to a net worth estimated at almost $8.6 billion as of August 2021, he has had some disappointments. After all, we all make mistakes, and when you're speculating, you're bound to lose sometimes. 

  • He lost in the 1987 crash. But even though his fund lost $300 million, it still had double-digit returns for the year.

  • He lost during the Russian debt crisis and completely misread the tech bubble burst, being premature on his predictions.

  • He bet on a decline in 1999, lost, invested hoping for a rise, and got in just in time for the tech crash, losing $3 billion.

But he had billions to lose.

Soros is also a philanthropist who "invests" billions into charitable causes, particularly those related to education. He was one of those behind MoveOn.org, and he is known for his liberal and progressive politics. Soros is known for funding a lot of liberal causes with his billions.

And, in the end, he has been successful using his style of investing.

The Investing Answer: Huge, leveraged bets can not only lead to big gains, but also to big losses. Most "ordinary" investors don't have the stomach for the type of speculating that George Soros does. 

However, there are ways to invest in more stable securities. By looking at the parent companies of various undervalued "child" companies, it's possible to find hidden gems that can result in solid returns -- without the need for the roller coaster that comes with speculation.

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