This Legendary Investor is Preparing For a Big Downturn - Should You Believe Him?

Undoubtedly one of the best investors living, George Soros is upping his game in preparation for a big market correction. Should the average investor do the same?

Mar 8, 2014 at 12:00PM
Soros Irekia

Source: Flickr/Irekia

Each quarter, Main Street investors get a glimpse of what portfolio moves the pros have made in the past few months. One of the greats, George Soros, has been preparing his Soros Fund Management LLC for a big market correction -- should you do the same?

The man
George Soros is one of the most successful hegde fund managers of all time. His Quantum Fund has returned over $40 billion to investors since its inception, including $5.5 billion last year alone.

Working with funds since the late 1960's, Soros has had plenty of time to study the market and its temperamental moods.

In fact, before opening his first fund, Soros developed the theory of reflexivity: see share prices rising? Market sentiment would be positive and entice new investors to the table, increasing buying and driving prices higher. This happens until the scenario is no longer sustainable and then a new negative sentiment drives action in the opposite direction.

So it goes, on and on in the "virtuous or vicious" cycles.

Predicting the future
Soros is highly sited for his 2008 prediction of a "superbubble" that had been building for 25 years and was ready to pop. With quick and decisive action, Soros had hedged his fund's portfolio, ultimately leading to a 32% -- or $4 billion -- return for 2007, a year when the S&P 500 index recorded a 5.5% return.

So given the all-time highs reached by the market's biggest indexes over the past year, there are plenty of investors convinced that a big correction is on the way -- and George Soros is one of them.

During the fourth quarter, Soros's fund more than doubled down on its bearish position for the S&P 500, increasing its holdings of put options the SPDR S&P 500 ETF, which tracks the index. The increased value of the puts make it the fund's largest position, commandeering 11% of the funds holdings, or $1.3 billion.

Approach with caution
When investors see a professional making such drastic increases in his fund's position on a bearish outlook for the market, it can be tough to avoid getting overly jumpy.

But before you take drastic measures to hedge against the possibility of a market correction like these two pros, remember this: George Soros predicted three market collapses and only one actually materialized.

The New Paradigm was Soro's third book predicting doom and gloom for the market. The first two, The Alchemy of Finance (1987) and The Crisis of Global Capitalism(1998), included stout arguments for collapses that never occurred. Even Soros acknowledge his proclivity for crying wolf, saying that after "the boy cried wolf three times ... the wolf really came."

The lesson for investors is that, while professionals have opinions about what will happen, not a single person on the planet knows exactly how the market will act in the coming days. Of course a correction will happen, ups and downs are inevitable, but trying to time the market can lead you down a very expensive path littered with losses.

So what do you do?
With the Soros fund holding its largest position in the put options, it may be grossly overestimating the chances of a correction. In fact, the S&P 500 finished 2013 up 30%, before having a rough start to the year. Even with sharp declines in late January to early February, the index is up 0.75% year to date, and has gained over 8.8% since the beginning of the fourth quarter 2013.

Luckily for Soros, his fund can absorb some of the risk that comes with rising price of the index. You on the other hand, would likely lose you hat if you followed the Soros plan to the letter.

Instead of trying to take predictive/protective positions in the market, focus on the long-term approach of investing. Find companies with stable operations, good management, and staying power. If you hold on to these types of investments through a downturn, their value will likely return to normal in time.

One investor who has got it right time and time again
It's no secret that professional investors can offer some great advise when it comes to your personal investing methods. Perhaps the greatest investor living, Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Jessica Alling has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information