George Soros Gives Away His Fortune

George Soros gives away his fortune... Why Soros was the greatest investor ever – and how he did it... What's an 'Open Society'?... How reflexivity is influencing 'crypto' assets...

George Soros is 87 years old...

He retired from active fund management in 2011 and stopped managing his personal wealth in 2015. This week, he disclosed that he has completed transferring the bulk of his remaining wealth – almost $20 billion – to his Open Society Foundations.

Soros is reviled by many of our dear subscribers. He has made large contributions to the Democratic Party in the United States (and in particular, to Hillary Clinton). I (Porter) would wager that no politician is more despised by our subscriber base than Hillary... and certainly no financier more hated than Soros.

Therefore, it makes perfect sense that I'm writing a Friday Digest to explain why Soros is the greatest investor of all time, and why his philosophy is so important to investors.

To everyone in our customer service department, I apologize. I'm certain this one essay will cost us more subscribers than anything I've written. Thousands of subscribers will cancel. Maybe tens of thousands. They won't get the irony...

Soros has generated more than $45 billion in profits from his investing activities...

That's more than money that anyone has made from investing except hedge-fund legend Ray Dalio. Soros, however, accomplished these profits with far less capital and far fewer clients. He also did it while giving away almost $1 billion a year for the last 20 years. So regardless of whether you agree with Soros about Hillary, you should at least understand his methods and investment philosophy.

Soros was greatly influenced by philosopher Karl Popper and his book, The Open Society and Its Enemies. Popper's core idea was that truth – the ultimate truth – was inherently unknowable. Ideologies that claimed to know "the truth" – such as communism or Nazism – could only impose that view upon society with force. These societies are doomed to fail.

Popper saw that societies are made up of different interest groups, all of which were in competition with each other. To remain a healthy and vibrant society required strong civil institutions and the rule of law to make sure that no one group was allowed to dominate the others. These "Open Societies" would allow humanity to flourish and reach its full potential.

We've long admired Popper's work. I suspect most readers who hate Soros simply don't understand (or don't care about) his philosophy. In any case, Popper's core idea – that "the truth" is unknowable – has a special meaning in financial markets. This is where Soros greatly added to Popper's philosophy, creating a unique way of viewing the markets that led to incredible amounts of wealth.

Soros figured out two things...

One, being around the markets taught him that the "perfect information" he learned at the London School of Economics was pure hokum.

Modern economic theory is based on the idea that the market, as a whole, has perfect information. That assumption is fundamentally wrong for two reasons.

First, most of what investors think they know simply isn't true. Take the "Peak Oil" theory most investors believed in over the last decade. That idea was priced into the markets and led more than $1 trillion to be invested in mostly marginal oil projects. But the idea was completely wrong... And most of those bets led to losses.

Figuring out that investors are often completely wrong isn't exactly a breakthrough. What makes Soros a genius, and what made him into the world's greatest investor, was that he figured out something else... something completely new. He realized that despite being wrong, investors could still influence reality to the point where they could even become right.

He called these phenomena "reflexivity."

Soros began his Quantum Fund in 1973, just as the U.S. was coming completely unglued from the gold standard...

(Gold ownership wasn't legalized in the United States until January 1, 1975, which ended the government's control over the price of gold.) Without this peg to reality, our currency began a long-term decline in purchasing power and credit began its enormous expansion.

Both of these structural changes have greatly increased the power of reflexivity in our markets... And they led to an immense increase in the value of financial assets relative to wages and profits. In short, Soros' philosophy was the perfect way to understand the new financial structure... And he understood it long before anyone else. That gave him a huge advantage in the financial markets.

As Soros wrote in a 2009 piece for the Financial Times...

I can state the core idea [of reflexivity] in two relatively simple propositions. One is that in situations that have thinking participants, the participants' view of the world is always partial and distorted. That is the principle of fallibility. The other is that these distorted views can influence the situation to which they relate because false views lead to inappropriate actions...

In the real world, the participants' thinking finds expression not only in statements but also, of course, in various forms of action and behavior... The participants' views influence the course of events, and the course of events influences the participants' views. The influence is continuous and circular; that is what turns it into a feedback loop.

Consider how this plays out in the real world...

Many people believe that carbon emissions are causing the climate to warm. Is this true or false? No one can really, truly know (despite all claims to the contrary). All we can do is test the hypothesis. We also can't know if a slightly warmer Earth would be "good" or "bad." If the government decides this is true and uses force to dictate how this idea will influence society, it's likely to have a negative outcome. On the other hand, if this idea is debated in civil society, reflexivity is likely to heavily influence the outcome.

So for example, when a carmaker announces it's going to build electric cars that will help solve the problem of global warming, many people will believe in this solution. Their support will enable the company to gain access to credit. Eventually, people will boost the company's share price. While many market watchers will say the stock is "overvalued," in reality the higher stock price will allow the company to continually raise more additional capital, keeping it in business.

What explains Tesla's (TSLA) success and its current market value? Not the company's profits. It has none. Nor is it any rational view of what Tesla's profits are likely to be in the future.

The only way to understand Tesla's valuation is through reflexivity. People's ideas about these cars – that they are the future – have caused a huge bubble in Tesla's financial standing. That, in turn, has allowed the company to grow faster than expected and increased its odds of success.

That's how reflexivity works in an open society and our financial markets.

What should you do with this information?

First, if you want to learn more, I suggest reading Soros' 1987 book The Alchemy of Finance, which explains the theory in much more detail.

Second, you should understand that reflexivity doesn't occur where there are clear-cut facts. So if someone says, "It's raining outside right now," participants don't have much to think about.

On the other hand, when someone suggests that virtual currencies are the future of monetary systems, you can bet that reflexivity is going to play a huge role in the outcome of that idea in an open society.

And that means the success of that idea will be determined more by what people believe than by what clear facts dictate... or what previous outcomes would suggest. That's especially true in a global economy, where credit is unlimited and currencies are fiat. In this environment, reflexivity is "nuclear powered." Practically any idea could become true, given enough money and credit... even spaceships to Mars and solar panels on every roof in America.

Putting these ideas in a kind of shorthand, people often said that Soros succeeded because he found the idea that was false... and then bet big on it. There's more to it than that, of course... But that's close enough to help inform your trading.

I met Brendan Blumer this week...

Brendan is the CEO of a blockchain-technology company called block.one. The company is pioneering the use of blockchain technologies to create new, user-owned, user-controlled software applications. The idea is revolutionary and hard for most people to wrap their heads around because it's an entirely new form of commerce – one that lacks a central controlling firm.

Many economists have theorized that in the absence of transaction costs and in a world of perfect property rights, we wouldn't need a firm to exist. (See the late British economist Ronald Coase's work, "The Nature of the Firm," and "The Problem of Social Cost." He was awarded the Nobel Prize in Economic Sciences for these ideas in 1991.)

Blockchain technology provides perfect property rights. And the use of massive computer networks enables virtually cost-free transactions. In other words, technology has finally enabled what these business theorists long dreamed about. That's what makes these ideas so powerful and ripe for a reflexive outcome.

Brendan and his team have built a platform that enables developers to build enterprise-worthy and massively parallel blockchain applications that can handle colossal numbers of transactions every second. The software is called EOS. And rather than license the software to its users or sell subscriptions to access the platform, they've instead sold "tokens."

These tokens dictate who will be allowed to build applications (like a mortgage registry) on the EOS blockchain and how they'll be compensated.

But just as important, these tokens don't convey any ownership of the blockchain. That's because this is a new form of commerce, one that doesn't exist because of a firm. This new environment will only exist because its users have decided it's a great platform and they've decided to build their applications on it.

These tokens – the EOS blockchain and Brendan's company, block.one – are almost completely a product of reflexivity. Users have decided that this software is great. As a result, they've bid heavily to buy these tokens, which are released in batches every 23 hours. So far, block.one has raised $500 million in token sales. This income can be used to build applications on the EOS blockchain, making it far more likely that it will succeed.

All of this is fascinating and deserves careful study. This new world of open-source software controlled by its users (rather than a firm) promises intense and severe competition for many of the world's most dominant businesses today.

Consider a Facebook application on the EOS blockchain, for example. Facebook would no longer own your content. And users whose posts and pictures generate the most page views would receive the advertising revenue they generate because there's no firm to keep the profits.

Meanwhile, the Financial Times says investors have foolishly spent hundreds of millions of dollars buying "nothing."

Someone is going to be very, very wrong...

It will either be the Financial Times or the pioneers of these new crypto assets. One thing though is certain, though: Reflexivity will have far more to do with the ultimate outcome than any objective analysis of the what the "facts" are today.

That's the lesson of Soros. And I hope you'll learn it well.

One final note...

I met Brendan at our offices in Baltimore. He's a kind and brilliant young man whose efforts in the crypto world stretch back to the mid-2000s. He is by far the most successful entrepreneur in the space. And his knowledge is encyclopedic. He knows all of the key programmers. He knows which of the platforms (like EOS) are likely to succeed... and which ones are garbage.

If you're going to learn more about crypto assets, he's the first person you should talk to. And I was thrilled that he was willing to sit down for a two-hour discussion with me and Tama Churchouse, a block.one investor who also edits the brand-new Crypto Capital newsletter produced by our affiliate publisher Stansberry Churchouse Research. You can listen to the entire interview for free by clicking here.

New 52-week highs (as of 10/19/17): AbbVie (ABBV), AMETEK (AME), Allianz (AZSEY), Becton Dickinson (BDX), CBRE Group (CBG), iShares MSCI Singapore Capped Fund (EWS), iShares U.S. Home Construction Fund (ITB), Johnson & Johnson (JNJ), JPMorgan Chase (JPM), McDonald's (MCD), Microsoft (MSFT), AllianzGI Equity & Convertible Income Fund (NIE), NVR (NVR), Overstock.com (OSTK), PowerShares High Yield Equity Dividend Achievers Portfolio Fund (PEY), ProShares Ultra Health Care Fund (RXL), ProShares Ultra S&P 500 Fund (SSO), and Travelers (TRV).

In today's mailbag, several subscribers share their opinions on our first-ever cryptocurrency webinar last Wednesday. We'd love to hear from you, too. Send your thoughts to feedback@stansberryresearch.com.

"This was the best ever workshop I have attended from Stansberry. The agenda was clear, the presentation was excellent and the sound worked perfect. However, since I am 88, bitcoin will be for younger persons But I believe it will outlive me." – Paid-up subscriber Margrit K.

"Hi team, I'm 30 years old and never in a million years (or 30) thought I would ever invest money into cryptocurrencies. But of course, after watching the presentation the other night I'm sold. One very big down side to Porter's special events like this, I always want in! I signed up and added this product to my other premium subscriptions I currently have.

"To try and make sense of all these cryptocurrencies on my own would have been a nightmare, let alone trying to figure out about the different exchanges, wallets, and underlying assets and utility behind each one.

"Tama has his website setup very nicely and the tutorial videos are very easy to follow. Anyone younger or older than myself, who is just getting into this kind of investment, shouldn't have a hard time following Tama. Look forward to seeing what this industry has to offer us subscribers!" – Paid-up subscriber Austin DeSico

"Caught the replay and was impressed with the content and the offer. A year from now I believe I'll be quite happy I bought this new service and cryptos." – Paid-up subscriber Kurt J.

"I plunked down for lifetime access to Tama's Crypto Capital after [Wednesday] night's call. It is pretty exciting.

"I'm trusting in the Stansberry name and so far, you have steered me fairly so it was a relatively easy decision to make and the cost wasn't too prohibitive. I am a touch disappointed with the Crypto website as I was hoping it would just be a link and have a similar feel/set-up to the main Stansberry site I'm used to and reasonably comfortable with, but I'll get over it and adapt.

"So far I've gotten an account... and I'm now setting it up for wire-transfer. I was able to get a very quick $500 deposited (<12 hours) but the remaining $9.5k needs to be done via wire-transfer so I'm working through my bank's online tools to get that going. It will likely take a few days to get the money transferred as I traipse through the process.

"I'm reading, reading, reading everything, but it looks pretty straight-forward. The videos are EXCELLENT and easy to follow. That is a very nice touch in helping us newbies navigate the cryptic water of cryptic investing. I'm looking forward to my first purchase of bitcoin maybe early next week... maybe tomorrow, Friday!" – Paid-up subscriber Chris Padilla

Regards,

Porter Stansberry
Baltimore, Maryland
October 20, 2017