22 April 2011

George Soros : Maybe I don’t understand the market.

An excerpt from a May 22nd, 2000 Wall Street Journal article, How the Soros Funds Lost Game of Chicken Against Tech Stocks

NEW YORK — For months, through late 1999 and early 2000, the Monday afternoon research meetings at George Soros’s hedge-fund firm centered on a single theme: how to prepare for the inevitable sell-off of technology stocks.
Stanley Druckenmiller, in charge of the celebrated funds, sat at the head of a long table in a room overlooking Central Park. Almost as if reading from a script, he would begin the weekly meetings with a warning that the sell-off could be near and could be brutal. For the next hour, the group would debate what signs to look for, what stocks to sell, how fast to sell them.
“I don’t like this market. I think we should probably lighten up. I don’t want to go out like Steinhardt,” Mr. Druckenmiller said in early March as the market soared, according to people present at the time. He was referring to Michael Steinhardt, who ended an illustrious hedge-fund career in 1995, a year after suffering big losses.
Mr. Soros himself, often traveling abroad, would regularly phone his top lieutenants, warning that tech stocks were a bubble set to burst.
For all this, when the sell-off finally did begin in mid-March, Soros Fund Management wasn’t ready for it. Still loaded with high-tech and biotechnology stocks and still betting against the so-called Old Economy, Soros traders watched in horror when the tech-heavy Nasdaq Composite Index plunged 124 points on March 15 while the once-quiescent Dow Jones Industrial Average leapt 320 points. In just five subsequent days, the Soros firm’s flagship Quantum Fund saw what had been a 2% year-to-date gain turn into an 11% loss.
“Can you believe this? This is what we talked about!” cried a senior trader amid the carnage. Others on the firm’s gloomy trading floor busied themselves calculating how much they had lost by aping Soros investments in their own accounts.
Aside from an April 28 news conference about the firm’s agonies and brief interviews afterward, the secretive Mr. Soros and Mr. Druckenmiller, long his No. 2, have said little about the period leading up to the humbling disclosure of the problems. An account pieced together from interviews with a dozen Soros insiders and managers of other hedge funds — private pools of investment capital — shows two longtime friends and colleagues increasingly at odds until it all became too much.
As the losses piled up, tension inside the firm grew, with Mr. Soros second guessing the traders who had made him billions of dollars in the past decade. Soros executives say they overheard heated arguments, as Mr. Soros pressed Mr. Druckenmiller to bail out of some swooning Internet stocks before they sank even further, while Mr. Druckenmiller insisted that the funds hold on.
During the worst of this period, it happened that the Soros offices were consumed by a powerful burning smell as electrical work on the floor above kept starting small fires and setting off deafening alarms. The smoke and racket and the dizzy headaches they caused seemed “like a divine message,” recalls one Soros executive of the bizarre office scene. “We almost wished it would burn down.”
By the end of April, the Quantum Fund was down 22% since the start of the year, and the smaller Quota Fund was down 32%. Mr. Soros had stated in a 1995 autobiography that he was “up there” with the world’s greatest money managers, but added, “How long I will stay there is another question.” Now came an answer. Both Mr. Druckenmiller and Quota Fund chief Nicholas Roditi resigned. Mr. Soros unveiled a new, lower-risk investing style — completely out of character for him — and conceded that even he found it hard to navigate today’s murky markets.
“Maybe I don’t understand the market,” a reflective Mr. Soros said at the April 28 news conference. “Maybe the music has stopped, but people are still dancing.”


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