The Alchemy of Finance by George Soros

The Alchemy of Finance Reviews

• 
  Mara

  Let's not skirt around the issue here- this book loses about a bajillion points* for having a man in a suit with his arms folded on its cover.
  
  
  What does having your arms folded on the cover of your book say?
  Typically one of two things:
  1. "I'm taking back my America one book at a time!"; or (and this one is more common)
  2. ADVICE!! "I am about to give you lots and lots of advice that will solve all of your problems and/or make you rich and/or force you to acknowledge that you'll never be able to follow my advice and, thus, are a failure."
  
  Don't believe me? I'll let this little array speak for itself.**
  
  
  
  
  Spoiler alert! (but not really), looks like George Soros fell victim to some terrible advice in book coveriness, because The Alchemy of Finance doesn't tell you how to do squat (or take back America, or the night for that matter, but I digress). So, if you're hoping for a step-by-step breakdown of how to land yourself in the top 20 of the Forbes 400, walk away now.
  
  Why read this book if it won't make me rich??
  If you're really asking yourself that question, then the answer is probably don't bother. However, if you're like me, (in addition to being awesome) you'll swoon as soon as he drops Karl Popper's name in the first ten pages (you know, the whole understanding of the self presupposes objectivity thing).
  
  If that doesn't do it for you, don't walk away just yet. What this book is really about is Soros' theory of reflexivity, in "the markets" and how the assumptions of traditional Economics have gotten things oh so wrong. It's much more philosophical than it is financial, and George Soros is a pretty smart dude.
  
  Why alchemy?
  Alchemy and science are not the same thing (duh). Science is about finding an underlying truth — scientific theories are supposed to be "universally valid". Soros' theories of the market, however, are not. Why not? Because (according to Soros) he has been more prone to "predictive failures" than not, which (and here's the alchemy part) doesn't mean he hasn't had financial gains.
  
  Alchemy, unlike science, is about operational success. This is why Soros has been able to fail to predict things about the world, but still rake in big bucks. The Market operates as a product of social phenomena- it's not like nature, where "laws operate independently of what anybody thinks."

  "This creates an opening for alchemy that was absent in the sphere of natural science. Operational success can be achieved without attaining scientific knowledge. By the same token, scientific method is rendered just as ineffectual in dealing with social events as alchemy was in altering the character of natural substances."

  Anything else?
  I'm no economist, but I do like to dabble in the study of decision making, cognition and human behavior and, turns out, those things are pretty darn interrelated. My point? I'm probably going to bungle any attempt at real explanation, so I'll just point out a few bits and pieces.
  
  - Homo economicus He doesn't exist, get over it! Humans are not rational actors and, even if we were, no one actually has all the options laid before them.
  
  - Stock prices are the reflection of some underlying reality there is no "essential price" toward which a stock will inherently trend and certainly no reality that exists independent of our perceptions.
  
  - Stock prices are shaped by underlying trends and prevailing biases which are then either self-reinforcing or self-correcting. Sometimes events fail to occur because they were anticipated.
  
  - I'll give you one more for fun (and also because it confuses me): the act of lending changes the value of collateral.
  
  Why the low rating?
  This book is old (I think it's my junior by only a few years). Soros brings up interesting ideas, but IMHO there are far more interesting books to be read on most of them (e.g. if you want to talk recursion, then Douglas Hofstadter's your man). Maybe someone more familiar with The Market than I would disagree, but it's my review, and he did fold his arms while wearing a suit on the cover.
  
  ___________________________________________
  * I'm sorry, but I can't be more precise due to adjustments for inflation and ever fluctuating currency markets, so you'll just have to live with my rough estimate.
  ** No, I haven't read any of these books, but can you blame me?
• 
  Stirling Mortlock

  This is a book I read and re-read on a regular basis.
  Soros has the greatest track record of any money manager, ever. This should give anyone who is interested in managing money, or managing their own money, a reason to read the book in which he describes exactly how he has made his billions.
  It surprises me how many people have read the book, and yet, so few put the actual theoretical framework to use. Despite Soros's introduction of the ideas of reflexivity in financial markets nearly 30 years ago, this type of thinking is almost absent from the investing community.
  And yet, these types of special reflexive situations abound in today's market. I have personally taken advantage of several.
  On the downside, I do not believe that Soros a great writer. He can make simple concepts almost incoherent by using complex vocabulary and odd phrasing. This may be why he failed to make much progress as a philosopher.
  In addition, this book is not for beginners in finance and money managing. The book assumes basic knowledge of the stock market and currency market. It also assumes knowledge of affairs that were current in the 1980's, but are probably a little arcane to today's investors. I had to look up various references like the Plaza Accord, which Soros profited handsomely from in the later half of the book.
  So, if you have a working knowledge of stocks, bonds, and currencies, and you are interested in managing money at some point in your life, then you must read this book. Without it, you might as well be trading blind.
• 
  Riku Sayuj

  Finally an expert who admits that he is shooting in the dark, mostly.
• 
  Ben Sutter

  I slogged my way through the first 200 pages of this...but enough is enough.
  
  What I learnt is:
  
  1) George Soros took high risk, leveraged positions. He became very rich. He may well have been skillful. He might have just been lucky. The Alchemy of Finance has not assisted me in determining which is more probable.
  
  2) If he was skillful at making money, he certainly isn't skillful at communicating his methods and strategy. This writing style is muddy, convoluted and the majority of the content is spent on describing market noise from specific time points in the 1980s. How any of this is to be applied to present/future scenarios is not covered at all in the first 200 pages of the book at any rate. The author himself seems to indicate at times that he is not really sure how to explain how he did it. It is like reading a poor quality financial newspaper from the 1980s - I'm just not interested!
  
  3) The author emphasizes how his intense emotional involvement with his portfolio was a key to his success. For example, how when he got a sore back this "told" him it was time to transact, or how he got so wound up about certain positions he felt like he was going to have a heart attack. Not only does this appear on the surface to be an extremely reckless way to manage money, but the attempt this book makes in trying to explain an emotional approach just doesn't work for me.
  
  4) Despite Soros being opposite in style to Buffett & co, one commonality of all seriously successful investors is again reinforced by this book - they all sacrificed everything else in their life to become financial "rock-stars". You gotta give 60, 70, 80 hours a week consistently year after year - this takes a toll on other aspects of your life.
  
  Overall, the one quote that stuck with me is that given by his son on p. 37:
  
  "My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bullshit."
  
  I wanted to shake off that quote as I progressed through the book....but I couldn't...I ended up siding with Soros jnr.
  
  
• 
  Trung Nguyen Dang

  An one idea book: Reflexivity, the circular relationships between cause and effect that feed momentum. Simplistically speaking, it just means momentum will feed itself until it becomes very extreme then it will reverse to the other extreme.
• 
  Matt Kelty

  A very smart, successful man is now a billionaire, but in his heart would rather be a philosophy professor. He realizes, along with many other people, that feedback loops exist in financial markets. He calls said feedback loops "reflexivity" and writes 200 pages. It's actually kind of fun to read, but there isn't much meat beyond this one concept. If he was able to make his fortune solely through an edge based on identifying feedback loops, there is a better book to be written eventually.
• 
  Jim

  One of the greatest traders and greatest minds of our lifetime. It doesn't get a higher rating because the communication of his ideas of social science/philosophy/principal of reflexivity etc are a little hard to follow at times. I would say that was just me but almost everyone I know who has bought this book hasn't finished it.
• 
  Nathan

  The Alchemy of Finance helps establish a modal of thought for the market and economy. It debunks the myth of efficient market theory where everything is ‘priced properly.’ Instead it posits how humans are not rational actors in a system. This inherently leads to a dynamic adjustment (volatility) in an illogical way. Trends will favour prevailing biases of the time. This can in part lead to speculative bubbles. The longer these bias trends go on for, the longer the boom. At inflection points these trends reverse and create busts.
  These inflection points can be determined by a credit cycle. Low interest rates (which allows people to easily borrow money creates an acceleration of buying). Then when insolvency hits an increasing of interest rates lower buying which then pops these bubbles of prevailing bias.
  
  That being said I disagree with his dissent from a contrarian and fundamental approach applied by Benjamin Graham, Warren Buffett, and Carl Icahn. It is a simpler way to understand values in the economy. In a context of investing, you want to buy assets that have a lower market value than intrinsic value (working capital, book value, equity and assets), and to also factor in growth. This will give you a valuation of a business which is either higher than the market price or lower. Regardless of the prevailing biases these businesses will always have to revert to the mean in due time. Through this modal you can understand inflection points of any business at any time in the economic cycle.
  
  I would recommend reading The Intelligent Investor preceding and then The Alchemy of Finance. One can garner a lot from this book and get into the mindset of a great investor!
• 
  George Jankovic

  A book by one of the 2-3 greatest investors of all time. It's about his reflexivity theory: stock prices are influenced by the economy then they, in turn, influence the real economy. And how all that applies to investing.
• 
  Chris

  I enjoyed The Alchemy of Finance far more than I expected I would, which I attribute to the fact that it is more an ideas book than a guide to anything or a retelling of events. More accurately, one idea is presented - the theory of reflexivity. Reflexivity is defined as a mutually recursive relationship between two variables which dynamically influence each other. Of course, Soros is not the founder of the idea of mutual recursion and other authors such as Douglas Hofstadter have far more sophisticated analysis of recursion and related concepts. However, Soros applied the idea to financial markets which - I believe he asserts correctly asserts- is a rare context for this framework of thinking. An example of two-way relationship of reflexivity is as follows:
  A bank loans a business money based on collateral, which denotes the creditworthiness of a debtor. Collateral could be the value of a property or a future stream of income. However, the very act of lending impacts the valuation of the collateral. The value of collateral depends on the value of capital borrowed (e.g. leverage can improve gains on future cashflows or precipitate losses) and the value of the amount borrowed depends on the value of collateral. Ad infinitum. The two variables act dynamically with each other as dependent variables.
  
  Participants in the fields of finance and economics have a fixation on theories explaining static states; equilibriums and efficient markets. Reflexivity suggests a permanent dynamism which follows what Soros terms a prevailing bias, with no single equilibrium tended to. The reflexive relationship promotes boom / bust cycles due to the self-reinforcing and self-correcting nature of mutual recursion. Expansion of credit leads to inflated values in assets, which are in turn used as collateral for further credit expansion. As Soros notes, economic contractions happen more rapidly as a tipping point is reached and market participants rush to liquidate deflating assets. Precipitous falls in market value are often the result of unexpected events, and the forecasting of known-known decreases can reflexively prevent them eventuating. Soros's conclusion is that the knot of recursion from reflexivity in all financial varieties (e.g. lender to debtor) is too challenging to untangle and the scientific method cannot be applied. Hence, the term alchemy, which refers to the achieving of operational success without a formal system which verifies a truth.
  
  One gets the impression that Soros would trade all his wealth for an esteemed place in the world of philosophy. Soros was a student of Karl Popper, which explains his fascination with the scientific method. As well as making a fortune speculating on financial markets, Soros took years off to write a philosophical text. An interesting comment he makes is that the abstractions of philosophy and the scientific method distanced him from his 'reality' trading where he believes overarching theories do not apply and instinct rules. He claims that returning from the abstract world of philosophy made him less profitable.
  
  For a blood-thirsty capitalist, Soros is also surprisingly astute in his comments on the limitations of capitalism; "Yet it is easy to exaggerate the merits of having an objective criterion at our disposal. We have become so fixated on objective criteria that we are inclined to endow them with a value they do not intrinsically possess. Profit-the bottom line-efficiency- takes on the aspect of an end in itself, instead of being a means to an end. We tend to measure every activity by the amount of money it brings... Values that motivate people cannot be readily translated into objective terms; and exactly because individual values are so confusing, we have elevated profit and material wealth-which can be readily measured in terms of money-into some kind of supreme value. "
  
  The Alchemy of Finance is a bit of a one trick pony admittedly - the central idea being the theory of reflexivity. However, the book essentially felt like a formal exposition and shaping of existing personal thoughts. I listened to the audiobook and the writing style translated well.
  
  5 stars.
• 
  Andreas Lorenz

  The most important concept in this book is "reflexesivity" - a novel concept in economics according to GS. It is basically a merger of the in "second order chaos theory" and that the "arrows of causation" runs both ways in any system. This means that the idea of equilibrium is an abstract/deduction with very little real word consequences in most financial markets.
  
  This is highly recomendable as it basically says that all our standard models of economics are - if not wrong - then without much real life consequence.
  
  Note: This is NOT a guidebook on how to become rich. Rather: GS uses his insights from finance to form a theory of the world.
• 
  Gabriel Pinkus

  This book, much like John Burr Williams' Theory of Investment Value could be shortened immensely for the big idea one ought to take away - The Theory of Reflexivity
  
  Soros' Theory of Reflexivity is a rational explanation of why economics is so terrible (read: absolutely awful) predictor of the future, and why social sciences as a whole tend to fall so short of natural sciences. Economists tend to get "physics envy". When you have thinking participants, results change. In physics, gravity pulls you to the ground regardless of whether or not Newton writes about it. However, what if Newton's writings changed gravity? Huh?
  
  RG Collingwood wrote a long time ago about how Europeans made fun of native warrior dances and being nonsensical to them and therefore illogical. Collingwood wrote that when a warrior believes those dances help make him a better warrior, he becomes more confident and therefore a better warrior. When an enemy sees him do the dance and yell loudly, the enemy becomes more frightened and at a disadvantage - the belief made it real.
  
  George applies this idea to social science and finance. Alchemy doesn't work, but by believing it works, people can achieve "operational success" as alchemists. I am very surprised Soros' idea has not been taken more seriously or taught in schools.
  
  If people's opinions are a function of results, and results are a function of people's opinions, you get this chaotic, nonsensical, random, all-over-the-place reality. There are instances where the two are functions of one another. It's like Y = f(x) and X = f(y). Just because you can't graph it doesn't mean it doesn't happen in real life.
• 
  Vaishali

  Dry, and far more nonlinear than expected. Prepare yourself to repeat sentences; Soros writes like an academic, and even alludes to this once. The one concept he hammers in more than any other : markets do & will fluctuate.
  
  Some rare brass tacks :
  -----------------------------
  
  "I react to events in the marketplace as an animal reacts to events in the jungle... for instance I used to be able to anticipate an impending disaster because it manifested itself in the form of a backache."
  
  "If we want to understand the real world, we must divert our gaze from a hypothetical final outcome, and concentrate our attention on the process of change that we can observe all around us. This will require a radical shift in our thinking."
  
  "Since the bias is inherent, the unbiased is unattainable."
  
  "Existing theories about the behavior of stock prices are remarkably inadequate. They are of so little value to the practitioner that I am not even fully familiar with them. The fact that I could get by without them speaks for itself."
  
  "Full employment is a special case."
  
  "The stock market comes as close to meeting the criteria of perfect competition as any market: a central marketplace, homogenous products, low transactions & transportation costs, instant communication, a large enough crowd of participants to ensure that no individual can influence market prices in the ordinary course of events, and special rules for insider transactions as well as special safeguards to provide all participants with access to relevant information. What more can one ask for?"
• 
  Mike

  Concise thesis that the basic concepts on market supply and demand I was taught in MBA and CFA programs is so significantly flawed by assumptions of independence and inertness as to heavily question the model's value. Since that is the basis for most economic theory its a pretty big challenge. Since over a long career, Soros was able to trade on his theory and consistently out perform the market, it obviously should be considered.
  
  Take always:
  1. Market trends are long and wave form.
  2. Collapses are often avoided by the nature of predicting their appearance and the market adjusting.
  3. Collapses usually happen due to unexpected events.
  4. Trends either direction are self reinforcing, and thus will continue past the point of rationality.
  5. Because of 4, being contrarian is inherently a losing bet unless you can time inflection points, which is very very difficult.
  6. The key point is a concept of reflexivity where the market trend affects the underlying value, which affects the trend, usually in a positive way, which affects the value, and so on. This continues until the trend is far out of whack with fundamentals which will cause a sharp correction and start of a new trend line, often in the opposite direction.
• 
  Asif

  Interested read. Found myself agreeing to the concept of changing equilibrium and two way causality (reflexiveness) but also disagreeing with some of his views.
• 
  Tim Jaeger

  The concept of reflexivity and the trading journals were interesting. Otherwise, it was a slog.
• 
  Matt

  I think you can get by reading the Introduction and Ch 1 and skipping the rest of the book, which felt like a series of ramblings
• 
  Ramesh Ruthrasekar

  Whatever it is, he was most likely on drugs when he conceptialized this idea! If fundamental analysis is based on eps, he questions which underlying trends are influencing eps and in turn, by positive reinforcement how high eps can make or break a trend - reflexivity!
  
  Technical analysis is primitive, fundamental analysis can be flawed and in comes reflexivity. He points out innumerable instances on where he made money by expecting reflexivity, but hardly demonstrates on how we as readers can use it. Many macro economic observations were awesome
• 
  Geoff Steele

  discusses how market participants end up affecting the prices, economies, trends, boom & busts, or in other words the market itself. Much like perception is reality...but in this case, perception really does affect asset prices, loan valuations, collateral, currency exchange rates. etc. and thus the market is reflexive to these activities. Interesting stuff, kinda like quantum physics in that the act of observing affects the object observed.
• 
  Stefan Bruun

  A dynamic alternative to the classical models of macro economics. It is clear that the dynamic/reflexive model is of more relevance to investors than the classical static ones. A lot of overlaps with Soros on Soros, though both more practical and more philosophical.
• 
  Terry

  The idea of reflexivity is interesting, can be widely applied to many social/economic activities. The normality of the market is not stability, but from one extreme to another. I agree with it - reflexivity drives sentiment, stock prices drive fundamentals too. Especially in fixed income, rising asset prices drive up value of collaterals, and therefore risk tolerance of banks, and more lending means better economic activities and more borrowing. The reverse is also true. This is why momentum works.
  
  The middle part of the book is Soros’ real time experiment of his theory. When I read it, I just feel how hard it is to trade macro. To be honest, I don’t fully understand how he makes every macro trading decisions based on reflexivity. I don’t see the connections. He sometimes has a view on JPY, treasuries, equities, but the reasoning of the view depends on his interpretation of an event. And I notice these views are quite random, even for Soros. I don’t know how to systematically implement such investment strategy. On contrary, Ray Dalio’s book is more executable.
• 
  Humble

  For all my original love of the medium of books, and the now years I've spent listening to inane podcasts mostly about media, pop culture, and basketball, I've never actually listened to an audiobook. And I still think I would find the experience odd for fictional material, much in the same way narrative podcasts sounds like an odd thing. But hey, I guess we've been doing this at the very least since Orson Welles scared the nation in 1938.
  
  Anyway, feels a little lazy to log an audiobook on this site as if I actually took the time to read a book, but whatever, who cares.
  
  George Soros is a pretty interesting figure. Someone I've been hearing about nonstop for my entire life, but I can't say I know much about him, and before this book I knew far less. He's been perpetually cast as an omnipresent, omnipotent, and diabolical villain in the right wing world. The ultimate globalist boogeyman for those who ever tuned into the EIB Network.
  
  Even at the height of my embarrassing youthful adherence to the Limbaughs and Matt Drudges of the world, I can't say I felt strongly about the man, but my interest was piqued when I saw a finance account I follow start to talk about what a genius he was, and I stumbled across this audiobook on YouTube.
  
  And man, it was pretty great. Far less practical advice on how to navigate and succeed in the markets, this book is instead a presentation and argument for a perspective on interpreting events. As a grounding point for it, this perspective, the theory of reflexivity, is primarily channeled to us through the filter of financial market events, but late in the book its explanation is extended to how Soros sees its application in everything from the political sphere and history, to the meaning of life itself.
  
  The theory of reflexivity largely appeals to my own personal biases, especially in its core premise of eternal flaws and self-reinforcing biases. The eternal battle for an equilibrium that does not exist, has no meaning, and that we are not even moving towards. We instead move forever towards poles of extremity.
  
  My cousin has recently taken umbrage at my declarations of both the lack of the existence of human truth, and the uninteresting nature of its very pursuit. Mostly in the philosophical sense. I think reflexivity is likely a better elucidation of some of what I'm trying to express. The one human truth is that we cannot have it, there is no perfect knowledge. Keep making your perfect equilibrant models and ideas of perfect competition Keynesian and Austrian economists. I guess we all need dreams.
  
  Even still it ultimately does argue for a world not too far afield from the one we inhabit. No doubt there is bias by Soros to perpetuate a system that he has thrived in, and could you expect any different from a neoliberal titan of the Silent Generation. But reflexivity's argument for a form of open, democratic, and market based society with some regulatory powers does largely ring true. If biases are the premise of existence, then let the system be built around accomodating their self perpetuating and hopefully preemptively corrective cycles. The worst form of societal organization sure, except for all the others.
• 
  D.H. Bernhardt

  Politically minded people have strong opinions about Soros. I dont know much about what his political motivations or convictions are, but I figured the guy has to know a thing or two about finance (being a multi-billionaire and all). Soros, an extremely successful hedge fund manager, is also referenced frequently in Nassim Taleb's eloquently expressed notions of optionality in Taleb's Incerto trilogy. I love Taleb and his interest in Soros's operational methods put me on the watch for more information. A friend lent me this book upon request and, say what you want about Soros, but I learned a lot.
  
  His theory of reflexivity makes total sense to me. I might re-term it as recursive rather than reflexive but the main idea holds that every action that takes place in a financial market informs the next and entire system eventually feeds back on itself. He continually points out that "social science" is a false metaphor and that there's nothing scientific about the way human beings interact. Rather than approaching society with the strictures of scientific method, he recommends the outcome focused operational methods of alchemy.
  
  He tracks his interaction with stock, bond and currency markets throughout the book in a real time experiment he ran back in the 80's. he journals the events and his thought processes and I was alarmed to discover how many mistakes he made. The optionality Taleb discusses was an evident bastion of Soros's hedge fund performance, however. Even Soros's mistakes were hedged in ways that grew his accounts substantially during the experiment (with the exception of the Japanese yen crisis).
  
  The book ends with some very interesting ideas for commodity based currency that I found very interesting. And he bags on Marxism like nobody's business. And the relational equations he sketches out between markets, currencies, etc were illuminating. His book showed me how much I dont know, but was refreshed to discover Soros admits he knows little about finances and terms himself a philosopher instead.
• 
  Travis Steward

  This is a deeply philosophical book that has not only dramatically affected the methods I use to invest, but how I look at science and any results based discipline.
  
  I think Soros is a total iconoclastic genius, but feel he does suffer some convolution of ideas. He's exactly right in naming this book the way he did. Frankly, I didn't find the "theory of reflexivity" that compelling. It was so many other areas of the book I found intriguing: 1. that the stock market is a feedback mechanism that tests ideas in real time -- if you make money you're right, if you lose you're wrong, no matter what theory you approach your position with, what matters is what works. 2. That science itself is flawed, and human beings should approach knowledge from uncertainty and instead use feedback to guide truths. There are many more gems, but overall it paints a way of thinking more than anything, that when followed plucks you right out of the world as we know it and places you in a strange mental land where you're half scientific and half faith-based, merging paradoxical concepts that no where else have been elucidated and defined so distinctly.
  
  We constantly hear of Soros and his maneuvering in currencies, but you can clearly see his results come from far simpler origin: he was long S&P 500 futures with heavy leverage during the extremely bullish phase of the 80s. The majority of his returns were from this simple positioning.
  
  Soros has a weird mix of knowledge I've never seen/read before, and in the end results in this complex, albeit poorly understood, masterpiece.
• 
  Antonio Kowatsch

  A very interesting book about George Soros' theory of reflexivity. Disclaimer: the book is aimed towards people who have an intermediate/advanced understanding of the financial market and how market conditions are evaluated.
  
  What I really liked about the book was that George Soros has written it in a very self-conscious way. It added a great deal of honesty and made it a very good read in my opinion. I definitely learned something from the book. His theory of reflexivity is amazing and quite counter-intuitive to what most investors are taught in regards of how macroeconomics work. In a nutshell it's about dynamic changes in the market and how biases of investors can influence other investors to the point where cataclysmic chain reactions can unfold. And how even the regulatory bodies are "all too human"[sic].
  In other words: investors who are worrying about a future recession sell stocks that ultimately lead to the future recession. It's kind of like a self-fulfilling prophecy in a way. That's what the theory of reflexivity is all about; the psychological aspect of the stock market that most people seem to forget about or recognize too late.
  
  To conclude: this book is about George Soros' life's work. It also explores various philosophical topics that mostly pertain to Karl Popper's philosophical ideas. I would definitely recommend it to anyone who's interested in investing.