Should average Joe invest like George Soros? NO, NO, NO!

George Soros Bet $1.3 Billion The Stock Market Will Fall

The above headline is from a news story a client of mine wanted me to comment on. The story basically says that George Soros has bet $1.3 Billion that the US market will drop this year:

From my client: 

Mike,

 

Give me your comments after reading the following article,

http://www.huffingtonpost.com/2014/02/18/george-soros-stock-market_n_4810434.html?1392759577&icid=maing-grid7%7Chtmlws-sb-bb%7Cdl3%7Csec1_lnk2%26pLid%3D444081

My Response:

I wish the press did not sensationalize these types of stories. It is very bad for the average stock market investor. It makes the average investor feel that they should follow in some form. They ask themselves "if the smart money is getting out, shouldn't I?"

Soros has made his wealth by taking extreme bets that have high risk but a high return if they succeed. This time, he is betting a portion of his wealth (11%) that  the market will decline. But it is only a portion of his wealth. He can afford to take this bet.

The problem for the average investor is that 3 factors reduce their ability to do what Soros does:

1. Getting the timing correct. There is nobody (including Soros) that has successfully designed a system to get the timing in and out of the market correct. If there was a perfect system, we would just let the computer run our stock portfolios. What makes us think that Soros has a crystal ball. he isnt always correct.

2. Emotional behavior usually scares the average investor out of sticking with the types of extreme bets Soros will make.  We know from studying investor behavior that emotion trumps rationality.  Most investors will bail out before the bet pays off. Soros has the emotional fortitude to stay with his bets. In addition, he can afford to make the bets. If he loses he still is a billionaire - what is $1.3 Billion when you have $11.8 Billion?

3. Taxes can take a big bite out of the returns - even if the timing is done correctly. All the buying and selling may result in taxes that exceed 30%. Will the bet return greater than 30% versus staying in the market for the long haul.

The average investor needs to keep in mind that over the last 50 years holding the total US market and not jumping in and out of the market has resulted in an almost 10% return. Over an 11% return when international stocks are included into the portfolio.
 

Remember this statistic:  Since 1970 an investor who was out of the market on 15 best days over 52 years would have seen their return go from 9.94% to 7.47%.

So unless selling portions of your stock portfolio this year are consistent with your long term investment plan, don't try and follow Soros or any other prognosticator, stay to your plan.
And remember: Those who live by the crystal ball eat glass!