What makes a great investor?

One day in 1992 Stanley Druckenmiller marched into his boss’s office, saying: “George, I’m going to sell $5.5bn-worth of British pounds tonight and buy Deutsche marks.” George was George Soros and Mr Druckenmiller, his protégé, was running his “Quantum” hedge fund. The idea was that the Bank of England was trying to sustain an unsustainable exchange-rate peg which speculative pressure could break, forcing the depreciation of the pound and netting Quantum a huge profit. But the $5.5bn would put 100% of the fund’s assets behind one wildly risky bet. “That is the most ridiculous use of money management I ever heard,” Mr Soros said. “We should have 200% of our net worth in this trade.”

It worked, and Mr Soros became the man who broke the Bank of England. Plenty, including Mr Druckenmiller, reckon he thereby demonstrated two cardinal virtues of great investors: the wisdom to spot a winning chance and the nerve to bet the house on it. Perhaps. But for Buttonwood’s money Mr Soros also demonstrated two other crucial, and underrated, virtues. What a great investor really needs is a big dose of luck and a distinctly odd character.

Mr Soros was certainly lucky. He was right that the peg was unsustainable over the long term and, once bank traders and other hedge funds piled in alongside him, victory might have been inevitable. But they might also have chosen differently, siding with the central bankers and steamrollering Mr Soros instead.

Today his would-be successors need luck, too. Most people who work in finance have to be right pretty much all the time. A compliance officer who catches only two-thirds of the dodgy trades your bankers make, for instance, will soon need a new job. But a stock analyst can have an even lower hit rate and still be considered excellent, since no one can do much better. The fund managers building portfolios from analysts’ recommendations can merely hope to pick the right ones. Even if the analysts have spotted a stock with potential that everyone else has missed, it will outperform only if the rest of the market cottons on.

Picking the right investment style takes luck, too. Half a century ago Warren Buffett became a superstar by buying shares that were cheap compared with fundamentals like earnings, then selling when they became expensive. Such value investing is now “something fund managers only do if they want to get fired”, in the words of one who was. Instead the momentum trade—of buying recent winners—has minted fortunes. If the past few weeks are anything to go by, that might be faltering, too. Even the whizziest strategies can underperform for career-wreckingly long periods. Cliff Asness, one of the world’s best quantitative investors, has described “getting kids at home asking: ‘Daddy, your stuff works, right?’”

Mr Asness stuck to his guns and emerged unwrecked. In doing so, he exhibited the other trait of all great investors: oddness. It takes more than stubbornness to stick with a strategy that isn’t working, while your clients lose faith and your children wonder if you are a chump. It takes an even more unusual character to do so in the financial world where, in contrast to the physical one, the rules are whatever everyone else agrees they are. In the end, Mr Asness’s doggedness was rewarded and his quant strategies began to perform again.

When perseverance doesn’t work, an investor must be even odder to be great: they need to be able to change their mind. Imagine that Mr Soros’s fellow hedgies had turned against him, and he had faced the steamroller. It is hard to picture a man with the chutzpah to bet 200% of his fund against a central bank going on to admit he was wrong and abandon his bets. But Mr Soros has been betting big since the 1970s. You don’t manage that without knowing when to hold ’em and when to fold ’em.

Even this combination of arrogance and humility is not enough. Great investors must be able to cut their losses without avoiding risk in the first place. They must pore over detail yet still communicate their ideas plainly—especially when they are not panning out. They must know their portfolio inside out yet remain detached enough to dump any of it the instant the facts change.

These qualities do not usually co-exist in the same person. When they do, that person is likely to be unusual. So if you are searching for a great money manager, look out for a weirdo who can roll lots of sixes in a row. Or just forget about it and buy an index fund.■