George Soros is 84 today. His career is remarkable both for its longevity and its returns – his Quantum fund has generated $39.6 billion in profits over the last four decades, making Soros the most successful hedge fund manager in history.

How has Soros managed to stay at the top for so long? What are the secrets to his success? Can investors learn from his methods? Or is Soros a one-off, a gifted speculator with an inimitable knack for timing?

Short selling

Never dependent on rising markets, Soros has long been a skilled exponent of short selling, where traders profit by betting on market declines. Although most equity markets went nowhere in the 1970s, Soros’s market-neutral trades helped fuel returns of more than 4,000 per cent during that difficult decade.

His most famous bet was in September 1992, when Soros’s shorting of sterling forced the Bank of England to devalue the currency and leave the European Exchange Rate Mechanism (ERM).

That trade earned Soros an estimated £1 billion and ensured he will forever be remembered as the man who “broke” the Bank of England.

Alarmed by the deteriorating global economy, he netted returns of 32 per cent after coming out of retirement in 2007 and even profited amid the chaos of 2008, a disastrous year for most investors.

Last year, Soros’s main fund earned an estimated $1 billion by shorting the Japanese yen.

Cautious contrarianism

Soros’s willingness to bet against the consensus means he is often considered a contrarian. Indeed, he has even spoken of the “joy of going against the herd”.

However, he admits to being “very cautious” about doing so, saying one is “liable to be trampled on”. The trend is your friend most of the time, he writes in Soros on Soros. “Trend followers only get hurt at inflection points, where the trend changes”.

Buy bubbles

Not only does Soros caution against battling the herd, he sometimes likes to join it, even if it means jumping on to an economically unjustifiable trend.

“When I see a bubble forming, I rush in to buy, adding fuel to the fire,” he said in 2009. “That is not irrational.”

One such example is gold, which he described as the “ultimate asset bubble” in early 2010. Gold had soared 40 per cent the previous year and many commentators took his words to mean he believed the precious metal was set to fall.

However, Soros was actually buying gold, which was then trading at abouat $1,200, the reasoning being that buying into bubbles can be very profitable, if one gets out in time.

Soros did just that, selling most of his holdings in early 2011, some six months before the bubble burst after prices topped out above $1,900.

Reflexivity

Soros does not believe in the idea of efficient markets driven by rational investors, instead arguing for the “twin pillars of fallibility and reflexivity”.

Markets can influence the events they anticipate, he says. One cannot truly separate market sentiment and economic fundamentals, as the former can actually shape and change the latter. Bullish sentiment may cause prices to rise, and rising prices in turn create a wealth effect, affecting consumer spending.

In a negative environment, the reverse applies. Investors’ views influence events, and events influence investors’ views.

There is, he says, a “two-way reflexive connection between perception and reality which can give rise to initially self-reinforcing but eventually self-defeating boom-bust processes, or bubbles”.

Animal instincts

According to his son, Robert, Soros’s trading was always influenced by more than reflexivity. “My father will sit down and give you theories to explain why he does this or that”, he once said, “but I remember seeing it as a kid and thinking, ‘Jesus Christ, at least half of this is bullshit’.

“I mean, you know [that] the reason he changes his position on the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm and it’s this early warning sign.”