"If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring."
These might seem strange words to be associated with George Soros. After all, this is a man once described as "one of the five most feared figures in finance" whose own impact on the global economy has been anything but boring. The Telegraph described him as the man who "broke the Bank of England" in 1992, after he bet that the UK Government's efforts to prop up the value of the pound would end in failure. Soros made around $1 billion as Britain was humiliatingly forced out of the European Exchange Rate Mechanism.
So can this most famous of currency speculators and hedge fund investors, really mean what he says when it comes to good investing being dull? Soros coined the phrase 'Reflexivity' to describe his views of how markets behave. And his theories suggest that it's when investing gets exciting that you really need to worry.
Many economists and investors believe that markets are inherently self-correcting and that the prices of stocks and shares will usually reflect the fundamental value of the companies behind them – so when share prices rise in value there's usually a good reason for it. We've featured a few of these thinkers (like Paul Samuelson and Ben Graham) in previous features. Soros' view appears to be different. It suggests that changes in the price of assets can become self-perpetuating: for example, when cheap mortgages encourage rising house prices, which in turn persuade lenders to offer more cheap mortgages. These feedback loops can also go into reverse, driving the booms and busts of the economic cycle. The big question is: if markets do get carried away, how can everyday investors cut the risk of getting caught up in the hype – and suffering from the fallout?
One of the approaches that Nationwide recommends is to spread risk across a range of different types of assets in an investment portfolio. That way, if one type of investment in the portfolio declines in value, this might be offset by others doing as well as, or better than expectations. This may be less exciting than attempting to pick winners and betting on the performance of a few companies, but as Soros' advice suggests, it's often a good approach to take.