How to Lose US$ 1 Billion & Survive

Apurva Sheth

George Soros - The billionaire hedge fund manager has been one of the most successful traders in history. In fact, Soros is apparently one of the 30 richest people in the world.

But there's some good news. Even the fantastically successful Soros messes up. And when he does - he goes big!

But there's some good news. Even the fantastically successful Soros messes up. And when he does - he goes big!

Billionaire George Soros

In 2016, Soros made a major trading blunder when he placed a large short bet on the stock market following Donald Trump's election victory in November. And lost nearly US$ 1 billion!

How's that for a big mistake. Now, we all know, that the bigger the mistake, the bigger the lesson learned. Since you and I probably won't be making billion dollar mistakes anytime soon, let's learn a few lessons from his.

1. Dear Trader, Leave Your Ego at the Door

George Soros was wrong about the market's reaction to the election and paid a hefty price of US1 billion for it. However, he recognized his mistake and moved on from the trade instead of being stubborn or sniffy about it.

He eventually closed out many of his short positions before the end of the year, cutting his losses before they got any worse.

Being wrong is not a major issue.

More important is what you do afterwards. In the business of trading, you and you alone are responsible for your actions.

It is better to be wrong and profitable, than try to prove you are always right and be a bad trader.

Remember you can always get back into a trade. No traders are perfect, and you don't have to be either.

2. News Trading Can be Risky

First, overconfidence in any market outcome can be devastating. Just days prior to the election, many polls and market gamblers gave Hillary Clinton a 74.9% chance of victory.

Even when the odds seem overwhelmingly in your favor, nothing is ever certain in the stock market. A lawsuit, an investigation, USFDA approval, elections...all examples of events that can be completely unpredictable.

Regardless of what type of trading system you follow, a crucial key to success is disciplining yourself only to react to price action, rather than attempting to predict it.

3. Diversification is Important for Your Trading Business

The most important aspect of Soros' blown trade is that he didn't put all his eggs in one basket. Incredibly, even after the US$1 billion loss in the last two months of the year, Soros Fund Management reportedly finished 2016 up 5% on the year.

The primary goal of diversification isn't to maximize returns. Its primary goal is to limit the impact of volatility on a portfolio. Soros made a huge bet on a market pullback, but he didn't bet the house. Because his fund was properly diversified, he could finish the year on top.

If you leave here with one lesson, let it be this: A large part of being a successful trader in the long term is managing risk. Everyone makes mistakes in the market, but limiting the impact of those mistakes is a key part of investing success over time.

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