George Soros: Building A Three-Dimensional Portfolio

In the book – Staying Ahead Of The Curve, George Soros explains how he built his three-dimensional portfolio to minimize risk and maximize opportunities. Here’s an excerpt from the book:

Yes. It is a rather unusual structure, because we use leverage. We position the fund to take advantage of larger trends-we call this macroinvesting-and then, within those larger trends we also pick stocks and stock groups.

So we operate on many different levels. I think it is easiest if you think of a normal portfolio as something flat or two dimensional, as its name implies. Our portfolio is more like a building. It has a structure; it has leverage. Using our equity capital as the base, we construct a three-dimensional structure that is supported by the collateral value of the underlying securities.

I am not sure whether I am making myself clear. Let’s say we use our money to buy stocks. We pay 50 percent in cash and we borrow the other 50 percent. Against bonds we can borrow a lot more. For $1,000 we can buy at least $50,000 worth of long-term bonds. We may also sell stocks or bonds short: we borrow the securities and sell them without owning them in the hope of buying them back later cheaper.

Or we take positions long or short-in currencies or index futures. The various positions reinforce each other to create this three dimensional structure of risks and profit opportunities. Usually two days-one up day and one down day-are sufficient to tell us how the fund is positioned.