Investing tips from socialist Soros

Even though George Soros is a devout socialist, he knows something about investing. He writes about a typical cycle in the stock market in his book The Crisis of Global Capitalism. He calls his theory “reflexivity,” but the general idea is that the stock market usually tracks profits closely until near the end of the cycle.

As the reader can see from the chart below, the variance in profits isn’t as great as that in stock prices. The two begin to diverge about halfway through the expansion. All that means is that the PE ratio begins to inflate because credit expansion by the Fed is pumping new dollars into the economy. 

If stock prices remained tethered to earnings, stock prices would level off. To prevent that, the media send in the clowns. In a rodeo, clowns distract the bulls to prevent them from stomping the cowboy into the arena dirt, but in the market the clowns distract the investor. The clowns pull from their shirt sleeves old tricks to make the fundamentals look better. They use performance measures that rely on creative accounting, alternative profit measures, pro forma statements, and complicated valuation techniques. The clowns break the connection to earnings so that prices continue their ascent unrestrained by fundamentals. If the market was an actual rodeo, the clowns would be lynched for letting the bulls pulverize the cowboys.