The Global Guru: How a Dead Paleontologist Explains Soros’ and Buffett’s Fading Returns

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

George Soros’ investment track record has made him the equivalent of a .400 hitter in baseball.

Yet, in a decade that has been lousy for all investors, even the “Grandaddy of Hedge Fund Managers” has had it tough.

Indeed, 2010 was Soros’ worst year since 2002, with his flagship fund up a mere 2.63%. The following year was even worse, with his famed Quantum fund reportedly down 15%.

And a quick glance at Warren Buffett’s returns shows that the Oracle of Omaha has had a tough stretch as well. Going back to June of 1998, Berkshire Hathaway’s average annual returns have hit a mere 5.57%.

Granted, that’s over a span in which the S&P 500 has risen only 4.51% a year.

These anemic returns are a long way from either Soros’ or Buffett’s glory days.

Prior to the dotcom bust in 2000, both Soros and Buffett boasted enviable “30:30” track records: average annual returns of 30% over a period of 30 years.

Today, those long-term returns have shrunk to (at best) “20:40” track records: 20% annually over 40 years.

The last time a hedge fund manager was able to make himself a reputation by generating outsized returns was in 2008 by betting against mortgages, like John Paulson or Kyle Bass did. And both Paulson and Bass have been struggling ever since.

With consistent double-digit percentage returns a thing of the past, no wonder a lot of the original hedge fund greats have called it quits. Even Soros himself quietly returned his outside investors’ money a few years ago.

Why .400 Hitters in Baseball Disappeared…

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So, will any investor ever again dominate the financial markets the way Soros and Buffett did between the mid-1960s and the dotcom meltdown of 2000?

The short answer is “no”…

And here’s why…

In his 1996 book, “Full House: The Spread of Excellence from Plato to Darwin,” the late Harvard paleontologist Stephen Jay Gould examined the question of why baseball had not produced a .400 hitter since Ted Williams in 1941.

That got me thinking whether Gould’s rationale could explain the similarly fading returns of the world’s top investors.

Gould’s argument is straightforward. The overall quality of performance in baseball has improved over time. That makes achieving “outlier” performances like a .400 batting average less likely.

On the one hand, it became harder for batters to get on base as pitchers mastered new pitches like the slider; bigger gloves improved fielding; and managers became increasingly savvy.

On the other hand, batters have also become bigger, spending less time brawling in bars and more time pushing barbells – with some of the players even popping steroids.

As everyone ups the quality of his game, the top players are performing closer and closer to what is humanly possible. That means less room for “variation” at the extreme edges of the performance bell curve, i.e., where .400 hitters stand out.

As Gould puts it, the “truly superb cannot soar so far above the ordinary.”

… As did Hedge Fund Managers Who Generate 30% Annual Returns

You don’t need to be a Wall Street rocket scientist to apply Gould’s thinking to hedge funds.

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The success of both Soros and Buffett has inspired a new generation of hedge fund managers whose own competitive streak made the likelihood of “30:30” track records ever more difficult.

While Soros couldn’t pass his Chartered Financial Analyst (CFA) exams, today there are hundreds of thousands of MBA and CFA holders analyzing global financial markets. Soros himself described his early career when he focused on mis-priced European securities as a “one-eyed king among the blind.”

Tens of thousands of George Soros wannabes have paged and parsed through the grand master’s classic “The Alchemy of Finance.” Paul Tudor Jones, who himself racked up five consecutive 100%+ annual returns in his early days as a trader, summed it up best in his forward to Soros’ book.

Quoting George C. Scott from the movie “Patton,” as the U.S. general looked out on the tank formations of his German nemesis, Tudor Jones jokingly warned Soros: “Rommel, you magnificent bastard! I read your book!”

And Tudor Jones wrote that back in 1987. Today, you have more information on your iPhone than Soros or Buffett ever had when they were trouncing the market back in the 1960s, 1970s and 1980s. Formerly secretive “Turtle Trading” trend-following systems are now available for free on the Internet.

Throw in the small army of “rocket scientists” at shops like Renaissance Technologies, D.E. Shaw and Goldman Sachs sucking out every tidbit of pricing inefficiency in the market… and the prospects of the world’s George Soros wannabes look even bleaker.

Why “30:30” Track Records Are a Thing of the Past

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There are, of course, thousands of small-time traders who crank out Soros-like 30% per year returns. But that’s akin to comparing a star high school quarterback to, say, a top quarterback in the National Football League. You can day trade your way to huge returns on a small scale. But you can’t do it with $100 million, let alone $10 billion dollars.

You now see John Paulson and others of his ilk appear like shooting stars one day — making billions from “the greatest trade ever” — only to fade away quickly the next.

That proves that there’s a world of difference between “one-hit wonders,” compared with cranking out 30%+ returns, as Soros and Buffett did, year-in, year-out for 30 years.

Gould did not exclude the statistical possibility that you could see another .400 hitter in baseball. Nor can you exclude the possibility of another George Soros or Warren Buffett.

But another investor with a “30:30” track record would be what Gould would call “a consummate rarity.”

That’s not a bet I’d be willing to make.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

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