Lessons To Learn From George Soros' $1 Billion Election-Trade Loss

There’s no question that billionaire hedge fund manager George Soros has been one of the most successful investors in history. In fact, Soros is one of the 30 richest people in the world, according to Bloomberg.

However, nobody’s perfect when it comes to predicting financial markets, even 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.

Not only has there been no post-election market crash, the SPDR S&P 500 ETF Trust SPY has surged higher by 6.0 percent since Election Day. The Wall Street Journal reported that Soros lost nearly $1 billion on his bearish bet.

When you invest as long as the 86-year-old Soros has, you’re no stranger to mistakes. But younger or inexperienced traders should always use losing trades as learning opportunities.

It's A Learning Opportunity

There are several lessons that traders can learn from Soros’ billion-dollar blunder. First, overconfidence in a particular market outcome can be devastating. Just days prior to the election, Betfair market gamblers gave Hillary Clinton a 74.9 percent chance of victory. Even when the odds seem overwhelmingly in your favor, nothing is ever certain in the stock market. A dividend cut, a patient death, a lawsuit, an SEC investigation or even a buyout offer are all examples of events that can be completely unpredictable at times.

Lesson No. 1: Overconfidence Can Be Dangerous.

Soros was wrong about the market’s reaction to the election, and he certainly paid for it. However, instead of being stubborn or prideful, he recognized he was wrong and moved on from the trade. Soros reportedly closed out many of his short positions before the end of the year, cutting his losses before they got any worse.

Lesson No. 2: Admit When You're Wrong And Move On.

Finally, the most impressive aspect of Soros’ blown trade and the reason he is one of the wealthiest men in the world is that he didn’t put all his eggs in one basket. Incredibly, even after the $1 billion loss in the last two months of the year, Soros Fund Management finished 2016 up 5 percent on the year thanks to bullish bets on financials and industrials.

Soros made a huge bet on a market pullback, but he didn’t bet the house. Because his fund was properly diversified, he was able to take his one mistake in stride and still finish the year on top.

Lesson No. 3: Don’t Underestimate The Power Of Diversification.

Many new investors see billionaires like George Soros and get the idea that Soros is simply very good at making winning trades. While that idea is certainly true to some degree, 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.