George Soros - The Credit crisis of 2008 and what it means

Had always been rather amazed by George Soros, as the man who broke the back of England. Having started my hand at doing a little investment myself, I must say that I am very keen to learn from the "gurus" as much as I can. And of course, investing in the midst of this financial turmoil does mean that I'm facing off with a Mr Market that is not in one of his very good moods, and any guidance that I can find to add to my analysis will be useful.

The central theme to Soros's book is that of reflexivity - which is roughly similar to Heisenberg's Uncertainty Principle in a way. We often view our role vis-a-vis the financial system as if we are independent observers, and our very act of observation and participation has no impact whatsoever. In such a world, prices will tend towards the fundamental value of assets, which our participation will not have an effect on. However, as the credit crisis (as well as all the other bubbles that blew up in our faces so far) has clearly showed that people's expectations and behaviours do impact on the fundmental value of assets, which in turn affect prices and consequently people's expectations and behaviours. Based on this feedback loop, the corresponding behaviour of the stock market often lapses into self-reinforcing cycles that makes Mr Market a clear bipolar case. It is no longer useful to apply traditional economics to explain or predict the market.

Unfortunately, while Soros's book serves as a good cautionary signal to those of us who are gullible enough to rely solely on economics to invest, the book did not offer clear ways out of this conundrum. Like the unsatisfying Uncertainty Principle, it leaves us with more uncertainty and doubt than answers.