Of Markets and morality...

TED KOPPEL "...as you describe it, it [the market] is, of course, a game in which there are real consequences. When you bet and you win, that's good for you, it's bad for those against whom you have bet. There are always losers in this kind of a game."

GEORGE SOROS "No. See, it's not a zero - sum game. It's very important to realize..."

TED KOPPEL "Well, it's not zero - sum in terms of investors. But, for example, when you bet against the British pound, that was not good for the British economy."

GEORGE SOROS "Well, it happened to be quite good for the British economy. It was not, let's say, good for the British treasury because they were on the other side of the trade...It's not - your gain is not necessarily somebody else's loss."

Later discussing Malaysia:

TED KOPPEL "Because - I mean put it in easily understandable terms. I mean if you could have profited by destroying Malaysia's currency, would you have shrunk from that?"

GEORGE SOROS "Not necessarily because that would have been an unintended consequence of my action. And it's not my job as a participant to calculate the consequences. This is what a market is. That's the nature of a market. So I'm a participant in the market."
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This interview is a little old, but still worthy of discussion. Background: the price of the British pound was being maintained using buying operations from the Bank of England, even as speculators, most notably George Soros, sold it. The Bank of England eventually gave up, the price broke badly, and Soros cleaned up four billion dollars. Obviously, if he hadn’t made so much money, he wouldn’t have ended up arguing with Koppel about the morality of his actions -- but what’s done is done -- and provides fodder for this little analytical foray!

Cosmetically, Koppel wipes the floor with Soros. He’s able to portray Soros as a person who destroys lives and economies without a second thought, as well as simplify, beyond belief, something that should not be simplified.

What Soros does, as a money manager, is to buy undervalued assets, and sell overvalued assets. This is arbitrage in its most general form. Notice that, by definition, a successful money manager, performs arbitrage, because he buys undervalued assets before they rise in price, and sell overvalued assets before they fall, equilibrating price to value by his actions. And this is what a market is and does. Soros’ argues that he is merely a extension of the market, that the market mechanism works through hundreds of participants like him, and that there is no morality in a mechanism.

It's probably right before this thought that Koppel falls off the ride.

Again, by definition, a SUCCESSFUL money manager fundamentally has an information difference, which allows him to buy assets before they rise, or sell assets before they fall. Without an information advantage, he would be gambling, and in the long run, should perform just as well as an index would. That informational difference is where Koppel’s argument is from. A better formulation of his argument would be that Soros is ripping people off (to put it bluntly) when he conducts his trades, because he happens to know more than they do. When the British pound fell, it happened to be good for the economy (according to Soros) as their currency was returned to par– but it was bad because Soros was taking advantage of the Bank of England (according to Koppel).

However, let’s just assume Koppel’s premise. If we generalize, we realize that informational differences exist as a necessary condition of our society. The corporation is able to gain market share from a competitor because of its’ innovation. The information difference between students allows them to be ranked and curved. In short, these differences are what we use to gauge merit. The only way we can say this method is not valid is if the information were gained through unscrupulous ways, i.e, cheating, corporate espionage, or insider information. However, the type of information that Soros had, was not insider information: no one can tell you if the pound were about the be devalued.

And keep in mind that the Bank of England was not exactly informationally disadvantaged.

What’s strange though, is that people who disparage money making through this informational difference, at the same time also disparage day trading because of its gambling qualities. The two thoughts can't mutually exist.