Hello reader, welcome to the latest issue of HX Weekly!

Each week we bring you a new edition of HX Weekly that includes three distinct sections.

In the first section, Thoughts on the Market, we'll offer insights into current economic and market news or timeless insights.

In the second section, HX Daily Redux, we'll revisit investing concepts, tactics, and more from past issues of HX Daily.

And in the third section, Market Wizard’s Wisdom, we’ll share thoughts, quotes, and theories from the greatest investing minds of all time.

Now, let's dive in!

Thoughts on the Market

Run to the Bubble

Earlier this week, famed investor George Soros celebrated his 96^th birthday.

Soros has become a polarizing figure over the last few decades because of his political advocacy.

Although we may not agree with his political views, he is without a doubt one of the most successful and influential investors of all time.

This is not only because of his financial success, but because of his thinking about the markets.

For me as an investor, he crystallized some of the most powerful and NOT obvious investment tactics out there.

In this week’s HX Weekly, we are sharing previous stories we have written about Soros.

Here we want to share one of his most famous quotes and why it is so important RIGHT NOW to make YOU money!

The quote is as follows...

"When I see a bubble forming, I rush in to buy, adding fuel to the fire. That is not irrational."

He said this when giving a lecture on financial markets at Central European University on October 27, 2009.

Despite the quote being quite short, it is a powerful concept.

The best way to explain what he is saying here is to use one of my nautical analogies.

Those of you who know me know I use these quite often. Which is funny because I grew up in bone dry Arizona!

Late in life, though, I did pick up surfing and became at least ok at it.

A surfing analogy is one that I think is best here. Don’t worry, you will understand it even if you have never surfed in your life…

Most of the time when you go to a good place to surf, there are regular waves that are manageable.

A place like Waikiki in Hawaii has a smooth and consistent break where even a beginner can catch a wave. That is why it is an extremely popular surf spot.

The majority of time you have these regular waves that everyone can enjoy.

This is like the stock market.

The majority of the time it is going higher. We call this a BULL market.

This is a consistent upward trend in prices and is true about 70% of the time.

In the ocean, though, sometimes a massive storm may be approaching.

This causes the wind to speed up and waves to get much bigger. Sometimes much, much bigger!

This is when the waves go from being smooth and consistent to massive.

This results in some of the best waves that a surfer might ever see in his lifetime.

The bigger the storm, the bigger the waves.

For most amateur surfers, going out into these waves would be suicide.

Professional surfers are equipped to handle them. They know that, if they stay disciplined, they can handle them and see some of the best surfing of their lives.

For that professional surfer, it is rational for them to go out in these big pre-storm waves.

There comes a point, though, where the waves become too big for even them. The waves crash all over the place and the danger is too high.

This is the same way it is in the financial markets.

A “bubble” builds when we see massive upwards movement in prices. Inevitably these moves overshoot and there is a misallocation in capital.

The bubble exists as the giant waves that are in front of the storm.

The bubble bursts when the storm hits the shore and those waves come crashing down.

You might have been enjoying some of the best surfing ever, but if you stayed too long out in the water – you are in real trouble.

This is exactly what Soros is saying.

Financial bubbles are misallocation of capital. This means they will end.

Before they end, though, you are likely to see some of biggest short to intermediate term opportunities that you may ever see.

The key to taking advantage of these opportunities (the big waves) is being disciplined and knowing when to get out of the water.

What does that mean for you as an investor?

Being disciplined means taking profits.

If you double your money in a stock in a day, a week or even a month. ALWAYS take some profits and put them aside.

A good rule of thumb is to take out your original capital and another ten percent (+10%). Then you are guaranteed a twenty percent gain no matter what happens later.

When do you get out of the water?

Our advice is to watch the Federal Reserve.

Every bubble over the last forty years has been fueled by a steady supply of easy and cheap money.

Each bubble has ended, when the Fed hiked interest rates by at least one percent (“a hundred basis points”).

Our advice is enjoy the big waves, but when the first couple of Fed rate hikes come, cash in and hit the bar on the beach to enjoy a few tiki drinks!

Building directly on Soros’s thinking, we turn to the powerful concept of reflexivity—the feedback loop in which investor perception can reshape fundamentals themselves.

This piece sets up the real-world application of the same ideas explored in the birthday reflection and the personal notes that follow. Originally published October 10, 2024 and based on an article originally published in 2021.

HX Weekly Redux

Find Your Inner Soros

Regular HX Research readers are familiar with one of the most essential concepts in this newsletter...

We are buying stocks, not companies.

When you buy a share of stock, you own an economic stake in a business. This means that the stake technically gives you the legal right to the cash flows of that business.

In reality, that doesn't mean a whole lot.

Most companies don't pay out that cash flow, and even if they do—via dividends—it's only a small amount.

In fact, some of the best stocks (and companies) of all time have never paid investors a dime of their cash flow. For instance, just look at e-commerce titan Amazon.com, Inc. (NASDAQ: AMZN) and Warren Buffett's Berkshire Hathaway Inc. (NYSE: BRK/B).

Unlike a bond (where there are real cash flows), stocks are valued based on opinions. You can have the same business trade at dramatically different values at any given point.

The only difference is that investors' perception of value may differ for several reasons. Frankly, those reasons don't really matter, only that you can identify them.

The popular phrase "perception is reality" is often true when it comes to stocks. Legendary investor George Soros illustrates one of the best concepts of this.

Soros adapted a sociology term—"reflexivity"—and applied it to economics. Reflexivity refers to the idea of a feedback loop: Investors' perceptions can affect economic fundamentals, which in turn can change investor perceptions.

Let's use a bank as an example. Banks take deposits from customers and then make loans equal to a multiple (five to 10 times) of those deposits. Those loans will pay out over many years. As long as all the depositors don't come and ask for their money back at once, it's no problem.

However, depositors may rush to withdraw their money if they become concerned about the bank's viability. The more people who withdraw their money, the more people become concerned, and the next thing you know, there's a "run on the bank," and the whole structure collapses.

Reflexivity is a powerful concept. Soros notes that if you can identify where something like this is about to happen, you've found a massive moneymaking opportunity.

Here at HX Research, I've frequently discussed the effect of human psychology and biology on financial markets, and these reflexive situations contribute to this.

Human beings are inherently emotional. They become excited (greedy) and panicked (fearful). Identifying where those emotions are about to flare up can be a great way to identify winning investment opportunities.

These concepts are always applicable to the stock market... but sometimes they're more useful than at other times.

Right now is one of those times.

The U.S. Federal Reserve and other global monetary authorities have injected a massive amount of liquidity (cash) into the economy to get us through the COVID-19 crisis. More cash in the economy means more cash to buy assets – including stocks.

Combined with the high degree of uncertainty – a highly "emotional" time – in the markets and several emerging technology areas such as electric vehicles and online gambling, we have a stock market where perception can become a reality.

Just look at what has happened to the bankrupt car rental company Hertz Global Holdings, Inc. (NYSE: HTZ) in the past few weeks.

As a result of the COVID-19 crisis, Hertz was thrust into bankruptcy late last month. In almost every scenario, a stock in bankruptcy is eventually worth almost nothing.

But despite that, HTZ shares went from an intraday low of $0.40 in the wake of the bankruptcy filing to an intraday high of more than $6 on June 8.

Yesterday, they closed at $1.24. Again, these shares are almost certainly worthless.

And that wasn't all. Shortly thereafter, Hertz made the wild statement that it might issue new shares to investors.

Hertz didn't go bankrupt because its rental car model was genuinely flawed. The company had a risky amount of debt on a well-operating business. But Hertz couldn't pay that debt when that business collapsed because of the COVID-19 crisis.

Had Hertz been able to find an equity investor to "bridge" it through this period, the company might have survived.

In theory, if enough investors felt it was worth the investment, they could have given Hertz enough money not to go bankrupt.

2024 Editor’s Note - This unlikely scenario is exactly what happened at HTZ. The recovery in the stock enabled the company to avoid bankruptcy.

Investor’s perception of reality literally changed the outcome. This is one of the most powerful instances of Soros’ “reflexivity” we have seen in our three-decade career!

A trip to Budapest brought the story full circle: walking the streets of Soros’s birthplace prompted a fresh look at the man, his extraordinary path from wartime Hungary to legendary investor, and a handful of his sharpest quotes.

We highlight the principles that have most shaped our own approach—position sizing, adapting to changing conditions, and again the critical role of reflexivity. Originally published October 9, 2024.

Market Wizard’s Wisdom

The Macro Master

This past week, I had the opportunity to take my first real trip in many years.

Over my lifetime, I have visited fifty-three countries. I'm not sure my goal is to visit all of them before I die, but I certainly want to visit a lot of them.

For most of the last thirty years, I have been able to hit a new one or a few new ones every year. In the previous six years, though, I have not visited ANY new ones. Between work, COVID, and life – my travel has been curtailed.

After successfully launching HX Research earlier this year, I decided to visit Eastern Europe.

The first place I visited—and the one I was most excited to see—was Budapest, Hungary. I honestly know little about the place but have always been very intrigued by it.

As we walked around this ancient city, I thought about one of its natives, George Soros, who became one of the greatest investors of all time.

Most of you are familiar with Soros. His story is an incredible one.

He was born in Budapest in 1930 to a non-religious Jewish family. They stayed in the country and survived the horrific events of the Nazi occupation and the holocaust. There were over 550,000 Hungarian Jews who did not survive.

He left in 1947 and eventually attended the London School of Economics. After working at several merchant banks after graduation, he founded his first hedge fund—Double Eagle—in 1969. In 1970, he used it to start Soros Fund Management and changed the name of the fund to Quantum Fund.

Over the next four decades, Soros built one of the most legendary track records in investment history.

He has generated some controversy in recent years with his strong political advocacy.

While this has led to some detractors, no one can doubt his ability to use powerful intellect to master the global markets.

Soros is one of the investors who has most influenced my own strategies, but he is also one of the most difficult to understand.

Soros is not known for simple quotes. Here are a few of our favorites, along with our thoughts…

“It's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong.”

Soros is known for his complex thoughts, but this is a simple and powerful trading insight.

We discuss this often when discussing our strategies. Everyone would prefer an approach that wins most of the time. Our TRADING strategies make money in over 70% of all our positions.

To make BIG money, though, you should aim for big returns. You also should manage your losses. This combination is how you compound wealth over time.

This is what we do in our INVESTING strategies. However, we will point out that most of our stocks make money there, too!

"Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected."

It isn't always what happens that is most important; rather, it is what happens relative to what investors THINK will happen.

Once an investor understands this concept, they are in a much better position to make money and manage risk.

The concept of expectations driving the market is an important jump to make to be successful.

“My peculiarity is that I don't have a particular style of investing or, more exactly, I try to change my style to fit the conditions.”

This is one of our favorites.

My partner Whitney Tilson once asked me what strategy we use in our investing and trading. I think he was expecting an answer like "value" or "growth.”

My answer was that I was a “make money” investor.

The environment changes, and your strategies need to adapt to be successful.

"The fact that a thesis is flawed does not mean that we should not invest in it as long as other people believe in it and there is a large group of people left to be convinced." The point was made by John Maynard Keynes when he compared the stock market to a beauty contest where the winner is not the most beautiful contestant but the one whom the greatest number of people consider beautiful. I have something significant to add: it pays to look for the flaws; if we find them, we are ahead of the game because we can limit our losses when the market also discovers what we already know. It is when we are unaware of what could go wrong that we have to worry.

This is a more typical Soros quote. It also raises one of the most powerful concepts in investing: Soros's theory of "reflexivity.”

This is the idea that investor perceptions of the future can influence the outcome.

This insight can occur at key market points and with particular stocks. IF you can identify these points, you can make an absolute fortune!

We hope that you’ve enjoyed this week’s issue of HX Weekly…

Do you have any thoughts, questions, or feedback? Tell us more in the comment section or at [email protected].