Read This Before You Panic Sell
Three Big Ideas For Dealing With Uncertainty From George Soros
Trump’s tariffs just sent a chill through the stock market.
Forced selling. Fear everywhere. The VIX spiking to 2008 and 2020 levels.
Ouch.
We find ourselves in a time of panic; just because everyone else is panicking does not mean you need to panic too.
Before you do anything, breathe, because there’s a billionaire who built his fortune on moments like this.
His name is George Soros, and his three mental models are exactly what you need right now.
To survive chaos, you need mental models, ones that work in uncertainty, not just in textbooks.
Today I will tell you the three models Soros uses and how we can thrive by using them too.
His ideas won’t just help you stay rational, they will help you profit from the chaos.
His Big Ideas were:
Fallibility
Reflexivity
The Agency Problem
These are timeless models for surviving (and thriving) in messy systems, especially like the one we find ourselves in today.
Today we will be diving into how these ideas can help us thrive in today’s unpredictable market.
As per usual, grab a coffee, take a breath, and join me.
Big Idea 1: Reflexivity
Reflexivity is similar to the concept of feedback loops & the self-fulfilling prophecy.
Soros believed that we don’t simply observe reality, our observations create the actions that shape reality.
Basically:
Perception → Action (Based On Perception) → Outcome (A Result Of Perception)
This means that our observations shape our reality.
Consider this example:
A man goes into a new neighbourhood to buy a home, he thinks house prices are going to rocket, so he buys one.
He tells his friends that he thinks house prices are going to rocket, they get interested and buy one for themselves.
Word of mouth then causes the general consensus to be that house prices are going to rise.
This creates new demand, which in turn increases the prices, which in turn increases the demand.
The original man with the idea didn’t have any factual evidence that prices would rise, but his perception ended up shaping reality.
That is reflexivity.
We don’t just observe reality, we actively change it by acting on our observations.
In markets, Soros believed that prices don’t just reflect fundamentals, they influence them.
This is how it goes: A belief (this stock is hot) → action (everyone buys) → price rises → More investment available to improve fundamentals → better fundamentals → higher price → belief is reinforced
It of course works in the opposite way.
A run on the banks is the embodiment of reflexivity.
A perfectly healthy bank can suddenly become a very unhealthy one if everyone instantaneously changes their belief’s about that bank.
A non-problem becomes a problem simply because people unnecessarily make it so.
Why this idea matters & how we can use it:
Volatility is a feedback loop, the level of volatility we are currently at matches the levels reached during the Dot-Com Bubble, the Great Financial Crisis, and The Covid Crash.
With our hindsight glasses on, those three periods of great uncertainty were great times to be a net buyer of stocks.
I am not saying to go and load the boat of course.
I am saying that if you currently find yourself participating in the feedback loop, you need to re-evaluate your position.
Panic has become reality. But it doesn’t have to become your reality.
With every drop, there is a chance that prices are detaching further from values.
You’re watching reflexivity in real time, this is the storm that Soros speaks about.
In times like this, it is crucial critically evaluate your own perceptions, belief’s and, behaviours.
Asking yourself questions allows you to become a thinker, not a reactor, in chaotic times.
Here are some questions to ask to protect you from yourself:
What do I believe right now, and why?
This Forces you to surface assumptions that might be shaping your perception of the market.
How might my beliefs be influencing my actions, and how might those actions be influencing the outcome I’m observing?
This forces you to understand if you are taking part in the feedback loop.
Am I reacting to price or to fundamentals?
Helps you spot when your reasoning is being shaped by market moves, not intrinsic value.
If I had no position right now, would I still be taking the same action?
Reveals whether you're rationalising your current stance instead of reassessing it.
Could the market move be the outcome of everyone else thinking the same thing I am?
Gets you thinking in second-order terms. Reflexive loops are collective.
Am I mistaking short-term movement for truth?
A falling price doesn’t confirm a belief is accurate. It might just be reflexivity at work.
Be aware of narratives driving action.
You will be glad to know that every business is currently not “a sell at any price” kind of business.
There are businesses being punished that are insulated from any tariff impact.
That is reflexivity.
Reflexivity explains how perceptions shape outcomes.
But to truly survive chaos, you also need to know how wrong your perceptions might be.
That’s where Fallibility comes in.
Big Idea 2: Fallibility
Fallibility is the idea that all our beliefs, especially our confident ones, are suspect.
It is all about how little we know, despite how much we think we know.
We never have full information.
We act based on flawed models, but don’t worry - we always have - it’s human.
Fallibility invites humility, and humility is a survival skill.
Consider this example:
An investor creates a brilliantly complex analytical model that compiles data and spits out the best investments among tech stocks.
People question him, asking if he is really sure that it’s a good idea.
He is so sure that he uses leverage to invest in these stocks.
Unfortunately, something panics the market, and despite no real threat, reflexivity takes hold, and the panic becomes a sell-off.
He is forced to sell all of his positions to cover his debt.
The problem wasn’t the data. It was the belief that he couldn’t be wrong.
(A perfect real life example of this is the LTCM example, discussed here.)
A re-evaluation of how you view certainty may be due, there are so many variations of outcomes that if you were to consider them all, the situation would unfold before you even finish.
Think of it uncertainty this way:
I’m sure you, like me, still discover new information regarding your closest friends and family members on a regular basis; if that is possible, imagine the sheer amount of information we do not know in businesses, politics, institutions etc…
How, with this in mind, can anything be even close to certain?
We know the tiniest fraction of information, yet proceed to make decisions with a level of gumption that might suggest we are omniscient.
I learned the hard way that the range of uncertainty is also uncertain and at times can become practically infinite.
- Soros
Not only are things uncertain, but the range of uncertainty is also uncertain, everything is uncertain, all the time.
Don’t let this worry you.
The realisation and appreciation of inevitable uncertainty is one of the traits that Soros thanks for becoming a billionaire.
When you have full appreciatioin for uncertainty, you view risk in a very different manner, and thanks to reflexivity, if you view it in a different way, you will act in a different way.
Why this idea matters & how we can use it:
“I’m only rich because I know when I’m wrong.”
- George Soros
Having a full appreciation for fallibility can protect you from dangers that you didn’t even know you were exposed to.
It gives you humility, more than most market participants will ever have.
Humility is the first step to creating a portfolio allocation and risk tolerance reflective of a highly uncertain market.
If you have aggressive position sizing, if you are over-exposed to one nation, if you are over-exposed to one industry, fallibility will bring you back to earth and allow you to protect you from yourself.
Fallibility allows you to create contingencies.
Volatile markets expose how little we actually know.
Don’t act like you know what comes next.
Build in room to be wrong.
Size your positions accordingly. Stay flexible and skeptical, especially of your own thinking.
Big Idea 3: The Agency Problem
Agents (fund managers, politicians, central bankers etc…) often act in their own interest, not yours.
The agency problem happens when the person making decisions (The Agent) isn’t the one who bears the consequences, and may even benefit from outcomes that hurt the people they are there to protect (The Principals).
In theory, agents are supposed to act in the best interest of those they represent.
In reality, incentives diverge.
When incentives diverge, bad decisions get made, especially in complex systems like markets or government.
Consider this example:
A ship captain assures his passengers he is going to give them a smooth, enjoyable journey. They are safe in his hands.
The captain'‘s employer inventivises him with bonuses based on the speed of each journey.
If the captain takes a shortcut, he will make a boat-load of money (pardon the pun).
The captain takes the shortcut and encounters a huge storm.
He jumps ship before he can lose any shred of reputation, with his salary in tact, caring for the passengers is not on his paycheck.
The passengers are left stranded with no captain.
This is the agency problem, the misalignment of incentives.
It is crucial to understand the role of incentives in markets, because incentives are what move the needle.
People act within their best interest, not yours.
Why it matters today:
In volatile times, bad incentives drive worse behavior.
It may be time to look at the incentive schemes for the management teams in the businesses you own.
The major market movers might not be acting on behalf of everyone’s best interests.
With Trump’s new tariffs, markets are reacting very poorly.
Investors are trying to price in the impact, will it hurt global trade? Will inflation rise? Will companies pass on costs?
But step back for a second.
Ask yourself: Who actually benefits from announcing tariffs right now? Might there be people not incentivised to improve the situation? Is this going to be a systemic issue thanks to the misalignment of incentives in the government?
Trump’s secretary of commerce is the CEO of a major broker of U.S Treasury Securities.
He will welcome a market crash with both arms as investors flock to invest in his bond products.
If it took a couple minutes of research for me to find a real-life current example of the agency problem, it isn’t a long shot to presume there is countless more at play.
There’s never just one cockroach in the kitchen.
When you are given information, question the source.
Don’t outsource your thinking to ‘experts’ or institutions. You don’t know what their incentives are.
Be your own fiduciary, nobody cares more about your money than you do.
Do your own homework, and put your money with in places and with people who’s incentives are the exact same as yours.
What To Do Next:
Soros’ ideas: fallibility, reflexivity, and the agency problem, give you a map for moments like this.
Not a map to predict the future, but a map to survive uncertainty with clarity.
It is time to go the extra mile with your due-diligence, understand the deep level incentive structures at play.
Embrace Uncertainty, let go of the need to be right, critically evaluate yourself and your positions, make room for error, include a margin of safety in purchasing.
Watch the Narrative Loops, don’t get caught in them, before making a big decision, ask yourself if this is driven by price action or fundamental change.
Trust Yourself, don’t outsource thinking, you can’t delegate responsibility in chaos, build a level of conviction in your strategy and positions so that when times like these arise, you know exactly what to do, and you have full trust in yourself.
When the direction of the future is unclear, mental models become your compass.
If you use them wisely, you will not only survive the storm, you will come out on top.
That is all for today,
Remember the things in life that truly matter, family, friends, hobbies, a healthy body, and a healthy mind.
Here’s to thriving in chaos better than anyone else,
Sincerely,
The Intellectual Edge