Cultivating Courage by Maryl Celiz

As transmuting a negative emotion requires research on its polar opposite, I recently found some interesting information on the opposite of fear – the quality we know as courage. We also know courage by many other names: adventure, audacity, backbone, bravery, daring, determination, endurance, enterprise, firmness, fortitude, guts, heroism, intrepidity, mettle, nerve, power, prowess, resolution, spirit, spunk, tenacity, valor, boldness, venturesomeness, and – this one is my favorite – élan.

Courage is so important to our personal and social well-being that it has been discussed in religion, literature, and film.

In Catholicism, the four cardinal virtues – fortitude, prudence, justice and temperance – are related to courage (fortitude is a synonym for it).

In the East, courage is part of Dharma, along with other qualities like patience, forgiveness, not stealing, austerity, knowledge, truthfulness, cleanliness, control of anger, and control of the senses.

The famous poet Virgil wrote in the Aeneid, “Audentes Fortuna Juvat”, which is Latin for “Fortune favors the bold”.

The author and journalist Ernest Hemingway said that courage was “grace under pressure”.

As we move from mental illness to a mental health approach, psychologists have taken interest in the concept of courage as well. According to the book Character Strengths and Virtues by Christopher Peterson and Martin Seligman, courage is one of six principal strengths, along with wisdom, humanity, justice, temperance and transcendence. Here, courage is broken down into four distinct categories:

  • Bravery: The ability to do what needs to be done despite fear.
  • Perseverance: Continuing to pursue a goal despite obstacles.
  • Honesty: Integrity and authenticity across circumstances.
  • Zest: Vitality and enthusiasm in spite of trying circumstances.

As you can see, courage is not the absence of fear, obstacles or opposition, but rather it is the ability to be yourself, do what you must, go on and live in spite of fear, obstacles or circumstances. It is being anddoing in spite of external situations that may discourage you from whatever it is you are compelled to be or do.

Sometimes we think that courage is innate, that some people are born brave and it is these who are the heroes of classic stories, the chosen few who carry the masses. They fear nothing. This is not the case, and it is illustrated by one of my favorite movies. In the futuristic film Dune (1984), the main character, Paul, faced with a daunting task, puts it this way:

“I must not fear. Fear is the mind-killer. Fear is the little-death that brings total obliteration. I will face my fear. I will permit it to pass over me and through me. And when my fear is gone I will turn and face fear’s path, and only I will remain.”

This quote – of fear as a mental concept, an idea corrosive to the mind, one that starts you down a destructive path, the idea of allowing fear to pass through you and after it’s passed, you being the last man standing – has been a visual aid that has helped me through many an obstacle. Use it as a tool, and remember that virtues and values are cultivated. You can grow in courage, and the more you focus on this polarity and not its opposite, the more you will experience it in your life. Some men are born brave. But most heroes are forged along the journey.


RICHARD BRANSON: Survive and thrive in a downturn

I think it’s time for a new approach: keep in mind that the economy has its ups and downs, and by investing wisely, reduce the damage a downturn can do to your business or career.

Published: 2010/09/02 08:16:42 AM

I’M OLD enough not to take a major recession lightly; on the other hand, I’ve seen them before, and I’m getting a feel for the market’s cyclical upturns and downturns. Each generation of politicians and economists tries to flatten the cycle of boom and bust, and every generation fails.

I think it’s time for a new approach: keep in mind that the economy has its ups and downs, and by investing wisely, reduce the damage a downturn can do to your business or career.

If I could go back to the beginning (and was interested solely in maximizing my investments, which I’m not), I would invest only during recessions, when almost everything costs 50% – 90% less than it does during boom times. This would be good for me as an investor, and the economy would benefit from the investment.

This is hard to do for two reasons. First because the economic cycle is slow — boom to bust can take a decade or more. We would have to learn patience. And the second reason is even more challenging: entrepreneurs have to respond to ideas as well as the market.

There are times when an idea is ripe, but the market is wrong — a situation many entrepreneurs find themselves in right now. What should they do? Shrug their shoulders and walk away? Of course not. We can’t. We can’t kill our enthusiasm at the touch of a button.

The answer is think big, but build small.

The idea should be simple — simple enough for an individual to turn it into reality. Small, lean, entrepreneurial companies are the future of business.

Not everyone is an entrepreneur. If you want to find out if you have what it takes, save your experiments for evenings and weekends. If you have a secure job, now is certainly not the time to hand in your notice unless you’re absolutely certain that you have a brilliant idea. People on a salary will suffer relatively little during a downturn. Wages may well be frozen, or even reduced, but since the price of everything is coming down, they will not be hurt much.

The prospects for people who lose their jobs are much worse.

If you are an employer, be aware that redundancies are bad for business. At its core, a company is its talent, its expertise and its relationships. Letting employees go must be a last resort. At the beginning of the downturn, we asked the chief executives in the Virgin Group to explore every avenue — from job-sharing to reduced working weeks to wage freezes to unpaid leave — before they laid off staff.

And what if you’ve lost your job? Not long ago, a journalist asked me what my advice would be to the newly unemployed. I pointed out, as gently as I could, that there were many people better qualified than me to answer that question. But there is one thought I will share.

If a company had just made me redundant I would look for ways for that very business to save money. All businesses — whether they’re booming or busting, young or old, a boutique or a bargain basement — need to save money.

If your office has an account with an expensive cab company, then undercut it. It burns regular light bulbs? As you take that slow walk to the elevator, count the bulbs. Do the math. Show them the savings they could make by switching to energy-efficient bulbs, offer to make the arrangements, and ask for a cut.

Many small entrepreneurial opportunities are there for the taking. Most have to do with saving energy. If there’s one thing we know for sure, it’s that fuel is going to get more expensive sooner or later.

Many companies have yet to understand that an ailing business can be saved simply by reducing waste and using energy more efficiently. Many businesses have no idea how much money they’re flushing away on unnecessary document printing, old-fashioned light bulbs, energy-hungry office machinery, and pointless travel and shipment costs.

But you do. You worked there. You know what goes on. Say something, pitch something — and then name your price.

Gandhi’s Top 10 Fundamentals for Changing the World by HENRIK EDBERG

“You must not lose faith in humanity. Humanity is an ocean; if a few drops of the ocean are dirty, the ocean does not become dirty.”

“The difference between what we do and what we are capable of doing would suffice to solve most of the world’s problem.”

“If I had no sense of humor, I would long ago have committed suicide.”

Mahatma Gandhi needs no long introduction. Everyone knows about the man who lead the Indian people to independence from British rule in 1947.

So let’s just move on to some of my favourite tips from Mahatma Gandhi.

1. Change yourself.

“You must be the change you want to see in the world.”

“As human beings, our greatness lies not so much in being able to remake the world – that is the myth of the atomic age – as in being able to remake ourselves.”

If you change yourself you will change your world. If you change how you think then you will change how you feel and what actions you take. And so the world around you will change. Not only because you are now viewing your environment through new lenses of thoughts and emotions but also because the change within can allow you to take action in ways you wouldn’t have – or maybe even have thought about – while stuck in your old thought patterns.

And the problem with changing your outer world without changing yourself is that you will still be you when you reach that change you have strived for. You will still have your flaws, anger, negativity, self-sabotaging tendencies etc. intact.

And so in this new situation you will still not find what you hoped for since your mind is still seeping with that negative stuff. And if you get more without having some insight into and distance from your ego it may grow more powerful. Since your ego loves to divide things, to find enemies and to create separation it may start to try to create even more problems and conflicts in your life and world.

2. You are in control.

“Nobody can hurt me without my permission.”

What you feel and how you react to something is always up to you. There may be a “normal” or a common way to react to different things. But that’s mostly just all it is.

You can choose your own thoughts, reactions and emotions to pretty much everything. You don’t have to freak out, overreact of even react in a negative way. Perhaps not every time or instantly. Sometimes a knee-jerk reaction just goes off. Or an old thought habit kicks in.

And as you realize that no-one outside of yourself can actually control how you feel you can start to incorporate this thinking into your daily life and develop it as a thought habit. A habit that you can grow stronger and stronger over time. Doing this makes life a whole lot easier and more pleasurable.

3. Forgive and let it go.

“The weak can never forgive. Forgiveness is the attribute of the strong.”

“An eye for eye only ends up making the whole world blind.”

Fighting evil with evil won’t help anyone. And as said in the previous tip, you always choose how to react to something. When you can incorporate such a thought habit more and more into your life then you can react in a way that is more useful to you and others.

You realize that forgiving and letting go of the past will do you and the people in your world a great service. And spending your time in some negative memory won’t help you after you have learned the lessons you can learn from that experience. You’ll probably just cause yourself more suffering and paralyze yourself from taking action in this present moment.

If you don’t forgive then you let the past and another person to control how you feel. By forgiving you release yourself from those bonds. And then you can focus totally on, for instance, the next point.

4. Without action you aren’t going anywhere.

“An ounce of practice is worth more than tons of preaching.”

Without taking action very little will be done. However, taking action can be hard and difficult. There can be much inner resistance.

And so you may resort to preaching, as Gandhi says. Or reading and studying endlessly. And feeling like you are moving forward. But getting little or no practical results in real life.

So, to really get where you want to go and to really understand yourself and your world you need to practice. Books can mostly just bring you knowledge. You have to take action and translate that knowledge into results and understanding.

You can check out a few effective tips to overcome this problem in How to Take More Action: 9 Powerful Tips. Or you can move on to the next point for more on the best tip for taking more action that I have found so far.

5. Take care of this moment.

“I do not want to foresee the future. I am concerned with taking care of the present. God has given me no control over the moment following.”

The best way that I have found to overcome the inner resistance that often stops us from taking action is to stay in the present as much as possible and to be accepting.

Why? Well, when you are in the present moment you don’t worry about the next moment that you can’t control anyway. And the resistance to action that comes from you imagining negative future consequences – or reflecting on past failures – of your actions loses its power. And so it becomes easier to both take action and to keep your focus on this moment and perform better.

Have a look at 8 Ways to Return to the Present Moment for tips on how quickly step into the now. And remember that reconnecting with and staying in the now is a mental habit – a sort of muscle – that you grow. Over time it becomes more powerful and makes it easier to slip into the present moment.

6. Everyone is human.

“I claim to be a simple individual liable to err like any other fellow mortal. I own, however, that I have humility enough to confess my errors and to retrace my steps.”

“It is unwise to be too sure of one’s own wisdom. It is healthy to be reminded that the strongest might weaken and the wisest might err.”

When you start to make myths out of people – even though they may have produced extraordinary results – you run the risk of becoming disconnected from them. You can start to feel like you could never achieve similar things that they did because they are so very different. So it’s important to keep in mind that everyone is just a human being no matter who they are.

And I think it’s important to remember that we are all human and prone to make mistakes. Holding people to unreasonable standards will only create more unnecessary conflicts in your world and negativity within you.

It’s also important to remember this to avoid falling into the pretty useless habit of beating yourself up over mistakes that you have made. And instead be able to see with clarity where you went wrong and what you can learn from your mistake. And then try again.

7. Persist.

“First they ignore you, then they laugh at you, then they fight you, then you win.”

Be persistent. In time the opposition around you will fade and fall away. And your inner resistance and self-sabotaging tendencies that want to hold you back and keep you like you have always been will grow weaker.

Find what you really like to do. Then you’ll find the inner motivation to keep going, going and going. You can also find a lot of useful tips on how keep your motivation up in How to Get Out of a Motivational Slump and 25 Simple Ways to Motivate Yourself.

One reason Gandhi was so successful with his method of non-violence was because he and his followers were so persistent. They just didn’t give up.

Success or victory will seldom come as quickly as you would have liked it to. I think one of the reasons people don’t get what they want is simply because they give up too soon. The time they think an achievement will require isn’t the same amount of time it usually takes to achieve that goal. This faulty belief partly comes from the world we live in. A world full of magic pill solutions where advertising continually promises us that we can lose a lot of weight or earn a ton of money in just 30 days. You can read more about this in One Big Mistake a Whole Lot of People Make.

Finally, one useful tip to keep your persistence going is to listen to Gandhi’s third quote in this article and keep a sense of humor. It can lighten things up at the toughest of times.

8. See the good in people and help them.

“I look only to the good qualities of men. Not being faultless myself, I won’t presume to probe into the faults of others.”

“Man becomes great exactly in the degree in which he works for the welfare of his fellow-men.”

“I suppose leadership at one time meant muscles; but today it means getting along with people.”

There is pretty much always something good in people. And things that may not be so good. But you can choose what things to focus on. And if you want improvement then focusing on the good in people is a useful choice. It also makes life easier for you as your world and relationships become more pleasant and positive.

And when you see the good in people it becomes easier to motivate yourself to be of service to them. By being of service to other people, by giving them value you not only make their lives better. Over time you tend to get what you give. And the people you help may feel more inclined to help other people. And so you, together, create an upward spiral of positive change that grows and becomes stronger.

By strengthening your social skills you can become a more influential person and make this upward spiral even stronger. A few articles that may provide you with useful advice in that department are Do You Make These 10 Mistakes in a Conversation? and Dale Carnegie’s Top 10 Tips for Improving Your Social Skills. Or you can just move on to the next tip.

9. Be congruent, be authentic, be your true self.

“Happiness is when what you think, what you say, and what you do are in harmony.”

“Always aim at complete harmony of thought and word and deed. Always aim at purifying your thoughts and everything will be well.”

I think that one of the best tips for improving your social skills is to behave in a congruent manner and communicate in an authentic way. People seem to really like authentic communication. And there is much inner enjoyment to be found when your thoughts, words and actions are aligned. You feel powerful and good about yourself.

When words and thoughts are aligned then that shows through in your communication. Because now you have your voice tonality and body language – some say they are over 90 percent of communication – in alignment with your words.

With these channels in alignment people tend to really listen to what you’re saying. You are communicating without incongruency, mixed messages or perhaps a sort of phoniness.

Also, if your actions aren’t in alignment with what you’re communicating then you start to hurt your own belief in what you can do. And other people’s belief in you too.

10. Continue to grow and evolve.

”Constant development is the law of life, and a man who always tries to maintain his dogmas in order to appear consistent drives himself into a false position.”

You can pretty much always improve your skills, habits or re-evaluate your evaluations. You can gain deeper understanding of yourself and the world.

Sure, you may look inconsistent or like you don’t know what you are doing from time to time. You may have trouble to act congruently or to communicate authentically. But if you don’t then you will, as Gandhi says, drive yourself into a false position. A place where you try to uphold or cling to your old views to appear consistent while you realise within that something is wrong. It’s not a fun place to be. To choose to grow and evolve is a happier and more useful path to take.

Social Media Are Easier Than You Think by MP Mueller

With so many new technologies and tools, we business owners often feel as if we’re playing catch-up — as if we don’t even know what we don’t know. In just the last few years, there’s been a land grab by newly minted social media experts staking claim to social media prowess. Last month, the team over at Thought Leadhosted an online meet-up of 60 social media and online marketing experts titled The Influencer Project. The one-hour seminar gave all of the experts 60 seconds to offer their best advice on how companies could increase their influence online. For anyone with attention-deficit impulses (ahem) this was nirvana.

Marketing and Twitter and Facebook stars like Guy Kawasaki, John Jantsch of Duct Tape Marketing and Gretchen Rubin, who penned The Happiness Project, suited up. I was sold on attending the free gathering when I saw Scott Porad, who created the LOL cat phenomenon I Can Has Cheezburger, would be chiming in, too.

While the conference focused on helping social media companies enhance their influence, the takeaways apply to many small businesses. We listened here at Door Number 3, and we were surprised. As mystifying as social media can seem, the collective advice sounded like a primer for — here’s the surprising part — parenting 101 or social skills 101. Basically, all it takes are good communication skills:

Tell great stories. The secret to creating brand allegiance is giving people a story along with every purchase. And what better venue than a social community that is there expressly to interact? Follow smart people like Brian Solis to learn how to hone your company’s storytelling skills.

Mr. Solis is a principal at Silicon Valley’s new media agency, FutureWorks. Check out his Conversation Prism, which is a visual synopsis that shows how all of the social media sites out there can be leveraged and how they overlap and build on each other. Be multidimensional. Share your passions as well as your expertise. People buy products from companies whose values they align with.

Be consistent. And flex your Twitter finger. Share good content consistently and your audience will keep coming back. Talk about things you know, provide relevant and interesting info. If they like what you’re serving, people — not unlike livestock — will come back at the same time every day for their daily diet. Repeat your Twitter posts up to four times in eight hours — you’ll get the same amount of click-throughs each time because people don’t go back to read what they’ve missed on Twitter. Make sure the story you tell about your brand is authentic and, yes, be consistent.

The content can’t be all about you. My friend Lisa often jokes when we are catching up, “Enough about me talking about me. What do you think about me?” The social media consultant Michelle Greer, who won the 2009 Austin Social Media Award, says social media done right is all about improving customer lives through a better online experience. And that starts with content.

Start a conversation, educate, entertain and create a better user experience. Stop talking about your products and services. Offer free samples and creative thoughts. Social media give you the power to listen to conversations and connect the dots. People want something to talk about and rally around. Social media allow businesses and nonprofits to bring people and passions together. In 2008, Ms. Greer organized the first Blood Drive Tweetup, a crowdsourced fund-raiser that doubled the traffic for the Central Texas Blood and Tissue Center. The project became a national blueprint for other blood banks around the country.

Listen, respond and take it offline. Social media are really just about talking to people, so start that dialogue on Twitter and Facebook. Then listen intently and respond. Identify bloggers who are influencers with your target audience and reach out to them. Freshbooks is an online time-tracking and invoicing company in Toronto that keeps the dialogue running with loyal customers on Facebook. The Freshbooks team members have titles like Chief Handshaker, Chief Cat Herder and Support Rockstar. And they take it offline, hosting suppers with their users to find out what they like and need.

Meanwhile, Pandora Radio holds town hall meetings across the United States where Pandora users can tell Tim Westergren, the chief executive, what kinds of music they want to hear. And then, guess what? Pandora fans blog about it, and upload video of meetings to Flickr and YouTube, further sharing the love for the brand.

Pandora has truly hit a sweet spot with customer service. Proof? The Onion satirized the company’s zeal to find the music a listener wanted in a “news” story. And then, of course, Pandora posted the story on Twitter.

Be transparent, be honest. Creating a good relationship requires these things. It’s no different online.

Social means not being alone. Use it as one tool of many to reach and motivate your target audiences. The real sweet spot in marketing your company comes from a confluence of different vehicles where the net effect is your brand being seen, heard and reinforced on many levels. Each medium has its strengths: television delivers emotion and impact. Coupons can drive trial and purchase. Search advertising lets people find your company easier. And billboards often direct people to your closest location. Social media, done well, strengthen the bond between the company and the end user. To create enduring brands, a marketing program uses many different touch points.

There. Demystified. Building your company’s influence through social media requires simple, straightforward communications skills. The only thing you may not have known about creating influence through social media is that you had the power to do it all along.

Ways to Invest In A Bear Market by Jordan Weir

Every day, the stock market seems to continue its precipitous drop towards worthlessness, crushing hopes, dreams, and investors in a flurry of dizzying price movements.  So when do we hit bottom? Of course, nobody knows.

Yet there is an answer; a light in the darkness, used by the masters of investment to generate excess returns even ” no, scratch that, – especially in falling markets like this one.

Shorting A Stock.
The phrase sends a blood-curdling chill down many a buy-and-hold investors spine, frightening them into a shock-induced state of confusion. Yet for masters of this easier-then-it-sounds technique, its an extremely profitable oasis within the uncompromising desert that is this bear.

Confused? Well there’s no need ot be.  Let’s take it step by step. First of all, the vast majority of investors only buy stocks. When you buy a stock, there are two ways to make money. Stock price appreciation (buy low, sell high), and dividends. Which is all well and good when the market is going up, but for markets such as the one were currently embroiled in, we need a whole different animal.

To short a stock is essentially to sell it, and then buy it at a later date. Counter-intuitive, no? In the shorting process, you borrow the stock from your broker, sell it on the open market, and when the price has fallen sufficiently, you buy it back again, and return it to your broker.

An example… back in early October, Kellogg (Symbol: K) was trading for around $56.00 per share. Over the next two months, it dropped from just over $55.00, to $42.00 per share. Shorting 100 shares of Kellogg would have, in this instance, had a profit of $1,400. The procedure would be the following. When you short the stock at $56.00, you borrow 100 shares from your broker, and sell them on the open market, giving you $5,600. Later on, you decide to buy back those shares, and return them to your broker, while Kellogg is at $42.00. This costs you $4,200. Now you have covered your short position, for a profit of $1,400. Not to bad for two months, and a relatively small $5,600 investment.

For those abstract thinkers, it may be easier to conceptualize shorting as simply buying a negative number of shares. When you own 500 shares of a company, and the companies stock price increases by $1.00, you make $500. When you own -500 shares of a company, and the companies stock price increases by $1.00, you lose $500. However, when you own -500 shares, and that company then plummets by 5$, now you stand to gain $2,500. As they say, the bull goes up the stairs, but the bear goes out the window. Markets fall faster then they rise, so the time to make money is now!

Even still, shorting stocks has risks. If you choose the one stock of 100 that is about to start trending upwards, you could lose some money on that. Different sectors of the economy may also be effected by events that cause exceptions to the everything goes down in bear markets rule. The recent auto bailout could feasibly cause industrials to go up for a while, so shorting industrials could choose to be a bad choice. The biggest risk is that the bear market turns into a bull market while your not paying attention ” that could rack up losses on many positions at once.

One standard practice among investment professionals is the 5% rule. This rule is used when deciding how many shares of a company to buy/short, and is an invaluable tool when shorting stocks. Lets say you want to short a $15 stock, but your not sure how many shares to short. First take the amount of money in your portfolio, say, $10000. Then, take 5% of that. $500. That is the amount you can risk on this transaction.

Next determine the most logical stop loss. Lets say you decide if the stock goes above $17.50, youll sell your shares using a stop loss. If you can lose 2.50 per share, and your willing to risk $500, then you would short 200 shares of the stock, maximum. Many risk adverse investors choose only 2 or 3%, but 5% serves as a good maximum for even most risk-tolerant investors.

When it comes to stock picking, some people would call this a challenging market. And traditionally, we have been taught that buying low and selling high is the idea scenario, so looked at from that sense, perhaps it is a challenging market. Or is it? With everything covered already in this short document, you have already learned that a so called “challenging market” can be a bonanza for those who have learned how to short a stock or etf. Author: Jordan Weir

If you wish to get better in Life–Author Unknown

Learn from the Lessons of History
The concepts of military strategy have been studied and written about for more than 4,000 years, going back to the early works of General Sun-Tzu in China more than 2,000 years BC. These principles of strategy that have been developed and perfected over the centuries have direct applications and implications for strategic thinking, both personally and corporately.

Decide In Advance What You Want
The most important military principle is the Principle of the Objective. This principle requires that you decide in advance exactly what it is that you are trying to accomplish. What exactly is your objective? In my experience, fully 80% of all problems in personal and corporate life come from a lack of clarity with regard to objectives and goals.

Clarity Is Critical
Clarity of objective precedes all other elements in strategic thinking. Here are some questions that you can use over and over again to focus and clarify your objectives. The first question is, “What am I trying to do?” The second question is, “How am I trying to do it?” The third question is, “What are my assumptions?” And the fourth question is, “What if my assumptions were wrong?”

Question Your Assumptions
Having the courage to ask these questions, and to question your assumptions, both spoken and unspoken, is a key mark of the superior person. Sometimes individuals avoid questioning their assumptions for fear that they will have to change their minds or do something other than what they started out to do. However, false assumptions lie at the root of almost every failure. The only way that you can root out these wrong assumptions is by carefully analyzing them and discussing them, and then by demanding proof or evidence that these assumptions are still valid.

Project Forward In Your Mind
Another method for clarifying your objectives is for you to project forward and look backward. In other words, imagine that you have already achieved the objective that you are working toward. Project yourself forward in your mind and then look back to the present day, to the present moment. What do you see? What changes could you make looking back from this imaginary perspective of hindsight? This is a key peak performance thinking technique.

Determine Why You Want It
The final part of clarifying your objectives revolves around your identifying the reasons why you want to achieve this objective in the first place. Why is it important? Is it still as important as when you started off? Is this objective more important than any other objective that you could be working on? It is essential that you be clear about the answers to these questions.

Action Exercises
Here are two things you can do immediately to apply the principle of the objective to your personal and business life:

First, take out a piece of paper and answer the question: “What am I trying to do?” What are your goals? What are your objectives? Why are you doing what you are doing in the first place? Is this the very best use of your time and energy?

Second, question your assumptions. What things are you assuming are true about yourself, the people around you and the situation? What if one of these assumptions turned out to be false? What changes would you have to make if you found that your most cherished assumptions were not based on reality, or were contradicted by facts?

The Great Debate — Gold as the “ultimate bubble”

Billionaire financier George Soros this month repeated his warning gold is locked in the “ultimate bubble”, and told investors bluntly it was “certainly not safe” in troubled times.

Soros was simply repeating a warning he issued at the World Economic Forum (WEF) back in February. At the time gold was trading at less than $1,150 per ounce. It has since risen to touch $1,300 this week, and is up more than 400 percent from its low of $252 in 1999. There is no end in sight for the bull run. Anyone who shorted gold back in February would be sitting on huge losses.

But while Soros himself warned gold was in a bubble, his hedge fund, Soros Fund Management LLC was one of the biggest gold bulls of the year, doubling its holding of shares in the SPDR Gold Trust at about the same time he was issuing his warning at the WEF in Davos.

Soros is no longer involved in the management of the fund. But the apparent disconnect between the bubble warning and the bullishness of his fund will strike many observers as strange. In reality it illustrates the fascinating investment philosophy of one of the most successful financiers of the last 50 years and is the best way to understand what is really going on in the precious metal market.

Soros outlined his theory of price formation, and how bubbles inflate and collapse, in a brilliant book on “The Alchemy of Finance”, first published in 1987, but updated in 2003. It remains one of the clearest, most incisive explanations of how and why bubbles occur, and shows how profiting from the “madness of crowds” has been pivotal to his success.

In particular, Soros rejected the prevailing idea that “market prices are … passive reflections of the underlying fundamentals”, a dogma he dismissed as market fundamentalism, or that there were stabilizing forces which would automatically drive prices back towards equilibrium.

Instead, Soros propounded a theory of “reflexivity”, in which fundamentals shape perceptions and prices, but prices and perceptions also shape fundamentals. Instead of a one-way, linear relationship in which causality flows from fundamentals to prices and perceptions, Soros developed the theory of a loop in which prices, fundamentals and perceptions all act on one another.

“I contend that financial markets are always wrong in the sense that they operate with a prevailing bias, but that the bias can actually validate itself by influencing not only market prices but also the fundamentals that market prices are supposed to reflect”.

Later he writes more bluntly: “[The efficient market hypothesis and theory of rational expectations] claims that the markets are always right; my proposition is that markets are almost always wrong but often they can validate themselves”.

Beyond a certain point, self-reinforcing feedback loops become unsustainable. But in the meantime positive feedback causes bubbles to inflate further and for longer than anyone could have foreseen at the outset.

“Typically, a self-reinforcing process undergoes orderly corrections in the early stages, and, if it survives them, the bias tends to be reinforced, and is less easily shaken. When the process is advanced, corrections become scarcer and the danger of a climactic reversal greater”.

Soros cites numerous examples of self-validating behavior — ranging from the conglomerate boom of the 1960s and real estate investment trusts (REITs) in the 1970s to the technology boom and the rise and spectacular fall of Enron and WorldCom at the end of the 1990s and start of the 2000s. Each was heralded at the time as a “new paradigm”.

But none is more fascinating than his explanation of the dynamics of the REITs bubble in the early 1970s. Because Soros recognized the potential for a bubble early and published a research note advocating investors should get aboard the trend.

In his note he sketched the entire rise and fall of the REITs in the form of a four act play, warning that eventually disappointment would affect valuation and lead to a shakeout, with fewer new entries, more regulation and more moderate growth.

But he observed “The shakeout is a long time away. Before it occurs, mortgage trusts will have grown manifold in size and mortgage trust shares will have shown tremendous gains. It is not a danger that should deter investors at the present time. The only real danger at present is that the self-reinforcing process may not get underway at all”.

In the debate about whether markets are a “weighing machine” for discovering true fundamental value or a “voting machine” which records the popularity of certain theories and the mass of the crowd, Soros came down firmly on the side of the voting machine.

Crucially, the successful speculator responds to bubbles not by shorting them and waiting for stabilizing forces to drive the market quickly back to some fundamental value, but by identifying them early and riding the wave, hoping to get out before the whole edifice finally comes crashing down.

Reading people (other investors, narratives) is as important — if not more important — as understanding the fundamentals of an asset itself. Identifying the next “new new thing” earlier than the rest of the crowd and getting aboard, and then being willing to liquidate before the deluge, is at the heart of the speculator’s success.

In this world, gold is the ultimate bubble because apart from the cost of actually digging it out of the ground it has almost no real fundamentals other than price itself. Investors have been buying it precisely because the price has been going up and is expected to carry on rising. Rising prices have created their own demand. It is the ultimately reflexive investment.

Rising gold prices have encouraged investors to add gold to their portfolios and central banks to reverse a long-standing drift towards eliminating the low-yielding asset from their reserves and start adding it instead.
In a thoughtful research note, Deutsche Bank argues that “the gold market is still some way from displaying the characteristics of a bubble” (Commodities Quarterly, Sep 28). But using the Soros idea of a bubble as a process, rather than simply a frothy end-state, gold has already been a bubble for some time as an ever larger group of investors has climbed aboard, propelling prices higher.

In an implicit acknowledgment of the role self-validating forces have played driving gold prices higher, one prominent gold analyst recently pointed out that gold still has the most compelling “narrative” of any investment.

In a research note, Barclays Capital explains “For analysts … gold has traditionally been a tricky one due to its multiple roles as a commodity, currency, inflation hedge and hedge against credit risk and macroeconomic uncertainty. Gold is, in sum, more than a simple commodity, it’s a hedge against fear” (Commodity Daily Briefing, Sep 23). Barclays might have added a hedge against deflation as well, another function cited by Deutsche Bank.

But with so many apparent fundamentals, in some sense it has none at all; gold is the ultimate voting asset, which is valuable precisely because other investors believe it is valuable.

Soros was right to identify it back in February as the ultimate bubble. And his hedge fund was even more right to brush aside fundamental concerns and go long.