Ray Dalio, founder of the world’s largest hedge fund Bridgewater Associates, shared his tips on investing during a TED Talks speech recently.
Dalio said that when he was a young kid he did not like following instructions and that he instead sought to figure out for himself how things work.
He was drawn to the stock market when he was 12. The ever-changing market dynamic enthralled him and he just fell in love with trading. The first stock he bought was Northeast Airlines.
He secured a three-fold return from the first investment. The carrier was about to go broke but it was acquired by a rival, leading to a tripling of the share price. Dalio just got lucky.
“This game is easy to me,” he thought.
He founded Bridgewater Associates at 26, but he almost lost everything seven years later.
In late 1970s, after studying a lot of statistics, Dalio found US banks had lent excessively to emerging markets. He predicted the US was heading towards the worst debt crisis after Great Depression.
At that time, US economic boom had lasted for five decades, and his conclusion was largely ignored.
Several years later, Mexico defaulted on its debt, followed by other emerging markets. Dalio became famous for his bold prediction.
He then decided to bet heavily on his view by taking large short positions on stocks. But he got burnt so badly that he had to lay off most of his employees. He even had to borrow from his dad to make ends meet at one time.
The S&P 500 index soared to 1,500 points in 1987 from around 100 points in mid-1982. The widely-expected bear market did not come despite the debt crisis. It’s the similar scenario as we’ve seen after the 2008 financial crisis, as the ensuing bear market only lasted for about a year.
Dalio learnt from the painful failure that any individual experience is too short when compared with economic cycles. “I learned a great fear of being wrong that shifted my mindset from thinking ‘I’m right’ to asking myself ‘How do I know I’m right?”
He started to listen to other independent thinkers who see things differently.
He requested his co-workers to integrate algorithmic decision-making and radical transparency into their investment. For instance, multiple scenarios would be drawn up and he would question the possibility that each may happen. Like what’s the chance for North Korea to start a war, and what’s the subsequent odds of a bear market. Radical transparency means everyone can share their true thoughts to make sure all ideas are carefully considered.
The changed decision-making approach has made Bridgewater the world’s most successful hedge fund, which made profit in 23 years out of the last 26 years.
Dalio’s success is largely built on his bet against the market.
So how do you know if you are right? You have to take out emotions from your decision-making process.
It’s a market consensus currently that there won’t be a war, and investors have also largely ignored monetary policy tightening. Let’s just wait and see whether that consensus is right in coming months.
This article appeared in the Hong Kong Economic Journal on Sept 20
Translation by Julie Zhu
[Chinese version 中文版]
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