market folly

Ray Dalio, founder of Bridgewater Associates, spoke with CNBC at Davos about a myriad of topics.  Dalio started Bridgewater with $5 million and now manages $130 billion.  His Pure Alpha hedge fund ended 2012 up 0.8% though his long-term returns are much more impressive.


Cash Will Move Into 'Stuff'

The Bridgewater founder thinks 2013 will be a year of transition as cash moves into 'stuff' like goods, services, financial assets (equities, gold, etc).

He points out that there's so much cash in the system due to central bank action.  Since cash has a negative real return, he argues that it has to go somewhere as risks are being reduced.  The desire to hold cash is being reduced. 

Dalio laid out his framework as essentially a scenario where US investors pile into stocks driving markets higher which will then give the Fed confidence to start to tighten, which will then cause a pullback across risk assets.


Bearish on Europe

However, he's quite bearish on Europe it seems noting that there's a terrible economy with a gradual restructuring.  He says there will be a depression there or a 'lost decade'.


Wisdom From Dalio

Dalio also had a some fantastic quotes about approaching investing, saying that,

"The way to look at any market... is to look at the buyers and sellers and to understand who's buying and who's selling and what the motivations are behind that."

He went on to note that,

"Too many investors are reactive decision makers... if something has gone up, they say 'ah, that's a good investment,' they don't say 'that's more expensive.'  It's the most common mistake in investing.  You have to look ahead and say what is the transaction? What will determine the buyer or seller?"

Dalio also points out:

"So much of the driver of any asset class returns is based on how events actually transpire relative to expectations. So there's a certain discounted growth rate in equities."

Lastly, Dalio made an excellent analogy comparing investing to poker:

"The bets are zero sum.  In order for you to beat me in the game, it's like poker, it's a zero sum game.  We have 1,500 people that work at Bridgewater, we spend hundreds of millions of dollars on research, and so on.  We've been doing this for 37 years and we don't know that we're going to win.  We have to have diversified bets.  So it's very important for most people to know when not to make a bet.  Because if you're going to come to the poker table, you're going to have to beat me, and you're going to have to beat those who take money.  So the nature of investing is that a very small percentage of the people take money essentially in that poker game away from other people who don't know when prices go up whether that means it's a good investment or if it's a more expensive investment."

This analogy is not a new concept and there are actually many similarities between poker and investing/trading.  Numerous hedge fund managers play poker (like David Einhorn) and we've highlighted the link between hedge fund managers and poker.

Embedded below are the videos of Dalio's interview from Davos:

Video 1



Video 2



For more on this legendary investor, Dalio is profiled in the book The Alpha Masters.  You can also check out Dalio's other in-depth interview on QE3, gold and other topics.