Ray Dalio is one of the most influential and successful investors of all time. His company Bridgewater Associates is one of the biggest hedge funds in the world with around $125 billion in assets under management.
On 7 May 2019, Ray Dalio took part in a Reddit AMA (‘Ask Me Anything’). Here are the highlights from the Q&A session.
Q: What is something you wish you had that money can never buy?
A: Time. I love meaningful work and meaningful relationships and I never have enough time to have as much of them as I would like.
Q: What are your top 5 books of all time?
A: The Lessons of History by Will and Ariel Durant, Hero of a Thousand Faces by Joseph Campbell, The River Out of Eden by Richard Dawkins, The Rise and Fall of the Great Powers by Paul Kennedy — gee there are so many that are running through my mind.
Q: You end your recent piece by saying “[you] expect some of these policies will occur in the intermediate future, and will probably take many people by surprise.” What exactly do you mean by this?
A: I think that what will take people by surprise will be:
- the failure of monetary policy to be adequately stimulative in the next downturn while
- there is so much polarity and conflict both within countries and between countries.
I think that these things will be surprising to people because they’ve never happened before in their lifetimes though they’ve happened many times before in history. I suggest that you study the cause-effect relationships in the 1930s to see the mechanics that led to the outcomes of that period.
Q: As you say populism rose in the 1930s and then again now. It rises when the economy is not able to function in a way that creates plentiful job/work opportunities resulting in pain and misery for a large number of people. Why do economies fail to create jobs? Do interest rates have much to do with it?
A: Yes. When they can’t decline, the first type of monetary policy (which I call Monetary Policy 1) ceases to work, which is bad. They then go to printing money and buying financial assets (which I call Monetary Policy 2), which causes financial asset prices to rise which helps those who have financial assets but isn’t nearly as good for those who don’t, so it widens the wealth gap. Still, it is necessary, though it ceases to be effective. Europe and Japan are now in that position, and the US will probably find itself in that position in the next downturn. That is when central banks have to go to what I call Monetary Policy 3, in which central governments run deficits to stimulate spending and these deficits are monetized by central bankers.
To see numerous examples of these, I suggest you read both part I and part II of “It’s Time to Look More Carefully at “Monetary Policy 3 (MP3)” and “Modern Monetary Theory (MMT)” on www.economicprinciples.com. The overarching principle is that when there is a large wealth and values gap between people who have to share a budget and there is an economic downturn, and monetary policy is not effective in reversing it, there is a high likelihood of significant conflict.
Q: You have 10 minutes with yourself from 20 years ago. What info do you give him and why?
A: While it’s a bit more than 20 years ago, the big message I would want to have given myself is “Why are you so stupidly arrogant!?!” That was in 1982 when I was 33, and I would have told myself you can be worlds smarter and raise your chances of making better decisions if you could simply be humble and worried enough about being wrong to have the smartest people who are willing to disagree with you and challenge you so that you could examine their reasoning.
Q: What are your thoughts on climate change generally and, specifically, how it can impact our economy, both through the challenges and opportunities it will lead to (assuming you agree with the science that it’s something to worry about)?
A: I think that climate change is a really important issue that will certainly impact us in big, evolutionary ways that people are not paying enough attention to or dealing with well, like a slow-growing cancer. The biggest problem with it, like so many of our other problems, is with us in dealing with ourselves in working through our disagreements to determine what we should do. We have a real problem in making good collective decisions and getting on with the things we need to do collectively.
For us individually, we need to think about what it means for us personally because a lot of the next thirty years’ changes are coming at us regardless of what we do and we need to adapt to them. Though we certainly could do a lot for future generations if we could just get past our big problem of not being about to reach agreement about what to do.
Q: How do you prioritize Principles that could seemingly be in conflict?
A: I’d love to have people understand the art of thoughtful disagreement. I think the greatest tragedy of most individuals and most groups in dealing with most of their issues is that individuals are inappropriately attached to their own biased perspectives so that they don’t properly stress-test their thinking through the art of thoughtful disagreement.
If I could change anything, it would be that individuals understand how thoughtful disagreement can be a path toward idea meritocratic decision-making that gets people past their disagreements onto doing the best things for them individually and collectively.
Q: Could you tell us a bit more about being ‘radical openminded’ and how you trained yourself to do it?
A: It comes from a place of deep curiosity and fear of missing important perspectives. I experience genuine excitement from seeing different perspectives through the eyes of others, especially through the eyes of brilliant and/or wise people because it’s very interesting and because it has been invaluable in my learning and decision making.
Q: Does only the passion for your work fuel you to work hard? Some people say do what you love and you would never have to work a day of your life Others say, work hard grind it out. What’s the truth to all this?
A: It’s passion that pulls but sometimes it feels like climbing Everest so that there’s a fair amount of grinding involved to get there. If you really want to know what it’s like for me, I urge you to watch my 30 minute animated video, “Principles for Success,” which is available on YouTube. I wanted to distill my most important life principles into that animation, just like I wanted to distill my most important economic principles into my 30 minute animation “How the Economic Machine Works,” which is also available on YouTube.
Q: In your industry (and a handful of others) it has become possible for individuals to attain extraordinary levels of wealth at relatively early stages in their adult lives. Are you ever in a position to advise these people about their very singular circumstances? If so, do they have common concerns or fears? What piece of your advice do you feel is most needed and/or appreciated, and why?
A: Most of the people who I knew who acquired great wealth did so because they got excited about, and built out something that a lot of people really wanted and not because they tried to make a lot of money. The ones who are most blessed are those who started with nothing and experienced the increments of the changes all the way up to having a lot because they gained the full range of experiences that allow them to know what each of these circumstances are like because it helped them understand what’s really important. Most of their experiences and also studies of what causes happiness around the world show the same thing — that beyond having enough money to comfortably deal with the basics, there is no correlation between the amount of money one has and the amount of happiness one has, and the factor which is most correlated to happiness is being part of a community. Having meaningful work and meaningful relationships is most valued.
Of course, some people can get hung up making money and connect their value to it or the supposed status that it brings; however, that’s not true for most of the people I know.
Q: I know that recently you have downgraded the chances for a recession to 35% or so. However, I can’t stop thinking that valuations of equities are extremely high. Are you worried about this, and would you be more neutral with your portfolios as an amateur investor?
A: First of all, the main thing I would worry about as an amateur investor is whether you can win at this game. I strongly doubt that you can. I believe that competing in the markets is more difficult than competing in the Olympics because there are more people trying to make money doing it and it’s a zero sum game, yet most people think that they can do it. However, history has shown that only a small percentage of the players of this game walk away with a lot of money and most lose money.
Regarding the first part of your question, I look at the expected return of equities relative to the return on bonds and the return on cash to assess their relative values, and, more importantly, I look at the flows of who is buying what for what reasons to try to judge how cheap or expensive equities are. Right now the biggest issues that are on my mind are:
- the inabilities of the ECB and the Bank of Japan to be stimulative and the limited ability of the Federal Reserve to be stimulative when
- we have big wealth/values gaps and populism
- going into a number of important elections around the world. That will lead to more fiscal policy moves that will affect markets (the way the Trump corporate tax cuts did). Additionally, 4) the rise of China and the economic, geopolitical, and possibly even military competitions with the US, will change the economic landscape in very important ways. So will 5) big data, artificial intelligence, and other “thinking-like” technologies.
It will be these factors that I feel I must pay the most attention to in thinking about our investments, but even more importantly our well-being.
Q: One thing I just don’t understand is your stance on China. China’s culture is the exact opposite of Bridgewater’s. They are radically non-transparent. Freedom of speech, religion, and even thought are nonexistent as exhibited by Tibet, Xinjiang, Taiwan, Hong Kong, etc. State sanctioned technology theft has been proven so many times (see Su Bin, AMSC, many more). They even stole the American Dream and called it the China dream. Their financial position is a house of cards on mountains of debt and least of all they are allies with North Korea! You often say that today is analogous to the 1930s-40s. Well wouldn’t that make China Nazi Germany then? We know that didn’t go well for investors. My real question is how can you invest in this country that is in so many ways the opposite of what your principles embody? What makes you think they won’t just do to you what they have done to so many other Western companies once they have your trade secrets?
A: I have been going to China since 1984, have come to know it well, and can assure you that the picture you paint of it is not the China that I know. It is certainly the case that the US is a culture that values the individual and individualism whereas China is a culture in which the core unit is the family, leadership is from the top-down, and knowing one’s place and how to play it well is most important. It’s more Confucian than “Communist dictatorship” than most Americans realize. I’m not arguing the pros and cons of it as much as wanting to convey that it is important not to bring our own biases to trying to interpret it.
This is worthy of a longer discussion at some other time because understanding China is now important and will rapidly get even more important.
Q: I’m 14 years old. I got interested in finance around 12. I read lots of books and watched lots of videos. I did as much as I could to become educated At 13 I bought 14 shares of BABA. My plan for that is very long term. When I grow up I want to probably be an investment banker or financial analyst. Though I have always wanted to go bigger than that. I want to help as many people as I can. I aspire to be like you or Buffett. Albeit the possibility of that is extremely low. Now what I came to ask is, what should I do from now on in my life to become successful. Just read more finance books and learn as much as I can until college and then see where life takes me from there?
A: To me it sounds like you’re halfway there at 14 years old and now the main thing that you need to do is play the game. I got hooked at about the same age and found that by loving the game I found my way because there’s no path to progress that’s as good as having actual experiences and reflecting on them.
Q: What would your advice be to someone in their teenage years?
A: Explore the things that excite you, think for yourself while having humility, and have fun!