Ray Dalio On Investing

Ray Dalio is the founder of the investment firm Bridgewater Associates, one of the largest hedge funds in the world.  Business Insider featured a piece yesterday, running an excerpt of an interview Dalio gave at Davos about individual investors.  I'm posting part of that article from yesterday because I really think if most investors would focus on the points he makes below their investment experience would often be much different.  {Excerpt with my highlights.}

"Dalio explained to CNBC's Andrew Ross Sorkin the biggest mistake investors make:

The question in the markets is how events transpire relative to what is discounted.

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."

And so, that's the most common mistake in investing. You have to look ahead and say, "What is the transaction? What will be determining the buyer and seller?"

Dalio went on to explain the most important thing an investor can do:

I think the important thing here if I'm an investor is that the most important thing you can have is a good strategic asset allocation mix. 

In other words, you're not going to win by trying to get what the next tip is – what's going to be good and what's going to be bad. You're definitely going to lose.

So, what the investor needs to do is have a balanced, structured portfolio – a portfolio that does well in different environments.

When pressed about making bets on different markets – which Sorkin surmised must be how Dalio and his peers are so successful – Dalio said investing was a lot like poker. 

Here is the key takeaway:

The bets are zero-sum, right? In order for you to beat me in the game, it's like poker – it's a zero-sum game.

We have 1500 people who 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. In other words, we work that. We have to have diversified bets. We have a lot of diversified bets, and so on.

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.

Wise advice – and actually very apt, since poker players should know who's at the table before sitting down. Avoidance is a key skill."

My comment:  The main difference between investing and game of chance like poker is that each bet in a gambling game is a binary event.  You either win or lose.  Investors should avoid binary events.  Investing if done correctly allows you to double down on a bet when the odds are in your favor and if you are disciplined know roughly what your downside will be.  

Link:  Businessinsider.com Ray Dalio's Poker Analogy