More Ray Dalio quotes from Jack Schwager’s book Hedge Fund
Market Wizards. I think the last couple of long paragraph quotes below
are especially important in regards to the current situation in the U.S.
“We don’t use stops. We trade approximately 150 different
markets, where I am using the term market to also mean spread positions, as
well as individual markets. However, at any given time, we probably have only
about 20 or so significant positions, which account for about 80 percent of the
risk and are uncorrelated to each other.”
…
“I don’t believe in reducing exposures when you have a
losing position. I want to be clear about that. The only pertinent question is
whether my being in a losing position is a statistically meaningful indicator
of what the subsequent price movement will be. And it is not. For that reason,
I don’t alter positions because they are losing.”
…
“The way we change our minds is a function of how that
information passes through our decision rules. Our decision rules determine the
position direction and size under the circumstances….It is 99 percent
systematized. These systems evolve, however, as the experience we gain might
prompt us to change or add rules. But we don’t make discretionary trading
decisions on 99 percent of our individual positions.”
…
On the origin of the Bridgewater system:
“Beginning around 1980, I developed a discipline that
whenever I put on a trade, I would write down the reasons on a pad. When I
liquidated the trade, I would look at what actually happened and compare it
with my reasoning and expectations when I put on the trade. Learning solely from
actual experience, however, is inadequate because it takes too much time to get
a representative sample to determine whether a decision rule works. I
discovered that I could backtest the criteria that I wrote down to get a good
perspective of how they would have performed and to refine them. The next step
was to define decision rules based on the criteria. I required the decision
rules to be logically based and was careful to avoid data mining. That’s how
the Bridgewater system began and developed in the early years. That same
process continued and was improved with the help of many others over the years.”
…
When asked if the rules get revised:
“They are sometimes revised. For example, we used to look at
how changes in the oil price affected countries. Between the first oil shock
and the second oil shock in the 1970s, crude oil was discovered in the North
Sea, and the U.K. went from being a net importer to a net exporter. That event
prompted us to change how we configured the decision rule that related to oil
prices so that when the mix of export and import items changed, the rule
changed.”
…
When asked how he was able to perform well in 2008:
“Our criteria for trading in a deleveraging had already been
established because we had previously studied other leveragings and
deleveragings. Our analysis included both inflationary deleveragings, such as
Germany in the 1920s and Latin America in the 1980s, and deflationary
deleveragings, such as the Great Depression of the 1930s and Japan in the
1990s. I had also directly experienced the deleveragings in Latin America and
Japan. We felt that if these sort of big events had happened before, they could
happen again. We also believed that fully comprehending these events was
important to understanding how economies and markets worked….In short, by
knowing how deleveragings occur, we could monitor the appropriate factors, and
by understanding the cause-and-effect relationships in a deleveraging, it was
not difficult to be well positioned in 2008.”
…
When asked about the current economic situation, Dalio
mentioned the importance of distinguishing between countries that are debtors
and those that are creditors, and countries that can print and those that cannot
print money. Debtor countries that can’t print money will experience deflationary
depressions. In regards to those debtor countries such as the U.S. that can
print money:
“Those that can print money, such as the United States, can
alleviate the deflation and depression pressures by printing money. However,
the effectiveness of quantitative easing will be limited because the owners of
the bonds that are purchased by the Fed will use the money to buy something
similar; they are not going to use it to buy a house or a car. In addition,
fiscal stimulus will be very limited because of the reality of the political
situation. So it is unlikely that we will have effective monetary policy or
effective fiscal policy. That means we will be dependent on income growth, and
income growth will be slow—maybe about 2 percent per year—because income growth
is usually dependent on debt growth to finance buying, and I don’t expect any
significant private credit growth. A growth rate of 2 percent is not sufficient
to meaningfully lower the unemployment rate. There is a risk that if the
economy deteriorates, we won’t have any effective tools for reversing the
situation. The current situation is analogous to being in a recession and not
being able to lower interest rates.”
“The best policy would be to spread out the problems over a
long period of time so that nominal interest rates stay below nominal growth
rates….You do it through a combination of monetary and fiscal policies that
produce enough government spending to make up for the reduction in private
sector spending to keep the economy from contracting. Avoiding an unmanaged
contraction is essential in order to maintain social and political order. At
the same time, there needs to be well thought-out debt restructurings because
we can no longer allow our debts to rise faster than our incomes, and we need
to gradually lower them….it is very important that the fiscal spending is used
for investments that generate returns that are greater than their costs. We
can’t afford to waste money.”
……………….
Related links: