Ray Dalio quotes from Jack Schwager’s book Hedge Fund
Market Wizards:
Original lesson learned after the U.S. went off the gold
standard in 1971:
“I learned that currency depreciations and the printing of
money are good for stocks. I also learned not to trust what policy makers say.
I learned these lessons repeatedly over the years.”
…
On the Fed's power over the market:
“I learned not to fight the Fed unless I had very good
reasons to believe that their moves wouldn’t work. The Fed and other central
banks have tremendous power. In both the abandonment of the gold standard in
1971 and in the Mexico default in 1982, I learned that a crisis development
that leads to central banks easing and coming to the rescue can swamp the
impact of the crisis itself.”
…
“In trading you have to be defensive and aggressive at the
same time. If you are not aggressive, you are not going to make money, and if
you are not defensive, you are not going to keep money.”
…
Correlation and diversification:
“There are ways to structure your trades so that you can
produce a whole bunch of uncorrelated bets. You have to start with your goal.
My goal is that I want to trade more than 15 uncorrelated assets. You are just
telling me your problem, and it’s not an insurmountable problem. I strive for
approximately 100 different return streams that are roughly uncorrelated to
each other. There are cross-correlations that enter into it, so the number
works out to be less than 100, but it is well over 15. Correlation doesn’t
exist the way most people think it exists. People think that a thing called
correlation exists. That’s wrong. What is really happening is that each market
is behaving logically based on its own determinants, and as the nature of those
determinants changes, what we call correlation changes. For example, when
economic growth expectations are volatile, stocks and bonds will be negatively
correlated because if growth slows, it will cause both stock prices and
interest rates to decline. However, in an environment where inflation
expectations are volatile, stocks and bonds will be positively correlated
because interest rates will go up with higher inflation, which is detrimental
to both bonds and stocks. So both relationships are totally logical, even
though they are exact opposites of each other. If you try to represent the
stock/bond relationship with one correlation statistic, it denies the causality
of the correlation. Correlation is just the word people use to take an average
of how two prices have behaved together. When I am setting up my trading bets,
I am not looking at correlation; I am looking at whether the drivers are
different. I am choosing 15 or more assets that behave differently for logical
reasons. I may talk about the return streams in the portfolio being
uncorrelated, but be aware that I’m not using the term correlation the way most
people do. I am talking about the causation, not the measure.”
…
“I think that one of the greatest problems that plagues
mankind is that people are always saying, “I think this, and I think that,”
when there is a high probability they are wrong. After all, to the extent that
there is strong disagreement about an issue, a lot of the people must be wrong.
Yet most of them are totally confident they are right. How is that possible?
Imagine how much better almost all decision making would be if people who
disagree were less confident and more open to trying to get at the truth
through thoughtful discourse.”
…
On Bridgewater's decision-making process:
“Our decision-making process is to determine the criteria by
which we make decisions in the market. Those criteria—I call them
principles—are systematized. These principles determine what we do under
different circumstances. In other words, we make decisions about the criteria
we use to make decisions. We don’t make decisions about individual positions. For
any trading strategy, we can look back at when it won, when it lost, and under
what circumstances. Each strategy develops a track record that we deeply
understand and then combine in a portfolio of diversified strategies. If a
strategy is not performing in real time as expected, we can reevaluate it, and
if we agree it is desirable, we might modify our systems. We have been doing
this for 36 years. Over the years, we develop new understandings, which we
continually add to our existing understandings.”
…
“….we test our criteria to make sure that they are timeless
and universal. Timeless means that we look at a strategy during all different
times, and universal means that we look at how a strategy worked in all
different countries. There is no reason why a strategy’s effectiveness should
change in different time periods or when you go from country to country. This
broad analysis through time and geography gives us a unique perspective relative
to most other managers. For example, to understand the current U.S. zero
interest rate, deleveraging environment, we need to understand what happened a
long time ago, such as the 1930s, and in other countries, such as Japan in the
postbubble era. Deleveragings are very different from recessions. Aside from
the ongoing deleveraging, there are no other deleveragings in the U.S.
post–World War II period.”