Trading Wisdom from Ray Dalio

 

  • He believes there are 4 economic conditions: Growth increasing, Growth decreasing, Inflation increasing, and Inflation decreasing. His funds’ strategy is to balance the portfolio with investments that do well in each of the above four environments. In contrast, most conventional portfolios substantially overweight assets that do well in the first category, leading to unbalanced portfolios that can do poorly in other types of environments.
  • The concept that mistakes are the path to progress is one of the pillars of Dalio’s life philosophy. Mistakes are good if they result in learning. He has created a culture in which it is okay to fail but unacceptable not to identify, analyze, and learn from mistakes. Recognize that you will certainly make mistakes and have weaknesses. What matters is how you deal with them. If you treat mistakes as learning opportunities that can yield rapid improvement if handled well, you will be excited by them. If you don’t mind being wrong on the way to being right, you will learn a lot.
  • Our school system doesn’t teach you how to deal with something you don’t know. Anyone who has been involved in the markets knows that you can never be absolutely confident. You value what you don’t know. I’m so worried that I may be wrong that I work really hard at putting my ideas out in front of other people for them to shoot down and tell me where I may be wrong. You have to be both assertive and open-minded at the same time. You have to be an independent thinker.
  • Currency depreciations and the printing of money are good for stocks. Don’t trust what policy makers say.
  • 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.
  • If you’re combining assets that have an average of zero correlation, then by the time you diversify to only 15 assets, you can cut the volatility by 80 percent.
  • 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
  • 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. 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.
  • Strategies that are based on a manager’s recent experience will work until they inevitably don’t work.
  • I don’t believe in reducing exposures when you have a losing position. 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.
  • The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment. When investors are making money because they’re greedy and fearless, which is typically after a large price rise, doing the opposite is a good idea.  

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