Ray Dalio Explaining Principles of Investing

0:48

decision i would write down the criteria

0:50

i used for making those decisions

0:52

because cause effect everything happens

0:56

because of a cause

0:58

and so and the same things happen over

1:00

and over again

1:02

and so by taking the time to write them

1:04

down

1:05

and then seeing how those criteria would

1:08

have worked over a period of time i

1:09

could get perspective

1:11

and so i wrote down those principles and

1:13

as hashem mentioned

1:15

i i wrote a book called principles

1:19

which has to do which just was a

1:21

collection of the life and work

1:23

principles so the culture that we have

1:25

is very very important it was really the

1:27

most important thing in terms of

1:29

whatever success we've had

1:31

at the same time i wrote down the

1:34

economic and investment principles

1:36

so what i thought i would do today is to

1:39

share with you

1:40

what i think of my most important

1:43

economic and investment principles and

1:45

then

1:45

look at the world through the

1:47

perspective of those principles

1:49

in other words rather than just tell you

1:51

what i think i want to tell you how it

1:53

works

1:54

and then we can apply that mechanics you

1:57

can decide does it work that way

2:00

or not so are these principles

2:03

valuable because if you know the

2:06

principles

2:08

it's like it's giving it like a giving

2:11

man the fish

2:11

ability to fish rather than to just give

2:13

the fish i can tell you what i think

2:16

but if these principles are right then

2:18

you could apply them yourself

2:20

to whatever time or circumstances exist

2:23

so um i broke it down in terms of

2:26

economic principles

2:28

and investment principles because

2:31

the markets follow the economy

2:35

so in order to understand economics and

2:38

all the markets you have to

2:40

understand in order to understand the

2:43

market you have to understand the

2:44

economy

2:45

so i want to describe how

2:48

i think the economy works i think it's

2:51

like a ver

2:51

it's a perpetual motion machine and

2:55

there are four big forces

2:58

three important equilibriums and two

3:00

levers if you get this down i

3:01

think this basically everything through

3:03

my eyes

3:05

is along those lines um over a period of

3:08

time

3:09

we raise our living standards because we

3:11

learn how to do things better

3:13

we become more efficient that's called

3:15

productivity

3:16

output and that

3:19

is something that evolves over a period

3:21

of time

3:24

that is because it evolves it is not

3:27

something that

3:28

is a big thing that's we see as a big

3:30

thing but it's the most important thing

3:32

over a period of time

3:34

the big things that we see and feel

3:37

every day

3:37

are debt cycles now there's a short-term

3:40

debt cycle and there's a long-term debt

3:42

cycle

3:42

when i say a short-term debt cycle what

3:45

i mean is

3:46

what we think of is normally the

3:48

business cycle

3:49

right you have a recession you have a

3:52

weakness in the economy

3:54

when the rate of economic activity is

3:56

too low

3:57

then central banks produce credit

4:01

and credit is buying power so

4:05

you produce that credit it makes

4:07

purchases of goods services and

4:09

financial assets happen

4:11

and so the economy picks up that

4:15

cycle usually lasts seven to ten years

4:19

as the economy picks up

4:23

the demand rises relative to the

4:25

capacity as you get

4:26

later in the cycle the central bank puts

4:29

the brakes on it

4:30

they raise interest rates tighten

4:32

monetary policy

4:34

as the uh there's less slack in the

4:36

economy the unemployment rate is

4:38

low they put the brakes on it interest

4:41

rates go up

4:42

tightness and monetary policy then you

4:44

have a recession

4:45

slow up and that's the cycle right and

4:48

because

4:49

credit is buying power

4:53

by providing it it also produces debt

4:57

and debt means the obligation to pay

4:59

back

5:00

and so by its very nature it's cyclical

5:03

first comes the stimulation then comes

5:05

the paying back

5:06

which means when you when you produce

5:09

credit

5:09

you can spend more than you earn and

5:12

when you pay back

5:13

you have to spend less than you earn and

5:16

that's the nature of the cycle and i

5:17

think we're all acquainted with that

5:18

type of cycle

5:20

and with that cycle goes market cycles

5:22

which we'll talk about

5:24

that's what i mean by the short-term

5:25

debt cycle

5:27

there's also a long-term debt cycle

5:29

which is the

5:30

accumulation of all of those that those

5:33

shorter term debt cycles

5:35

because everybody wants things to go up

5:40

they want their asset prices the markets

5:43

to go up

5:44

they want employment to go up they want

5:46

everything to go up

5:47

and for that reason they

5:51

central banks over a period of time

5:53

stimulate

5:54

and they do that by normally

5:58

lowering interest rates until interest

6:00

rates hit zero

6:02

and then when interest rates hit zero

6:05

they can't do that anymore

6:07

and then we come to the need to

6:11

print money and buy financial assets

6:13

which we call quantitative easing

6:15

and when they can't do that anymore or

6:18

there are limitations

6:19

we come to the end of the long-term debt

6:21

cycle

6:23

so there's a short-term debt cycle a

6:25

long-term debt cycle and productivity

6:28

now related to all that is

6:31

politics internal politics and external

6:34

politics

6:37

in that normal cycle they're related

6:41

as we're going to see in terms of that

6:46

dynamic

6:48

the period that we're going through 2008

6:52

and 9

6:53

there was a debt cycle and interest

6:56

rates hit zero

6:58

and that's very similar to 1929 to 32

7:02

there was a debt crisis and interest

7:04

rates hit zero

7:06

and in both of those cases there was the

7:09

printing of money and the buying of

7:11

financial assets

7:12

which caused those financial asset

7:14

prices to go

7:15

up and more liquidity in the economy

7:19

and that particularly benefited

7:22

those who had financial assets and it

7:26

contributed

7:27

to the wealth gap and the

7:30

income gap as did technology

7:33

and as a result of that in the 1930s as

7:37

also happened now politics entered into

7:40

the picture

7:41

so as we're seeing in the world right

7:43

now that issue

7:45

of wealth gap is causing

7:50

populism populism of the left and

7:52

populism of the right

7:54

and that's having an effect on the

7:56

markets and having an effect on the

7:58

economy

7:59

so we are also seeing a situation

8:02

very much like the 30s in which

8:05

uh we're seeing a rising power

8:09

uh challenging an existing power

8:13

that's a geopolitical cycle

8:16

when a rising power in the form of china

8:19

a challenging and existing power in the

8:21

form of the united states

8:23

and if we look at histories and cycles

8:25

of those periods

8:28

there's a cycle of

8:31

conflict and peace normally

8:34

peace happens after a war because some

8:37

dominant

8:38

country wins the war nobody wants to

8:40

fight

8:41

the dominant power and you have an

8:44

extended period of

8:45

peace until there's then that particular

8:47

conflict

8:48

doesn't i'm not saying we're going to

8:49

have a military conflict or anything

8:51

like that

8:51

although you know that

8:55

always exists as a possibility so these

8:58

cycles these things have happened um

9:00

over and over again

9:02

so politics enters into can affect

9:06

the the cycles for example um

9:09

the the shift in the uh united states

9:13

to be able to create tax cut changes

9:16

help the corporate tax picture

9:18

and cause stock prices to rise okay

9:21

those are the cycles

9:23

then when i look at what's happening i

9:26

compare it to three equilibriums

9:29

and what are these three equilibriums

9:32

first that debt growth has to be in line

9:36

with the income growth that's required

9:39

to service the debt

9:43

if debt growth is faster than the income

9:46

growth that's going to service the debt

9:48

we're going to have an adjustment and

9:51

so i'm always doing the pro forma what

9:54

is the ability to service that debt

9:56

so that's what i'm watching second

9:59

equilibrium

10:01

is that the rate of economic activity

10:04

economic capacity utilization is neither

10:08

too high nor too low what that means

10:11

is if you have it pressing up too much

10:13

over an overheating economy

10:15

that's going to be the tightening of

10:17

monetary policy and a correction

10:19

and if you have it too low so that the

10:21

economy is depressed

10:23

and there's a lot of slack that's going

10:25

to cause an adjustment to bring it up

10:28

and so i'm always watching where are we

10:30

relative to that because that's a key

10:32

driver of the of these cycles and the

10:35

third

10:36

is that the projected returns of

10:39

equities

10:40

are above the projected returns of bonds

10:44

which are above the projected returns of

10:46

cash

10:47

by appropriate risk premiums in other

10:49

words the capital markets

10:52

produce the circulation of buying power

10:56

in the form of this credit coming around

10:58

and this relationship of the

11:02

cash to bond yields to stock yields and

11:05

asset classes

11:06

determines how money flows through the

11:08

economy

11:10

and a normal condition is for reasons i

11:13

won't digress into

11:14

to have cash have a lower return than

11:17

bonds that have to have a lower return

11:19

from equities

11:20

having to do with how the system works

11:22

basically central banks put cash on

11:24

deposit and people with better ideas

11:26

have to make a profit to that they use

11:29

that money to create

11:30

these other uh the level of economic

11:33

activity and

11:34

have to have higher returns and when

11:36

that's not the case the way they tighten

11:37

it

11:38

is that there are two levers so now

11:42

there are two levers monetary policy

11:46

and fiscal policy right monetary policy

11:49

then

11:50

is the means by which the brakes and the

11:52

gas are put on

11:53

and the brakes and the gas being put on

11:56

become reflected

11:57

in each of these other items so let's

12:00

say

12:01

if debt growth is too high relative to

12:03

income growth and capacity utilization

12:06

is high and strat stretched

12:10

monetary policy will be tightened

12:13

and that tightening of monetary policy

12:15

will change the projected return

12:18

of ec of cash relative to bonds and of

12:21

equities those risk premiums

12:23

and that will slow the economy down

12:26

and that will drive those cycles and

12:29

that's how

12:30

the economy is operating in these

12:32

perpetual motion kind of way

12:35

and if you you could almost picture i

12:38

literally can picture where you are in

12:41

those cycles

12:43

and what is happening and you can

12:45

anticipate what is going to happen

12:47

next from that because it's that petrol

12:49

perpetual motion machine

12:51

so that's my template in a nutshell

12:55

and if you keep thinking like where are

12:58

we now

13:00

then you um you know you can kind of

13:03

think where we are

13:04

okay so i'm just going to show you some

13:06

charts to help to convey the picture

13:08

this is uh real gdp

13:11

going back to 1900. so this is

13:15

that line is productivity right and

13:19

that's an a big inevitable force

13:22

that happens over a period of time even

13:24

the biggest economic

13:26

turbulence you know looks like a bump

13:29

in that that cycle right productivity is

13:32

a big force

13:33

betting on productivity is a big force

13:35

but what happens is that

13:38

cycle as you get later in the long-term

13:40

debt cycle

13:41

that productivity begins to slow because

13:44

there needs to be investment

13:46

and there needs to be other things and

13:48

when you activity

13:50

um when there's prosperity and so on you

13:52

get more productivity it's a self

13:55

reinforcing cycle so these

13:58

charts are just meant to show

13:59

productivity and how it's changing

14:02

over a period of time in the developed

14:05

countries and then

14:06

in china so just to give you a quick

14:08

picture here

14:09

you could see it in varying degrees bend

14:11

over as they are

14:12

later into their longer term debt cycle

14:16

this united states over the last 10

14:18

years versus

14:19

since 1980 and so in each one of those

14:22

cases you could see it declining

14:24

japan which is large later in that debt

14:27

cycle and so on

14:28

basically hardly any growth in

14:29

productivity so so

14:31

okay that's what productivity looks like

14:33

now where are we

14:35

in the short-term debt cycle of the

14:37

business cycle

14:38

this is what the cycle looks like that i

14:40

was describing

14:42

in other words um what happens from the

14:47

capital markets perspective as as

14:50

you um begin to go to higher levels of

14:53

operating rates

14:54

lower levels of unemployment central

14:57

banks begin to tighten

14:59

liquidity starts to tighten then risk

15:02

premiums start to rise okay in this

15:04

cycle we're

15:07

nine years into the cycle unemployment

15:09

rates are comparatively low

15:11

and there's less slack so you know no

15:14

surprise

15:15

central banks tighten monetary policy

15:17

and the way they tighten monetary policy

15:20

is by either raising interest rates or

15:23

lowering the purchases

15:25

of the financial assets that they buy by

15:28

expanding the balance sheet

15:29

so that's where we are in that cycle now

15:32

if you look at how markets behave in

15:35

that part of the cycle

15:36

this is breaking the cycles into three

15:39

parts

15:40

the early phases of the cycle the mid

15:42

phase of the cycle and the late phase of

15:44

the cycle

15:45

and this is across the world

15:49

different countries this is the united

15:51

states this is europe to show how the

15:52

historical so we're in a period of time

15:56

this period of time which is relatively

15:59

late in the cycle

16:00

is also associated with a period of time

16:03

where there is less attractive returns

16:07

greater vulnerability so that's largely

16:10

where we are in the cycle

16:14

interest rates have

16:17

hit their lows in some cases can't go

16:21

lower

16:22

and then we're dealing with the issue of

16:24

quantitative easing

16:27

so taking this back to uh this goes back

16:30

to 1900

16:32

this shows debt in debt to gdp ratio in

16:35

the united

16:36

states and it just shows how the cycle

16:38

that we're going through now

16:40

is very similar to the cycle that we

16:42

went into the 30s

16:43

in other words because of that debt

16:45

crisis

16:46

and interest rates hitting zero you had

16:49

the printing of money this shows the

16:51

central bank's balance sheet the

16:53

monetary base the acceleration of

16:55

printing and money

16:56

same thing happened in the 2008

16:59

financial crisis

17:00

you could see that what happens is you

17:04

have

17:05

the debt crisis you have the hitting of

17:07

zero in interest rates

17:09

they're stuck so they have to print the

17:12

money

17:13

and then we have the reaction very

17:16

similar to

17:17

1932 to 1937 in the economy picks up

17:21

1937 they start to tighten monetary

17:25

policy because they're worried that the

17:26

economy is overheating

17:28

and inflation's going to rise and they

17:30

cause

17:31

a recession that's the first time they

17:33

use the word recession

17:34

recession it was like re-depression they

17:36

used the term recession

17:38

and that was the uh the 1938

17:41

period now um i talked about debt

17:45

but there are also unfunded liabilities

17:48

that we don't call

17:49

debt which would be pension and health

17:51

care liabilities and i just wanted to

17:53

give you

17:53

a picture of what that's like that has

17:56

there's a lot of liabilities

17:58

out there um promises that have to

18:02

be kept and so the liabilities are

18:05

very large um i want you to focus then

18:08

on these the bottom charts before i put

18:11

the top charts in because i

18:12

i want to convey um as it relates to

18:16

both markets and the economy

18:18

the important um the the really

18:22

realizing that we've been really in a

18:24

golden age

18:25

of capitalism in the following sense

18:32

this chart shows how profit margins have

18:35

increased

18:36

in other words uh they've more than

18:38

doubled

18:39

since 2000. means if you didn't have an

18:43

expansion in profit margins you wouldn't

18:45

have you'd have the stock market 40

18:47

percent lower

18:48

you had an expansion in profit margins

18:51

and at the same time you had

18:52

a decrease in the form of employee

18:55

compensation

18:56

and profit margins be largely because

18:59

of a number of factors but technology

19:02

has been replacing people

19:04

and so it's made it more efficient so

19:06

that that was

19:07

an element uh also

19:10

globalization has helped um

19:14

just to show you a couple of charts

19:15

pertaining to this this

19:17

is um number the globalization pressure

19:22

movement and this is um the

19:25

capital movement and these scatter

19:28

diagrams

19:28

show um

19:32

if you go the globalization companies

19:35

that have

19:36

gone global on the margin have improved

19:38

their profit margins more

19:40

and those that are more concentrated

19:44

have improved their profit margins more

19:46

and those with

19:48

who have reduced union membership have

19:50

produced their profit margins more

19:52

and so as a result of that this has

19:55

contributed to

19:57

the growth of um the wealth gap

20:02

and the prof profit gap it's been great

20:05

for companies

20:06

but it has not been good for a certain

20:09

percentage of the population if you look

20:11

at the conditions of

20:12

the bottom 60 percent of the population

20:16

bottom 60 means the majority the

20:19

conditions have

20:20

uh have been bad there has not been

20:25

over the since 1980 any income growth

20:27

real income growth in the united states

20:30

um in a fed survey the

20:33

40 of all americans could not raise 400

20:37

in the event of an emergency

20:40

so there is a gap and with that gap

20:45

um has come this is the wealth gap that

20:49

the top um one-tenth of one percent of

20:51

the population's net worth

20:53

is almost the same as the bottom 90

20:57

percent combined

20:58

and as a result we have populism

21:01

populism of the left and populism of the

21:04

right

21:04

that was a phenomenon that developed

21:08

countries didn't used to have

21:09

and so now it is a

21:13

not only political phenomenon it's an

21:16

economic and market phenomenon

21:18

because as we come to go into the

21:20

political elections

21:21

in the number countries in europe and in

21:23

the united states

21:25

it will be really um a

21:29

a conflict over capitalism versus

21:32

socialism

21:33

or the left and the right and it's going

21:36

to become

21:38

rather extreme in both of those cases

21:40

and

21:41

that has an implication just as the

21:46

these profit margins improved

21:49

and then i and then tax rates

21:52

that's the effective corporate tax rate

21:54

and how the effective corporate tax rate

21:55

isn't

21:56

that's been fantastic so imagine you

21:58

have profit margins increasing

22:01

you have the tax rate going down

22:04

you have cheap money cheap money has

22:07

been used to

22:08

borrow to buy back stock or make mergers

22:12

that's also supportive to stock prices

22:14

and so on

22:15

many of those things will not continue

22:17

we think profit margins will go

22:19

down i think you're at the best of the

22:21

corporate tax rates

22:23

and in terms of the issue in terms of

22:26

the wealth gap so we're entering a newer

22:30

environment

22:31

including an environment which is not

22:34

going to be as conducive to the

22:36

purchasing of financial assets by

22:38

central banks

22:39

and all of that we're going from uh

22:42

headwind

22:42

from tailwinds to headwinds

22:46

and to give you a flavor of what this

22:49

political

22:50

uh situation is like and and the

22:52

polarity and the entrenchedness these

22:54

are

22:54

two charts the first they go back to

22:57

1900.

22:58

the first chart which is the red chart

23:00

shows

23:01

um how conservative the republicans are

23:04

survey

23:05

surveyed economically conservative so

23:07

the they're more conservative than they

23:09

have ever been

23:11

the democrats it shows how liberal they

23:14

are

23:14

in terms of policies and they're more

23:16

liberal than they have ever been

23:19

so the two have not had greater polarity

23:22

than we have today in politics

23:25

and this shows how much is

23:29

the votes cast along party lines in

23:31

other words republicans sticking with

23:33

republicans and democrats sticking with

23:35

democrats and so it shows the entrenched

23:38

conflict that we're having this is in

23:41

the united states

23:42

this is not just a united states

23:44

phenomenon it is a european phenomenon

23:47

as as much we're going to be going into

23:50

elections

23:51

in uh europe and then

23:55

for the european elections and then

23:57

we're also going to have

23:58

changes in politics and there's going to

24:00

be more movement

24:02

to political extremes for example in the

24:04

uk i think it's likely that

24:06

um jeremy corbyn will be um in power

24:09

which will have an effect on capital

24:12

flows

24:14

so we're entering a period of time

24:18

in which we're late rather late in the

24:22

cycle

24:25

central banks have less power than they

24:28

used to to ease

24:32

and we're having this populism

24:36

in an election cycle so that's kind of

24:39

the lay of the land

24:40

if you look at europe uh you can you can

24:43

judge the

24:44

capacity of a country to ease by looking

24:47

at the level of interest rates relative

24:50

to zero

24:52

and the amount of quantitative easing

24:56

that can take place and its marginal

24:58

effects so let's say in the united

25:00

states you go from two and a half

25:01

percent to zero

25:03

and you're done in europe you're at zero

25:07

and in europe there are limitations

25:11

caps at 33 of certain types of debt

25:14

that they have hit that they can't go

25:16

beyond unless there's

25:17

some sort of an agreement and

25:19

politically very difficult to have an

25:21

agreement so in

25:22

in europe is going to be a problem for

25:24

the ecb

25:25

in terms of being able to have uh the

25:27

ability to stimulate

25:29

and japan is in a position somewhat

25:31

similar with these

25:33

negative interest rates slightly

25:35

negative interest rates farther and

25:36

a lesser ability to stimulate

25:40

so that's the lay of the land

25:43

i think in terms of markets and economy

25:45

within the template that i showed you

25:47

for

25:47

to begin with okay um

25:50

in terms of um the rising power

25:54

challenging existing power uh

25:56

china will be an important influence

25:59

in the world that we're operating in

26:02

um for the rest of our lifetimes it'll

26:05

become an

26:05

increasing influence in in that

26:08

globalization and so on

26:10

um so this just shows

26:13

uh where they are in united states and

26:16

china in relative output this is what i

26:19

believe

26:20

that what's likely in terms of equity

26:23

market cap

26:24

and share of debt securities outstanding

26:27

in other words the european

26:29

the chinese markets are big

26:32

and becoming bigger and more liquid and

26:35

more

26:35

effective and they're going to play an

26:38

important role as will the chinese

26:40

economy

26:40

in the environment we're in not only in

26:43

the form of trade

26:44

but also in the form of you know the the

26:47

whole

26:48

geopolitics particularly reflected

26:50

through technology if you look at

26:52

history

26:53

and what caused countries to succeed and

26:56

fail

26:56

it was um particularly led by technology

27:00

so um i've been uh

27:03

over the last several months

27:07

wanting to research the rise and

27:09

declines of world reserve currencies

27:12

and in order to do that i have to watch

27:15

the arc of each one of these reserve

27:17

currencies

27:18

there's the us dollar before that there

27:20

was the british pound before that there

27:22

was the dutch gilder

27:23

and as a result of that i needed to

27:26

understand

27:27

uh a number of things about the

27:29

economies

27:30

that i um that made them reserve

27:34

currency how did they become reserve

27:35

currencies how did they lose their

27:37

reserve currency status

27:39

and that led me to uh watch

27:43

um a number of factors and studying

27:46

those

27:47

um and i i love putting together

27:49

statistics and numbers

27:51

to put together indices so uh

27:54

these are the six main factors

27:57

uh that you can judge a country's power

28:00

by

28:02

you know power's a a vague thing

28:05

you can have economic power you can have

28:07

military power you can have power in

28:09

different ways

28:10

but this is the uh when i

28:13

uh went to each one of these four

28:16

cases here's the dutch cycle here's the

28:19

british cycle here's the u.s cycle

28:20

here's the chinese cycle

28:22

and reflected in these this dynamic

28:25

and uh what you can see this classic

28:29

cycle is first

28:31

it's innovation meaning technology

28:34

education and competitiveness mostly a

28:37

new technology

28:38

and the new technology like the 5g

28:41

technology today

28:43

and the issues pertaining to huawei and

28:45

other technology companies

28:47

if you have technology it works uh both

28:51

economically and militarily and so

28:54

there's always a new technology in the

28:55

case of the dutch

28:57

it was the ability to build ships that

28:59

can go anywhere around the world

29:01

and they took those ships and they put

29:03

and because the

29:05

europeans were experts in fighting

29:07

because they was fought with each other

29:09

they took the guns they put them on the

29:10

ships and they go out to the rest of the

29:13

world

29:13

and they accounted for half of world

29:16

trade

29:17

can you imagine that and when they go

29:19

out there with half of world trade

29:21

they're bringing their money the dutch

29:23

gilder

29:24

okay so they bring the money and when

29:27

they have bring the money it becomes a

29:28

world reserve currency

29:30

and in order to go out in the world they

29:32

have to have a military

29:34

to support that and so these cycles go

29:37

on

29:37

and if you look at that this is the red

29:40

line is china and

29:42

the blue line is in the united states in

29:44

terms of the averages of these things

29:46

and it goes back to 1500 and one of the

29:49

things you could see

29:50

there is the chinese have typically been

29:54

number one or number two although the

29:56

world was a different size then you know

29:58

those were all very far away places we

30:00

now have

30:01

one sort of world so

30:05

that's where that those are the economic

30:07

principles so i think we're late in the

30:09

business cycle

30:10

relatively late um i would say the

30:12

seventh inning

30:13

of the business cycle there is a

30:15

relatively tightening and monetary

30:17

policy

30:18

we have less capacity and we are

30:21

we have greater polarity and we have

30:24

um a situation in which we're going to

30:27

have political issues

30:28

and those political issues will be

30:31

market issues

30:32

because as as we start to think

30:35

will this be a movement to the right or

30:37

a movement to the left

30:39

that will affect capital flows

30:42

so these are my list of investment

30:44

principles

30:46

the template that i look first the

30:49

theoretical

30:50

theoretical value equals the present

30:52

value of future cash flows in other

30:54

words every investment

30:56

is a lump sum payment for a future cash

30:58

flow

31:00

so when we think what is something worth

31:03

we look at those projected cash flows

31:06

and we discount it with an interest rate

31:08

that's the theoretical value

31:11

the actual value that it will trade at

31:13

will

31:14

equal the total amount of spending

31:18

if i calculate total amount of dollars

31:19

spending on something divided by the

31:22

quantity of goods sold

31:23

so i'm always looking at who how much is

31:26

going to be spent

31:27

and what are the motivations of the

31:28

spenders and what are the and

31:30

how much of it is going to be quantity i

31:32

try to estimate

31:33

what the total spending is divided by

31:35

the quantity to estimate the price

31:37

okay number three is that asset classes

31:41

will outperform cash over the long term

31:44

i explained that

31:45

it's required otherwise the gears come

31:49

the economy comes to a halt and that the

31:51

outperformance of

31:53

asset classes over cash that beta

31:56

cannot be very positive for too long

31:58

because if it was it would be easy

32:00

if it was positive you just buy borrow

32:02

cash and you buy the long things and you

32:04

make a lot of money

32:06

it ha comes with big bumps along the way

32:09

and that assets

32:12

are priced to discount future

32:15

expectations most importantly inflation

32:20

growth risk premiums and discount rates

32:22

and i'm going to get

32:23

into that in a minute and then every

32:26

investment

32:27

is a return stream what i mean is every

32:29

day you can market to the market you

32:31

know what it's like

32:32

and so the key is to be able to put

32:35

together portfolios of return streams

32:38

so that they balance well as hashing was

32:41

saying

32:44

i would say whatever success that i've

32:46

had in life

32:47

or that bridgewater has had has to do

32:50

with knowing how to deal with our not

32:52

knowing

32:53

more than anything we know because what

32:57

you don't know

32:58

is a lot and if and you can reduce your

33:02

risk by a lot more than you could reduce

33:05

your return by knowing how to diversify

33:08

well

33:09

so so diversification can reduce risk

33:13

more than it reduces return

33:14

so it improves the return to risk ratios

33:18

and then i say that there i'm sorry if

33:20

i'm getting technical but there are two

33:22

types of return streams

33:24

there is a beta return stream and an

33:26

alpha return stream

33:27

and what i mean by a beta return stream

33:30

is that there is an intrinsic

33:32

reason that that asset class will behave

33:35

in a certain way that you will

33:36

know in other words if growth rises

33:38

faster than discounted

33:40

and interest rates don't rise much you

33:42

know that that stocks are going to go up

33:44

so there is environmental so you can

33:46

structure that alpha is a zero-sum game

33:49

in other words for me to produce alpha i

33:51

have to be uh

33:53

outperform i have to take money away

33:55

from somebody else it's a zero-sum

33:56

game like poker at a poker table so

34:00

so they can be either alphas of betas

34:03

and the key

34:04

to good investing is to create good

34:07

portfolios of good return streams

34:10

and then in order to balance these you

34:13

have to risk balance them

34:15

in other words if somebody might think

34:16

if i put 50

34:18

of my dollars in stocks and 50 percent

34:20

of my dollars in bonds

34:21

that i have my diversification but not

34:24

so because

34:25

the volatility of stocks is greater than

34:27

the twi is twice the volatility of bonds

34:30

and because of that you have to risk

34:32

balance them and

34:34

then the holy grail of investing is to

34:36

find 15 or more

34:38

good uncorrelated return streams i'll

34:40

get into that in a minute

34:41

and then as hashem mentioned then

34:45

systemizing decision rules is is

34:49

critical

34:50

and those rules should be timeless and

34:51

universal what i mean is

34:54

as i said i write down the criteria we

34:57

write down the criteria for

34:58

investing and then we take those

35:02

criteria and we test them through all

35:04

periods of time

35:06

and all countries timeless

35:09

and universal because if something

35:11

happened in one time

35:13

and your process is not working in that

35:15

time

35:16

then it must be that you haven't

35:18

explained the differences

35:19

and so by forcing ourselves to try to

35:21

make those rules

35:23

timeless and universal it then becomes

35:26

the

35:26

you know the the standard that we

35:28

operate by so all the rules that we're

35:30

operating them by are

35:31

timeless and universal i'll just pass

35:33

through some

35:34

charts so this going back to 1975

35:38

think of this as the rolling returns of

35:41

asset classes okay what you can see

35:45

is that all of the asset classes there

35:48

have some times that are good sometimes

35:51

that are bad

35:52

on average they're above zero but they

35:54

all have periods of down

35:56

and inevitably what happens is that

35:59

investors most

36:00

investors love the asset classes

36:04

that did well they

36:07

the biggest mistakes of most investors

36:09

is that they

36:10

think that the investment that did well

36:12

is a good investment

36:14

rather than it's a more expensive

36:16

investment

36:18

and so like so here we we have

36:22

here's eq whoops

36:28

you know here's equities recently done

36:30

well here's commodities

36:33

done very poorly then here but here's

36:35

equities

36:36

right done very poorly in that period of

36:39

time so the key

36:40

as hashim was saying is balance

36:46

how to do that so you can break the

36:49

drivers

36:49

of asset class returns into a few

36:52

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