Lessons from the world's greatest macro investor.
By
Samuel Lee |
02-11-14 |
06:00 AM | Email Article
A version of this article was published in the December 2013 issue of Morningstar ETFInvestor. Download a complimentary copy here.
Samuel Lee is a strategist on the passive funds research team for Morningstar and editor of Morningstar® ETFInvestor℠, a monthly investment newsletter.
Dalio's perspective is invaluable. He's willing to entertain seemingly loony ideas. For example, in 2001 he had his firm develop a depression gauge. In 2003, Nobel Prize-winning economist Robert Lucas declared that the "central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades." Five years later, in late 2008, Dalio's depression gauge went off.
Bridgewater was one of the few firms that anticipated and successfully navigated the financial crisis and its aftermath. Unlike many other money managers, Bridgewater predicted low interest rates and low inflation even after the Federal Reserve and other central banks worldwide embarked on rounds of massive and unconventional monetary stimulus.
A great deal of Dalio's success owes to his admirable willingness to admit error and self-correct. He expects the same of his workers. He says, "At Bridgewater people have to value getting at truth so badly that they are willing to humiliate themselves to get it."
In many respects, Dalio is the anti-Warren Buffett. Buffett makes big bets on a handful of companies. Dalio makes many small bets on currency pairs, commodities, bonds, and, to a much lesser extent, equities. Buffett grants his subordinates plenty of autonomy and lets them figure out their own way. Dalio imposes a set of principles that his subordinates are to live by and heavily monitors them. Buffett doesn't give much thought to economic cycles. Dalio's investing style is based on identifying and navigating them. Buffett doesn't like gold. Dalio thinks everyone should own a little bit of it.
Because Dalio's found success in such an unconventional way, his methods are a rich vein to mine for lessons. After all, successful investing requires delinking your perspective from the consensus. Here are some of the most important lessons I learned from Dalio and his colleagues at Bridgewater.
The long- and short-term debt cycles are the biggest reasons the economy deviates from trend-line growth.
According to Dalio, the economy's behavior can be largely explained by three forces: trend productivity growth, the long-term debt cycle, and the short-term debt cycle. Productivity growth occurs due to technological progress and is the most important force over century-long scales. Exhibit 1 is a chart reproduced from Dalio's paper, "How the Economic Machine Works."
It shows trend growth of per-capita income has been steady, especially after World War II.
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