Yesterday, I had breakfast at McDonald’s.
I ordered a McSausage and a hot Milo, found myself a quiet spot, and started to enjoy a brief moment of solitude. I brought along Tony Robbins’ ‘Money – Master the Game’ book and flipped it as I began to ‘break’ my own ‘fast’. It is my ideal way to start off a day.
I chanced upon a chapter that is specifically written about Ray Dalio and his views on investing. While consuming my tiny puny sausage burger, I took an hour to read about Ray, his background, and his investment strategies. Thus, if you don’t have time to go through 24 pages of this write-up, I’ll list down a total of 7 things that I’ve learned about Investing from Ray Dalio.
#1: Who’s Ray Dalio?
Ray Dalio is the Founder and Co-Chief Investment Officer of an investment firm, Bridgewater Associates. Currently, it manages about US$ 160 billion of hedge funds for over 350 global institutional clients such as sovereign wealth funds, pension funds, central banks, charitable foundations and endowments for prestigious universities. Today, Ray Dalio has amassed a net worth of US$ 17.4 billion and is ranked #67 on the Forbes’ Billionaire List.
#2: Ray’s Background
Ray started off as a clerk on the New York Stock Exchange (NYSE) in 1971. It was the year when U.S. President Richard Nixon took the Dollar off the Gold Standard and effectively turned all currencies of the world into fiat. Ray went through the oil shock in 1973, intense volatility in the U.S. stock market and a Gold Rush throughout the 1970s. The series of huge market uncertainties has shaped Ray into a conservative investor who is obsessed about managing risk and ‘Preparing for Anything’ that could happen in the market. This quality, I believe, is pivotal to Ray’s enormous success as a hedge fund manager.
#3: Ray is a Key Person to Chicken McNuggets
Perhaps, without Ray, we would not have Chicken McNuggets today. While most of us know and tasted Chicken McNuggets, what is less known to most people is this – Ray is the key person that made Chicken McNuggets possible. Let me connect the dots for you:
In 1983, McDonald’s was at the brink of launching Chicken McNuggets. But, McDonald’s had a problem – the Chicken. McDonald’s wanted to pay a fixed price for its supply of chicken so that it can sell Chicken McNuggets at fixed price with stable margins. However, McDonald’s was concerned that chicken suppliers would not settle with a fixed price due to rising production costs of chickens due to hikes in prices of corn and soymeal.
That was when McDonald’s called for Ray Dalio. Subsequently, Ray put into place a customized futures contract to hedge (or protect) its suppliers from a possible hike in future prices of corn and soymeal. It was brilliant and served as a huge catalyst that enabled suppliers to supply chickens to McDonald’s at a fixed price. The deal is done and Chicken McNuggets became a worldwide international success today. Thanks Ray!
#4: Ray’s Take on Timing the Market
In Ray’s words, ‘Timing the Market is likened to playing poker with the best players in the world who play round the clock with nearly unlimited amount of resources. Only a handful actually made money and they make theirs from taking money away from people who are not as good. You do not want to be in that game.’
Time and time again, I come across people who intend to make a quick buck from stocks, futures, commodities, foreign exchanges, … etc by attempting to time the market. Let us ponder for a moment. Perhaps, you met a few who’re trying to beat the market by timing it. Are they rich and successful? Are their riches derived from beating the markets? It’s a food for thought.
#5: Ray is about Constructing Portfolios
To Ray, investing is not about a product (stocks, futures, bonds, commodities … etc), nor a procedure (time the market, tools and analysis to use). I learned that Ray is into crafting a simple portfolio that is designed both to maximize returns with minimal risk in all market conditions. This is why Ray is known as one who came out with the ‘All Weather Investment Strategy’.
Personally, I received multiple questions such as: ‘What stocks I had invested into after GE 14? What is my market expectations after GE 14? Is now a great time to get into oil & gas stocks as oil is now US$ 70 – 80 a barrel? If the U.S. Dollar strengthens or weakens against our Ringgit, what should I invest into? and many more …etc’
As much as I wish that I have a list of simple answers to give it to you, I don’t have it. I understand that most questioners expect answers either in the form of a product (stocks, unit trusts, bonds, properties, commodities, … etc), or a procedure (value investing, trading, flipping, long or short-term … etc). But, I realized that most who ask do not realize the need of an investment plan that is uniquely crafted to suit your own needs.
Without a plan, you would not be able to design a portfolio, which is vital to determine your products and your procedures for investing. It is hard for me or anyone to tell you how you should invest if you don’t really have a specific plan or portfolio crafted out. You may want to take time to do so.
#6: Ray’s Take on a Balanced Portfolio
Here’s the highlight of my findings. It has changed the way I view at what a balanced portfolio. Let me explain:
My Previous Viewpoint:
Let us use a simple illustration. Supposedly, I have $ 10,000 for investment. I split the amount equally and invested $ 5,000 into stocks and the remaining $ 5,000 into bonds. I opined, this is a ‘balanced’ portfolio as my exposure for stocks and bonds is 50:50.
To Ray, the above is not a balanced portfolio. This is because he believes that stocks are more ‘risky’ than bonds. The risk, I believe, is based on volatility in price movements of a financial asset. It means – Stock price movements have greater ups and downs than Bond Prices. Thus, the above 50:50 portfolio was in fact unbalanced in terms of risk profile.
In Ray words, ‘A Balanced Portfolio is one where your money is divided into investments based on how much risk / reward there is – not in equal amounts of money.’ Let us say, stocks are three times more risky than bonds. Hence, if you invest $ 7,500 into bonds (less risky) and $ 2,500 into stocks (more risk), then, your portfolio is deemed to be more balanced than the 50:50 portfolio as stated above.
#7: Ray’s Sample Portfolio for an Individual Investor
Let’s just called this – Ray’s All-Weather Portfolio for American Investors.
– 40% Long-Term U.S. Bonds (Long Tenure, High Yield)
– 15% Intermediate U.S. Bonds (Short Tenure, Low Yield)
– 30% Stocks. (Riskier)
– 7.5% Gold (Hedge against Inflation)
– 7.5% Commodities (Hedge against Inflation, High Volatility)
Please be mindful that the breakdown given is a sample for your reference. It is meant as a guide and please feel free to modify it to suit your needs. But, if I’m a Malaysian, how can I apply this locally? Well, let me try this to the best of my personal understanding:
– 40% Long-Term Bonds which pays 4-5% Coupon Rate)
– 25% Fixed Deposits (3% Interest)
– 30% Stocks (Eg. Stocks that Pay 6% Dividend Yield)
– 5% Gold (Hedge Against Inflation)
As mentioned, the percentage allocation is just a sketch and should never be construed as a personalized investment advice. The sketch above is designed based on the author’s (or my) personal understanding after reading a section of Ray’s All-Weather Portfolio for American-based Individual Investors. It is a sketch intended solely for education and illustration purposes.
If you wish to read about Ray Dalio, his investment strategies and as well as insights from other billionaires such as Carl Icahn, John C. Bogle, Paul Tudor Jones, and Sir John Templeton in greater detail, you may find them in Tony’s book: Money – Master the Game.