US investor and hedge fund manager Ray Dalio served as co-chief investment officer of Bridgewater Associates.
Two years after completing his MBA from Harvard University, he started Bridgewater in 1975 in his apartment. It was listed as the largest hedge fund in the world in 2013.
The firm started as a wealth advisory firm and served a number of clients. The key areas in which Dalio advised were currencies and interest rates.
The big break for the hedge fund came when McDonald’s joined the firm as a client. Following this, it started to grow rapidly and signed larger clients such as World Bank to manage its pension fund.
Dalio is also the author of 2017 book ‘Principles: Life and Work’ that revolves around investment philosophy and corporate management. He also wrote ‘Principles for Navigating Big Debt Crises’ in 2018.
Six key investing lessons one can learn from Ray Dalio:
The big picture: Dalio is known for looking at the big picture while being connected to the street-smart trader. The New Yorker called Dalio ‘a big-picture thinker connected to a street-smart trader’.
He divides his holding into two categories: beta investments and alpha investments. While beta investments entail passive funds, alpha investments refer to funds that are managed actively in a bid to generate alpha.
Keeping cards close to your chest: Although he has now retired from the day-to-day operations, he did not believe in revealing to the outside world the exact investment portfolio.
This included most of the Bridgewater’s employees and external investors. In fact, only a dozen people within his firm know how it trades at a given time.
Risk is pre-defined: He uses an optimal risk target level as its basis for investing.
The other more common practice among investing circles is to first allocating capital and then achieving a risk target. He implements this strategy by using leverage to evenly distribute exposure across various asset classes while maintaining the best risk target level.
Diversification of portfolio: It is an age-old maxim that diversification helps bring down the risk substantially. To emphasise it further, Dalio says diversifying your portfolio in the right way can bring down your risk anywhere between 70 percent to 80 percent.
Understanding economic cycles: Discerning economic cycles and knowing what causes them can help investors gain better insight into what to expect in the markets.
For instance, when business activity is set to pick up in the short term, the sectors that would get an impetus would include infrastructure, banking and housing, among others.
6. Avoid sectors you do not know about: Risk is usually part of investing process. Higher the risk, higher the return. So, investors with high-risk appetite are expected to earn bigger gains. On risk, he believes that it increases from not knowing what you are getting involved in.
If you buy securities in a sector that you know little to nothing about, it is highly risky. So, to be successful in investing, one should invest in the things that you know.
