Ray Dalio Tells Investors: "Don't Trade Against Pros Like Us, You Will Lose... Own Gold"

Before his presentation to the University of Texas, Bridgewater's Ray Dalio gave a far-ranging interview to Bloomberg's Erik Shatzker which we will have more to say about in the coming days, but the overarching theme was what to expect from markets going forward. He said that while there are "asymmetric" risks to the downside, asset prices will correct to a point where risk premiums return and investors come back, and predicted that equities will return about 4% in the long term. The concern he had was whether the slowdown in markets will have negative repercussions for the economy at a time when central bank policy is becoming less effective.

Repeating comments he has given before, Dalio said that the "next big move I believe will have to be toward quantitative easing, rather than a big tightening,” he said in the interview. The recent developments have surprised the Fed, because it is not paying enough attention to the long-term debt cycle, adding that "If you look around the world, our risk is not inflation and our risk is not overheating economies", something all too clear to the nearly 30% of global economies currently blanketed by negative interest rates.

He also had some rather dire comments on China which we wil get back to in a future post, but what caught our attention was the following exchange in which Dalio discussed whether ordinary investors have a chance of making money in the current market when faced with institutional behemoths like Brigewater which as the world's biggest hedge fund manages over $150 billion.

His honesty was refreshing.

SCHATZKER: Broadly speaking, what's going to work? And what is working, perhaps more appropriately, today?

 

DALIO:  I think there are two ways that the average investor should think of investing.  One is, are you going to create a good strategic asset allocation mix that is a balanced portfolio, that means you will not go to the betting table and bet against active investors like me? Look, I'm scared to be wrong in the markets.  It is not easy to win in the market.  It is more difficult to win in the markets than to compete in the Olympics.

 

SCHATZKER:  Hang on a second.  Hang on a second. You guys have an extraordinary track record of winning.  Is it harder to compete in the markets today than it been since you founded Bridgewater?

 

DALIO:  No, I don’t think so.

 

SCHATZKER:  Really?

 

DALIO:  Not the way we do it.  And the reason I'm saying not the way we do it is we do not take systematic biases.  I think for a lot of people, they are systematically long everything. And so when the world gets bad, it's bad for them. In 2008, it was great for us.  I don't know, we had nearly 10 percent return in 2008. So we have the opportunity to go either way.  We just my be wrong.

 

DALIO:  So I'm so scared about being wrong that it has help reduce my chances of being wrong because I'm so scared.  I won't take bets that I don’t feel good about.  And we diversify our portfolio.  And that is how we got the track record.  So you asked me about investors.  So I'm trying to go back what investors should do.

 

SCHATZKER:  And what you think is appropriate for your investors.

 

DALIO:  I want to just convey to investors, I think in the average investor, most everybody, do not compete against pros like ourselves or other people; do not making tactical asset allocation bets or moving around in the markets, because you will probably lose.

It is worth noting that Dalio does not suggest that investors will lose because he thinks markets are rigged, something we and Eric Hunsader have been noting for years, instead Dalio's point is that ultimately directional, "tactical" bets will rarely work.

If you're talking about tactical bets, in other words, I could come on the show and I can say, I think this is good.  But then what happens is if I come a month later and I then change my mind because something has happened, then I will mislead people.  So the tactical bets, I don't think, are going to be helpful.

Granted, Dalio is pitching his "All Weather" portfolio, and yet this statement is perhaps one of the more honest admissions of how the market "works" or rather doesn't, because unlike the  empty suits who come on TV to pitch any given stock who ultimately have no idea what will happen and are merely flipping a coin (and who are never heard from again when the trade goes against them) Dalio is warning to give up on hopes for quick "long" (or short) bets leading to major winnings, and instead stick to broader market returns in the form of a diverisifed portfolio. Then again, since for most "ordinary" investors the stock market is merely an chance to strike it rich, fast, we doubt his advice will be heeded.

But the surprising moment of biggest honesty came when Dalio laid out what should comprise a properly diversified portfolio:

I would say that we are in an environment where it is very important to have a well-diversified portfolio, and that'll include assets gold.  In other words, what could I tell investors, try to achieve balance in various ways.  That's a whole subject about how to do it.

 

And also I think that gold at 5 percent of your portfolio, 5 percent or 10 percent of your portfolio, under the circumstances, would be also a prudent thing to doPrudence is the important thing to do.  The reason I'm also referring to that is we have a situation where a debt is money. In other words, we have a fiat monetary system, too.  And so we are having problems as these central banks operate.  And so  think of it as another form of cash and when cash now has zero or 0 percent interest rates or less, think of it as one of those possibilities in terms of how do you create diversification.

Debt is indeed money, and so is gold, and unlike debt whose yield increasingly more central banks are now artificially pushing into negative territory and will soon do everything in their power to eliminate physical money so that electronic money is subject to the same "financial repression" as every other asset, gold has and always will be an inert metal with intrinsic value, with zero counterparty risk, zero "central banker policy risk", and whose only real risk is being confiscated through another presidential executive order.

Yes, Bridgewater may have gone through a rough patch recently as we exclusively revealed a few weeks ago, but we applaud Dalio for the intellectual honesty and telling the truth.

Full interview below

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