Ray Dalio

More than 50 years ago, a young Harvard Business School graduate Ray Dalio started a hedge fund, Bridgewater. That fund became the largest hedge fund in the world and one of the most successful in the world over this period of time. He's writing a number of books and his most recent book talks about his concern about debt in the United States and around the world. I had a chance to sit down with Ray Dalio to talk about his views about investing. In recent months, one of the most common things talked about is something called tariffs. What is your view on tariffs? Is it good economically, bad economically, is it going to solve our budget problem because I think in the big, beautiful bill, a lot of money that's coming in comes in from tariffs and that helps reduce the deficit a bit. Tariffs are not bad. Throughout history, tariffs were the main source of government revenue and so on. And any form of taxes has its cost, so capital gains taxes are bad and so on. Different things have their costs. I think the question is how well executed, how big are they, how disruptive are they in terms of the process. They can bring a significant, there's something to be said for them in that they bring in a significant amount of revenue. That means that there was less that's needed elsewhere. We're now in a different world, we're in a world where the world is almost at war, self-sufficiency. We have to build self-sufficiency. We cannot continue to borrow or depend on imports for that. And so there's a manufacturing, how do you create manufacturing in the United States and so on. There's some merit to all of those arguments. The question is whether that is done really well and so on. So the whole world, tariffs, of course, are not the ideal. You would like to have, if you're dealing what's best for the whole world, you would like to have the least inefficiency. You'd say wherever they produce it the best and we have it go around. But we're in a world now that we have to be realistic in terms of, we cannot be dependent on importing a lot of things and nor can the world be dependent on the value of the bonds and the debt that we're acquiring in order to pay for those things. Well the big, beautiful bill that's now being talked about, will that solve our problem or mitigate it or what it will do? It's not going to solve our problem. Okay, so if that's not going to solve our problem, how are we going to solve this problem? We're going to do it the way that we always do it and it's always done when countries essentially go broke. What they do is they, through a combination of devaluing the currency, printing of money. There's an imbalance, the print money devalued the currency and created an artificially low interest rate so that the person who's holding the bonds is receiving an artificially low interest rate. That's the way Japan has done it with their local and that's the way we will do it. So in other words, my grandchildren and great grandchildren not yet born are going to be paying off his debt in devalued dollars more or less. It's going to happen faster than that. Faster than that. Oh, okay. I think they'll probably be beyond that. What about cutting interest rates? Why doesn't the chairman of the Fed say, well, cutting interest rates will save us money. We're spending a trillion dollars now on interest for our own debt. Why don't we just lower the interest rate? Why don't we just do that? Here is the real interest rate and one man's debts or another man's assets. And so if I lower the interest rate, I will reduce my desire to hold that bond. And in my opinion, if you do that too much, you will lose the demand for those bonds. Unlike if you do create something closer to the 4% cut in the expenditures, 4% increase in the tax revenue, improve the balance, then you'll have a benefit. If you try to force interest rates down, you are hurting those who are holding the bonds and you will lose the demand for the bonds and you can create that spiral. Before we finish this discussion, I want you to just interrupt it a moment and say, look, you've scared me a bit, but I need to make money, I want to invest her. What should I do to take advantage of what you just described and scared me? Should I go by gold, should I go by dollars, by euros? What should I do? Look at the value of your portfolio in inflation-adjusted terms, not in nominal terms, okay? And the safest investment that you can get right now is an inflation index bond. Because what you'll get is it'll be indexed and you'll get a bit over 2% real return above inflation and whatever happens. So you start with what is a safe investment. The next thing I think you have to do is diversify your portfolio. We've talked about the powers of diversification. So I don't want to get anybody into one bet because I'm going to be wrong, but do consider that gold is a form of money, and gold is that central banks are acquiring gold now as a diversifier. And so it also was negatively correlated with most of the things that you have. In a time of great stress, what you'll find is that the gold will do well and when the assets don't. The world used to have gold as money, that was the way. And so the world would look at things differently. They would look at the prices of things in gold terms. Now because we have fiat money and we've become used to it, we look at the prices of things in money terms and we look at gold that way. I think if you started to say it's money, it's a source of money and you have that, that's part of the diversifier. So it would diversify your portfolio. It's a prudent thing to have somewhere between 10 or 15% of your portfolio and gold. For thousands of years people have liked gold and people still seem to like gold, price of gold are going up. Why are people so interested in owning gold in a time like this? Since 1750, 80% of the world's monies have disappeared and all of those that existed have been greatly devalued. That's one of the reasons that gold is a storehold of wealth and has been for a long time. And there's a saying that gold is the only asset that you can have that's not somebody else's liability. And what they mean by that is that you don't have to receive money from somebody else. In the world that we're now in and we're seeing it internationally, there's a worry about sanctions. There's a worry about taking gold. Those holders, central banks, around the world are concerned about the possibility that let's say what happened to Russia could happen to them and so on. So there's a diversification of that and it creates a dynamic in and of itself because what happens is if they are switching and they are switching to gold away from bonds and so on. Then that has the effect of not only making our supply demand balance that we're talking about, about the new deficit, it means that you can have the selling of gold which makes that supply demand balance worse. Now, it used to be the case that the US dollar was backed by gold and US government said if you don't like these pieces of paper, we'll give you gold and ultimately we ended that. We're never going to go back to that presumably, right? Probably, presumably, that's right. But if you watch these gold cycles, because you have the devaluation, then people feel that they don't have confidence in the fiat system over a period of time and through history they've at that point the way that works is you print all this money, then you pray the debt with the cheap money and that but nobody wants to hold it so then they go back and link it again. It is conceivable that you can see a re-linking of gold to money but that's way in the future. Since the beginning of this year, the dollar against the basket of currencies is down about 10%. Many people are worried that they might continue that way, deemed devalued. Some people say it's not a bad thing because we can sell things more cheaply overseas and increase our exports. But if people are worried about the dollar going down in value, what would you suggest they do by other currencies or go by things that are not dollar-denominated? I think they're concerned. Would be some version very similar to the '70s. You just talked about. I remember I was clirking on the floor of the New York Stock Exchange on August 15, 1971 and that is when Richard Nixon got on the television and he said in his polite way this was a wonderful move but the money that you thought you had, the gold was money and what at the time people thought were real the money that we're used to, they would say are like checks in the checkbook. He said you're not going to get your money, you can keep the checks. At that point then we began the '70s and the '70s was a period in which there was both stagflation. The thing that we have to worry about is a stagflationary environment because all the currencies went down. So when you were looking at diversification, the problems that we're talking about are not just American problems. We have a significant problem but if they're European problems, they're Japanese problems, there's Chinese problems. So we've lived on promises to be able to take that debt asset and convert it into money. And now there's not enough money to go around. So I would say that when you ask the question, would I devalue in relationship to other currencies? Probably. But the other currencies won't want much of an appreciation and so that's why I'm saying that something like gold will breed the better performing currency. Some people worry about this and can tell us whether this is realistic or not. In 1985 there was something called applause accords where the United States government agreed with other governments that we were going to devalue the dollar illegally, officially and it was done in secret, nobody knew it was coming. Is that a possibility that the government of the United States could again agree with other governments we're going to devalue the dollar further or you think that's unlikely these days? No, I think it's a possibility, yes, it's so interesting. In history, when you look at what happens when governments are in certain positions, all through history they do the same things, okay? And that means that a move like that or even there could be foreign exchange controls, there can be different ways that that happens. Now my perception is that people in Washington always say, well, if a situation was that bad, the bond market would collapse. And then the bond market people say, well, the situation at bad Congress wouldn't do this. And they both blame each other for not doing anything. Why hasn't the bond market collapsed over the fact that we have all this debt over all these years? You don't like this saying, I experienced this many times. I did this analysis in 2007 and 2008. I went to Congress and everybody said they asked me the same question, but we had the problem. Same thing happened in Europe. So there's a supply demand. There's a saying that everything goes slowly until it happens all it wants. When the problem happens, these things happen like that. How long are going to take you to write this book? How many books have you now written? Four. Four, okay. And how long do I take to write a book like this? This is research that I've done over a long period of time. So putting it together and getting it out, you know, I would say a part-time basis maybe over a year. Okay. So you built the biggest hedge fund in the world? What's the relative pleasure of building the biggest hedge fund in the world versus writing a book? That's the best seller. As you would know probably, it's a stage-in-life thing, you know? There's a stage-in-life where, you know, you're competing, you build something and then there's a stage-in-life where you're passing things along, you know? So at this stage-in-life, you and your way, me and my way, it's a great, great joy to be able to pass along what I've learned. So I'm loving it. This book is designed to make people feel good or to scare people. Neither. I wanted to convey the mechanics, the cause-effect relationships, so that people can understand what's going on and then navigating it. I think it's a book that will make people worry, but I have a principle which is, if you worry, you don't have to worry. And if you don't worry, you need to worry because if you worry about something that maybe you'll prevent what you're worrying about. When did you decide to become a writer as opposed to just an investor? I mean, a lot of great hedge fund investors just keep sitting in front of screens and so forth. When did you say I want to do more than fit in front of screens? Was that a couple years before you decided to exit Bridgewater? No, it was maybe 35, 40 years ago. What I learned was that if I was, whenever I was making decisions, if I would pause and reflect and write down the criteria that I would use to make that decision, it would make me think more deeply about it, and then I learned that I could put those into code and then back test them so I would know how my decision-making would work. And so right from then, 35 years ago, that's how really I built Bridgewater was, what of the criteria test the criteria over a period of time and then form a game plan. So I'd say 35 years ago, I've written down, I call these things principles, I've written down probably, I don't know, a thousand of them or something. For those who haven't followed the hedge fund world, you're from Long Island, you went to Long Island University, you would say you were not a superstar in high school. On the contrary. But you did very well at Long Island University and you eventually got in the Harvard Business School and you started your career and your career almost went south when you punched your boss in the mouth, right? No, that was when my opportunities began, I got fired, and when I got fired, then I started you started your own firm, and you borrowed some money at some point from your father because the firm hadn't done that well, and what did you ever think that maybe you weren't going to make it and at the point that you were? So yeah, let me tell you about that incident because it was one of the worst cases and one of the best cases for me. So this is 1981, and I had calculated that the United States lent more money to countries than they're going to be able to pay back and that there would be a big debt crisis. And then in that happened, Volker tight money, 1982, Mexico defaults on its debt. And I got a lot of attention because I anticipated this, and I thought I was right. And I couldn't have been more wrong. I thought we were going to have a big economic crisis because of this. And what happened instead was the stock market went up, the E's monetary policy, and I, a terrible mistake, and of course, me money, I was so broke that I had to borrow $4,000 from my dad in order to pay for family bills, and this was painful. And that changed my approach to everything, two ways, two ways. But it made me think, how do I know I'm right? It gave me the humility I needed to balance with my audacity. And it let me understand, how do I play this game going forward? And I understood the power of diversification and how diversification could reduce risk by up to 80% without reducing returns. And that was then the bottom of Bridgewater, and then from then on it was straight because of the lesson I learned. Getting down these things and these experiencing and making the most out of mistakes, as learning experiences has been. As an investor, you always have ups and downs. Nobody does everything perfectly, not even Warren Buffett, right? But you know what changed that? From that point, the returns were in my 30-some-odd years of doing that since that point. It was, I think, about 11.8% return with no year down significantly other than 2020 during COVID. And that was down 13%. But the other years were down like 2%. Because I learned the power of diversification. You know, one of the things about diversification is that you can reduce the returns, the risks without reducing the return. My mantra is 15 good, uncorrelated return streams, because if they engineered to have about the same expected return and you have that kind of diversification, you will lower the risk by about 80% which raises the return to risk ratio by factor of 5. So that's the power of the gameplay. That's what helped me. I wanted to get the deficit down to 3% of GDP. You want to do it in three ways, cut the interest rates, cut spending and increase taxes. Each by modest amounts. And do it over three years. Okay. Three, three, three. Okay. What's the chance of that happening? Okay. 5%. All right. You've been in Washington. I was in Washington the other day. Okay. That's how you, this is a brilliant idea, we wish we had thought of it and we're going to do this. I'll tell you what members of Congress tell me, which is very interesting. Both sides. Nobody agrees, nobody disagrees with what I just said. It's very interesting. They all agree that has to go to 3%. They all agree it has to come from those three things and so on. And then they say, but I can't say that because we're now in an absolutist political environment in which if I say, they want the public, my electorate wants me to say, I will take a pledge of no new taxes. So because of that absolute, if you don't take a pledge, then it's like this with the constituents. The constituents say something like, are you telling me that you're going to compromise with those people and you're going to raise my taxes? Okay. No way. I don't want you in government. Well, they won't convey what they truly believe. What about yourself? Why don't you go into government? Why do you think about you being Secretary of Treasury, Chairman of the Federal Reserve, run for the Senate or something and solve those problems while you're in government? Have you ever thought of that? Scares of Daylights out of me. Let me say, I have the greatest appreciation and respect for those who go into public service and serve in this kind of an environment. And I think there's a question of whether with the population, it's not just a leadership question. It's a can-you-lead question. You can bring capable people into that job, but we're in a situation where everybody's fighting over every decision all the time and we'll tear everybody down if they're so it's a very difficult situation. Somebody is watching and they say, I want to be the next Rae Dalio who builds a gigantic hedge fund does well financially, well respected by people, right, best selling books. What's the secret to that? What do you do? Make your work and your passion the same thing and don't forget about the money part. In other words, I didn't work for money, but I had a passion. I fell in love with the game of investing. And I think you have to make your work and your passion the same thing. But you do have to pay attention to the money part because if you're not earning an adequate amount of money, then that's a problem. So what, and I don't think the best life is for those who make the most amount of money. And there's a very low correlation between the level of happiness or well-being past the basic level of income. The highest. Really? You're just telling me that now. Wow. Well, we know. Oh, so. That which has the highest level of happiness and well-being generally is a sense of community. Do you have a sense of community? Your friends and that community. But anyway, I would say, don't over exaggerate the power of money. You need to have enough and you have to pursue your passion and have enough money. It's never work if you're pursuing your passion. What do you think is the best investment vehicle for a middle-class American that is risk adverse? An inflation index bond. Which is index fund. Tips, treasury, inflation, protected, securities because it will guarantee you a real return. And I don't think that you should be speculating in the markets because there's a zero sum gaming. You're probably be the loser. So, as we get ready to celebrate next year, the 250th anniversary of this country, are you optimistic about our future or is the debt problem so concerning to you? You're not optimistic about our future. I think it's a time horizon. I think we can deal with this. I think it comes down to how we are with each other. But we will go through this and we will get to the other side. Okay. And when you go meet with members of Congress or other people in government and you talk about these serious issues of debt and deficits and so forth, do they listen? And then they say, by the way, what should I do with my own money? Do they ever ask you how they should invest their money or do they never ask you for investment tips? Not typically. What about when you go to a cocktail party? People ask you for investment ideas all the time? Here and there. I guess it's, let me reverse the question. What do they do with you? Well, I'm not as good an investor as you are, so they worked out pretty good. They mostly say to me, "Do you know Ray Dalio?" So Ray, look, I'd like to congratulate you on your incredible success. You've came from very modest means, worked your way up 50 years as an investor, built the biggest hedge fund in the world, and you've contributed a lot to endowments and others who've been your investors, so you should be very proud of what you've achieved. And now I hope you can make some progress in Washington. I've been living there for a while. It's not that easy to make progress, as you know. But hopefully you'll continue and maybe some people will say they don't want to get reelected. They just want to do the right thing. Hopefully you'll convince them. Thanks very much. Thank you. Thanks for listening. To hear more of my interviews, you can subscribe and download my podcast on Spotify, Apple, or wherever you listen.