- Investing is about you – we’ll go through some questions that will help in making better investing decisions over the long term.
- Dalio answers a question on his European short positions.
- The chances of a recession are pretty significant.
In a recent interview at Harvard, Ray Dalio discussed a lot of things that I would like to cover here as I think they are extremely important.
Let’s start with what is most important, how to be a better investor. After that, we’ll get into what’s most interesting but less important, the economy and the markets.
The Consensus Is Built Into The Price
In order to be a successful investor, you have to be a contrarian or at least have a different opinion than most investors. This also leads to being wrong from time to time.
So we have to accept failure as a learning process if we want to be successful in entrepreneurship or investing.
As Investors, We Always Have To Be Evolving & Questioning What We Do
According to Dalio, to become an investor you have to constantly evolve and learn from your mistakes.
He shares an interesting story about how he lost a lot of money in 1982 betting on an economic collapse after Mexico defaulted. Unfortunately, or fortunately for Dalio, August 1982 was the exact bottom of the stock market. Dalio said he was fortunate because he started asking himself how he knew he was right on something and he started searching for the people who disagreed with him.
The question I think would help all of us is do we assess how wrong we could be when we make investment decisions?
I must say that I’ve been tossing this question around and it’s really hard to look at what you are doing from a different perspective. The easiest way to invest is to be 100% convinced in something and then if it doesn’t work, repress it. However, that doesn’t lead to long term investing success. Think about how that applies to you.
What I would take out of Dalio’s views is that whatever investment we make, we have to look at the weaknesses of the investment and how others might think differently about it.
On The Markets & The Economy
Dalio has a simple piece of advice for all investors out there amid the recent market turmoil.
If you see the stock price drop and then get scared and sell, you are doing the wrong thing. You should buy when you are scared and sell when you aren’t scared.
Further, he says the biggest mistake individual investors make it to think that a market that has done well is a good market rather than an expensive market and that a market that has done poorly is a bad market rather than a cheaper market.
As for what’s going on in the economy, Dalio discussed how we are in the late part of the economic cycle. We have interest rates rising as the economy is producing at maximum capacity but the markets haven’t yet reacted significantly because there’s a lot of cash on the side lines. Companies have a lot of cash as it’s really easy to borrow and therefore can easily do buybacks, mergers, and acquisitions. Individuals also have a lot of cash which leads to the current situation in the markets.
Dalio is pretty clear that we shouldn’t read anything into his short positions because we will probably be misled by them. This means that he might have a long short position where we really can’t know what it’s all about.
On the economy, Dalio thinks we are at a pre-bubble stage that could become a bubble that then could be followed by a bust phase. On the timing of that, he says that there is a 70% chance of a recession before the next presidential election. What’s also interesting is that, if I got it right, a recession usually comes 14 months after the first financial squeeze.
Dalio is also scared about a recession because of the two economies that exist, one of those who have and the other of those who have not. The big difference between the rich and poor.