Master the Market | Investment Tips from Ray Dalio in 20 Minutes

Hey, Believe Nation, it's Evan Carmichael. My one word is believe, and I believe in you, and I want to see that thing you've got inside of you come out and have a big impact on the world. I started the Mentor Me series to hang out with people who've done more than us, and hopefully we can learn from them the way they think, their mindsets, their beliefs, to help us be the best version of ourselves. So today we're going to learn from Ray Dalio and some of his best investment advice. Mentor me, Ray. Rule number 1 is my personal favorite, and I'd love to know which one you guys like the best. And as always, guys, as you're watching, if you hear something that really resonates with you, please leave it down in the comments below. Put quotes around it so other people can be inspired as well. And when you write it down, it's much more likely to stick with yourself too. Enjoy.

When I was 12, I hated school, but I fell in love with trading the markets. I caddied at the time, earned about $5 a bag, and I took my caddying money and I put it in the stock market. And that was just because the stock market was hot at the time. And the first company I bought was a company by the name of Northeast Airlines. Northeast Airlines was the only company I heard of that was selling for less than $5 a share. And I figured I could buy more shares, and if it went up, I'd make more money. So, that was a dumb strategy, right? But I tripled my money. I tripled my money because I got lucky. The company was about to go bankrupt, but some other company acquired it, and I tripled my money. And I was hooked. And I thought, "This game is easy." With time, I learned this game is anything but easy. In order to be an effective investor, one has to bet against the consensus and be right. And it's not easy to bet against the consensus and be right. One has to bet against the consensus and be right because the consensus is built into the price. And in order to be an entrepreneur, a successful entrepreneur, one has to bet against the consensus and be right. And to be an entrepreneur and an investor, And what goes along with that is making a lot of painful mistakes. So I made a lot of painful mistakes. And with time, my attitude about those mistakes began to change. I began to think of them as puzzles, that if I could solve the puzzles, they would give me gems. And the puzzles were, what would I do differently in the future so I wouldn't make that painful mistake? And the gems were principles that I would then write down so I would remember them, that would help me in the future. You know, from a very early age, the whole idea of being right is so rewarded, whereas learning from mistakes doesn't have its place, right? So a kid studies, they're, "Oh, you're smart, smart, smart." You take the examination, and okay, you do badly. And but life's not like that. Life is mostly a matter of making your mistakes and knowing how to evolve past those mistakes and learn. You guys have an extraordinary track record of winning.

Yeah.

Is it harder to compete in the markets today than it has been since you founded Bridgewater? No, I don't think so. Really? Not the way we do it. And the reason I'm saying not the way we do it is we don't take systematic biases. I think for a lot of people, they're systematically long wrong everything, you know. And so we have a world in which they're— 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% return in 2008. So we have the opportunity to go either way. We just may be wrong. If we're wrong— so, so I'm so scared about being wrong that it has helped reduce my chances of being wrong because I'm so scared. I won't take bets that I'm, you know, that I don't feel good about. And we diversify our portfolio, and that's how we We have the track record. I was just commenting in terms of— I see. Let's say, so you asked me about investors, so I'm trying to go back what an investor should do. Well, and what you think is appropriate for your own investments, what you guys are doing. Well, I want to just convey to investors, I think the average investor, most everybody, don't compete against pros like ourselves or other people. Don't be making tactical asset allocation bets or moving around in the markets because you're probably going to lose. Lose. It's difficult for us. We put 100— no, you have to have a balanced portfolio. In other words, think about how you, how you're going to have a balanced portfolio. What you know is that asset classes as a whole over a period of time are going to outperform cash. Okay, that's the most thing that you could be most comfortable with. If they don't, you have a depression. The only times that hasn't happened— but to, to know how to achieve a balanced portfolio And that's a whole other subject. I don't know that you want to go through. If you're talking about tactical bets, in other words, I can 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'm going to leave some— I'm going to mislead people. So the tactical bets I don't think are going to be helpful. I would say that we're in an environment in which it's very important to have a well-diversified— and that'll include assets like to some extent, maybe a little bit of gold in your portfolio. 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, you know, gold, you know, at 5% of your portfolio, 5 or 10% of your portfolio, under the circumstances, would be also a prudent thing to do. Prudence 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're having problems as these central banks operate. And so think of it as another form of cash. And when cash now has 0% interest rates or less, think of it as one of those possibilities in terms of how do you create diversification? Well, we break it into two parts. We have two basic portfolios. There is the strategic asset allocation mix, which we call all-weather, and that just has nothing to do with bets. It has to do with how to make all the assets the same risk parity. I would call risk parity. The problem is when people try to diversify and they own some equities and equities has a volatility, right, that's large, or they own assets that do well when the economy does well and do badly when the economy does badly. They have a concentration of their risk in some assets, right? They need to have— they need to change the portfolio. They need to buy longer duration bonds or leverage the bonds or bring up so that bonds and commodities and pieces have comparable impacts so that whatever happens in the economy will then have a balancing effect. Because the one thing you could be most confident is that asset classes on average will outperform cash. Okay, so if you have— that's a strategic asset allocation. That's what the all-weather piece is. Then there's the bets. The bets are zero-sum, right? In order for you to beat me in the game, you're going to— you— it's like poker. It's a zero-sum game. I have— we have 1,500 people who work at Bridgewater. We spend hundreds of millions of dollars on research and so on. We've been doing this for for 37 years, and we don't know that we're going to win. In other words, we work that— we have to have diversified bets. We have a lot of diversified bets and so on. So it's very important for most people to know when not to make a bet, because if you're going to come to the poker table, you're going to have to beat me, and you're going to have to beat those who take money. So the nature of investing is that a very small percentage of the people take money, essentially, in that poker game away from other people who don't know when prices go up whether that means it's a good investment or if it's a more expensive investment.

Well, I sat down with the famous Ray Dalio, right?

Right.

And I, I prepared for 18 hours for that interview because he's a genius and there's not that much on him. I wanted to absorb it all, so I got every little bit of it, sat down with him, and it turned out Ray was a fan of my work, which I was touched by. 20 years ago, I guess he listened to my program, so he was very generous with his time. And We spent these 3 hours and in the 3 hours when I got to the end, I said to Ray, I said, listen, I really wanna help the average person. So I got a question for you. I did this with everyone. I said, if you couldn't give your money to your children, any of it, and all you could do would be give them a portfolio or a set of investment strategies or instructions and they were gonna start over and build it, what would it be? And he said, Tony, I spent a decade figuring that out. All my money's already there. My kids' money is there. My money for philanthropy when I'm gone is there. 'Cause I'm not gonna be here and I want something that'll do well in the future. And I don't know what the future's gonna be. Markets are gonna always change. I need something that could work in any market. I call it my all-weather fund. Most of us in the business are familiar with it a little bit. And so he explained it to me and I have a good understanding. And I said, I get it. So what you're saying is the reason why, this was obsessed him, why is it if I have a balanced portfolio in 2008, I got nailed on both sides? Exactly. Why did that happen in 2000? Everybody says portfolio theory, this is supposed to protect me and it didn't work. But he said, as soon as things get better, no one talks about it. We just forget about it and happens again. Happened in 2000, happened in 2008. He said, "I figured it out. When you have a 50/50 portfolio, that's 50/50 of where you put your money and assets. 60/40, 50/50, however you look at balanced portfolio, right?" But he said, "The problem is that's not balanced risk." And this is where people are crazy. I've seen people write things up. They see this in the book and say, "Tony Robbins is promoting—" First of all, I'm not promoting anything. Every word in this book is from the best investors on Earth. Anything that's from me is about the emotions. That I know for 36 years. That's been my expertise. These are their views. But I'll tell you what's amazing. He said, "Tony, when you have stocks and bonds half and half, you're not equal because equities are 3 times more volatile. So your risk is 95/5." He said, "So that's why people get killed in 2008." And he said, "I try to get this through to people," he said, "but all of our people handle it." You know, you manage money for countries, the largest pension funds on Earth. He said, "But people don't listen. They look at it and go, 'Oh, this is bond heavy. The bond days are over because inflation's going forward.'" He said, "It's not true, Tony." this fund in the 1970s, it was the worst time for bonds and it was an extraordinary time for all-weather because it looks overbalanced because in order to get the same level of risk, you have to go for more long-term bonds or you have to use more leverage on the bond side. And so when he was all done, it was, you know, for the average person complex, I'm seeing financial people look at this and write things up that are just silly saying, you know, this is never gonna work 'cause we're in the, you know, interest rates go, the only place to go. If interest rates go up, it's a balanced fund. The other areas kick in. But here's what's interesting. After he told the whole thing to me, I said to him, I said, look, I said, this is wonderful. You've given me something that very few people understand on the planet. I think I really got it. And I played it back to him. He said, you got it. I said, but here's the problem. The average person is never gonna know what to do with this. And I said, I'm trying to help somebody that needs to know what to do. I said, tell me, you're telling me to make this beautiful chocolate cake and you're saying, Tony, here's how to do it. Use some sugar, right? Use some chocolate, use some dairy products. I need to know the amounts. You know, give me the amounts. He goes, Tony, that's my secret sauce. And that's when he told me, he said, look, 10 years ago for you to even get in to talk to me, it was $5 billion net worth, $100 million to get in. And he said, and now for 10 years I haven't taken anybody's money. I said, you answered your own question. I said, you're not taking money anyway. It's not gonna compete with you. The average guy, he says, never gonna make it talking to a wealth manager. Tell me what to do. And he's so generous, you know, he's giving up half his net worth like many other people. And in the end he said, okay, he said, but it'll be complex. I said, I can make it simple. He said, well, I don't want leverage in it. I said, design one without leverage. He goes, it won't be perfect. I said, I don't care if it's not perfect. Your idea of unperfect will be somebody else's idea of the best thing they could do. And they laid out the numbers. We ran the numbers and used the same backtesting. So you saw year by year how it really did over the last 75 years of modern investing. And here's what's amazing. Like all weather similar, in 75 years, it's been right 85% of the time. What's even more extraordinary is the 15% when it wasn't doing well, when it didn't do well, its average loss was 1.6%, not 50, 40, 30, 20. Think of the last 10 years, the 250% Hits. His biggest loss in 75 years was less than 4%, -3.95%, and that was 2008 when the market exploded, you know, down to 51% at peak.

Here are the allocations in the book, which would make a normal person gag initially. Stocks only 30%. That's right. Even though it's the stocks on average supposed to gain, what, 9% a year? That's 9.2%. Long-term Treasuries 40%. Yeah. Intermediates 15, gold 7.5, commodities 7.5.

Absolutely counter wisdom. I know, and it's amazing, you know, when I interviewed David Swensen, he said, he wrote a book, and when he said the whole secret to success is to be contrary to what everybody else believes, but the math on this is what works. Here's what's interesting, that looks like you're heavy bonds, 40 and 15, 55% bonds, and it looks that way visually in terms of volume you are, but in terms of risk you're not. You're still, you're making it so you're equally weighted. Think of it this way. What triggers things to grow is inflation or deflation in terms of price. Certain things do really well in inflation, certain do in deflation. Growing economy, shrinking economy. And he's figured out which quadrant you need to put each to actually have equal risk. And that's why it's done well. This year, this formula is done, it's 1% better than the market. It's in 13 and a third right now. And, but more importantly, 3 weeks ago when the market dropped and gave up all of its entire benefits for the entire year and everybody's guts were checking, There was no gut check because it went up a quarter of a point. So the beauty of this is, I'm sure you know, there was a study done the last 20 years and the study's from 1993 to 2013 and it's by Dalbar. And they found that the market, S&P 500 during that time did 9.2% on average, just as you said. But do you know what the average mutual fund owner got? Investor? 2.5%. That's before tax. Why? Because we as investors always do the wrong thing. Emotions. That's right. We sell when we should hang on. We buy when we shouldn't. So the greatest thing that I think that Ray offers somebody the opportunity to do is actually stay in the market. Because if you— yeah, if you got 1.6% as your big hit, if 4% was the biggest hit you've ever seen in 75 years, I think you could stay in and you can do what Jack talks about, which is stay in that market through time.

So this means resetting each year?

It's a reset once a year. That's the one recalibration. So 15 minutes a year and you're in the game.

Ordinarily, you know, there are two ways of making decisions, pretty much. There's the boss has control and so— Autocratic. Autocratic. I'll call that autocratic. Takes in everything and then he makes a decision. Or there's democratic, pretty much one man, one vote. But really the best decision-making is believability-weighted decision-making. And if you think about it first conceptually, believability, you would say if you're gonna make a decision of what you— you have a medical condition and you're going— how are you gonna get that? You're gonna think who are the best doctors. Consult the experts, right? Consult the experts, but this one knows more and that one knows less and how do you do it? And then you have this triangulation and then you make that. That's kind of the idea of believability decision-making. We have ways of assigning believability that we all agree are fair, that We each assess each other and we get a certain amount of believability points. So now imagine that you had believability, your believability on a subject matter. Maybe it's investing, maybe it's accounting, whatever the subject is, that you have a certain amount of believability weighted points and you're together. Well, those believability weighted points, when you say, okay, what should I make as a decision? Now I'm responsible to something, but I ask everybody else and I take a believability-weighted vote. I can have a believability-weighted vote. When I have that believability-weighted vote, I really do believe that it's going to be a better decision than I would individually make. That's believability-weighted decision-making. And it's fantastic when you have independent thinkers. In order to be successful in the markets or as an entrepreneur, one has to be an independent thinker that makes decisions better than the consensus decisions. It's fair. In the markets, the consensus is built into the price. It's beta. Yeah. So now you have to bet against the consensus to make money. Therefore, you have to be an independent thinker. The best dynamic is to have a bunch of independent thinkers. Now you've got a bunch of independent thinkers. How are they going to have thoughtful disagreement and get past those disagreements? How we have done that is the key to our success, and it's outlined in the book. So what happens with meditation, as you know, is it's just a simple exercise that allows you first to clear your head and then brings an equanimity to everything. Everything— it eliminates the stress, it eliminates the emotion. And you do it how often? You're a busy guy. Yeah, I've been doing it for 44 years, but I do it, you know, twice a day, probably a third of the time, once a day, probably a third of the time, and not at all. For 20 minutes twice a day? Yes. So you spend 40 minutes a day as part of your— Oh, it's such a great investment. I would say that more than any other factor having any effect on my success, it's been meditation. Because the equanimity and also the creativity, because it opens between the— literally the prefrontal cortex and the amygdala. It opens the two sides of the brain and allows spontaneity, creativity, and open-mindedness And so it's good for not only the health, because stress is a terrible thing, but it also is very good in terms of the clarity, and you don't get the emotional hijacking, and it's great for creativity. So it's helped me a lot. It's the biggest gift I can give anyone. Okay, so if you didn't understand the economic stuff, meditate.

Thank you guys so much for watching. I hope you enjoyed. I'd love to know what did you take from this video? What was the single most important message that you are going to immediately apply somehow to your life or to your business, leave it down in the comments below. I look forward to hearing what you have to say. I also wanna give a quick shout out to Jelena Ostrovska. Thank you so much for picking up a copy of my book, Your One Word, and doing a review on your YouTube channel, as well as the interview we did together. I really, really, really appreciate the support, and I'm so glad that you enjoyed my book. I'm super excited to bring a book review for you about a book that I finished reading quite recently, which is called Your One Word by Evan Carmichael. Thank you guys so much for watching. I believe in you. I hope you continue to believe in yourself and whatever your one word is. Much love. I'll see you soon.

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