6 key takeaways from Ray Dalio's interview with Nithin Kamath

Ray Dalio

From being a caddie at a golf course, earning $6 a bag at the age of 12, to saving up $50 to invest in the stock exchange, the 75-year-old billionaire Ray Dalio explains how he got into the game.

Ray, the founder of Bridgewater Associates, is widely known for his "global macro" investment style and for predicting the 2008 financial crisis.

He joins WTF, the podcast series of Zerodha CEO Nithin Kamath, for a candid conversation. Here are the key takeaways as excerpts from the interview—

I was a caddie at a golf course. At the time, there was a stock market boom. I would earn $6 a bag. When I got $50, I would put it in the stock market in the only company I ever heard of that was selling for less than $5 a share. It was a company that was about to go bankrupt, but another company acquired it, and it tripled in value. Then I thought this was easy. It's not easy, but I got hooked on the markets at 12. I got into the game.

The way I learn to invest was to write down the criteria to make a decision. Then I’d see how it would have worked in the past. When you have a decision rule, you’d know how it would have worked all through time. Now you're just playing that decision rule, and it helps. Once you get into playing the game, you'll start to learn the fundamentals of the game. So while you're playing it, you will learn through your experiences and your reflections and with the help of other people.

All assets are valued based on their appreciation in price and their yield. The yield that you're getting and the price change— that's your total return. So all assets are compared on that basis. When looking at the markets as a whole, I just compare everything. Because all I want to do is to essentially borrow or be short of those that will have the lower returns relative to those that will have the higher returns. So it takes constant calculations.

Many people realised that gold is a storehold of wealth. Throughout history, gold has been the most-used and widely accepted money around the world. There’s the perception of money that money can be used as a medium of exchange. Gold is the only money that you can have, and nobody has to give you anything to have it. All other money is dependent on somebody giving you something. Its confiscation risk is less than that of others. So that's one of the reasons gold is unique, but it is also a widely recognized storehold of wealth that I could take around the world, and use it. You can't deflate its value, and you can't print it or create more of it.

Money doesn't have much utility. Generally speaking, if you're carrying around cash, it's paper; it doesn't have much utility. Everything that's money could be a risk. For example, when there were great discoveries of gold, the value was affected by the quantity of those discoveries. Gold fell out of fashion as a money, and bonds fell into fashion. Throughout history, when there's a fiat money which could easily be produced, there's the temptation of an interest rate.

Gold doesn't have an interest rate. The great trick of history, and everybody believed it back then for a long time, is that if I hold the promise to get the gold, then I will get an interest rate, and I could always turn my money in for gold. So why won't I hold the promise to get the gold and get an interest rate on it rather than to hold the actual gold, which wouldn't give me an interest rate? And that was the trap, and that is always the trap.

You have to stop thinking about the appreciation and market timing as a starting point. You have to say what amount am I going to hold? What is the right amount? So the answer to the question is, yes. Forget about the pricing of gold or what it might do and what it might not do. I need to hold that amount because that amount is the right amount. If you were to go through a portfolio optimisation, and you were to say, through a mechanical portfolio optimisation, what is my mix of assets to create the right portfolio?

Gold produces about a 1.2 per cent real return a year. That's a low real return, but it is highly diversifying because when the other portfolio performs very badly, then the gold does very well. So, it also has a diversification benefit in terms of the portfolio. For those reasons, it is the most fundamental money that we know of, and it is at the same time an effective diversifier to other things. That'll get you to that 50 between five and 15 per cent of the portfolio.

Bitcoin is limited in supply. It is perceived as money as a storehold of wealth that is unlikely to be significantly held by central banks and many others because of a number of problems it has. Transactions could all be followed in Bitcoin. One can monitor what the transactions are. Governments can monitor what the transactions are, and governments can interfere with those transactions. Gold is the only asset that you can have that can't be controlled; that's not true of Bitcoin. There are other issues, in terms of Bitcoin being cracked, broken, all sorts of things and controlled. I have a little bit of Bitcoin. But for me, it's not as attractive as gold.