Monday, July 30, 2012

Ray Dalio quotes

Ray Dalio quotes from Jack Schwager’s book Hedge Fund Market Wizards:

Original lesson learned after the U.S. went off the gold standard in 1971:

“I learned that currency depreciations and the printing of money are good for stocks. I also learned not to trust what policy makers say. I learned these lessons repeatedly over the years.”

On the Fed's power over the market:

“I learned not to fight the Fed unless I had very good reasons to believe that their moves wouldn’t work. The Fed and other central banks have tremendous power. In both the abandonment of the gold standard in 1971 and in the Mexico default in 1982, I learned that a crisis development that leads to central banks easing and coming to the rescue can swamp the impact of the crisis itself.”

“In trading you have to be defensive and aggressive at the same time. If you are not aggressive, you are not going to make money, and if you are not defensive, you are not going to keep money.”

Correlation and diversification:

“There are ways to structure your trades so that you can produce a whole bunch of uncorrelated bets. You have to start with your goal. My goal is that I want to trade more than 15 uncorrelated assets. You are just telling me your problem, and it’s not an insurmountable problem. I strive for approximately 100 different return streams that are roughly uncorrelated to each other. There are cross-correlations that enter into it, so the number works out to be less than 100, but it is well over 15. Correlation doesn’t exist the way most people think it exists. People think that a thing called correlation exists. That’s wrong. What is really happening is that each market is behaving logically based on its own determinants, and as the nature of those determinants changes, what we call correlation changes. For example, when economic growth expectations are volatile, stocks and bonds will be negatively correlated because if growth slows, it will cause both stock prices and interest rates to decline. However, in an environment where inflation expectations are volatile, stocks and bonds will be positively correlated because interest rates will go up with higher inflation, which is detrimental to both bonds and stocks. So both relationships are totally logical, even though they are exact opposites of each other. If you try to represent the stock/bond relationship with one correlation statistic, it denies the causality of the correlation. Correlation is just the word people use to take an average of how two prices have behaved together. When I am setting up my trading bets, I am not looking at correlation; I am looking at whether the drivers are different. I am choosing 15 or more assets that behave differently for logical reasons. I may talk about the return streams in the portfolio being uncorrelated, but be aware that I’m not using the term correlation the way most people do. I am talking about the causation, not the measure.”

“I think that one of the greatest problems that plagues mankind is that people are always saying, “I think this, and I think that,” when there is a high probability they are wrong. After all, to the extent that there is strong disagreement about an issue, a lot of the people must be wrong. Yet most of them are totally confident they are right. How is that possible? Imagine how much better almost all decision making would be if people who disagree were less confident and more open to trying to get at the truth through thoughtful discourse.”

On Bridgewater's decision-making process:

“Our decision-making process is to determine the criteria by which we make decisions in the market. Those criteria—I call them principles—are systematized. These principles determine what we do under different circumstances. In other words, we make decisions about the criteria we use to make decisions. We don’t make decisions about individual positions. For any trading strategy, we can look back at when it won, when it lost, and under what circumstances. Each strategy develops a track record that we deeply understand and then combine in a portfolio of diversified strategies. If a strategy is not performing in real time as expected, we can reevaluate it, and if we agree it is desirable, we might modify our systems. We have been doing this for 36 years. Over the years, we develop new understandings, which we continually add to our existing understandings.”

“….we test our criteria to make sure that they are timeless and universal. Timeless means that we look at a strategy during all different times, and universal means that we look at how a strategy worked in all different countries. There is no reason why a strategy’s effectiveness should change in different time periods or when you go from country to country. This broad analysis through time and geography gives us a unique perspective relative to most other managers. For example, to understand the current U.S. zero interest rate, deleveraging environment, we need to understand what happened a long time ago, such as the 1930s, and in other countries, such as Japan in the postbubble era. Deleveragings are very different from recessions. Aside from the ongoing deleveraging, there are no other deleveragings in the U.S. post–World War II period.”