[Video] - How The Economic Machine Works

Geoff Cook - CFP, CHAIP

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In this video we are privileged to have one of the most succesful investors on the planet, Hedge Fund manager Ray Dalio of Bridgewater Associates explain how the economic machine works.

I have always been very impressed with Ray Dalio's very simple and logical approach to markets.

Here are some more points I have learned from studying Ray and Bridgewater;

  • Recognize that mistakes are good if they result in learning.

  • Create a culture in which it is okay to fail but unacceptable not to identify, analyze, and learn from mistakes.

  • We must bring mistakes in to the open and analyze them objectively, so managers need to foster a culture that makes this normal and penalizes suppressing or covering up mistakes - highlighting them, diagnosing them, thinking about what should be done differently in the future ans then adding that new knowledge to the procedures manual are all essential to our improvement at Bridgewater.

  • Recognize that you will certainly make mistakes and have weaknesses; so will those around you and those who work for you. What matter is how you deal with them. If you treat mistakes as learning opportunities that can yield improvement if handled well, you will be excited by them.

  • If you don't mind being wrong on the way to being right, you will learn a lot.

  • People who blame bad outcomes on anyone or anything other than themselves are behaving in a way that is at variance with reality and subversive to their progress.

  • 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.

  • If you add assets that have 0.60 correlation to the other assets, the risk will go down by about 15% as you add more assets, but that’s about it, even if you add a thousand assets.

  • If you combine assets that have an average of zero correlation, then by the time you diversify to only 15 assets you can cut the volatility by 80%.

  • I think it is human nature for people to choose strategies that worked well during the recent past. Typically high past returns simply mean that an asset has become more expensive and is a poorer, not better, investment.

  • Correlation can be a misleading statistic and poorly suited as a tool for constructing a diversified portfolio.

  • Instead of using correlation as a measure of dependence between two positions, you need to focus on the underlying drivers that are expected to affect those positions. Drivers are the cause; correlations are the consequence.

    Source: Jack D. Schwager - Hedge Fund Market Wizards


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