Ray Dalio, one of the world’s most famous and successful investors, has openly talked to Nikhil Kamat, co-founder of Zerodha, about his long and tumultuous journey in the world of investing, his thinking and strategies. Dalio recently appeared on a recent episode of Nikhil Kamat’s podcast show ‘WTF’.
The 75-year-old billionaire investor told in this conversation how at the age of 12, he entered the stock market while working as a caddy at a golf course and how the same experience later became the foundation of his investment style. Dalio, who accurately predicted the 2008 financial crisis, shared many important points on investing, gold, portfolio building methods and Bitcoin.
The first lesson in getting into the game
Ray Dalio told that he was a caddy at a golf course and got paid $6 per bag. When he saved $50, he invested it in the stock market. At that time, there was a boom in the stock market. He said that he invested in a company whose shares were selling for less than $5 and which was about to go bankrupt. But later that company was acquired and the share tripled.
According to Dalio, this is where he realized the stock market was “easy.” However later I realized that it is not easy. But at the same age he got into the “game” of the market. He says the best way to learn investing is to create rules, write them down, and see how they would have worked in the past.
Dalio said that I learned to invest because I had written down the criteria for taking decisions. Then I would see how it worked first. When the rules are made, you know how it works all the time. Now you’re just playing that decision rule, and that helps. Once you start playing the game, you will start learning the basics of the game. So when you’re playing it, you’ll learn from your experiences and your ideas and the help of other people.
How is the value of assets determined?
According to Ray Dalio, the price of any asset is determined by two things. The increase in its price and the income received from it i.e. yield. The total return is formed by combining these two. He said that he compares all the assets on this basis and his aim is to stay away from those assets which are expected to give low returns, while taking positions in assets with high returns. For this, constant calculation and comparison is necessary.
Why is gold the most important asset?
Regarding gold, Dalio said that gold has been the most accepted “money” in history. Gold is such an asset that one does not have to depend on any third party for its custody. According to him, all other types of currency are based on the promise of some institution or government, whereas gold has value in itself. It can neither be printed nor its supply can be increased as desired. This is the reason why gold is still considered a reliable storage of wealth across the world.
There is no interest rate on gold
Ray Dalio said that the biggest feature of gold is that it does not earn any interest. It has happened many times in history that when large deposits of gold have been discovered, its price was affected because its quantity increased. Gradually gold became less used as currency and instruments like bonds became popular in its place. Whenever there is currency (fiat money) that can be easily printed or created, there is a temptation to pay interest on it.
Dalio said that what happened repeatedly in history was that people were led to believe that if they kept the “promise of receiving gold,” they would receive interest and the gold would also be available when needed. This was the trap in which investors kept falling.
Should you add gold to your portfolio today?
When asked about the recent rise in gold, Dalio clearly said that investors should stop thinking about market timing. He said, “If you want to start building your investment portfolio from today, then first of all stop thinking about how much gold prices have increased before or what will happen next. The real question should be how much gold you should keep in your portfolio, not waiting for the right time. So the answer is – yes, you should start from today.”
He said that instead of worrying about gold prices, decide what portion of your total investment should be in gold. If the portfolio is balanced properly, gold gives real returns of around 1.2% per annum. Even though these returns may not be high, gold often does well when other investments perform poorly. For this reason it is an excellent diversifier. According to him, the share of gold in a balanced portfolio should generally be between 5 to 15 percent.
Bitcoin vs Gold: Which does Dalio consider better?
Ray Dalio admitted that the supply of Bitcoin is limited and it is also being seen as a form of wealth. However, the Central Bank and other such institutions will hardly hold it because it is surrounded by many problems. He said that all transactions of Bitcoin can be tracked. Governments can monitor what transactions are taking place, and governments can interfere in those transactions. Gold is the only asset which you cannot control; This is not the case with Bitcoin. Additionally, technical risks and system threats also remain. Dalio did admit that he has a small amount of Bitcoin, but to him it is not as attractive as gold.
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