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Tony Robbins interviews billionaire Ray Dalio - author of Principles

It is a fundamental law of nature that to evolve one has to push one’s limits, which is painful, in order to gain strength- whether it’s in the form of lifting weights, facing problems head-on or in any other way.
— 

- Ray Dalio about Principles

A friend recommended that I read this article Ray Dalio (Bridgewater) wrote about principles. The more I read, the more I relate to it!

“I believe that our society’s “mistakephobia” is crippling, a problem that begins in most elementary schools, where we learn to learn what we are taught rather than to form our own goals and to figure out how to achieve them. We are fed with facts and tested and those who make the fewest mistakes are considered to be the smart ones, so we learn that it is embarrassing to not know and to make mistakes. Our education system spends virtually no time on how to learn from mistakes, yet this is critical to real learning. As a result, school typically doesn’t prepare young people for real life–unless their lives are spent following instructions and pleasing others. In my opinion, that’s why so many students who succeed in school fail in life. “

–Ray Dalio

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You can’t learn how to ski unless you’re falling.

Ray Dalio on the type of people who change the world.

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STUDY TIME: How The Economic Machine Works

By Ray Dalio. The American businessman and founder of the investment firm Bridgewater Associates appeared on the annual Time 100 list of the 100 most influential people in the world.

Bridgewater Associates

Ray Dalio’s Bridgewater Associates was one of the top performing hedge funds in 2011 with return of 23%. Bridgewater (IMO) uses a macro strategy and their main bets were long gold, short S&P with some directional bets on US treasuries, German sovereign bonds and Japanese Yen. With AUM of US$120bn, Bridgewater's macro strategy helps it produce scalable investment ideas and maintaining performance with size.  

Bridgewater is a very deep thinking group and does not hesitate to come up with independent opinions (a commonality amongst top funds). 

Template for Understanding

  • Rather than the traditional idea of price being a function of supply and demand, Ray Dalio argues that “price = money supply / quantity”. This is a simplification of how the market works. He also assumes money supply is more elastic than supply. Supply must come from real productivity growth, where money supply can come in the form of cash or credit, and credit can be created instantaneously by anyone.  
  • In all transactions, both the buyer and the seller think they will be better off. 
  • Short term cycle: When productivity (“quantity”) cannot keep up with money growth (cash and credit) due to a tight central bank policy, the bubble pops and leads to a recession. This will end with central bank easing.
  • Long term cycle: When debts increase faster than both income and money and leads to deleveraging. This is different from a short term cycle as it is more serious as the central bank has already reached the zero bound and cannot ease any further. This will end with debt reduction, austerity, redistribution of wealth or debt monetization. 
  • The short term cycle, long term cycle and real productivity growth (typically 2% a year) together are the three major forces to the economic activity. 

Why Countries Succeed and Fail Economically

  • Cycles of economic distribution of wealth between countries are affected by (a) psychology of people’s desire to work, and (b) war
  • Countries go through five phases:
  • (1) Countries are poor and think that they are poor, e.g. BRI-C. During this phase, currencies and capital markets are underdeveloped and peg their currency to a commodity or the reserve currency. Investors buy hard assets and sometimes the world’s safest investment (USTs).
  • (2) Countries are getting rich but think they are poor, e.g. China (kind of…). During this phase, they work hard, are export driver, pegged exchange rates, save and invest
  • (3) Countries are rich and think they are rich. GDP/ Capita approaches highest in the world, start to become importers. e.g. Australia
  • (4) Countries are poor but think they are rich. People earn and spend a lot, but high labor costs cause slow real income growth rates and lose competitiveness. e.g. US (t-2 haha!)
  • (5) Countries deleverage and slow to accept the new reality. e.g. Greece

Ray Dalio’s 5 Principles

  1. Good: Understand how to manage pain to produce progress. Bad: Allow pain to stand in the way of progress. 
  2. Good: Face “harsh realities”. Bad" Avoid facing “hard realities”
  3. Good: Worry about acheiving the goal. Bad: Worry about appearing good.
  4. Good: Make desicions on basis of 1st, 2nd, 3rd order consecquences. Bad: Make decisions based on 1st order consecuqnes.
  5. Good: Hold yourself accountable. Bad: Don’t hold yourself accountable
  • Note 1: Push your limits. Avoid the “fight or flight” response
  • Note 2: Ask yourself “Is it true?”
  • Note 3: People who want to make the best decision are rarely confident they have the best answer
  • Note 4: 1st order is usually pain, 2nd order is usually reward. Hardwire yourself to like the action with the 2nd order (e.g. exercise is good for health, NOT exercise is tiring/ painful)
  • Note 5: Suspend the ego. Ask for help if needed.  

iansomerhalder: Happy EarthDay everyone from us. We’re in the middle of the North Atlantic Ocean in this yellow submarine shooting Season 2 of @yearsofliving on the@natgeo Channel with an amazing group of scientists, film makers, and the incredible tech professionals as well as crew of the Alucia. Thank you Mr. Ray Dalio for this extraordinary vessel to live on while we search for the Earth’s past that will be the key to our future. This has always been my boyhood dream to be on a National Graphic science expedition-thank you for all that made this happen! Let’s do something Great for our planet today so we get in the habit of doing it everyday. We must protect our wild habitats, keep our waters clean, educate our youth and stop stop dirty corporations that own dirty governments so all of us and our kids have a home. It’s our earth, our home- let’s make Earth Day EVERYDAY…
Love,
Ian and Nikki

122 Things Everyone Should Know About Investing

A year ago I started writing what I hoped would be a book called 500 Things you Need to know About Investing. I wanted to outline my favorite quotes, stats, and lessons about investing. 

I failed. I quickly realized the idea was long on ambition, short on planning. 

But I made it to 122, and figured it would be better in article form. Here it is. 

1. Saying “I’ll be greedy when others are fearful” is easier than actually doing it.

2. When most people say they want to be a millionaire, what they really mean is “I want to spend $1 million,” which is literally the opposite of being a millionaire.

3. "Some stuff happened" should replace 99% of references to “it’s a perfect storm.”

4. Daniel Kahneman’s book Thinking Fast and Slow begins, “The premise of this book is that it is easier to recognize other people’s mistakes than your own.” This should be every market commentator’s motto. 

5. Blogger Jesse Livermore writes, “My main life lesson from investing: self-interest is the most powerful force on earth, and can get people to embrace and defend almost anything.”

6. As Erik Falkenstein says: “In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.”

7. There is a difference between, “He predicted the crash of 2008,” and “He predicted crashes, one of which happened to occur in 2008.” It’s important to know the difference when praising investors. 

8. Investor Dean Williams once wrote, “Confidence in a forecast rises with the amount of information that goes into it. But the accuracy of the forecast stays the same." 

9. Wealth is relative. As comedian Chris Rock said, "If Bill Gates woke up with Oprah’s money he’d jump out the window." 

10. Only 7% of Americans know stocks rose 32% last year, according to Gallup. One-third believe the market either fell or stayed the same. Everyone is aware when markets fall; bull markets can go unnoticed. 

11. Dean Williams once noted that "Expertise is great, but it has a bad side effect: It tends to create the inability to accept new ideas.” Some of the world’s best investors have no formal backgrounds in finance – which helps them tremendously.

12. The Financial Times wrote, “In 2008 the three most admired personalities in sport were probably Tiger Woods, Lance Armstrong and Oscar Pistorius.” The same falls from grace happen in investing. Chose your role models carefully. 

13. Investor Ralph Wagoner once explained how markets work, recalled by Bill Bernstein: “He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.”

14. Investor Nick Murray once said, “Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage.” Remember this the next time you’re compelled to cash out.

15. Bill Seidman once said, “You never know what the American public is going to do, but you know that they will do it all at once.” Change is as rapid as it is unpredictable.

16. Napoleon’s definition of a military genius was, “the man who can do the average thing when all those around him are going crazy.” Same goes in investing. 

17. Blogger Jesse Livermore writes,“Most people, whether bull or bear, when they are right, are right for the wrong reason, in my opinion." 

18. Investors anchor to the idea that a fair price for a stock must be more than they paid for it. It’s one of the most common, and dangerous, biases that exists. "People do not get what they want or what they expect from the markets; they get what they deserve,” writes Bill Bonner.

19. Jason Zweig writes, “The advice that sounds the best in the short run is always the most dangerous in the long run.”

20. Billionaire investor Ray Dalio once said, “The more you think you know, the more closed-minded you’ll be.” Repeat this line to yourself the next time you’re certain of something.

21. During recessions, elections, and Federal Reserve policy meetings, people become unshakably certain about things they know very little about. 

22. “Buy and hold only works if you do both when markets crash. It’s much easier to both buy and hold when markets are rising,” says Ben Carlson. 

23. Several studies have shown that people prefer a pundit who is confident to one who is accurate. Pundits are happy to oblige. 

24. According to J.P. Morgan, 40% of stocks have suffered “catastrophic losses” since 1980, meaning they fell at least 70% and never recovered.

25. John Reed once wrote, “When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principles – generally three to twelve of them – that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.” Keep that in mind when getting frustrated over complicated financial formulas. 

26. James Grant says, “Successful investing is about having people agree with you … later." 

27. Scott Adams writes, "A person with a flexible schedule and average resources will be happier than a rich person who has everything except a flexible schedule. Step one in your search for happiness is to continually work toward having control of your schedule." 

28. According to Vanguard, 72% of mutual funds benchmarked to the S&P 500underperformed the index over a 20-year period ending in 2010. The phrase "professional investor” is a loose one.

29. "If your investment horizon is long enough and your position sizing is appropriate, you simply don’t argue with idiocy, you bet against it,“ writes Bruce Chadwick. 

30. The phrase "double-dip recession” was mentioned 10.8 million times in 2010 and 2011, according to Google. It never came. There were virtually no mentions of “financial collapse” in 2006 and 2007. It did come. A similar story can be told virtually every year.

31. According to Bloomberg, the 50 stocks in the S&P 500 that Wall Street rated the lowest at the end of 2011 outperformed the overall index by 7 percentage points over the following year.

32. "The big money is not in the buying or the selling, but in the sitting,“ said Jesse Livermore. 

33. Investors want to believe in someone. Forecasters want to earn a living. One of those groups is going to be disappointed. I think you know which.

34. In a poll of 1,000 American adults, asked, "How many millions are in a trillion?” 79% gave an incorrect answer or didn’t know. Keep this in mind when debating large financial problems.

35. As last year's Berkshire Hathaway shareholder meeting, Warren Buffett said he has owned 400 to 500 stocks during his career, and made most of his money on 10 of them. This is common: a large portion of investing success often comes from a tiny proportion of investments. 

36. Wall Street consistently expects earnings to beat expectations. It also loves oxymorons. 

37. The S&P 500 gained 27% in 2009 – a phenomenal year. Yet 66% of investors thought it fell that year, according to a survey by Franklin Templeton. Perception and reality can be miles apart. 

38. As Nate Silver writes, “When a possibility is unfamiliar to us, we do not even think about it.” The biggest risk is always something that no one is talking about, thinking about, or preparing for. That’s what makes it risky.

39. The next recession is never like the last one.

40. Since 1871, the market has spent 40% of all years either rising or falling more than 20%. Roaring booms and crushing busts are perfectly normal.

41. As the saying goes, “Save a little bit of money each month, and at the end of the year you’ll be surprised at how little you still have.”

42. John Maynard Keynes once wrote, “It is safer to be a speculator than an investor in the sense that a speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware.”

43. "History doesn’t crawl; it leaps,“ writes Nassim Taleb. Events that change the world – presidential assassinations, terrorist attacks, medical breakthroughs, bankruptcies – can happen overnight.

44. Our memories of financial history seem to extend about a decade back. "Time heals all wounds,” the saying goes. It also erases many important lessons.

45. You are under no obligation to read or watch financial news. If you do, you are under no obligation to take any of it seriously.

46. The most boring companies – toothpaste, food, bolts – can make some of the best long-term investments. The most innovative, some of the worst.

47. In a 2011 Gallup poll, 34% of Americans said gold was the best long-term investment, while 17% said stocks. Since then, stocks are up 87%, gold is down 35%.  

48. According to economist Burton Malkiel, 57 equity mutual funds underperformed the S&P 500 from 1970 to 2012. The shocking part of that statistic is that 57 funds could stay in business for four decades while posting poor returns. Hope often triumphs over reality.

49. Most economic news that we think is important doesn’t matter in the long run. Derek Thompson of The Atlantic once wrote, “I’ve written hundreds of articles about the economy in the last two years. But I think I can reduce those thousands of words to one sentence. Things got better, slowly.”

50. A broad index of U.S. stocks increased 2,000-fold between 1928 and 2013, but lost at least 20% of its value 20 times during that period. People would be less scared of volatility if they knew how common it was.

51. The “evidence is unequivocal,” Daniel Kahneman writes, “there’s a great deal more luck than skill in people getting very rich.”

52. There is a strong correlation between knowledge and humility. The best investors realize how little they know. 

53. Not a single person in the world knows what the market will do in the short run. 

54. Most people would be better off if they stopped obsessing about Congress, the Federal Reserve, and the president, and focused on their own financial mismanagement.

55. In hindsight, everyone saw the financial crisis coming. In reality, it was a fringe view before mid-2007. The next crisis will be the same (they all work like that).

56. There were 272 automobile companies in 1909. Through consolidation and failure, three emerged on top, two of which went bankrupt. Spotting a promising trend and a winning investment are two different things.

57. The more someone is on TV, the less likely his or her predictions are to come true. (University of California, Berkeley psychologist Phil Tetlock has data on this).

58. Maggie Mahar once wrote that “men resist randomness, markets resist prophecy.” Those six words explain most people’s bad experiences in the stock market.

59. "We’re all just guessing, but some of us have fancier math,“ writes Josh Brown. 

60. When you think you have a great idea, go out of your way to talk with someone who disagrees with it. At worst, you continue to disagree with them. More often, you’ll gain valuable perspective. Fight confirmation bias like the plague.

61. In 1923, nine of the most successful U.S. businessmen met in Chicago. Josh Brown writes:

Within 25 years, all of these great men had met a horrific end to their careers or their lives:

The president of the largest steel company, Charles Schwab, died a bankrupt man; the president of the largest utility company, Samuel Insull, died penniless; the president of the largest gas company, Howard Hobson, suffered a mental breakdown, ending up in an insane asylum; the president of the New York Stock Exchange, Richard Whitney, had just been released from prison; the bank president, Leon Fraser, had taken his own life; the wheat speculator, Arthur Cutten, died penniless; the head of the world’s greatest monopoly, Ivar Krueger the ‘match king’ also had taken his life; and the member of President Harding’s cabinet, Albert Fall, had just been given a pardon from prison so that he could die at home.

62. Try to learn as many investing mistakes as possible vicariously through others. Other people have made every mistake in the book. You can learn more from studying the investing failures than the investing greats.

63. Bill Bonner says there are two ways to think about what money buys. There’s the standard of living, which can be measured in dollars, and there’s the quality of your life, which can’t be measured at all.

64. If you’re going to try to predict the future – whether it’s where the market is heading, or what the economy is going to do, or whether you’ll be promoted – think in terms of probabilities, not certainties. Death and taxes, as they say, are the only exceptions to this rule.

65. Focus on not getting beat by the market before you think about trying to beat it.

66. Polls show Americans for the last 25 years have said the economy is in a state of decline. Pessimism in the face of advancement is the norm. 

67. Finance would be better if it was taught by the psychology and history departments at universities.

68. According to economist Tim Duy, "As long as people have babies, capital depreciates, technology evolves, and tastes and preferences change, there is a powerful underlying impetus for growth that is almost certain to reveal itself in any reasonably well-managed economy.”

69. Study successful investors, and you’ll notice a common denominator: they are masters of psychologyThey can’t control the market, but they have complete control over the gray matter between their ears.

70. In finance textbooks, “risk” is defined as short-term volatility. In the real world, risk is earning low returns, which is often caused by trying to avoid short-term volatility.

71. Remember what Nassim Taleb says about randomness in markets: “If you roll dice, you know that the odds are one in six that the dice will come up on a particular side. So you can calculate the risk. But, in the stock market, such computations are bull – you don’t even know how many sides the dice have!”

72. The S&P 500 gained 27% in 1998. But just five stocks – Dell, Lucent, MicrosoftPfizer, and Wal-Mart – accounted for more than half the gain. There can be huge concentration even in a diverse portfolio. 

73. The odds that at least one well-known company is insolvent and hiding behind fraudulent accounting are pretty high.

74. The book Where Are the Customers’ Yachts? was written in 1940, and most people still haven’t figured out that brokers don’t have their best interest at heart.

75. Cognitive psychologists have a theory called “backfiring.” When presented with information that goes against your viewpoints, you not only reject challengers, but double down on your view. Voters often view the candidate they support more favorably after the candidate is attacked by the other party. In investing, shareholders of companies facing heavy criticism often become die-hard supporters for reasons totally unrelated to the company’s performance.

76. "In the financial world, good ideas become bad ideas through a competitive process of 'can you top this?’“ Jim Grant once said. A smart investment leveraged up with debt becomes a bad investment very quickly.

77. Remember what Wharton professor Jeremy Siegel says: "You have never lost money in stocks over any 20-year period, but you have wiped out half your portfolio in bonds [after inflation]. So which is the riskier asset?”

78. Warren Buffett’s best returns were achieved when markets were much less competitive. It’s doubtful anyone will ever match his 50-year record.

79. Twenty-five hedge fund managers took home $21.2 billion in 2013 for delivering an average performance of 9.1%, versus the 32.4% you could have made in an index fund. It’s a great business to work in – not so much to invest in. 

80. The United States is the only major economy in which the working-age population is growing at a reasonable rate. This might be the most important economic variable of the next half-century.

81. Most investors have no idea how they actually perform. Markus Glaser and Martin Weber of the University of Mannheim asked investors how they thought they did in the market, and then looked at their brokerage statements. “The correlation between self ratings and actual performance is not distinguishable from zero,” they concluded.

82. Harvard professor and former Treasury Secretary Larry Summers says that “virtually everything I taught” in economics was called into question by the financial crisis. 

83. Asked about the economy’s performance after the financial crisis, Charlie Munger said, “If you’re not confused, I don’t think you understand." 

84. There is virtually no correlation between what the economy is doing and stock market returns. According to Vanguard, rainfall is actually a better predictor of future stock returns than GDP growth. (Both explain slightly more than nothing.)

85. You can control your portfolio allocation, your own education, who you listen to, what you read, what evidence you pay attention to, and how you respond to certain events. You cannot control what the Fed does, laws Congress sets, the next jobs report, or whether a company will beat earnings estimates. Focus on the former; try to ignore the latter.

86. Companies that focus on their stock price will eventually lose their customers. Companies that focus on their customers will eventually boost their stock price. This is simple, but forgotten by countless managers.

87. Investment bank Dresdner Kleinwort looked at analysts’ predictions of interest rates, and compared that with what interest rates actually did in hindsight. It found an almost perfect lag. "Analysts are terribly good at telling us what has just happened but of little use in telling us what is going to happen in the future,” the bank wrote. It’s common to confuse the rearview mirror for the windshield.

88. Success is a lousy teacher,“ Bill Gates once said. "It seduces smart people into thinking they can’t lose.”

89. Investor Seth Klarman says, “Macro worries are like sports talk radio. Everyone has a good opinion which probably means that none of them are good.”

90. Several academic studies have shown that those who trade the most earn the lowest returns. Remember Pascal’s wisdom: “All man’s miseries derive from not being able to sit in a quiet room alone.”

91. The best company in the world run by the smartest management can be a terrible investment if purchased at the wrong price.

92. There will be seven to 10 recessions over the next 50 years. Don’t act surprised when they come.

93. No investment points are awarded for difficulty or complexity. Simple strategies can lead to outstanding returns.

94. The president has much less influence over the economy than people think.

95. However much money you think you’ll need for retirement, double it. Now you’re closer to reality.

96. For many, a house is a large liability masquerading as a safe asset.

97. The single best three-year period to own stocks was during the Great Depression. Not far behind was the three-year period starting in 2009, when the economy struggled in utter ruin. The biggest returns begin when most people think the biggest losses are inevitable.

98. Remember what Buffett says about progress: “First come the innovators, then come the imitators, then come the idiots.”

99. And what Mark Twain says about truth: “A lie can travel halfway around the world while truth is putting on its shoes.”

100. And what Marty Whitman says about information: “Rarely do more than three or four variables really count. Everything else is noise.”

101. Among Americans aged 18 to 64, the average number of doctor visits decreased from 4.8 in 2001 to 3.9 in 2010. This is partly because of the weak economy, and partly because of the growing cost of medicine, but it has an important takeaway: You can never extrapolate behavior – even for something as vital as seeing a doctor – indefinitely. Behaviors change.

102. Since last July, elderly Chinese can sue their children who don’t visit often enough, according to Bloomberg. Dealing with an aging population calls for drastic measures.

103. Someone once asked Warren Buffett how to become a better investor. He pointed to a stack of annual reports. “Read 500 pages like this every day,” he said. “That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

104. If Americans had as many babies from 2007 to 2014 as they did from 2000 to 2007, there would be 2.3 million more kids today. That will affect the economy for decades to come. 

105. The Congressional Budget Office’s 2003 prediction of federal debt in the year 2013 was off by $10 trillion. Forecasting is hard. But we still line up for it.

106. According to The Wall Street Journal, in 2010, “for every 1% decrease in shareholder return, the average CEO was paid 0.02% more.”

107. Since 1994, stock market returns are flat if the three days before the Federal Reserve announces interest rate policy are removed, according to a study by the Federal Reserve.

108. In 1989, the CEOs of the seven largest U.S. banks earned an average of 100 times what a typical household made. By 2007, more than 500 times. By 2008, several of those banks no longer existed.

109. Two things make an economy grow: population growth and productivity growth. Everything else is a function of one of those two drivers.

110. The single most important investment question you need to ask yourself is, “How long am I investing for?” How you answer it can change your perspective on everything.

111. "Do nothing" are the two most powerful – and underused – words in investing. The urge to act has transferred an inconceivable amount of wealth from investors to brokers.

112. Apple increased more than 6,000% from 2002 to 2012, but declined on 48% of all trading days. It is never a straight path up.

113. It’s easy to mistake luck for success. J.Paul Getty said, the key to success is: 1) rise early, 2) work hard, 3) strike oil.

114. Dan Gardner writes, “No one can foresee the consequences of trivia and accident, and for that reason alone, the future will forever be filled with surprises.”

115. I once asked Daniel Kahneman about a key to making better decisions. “You should talk to people who disagree with you and you should talk to people who are not in the same emotional situation you are,” he said. Try this before making your next investment decision.

116. No one on the Forbes 400 list of richest Americans can be described as a “perma-bear.” A natural sense of optimism not only healthy, but vital.

117. Economist Alfred Cowles dug through forecasts a popular analyst who “had gained a reputation for successful forecasting” made in The Wall Street Journal in the early 1900s. Among 90 predictions made over a 30-year period, exactly 45 were right and 45 were wrong. This is more common than you think.

118. Since 1900, the S&P 500 has returned about 6.5% per year, but the average difference between any year’s highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.

119. How long you stay invested for will likely be the single most important factor determining how well you do at investing.

120. A money manager’s amount of experience doesn’t tell you much. You can underperform the market for an entire career. Many have.

121. A hedge fund once described its edge by stating, “We don’t own one Apple share. Every hedge fund owns Apple.” This type of simple, contrarian thinking is worth its weight in gold in investing.

122. Take two investors. One is an MIT rocket scientist who aced his SATs and can recite pi out to 50 decimal places. He trades several times a week, tapping his intellect in an attempt to outsmart the market by jumping in and out when he’s determined it’s right. The other is a country bumpkin who didn’t attend college. He saves and invests every month in a low-cost index fund come hell or high water. He doesn’t care about beating the market. He just wants it to be his faithful companion. Who’s going to do better in the long run? I’d bet on the latter all day long. “Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ,” Warren Buffett says. Successful investors know their limitations, keep cool, and act with discipline. You can’t measure that.

For more:

The Bottom Line by Carl Icahn

Among other things, I’m known to be a “reductionist.“  In my line of work you must be good at pinpointing what to focus on – that is, the major underlying truths and problems in a situation. I then become obsessive about solving or fixing whatever they may be. This combination is what perhaps has lead to my success over the years and is why I’ve chosen to be so outspoken about shareholder activism, corporate governance issues, and the current economic state of America. Currently, I believe that the facts “reduce” to one indisputable truth which is that we must change our system of selecting CEOs in order to stay competitive and get us out of an extremely dangerous financial situation. With exceptions, I believe that too many companies in this country are terribly run and there’s no system in place to hold the CEOs and Boards of these inadequately managed companies accountable. There are numerous challenges we are facing today whether it be monetary policy, unemployment, income inequality, the list can go on and on… but the thing we have to remember is there is something we can do about it: Shareholders, the true owners of our companies, can demand that mediocre CEOs are held accountable and make it clear that they will be replaced if they are failing. I am convinced by our record that this will make our corporations much more productive and profitable and will go a long way in helping to solve our unemployment problems and the other issues now ailing our economy. We can no longer simply depend on the Federal Reserve to keep filling the punch bowl.

Federal Reserve Chair Janet Yellen recently commented on our Monetary Policy at the International Monetary Fund saying, “Monetary policy faces significant limitations as a tool to promote financial stability.” She continued that, “Its effects on financial vulnerabilities, such as excessive leverage and maturity transformation, are not well understood and are less direct than a regulatory or supervisory approach.” Yellen’s comments suggest, and I agree, that we are in an asset bubble.

Adding to this, Standard & Poor’s issued a report just a few days ago titled, “How Increasing Income Inequality is Dampening U.S. Economic Growth and Possible Ways to Change the Tide.” In it they say: “Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the U.S. is dampening GDP growth, at a time when the world’s biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population.”

There is also a dire situation regarding pension funds which supports the view that Main Street Americans are the ones falling victims to entrenched CEOs and Boards doing poor jobs at running companies. A study by Ray Dalio, founder of Bridgewater Associates, calculates 85% of public pension funds going bankrupt in three decades and only able to achieve 4% returns on their assets. These inexcusable numbers are mainly due to pension and mutual fund managers “voting with their feet” or simply voting for current management of companies in their funds, regardless of their effectiveness on shareholder value.

Our current system of corporate governance protects mediocre CEOs and boards that are mismanaging companies and this must be changed. With this system we will not meet the needs of Main Street America, nor will we be ready for when the asset bubble we have today bursts – whether it is the next one, five, ten, or 20 years. Nobel Laureate and professor of economics at Columbia University, Joseph Stiglitz recently told CNBC, “These very strong stock market prices are in a sense a symptom of the weak economy, not a symptom that we are about to have a strong recovery to our real economy.” He also said, “In the United States, from 2009 to 2012, 95 percent of the gains went to the upper 1 percent. Ordinary Americans are using up their savings.”

Currently, we must focus on the simple solution that I believe could alleviate many of these problems we are facing. The solution is shareholder activism. Icahn Enterprises L.P. (IEP) reported its Second Quarter 2014 results on August 5th and as I said, I am very pleased with our performance. What makes me especially happy is that I believe that IEP’s performance not only in Q2 but since 2000, gives testimony to my belief that activism, when properly practiced, meaningfully enhances value for all shareholders as well as the economy in general. If you bought IEP in the beginning of 2000 you would have an annualized return of 21.5% compared to the S&P 500’s 3.8% and if you bought IEP April 1 2009 you would have an annualized return of 34.3% compared to the S&P 500’s 20.5%, through July 31 2014.

Even more telling is the annualized return of a person who invested in 23 companies whose Boards Icahn designees joined between January 1 2009 and June 30 2014: if the person invested in each company on the date that the designee joined the Board and sold on the date that the Icahn designee left the Board (or continued to hold through June 30, 2014 if the designee did not leave the Board) they would have obtained an annualized return of 27%.

I believe that the main reason for our success is we adhere to the activism model which we have spent many years developing. What we essentially do is attempt to hold managements accountable through our rights as shareholders and seek to ensure the right people run the companies we invest in. We do not micromanage however. If a company is doing more poorly than its peers we take a hard look, and in a number of these cases the CEO is not the right person to be running the company.

True corporate democracy does not exist in America and as a result many unfit CEOs are not held accountable. Poison pills and other board tricks disenfranchise stockholders. As a result entrenched CEOs and Boards of Directors may be protected even if they are ineffective. Many large money managers agree but amazingly hardly anything is done about it - even though the most important thing in a company is its CEO. To this point, in a recent essay in the Wall Street Journal, Bill Gates discusses one of his and Warren Buffett’s favorite books, ‘Business Adventures’ by John Brooks. Gates says, “Brooks’s work is a great reminder that the rules for running a strong business and creating value haven’t changed. For one thing, there’s an essential human factor in every business endeavor. It doesn’t matter if you have a perfect product, production plan and marketing pitch; you’ll still need the right people to lead and implement those plans.”

The mantra of opponents of shareholder activists, such as lawyer Marty Lipton is that “short-termist” is synonymous with “shareholder activist.” But my record belies this statement. I have held many positions for long periods of time; some up to 30 years.

Again, I believe that the kind of shareholder activism that IEP practices has been extremely successful because we seek to bring true corporate democracy to the companies we are involved with through exercising our rights as shareholders to hold CEOs accountable and change unproductive management that needs to be changed. I believe that America needs this to correct the economic course we are on and push back against the approaching storm clouds resulting from the many problems we face today, including a major asset bubble that continues to grow.

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Simply explained.  

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Foreign Affairs Focus on the Global Economy with Ray Dalio

Managing Editor Jonathan Tepperman interviews Bridgewater founder Ray Dalio on the European debt crisis and Eurozone’s future, the promising financial condition of emerging markets, and how countries can structure a successful deleveraging. Mr. Dalio emphasizes the wisdom, restraint, and historical awareness necessary to balance fiscal and monetary policy.

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Ray Dalio | How The Economic Machine Works: In 30 Minutes

The Problem With the Ray Dalio's "All Weather" Portfolio

Before I even get started with this, I’m going to put out a disclaimer:

What I’m about to do is the same thing as standing on the shoulders of giants and shooting spitballs into their ears. I respect the fact that this criticism is targeting very very smart and successful people. I can’t wait to read my copy of Tony’s new book, and Ray Dalio is one of the smartest investors out there.

Right. So. With that out of the way, I want to talk about Ray Dalio’s “All Weather” Porftolio.

You can read the full post here, but I’ll summarize a bit:

The goal of this portfolio is to maximize returns and reduce volatility, with an asset allocation strategy that anyone can understand.

The assumption here is that economic conditions consist of a mix of inflation/deflation, and rising/falling economic growth.

With that in mind, you can construct a portfolio with these components:

  1. 30% Stocks
  2. 15% Intermediate Term Treasuries
  3. 40% Long Term Treaasuries
  4. 7.5% Gold
  5. 7.5% Commodities

With those holdings, rebalance every once in a while and you’re set.

All things considered, it’s not a bad strategy. Here are the results:

  1. Around 10% annualized
  2. Max drawdown around 4%
  3. Standard Deviation of 7.63%

Not half bad, considering if you were 100% long stocks there have been a few times where your max drawdown was well under 30%.

So what is the problem here?

I think there’s a bit of sampling bias going on.

The results come from what Tony calls the “Modern Period.” That’s from 1984 to 2013.

What I’m going to do is show you a chart of 10 year bond yields, starting in the early 80’s.

Do you see where I’m going with this?

The sampling window just happens to include a 30 year secular bull market in treasuries.

I’m sure we could construct a similar portfolio that is overweight stocks, that includes the period 1980 - 1999 that would have amazing returns with low drawdowns.

The problem I see with this portfolio is the super cliche phrase:

Past returns are not indicative of future performance.

In my opinion this kind of portfolio will have trouble managing those kinds of returns because yields are near a floor. You can’t have significant price appreciation in this asset.

The funny thing is, that is obvious. And way too many people tried to take the other side, getting short bonds and the treasury market had a flash crash last month. So the trade is doing fine.

What would I change?

Again, I’m just throwing spitballs here. My timeframe rarely goes past 2 months with my trading style. All things considered it’s a fine portfolio for someone that wants to be super passive.

I think that a good idea here is to replace some of the direct treasury exposure with TIPS (Treasury Inflation Protected Securities). If we actually do see some proper wage growth, and if central banks (heaven forbid!) start to raise rates, the TIPS will get you a little bit better risk-adjusted returns.

Here is the rub:  if you were to go and backtest a portfolio with TIPS as a significant asset, it will underperform the “All Weather” portfolio. Changing the portfolio would be a slightly speculative bet (over the long term) that rates will not persist at these levels in the next few years.

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How The Economic Machine Works (Ray Dalio)