Speaker 1: Ray Dalio, he’s the billionaire hedge fund manager at Bridgewater who’s made over fifty eight point five dollars billion for his clients. Now, when you’ve got such wealthy clients, you have to send them updates every now and again. And Bloomberg has managed to get insights into a recent updates that Dalio sent to his clients. And what can I say about those insights?
It was a very gloomy prediction on what stocks would do over the next 10 years. Dalio warned of a possible lost decade for the stock market’s going ahead. Let me explain. If you look throughout history, there’s been a number of these times where the stock market has seen negative returns for 10 years or longer. So if you put your money in the stock market during those times, you could have waited 10 years and still seen a loss. For example, the year 2000, right before the dotcom crash, if you invested, then you could have waited over 12 years until 2012 and still lost money. Probably the best example that we could give was back in 1929. If you invested, then you would have had to wait over 30 years before you made any profit on your investment. Imagine investing and having to wait that long crazy. And Dalio thinks that we might be in one of those periods today where if you invested now, it might be a decade and you could still lose money. But let’s delve into why the first thing that Bridgewater mentioned as Kohl’s ability for the lost decade ahead was lowering profit margins. So that’s a decrease. And what profit margins once were. They said the margins, which have provided a big chunk of the excess return of equities over cash, could face a shift that will go beyond the current cyclical downturn and earnings. And one of the reasons why they see the lowering of profit margins is because of the decline in globalization, they said. Globalization, perhaps the largest driver of developed world profitability over the past few decades, has already peaked. Now the US China conflict and global pandemic are further accelerating moves by multinationals to reassure and duplicate supply chains with a focus on reliability as opposed to just cost optimization, end quote. So I want to explain this because it’s very important to understand what these analysts are saying.
So what they’re saying is in 2019 and the year before this, there was this big drive towards globalization. By the way, globalization just means businesses operating in different countries and sourcing things from other countries as well. Why do they do this? Because it’s so much cheaper and so much more profitable. So profit margins because of globalization became really high. But the analysts at Bridgewater, what they’re saying is the decline in globalization since this crisis, this decline is happening because countries are looking to rely more on themselves and produce their own goods. But what this does to a lot of companies, profit margins, is it decreases them because it’s more expensive to produce them yourself instead of outsourcing them. This is one of the key reasons behind the lost decade arguments, the decrease in globalization. The analysts at Bridgewater say even if overall profits recover, some companies will die or their shares will devalue along the way left with lower levels of profits and cash shortfalls. Companies are likely to come out on the other side of the illness more indebted, the analysts warned. This is the second reason behind the lost decade argument for stocks, and that is higher levels of corporate debt. You’ve got to understand this lockdown that we’ve seen. It hasn’t helped companies balance sheets. If you’ve got a business and you’re not able to operate for a couple of months while you’ve still got expenses to pay and you’re not generating any income for those expenses, you do the only thing that you can do, and that is borrow money. And that is while Bridgewater analysts are talking about the rise in corporate debt, which never helps long term with equity markets, the other thing that we can do in order to get a better perspective on Dahlia’s thoughts on the stock market is go to Heslington. He does a weekly Q&A with his viewers, which is actually really helpful. Now, one of his viewers asked whether he thought we were in terms of the economic cycle. Dalio answered with this. He said, I think it’s pretty clear to see that we are in one the late stage of the long term debt cycle, which makes it difficult to have effective debt, economic activity, when, too, there are large gaps in wealth and opportunity. You see, the thing you need to know about the long term debt cycle is that it lasts between 50 to 75 years. This current debt cycle that we are in started in 1945. This means it’s been exactly 75 years in this debt cycle, which is one indication that we are in the later stages of it and a crash and a new debt cycle might take place. The other thing that he mentioned is the wealth gap right now. At the top point, one percent of families own the same amount as the bottom 90 percent.
This was the exact same in the 1930s before the crash. It is a potential signal that some form of reallocation of wealth will take place in. This could be through a stock market decline where a lot of wealthy people lose money. And, you know, Ray Dalio, he thinks there’s going to be tough times ahead, at least when we’re talking the economic environments. He said we’re not going to go back to the way it was. We’re going to restructure our economy and restructure our financial system over the next couple of years in order to recover. But, you know, one of the things I like about Ray Dalio is, OK, he identifies the problem, but generally speaking, he will provide a solution alongside that problem as well. Dalio say is the key to success as an individual investor is to know how to diversify well and in a balanced way. You know, Ray Dalio, he manages billions of dollars for extremely wealthy people. So one of the things that Dalio is best, that is conservative investing and ensuring that his investors don’t lose money. Because let’s be honest, when you’ve made a lot of money, the most important thing you want is first not to lose any of it and then obviously to make returns on it. So I want to dig a little deeper into Ray Dalio strategy for diversifying well and not losing money. This is going to help us stay more prepared for if the market does not go anywhere over the next 10 years. So Dalio strategy. He says there are many ways to diversify. Some of the biggest and most important ones are across asset classes, sectors, currencies, countries and investment styles like small cap growth, etc. and equity markets.
So let’s break that down. When he’s talking about asset classes, the main thing he’s talking about is stocks and bonds. And of course, another asset that you can personally diversify across is real estate. But stocks and bonds are key. If we take a look at Hidalgo’s or whether portfolio, he has a high amounts of that in bonds, he has 40 percent and long term bonds and 15 percent an intermediate term bonds. If we take a look at Bridgewater Associates, they own a bunch of bonds that we can all get our hands on. It’s available to the public they own. The iShares 20 plus year Treasury bond ticker symbol equals TLT. They own the investment grade corporate bond ETF. Ticker symbol equals Al-Qadi and they own the high yield corporate bond ETF. H.I.G. is the ticker symbol there. As for stocks in Dallas or whether portfolio, it adds up to 30 percent of its and is extremely well diversified in this field as well. If we go back to Bridgewater’s portfolio, we can say again, Adelia likes ETFs. One of the main ETFs that he owns is the S&P 500. One ticker symbol equals S.P.I. So that’s 500 large cap companies in the United States straight away showing wide diversification. But he also owns the Vanguard Emerging Markets ETF ticker symbol for that as VW. Oh, this helps diversify his stocks throughout the rest of the world. As Dallier says, diversifying well is the most important thing that you need to do in order to invest well. And he certainly practices what he preaches. The great thing for US investors about what Dallier does is it’s available to all of us as well. All of these ticker symbols that I’ve just mentioned available for anyone to buy. You don’t have to be a billionaire or a millionaire to diversify. Well, speaking of diversifying, Dalio would be disappointed in me if I did not mention gold in this video. He has seven point five percent of his or weather portfolio in this asset. And what gold is good for is security, safety. And as a stock market hedge, what I mean by this is often in the stock market crash, gold actually holds its value and often increases. That’s why I personally have a percentage of my portfolio in gold. So I want to get round to wrapping this up. Yes, there is a good chance that we could see what Dalio calls a lost decade ahead for me. We can interpret this in two different ways.
One, we could panic and worry. Over our portfolios, potential results or two, we can do our best to stay prepared, and that’s what I try to teach during the latter part of this video. Just like Dalio, we need to be well diversified across asset classes, sectors, countries and investment styles if we can do this properly. Granted, we might not make the highest returns, but at least will do better than everyone else.