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If you’re following the hot stocks of the moment — such as the Magnificent Seven — it’s likely been a rush to watch them rise.
However, “I think it’s very much like the internet and the dot-com period,” cautioned Bridgewater Associates founder Ray Dalio during a conversation with Yahoo Finance Executive Editor Brian Sozzi for the Opening Bid podcast (see the video above or listen below). The pair sat down to chat at the World Economic Forum in Davos, Switzerland, and Dalio delivered insights ranging from leadership to his personal investing mantras.
Dalio has the benefit of five decades of market hindsight. He founded Bridgewater in 1975 and grew the company from a scrappy operation that he ran out of a two-bedroom apartment into a firm that Fortune ranked as the fifth-most-important private company in the US.
Known in the industry for sticking to a bespoke set of principles and sharing them widely, Dalio is the author of several books on the subject. His latest book, “How Countries Go Broke: Principles for Navigating the Big Debt Cycle, Where We Are Headed, and What We Should Do,” is expected in September.
Rather than piling everything into the hot stock of the day, Dalio advised investors to consider more diversification by investing in 10 to 15 “good, uncorrelated return streams that are risk balanced.” Calling this strategy his “holy grail and … mantra in investing,” he told Sozzi, “If you achieve this mantra, you will make a fortune.”
“Everybody’s thinking about what is the best debt,” he continued. “They don’t realize that with diversification, the first three diversified, relatively uncorrelated assets will reduce the risk almost in half. That means you double your return-to-risk ratio.”
Dalio also advised that this type of strategy often requires patience upon deployment, which can prove difficult in a buzz-generation environment. “The game is played on not getting out,” he said. “The nature of loss [is], you lose 50%, you have to make 100% to get it back.”
For the evergreen investor with $1,000 to invest, Dalio advised reflecting on the difference between alpha and beta.
“Alpha is a zero-sum game,” he said. “To get alpha, you have to take it away from somebody else. Beta means there’s an asset class.”
But even before diversification, his first tip for investors is to be humble.
“Be humble, like in any game [where] you’re competing,” he said.
His final tip is to evaluate the headline- and buzz-generating investments. “Get away from the notion that investments which have done well recently are better investments, rather than more expensive. You have to know the difference between an investment that has gone up a lot and [that’s] done well.”
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