Ray Dalio is one of the most successful hedge fund managers in history.
After earning an MBA from Harvard Business School, Dalio launched his firm, Bridgewater Associates, in 1975 from his two-bedroom New York City apartment.
Since then, Bridgewater has made $46.5 billion for its investors. And Dalio’s net worth has ballooned to $20 billion.
He attributes his success to daily meditation and a relentless focus on first principles thinking.
Principles – the book he published in 2017 – distills thinking and decision making down to their essentials. By Dalio’s reckoning, once you understand his principles, you can predict the direction of financial markets.
He applies a similar principle-driven approach in his new book, Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail.
With endorsements from Henry Kissinger and former Treasury Secretary Larry Summers, Principles for Dealing with the Changing World Order will undoubtedly become required reading on Wall Street.
But should it?
Dalio’s Theory of History
In Dalio’s view, nations rise and fall in a series of predictable cycles.
The cycle begins with a nation’s newfound competitiveness. It continues with a general prosperity, reflected in the country’s rising political and economic power.
This cycle eventually leads to excess and decadence. But it inevitably closes with decline and even conflict.
Take the example of currencies – a surrogate for the economic might of a nation…
The Dutch guilder became Europe’s dominant reserve currency in the 1600s when Amsterdam stood at the center of global finance.
The pound sterling overtook it when Britain’s industrialization and military strength surpassed the Dutch’s.
The pound subsequently lost out to the U.S. dollar during the first half of the 20th century as Britain’s influence waned.
That said, Dalio is hardly the first to view history in terms of cycles.
German philosopher Georg Wilhelm Friedrich Hegel argued for the back-and-forth of history through his dialectic.
Russian sociologist Nikolai Kondratiev embraced the idea of a long cycle in financial markets.
Yale historian Paul Kennedy made similar arguments in his 1987 bestseller, The Rise and Fall of the Great Powers.
The World Today, According to Dalio
Dalio sees three significant financial, social and political challenges for the world today.
First, global debt has exploded to unsustainable levels. Near-zero interest rates have led to massive money printing in the world’s three major reserve currencies.
Historically, at times like this, the countries that represent the reserve currencies have come crashing down.
Second, Dalio sees massive political and social conflicts within countries, especially the U.S. – which he attributes to the largest disparities in wealth in more than 100 years.
Similar wealth disparities in the past have led to revolution. Ominously, Dalio estimates a 30% chance of a civil war breaking out in the United States over the next five years.
Finally, he views China as the major challenge to the existing geopolitical world order. He argues that China is already equal to the U.S.
Their economies are roughly the same size. China’s share of global trade is already more than that of the U.S.
Dalio estimates the chance of a hot war between the U.S. and China over the next 10 years at 35%.
Dalio on Investing
As Dalio is a hedge fund manager, his objective is to apply the lessons of history to investing. He believes that he can best do this by focusing on data.
Principles for Dealing with the Changing World Order is packed with charts and data on everything from population and real GDP per capita to mortality measures from war or famine. Dalio inputs these statistics into a dashboard, thereby tracking the rise and fall of 20 nations.
He draws two broad conclusions from his studies…
First, he believes that Chinese stocks should make up a substantial part of your portfolio.
Second, he admits that, because he can’t predict the future, diversification is the best hedge against ignorance.
The Danger of Unfamiliar Territory
In writing this Principles for Dealing with the Changing World Order, Dalio has waded into unfamiliar territory for a finance guy. And frankly, it shows.
His approach to history resembles an investment banking pitch deck. Its curve-fitting methodology to interpreting events often feels like technical analysis misapplied to historical data.
Dalio may genuinely believe that he has unlocked the secrets of historical cycles. (I guess becoming a self-made billionaire gives you that kind of confidence.)
Sure, at 30,000 feet, Dalio’s conclusions are undeniable. After all, no structure of government, economic system, currency or empire lasts forever.
Fine. But anyone who knows history already knows that.
Another historian could weave a tale opposite Dalio’s yet offer the same investment advice.
For example, I could argue that unpredictable technological innovations – “black swans” – like the printing press, industrialization or the adoption of the scientific method – best explain the turning points in history.
Yet my investment advice would remain the same: Since we don’t know which innovations will matter in advance, diversification is the best hedge against ignorance.
But you probably didn’t need me – or the world’s most successful hedge fund manager – to tell you that.
In reviewing Principles for Dealing with the Changing World Order, Larry Summers wrote, “History is too important to leave to historians.”
Serious history is too important to leave to amateurs – even if they are billionaires.
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