Most investors seem to assume that uncertainty is a problem that must be resolved in order to make a move. It seems you're saying, in investing, we often have to act with substantial uncertainty that cannot be resolved. The same capacity that allows an investor to make a decision without complete certainty is also what allows them to hold a position and not sell at the wrong time when uncertainty inevitably returns.
Diversification then, is a way of investing taking into account the unknown, not just a portfolio balancing technique.
I see this as a form of intellectual honesty that is uncommon in investing, where there is often pressure to have an opinion on everything, but now seems as integral as data analysis itself.
There's a quiet flaw in the holy grail right now. Diversification only works while your bets stay uncorrelated. But the thing driving this whole concentration, one technology repricing every sector at once, is also quietly correlating everything that touches it. Chips, power, the grid, even bonds through rates, all turning into the same leveraged bet on the AI capex cycle.
So the correlations climb toward one exactly when you most need them low. Finding 15 good bets was never the hard part. The hard part is that the thing inflating the index is busy making everything the same bet.
15 uncorrelated bets sounds great in theory. My question is whether truly uncorrelated bets even exist when AI is driving so much of the market. Curious how you're defining "uncorrelated" here.
I too got amused, because equity markets too follow the bond market after some point of time. As bond market can tell you a lot about future of equity markets. But Thanks Ray for sharing his insights in this chaotic scenario. Always lovely reading his articles as it teaches something new!
With you so far. Since we all know different things to different confidence levels, we all have a different ideal diversified portfolio. For example, I would guess that I might be 9.9/10 on environmental/physical constraints and 9.9/10 on some technologies that I understand well. Investing in the intersection of these two seems natural and easy. My best returns are then in a few highly concentrated positions. I’m maybe a 5 or 6/10 on things like geopolitical conflict and monetary policy. It seems much harder to invest in those things that will balance my portfolio because I lack that knowledge or conviction. Is collaboration the answer or is there some other way to invest in what you don’t know effectively?
Thankyou for the valuable commentary. My concern is that debt vs prospective revenue is generally the weak link in these scenarios, and when debt collapses, a heck of a lot of asset classes become correlated quickly. Do you allow for that outcome in your weighting (with cash) or simply allow that wave to wash through?
Please.share the math how the 10-15 bets improve return/risk by 4x. It is a very powerful idea and a 1 pager on this would make it easier to share this thinking and help people adopt it. Thank you for sharing your perspectives
Most investors seem to assume that uncertainty is a problem that must be resolved in order to make a move. It seems you're saying, in investing, we often have to act with substantial uncertainty that cannot be resolved. The same capacity that allows an investor to make a decision without complete certainty is also what allows them to hold a position and not sell at the wrong time when uncertainty inevitably returns.
Diversification then, is a way of investing taking into account the unknown, not just a portfolio balancing technique.
I see this as a form of intellectual honesty that is uncommon in investing, where there is often pressure to have an opinion on everything, but now seems as integral as data analysis itself.
There's a quiet flaw in the holy grail right now. Diversification only works while your bets stay uncorrelated. But the thing driving this whole concentration, one technology repricing every sector at once, is also quietly correlating everything that touches it. Chips, power, the grid, even bonds through rates, all turning into the same leveraged bet on the AI capex cycle.
So the correlations climb toward one exactly when you most need them low. Finding 15 good bets was never the hard part. The hard part is that the thing inflating the index is busy making everything the same bet.
Good observation, Scenarios. Take farming, for example. It might seem that the farm is a long ways from AI/tech excitement.
But even the farmer needs to look into how AI/Tech is going to impact his farm.
Another thing: AI is having a massive effect on the economy. Talk about everything being connected!
15 uncorrelated bets sounds great in theory. My question is whether truly uncorrelated bets even exist when AI is driving so much of the market. Curious how you're defining "uncorrelated" here.
I too got amused, because equity markets too follow the bond market after some point of time. As bond market can tell you a lot about future of equity markets. But Thanks Ray for sharing his insights in this chaotic scenario. Always lovely reading his articles as it teaches something new!
With you so far. Since we all know different things to different confidence levels, we all have a different ideal diversified portfolio. For example, I would guess that I might be 9.9/10 on environmental/physical constraints and 9.9/10 on some technologies that I understand well. Investing in the intersection of these two seems natural and easy. My best returns are then in a few highly concentrated positions. I’m maybe a 5 or 6/10 on things like geopolitical conflict and monetary policy. It seems much harder to invest in those things that will balance my portfolio because I lack that knowledge or conviction. Is collaboration the answer or is there some other way to invest in what you don’t know effectively?
It’s interesting how many investing mistakes start with a strong opinion and end with a lack of diversification.
Ray Dalio delivering as always.
As a retiree who has to live off of our investment income I am extremely grateful for Ray sharing his experience and thoughts.
Thank you for sharing this with us!
Everyone is so excited with greed. Personally, I see this AI/TECH mania to be another dot.com fiasco.
When the big crash comes, no one will care how much energy that chip draws. Trust me. Greed, greed, greed.
DIVERSIFY.
Thank you for this wise perspective.
Thankyou for the valuable commentary. My concern is that debt vs prospective revenue is generally the weak link in these scenarios, and when debt collapses, a heck of a lot of asset classes become correlated quickly. Do you allow for that outcome in your weighting (with cash) or simply allow that wave to wash through?
useful information
Great advice, thank you Ray.
Looking forward to your next communication.
Please.share the math how the 10-15 bets improve return/risk by 4x. It is a very powerful idea and a 1 pager on this would make it easier to share this thinking and help people adopt it. Thank you for sharing your perspectives
Lol, is he saying not to buy $SPCX?
Anyways, it was a good read.