Thread by @jaynitx

In 2018, Ray Dalio gave a 40-minute masterclass on how to never lose money investing.

His frameworks:
• Economy as a perpetual motion
• Four forces, three equilibrium, two levers
• Holy grail of investing

15 lessons on markets and money:

1. Write down your decision criteria

"Every time I would make a decision, I would write down the criteria I used."

"The same things happen over and over again."

"By taking the time to write them down, then seeing how those criteria would have worked over time, I could get perspective."

2. The economy is a perpetual motion machine

"There are four big forces, three important equilibriums, and two levers."

"If you get this down, basically everything through my eyes is along those lines."

"You can almost picture where you are in the cycles and anticipate what will happen next."

3. The four forces

"Over time, we raise our living standards because we learn to do things better. That's productivity."

"Then there's the short-term debt cycle what we call the business cycle. Usually 7-10 years."

"There's a long-term debt cycle, the accumulation of all those shorter cycles."

"And there's politics internal and external."

4. Credit is buying power and debt

"When you produce credit, you can spend more than you earn."

"When you pay back, you have to spend less than you earn."

"That's the nature of the cycle. First comes stimulation. Then comes paying back."

"By its very nature, it's cyclical."

5. The long-term debt cycle

"Central banks stimulate by lowering interest rates until rates hit zero."

"Then they can't do that anymore. They print money and buy financial assets. Quantitative easing."

"When they can't do that anymore, we come to the end of the long-term debt cycle."

6. 2008 was just like 1932

"In 1929-32: debt crisis, interest rates hit zero, printing of money."

"In 2008-09: debt crisis, interest rates hit zero, printing of money."

"Both times: financial assets rose, benefited those who owned assets, contributed to the wealth gap."

"Both times: populism followed."

7. The three equilibriums

"First: debt growth must be in line with income growth that services it."

"Second: capacity utilization is neither too high nor too low."

"Third: projected returns of equities are above bonds, which are above cash, by appropriate risk premiums."

"I'm always watching where we are relative to these."

8. The two levers

"Monetary policy and fiscal policy."

"That's the brakes and the gas."

"Tightening monetary policy changes the projected return of cash relative to bonds and equities."

"That slows the economy. That drives the cycles."

9. The golden age of capitalism

"Profit margins have more than doubled since 2000."

"If you didn't have that expansion, the stock market would be 40% lower."

"Technology replacing people. Globalization. Declining union membership."

"Great for companies. Not good for a certain percentage of the population."

10. The wealth gap and populism

"The top one-tenth of 1% has a net worth almost equal to the bottom 90% combined."

"40% of Americans couldn't raise $400 in an emergency."

"Populism of the left and populism of the right. That was a phenomenon developed countries didn't used to have."

"Now it's an economic and market phenomenon."

11. The theoretical value of any investment

"Every investment is a lump sum payment for a future cash flow."

"Theoretical value equals the present value of future cash flows."

"Actual value equals total spending divided by quantity of goods sold."

"I'm always looking at who's going to spend and what motivates them."

12. Asset classes outperform cash long-term

"It's required otherwise the economy comes to a halt."

"But that outperformance cannot be very positive for too long."

"If it was, you'd just borrow cash and buy assets. Easy money."

"It comes with big bumps along the way."

13. The biggest mistakes investors make

"Most investors love the asset classes that did well."

"They think that the investment that did well is a good investment."

"Wrong. It's a more expensive investment."

"Here's equities recently done well. Here's commodities, done very poorly. But flip the timeframe and it reverses."

14. The holy grail of investing

"Find 15 or more good uncorrelated return streams."

"With 5 uncorrelated investments, you cut your risk by more than half."

"With 15, you reduce your risk by nearly 80%."

"That means you've improved your return-to-risk ratio by a factor of five."

15. Diversification beats picking winners

"Most people think: give me the best investment and let me put all my money in it."

"Wrong."

"Find your best 10 uncorrelated investments and put your money in that."

"Diversification is more important than being good at picking the best investments."

Ray Dalio on success:

"Whatever success I've had has to do with knowing how to deal with our not knowing more than anything we know."

"What you don't know is a lot."

"You can reduce your risk by a lot more than you reduce your return by knowing how to diversify well."

His rules:
• Write down decision criteria
• Make them timeless and universal
• Diversify across uncorrelated streams
• Know where you are in the cycle

"If something happened in one time and your process isn't working, you haven't explained the differences."

Want to think like the top 1%?

I study the world’s sharpest minds so you don’t have to.

Peak Thinkers breaks down mental models & systems from elite founders, strategists, and creators every week.

Subscribe here (for FREE) → peakthinkers.substack.com

That's a wrap!

If you enjoyed this thread:

1. Follow me @jaynitx for more of these

2. RT the tweet below to share this thread with your audience