Key Takeaways
- • Ray Dalio republished a chapter from his 2021 book Principles for Dealing with the Changing World Order, titled "Investing in Light of the Big Cycle," in response to reader demand following a prior chapter that drew more than 75 million views.
- • Dalio states that all markets are primarily driven by four determinants: growth, inflation, risk premiums, and discount rates, which together determine the present value of any investment's future cash flows.
- • Dalio argues that U.S. and U.K. market returns are distorted by survivorship bias, and that a longer historical lens shows boom-and-bust cycles, including the destruction of most wealth in many countries in the 35 years before 1945.
- • Dalio frames the debt and capital markets cycle as the greatest contributor to Big Cycles, which he calls the "Big Investing Cycle," and argues that the key task for investors is to identify where countries sit within their cycles.
- • Dalio says he plans to publish further investment principles over coming weeks and in his next book, Principles: Economics and Investing.
Summary
Ray Dalio, founder of Bridgewater, has published an excerpt from his 2021 book Principles for Dealing with the Changing World Order. The chapter, "Investing in Light of the Big Cycle," follows an earlier excerpt on the classic signs of geopolitical order breakdown that Dalio calls the "Big Cycle." According to Dalio, that earlier piece drew more than 75 million views and prompted readers to ask how the framework applies to investing.
Dalio's core investment framework holds that all markets are primarily driven by four determinants: growth, inflation, risk premiums, and discount rates. He argues that investments are exchanges of lump-sum payments today for future payments, with growth and inflation shaping those future cash flows, risk premiums reflecting the compensation investors require, and discount rates determining present value. Governments influence these drivers through fiscal and monetary policy, and Dalio distinguishes between central governments, which tax and spend but cannot create money, and central banks, which can create money and credit but cannot direct where it flows in the real economy.
Dalio contends that most investors base expectations on their own lifetimes or on U.S. and U.K. return data, which he characterizes as subject to survivorship bias because those countries won the two World Wars and most other stock and bond markets did not survive. He argues that extending the historical window reveals far more volatile outcomes, noting that in the 35 years before 1945 much of the wealth in most countries was destroyed or confiscated. He traces the origins of modern lending to Italy around 1350, when deposits, bonds, and stocks began to create "financial wealth," and argues that the growth of such promises increases the risk that they cannot be kept.
Dalio states that the debt and capital markets cycle has been the greatest contributor to Big Cycles and frames it as the "Big Investing Cycle." He says his objective is to understand past cycles well enough to tilt or diversify portfolios against them or profit from them. He plans to cover his full set of investment principles in future publications and newsletter releases.
Dalio's core investment framework holds that all markets are primarily driven by four determinants: growth, inflation, risk premiums, and discount rates. He argues that investments are exchanges of lump-sum payments today for future payments, with growth and inflation shaping those future cash flows, risk premiums reflecting the compensation investors require, and discount rates determining present value. Governments influence these drivers through fiscal and monetary policy, and Dalio distinguishes between central governments, which tax and spend but cannot create money, and central banks, which can create money and credit but cannot direct where it flows in the real economy.
Dalio contends that most investors base expectations on their own lifetimes or on U.S. and U.K. return data, which he characterizes as subject to survivorship bias because those countries won the two World Wars and most other stock and bond markets did not survive. He argues that extending the historical window reveals far more volatile outcomes, noting that in the 35 years before 1945 much of the wealth in most countries was destroyed or confiscated. He traces the origins of modern lending to Italy around 1350, when deposits, bonds, and stocks began to create "financial wealth," and argues that the growth of such promises increases the risk that they cannot be kept.
Dalio states that the debt and capital markets cycle has been the greatest contributor to Big Cycles and frames it as the "Big Investing Cycle." He says his objective is to understand past cycles well enough to tilt or diversify portfolios against them or profit from them. He plans to cover his full set of investment principles in future publications and newsletter releases.
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