Brdigewater returns faltered

Interesting article about Ray Dalio and Bridgewater, the largest hedge fund in the world, looking forward to his new book "Principles", soon to be published.

One snippet:


The transition comes as returns at the hedge fund’s flagship product have faltered, just like at other so-called macro managers. Since the beginning of 2012, Bridgewater’s Pure Alpha II has posted an annualized return of 2.5 percent, according to a document reviewed by Bloomberg Markets, a far cry from its historic average of 12 percent. It’s down 2.8 percent this year through July. (A smaller Bridgewater hedge fund, Pure Alpha Major Markets, has fared better, as has the company’s long-only product.)

Apparently it has not been easy to make money in the last six years, may be of some comfort for investors who have missed out mostly on the bull run of the US stocks:

How the economic machine works

I featured Ray Dalio in this blog, here and here. He has now started a new website, called EconomicPrinciples. He offers another view on how the economy works, not only in the form of a book, but also in the form of a 30 minute cartoon, which I highly recommend. I have never been much of a fan of economy (it is all much too vague to me, also incomprehensible that economists can have such a different opinion and that so many didn't see the 2008/09 events coming), but this video I can understand.



I think that his theory is also relevant in the Malaysian context, the economy has grown quite impressive, but part of that is realized by spending on credit (on many levels, both federal but also consumers), which translates into debt.

Below comments are from The New York Times, Andrew Ross Sorkin:


"Ray Dalio, the 64-year-old founder of Bridgewater Associates, the largest hedge fund in the world with some $150 billion under management, has quietly begun teaching his investment secrets on YouTube.

Mr. Dalio, who is said to be worth some $13 billion, was one of the few investors to see the financial crisis of 2008 developing, and perhaps just as important, the rebound. He’s made his money by predicting big macroeconomic cycles. His economic theories, up until now, have been known only to a small group of investors and those willing to pay his firm 2 percent management fees and 20 percent of the investment profits.

Mr. Dalio’s plain-spoken 30-minute video is an oddly entertaining animated cartoon filled with provocative theories about the way the economy runs. He dispenses with the way economists have long taught economics in school, and instead explains the economy as if it were a “machine” that he believes is much easier to understand and predict.

The average Main Street investor has probably never heard of him. It also may seem counterintuitive that a money manager who sells his clients on his foresight would want to preach to the masses. But he told me that he decided to make the video to demystify economic cycles because he believes most investors, regulators and politicians are focused on the wrong issues.

“While I kept it confidential until recently, I now want to share it because I believe that it could be very helpful in reducing big economic blunders, if it was more broadly understood,” he wrote in an e-mail. He explained that, “I believe that most influential decision makers and most people cause a lot of needless economic suffering because they are missing the fundamentals.”

An image from the animated cartoon “How the Economic Machine Works.”An image from the animated cartoon “How the Economic Machine Works.”

Mr. Dalio says he believes that the traditional approach to economics is too academic and impractical. It is one of the reasons he, and others, believe that the Federal Reserve and many other institutions missed the signs of the financial crisis.

Just as there is monetarism and Keynesianism, Mr. Dalio’s approach may be a more practical way to think about the economic cause-and-effect relationships. There are refreshingly basic explanations for neophytes in his video, titled “How the Economic Machine Works,” that even the most sophisticated investors will appreciate.

“Think of borrowing as simply a way of pulling spending forward,” he says, explaining that to buy something you can’t afford today, “you essentially need to borrow from your future self. In doing so you create a time in the future that you need to spend less than you make in order to pay it back.”

This is how he explains austerity: “When borrowers stop taking on new debts, and start paying down old debts, you might expect the debt burden to decrease. But the opposite happens. Because spending is cut — and one man’s spending is another man’s income — it causes incomes to fall.”

Mr. Dalio’s effort is attracting attention with both students of economics and the financial cognoscenti. Already, more than 300,000 people have viewed the video since it went up last month. Henry M. Paulson Jr., the former Treasury secretary, has been sending the link to friends.

Paul A. Volcker, the former Fed chairman, a fan of the cartoon, described it as “unconventional but it casts strong light on how the economy actually works, with its history of repetitive and ultimately destructive excesses in credit creation. The analysis points the way to practical ways central banks and governments can ease the pain of defaults and deleveraging.”

Mr. Dalio has been compared to George Soros and has become something of a philosopher king in recent years — though it is worth noting that his firm’s returns in the last year have been a bit lackluster.

Mr. Dalio has always believed he can see more clearly than others. His approach to running his firm, for example, is based on 210 rules he devised in a handbook for his firm, called Principles. (Among them: “Ask yourself whether you have earned the right to have an opinion.”) As a result of his unconventional management style, his firm has been likened to a cult, a description that irks him because he believes it undervalues the success of the approach.

Unlike traditional economists — Mr. Dalio isn’t one — he does not focus on the much-watched statistics that most economists depend on. He also doesn’t focus on basic theories like supply and demand nor does he believe that monetary policy makers can control inflation simply by controlling the money supply. He derides the MV=PQ formula that is a central principle of economics. (A quick economics lesson, by way of TheStreet.com: “M is the money supply; V is velocity — the number of times per year the average dollar is spent; P is prices of goods and services; and Q is quantity of goods and services. The equation suggests that if V is constant and M is increasing, there must be an increase in either Q or P.”)

That theory, developed by the esteemed Milton Friedman, leads to the wrong conclusions, he says.
Ray Dalio, the founder of Bridgewater Associates, a hedge fund with some $150 billion under management.Anja Niedringhaus/Associated PressRay Dalio, the founder of Bridgewater Associates, a hedge fund with some $150 billion under management.

Mr. Dalio said in an e-mail that his template indicates the formula “is misleading because there really isn’t much ‘velocity’ of money happening as most of what we call velocity is credit growth, which is very different and has different reasons for happening. Velocity is made out to be some vague force that drives the rate that money goes around, and it’s not that at all. I believe that we should agree that spending comes from either money (with a bit of velocity) or credit and we should understand how each is made up and spent to make nominal G.D.P. (gross domestic product).”

If that sounds a bit confusing, that’s because it is. But his video is more straightforward.
For example, he says that there are only two types of economic cycles, but investors always seem to miss them. “One takes about 5 to 10 years and the other takes about 75 to 100 years. While most people feel the swings, they typically don’t see them as cycles because they see them too up close — day by day, week by week,” he says in his video.

So where are we now in the economic cycle? He doesn’t exactly say. But based on his theories, we are probably in the back half of a long deleveraging, which Mr. Dalio says he doesn’t believe has to be a bad thing.

“The key is to avoid printing too much money and causing unacceptably high inflation, the way Germany did during its deleveraging in the 1920s,” he says. “If policy makers achieve the right balance, a deleveraging isn’t so dramatic. Growth is slow but debt burdens go down. That’s a beautiful deleveraging,” he continues. “It takes roughly a decade or more for debt burdens to fall and economic activity to get back to normal — hence the term ‘lost decade.’ ”

So if you studied his lesson, you can estimate that it will be 2018, or at least 10 years after the crisis, before you can begin to proclaim all clear."

News October 27, 2011

"AP Land board postpones AGM but still recommends shareholders to sanction asset sale"

http://biz.thestar.com.my/news/story.asp?file=/2011/10/27/business/9774575&sec=business

"In a filing with Bursa Malaysia, AP Land said that its board, (save for interested directors, Low Gee Tat, Low Gee Teong and Low Su Ming) was now of the opinion that the proposed disposal “is not fair but reasonable.” This is a move away from its previous view where the board had stated that the proposal was fair and reasonable.
....
However, the board still feels that the proposal is in the best interest of AP Land and its non-interested shareholders and hence shareholders should vote in favour of the resolution."

Voting in favour of an unfair proposal is in the best interest of the shareholders while there is no hurry at all? The first announcement is from January 2011, more than nine months ago, did the Board of Directors try to come with a better proposal that is more fair? Did it for instance consider holding auctions for its assets?

Olympus’ Kikukawa Quits; Complaint Goes to FBI

http://www.bloomberg.com/news/2011-10-26/olympus-chairman-kikukawa-quits-after-fees-dispute-takayama-is-president.html

"Olympus Corp. Chairman and President Tsuyoshi Kikukawa quit after allegations over acquisitions wiped out more than half the company’s market value in two weeks and as the chief executive officer he fired prepares to meet U.S. criminal investigators."

"Domestic and overseas investors have “expressed opinions that the management of such listed companies have unfairly damaged their corporate value,” the TSE said in the statement on its website. Shareholders were also concerned about “underlying problems in the quality of Japanese corporate governance,” according to the statement."

“They’re stonewalling” Merner said. “They still haven’t answered the question about why they paid huge commissions.”


More Than 80 Percent of Hedge Funds Underwater

http://www.institutionalinvestor.com/Article.aspx?ArticleID=2921936&LS=EMS581643

"The selloff in most of the global markets in the third quarter heavily impacted a large number of hedge funds.

In fact, not only did it put many funds into the red for the year, it pushed a huge number of hedge funds below their high water mark."

Are Hedge Funds not supposed to hedge (part of) the risk? Current conditions (with lots of volatility) should have been good for some funds.

Ray Dalio's radical truth

http://www.institutionalinvestor.com/Popups/PrintArticle.aspx?ArticleID=2775995

 

 

Charlie Rose interviews Ray Dalio

http://www.charlierose.com/view/interview/11957

Ray Dalio, founder of Bridgewater Associates:

http://cgmalaysia.blogspot.com/2011/09/farnam-street-blog.html

Farnam Street Blog

Just discovered an interesting blog:

http://www.farnamstreetblog.com/

Many interesting articles and also a special section on Charlie Munger's Mental Models:

http://www.farnamstreetblog.com/mental-models/

An article about Ray Dalio's Management lessons:

http://www.farnamstreetblog.com/2011/09/management-lessons-from-ray-dalio/

Ego
“Two of the biggest impediments to truth and excellence are people’s ego’s and organizational bureaucracy. Most people like compliments and agreement, and they dislike criticisms and conflict. Yet recognizing mistakes and weaknesses is essential for rapid improvement and excellence. In our culture, there is nothing embarrassing about making mistakes and having weaknesses. “
“We need and admire people who can suspend their egos to get at truth and evolve toward excellence, so we ignore ego-based impediments to truth. We have a different type of environment in which some behaviors discouraged elsewhere are rewarded here (like challenging one’s superiors), and some behaviors encouraged elsewhere are punished here (like speaking behind a subordinate’s back).”

Think and act in a principled way and expect others to as well
“all outcomes are manifestations of forces that are at work to produce them, so whenever looking at specific outcomes, think about the forces that are behind them. Constantly ask yourself, “What is this symptomatic of?”

If you don’t mind being wrong on the way to being right, you will learn a lot
“I once had a ski instructor who had taught Michael Jordan, the greatest basketball player of all time, how to ski. He explained how Jordan enjoyed his mistakes and got the most out of them. At the start of high school, Jordan was a mediocre basketball player; he became great because he loved using his mistakes to improve. I see it all the time. Intelligent people who are open to recognizing and learning from their mistakes substantially outperform people with the same abilities who aren’t open in the same way.”

Mistakes
“Create a culture in which it is OK to fail but unacceptable not to identify, analyze and learn from mistakes. … A common mistake is to depersonalize the mistake, saying “we didn’t handle this well” rather than “Harry didn’t handle this well.” Again, this is because people are often uncomfortable connecting specific mistakes to specific people because of ego sensitivities. … it is essential that the diagnosis connect the mistakes to the specific individuals by name.”

Not all opinions are equally valued
“Not all people’s opinions are equally valuable. Still that important distinction is often unacknowledged in discussions. Prevent this by looking at people’s track records, noting their credentials, and evaluating how their arguments hold up when challenged.

Debate
“Debate is generally among approximate equals; discussion is open-minded exploration among people of various levels of understanding; and teaching is between people of different levels of understanding.”

There are times when instruction is more important than debate
“Imagine if a group of us were trying to learn how to play golf with Tiger Woods, and he and a new golfer were debating how to swing the club. Would it be helpful or harmful and plain silly to treat their points of view equally, because they have different levels of believability. It is better to listen to what Tiger Woods has to say, without constant interruptions by some know-nothing arguing with him.”

Be careful not to lose personal responsibility via group decision making
“Too often groups will make a decision to do something without assigning personal responsibilities so it is not clear who is supposed to do what.”

Don’t pick your battles. Fight them all.
“If you see something wrong, even small things, deal with it. that is because 1) small things can be as symptomatic of serious underlying problems as big things, so looking into them, finding what they are symptomatic of, and resolving them will prevent big problems; 2) resolving small differences with people will prevent a more serious divergence of your views; and 3) in trying to help to train people, constant reinforcement of the desired behavior is helpful. The more battles you fight, the more opportunities you will have to get to know each other and the faster the evolutionary process will be.”

All problems are manifestations of their root causes
“Keep asking why? and don’t forget to examine problems with people. In fact, since most things are done or not done because someone decided to do them or not to do them a certain way, most root causes can be traced to specific people, especially “the responsible party.” When the problem is attributable to a person, you have to ask why the person made the mistake to get at the real root cause. For example, a root cause discovery process might go something like this: The problem was due to bad programming. Why was there bad programming? Because Harry programmed it badly. Why did Harry program it badly? Because he wasn’t well trained and because he was in a rush? Why wasn’t he well trained? Did his manger know that he wasn’t well trained and let him do the job anyway or did he not know?”

Avoid Monday-morning quarterbacking (hindsight bias)
That is “evaluating the merits of past decisions based on what you know now versus what you could have reasonably known at the time of the decision. Do this by asking the question, “what should an intelligent person have known in that situation,” as well as having a deep understanding of the person who made the decision (how do they think, what type of person are they, did they learn from the situation, etc?)”

Don’t undermine personal accountability with vagueness
“Use specific names. For example, don’t say “we” or “they” handled it badly. Also avoid: “We should…” or “We are…” Who is we? Exactly who should, who made a mistake, or who did a great job? Use specific names.

Efficiency
“Try to equip departments to be as self-sufficient as possible to enhance efficiency. We do this because we don’t want to create a bureaucracy that forces departments to requisition resources from a pool that lacks the focus to do the job. For example, while people often argue that we should have a technology department, I am against that because building technology is a task, not a goal in and of itself. You build technology to…(fill in the blank, e.g., help service clients, help market, etc.). Keeping the tech resources outside the department means you would have people from various departments arguing about whether their project is more important than someone else’s in order to get resources, which isn’t good for efficiency. The tech people would be evaluated and managed by bureaucrats rather than the people they do the work for.”

Constantly worry about what you are missing
“Even if you acknowledge you are a dumb shit and are following the principles and are designing around your weaknesses, understand that you still might be missing things. You will get better and be safer this way.”

Remember the 80/20 rule and know what the key 20% is
“Distinguish the important things from the unimportant things and deal with the important things first. Get the important things done very well, but not perfectly, because that’s all you have time for. Chances are you won’t have to deal with the unimportant things, which is better than not having time to deal with the important things. I often hear people say “wouldn’t it be good to do this or that,” referring to nice-to-do rather than important things: they must be wary of those nice-to-do’s distracting them far more important things that need to be done.”

Use the phrase, “by and large”
“Too often I hear discussions fail to progress when a statement is made and the person to whom it is made to replies “not always,” leading to a discussion of the exceptions rather than the rule. For example, a statement like “the people in the XYZ Department are working too many hours” might lead to a response like “not all of them are; Sally and Bill are working normal hours,” which could lead to a discussion of whether Sally and Bill are working too long, which derails the discussion. Because nothing is 100% true, conversations can get off track if they turn to whether exceptions exist, which is especially foolish if both parties agree that the statement is by and large true. To avoid this problem, the person making such statements might use the term “by and large,” like “by and large, the people in the XYZ Department are working too many hours.” People hearing that should consider whether it is a “by and large” statement and treat it accordingly.”

Most importantly
“a) build the organization around goals rather than around tasks;
b) make people personally responsible for achieving these goals;
c) make departments as self-sufficient as possible so that they have control over the resources they need to achieve the goals;
d) have the clearest possible delineation of responsibilities and reporting lines;
e) have agreed-upon goals and tasks that everyone knows (from the people in the departments to the people outside the departments who oversee them);
f) hold people accountable for achieving the goals and doing the tasks.”

More about Dalio: http://www.newyorker.com/reporting/2011/07/25/110725fa_fact_cassidy