Business Insider CEO Henry Blodget speaks with Ray Dalio, the founder of Bridgewater Associates, the world’s biggest hedge fund. Dalio discusses his assertion that most portfolios should have gold allocated at 5-10%, if for no other reason than it’s a great diversifying asset. Following is a transcript of the video. 

Henry Blodget: You recommend that most portfolios should contain some gold.

Ray Dalio: Yeah, of course.

Blodget: Why? A lot of people think it's not of course. In fact, it doesn't make sense.

Dalio: Well, first of all, the best way to structure a portfolio is to have the right kind of balance in your portfolio, and some amount of gold. Gold serves a purpose. It is first of all, a diversifier against other assets. You know, we have this risk on, risk off thing. We also have a monetary system. The Bretton Woods monetary system began after World War II, and it had the dollar as the world's reserve currency. There's a risk there. There's a lot of dollar denominated debt and so on. If somebody felt they didn't want to hold that, and so you could have exposures to that.

So it's a diversifying asset that is sensible, and that's the main reason to have gold in the portfolio, five to 10%.

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Business Insider CEO Henry Blodget speaks with Ray Dalio, the founder of Bridgewater Associates, the world’s biggest hedge fund. Dalio breaks down one of the fundamental tenets of his investment approach: that you have to bet against the consensus and also be right. He argues that the following the consensus isn’t viable, because it’s already reflected in the price of an asset. Dalio thinks that, based strictly on an odds basis, a person has better odds of being successful in the Olympics than in the market. He says that, in general, investors buy high and sell low, and uses that as evidence to show that the average man shouldn’t be playing the proverbial game. Following is a transcript of the video.

Henry Blodget: You said something else about investing that I think is very profound and simple that I think a lot of people don't understand, which is to be successful as an investor, you have to bet against the consensus and be right. First of all, why? Why can't we just buy stocks we think are gonna go up.

Ray Dalio: Well, the consensus is built into the price. So because the consensus is built into the price. And assets price themselves in a way that they're all compete, and they're all of equal value in a certain sense. There's risk premium of equities over cash and bonds will have that over whatever, but basically, they're all priced that way. So like think of it as going to betting on a sports team or in other words, or horse racing.

Okay, there's handicapping that's going on. So in order to be successful, you're betting against the consensus, and you have to be right. That's the game.

Blodget: And you describe your first trade when you were a teenager. You bought a stock. It tripled. You thought, hey, this is easy. But you convey very effectively that in fact, it is extremely difficult even though it seemed so simple.

Dalio: Being successful in the markets is more difficult than being successful in competing in the Olympics. Your odds are higher to be successful competing in the Olympics because you have more people trying to do it. You have more resources. We put hundreds of millions of dollars. We have at Bridgewater, 1,500 people. We're now competing against other teams, and that's the kind of resources that are going into playing that particular game. So think about that in terms of handicapping it. It's not an easy thing to do. What you can do is achieve balance. To know how to hold a balanced portfolio, and to receive something that is a return that is much better than cash achieving balance is something that you can do, and I think that that, but figure. If you're going to enter the game, since value added is a zero sum game, you have to ask. Who are you playing against? Who are you going into the poker game with? Do you want to do that?

Blodget: And as you talk to people in the real world, is your sense that people understand what they're up against when they might buy a stock or try to time the market?

Dalio: Institutional investors who are smart by and large understand that. The average man tends to be much more reactive if you look at the purchases and sales that they make. When something goes up, they're more likely to buy it. They think, ah, that's a good investment. They don't know how to measure that in terms of oh, is that a much more expensive investment that's more likely to go down?

So that's why, you know, you put in ads in newspapers, and they say, ah, that's what had that return. That's what they're attracted to. They tend to buy high and sell low, and so an average man should not be playing this game in that way. They should be playing the game, or humility. If you think that you're good at playing the game, just make sure, it's like going to the poker table or going to the race track. Do it with a little bit of money, and watch it. And get the best advice that you can to know that you're gonna be able to take money out of the system rather than put it in.

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• Bridgewater Associates founder Ray Dalio believes that all organizations can benefit from automated management systems.
• Bridgewater is developing a "coach" that acts like a personal GPS for decision-making.
• The automated management processes parallel the automated investment systems the fund already uses.

"Whether you like it or not, radical transparency and algorithmic decision-making is coming at you fast, and it's going to change your life."

That's how Bridgewater Associates founder Ray Dalio opened his TED Talk in April, and the belief has guided his hedge fund for the past few decades. It's why Bridgewater's 1,500 employees are working with an artificial-intelligence management "coach" that is scheduled to reach a new level of capability and integration within the company in the next two or three years, according to Dalio.

Dalio explained to Business Insider in general terms how this will work:

"Let's say you're dealing with somebody who isn't doing a good job or is somebody who has a personal problem, maybe an illness, or whatever the person's circumstances are. What it does now is if you type into a 'coach' ...  it then gathers information about the person and the circumstances, so they're there. It analyzes what they're like and provides guidance for what to do."

Employees can give daily updates about how they're feeling, and if, for example, one is feeling a 5 on a 1-5 scale of being overworked, the coach will notify that employee's supervisor and recommend that they reach out for a discussion.

Dalio said it's a direct parallel to the investment system that long been in place, which he likens to driving with a GPS. Since the 1980s, Dalio and his team have been creating investing algorithms based on tested theories. As Dalio explains in his book, human investors work alongside the automated investor, considering its suggestions and either acting on them or determining what the algorithms are missing. New algorithms can be adjusted when flaws are revealed.

While he chose to remain co-CIO, Dalio completed a seven-year transition phase away from management this year, and marked the occasion with a book tour around "Principles: Life and Work," the first of two he will write. In "Principles," Dalio shares the collection of insights that every Bridgewater employee reads, and explains that before he left the role of co-CEO, he ensured that the management principles would be automated as much as possible, in the same way that his investment principles already had been.

The management coach is in beta testing and is "providing a lot of help now" but "is not nearly there" in terms of reaching its potential, according to Dalio. He said that, like the automated investment system, it will always be evolving, but a "thorough version" should be available to Bridgewater employees within three years.

The idea is that it will have access to more information than any one person could have about the employees within the company.

This coach is linked to the existing management software at Bridgewater, including the "Dots" iPad app that Dalio publicly demonstrated for the first time in his TED Talk. In Dots, employees rate each others' performance in real time during meetings according to traits like assertiveness and open-mindedness, leaving contextual comments as necessary.

Dots ratings come into play with "believability-weighted decision making" process at Bridgewater. When a question is posed to a group, the averages of each employee's Dots ratings are considered.

For example, an investment decision may receive 13 "yes" votes and four "no" votes and still be denied because the four people who voted in the negative significantly outweighed those for the decision in relevant areas, like their experience level and capability for high-level strategy.

Dalio's ideal version of Bridgewater, then, takes its existing automated management programs and gives each employee a fully functioning coach that will help them interact with each other.

And, as he said in his TED talk, he thinks that Bridgewater is ahead of the curve on a global trend, and it's why he plans on making Bridgewater's proprietary management software available to the public in the near future.

"It's a little bit like playing chess and then also being able to have, when you're playing the chess, a computer chess system next to you making the moves," Dalio told us.

"So you make the move, it makes the move," he said. "You compare your moves and you think about them and then you refine them. Well, that's what we're doing in management."

SEE ALSO: Bridgewater's Ray Dalio shares the piece of advice he wants to be his legacy

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NOW WATCH: THE RAY DALIO INTERVIEW: The billionaire investor on Bridgewater’s 'radically transparent' culture and how to bet on the future

Bridgewater Associates founder Ray Dalio sat down with Business Insider CEO Henry Blodget to discuss his book "Principles: Life and Work." Here Dalio explains the importance of learning from his mistakes.

"Principles: Life and Work" is the first of two planned books, and includes a short autobiography along with an expanded version of the "Principles" that all Bridgewater employees read when joining the company. Following is a transcript of the video. 

Henry Blodget: And one of the other principles that you stress is this idea that you should teach your team to fish rather than giving them fish, but you gotta give 'em room to make mistakes. This is something that Jeff Bezos and many other incredibly innovate entrepreneurs have stressed again and again. We have to get over the fear of mistakes. This seems to be a key part.

Dalio: Well, you learn from mistakes and learn from pain. Like I say, you can scratch the car, but you can't total the car. Okay. Mistakes is one of the best sources of learning, right. Successes mean you do the same thing over again, and okay, that's fine, but mistakes that are painful stick. When I look back on my career, I think that the mistakes were the best thing that happened to me.

I remember my mistakes better than I remember my successes. Somehow there must be more of the successes to get me where I am, but I remember all the mistakes, and I remember the lessons. So that's what I mean by pain plus reflection equals progress. So yeah, it's okay for you to make mistakes. It's not okay for you to not learn from those mistakes. That's a principle in there, right. And so you have a culture that operates this way.

If you don't have a culture that operates this way, it's not gonna be self-reinforcing. And so the reason I'm talking about these types of principles rather than my economic and investment principles, which'll come out in the next book is because these are the most fundamental principles, which are the basis of success. And they're not just in investment, investment firms principles. It's not just a hedge funds principles. It's like life principles and how we're gonna deal effectively with each other.

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• Ray Dalio, the founder of Bridgewater, the world's largest hedge fund, just published a note on the state of the US economy.
• He noted that the bottom 60% of Americans are struggling, listing a litany of depressing statistics to make his case. 
• He said that if he were running Federal Reserve policy, he'd keep an eye on the bottom 60%. 

Brutal.

There's no other word for Ray Dalio's latest note on the US economy, and the situation it describes. The founder of Bridgewater, the world's largest hedge fund with about $160 billion in management, posted the note on LinkedIn on Monday, and sets about splitting the US economy in two: the top 40% and the bottom 60%.

The point of this exercise is to show that while the headline numbers show a growing, healthy economy, there's a lot more going on under the surface that needs to be paid attention to. 

The stats he cites for the bottom 60% are downright depressing. Here's a selection taken straight from the note (emphasis Dalio's):

• Real incomes have been flat to down slightly for the average household in the bottom 60% since 1980 (while they have been up for the top 40%). 
• Those in the top 40% now have on average 10 times as much wealth as those in the bottom 60%. That is up from six times as much in 1980.
• Only about a third of the bottom 60% saves any of its income (in cash or financial assets).
• Only about a third of families in the bottom 60% have retirement savings accounts—e.g., pensions, 401(k)s—which average less than $20,000. 
• For those in the bottom 60%, premature deaths are up by about 20% since 2000. The biggest contributors to that change are an increase in deaths by drugs/poisoning (up two times since 2000) and an increase in suicides (up over 50% since 2000).
• The top 40% spend four times more on education than the bottom 60%. 
• The average household income for main income earners without a college degree is half that of the average college graduate.
• Since 1980, divorce rates have more than doubled among middle-aged whites without college degrees, from 11% to 23%.
• The number of prime-age white men without college degrees not in the labor force has increased from 7% to 15% since 1980.

In other words, the economy isn't as healthy as might appear at first look. And note includes a warning: the "stress between the two economies" will "intensify over the next 5 to 1o years" because of demographic and technological change. 

How does this relate to markets? Well, Business Insider reported back in September that Bridgewater had told clients that the Fed was making a mistake by raising rates. And there is a hint of that view in Dalio's latest note, where he said that the "average statistics could lead the Federal Reserve to judge the economy for the average man to be healthier than it really is."

He warned that that could lead the Fed to run "an inappropriate monetary policy."

Dalio said: 

"Because the economic, social, and political consequences of an economic downturn would likely be severe, if I were running Fed policy, I would want to take this into consideration and keep an eye on the economy of the bottom 60%."

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• Bridgewater Associates executive Bruce Steinberg and his family were among 12 dead in a Costa Rica plane crash on Sunday.
• Steinberg was a senior researcher at the firm, the world's largest hedge fund.
• Costa Rican authorities say strong winds or mechanical failure are likely causes.

Bridgewater Associates senior researcher Bruce Steinberg and his family were among 12 who died in a plane crash in Costa Rica on Sunday.

Bridgewater founder Ray Dalio noted the loss on his Facebook page, calling Steinberg a "wonderful man."

"Right now, we are each processing this devastating tragedy in our own ways," Dalio wrote. "At this time I will be devoting my attentions to doing this and helping others."

Steinberg, his wife, Irene, their sons Matthew (14), William (19), and Zachary (20), along with another American family of four, an American tour guide, and two local pilots all died in the crash, leaving no survivors.

The families had taken a charter flight on a Cessna 208B Grand Caravan that crashed in a wooded area off the beach town of Punta Islita just minutes after takeoff, Costa Rican authorities told Reuters. The Journal News reported the flight was en route to Costa Rica's capital, San Jose, where the Steinbergs had planned to celebrate the new year.

The US State Department and Costa Rican authorities are investigating the crash.

Costa Rica's Judicial Investigation agency deputy director Michael Soto told the Associated Press that "No possibility can be left out for certain," but that the two most likely causes are inclement weather or mechanical failure. Costa Rican authorities told the AP that there were strong winds during the time of the crash.

The Steinberg family lived in Scarsdale, New York, and were philanthropists and prominent members of their local Jewish community.

"They were wonderful people. We need a whole world of people like them," Steinberg's mother Diane told the New York Daily News.

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• Ray Dalio, the founder and chairman of Bridgewater Associates — the world's largest hedge fund — says investors must keep an eye on what a Jeremy Corbyn premiership would look like for the markets.
• Speaking to the Financial Times, Dalio said investors must now look beyond traditional market events like central bank meetings.

LONDON – Ray Dalio, the founder and chairman of Bridgewater Associates — the world's largest hedge fund — said investors must keep an eye on what a Jeremy Corbyn premiership would look like for the markets in a new interview with the Financial Times.

Dalio said that the world's investment landscape must change to reflect growing political unrest and uncertainty sweeping major economies, singling out Jeremy Corbyn in the UK as a particular point of interest.

"[These days] there’s not the same volatility of inflation, growth and interest rates. So political issues are more important than macro [economic] issues," he told the FT's Gillian Tett, adding that investors must look beyond traditional points of interest like central bank meetings and statements, and look instead to events like "the next election in France or in the UK, or how hospitable will Jeremy Corbyn be to capital?"

Dalio believes that this shifting landscape has fundamentally altered the way he looks at investing, saying that Bridgewater has created algorithms to track and forecast these notoriously unpredictable political developments.

"You can convert whatever you are thinking into an algorithm," he said.

"We’ve created a conflict gauge looking at words [in the media] and things. We’ve done examinations of all political conflicts in the past and their impact on markets [for models]."

The potential for Prime Minister Corbyn has been the subject of much hand wringing in the UK's financial markets, with Morgan Stanley in December warning that for the markets "domestic politics may be perceived as a bigger risk than Brexit," highlighting the potential for a drastic shift in economic policy under a Labour government.

Should he get to power Corbyn is expected to carry out a major programme of nationalisations, as well as ramping up government spending on services and infrastructure, with the National Health Service a major focus.

Morgan Stanley's comments sparked an angry response from Corbyn, who criticised Morgan Stanley for its role in the 2008 financial crisis, labelling it as one of the "speculators and gamblers who crashed our economy."

"Their greed plunged the world into crisis and we're still paying the price," he said.

"Nurses, teachers, shopworkers, builders, just about everyone is finding it harder to get by, while Morgan Stanley’s CEO paid himself £21.5 million last year and UK banks paid out £15 billion in bonuses."

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• According to reports by Bloomberg, Vanessa Selbst, one of the best poker players in the world, has joined the largest hedge fund in the world. 
• Selbst made $11 million (£8 million) in her 12-year poker career. 
• Reports state she will be analysing information and trading strategies. 

Vanessa Selbst, who according to Bloomberg is the best poker player in the world, got a job at the largest hedge fund in the world — Bridgewater Associates, founded by billionaire Ray Dalio. Selbst is there to learn how to trade — reports Bloomberg.

Vanessa Selbst has won over $11 million playing poker over 12 years, making her the most successful woman in the business. Now in Bridgewater she is going to learn how to make money in a completely different way. Bloomberg has reported that her focus there will be on the analysis of information and trading strategies.

It is not yet known exactly what position Selbst would take because the information about her attachment to the fund is secret.

Bloomberg refers to an anonymous source from the fund and quotes Selbst's Facebook page where she announced the move. On December 31, Selbst revealed that she had begun her career four months earlier in an unspecified hedge fund.

Selbst stressed in her post that the trading environment is a lot like the poker scene, "a group of nerdy kids working together to beat opponents in the game." She also added that "it is very difficult."

Both Selbst and Bridgewater refused to comment on the matter.

The decision to take on Vanessa Selbst, however, should not be surprising, because Bridgewater is known for taking unusual initiatives and an innovative approach to investing.

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• Global markets dived during a rocky week for trading last week.
• Bridgewater Associates' co-CIO: "We don’t think this shakeout will be over in a matter of days."
• Fears over tightening central bank policy are expected to drive more volatility.

LONDON — One of the most senior figures at the world's biggest hedge fund is predicting more volatility in global markets after a turbulent few weeks for global markets.

Bob Prince, the co-chief investment water of Bridgewater, told the Financial Times in an interview published on Monday:"There had been a lot of complacency built up in markets over a long time, so we don’t think this shakeout will be over in a matter of days. We’ll probably have a much bigger shakeout coming."

The comments come after a choppy week for global markets. The Dow Jones Industrial Average suffered its biggest points drop in history on Monday before rebounding strongly. However, the slump resumed on Thursday as the Dow entered correction territory.

The sell-off in the US, which spread to Asian markets and Europe, was sparked by fears that the Federal Reserve could be about to raise interest rates again, suggesting an end to the easy money central banking policy that has propped up businesses and growth in the post-crisis era.

Prince told the FT:"Last year equity markets had a free run. But this year we are going from central banks contemplating tightening policy to actually doing it. We will have more volatility as we are entering a new macroeconomic environment."

US-based Bridgewater is the world's largest hedge fund, with $160 billion under management. Prince oversees the investment of this pot alongside the firm's founder Ray Dalio.

Michael Hewson, the chief market analyst at CMC Markets, said in an email on Monday morning: "US, as well as global equities, have undergone their worst fortnight this decade.

"For a market that has enjoyed steady gains and fairly low volatility over the course of the past two years, the steepness of the falls speaks to a complacency that has been prevalent for a while now and which appears to have been shattered in the wake of a surge in volatility.

"How this plays out over the coming days depends on whether the rebound we saw on Friday can translate into some form of a base for a continuation of the uptrend that has been in place for the last nine years. This may well depend on whether we see further increases in bond yields or a rise in interest rate expectations from other central banks around the world."

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• Ray Dalio’s Bridgewater Associates has upped its bet against European stocks to $22 billion.
• The world's largest hedge fund has short positions on some of the continent’s largest and most recognizable companies, including Adidas, Deutsche Bank and Daimler. 

Bridgewater Associates, the world’s largest hedge fund founded by billionaire Ray Dalio, has upped its bet against European stocks, according to regulatory documents filed Wednesday.

The Connecticut-based fund, which manages about $150 billion, has a total short bet of $22 billion against some of the largest companies in Europe, according to a 13F filed Thursday. The document is a required quarterly disclosure for large fund managers.

Here are the firm’s biggest short bets against European companies, from the filing:

• Unilever: $1.03 billion
• Total: $1.017 billion
• Siemens: $970 million
• SAP: $925.2 million
• Allianz: $878.2 million

Other popular brands the firm has short bets against include Adidas ($339.1 million) and Daimler ($780 million).

Because the filings cover the entire quarter, it’s not clear when exactly the fund made the short bets, or if it owns more short positions than long. However, an investor in Bridgewater’s Pure Alpha Major Markets strategy told Reuters earlier this month the firm was slightly long European stocks.

Short bets, or those that are profitable when a stock declines in price, could be a sign the firm is bearish on European equities or the European economy as a whole. Such positions are a mainstay of hedge fund investing.

"Recent spurts in stimulations, growth, and wage numbers signaled that the cycle is a bit ahead of where I thought it was," founder Ray Dalio wrote on LinkedIn this week.

"Frankly, it seems to be inappropriate oversight to not be talking about the chances of a recession and what that recession might look like prior to the next election."

SEE ALSO: Warren Buffett’s Berkshire Hathaway loads up on more Apple

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• Bridgewater Associates is the world's largest hedge fund.
• On his new podcast, Wharton professor Adam Grant spoke to some Bridgewater employees about their culture of "radical transparency."
• One manager remembered finding out in front of 200 coworkers that he'd been ranked the worst performer. He said it "energized" him by motivating him to either improve or leave.
• Bridgewater founder Ray Dalio told Grant that if you care about results, you'll want this kind of candid feedback.

Kiran Rao is a smart guy. Before joining Bridgewater Associates, the world's largest hedge fund, he'd been a medical doctor who worked with the World Health Organization and a principal at a consulting firm.

One day after joining Bridgewater, he was sitting in a meeting with 200 other employees when an announcement was made. Everyone was would be shown a list that ranked the people in the room according to their performance.

"Some of the people in this room probably shouldn't be here," the person presenting the list said.

Sure enough, there was Rao's name — the worst performer on the list.

Rao recounted this story — in fact, he shared the recording from the meeting — on the first episode of "WorkLife with Adam Grant," a new podcast hosted by the Wharton professor Adam Grant.

Rao was able to share the recording because almost all meetings are recorded at Bridgewater, a company that's by now well known for its culture of "radical transparency."

As Business Insider's Richard Feloni has reported, Bridgewater employees constantly rate and critique each other's performance. (The meeting footage is available to all employees.)

On the podcast episode, Grant spoke to Bridgewater founder Ray Dalio, who built the culture of radical transparency. Dalio said that if your objective is to be as good as possible — if you care about results more than your image — you'll want criticism of your performance.

It's unclear that public rankings motivate everyone at every company

On the podcast episode, Grant mentioned that research suggests ranking employees can be demotivating. It could depend on the specific work environment.

In one 2016 study from New York University and Columbia Business School (not mentioned on the podcast), researchers looked at the effect of performance ranking among truck drivers. Results showed that drivers who were told to emphasize teamwork performed worse after the rankings were posted, while drivers who had not been told to emphasize teamwork performed better.

Rao told Grant that learning he was the worst manager was like "dressing for the beach one day in flip flops and your swimwear and you swing your door open and you're in a full-force winter storm." But, he added, "I felt great."

On the recording, you can hear Rao introduce himself to the group and say that he agrees he should be in this spot. "This leaves me more energized versus not," he says. The feedback motivated him to either improve — or leave.

Rao is still a manager at Bridgewater.

Rao more or less echoed what Dalio said. He told Grant: "It's just data, objective data about what I'm like. I would rather know how bad the bad is and how good the good is so I can do something with it."

SEE ALSO: Ray Dalio, head of the world's largest hedge fund, explains his succession plan for Bridgewater and how its 'radically transparent' culture is misunderstood

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NOW WATCH: THE RAY DALIO INTERVIEW: The billionaire investor on Bridgewater’s 'radically transparent' culture and how to bet on the future

• Ray Dalio— founder of Bridgewater Associates, the world's largest hedge fund — has released a 30-minute animated version of his bestseller "Principles," in eight parts.
• The lessons are focused on recognizing and adapting to challenges and positively using "radical transparency."
• Dalio said he specifically wants new college graduates to see the series.

As the weight of the real world starts to settle in for new college graduates in May, Bridgewater Associates founder Ray Dalio wants to be there to offer guidance.

He's doing so with a new animated adaptation of his 2017 bestseller "Principles," which is itself the full text of Bridgewater's culture book with additional context.

"I'm now at a stage in my own life in which it is much more important to me to pass along what I've learned about how to be successful than to seek more success for myself," Dalio says in the first video in the animated series, which is 30 minutes long and broken into eight parts by theme.

Last year, Dalio completed a seven-year transition away from daily management of his Connecticut-based hedge fund, the largest in the world with roughly $150-160 billion in assets under management. Dalio founded Bridgewater in 1975 and began developing a culture of "radical transparency" in the '80s.

Over time, the firm became as well known for its success as its culture, where employees use proprietary iPad apps to rate each other's performance in real time and nearly every meeting is recorded. While Bridgewater's implementation of Dalio's principles create an intense environment that isn't for everyone, the foundational teachings are universal and focused primarily on individual development.

In a video Dalio released on his Twitter, he said that he oversaw the animated adaption of his book due to the success of his earlier animated feature on how capitalism works, and, "because these principles were responsible for whatever success I've had, and, I've been told, invaluable to millions of other people."

We've included the first episode below, marked by a featured lesson. The production team includes creative director Mark Del Lima and graphic design firm Thornberg & Forester. You can watch all eight episodes on Youtube.

"You need to think for yourself about what is true."

Watch all eight episodes on Youtube »

SEE ALSO: Bridgewater's Ray Dalio shares the piece of advice he wants to be his legacy

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• Bridgewater Associates, the world's largest hedge fund, is sounding the alarm on one crucial market driver, according to a note to clients reviewed by Business Insider.
• The hedge fund reportedly recently shifted to a net short position on US equities.

On the surface, Bridgewater Associates' performance last month looks unremarkable.

Sure, the $150 billion firm's flagship fund lost 1% in April, but it's still up about 4% over the first four months of the year, according to a Bloomberg report.

So what's the big deal? As is often the case, the devil is in the details.

While the benchmark S&P 500 limped to a gain of just 0.3% in April, Bridgewater was busy reducing its net long wagers on US stocks, according to Bloomberg. The firm now has just 10% of its portfolio allocated into net long bets, down from 120% earlier this year. Even more ominous, Bridgewater now has a net short position on US equities.

In a recent note sent to a group of clients seen by Business Insider is any indication, the firm highlighted a fear of diminishing liquidity.

Bridgewater is referring specifically to the Federal Reserve's plan to tighten monetary conditions, and arguing some current market drivers are merely holdovers from a more accommodative regime.

The note, written by co-CIO Bob Prince and research head Karen Karniol-Tambour, is a part of Bridgewater's Daily Observations series, which is not meant for media consumption but is instead intended to give clients a view of Bridgewater's thinking on markets, the economy, and geopolitics. Bridgewater declined to comment.

"The monetary tightening has pushed interest rates up, but the production of credit by the financial system is supporting economic growth," the note read. "We represent this as about 10 o'clock on the dial."

Once the "dial"— represented visually in Bridgewater's note by an arrow within a feedback loop — reaches 12, liquidity will tighten in earnest. And that's when the going will get really tough.

The note said that the combination of monetary tightening with strong growth and credit availability had kept cash flows up, but raised the discount rate on those cash flows. As a result, returns have been flat.

Once the tightening produces a downturn, it will favor bonds and hurt most everything else.

"This favors commodities and other real assets in relation to stocks, and stocks in relation to bonds, and warrants a less than normal overall exposure to financial assets and risk premiums," it said. "Once the tightening produces a downturn, it will favor bonds and hurt most everything else."

Wide-reaching implications

Needless to say, this is all very troubling for stock bulls. Even if you believe Bridgewater is being overdramatic, it's difficult to avoid the psychological overhang of the world's biggest hedge fund holding a different view than you.

It's also worth noting that tighter lending conditions and the resulting liquidity squeeze have been cited repeatedly as a major fear by a chorus of Wall Street experts.

There are other reasons to be wary of US stock exposure, of course. They include but aren't limited to: the prospect of a global trade war, a slowing pace of corporate-earnings growth, escalating nuclear tensions in the Middle East, and lofty valuations.

Perhaps of some encouragement to those who have money in Bridgewater's fund is the strong performance in developed-market currencies and rates trading in April, per Bloomberg's report. It may not have been enough to salvage a gain for the month, but it kept the firm in good shape relative to its peers on a year-to-date basis.

In the meantime, as Bridgewater scales back its US equity holdings, it's showing increased interest in European stocks. Or rather, it's taking a cleaver to net short bets, cutting them by 80% since February, according to Bloomberg. The firm still has a $4 billion short position in European equities, but recent disclosures show it's been trimming select bearish wagers.

In the end, if you're the type to take investment cues from massive hedge funds like Bridgewater, perhaps it's time to consider weaning yourself off the US while giving Europe a chance.

And, above all else, keep a close eye on liquidity.

SEE ALSO: The stock market's recovery is one of the slowest on record — here's why that could be foreshadowing the next crash

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NOW WATCH: The surprising reason we boil lobsters alive

• Bridgewater Associates is bearish on nearly every financial asset, it said in a recent note to clients.
• "2019 is setting up to be a dangerous period for the economy," the giant hedge fund said.
• The firm said earlier this month that a major driver of the stock market is nearing its end.

Bridgewater Associates, the world's largest hedge fund, is sounding the alarm on nearly every financial asset.

"We are bearish on almost all financial assets," the firm said in a note to clients last week that was seen by Business Insider and first reported by ZeroHedge."Markets are still pricing in Goldilocks conditions, compounding the risks."

Extrapolating from current conditions, the hedge fund — which currently manages about $150 billion, according to its website — says the yield curve for Treasury bonds should remain flat, with oil hitting $62 and the dollar slumping 3.5% compared to other major currencies.

"2019 is setting up to be a dangerous period for the economy, as the fiscal stimulus rolls off while the impact of the Fed's tightening well be peaking," the firm continued. "And since asset markets lead the economy, for investors the danger is already here."

Earlier this month, Bridgewater said a crucial market driver is at 10 o'clock. Once the "dial"— represented visually in Bridgewater's note by an arrow within a feedback loop — reaches 12, liquidity will tighten in earnest. And that's when the going will get really tough.

SEE ALSO: Bridgewater, the world's biggest hedge fund, says a crucial market driver is at 10 o'clock — and forecasts widespread pain once it gets to 12

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NOW WATCH: This $530 Android phone is half the price of an iPhone X and just as good

• A YouTuber has combined the music of Goldman Sachs President David Solomon with a motivational video from Bridgewater Associates founder Ray Dalio.
• Solomon creates music under the name DJ D-Sol, and has over 425,000 monthly listeners on Spotify.
• Check out the video below.

Wall Street's song of the summer is almost certainly going to be a dance remix of Fleetwood Mac's 1977 hit "Don't Stop."

That's because it was produced by David Solomon, the president and future CEO of Goldman Sachs.

DJ D-Sol, as he is known, released the mix on streaming services like Spotify and Apple Music, and it has already become the talk of Wall Street.

YouTube user Thornton McEnery, the executive editor of Wall Street blog Dealbreaker, has taken things to a new level, however, by dubbing the mix over one of hedge fund titan Ray Dalio's now infamous cartoon videos explaining the principles of success.

Dalio, the founder of Bridgewater Associates, recently turned his best-selling book "Principles,"— which contains the full text of Bridgewater's famous culture book with additional context — into a series of cartoon videos aimed at recent college graduates.

The videos were originally narrated by Dalio, but in McEnery's video, his voice is replaced by the strains of DJ D-Sol's EDM remix, creating a hybrid containing two of the most important figures in the financial industry.

You can see the video, which first caught our eye after a tweet by Bloomberg's Tracy Alloway, below (sound on for full effect):

SEE ALSO: Goldman's CEO-in-waiting just released his first electronic dance single, a remix of a popular Fleetwood Mac song, and it's already a hot song of the summer on Spotify

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NOW WATCH: This impact investor says stop trying to help people without including them in the conversation

Bridgewater Associates founder Ray Dalio is on tour for his first book, "Principles: Life and Work" and it's one of the last times you'll see him embrace the spotlight, he told Business Insider.

As the head of the world's largest hedge fund, with $160 billion in total assets under management, Dalio generally avoided the media for the majority of his career.

But when his firm gained increased interest in the mainstream media after it emerged strong from the 2007-08 financial crisis, which then led to further interest in Bridgewater's highly unusual culture of "radical truth" and "radical transparency," he became a regular topic of Wall Street coverage.

Dalio, 68, completed his seven-year transition from leading Bridgewater's management this year but remains as chairman and co-CIO. To him, he said, it marked the beginning of the third phase of his life, where he will share with the world the management lessons he's learned — hence the book and its accompanying tour, as well as his complementary TED Talk from April.

But that doesn't mean he's enjoyed putting himself out there. In the introduction to the autobiographical aspect of his book, he notes that he still has "mixed feelings about telling my personal story," and adds "I wouldn't mind if you decided to skip this part of the book."

He told us that while he knew that making himself more public and going on a book tour would be difficult for him, he was faced with a choice to either work through his fear and share his message, or let his principles be analyzed without his input.

"When you have discomfort, do you let discomfort stand in the way of doing what you think is the right thing?" he said, about this final choice he faced as head of management. "And I couldn't make my last decision that way. I didn't make my other decisions that way. So while it's uncomfortable, it's tolerable, and I feel that I've handled this the way that I needed to handle it."

Dalio will be publishing a second volume of "Principles," on the economy and investing, at an undetermined date likely in the next year or two. Once he's done explaining what he has to, he's going to go dark. "I know that I'm personally going to take a low profile," he said, noting he plans on no longer commenting about his personal life or philosophy.

That said, he thinks he may still publish essays about the economy similar to the approach he's taken on LinkedIn. "I'll wait till it comes and I'll see how it all is," he said. If an unexpected financial crisis happens, for example, he may have to weigh in. "At such times, I feel it might be helpful for me to offer thoughts."

Dalio believes his life philosophy and management approach, in which radically transparent processes are put into place for an "idea meritocracy," could benefit anyone who reads them, regardless of how much or how little they implement into their own lives and companies.

"What people then do with these principles is up to them," he said. "Them being clearly understood rather than distorted was important to me."

SEE ALSO: Employees at the world's largest hedge fund use iPads to rate each other's performance in real-time — see how it works

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NOW WATCH: Bridgewater's Ray Dalio explains what he wants his legacy to be

Bridgewater Associates founder Ray Dalio sat down with Business Insider EIC Henry Blodget to discuss his book "Principles: Life and Work," the culture of Bridgewater, and his outlook for the future.

"Principles: Life and Work" is the first of two planned books, and includes a short autobiography along with an expanded version of the "Principles" that all Bridgewater employees read when joining the company. Following is a transcript of the video. 

HENRY BLODGET: Ray Dalio is one of the most successful investment managers in history. He's built a firm, Bridgewater, that is the largest hedge fund by multiples, most successful. He's now written a book called Principles, in which he's kind enough to tell us how he did it and how we can do it. Ray, thank you so much for joining us.

RAY DALIO: Thrilled to be here.

BLODGET: So here's your book, congratulations. I know firsthand how hard it is to write a book, and this is a particularly long and pithy one. So congratulations.

DALIO: Thanks.

BLODGET: So let's start right at the beginning. The first sentence, you say I want to establish that I am a quote “dumb s***” who does not know everything he should know. What do you mean by that? It's a very charming and disarming start, but what are we supposed to take away from that?

DALIO: Well, I think it's important I know that the key to my success has not been so much what I know as much as how I deal with my not knowing. And that's basically a big theme in the book. How do you have an idea meritocracy? Only two things that you need to do in order to be successful. The first is you have to know what the right decisions to make are, and then you have to have the courage to make them. And most people don't have in their head the right decision. And I think one of the greatest tragedies of man is that they hold onto opinions in their heads that are wrong, and they don't go out there and stress test them.

So we have an idea meritocracy. I mean, there's a reason I wrote this book before I wrote Economic and Investment Principles 'cause that's really more sort of my skill set. But in building an organization and/or dealing with the markets, to be able to have independent thinking and go beyond what you all individually know in order to get the best is the key to success.

BLODGET: You share in detail your own development of coming to developing these principles. One of the events that you share would have been wildly traumatic for most people is that you talk about being fired from Shearson for punching your boss in the face. What happened there?

DALIO: Well, that was just a, you know, I was kind of wild then, and it was New Year's Eve. And I got drunk, and he got drunk. And you know, we did that. And I punched him. I didn't get fired for that. He was a good guy. We came in on the following Monday morning, and he said, okay, we'll get it past us. I got fired for doing something else, not for that.

BLODGET: Okay.

DALIO: But I was kind of a rebellious. The thing that affected me the most, I would say, was being so wrong in 1982 when the bottom of the stock market, on other words, I had anticipated that there would be a debt crisis with Mexico. And in August, Mexico defaulted on its debt, and I thought we were gonna have an economic crisis because there would be this worldwide debt crisis, which occurred, and —

BLODGET: Right, and just to set the scene, this was, you had left Shearson. You had started Bridgewater. You'd had many years of being very successful. You had gotten very confident, and you've made this huge controversial bet that we were headed into the next Great Depression and then.

DALIO: Right, the defaults came. Mexico defaulted in August of 1982. I thought, wow, we're gonna go in this crisis, and everything's gonna fall apart. That was the exact bottom of the stock market. I couldn't have been more wrong. And it was painfully wrong because I had built the company until that point.

We were a tight group, small group of people. I had to let everybody go. I was so broke, I had to borrow $4,000 from my dad. I had testified to Congress 'cause they asked me to explain this. I had been on Wall Street Week. All of those mistakes, and it was very painful experience. And it turned out to be probably the best experience of my life because it changed my attitude about thinking.

In other words, rather than thinking I'm right, I went to thinking how do I know I'm right? And it created this open-mindedness, to be able to then go, fine. The smartest people who disagreed with me, and to see how they would think about things, to balance my bets better. It taught me a radical open-mindedness. It taught me what you're referring to in the beginning of the book that I'm trying to convey, that the power of radical open-mindedness and an idea meritocracy is such a powerful thing.

BLODGET: And you talk a lot about how this process of pain, and I can imagine it was just, again, a gut-wrenching experience of having to fire all of your friends. You have to rebuild from zero. You start going forward. You have to look in the mirror and say, hey, I was way too arrogant and confident. I have to effectively relearn. That's not an easy thing to do.

DALIO: Right, I have a saying. Pain plus reflection equals progress, right. And I began to develop this knee-jerk reaction. If pain is a signal that something is wrong, that you did something, if you make those mistakes, and then to take that pain and to calm oneself down and think what would I have done differently in the future? So my instincts changed.

I view those experiences now like solving puzzles that'll give me gems. The puzzle is, what would I do differently in the future so I would get a better result? The gem is the principle that I would write down as I learned it, so literally by writing down the principle, when this one comes along, what do I do with it? Everything is another one of those. Like, we have a million those.

BLODGET: Yes.

DALIO: If you start to say, when one of those comes along, how should I bet steer with it, and you write down that recipe. Those are the principles. So I found that exercise to be great, and I also found that I could turn those principles into algorithms.

So let's say our investment process, those criteria are built into literally algorithms and data can come in. So I found that process of encountering pain to produce reflection to produce better ways of doing it to produce principles and then carrying that forward to the decision-making has been invaluable and to do that with people who are gonna disagree with me and to know how to do that well. That's been the key to success.

BLODGET: And one of the first and most important principles that you outline is embrace the truth whatever it happens to be.

DALIO: Right, a reality.

BLODGET: And one of the very striking moments in the book is when you talk about how your top managers after you rebuilt Bridgewater into a success again. Basically, they came to you and said, look. Here's what Ray does well. He's a genius money manager and thinker and so forth, but here's what Ray doesn't do well, and I have to read this because for anybody leading other people, just a very startling quote. It says, quote, "Ray sometimes says or does things to employees that make them feel incompetent, unnecessary, humiliated, overwhelmed, belittled, oppressed, or otherwise bad." And you say very candidly, your first reaction was ugh.

DALIO: I'm like, I don't want to do that. These are the people I work with. I don't want to have those consequences. And on the other hand, it's this radical straight forwardness, and I want them to speak to me in a straight forward way, so we were at a moment. That's a painful moment. And then it's a moment of reflection. Should I not be as straight forward? Should they not be? What could I do differently? So what we decided to do was deal with it together. Like I thought that I should then ask the questions. Do you not want me to tell you what I think? Do you, I would appreciate you doing the same with me in that straight forward. So how should we be with each other? And by agreeing how we should be with each other and writing those things down so that this is what we're doing, we began to get more of the management principles of how we are with each other because it's the key to our success.

But it can be painful. It can be not understood well. There's things in our brain. Neuroscientists tell me that there's a part of our brain, which we call the prefrontal cortex, the thoughtful part of our brain, in which we sort of want to be radically straight forward. We'd like to know what our weaknesses is 'cause it's logical. And then there's an emotional part of the brain. We understand the amygdala that is the fight or flight. And it takes disagreement and it converts that into a battle, and it's not easy. And so those two parts of our brains are at odds, and if we understand that and we work ourselves through.

At the end of the day, can I be radically truthful with you? Like, what's so bad about us being radically truthful with each other and radically transparent?

I want to say one more thing so you understand Bridgewater. Okay, Bridgewater is an idea meritocracy in which the goal is to have meaningful work and meaningful relationships. They're equally important. But to do those through radical truthfulness and radical transparency. So you're on a mission together: meaningful work. And you have these relationships in which you care. If you have those relationships and you can understand that there's caring at the same time that there's holding each other to high standards, if there's tough love, that that's a very powerful force. And by being radically truthful and not political and being radically transparent, we've been able to do that. So that's the secret sauce. In other words, it's explained more comprehensively there, but the results speak for themselves.

BLODGET: And you talk about the two parts of the brain, the logical part, the emotions, a lot of the book sounds like the process you've created is to take the emotion out of everything. Turn the business into a machine. Make all decisions. Use computers to aid decision-making. Is there any part where emotion helps?

DALIO: Well, emotions —

BLODGET: What about passions?

DALIO: I think emotion is the most important thing, so let me distinguish between two things. There's emotion that's beneficial to you, and there's emotion that's detrimental to you. If your emotion is going to cause you to do something that you're going to regret later, that's a problem. If the emotion helps you do the things that you want, so I think the most important things are emotion, the emotion of inspiration, the emotion of love. These are things, that's what I'm working for.

The emotions that we don't want to have is those that we regret afterwards. So the notion is here is to deal emotion and not just take it out, but to put it in its right place. So for example, if somebody's having an emotional moment in a conflict, then you say, how should we best handle it? Do we put it aside, and we'll deal with it a little bit later? Do we have somebody help us through our conversation? Do we communicate by another vehicle, email, so that it can be logical and seem less emotion?

The important thing is in order to have an idea meritocracy you have to do three things. First, you have to put your honest thoughts on the table for everybody to see. So if everybody can put their honest thoughts on the table for everybody to see, that's a great thing. A lot of people have problems doing that, but that's the beginning.

BLODGET: Difficult, scary.

DALIO: But not if it's the, you gotta do it. Otherwise it's all the scenarios going on in your mind that might be wrong, and it's not honest. So what should be the problem? There should be no problem. You should be feel good. Put it on the table. Let's look at it. Let's do it well. The second step that you need to do is to have thoughtful disagreement. In other words, to know how to disagree well, to take in information and pass it through and to think things through. And so we have protocols for doing that.

So we have a two minute rule and things that I can describe, are described in the book, that allow that protocol to have a quality exchange so that you together can get all of you to a better place than you could individually. That's the power, right, and then you have a process that if you have a disagreement that remains, how do you get past that disagreement? And so you have to have a way.

Ours is what we call believability-weighted decision-making. And I can explain this if you want me to. But in any relationship, you need to have those things. Can you speak honestly with each other? Do you have good ways of working through disagreement in a productive way? And do you have ways of getting past your disagreement? That's true for any relationship, right?

BLODGET: And one of the other principles that you stress is this idea that you should teach your team to fish rather than giving them fish, but you gotta give 'em room to make mistakes. This is something that Jeff Bezos and many other incredibly innovate entrepreneurs have stressed again and again. We have to get over the fear of mistakes. This seems to be a key part.

DALIO: Well, you learn from mistakes and learn from pain. Like I say, you can scratch the car, but you can't total the car. Okay. Mistakes is one of the best sources of learning, right. Successes mean you do the same thing over again, and okay, that's fine, but mistakes that are painful stick. When I look back on my career, I think that the mistakes were the best thing that happened to me.

I remember my mistakes better than I remember my successes. Somehow there must be more of the successes to get me where I am, but I remember all the mistakes, and I remember the lessons. So that's what I mean by pain plus reflection equals progress. So yeah, it's okay for you to make mistakes. It's not okay for you to not learn from those mistakes. That's a principle in there, right. And so you have a culture that operates this way.

If you don't have a culture that operates this way, it's not gonna be self-reinforcing. And so the reason I'm talking about these types of principles rather than my economic and investment principles, which'll come out in the next book is because these are the most fundamental principles, which are the basis of success. And they're not just in investment, investment firms principles. It's not just a hedge funds principles. It's like life principles and how we're gonna deal effectively with each other.

BLODGET: Let's talk a little bit about investing. One of the things, as I've learned more about Bridgewater that I hear again and again, is you've, the radical transparency in the culture and among employees, but your actual investment book and decisions are kept to a very small group. Is that for competitive reasons? Why do you do that?

DALIO: Well, proprietary reasons on anything like the particular algorithms, the trades that we're doing. It would be disadvantageous to our clients if we were to make that all public. But the concepts are economic and investment concepts I'm happy to share. I did this 30 minute video basically how the economic machine works, and in 30 minutes I told the most important things that I know about the economy 'cause I want to pass that along. I want to pass along things that are gonna be helpful to people.

I'm at a stage in my life where now my primary goal isn't to be more successful. My primary goal is to help other people be successful. When I first did this, I thought this was presumptuous. In 2008, we anticipated the financial crisis and did well, which received a lot of attention, and there were stories about what this environment is like that were not accurate. And I tried to stay below the radar, no media. And then I was suggested I put the principles online. They were downloaded over three million times, and I received a lot of thank you notes and so on.

Well, at this time, I think that I sort of have a responsibility to pass along the things that I think are valuable along those lines. And I hope it'll encourage other people to do it. When I think about the, if I think about Jeff Bezos, Jeff Bezos is a man who made, who has formulas for successes. He's got recipes, and I think of principles are recipes for success.

So wouldn't it be great if Jess Bezo had a book of recipes and that you say, when you encounter that thing, what do you do when you encounter that thing? And I hope to encourage. In fact, I am encouraging a number of people. I won't mention their names, but they're kind of luminaries, fabulously successful people will be giving me principles and writing principles, and I think if we look at those principles so when we encounter another one of those things we have principles to go to.

I think it would be good for you to write your principles. And each person to write their principles and also to walk the talk so that way others know what you stand for and are you operating that way? I think at this time it's important to be principled. I think our country needs to restate, you know, what are the principles that bind us together? What are the ones that divide us? How should we be with each other? Then we have idea meritocratic decision-making. Can we deal with who knows who's right, and how do you work those through? So this is something that's much more pervasive and I think very important.

BLODGET: Wow, I think on behalf of everybody who reads your book, it's been very valuable. I've learned a lot from you, from Jeff Bezos, Steve Jobs, and others. There's so much to soak up from that, so it's great. On investing, you've recently written that risks are rising because of the political atmosphere. You've talked about how it looks a lot like 1937. That sounds very scary. What do you mean by that?

DALIO: Well, let me clear up this. This is not like 2007-08 when in 2008, we could do the calculations of how much debt had to be paid by whom and we could see that that wasn't gonna happen, and we were gonna have a financial bust and that. By and large, economically we are at the part of the cycle that is not too hot and not too cold, and assets have the right risk premiums and so on, so it's a relatively stable kind of environment. On the other hand, it's very much like the '30s in that in 1929-32, like 2008, we had a debt crisis. Took your interest rates to zero, both of those times, and when interest rates hit zero, you don't have the same kind of monetary policy, so they print money. They buy financial assets. In both cases they did. That caused an economic rebound in both of those cases. And it caused the stock market to rise a lot in those particular cases, and at the same time, it did not resolve the wealth differences.

So that today, the top 1/10 of 1% of the population has a net worth that is equal to the bottom 90% combined. Okay, the wealth is the largest wealth gap that there has been since the 1935-40 period, and so while we have good conditions here, for the bottom 60% of the population, we have bad conditions. So the averages don't convey what the picture is because of this disparity. So what was tapped into and what we see is there's a large percentage of the population who is hurting and that there's a conflict between the haves and the have nots and liberal ideas and conservative ideas and all of that, and we are having a greater polarity.

In the '30s, we had populism. In other words, the selection of leaders who were strong leaders in a battle of one segment against the other segment inclined to fight for certain things. So as we come into this period, it's somewhat similar to that. We will have, as we go forward, obligations. Demographics is going to affect our obligations. We're right now at the point where pension obligations, not only debt obligations, pension obligations, health care obligations, all of those are going to gradually sort of squeeze us, and we have that division. And so it's very similar to that. And we're also at the point where 1937 was when the feds said we could tighten monetary policy. And they put a slight tightness in monetary policy.

In my opinion, the risks are asymmetric on the downside. In other words, if you tighten monetary policy certainly by more than is discounted in the market and what's discounted in the market is very minor rise in market that that will reverberate through asset class prices as well as then you can have a situation in terms of the economy.

So it's similar in that interest rates are close to zero, not much room on the downside. Obligations are large. There is a political division. There is more populism. Therefore, there's more conflict. And therefore we need to be very careful at this moment. That's what I'm basically saying.

BLODGET: And you have spent more than 45 years betting on the future. Given that picture you just painted, what is your bet for the future?

DALIO: Well, I think we're in the process of watching how conflict is going to be handled politically, and that's being reflected not only internationally with something like Korea or Iran and so on, but we're also dealing with conflict on taxes and so on. I think that one of the things that Donald Trump did extremely well was to identify a constituency that was not heard, and he did that as a pro-business person. In other words, somebody who is going to be business-like and create that environment.

That group could have been tapped into also by more of a socialist, and what we have is a capitalist who is doing that. But in any case, whether socialists and capitalists working together to focus on that, I think that issue has been raised and now we deal with the issue. We're going to find out. The question is really is Donald Trump, he's gonna be aggressive. Is he aggressive and thoughtful? Or is he aggressive and reckless, and when we work through these situations, we're going to find out more and more. I think the fact that he's working across the lines, personally, I like the negotiations with the Democrat side.

BLODGET: I think a lot of Americans do.

DALIO: And so on and to see, cut that deal in a way if we can to also deal with the whole of the economy is something that I'm all in favor for. So we're in the process of finding this out, right.

BLODGET: You recommend that most portfolios should contain some gold.

DALIO: Yeah, of course.

BLODGET: Why? A lot of people think it's not of course. In fact, it doesn't make sense.

DALIO: Well, first of all, the best way to structure a portfolio is to have the right kind of balance in your portfolio, and some amount of gold. Gold serves a purpose. It is first of all, a diversifier against other assets. You know, we have this risk on, risk off thing. We also have a monetary system. The Bretton Woods monetary system began after World War II, and it had the dollar as the world's reserve currency. There's a risk there. There's a lot of dollar denominated debt and so on. If somebody felt they didn't want to hold that, and so you could have exposures to that.

So it's a diversifying asset that is sensible, and that's the main reason to have gold in the portfolio, five to 10%. People, I don't understand it. People will have more in terms of cash. The key in terms of being able to have a successful portfolio as your core portfolio. In other words, what's your strategic asset allocation mix? What is your, if your, let me —

BLODGET: I got it. Let me ask you about Bitcoin.

DALIO: Okay.

BLODGET: Bitcoin, people say the same thing. It's a store of value. You gotta diversify. The dollar's not safe. It's been going up and up and up. Yet recently it crashed. Jamie Dimon came out and said, it's complete fraud. He'd fire anybody at JP Morgan who invested in it cause he wouldn't want people that stupid working for him. What do you think?

DALIO: There are two purposes of a currency. Is it a medium of exchange? And is it a storehold of wealth? Those are the basic ingredients. Bitcoin is not an effective medium exchange by and large. I have a Bitcoin. I want to go buy things. It's not easy to buy things with the Bitcoin, and in terms of a storehold of wealth, a storehold of wealth more reflects, like gold more reflects the opposite of what money is doing, right?

And so you look at it. It's a storehold of wealth.

Bitcoin is a speculative bubble, right. Its price is like a greater fool theory in terms of its price. If you say, what is its intrinsic value? If Bitcoin was made to a more effective medium of exchange, and also operated in terms of a storehold of wealth, not of the reflection of that volatility, it would be a viable instrument. It is, to me, a vehicle for speculation that's attracting people in, and it has all the classic ingredients of a bubble. People are leveraging themselves up. It doesn't have that same intrinsic value. Even the privacy value, okay, is suspicious.

In other words, it has a purpose to some extent. If you're living in a country, and you don't know your currency, whether it's gonna be good or not, and you might try to hold that. But that thing you're holding is running around like crazy for reasons that you don't understand, so it's not gonna be an effective storehold of wealth, and the privacy will be stress-tested.

In other words, governments are examining who is operating in their own clever ways of what that, and so you can't even assume, so it's gonna be a privacy vehicle. So I don't see the effectiveness of Bitcoin. I could see cyber currencies and so on, crypto-currencies, but this is not what we're having. You know, it's a possibility that I think has been captured as a speculative vehicle that's in the middle of a bubble.

BLODGET: You said something else about investing that I think is very profound and simple that I think a lot of people don't understand, which is to be successful as an investor, you have to bet against the consensus and be right. First of all, why? Why can't we just buy stocks we think are gonna go up.

DALIO: Well, the consensus is built into the price. So because the consensus is built into the price. And assets price themselves in a way that they're all compete, and they're all of equal value in a certain sense. There's risk premium of equities over cash and bonds will have that over whatever, but basically, they're all priced that way. So like think of it as going to betting on a sports team or in other words, or horse racing.

Okay, there's handicapping that's going on. So in order to be successful, you're betting against the consensus, and you have to be right. That's the game.

BLODGET: And you describe your first trade when you were a teenager. You bought a stock. It tripled. You thought, hey, this is easy. But you convey very effectively that in fact, it is extremely difficult even though it seemed so simple.

DALIO: Being successful in the markets is more difficult than being successful in competing in the Olympics. Your odds are higher to be successful competing in the Olympics because you have more people trying to do it. You have more resources. We put hundreds of millions of dollars. We have at Bridgewater, 1,500 people. We're now competing against other teams, and that's the kind of resources that are going into playing that particular game. So think about that in terms of handicapping it. It's not an easy thing to do. What you can do is achieve balance. To know how to hold a balanced portfolio, and to receive something that is a return that is much better than cash achieving balance is something that you can do, and I think that that, but figure. If you're going to enter the game, since value added is a zero sum game, you have to ask. Who are you playing against? Who are you going into the poker game with? Do you want to do that?

BLODGET: And as you talk to people in the real world, is your sense that people understand what they're up against when they might buy a stock or try to time the market?

DALIO: Institutional investors who are smart by and large understand that. The average man tends to be much more reactive if you look at the purchases and sales that they make. When something goes up, they're more likely to buy it. They think, ah, that's a good investment. They don't know how to measure that in terms of oh, is that a much more expensive investment that's more likely to go down?

So that's why, you know, you put in ads in newspapers, and they say, ah, that's what had that return. That's what they're attracted to. They tend to buy high and sell low, and so an average man should not be playing this game in that way. They should be playing the game, or humility. If you think that you're good at playing the game, just make sure, it's like going to the poker table or going to the race track. Do it with a little bit of money, and watch it. And get the best advice that you can to know that you're gonna be able to take money out of the system rather than put it in.

BLODGET:  Ray, you've written a terrific book. Thank you so much for sharing your life and wisdom, and best of luck. Congratulations.

DALIO: Thank you.

BLODGET: Thanks.

DALIO: Appreciate it.

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This week:

• Business Insider CEO Henry Blodget speaks with Ray Dalio, the founder of Bridgewater Associates, the world’s biggest hedge fund. Dalio discusses his assertion that most portfolios should have gold allocated at 5-10%, if for no other reason than it’s a great diversifying asset. He also shares his thoughts on bitcoin, which he says is not an effective medium of exchange, because it’s difficult to buy things using it. Dalio calls bitcoin a speculative bubble, and says it lacks intrinsic value.
• Dalio breaks down one of the fundamental tenets of his investment approach: that you have to bet against the consensus and also be right. He argues that the following the consensus isn’t viable, because it’s already reflected in the price of an asset. Dalio thinks that, based strictly on an odds basis, a person has better odds of being successful in the Olympics than in the market. He says that, in general, investors buy high and sell low, and uses that as evidence to show that the average man shouldn’t be playing the proverbial game.
• Business Insider executive editor Sara Silverstein takes a close look at the so-called Trump trade, which has rebounded amid optimism around a Republican tax plan that’s scheduled to be released next week. She specifically cites an index of companies paying high taxes, which would benefit most from the proposed corporate tax cut. After falling over the past few months, the gauge has recovered, and JPMorgan says that the broader S&P 500 stands to benefit greatly from lower taxes.
• Silverstein also discusses comments made by Jim Febeo, senior vice president of government relations at Fidelity Investments, who stresses the importance of budget reconciliation. Jurrien Timmer, Fidelity’s director of global macro, adds the caveat that most long-term investors don’t need to react to short-term events.
• Silverstein talks with University of Chicago Booth School of Business professor Luigi Zingales about whether companies should maximize market value. Zingales discusses a research paper he authored, which makes the point that profit maximization is important to shareholders, but it’s not the only thing they care about. Put simply: shareholder welfare is not equal to market value.
• Building on the debate around profit maximization, Silverstein and Zingales touch upon comments made by imprisoned former pharmaceutical executive Martin Shkreli. Zingales says that while the pursuit of peak profits has become the corporate mantra, that isn’t a hard-and-fast rule. He then talks about how private companies often have considerations beyond profit, and tend to worry more about the well being of employees. Zingales also mentions how the divesting of socially conscious investors is driving the focus on profitability, while not hurting companies.

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Business Insider CEO Henry Blodget speaks with Ray Dalio, the founder of Bridgewater Associates, the world’s biggest hedge fund. Dalio discusses his assertion that most portfolios should have gold allocated at 5-10%, if for no other reason than it’s a great diversifying asset. Following is a transcript of the video. 

Henry Blodget: You recommend that most portfolios should contain some gold.

Ray Dalio: Yeah, of course.

Blodget: Why? A lot of people think it's not of course. In fact, it doesn't make sense.

Dalio: Well, first of all, the best way to structure a portfolio is to have the right kind of balance in your portfolio, and some amount of gold. Gold serves a purpose. It is first of all, a diversifier against other assets. You know, we have this risk on, risk off thing. We also have a monetary system. The Bretton Woods monetary system began after World War II, and it had the dollar as the world's reserve currency. There's a risk there. There's a lot of dollar denominated debt and so on. If somebody felt they didn't want to hold that, and so you could have exposures to that.

So it's a diversifying asset that is sensible, and that's the main reason to have gold in the portfolio, five to 10%.

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Business Insider CEO Henry Blodget speaks with Ray Dalio, the founder of Bridgewater Associates, the world’s biggest hedge fund. Dalio breaks down one of the fundamental tenets of his investment approach: that you have to bet against the consensus and also be right. He argues that the following the consensus isn’t viable, because it’s already reflected in the price of an asset. Dalio thinks that, based strictly on an odds basis, a person has better odds of being successful in the Olympics than in the market. He says that, in general, investors buy high and sell low, and uses that as evidence to show that the average man shouldn’t be playing the game. Following is a transcript of the video.

Henry Blodget: You said something else about investing that I think is very profound and simple that I think a lot of people don't understand, which is to be successful as an investor, you have to bet against the consensus and be right. First of all, why? Why can't we just buy stocks we think are gonna go up?

Ray Dalio: Well, the consensus is built into the price. So because the consensus is built into the price, and assets price themselves in a way that they're all competeing, and they're all of equal value in a certain sense. There's risk premium of equities over cash and bonds will have that over whatever, but basically, they're all priced that way. So like think of it as going to betting on a sports team or in other words, or horse racing.

Okay, there's handicapping that's going on. So in order to be successful, you're betting against the consensus, and you have to be right. That's the game.

Blodget: And you describe your first trade when you were a teenager. You bought a stock. It tripled. You thought, hey, this is easy. But you convey very effectively that in fact, it is extremely difficult, even though it seemed so simple.

Dalio: Being successful in the markets is more difficult than being successful in competing in the Olympics. Your odds are higher to be successful competing in the Olympics because you have more people trying to do it. You have more resources. We put hundreds of millions of dollars, we have at Bridgewater, 1,500 people. We're now competing against other teams, and that's the kind of resources that are going into playing that particular game. So think about that in terms of handicapping it. It's not an easy thing to do. What you can do is achieve balance. To know how to hold a balanced portfolio, and to receive something that is a return that is much better than cash achieving balance is something that you can do ... If you're going to enter the game, since value added is a zero sum game, you have to ask, who are you playing against? Who are you going into the poker game with? Do you want to do that?

Blodget: And as you talk to people in the real world, is your sense that people understand what they're up against when they might buy a stock or try to time the market?

Dalio: Institutional investors who are smart by and large understand that. The average man tends to be much more reactive if you look at the purchases and sales that they make. When something goes up, they're more likely to buy it. They think, ah, that's a good investment. They don't know how to measure that in terms of, oh, is that a much more expensive investment that's more likely to go down?

So that's why, you know, you put in ads in newspapers, and they say, ah, that's what had that return. That's what they're attracted to. They tend to buy high and sell low, and so an average man should not be playing this game in that way ... If you think that you're good at playing the game, just make sure, it's like going to the poker table or going to the race track, do it with a little bit of money, and watch it. And get the best advice that you can to know that you're gonna be able to take money out of the system rather than put it in.

Join the conversation about this story »