Ray Dalio: When the AI giant dominates the stock, I choose not to gamble, but to do one. Yes

Original title: Investment Principles?

Original by Ray Dalio, host of Bridgewater Associates

Original by Peggy, Block Beats

Editor: Against the backdrop of AI giants continuing to push up the US stock index and increasing market concentration, Ray Dalio revisited a classic issue in this latest note: How should investors allocate assets when a revolutionary technology is transforming the world

The central reminder of Dalio is that technological advances in themselves do not equal the attractiveness of the stock in question. The major technological cycles of history tend to experience excitement, congestion, volatility and clarity, even for companies such as Microsoft and Apple that have won for a long time. Today's AI industry also faces multiple uncertainties such as overinvestment, increased competition, geopolitics, tax policy, anti-AI sentiment, and the next generation of technological subversion。

The most important point of the article is not to judge whether AI will change the world, but to discuss how investors will respond to "high concentration" market structures. Dalio argued that when a few technology companies are taking on an increasing weight, investors need to be wary of whether they are unwittingly holding high-related and high-risk exposures. A truly more robust way to continue to pursue a small number of champions is to build a decentralized mix of high-quality, low-relevant assets and adjust the level of volatility to its own risk tolerance。

In his view, knowing what he does not know is as important as judging what he does. In the face of the current AI-driven, overvalued and risk-intensive market environment, investors should not turn their enthusiasm for new technologies into a centralization of a few AI equities. Dalio's vision of investing in the Holy Grail through this technology cycle。

The following is the original text:

The note discusses how investment in this game should take place in the current environment。

Imagine you're playing bridge, poker, backgammon or chess games, and you've got a computer around you that can evaluate the situation with you and suggest the next step. For me, that's how investment plays. Whether you have a computer or not, I think you should:

Based on the current situation on the board, ask yourself what to do next. That is to say, how to proceed is determined by the current characteristics of the market and the forces that are influencing it。

I'VE BEEN INVESTING IN THIS GAME FOR A LONG TIME. AT THIS STAGE, MY GOAL IS TO PASS ON HOW I'M GOING TO PLAY THIS GAME; AND, FURTHER, I WANT TO CREATE A PLATFORM WHERE PEOPLE CAN EXPLORE THE INVESTMENT GAME IN THE WAY THEY WANT, LEARN, SEE WHAT THEY'VE DONE IN THE PAST, AND REALLY DO IT. I AM CONVINCED THAT THERE IS THE RIGHT AND WRONG WAY TO DEAL WITH THE CARDS THAT ARE IN HAND. SO WHEN YOU MEET A COMBINATION OF SITUATIONS LIKE XYZ, YOU SHOULD ASK YOURSELF, "HOW SHOULD I BET IN THIS SITUATION?" AND YOU CAN GIVE A GOOD ANSWER。

Now, I would like to share with you what I see as the current market features and what I think should be done, and what I am actually doing。

How to deal with the current set

What are the most important environmental factors of the moment? Under these factors, how should a person bet

IN MY VIEW, IT MAY SEEM TO MOST THAT THE MARKET ENVIRONMENT IN WHICH WE NOW LIVE IS ONE IN WHICH ONLY A VERY SMALL NUMBER OF COMPANIES DOMINATE MARKET DYNAMICS IN A MAJOR NEW TECHNOLOGY, MAINLY AI, DRIVEN INDUSTRIES. THESE COMPANIES ACCOUNT FOR A HIGH PROPORTION OF THE MARKET VALUE OF THE OVERALL MARKET AND ARE HAVING A SIGNIFICANT IMPACT ON THE MARKET AND THE ECONOMY. ALL THESE PERIODS HAVE A COMMON DENOMINATOR: HIGH LEVELS OF EXCITEMENT, UNCERTAINTY AND VOLATILITY ARE CONCENTRATED IN, AND CHANNELLED THROUGH, THE NEW TECHNOLOGY INDUSTRY TO GLOBAL STOCK MARKETS. THEREFORE, VOLATILITY AND UNCERTAINTY SURROUNDING THE INDUSTRY ARE IMPORTANT。

In addition, there are uncertainties associated with other major drivers. I call these drivers the "five powers": 1) what is going on with debt and money; 2) what is going on with political and social issues that may have a major impact on taxes and other politically driven market factors; 3) what is the impact of geopolitical factors on markets, such as war; 4) what is happening with natural forces; and 5) what is happening with new technologies. I'll put this into my investment system and let it think about how to bet in these environments, and I'll think about what to bet on my own。

when you think about how to place a bet in these environments, the most important question is: (a) what choice do you want to make? (a) a more heavy bet on new technology than a broad-based stock index, such as the 500 scale, or a match for the new industry, or for the best companies in the industry that you think it is; (b) to keep your openings roughly near index weights; or (c) to spread them out of this concentration

ALMOST EVERYONE WANTED TO BUY THE BEST INVESTMENT, AND THEY DID, AND NOW A NEW TECHNOLOGY THAT SEEMED TO BE CHANGING ALMOST EVERYTHING. BUT HISTORY SHOWS THAT, AT THIS STAGE OF THE CYCLE, MOST PEOPLE WILL FAIL BY PLACING A LARGE PERCENTAGE OF THEIR CHIPS ON THE SHARES OF A FEW LEADING TECHNOLOGY FIRMS. THERE IS A LOGICAL SET OF REASONS BEHIND THIS, AND IT HAS ALWAYS EVOLVED IN THE PAST. ALTHOUGH THIS TIME AI TECHNOLOGY IS INDEED UNIQUE, THERE HAVE ALSO BEEN MANY NEW AND EQUALLY "UNIQUE" TECHNOLOGIES IN HISTORY THAT CAN SERVE AS ANALOGIES AND REFERENCES. THOSE CASES SHOULD BE STUDIED; IF THE CHOICE WAS TO IGNORE THEM, IT MUST BE POSSIBLE TO EXPLAIN WELL WHY THIS WAS DIFFERENT。

The risk is certainly high

ALL CASES OF MAJOR NEW TECHNOLOGIES IN THE PAST WILL BE CARRIED OUT IN A SIMILAR MANNER FOR THE SAME LOGICAL REASONS. HIGH RISK AND GREAT UNCERTAINTY ARE INTRINSIC FEATURES OF THESE NEW TECHNOLOGY COMPANIES. LOOKING BACK AT THE PERFORMANCE OF THESE COMPANIES IN SIMILAR CIRCUMSTANCES IN HISTORY, WE WILL FIND THAT EVEN THE BEST REVOLUTIONARY NEW TECHNOLOGY COMPANIES, SUCH AS MICROSOFT AND APPLE, THAT HAVE FLOURISHED IN THE LONG RUN, HAVE BEEN HIT HARD AT SIMILAR STAGES IN THEIR DEVELOPMENT. MOREOVER, IT IS NOT EASY TO JUDGE WHICH COMPANIES WILL SUCCEED AND WHICH WILL FAIL, SUCH AS IBM, WHEN THESE NEW TECHNOLOGY COMPANIES EMERGE, RATHER THAN LOOKING BACK AFTERWARDS. IF YOU LOOK AT ALL THESE CASES, YOU SEE THAT MAJOR NEW TECHNOLOGY COMPANIES HAVE A HIGHLY UNCERTAIN FUTURE。

For example, they are either overinvested or underinvested. The reason is that if they do not invest enough to win the competition, they will lose; but they cannot know with sufficient precision what will happen in the future to judge whether they have invested too much. The costs are high, both in terms of overinvestment and underinvestment。

Moreover, they cannot accurately anticipate all changes, including external changes, such as monetary tightening, war, large tax changes, which affect them. As a result, they all go through an intense up and down cycle: first they turn investors on, then scare them, and wash vulnerable investors out, eventually leading to exaggerated fluctuations in markets. Further, just as these new and new technology companies have destabilized previous generations, most of them will eventually be destabilized by new and updated technologies in ways we cannot anticipate. Therefore, we should also consider whether the same risks will be present with these new technologies and technology companies. The impact of quantum calculations is one of the known risks we know. So what are the risks that have not yet been imagined

WHAT ABOUT THE RISKS POSED BY COMPETITORS? FOR EXAMPLE, CHINA IS PRODUCING AND DISTRIBUTING AI TECHNOLOGIES, WHILE CHINESE POLICYMAKERS HAVE COMPLETELY DIFFERENT VIEWS OF THE ECONOMY AND AI. WE ARE IN A WAR OF NEW TECHNOLOGIES, AND LEADERS BELIEVE THAT THEY MUST WIN IT. THEIR UNDERSTANDING OF AI AND ITS IMPACT ON THE ECONOMY AND PEOPLE ' S WELL-BEING WILL PROMPT THEM TO MAKE THE TECHNOLOGY AVAILABLE FREE OF CHARGE OR AT LOW COST, BECAUSE IT HAS ENORMOUS PRODUCTIVITY GAINS AND CAN IMPROVE LIVING STANDARDS AS A WHOLE. IN THEIR VIEW, PROFITS ARE LESS IMPORTANT THAN THE OVERALL BENEFITS OF MANY PEOPLE USING THESE NEW TECHNOLOGIES. I BELIEVE THAT THEY WILL COMPETE ON THE INTERNATIONAL MARKET, AS IN CARS, SOLAR PANELS, BATTERIES AND MANY OTHER PRODUCTS。

THE CURRENT SET OF CIRCUMSTANCES AND MANY CASES IN WHICH LESSONS HAD BEEN LEARNED IN HISTORY WERE SIMILAR. I CANNOT HELP BUT WONDER HOW BRITAIN DEFEATED THE NETHERLANDS IN THE SHIPBUILDING INDUSTRY AND OTHER IMPORTANT INDUSTRIES AT THE END OF THE DUTCH EMPIRE AND AT THE BEGINNING OF THE BRITISH EMPIRE. MOREOVER, THERE IS ALSO A GEOPOLITICAL CONFLICT AROUND TAIWAN, WHICH SHOULD AT LEAST ALLOW US TO CONSIDER THE POSSIBILITY THAT CHINA, AS AN INSTRUMENT OF GEOPOLITICAL WARFARE, MIGHT PREVENT THE FLOW OF CHIPS FROM TAIWAN. AI EQUITIES ARE ALSO EXPOSED TO OTHER RISKS, SUCH AS THE RISK OF AN INCREASE IN WEALTH TAX AND OTHER TAXES, WHICH MAY FORCE HOLDERS WHOSE WEALTH IS CONCENTRATED IN THESE STOCKS TO SELL STOCKS; AND AN INCREASE IN ANTI-AI SENTIMENT, SUCH AS THAT, WHICH MAY LIMIT THE SCOPE FOR ENTERPRISES TO ADVANCE TECHNOLOGICAL DEVELOPMENT。

I CAN GIVE YOU MORE TO WORRY ABOUT, AND I CAN GIVE YOU THE SAME LONG LIST OF AIS THAT WILL CREATE, AND I WANT TO BET. I'M NOT SAYING HOW THESE RISKS WILL EVOLVE, OR THAT ONE SHOULDN'T BE BETTING ON AI. I AM SIMPLY SAYING THAT THERE IS AN INDISPUTABLE RISK OF CONCENTRATION IN THE MARKET; ONE SHOULD KNOW HOW TO DEAL WITH IT IN SUCH AN ENVIRONMENT. BASED ON MY STUDY OF ALL SIMILAR CASES, AND THE LOGICAL REASONS FOR THEM, I AM CONVINCED THAT THE RISK IS HIGH AND THAT THE BEST WAY TO DEAL WITH THIS ENVIRONMENT IS TO:

Get it spread out

You may know that my motto is "decentralization". My Investment Grail is an effort to hold 15 high-quality, unrelated and risk-balanced investments. In other words:

A fully decentralized portfolio of high-quality bets will win a single concentrated bet. It has a higher risk return and can achieve a better return at the same risk level through engineering. The more the risk in the market is concentrated in one area, the more the individual should be decentralized; especially when the market is driven by revolutionary new technologies, which in themselves create great uncertainty。

This is not a view, but a mathematical certainty. For example, if I compare a risk return with an investment of 0.3, assuming a rate of return of 6 per cent and a standard difference of 18 per cent, which is usually a presumption of equity, I get the same return of 6 per cent if I hold 5 or 10 or 15 unrelated investments, but the risk as measured by the standard deviation will be reduced to 8 per cent, 6 per cent and 5 per cent, respectively. So if I had 15 high-quality and unrelated investments, my risk return would have increased 4.3 times, from 0.3 to 1.29. If you want, you can leverage it on this basis, with much higher returns at the same risk level. That's the truth。

I have great confidence in that. The reason for this is my assessment, the return on what I actually delivered in more than 50 years of investment, and the logic of probabilisticness in this: a well-regulated bet and adjusted to the rate of volatility that I would like to bear in the long run would yield far better returns than the concentration that most investors tend to hold. More specifically, through good decentralization, a person can obtain a better risk-return ratio than any concentrated bet; and then adjust it to the level of risk he or she wishes to take, with a higher return at the target risk level than any other process。

Because I'm passing this out, it's now a successful way of investing "not so secret." Nevertheless, I rarely meet investors who think about investment strategies in this way. In other words, I rarely meet people who really think from the perspective of portfolio construction, that is, thinking about a well-structured, decentralized downplay, which is different from a concentration of corporate shares in a major new sector of change. Most people just wonder if these stocks and the industry are doing well and how they should be bet on them. Those who think about the construction of the portfolio, and those who don't, will end up showing a huge difference. I will therefore elaborate more fully on my thoughts on how to do this at another time。

For all these reasons, in the current set of circumstances, thinking about how to play the cards in your hand should leave one to ask myself: What proportion of the concentrated bets should I hold? And then it spreads。

The returns will look low

High risk is indisputable. And then I'm going to make the wrong point: the expected future returns are very low. My judgement on the expected future returns comes from the valuation-related analysis and my foam indicator reading: real returns on equities over the next 5 to 10 years seem to be in the range of -5 to -10 per cent, despite the considerable uncertainty of these figures. These stocks are, in my view, long-standing assets with high risks, as it is difficult to reliably see the distant future; at the same time, they appear to be expensive and not well-established。

My research team asked a question about this

AT MY MOST RECENT MEETING, A MEMBER OF MY RESEARCH TEAM ASKED ME: WHY DO YOU THINK MARKETS ARE BEING CONFIGURED IN THE WRONG WAY TODAY? HOW DO YOU KNOW THAT THE LACK OF DECENTRALIZATION IN TODAY'S MARKET IS NOT JUSTIFIED? FOR EXAMPLE, SOME INVESTORS BELIEVE THAT THE EXPECTED RETURN ON AI EQUITIES WOULD BE VERY HIGH; OR THAT SUCH INDEX CONCENTRATION WOULD HAVE BEEN NATURAL WHEN AN INDUSTRY HELD SUCH A HIGH SHARE OF THE TOTAL MARKET VALUE; OR THAT, WHEN AN INDUSTRY WAS ENTHUSIASTICALLY FOLLOWED, MANY INVESTORS WOULD HAVE BOUGHT THESE STOCKS WITHOUT SHOWING WHAT FUTURE PROFITS WOULD BE, HOW THEY SHOULD BE REFLECTED IN STOCK PRICES, AND MAKING SMART AND RELIABLE CALCULATIONS。

My answer

There are various reasons for the rise in prices, which are not all good. Some investors think about prices and push them up because they believe they are still attractive relative to the basics; some have long held them because they recognize that this is a great new technology and consider the rise in the price of these stocks to be a recognition of them as good stocks; and others have index exposures that passively give them a large weight on these stocks. In my view, you can dwell on these issues in order to decide what you want to do; you can also realize that you do not need to dwell on them, because you do not have enough information to be confident. And say thou: I know not enough, but the following note. And then no bets。

What is troubling is that they must form a view for themselves and that their views are valuable; but more likely, they are unable to develop a view that is sufficiently reliable and worthy of note。

Footnote: To be clear, I am not suggesting avoiding bets. And you can't avoid betting because you have to put it in some kind of investment or cash. Most consider cash to be the least risky investment, but it is almost certainly the worst investment in the long run. I suggest that even if you do not have a tactical view of which market is good and which market is bad, you know how to spread your bets well. This is achieved by having a well-balanced strategic asset allocation portfolio and holding it when you do not have enough confidence to bet on tactical perspectives. But this is another time topic。

So I believe it is equally important to know what I do not know, to decide when I will not bet, and to know what I know, to decide when I will bet。

More simply, I believe in the following principles: Since it is often difficult to know enough information to justify concentrating, the best way to do so would be to hold only the decentralized portfolio of its most confident and unrelated bets and adjust the portfolio to the level of risk it wishes to take. This is my Investment Grail。

At this point in time, given the current set of circumstances, I do not think anyone is sufficiently well aware of what happens next in this technology-driven market to bet on a huge and concentrated bet. In my view, avoiding concentration and decentralization is the best way to deal with this “unknown” approach. I know, it's contrary to the theory you might read in the textbooks. Textbooks actually say that the market works, so you should "trust the market."。

In conclusion, the current market is extremely concentrated and revolves around a new and revolutionary technology. This fact should remind us not to mix their excitement with the attractiveness of new technology stocks themselves, nor to move aside from caution and hold a high-risk, highly relevant set of central bets. In particular, this should not be the case when we can get equally attractive returns through smart decentralization at much lower risk。

Annex: I will not share my specific position or tactical views with you because I do not want to be your investment adviser. But I will soon share with you some of the key perspectives behind these views, including my foam indicator readings and the logic behind them。

Original Link