Ray Dalio President & Chief Investment Officer September 13, 2010
One Glendinning Place Westport, CT 06880 (203) 226-3030 www.bwater.com
If you’re talented, don’t go into a business in which the macro environment will determine your success.
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What each decade is like is determined by the excesses of the prior decade.
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If you can understand the linkages and not get carried away by the excitements of the times, you can maneuver strategically.
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Whenever there's a boom and debts are rising faster than incomes, a bust will follow.
-4-
Governments will always choose to print money rather than tighten their belts, if the pain of debt gets bad enough.
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Whatever career has the highest percentage increase in HBS grads going to it is probably headed for trouble.
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You can’t chase the good things – you have to be ahead of them or early on their waves.
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Whenever economic conditions are extremely one way and most people are sure that they will continue, they will probably reverse.
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The most common mistake of investing is to assume that investments that had the highest returns over the past few years are the best investments rather than they have become expensive.
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INVESTMENT PRINCIPLES
A portfolio is nothing more than the weighted average of its return streams.
There are only 2 types of return streams: Alphas and Betas.
You need to have a well thought out game plan that is based on knowing what your return streams are like and knowing how to combine them.
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15 UNCORRELATED RETURN STREAMS – THE HOLY GRAIL OF INVESTING Probability of Losing Return-to- Money in a
60% correlation
Risk Ratio
Given Year
40% correlation 10%
1.00 0.25
40%
0.90 0.28
39%
8%
0.80 0.31
38%
7%
0.70 0.36
36%
6%
0.42 0.60
34%
5%
0.50 0.50
31%
4%
0.63 0.40
26%
3%
0.83 0.30
20%
2%
1.25 0.20
11%
1%
2.50 0.10
1%
20% correlation 10% correlation
Annual Portfolio Standard Deviation
9%
0% correlation
1
2
3
4
5
6
7
8
9
10
11
12
13
Number of Assets/Alphas in Portfolio
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14
15
16
17
18
19
20
Our Alpha
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DECISION RULES ARE CONVERTED INTO RETURN STREAMS 18%
1.60
Inflation/ Unemployment 1.40
16%
T-Bill Rate 14%
1.20
12%
1.00
10% 0.80 8% 0.60
6%
0.40
4%
0.20
2%
0.00
0% 60
62
64
66
68
70
72
74
Inflation/ Unemployment Pressure
76
78
80
82
84
86
88
90
92
94
96
98
100%
18%
80%
16%
06
08
10
Avg Annual Ret: 3.7% Std Dev: 5.3% Ratio: 0.70
14% 150%
12%
20%
04
250% 200%
40%
02
Cumulative Profit
T-Bill Rate
60%
00
10% 100%
0% 8%
-20%
50%
6%
-40% -60%
4%
-80%
2%
-100%
0%
0% -50% 60
60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11
63 66
69
72 75
78 81
84 87
90 93
96 99
02
05 08
11
Please refer to Note 1 for relevant disclosures. HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING OR THE COSTS OF MANAGING THE PORTFOLIO. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. - 15 -
COMBINE UNCORRELATED RETURN STREAMS Aus Equity Indicator Cum Return
Aus - UK Equity Diff Cum Return
US Bond Indicator Cum Return 200% 150% 100% 50% 0%
160%
130%
60%
140%
110%
50%
120%
40%
100%
30%
80%
20%
60%
10%
40%
0%
20%
-10%
-50% 70
74
78
82
86
90
94
98
Copper Indicator Cum Return 500%
7%
60% 50%
400%
6%
4%
20%
3%
10%
2%
0%
1%
100% 0% 91 92 93 94 95 96 97 98 99 00 01 02
US Yield Curve Cum Return
-100% 70
3.0%
3.0%
1.75%
2.5%
2.5%
1.50%
0.5%
1.00%
1.5%
0.75%
1.0%
0.50%
0.0%
0.00%
0.0%
-0.25%
-0.5%
88
92
96
00
82
86
90
94
98
86
90
94
98
91
02
93
95
97
99
01
CHF vs EUR Cum Return
Swiss Franc vs Euro
2.0% 1.5% 1.0% 0.5%
Average Alpha = 0.09% 0.0%
-0.5% 84
82
0.5%
0.25%
80
78
2.0%
1.25%
Average Alpha = 0.14%
78
Nominal vs IL Cum Return
2.00%
1.0%
74
US Bond Diff Cum Return
3.5%
74
80
84
88
92
96
00
-0.5%
80
Please refer to Note 2 for relevant disclosures - 16 -
02
IL Indicator Cum Return
200%
0%
70
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10%
300%
5%
1.5%
10%
Opportunistic EMD Indicator Cum Return 8%
2.0%
30%
-10%
70%
81 83 85 87 89 91 93 95 97 99 01
50%
80 82 84 86 88 90 92 94 96 98 00 02
Aus Bond Diff Indicator Cum Return
-10%
70%
80 82 84 86 88 90 92 94 96 98 00 02
80%
30%
90%
0%
02
40%
JPY/USD Indicator Cum Return
70%
84
88
92
96
00
80
84
88
92
96
00
03
Our Beta
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CONVENTIONAL ASSET RETURN/RISK PERSPECTIVE
Expected Rates of Return For Various Asset Classes 18%
16%
Private Equity
14%
Expected Total Return
Emerging Equities
12%
10% U.S. Equities
8%
Real Estate
6%
Non-U.S. Equities
Non-US Fixed Income (Hedged)
Emerging Market Debt
4% High Yield Debt
2% Cash
0% 0%
Inflation Linked Core US Bonds Fixed Income
5%
10%
15%
20% Expected Risk
Please refer to Note 3 for relevant disclosures. - 18 -
25%
30%
35%
40%
0%
Asset Class
Please refer to Note 3 for relevant disclosures. - 19 -
Real Estate
Private Equity
Emerging Equities
Non-U.S. Equities
U.S. Equities
Emerging Market Debt
25%
Non-US Fixed Income (Hedged)
High Yield Debt
Inflation Linked Bonds
Core US Fixed Income
Expected Excess Return
RISK-ADJUSTED RETURNS Leverage-Adjusted Expected Excess Returns (Standardized to the Risk Level of the S&P 500)
20%
15%
10%
5%
BALANCE RISK (NOT CAPITAL) EQUALLY ACROSS ECONOMIC ENVIRONMENTS
GROWTH
INFLATION
RISING
FALLING
Please refer to Note 4 for relevant disclosures. - 20 -
The Economy: How it Works & What it Looks Like Now
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My Template • Long-term Productivity Growth • Long-term Debt Cycle • Business Cycles
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LONG RUN GROWTH DRIVEN BY INCREASES IN PRODUCTIVITY Real GDP per Capita (2008 dollars, ln) 4.5
4.0
0.7% 2.1% 2.1%
3.5
2.2% 3.0% 3.0
2.4% 4.1%
2.5
0.2% 1.9% 0.8%
2.0
2.7%
1.5
1.0 00
10
20
30
40
50
60
Source: Global Financial Data Inc. and Bridgewater Analysis. - 23 -
70
80
90
00
10
WE HAVE REACHED OUR DEBT LIMITS USA Total Debt %GDP
400%
350% 60 Year Credit Expansion 300%
250%
200%
150%
100% 1920
1930
1940
1950
1960
1970
Source: Global Financial Data Inc. and Bridgewater Analysis. - 24 -
1980
1990
2000
2010
THE SECULAR FALL IN INTEREST RATES KEPT DEBT SERVICE STABLE USA 3m Interest Rate 18%
16% 1982
14%
12%
10%
8%
Hard landing
Hard landing
6%
4%
2%
0% 1920
1930
1940
1950
1960
1970
Source: Global Financial Data Inc. and Bridgewater Analysis. - 25 -
1980
1990
2000
2010
DEBT LEVELS ROSE RAPIDLY WHILE DEBT SERVICE DID NOT USA Household Debt % Disposable Income
USA Household Interest Payments % Disposable Income 20%
140%
18% 120% 16% 14% 100% 12%
1982 80%
10% 8%
60% 6% 4% 40% 2% 20%
0% 20
30
40
50
60
70
Source: Global Financial Data Inc. and Bridgewater Analysis. - 26 -
80
90
00
10
MASSIVE PRINTING OF MONEY US M0 as % of NGDP
20%
18%
16%
14%
12%
10%
PRINTING
8%
6%
4%
2% 1920
1940
1960
1980
Source: Global Financial Data Inc. and Bridgewater Analysis. - 27 -
2000
BIG BUDGET DEFICITS US Federal Budget Surplus as a % of NGDP
6%
4%
2%
0%
-2%
-4%
-6% even bigger deficit -8% wartime deficit goes to -30%
-10%
-12% 1920
1930
1940
1950
1960
1970
Source: Global Financial Data Inc. and Bridgewater Analysis. - 28 -
1980
1990
2000
2010
FISCAL AND MONETARY STIMULATIONS ARE OVER Developed World Purchases of Financial Assets (annualized) %PGDP
9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
United States Trailing 3 Month Growth Impact from Stimulus (%PGDP)
4% 3% 2% 1% 0% -1% -2% -3% Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
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THERE ARE TWO WORLDS Developed World Industrial Production (GDP-w eighted) 105 100 95 90 85 80 75 00
01
02
03
04
05
06
07
08
09
10
08
09
10
Emerging Market Industrial Production (GDP-w eighted) 120 110 100 90 80 70 60 50 40 30 00
01
02
03
04
05
06
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07
SECULAR IMBALANCES HAVE NOT CHANGED Creditor Countries (const. basket) Curr Acct % NGDP
Debtor Countries (const. basket) Curr Acct % NGDP
8%
6%
4%
2%
0%
-2%
-4%
-6% 00
01
02
03
04
05
06
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07
08
09
10
Appendix
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Our Principles • People and culture • Truth and excellence at all costs
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BAD
GOOD
…Allow pain to stand in the way of their progress.
…Understand how to manage pain to produce progress.
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BAD
…Avoid facing “harsh realities.”
…Face “harsh realities.”
GOOD
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BAD
…Worry about appearing good.
…Worry about achieving the goal.
GOOD
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BAD
GOOD
…Make their decisions on the basis of first‐order consequences.
…Make their decisions on the basis of first‐, second‐ and third‐order consequences.
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BAD
…Don’t hold themselves accountable.
…Hold themselves accountable.
GOOD
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Disclosures
Please read the following notes and disclosures as they provide important information and context for the research and performance presented herein. Additional information is available upon request except where the proprietary nature of the information precludes its dissemination.
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NOTES Note 1 : This slide is meant to show an example of how Bridgewater’s active market views are formulated and is purely for illustrative purposes. The charts are not intended to reflect what actual Bridgewater valuation, signals, and performance were during the periods outlined. Charts are created using backtesting of a portion of Bridgewater’s systems. Note 2 : For illustrative purposes only. The example does not necessarily indicate the actual historical or current implementation of Bridgewater’s strategies. Markets listed may or may not be currently traded and are subject to change without notice. Note 3 : Based on return and risk expectations from an independent study by Rocaton, a third party consultant. Note 4 : For illustrative purposes only. The example does not necessarily indicate the actual historical or current implementation of Bridgewater’s strategies.
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Research/Outlook Disclosure: This research is based on Bridgewater Associates, LP proprietary research and analysis of global markets and investing. Bridgewater research utilizes (in whole and in part) data and information from public, private, and internal sources. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. External sources include the International Energy Agency, International Monetary Fund, National Bureau of Economic Research, Organisation for Economic Co-operation and Development, U.S. Department of Commerce, as well as information companies such as Bloomberg Finance L.P., CEIC Data Company Ltd., Emerging Portfolio Fund Research, Inc., Global Financial Data, Inc., Global Trade Information Services, Inc., Markit Economics Limited, Mergent, Inc., MSCI, Standard and Poor’s, Thomson Reuters, TrimTabs Investment Research, Inc. and Wood Mackenzie Limited. While we consider information from external sources to be reliable, we do not assume responsibility for its accuracy. The views expressed are solely those of Bridgewater Associates, LP and are subject to change without notice. Reasonable people may disagree. You should assume that Bridgewater Associates, LP has a significant financial interest in one or more of the positions and/or securities or derivatives discussed. Bridgewater Associates, LP employees may have long or short positions in and buy or sell securities or derivatives referred to in this research. Those responsible for preparing this research receive compensation based upon various factors, including, among other things, the quality of their work and firm revenues. The research in this presentation is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including tax advice. Investment decisions should not be based solely on simulated, hypothetical or illustrative information. The price and value of the investments referred to in this research and the income therefrom may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Bridgewater Associates has no obligation to provide recipients hereof with updates or changes to such data. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Bridgewater ® Associates, LP.
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