WTF is Finance #Ep 2: Ray Dalio on Money, Bubbles, and Playing the Game (Transcript)

So thank you for allowing me to do that.

Early Life and First Steps in the Market

NIKHIL KAMATH: No, thank you for doing this. Everybody knows you. But if we could go through the big events of your life and very briefly, just to set context again, could you tell us how you look at your life from the very beginning, from when you were younger up until today?

RAY DALIO: Okay. My dad was a jazz musician. My mom was a stay-at-home mom. I was raised in a—I didn’t have any brothers or sisters. It was a loving family. It was not poor, it was lower middle class.

I did jobs when I was young. One of those jobs was caddying at a golf course. And because I caddied at a golf course at the time when there was a stock market boom, the people I caddied with, I would have conversations with. And I took the money I earned—$6 a bag. I carried two bags, $12 for a round. When I got $50, I would put it in the stock market.

And so I started playing around in the stock market much like you’re describing our audience does. And the first stock I bought, I bought only because it was the only company I ever heard of that was selling for less than $5 a share. And I thought, well, then I can buy more shares, so if it goes up, I’ll make more money—which of course made no sense.

But it was a company that was about to go bankrupt, but another company acquired it and it tripled in value. And I thought, “This is easy.” It’s not easy, but I got hooked on the markets at 12.

The Role of Luck in Early Trading

NIKHIL KAMATH: Do you think it’s like that? I often think about this. When I was 17, I bought this company called Marsoft, a defunct software company in India. And the share price again doubled or tripled. The first experience of the stock market—the people who tend to continue are the ones who get lucky. Do you think so?

RAY DALIO: I think positive reinforcement works. Yeah, sure.

NIKHIL KAMATH: If you lost money on your first trade, you would never have done it.

RAY DALIO: Maybe, probably. You know, you put your hand on a hot stove—how many times do you do that? And then you react to it. So I can’t say for sure, but probably.

But I got into the game. And it was a game. It’s a great game. If you play it, you think of it as a game, and if you play it well, it pays you money.

Emotion vs. Logic in Trading

NIKHIL KAMATH: Do you think the stock market has emotion? Does it treat you a certain way at the beginning?

RAY DALIO: I think it’s unemotional. We are emotional and we certainly have emotions. And that’s one of the reasons the way I learned to invest was to write down my criteria when I was making a decision.

Every time I’d make a decision, I would then think, “Why am I making that decision?” And then I’d write down the criteria and see how it would have worked in the past. It took me a while to do this because of my experiences.

And also, you know, when you’re wrestling with positions, particularly a position that goes against you, you’re wondering, “Am I missing something? And how long do I hold that position and what do I do?”

So emotions and intellect and lack of perspective is a problem. So when you have a decision rule that you know how it would have worked all through time, now you’re just playing that decision rule and it helps.

Early Experience with Leverage and Futures

NIKHIL KAMATH: Did you trade on leverage at the very beginning?

RAY DALIO: I didn’t trade on leverage in the beginning, but very early in my age, I bought futures because it would give me leverage. I decided very—nobody traded futures.

NIKHIL KAMATH: Right.

RAY DALIO: Okay. There were no commodities. Very little. But I realized that it would give me leverage. And so I figured if I was going to be good in the markets, I would want to have that leverage because I’d make more money. So that’s what drew me to it.

NIKHIL KAMATH: Was it about four or five times leverage?

RAY DALIO: Well, it was the futures contract.

NIKHIL KAMATH: The margin requirement would be about 15, 20%?

RAY DALIO: Yeah. And that would be a good, general bad one. Yeah.

NIKHIL KAMATH: And what kind of contracts were you trading in the very beginning?

RAY DALIO: Well, then it was commodities. Right. So then it was everything from precious metals to cattle. I got really into grain and livestock and those types of commodities.

So my background—okay, you want a couple of stories, so I’ll give you the stories. So I did this and I went to college. And then what was a defining moment, my learning experience, was the year I graduated from college, 1971. I clerked on the floor of the New York Stock Exchange. And this is before I went to graduate school. So it was in the summer.

And on August 15, 1971, President Nixon defaulted on his obligation—the U.S. obligation—to give gold for paper money. You know, back then, gold was money. The paper money was like checks in a checkbook.

The Nixon Shock and Understanding Money

NIKHIL KAMATH: Did he default or did he say that he will no longer back the dollar with gold?

RAY DALIO: I don’t know the difference. The way you say it, there was a promise that you could turn in, take $35, get an ounce of gold. Then he said, “You can’t take your $35, get an ounce of gold.” So that to me is—

NIKHIL KAMATH: And that was because of Vietnam and going to the moon?

RAY DALIO: Because we were spending a lot more. This is the thing—through history, we always have to look at this. We’ll get into this, I’m sure. But through history, back to the Old Testament and everything, the years of jubilee and so on, it’s when there is a lot of claims on money and there’s not enough money in the bank.

NIKHIL KAMATH: Okay.

RAY DALIO: And that’s happened throughout history. So we have a central bank that started in 1913, and the idea was it had gold, and there were many more claims on the gold than there was gold in the bank. Because for the same reason you borrow a lot of money.

And when you borrow a lot of money, one man’s debts are another man’s assets. So they’re holding it, expecting that they can get the money, and then they want the money, but there’s not enough money. And that was the Federal Reserve Bank’s problem in 1971.

What Is Money?

NIKHIL KAMATH: What is money?

RAY DALIO: Money is a medium of exchange and a storehold of wealth. Very important to recognize it as a storehold of wealth. What is a storehold of wealth?

Okay, so when you—in India, many people realize that gold is a storehold of wealth. Now, it’s the perception of money that it can be used as a medium of exchange, that I can go around the world and I can go from one country to another and I can turn it in and get value to be able to buy things. Right. So that is what it is.

And through history, gold has been the most used money, most accepted around the world. Then—but it’s the perception of it. And so when we think about, let’s say, money as we commonly think about it, which is fiat money, then that—

NIKHIL KAMATH: But there’s a difference there, right? Like gold is an asset which is not a liability on anyone else’s book.

RAY DALIO: Exactly. It’s money. It’s the only money. Well, maybe—we could talk about crypto. But yes, gold is the only money that you can have and nobody has to give you anything to have it.

Other money, all other money, is dependent on somebody giving you something. Whether they give you—and so it’s unique in that its confiscation risk is less than others. So that’s why, one of the reasons, gold is unique.

But it is also—back to your main point—it is a widely recognized storehold of wealth that I could bring around the world and I could use it. And it’s particularly important in that you can’t deflate its value, but you can’t print it. You can’t create more of it.

Gold as a Store of Value

NIKHIL KAMATH: I have a personal question here. I hold a lot of gold. For a long time I have kept 10% of my asset base in gold. The thing I wonder with gold is, while it can’t be replicated today—I mean there are people who are talking about it as a byproduct of fusion and how they will create it like they did lab-grown diamonds. I don’t want to extrapolate that far.

But with gold, isn’t it based on faith? Isn’t it a bit like religion? Because gold inherently—I get that it’s a great place to store value, but does gold have enough utility in isolation?

RAY DALIO: Money doesn’t have much utility, generally speaking. Right. If you’re carrying around cash, it’s paper, it doesn’t have much utility. So I don’t think it’s utility. I think you’ve got to get out of the utility perspective of gold.

Everything that’s money could be a risk. Does it stay money? So, for example, in the history of gold, when there were great discoveries of gold, then the value of gold is affected by the quantity of those discoveries. And if they could replicate gold, like they’ve been replicating diamonds, then that becomes a risk of gold.

So there are risks to all monies that are of a similar nature in terms of replicating the supply of them or also the acceptance of them as money. You know, gold fell out of fashion as money and bonds fell into fashion.

But the historic thing to know is that throughout history there is always the temptation when there’s a fiat money which could easily be produced. And then there’s the temptation of the interest rate. Okay, gold doesn’t have an interest rate. No interest.

NIKHIL KAMATH: In India it does.

RAY DALIO: Oh, gold has an interest rate?

NIKHIL KAMATH: So India doesn’t produce very much gold of our own. We end up importing a lot of the gold. So to be fiscally prudent, the government has this plan where if you buy sovereign gold bonds from the government, digital gold bonds, you get a—

RAY DALIO: That ain’t gold.

NIKHIL KAMATH: But you’re also able to monetize physical gold because you can lend it out for a certain percentage, but you’re still—

RAY DALIO: Dealing with credit risk. Okay, so what you’re getting paid for is credit risk. Right. So it’s not gold, it’s a promise to get your gold back. Right. Then that’s what money was, and that’s why it would have an interest rate. You have an interest rate on the promise to get your gold back.

That’s what everybody believed. And that’s the great trick through history—the great trick of history. And everybody believed it back then for a long time: “If I hold the promise to get the gold, then I will get an interest rate. And I could always turn my money in for gold. So why won’t I hold the promise to get the gold and get an interest rate on it rather than to hold the actual gold, which wouldn’t give me an interest rate?”

And that was the trap. And that is always the trap.

So when you look at it today, let’s say, and you think, “Okay, I think it’s just arbitrage.” Let’s say I can hold gold that gives me no interest rate. I can hold Swiss francs, which don’t give me much interest rate. I can hold U.S. dollars, which will give me, depending on the maturity, but let’s say will give me a 4% interest rate.

My basic question is: if gold goes up by more than 4%, then I’m better holding gold. And if it goes up by less than 4%, then I’m better holding the bond. And I keep thinking about that question, and the world keeps thinking about that question.

Alternative Stores of Value

NIKHIL KAMATH: When I think of store of value, I also think of gold, money, U.S. dollar, whatever currency. But if I owned equity in something very basic, like a farm, for example, which is producing a certain good, that makes it more fungible, almost. Right?

Comparing Asset Returns and Portfolio Construction

RAY DALIO: All assets are valued as their appreciation in price and their yield, the yield that you’re getting and the price change, and that’s a total return. And so all assets you compare on that basis. If you’re holding a farm, same deal, in other words, what is the yield on that farm from holding it?

NIKHIL KAMATH: Generally more than 4%.

RAY DALIO: No, I’m not getting into the specifics, I’m getting into the mechanics. So while looking at the markets as a whole, what I do is I just compare everything, right? Okay. Because all I want to do is I want to essentially borrow or be short those that will have the lower returns relative to those that will have the higher returns.

So it’s constantly calculations in that way, however you get there. And that’s true of your farm as it is on the other. But I think that the farm or illiquid assets should have to give me a higher return because I’m not going to have the choice of easily selling that farm and buying that farm. Whereas that choice, that flexibility, that liquidity.

NIKHIL KAMATH: But I’m talking about the public equity of a farm farming company.

RAY DALIO: Okay, then you are dealing with the public liquidity. I didn’t know that in terms of that. So then there’s no liquidity premium. Still, that same calculation, okay, what is the yield and then what is the price change relative? What is that? That’ll be my return. And what is that relative to the other things I could be in?

And basically you start to think, when you think of leverage, you start to think, okay, it doesn’t have to be about zero. Zero means like no leverage. When you start to think, okay, I can be. If the lesser returning asset can become a liability, meaning I can then borrow it and get higher here, then I want to get that spread. And that’s how I think of the issue of using leverage.

Then the issue is how do you deal with the risk? The risk is not something that is at like zero leverage. And it’s a black and white thing. It’s a continuous thing.

Two Approaches to Investing

Look, I should say the following. There are two important ways to invest, okay? The first is what if you can’t beat the market? Most people can’t beat the market. So when they start off, everything isn’t a bet. It’s like if I don’t know what to bet on, what is my portfolio?

And so you should start with what is that mix of assets if you’re not a trader and so on, what is the right mix? And that’s for example, why a lot of Indians hold gold. A lot of people gold, they don’t want to bet, but they just saying that’ll be a storehouse of wealth once you have that portfolio. That portfolio should be a well diversified portfolio. That assumes you can’t market time.

Then there’s the question, can you market time? Okay, so you’re asking me a market timing question. I want to distinguish it. I don’t think most people should play a market timing question. And when you’re asking me my market timing, I view that question with a lot of responsibility because maybe I’m right and maybe I’m wrong. I wanted to preface answering your question with that explanation and then I’ll go back to answering your question.

Money, Debt, and the Case for Gold

Money is debt and debt is money. What I mean money. So here’s mechanics. You’re holding a debt instrument. What you’re holding is a promise to deliver some money. And what that money’s worth will determine what the value of what you’re holding is. Okay? You’re really, you’re holding, when they hold that debt, you’re holding money that if it’s devalued, you’re going to be sorry. Okay?

And money is debt. And what I mean by that, when you’re holding your money, you’re holding it in a debt instrument. So money is debt and debt is money. And so now when I’m answering your question, to me there’s too much debt and we’re producing it too much.

And so when I’m looking at that, and I’m looking at around the world, and I’m not just looking at it in the United States, I’m looking at it in the UK and in France and in China and in most countries we’re producing too much debt. That means I don’t want that kind of money.

So when, because I don’t want that kind of money I look at. Well, that’s why I prefer, and have been preferring the holding of gold to that kind of money. I think when you think about your portfolio, you should start to think again. If you don’t have any, what should you be holding?

I think individuals or if you look at the quality of money and like gold, let’s call it, you want to stay. I would say I want to stay out of fiat currencies and I want to stay out of those things on a tactical bet, not on the strategic asset allocation bet.

When I do that, I think to myself, okay, what should I have? And an individual and most investors should have between 5 and 15% of their portfolio in a gold or an alternative money. Now it depends what other assets they have in the portfolio.

NIKHIL KAMATH: Even if they’re starting today to build a portfolio after the gold appreciation of the last year?

RAY DALIO: I think that they have to stop even thinking about the appreciation and market timing. As a starting point, you have to say, what amount am I going to hold? Okay, what is that right amount? And it’ll be beat. So the answer to your question is yes, forget about, and we can get into the pricing of gold and what it might do and what it might not do. But still, okay, I need to hold that amount because that amount is the right amount.

If you were to go through a portfolio optimization and you were to say what? Through a mechanical portfolio optimization, and you say, what is my mix of assets to create the right portfolio? If you’re holding stocks holding other assets because gold, gold is over a period of time, a low returning asset class like cash, it’ll produce, it has produced, and for logical reasons, it produces about a 1.2% a year real return. That’s a low real return.

But it is highly diversified because when the other parts of the portfolio do very badly, let’s say because of certain things, like we’re talking about stagflation, you print money and all debt issues, then the gold does very well. So it also has a diversification benefit in terms of the portfolio.

For those reasons, it is the most fundamental money that we know of, and it is at the same time an effective diversifier to other things that’ll get you to that between 5 and 15% of the portfolio.

Views on Bitcoin and Cryptocurrency

NIKHIL KAMATH: While we are speaking about currency, how do you view crypto and the world of Bitcoin?

RAY DALIO: Bitcoin is limited in supply and its perception of money. It is a form of money. It’s perceived as money as a storehold of wealth that is unlikely to be significantly held by central banks. And many others because of a number of problems it has.

Transactions could all be followed in Bitcoin. One can monitor what the transactions are, governments can monitor what the transactions are and governments can interfere with those transactions. Just like we talked about earlier when we talked about, you know, gold is the only asset that you can have that they can’t mess with and control. You’ve got it. Okay, that’s not true of Bitcoin.

And then there are other issues in bitcoin. Like if we talked about the possibility, would somebody make synthetic gold like they would make synthetic diamonds, as a risk? Well, in terms of bitcoin being cracked. Broken all sorts of things and controlled, it has those issues. Okay, so that’s how I look at Bitcoin.

NIKHIL KAMATH: You’re not bullish.

RAY DALIO: I have a little. No, no. I’m bearish on fiat currencies and bearish on. So when I look at the world, I’m just trying to say, then I say, what do I hold? Okay, so I hold a little bit of bitcoin. I have a little bit of Bitcoin. But for me it’s not as attractive as gold for the reasons you asked me. My thoughts, those are my thoughts about Bitcoin.

A stablecoin is attached to the fiat currency. So it goes down like the fiat currency goes down and it doesn’t give an interest rate. And they’re toying around with whether it gives interest rates or not. But there’s not a model that I’ve seen. So so far it’s used largely for immediate quick transactions and not a storehold of wealth, but immediate quick transactions. And it may be an efficient way to have that, but it’s not my storehold of wealth yet I don’t see the merit of it.

Portfolio Allocation Strategy

NIKHIL KAMATH: So if I were to build your portfolio Ray of store hold of wealth, just that component, let’s say 5 to 15 goes to gold. How much goes to. You said you have a little bitcoin. What percentage would that be?

RAY DALIO: I’m not going to give you what I’ve got, but I’ll give you just general guidelines. It depends on the type of equities. You can’t talk about equities as equities because they’re too divergent. As we’re seeing, for example now it’s so contrary. The magnificent Sabbath and AI and tech is such a dominant thing. So in order to think about portfolio construction, you have to think what type of equities? Where do you hold those equities?

NIKHIL KAMATH: I’m not talking about equity. I’m talking about the assets that you hold with relatively lower risk, like gold and treasury and Bitcoin, which is not you taking a bet on a particular industry, but someplace to park money. What else?

RAY DALIO: I see. In other words, you’re not asking whether there’s equities in the portfolio or bonds or what country or anything like that. You’re just saying that piece of equities. Okay. Then you think about that on that store hold. Well, you start to think about what that nature of that piece thing is.

There aren’t many. Some might say there are gems, some might say there are works of art. I mean, basically, when they say these things, they’re going through criteria which is, can I move them around? Are they store holds of wealth that are recognized in different places? They’re not like real estate. Real estate is something that’s nailed down in a location. It’s easy to tax, it’s not transferable, and so on. So it’s, you know, those kinds of things. Right.

Real Estate and Taxation

NIKHIL KAMATH: Do you think real estate should be taxed? Like, we have very low property tax.

RAY DALIO: I think, I think what should be taxed? I mean, like, if I was to create a priority list, first tax this, last, tax this, and so on. And I would say in real estate, I think there’s the question of what does it mean for the economy or what does it mean for those who are being taxed, or what does it mean for those who are taxing?

I think the practical aspect of real estate in terms of taxing is because the individual owner of real estate can’t take it with them. It is a very practical asset to tax for the government because they can always tax that and you can’t take it with you versus the other.

So I think while, you know, what should be taxed is dependent on who you’re asking should. It’s a. For the government, it’s a very effective thing to tax for an individual, it’s another in terms of its economic impact. I think it’s fine to tax real estate and there’s nothing. You got to tax something.

I think nobody. Do you want to have such a tax burden on any one thing that it’s crushing to the economy? Just generally taxes, I would say, you know, I want to spread them out. And then I would tax things that are harmful. You know, like what? I don’t know if they call them syntax.

NIKHIL KAMATH: Yeah.

RAY DALIO: Okay. If. I don’t know, maybe cigarettes or, you know, I don’t know those things. And then some things that are harmful and mutual, the least things you would tax are those things that are helpful. Yeah.

NIKHIL KAMATH: I make a case for taxing real estate because I think a lot of the benefits of corruption and the bad money, the black money, in a way, sits in real estate, and that might be a good way to bring it into the tax system.

RAY DALIO: Okay.

Learning from Proximity to Success

NIKHIL KAMATH: Personally, if you go back to your life, you spoke about going to college after you began trading, after you were a caddy and after. Do you think there are roles today, like the role of academy, where you work around influential people and you can learn by virtue of being in their proximity?

RAY DALIO: It’s always, it’s always, of course, great to be about, around smart people. If they want to be an entrepreneur, whatever it is, be around the smart entrepreneur and talk. Yeah, that’s great. Sure.

NIKHIL KAMATH: What was caddy, the job of a caddy back then? What do you think it would be today?

RAY DALIO: Well, they do the same. They can. They carry bags or they put them on golf carts and. But they walk there. And if you’re walking with people who are, it’s an entrepreneur. Or if you were a physicist and you walk in with. Want to be a physicist and you’re.

NIKHIL KAMATH: Talking with a business, any suggestion of other jobs, like the caddy job today?

Playing the Game: Ray Dalio’s Advice for Young Investors

RAY DALIO: Whatever gets you. Two things I’d suggest. First, play the game. If you have an opportunity to play the game, you can play the game. One of the beauties of the markets is it doesn’t take a big portfolio to play the game. At $50, I went into the game, and because the market pieces can be broken up into small sizes, you can almost play the game the same as a huge investor can play the game. Ease of access, you’ve got that in terms of those.

So the game that you get into at an early age will influence you a lot. If I look at, like age 12, I’ll give you that example. There’s some people who say, their psychologists will say prior to 12, people learn differently because puberty, at the age of puberty, prior to that, you learn. If you’re learning a language or learning a sport or learning things anyway, the earlier you start learning, the better it is, the more internal learning that you have.

And so play. Play the game, whatever it is. Bill Gates and a lot of the key tech people like to play gaming. They were in gaming and they would hack the games and they would play in the computer, and that’ll affect them. So play the game. Find a game that you love and ideally one that makes money. If you can do those two things together, that’s a terrific thing. Play the game and then be around people who are pros at playing the game so you can chat about it. That’s a good path.

Leverage, Speculation, and Qualified Investors

NIKHIL KAMATH: Leverage in speculation, especially around equity markets across the world, many people seem to be coming down on qualify investor more before you allow him to speculate, buy futures or options. Do you think that should happen or should a young kid who’s 18 and has that $50 be allowed to speculate?

RAY DALIO: These are questions about, I mean, they’re broader questions about being taken advantage financially versus learning experiences. I don’t mind any kind of risk. Something that becomes a tolerable amount of risk that’s different from exploitation. And so I think that it’s incumbent, it should be incumbent on anybody who’s selling any investment product to be dealing with it at a certain age to be thinking about am I exploiting that person or not? So that’s. But that’s a balance for regulators to deal with, right?

Prediction Markets and Their Future

NIKHIL KAMATH: Do you have a view on prediction markets? Like, I know Shane, I like them.

RAY DALIO: I like them. Yeah, yeah.

NIKHIL KAMATH: Shane and Tariq are friends of mine. They both live in New York, Kalshi and Polymarket. In the future, does a lot of what is happening on stock markets move there? Because you can speculate on just about anything.

RAY DALIO: Mostly different events to bet on. And I think events affect companies, but they’re two different things. So I would say it’ll be something to speculate on, but. And it’d be something that smart people may use as a hedging device against owning an equity. Like if this event happens, that event that you can speculate on and that might have an adverse effect to the stock I’m holding. There’ll be all sorts of engineering and so on. I would imagine you’d see something like that happening, but we’ll see.

NIKHIL KAMATH: So you would use it like a leading indicator to make stock decisions.

RAY DALIO: I’m not a leading indicator. I wouldn’t view it as a leading indicator. I mean, you might think about it. It gives you information, but it’s a vehicle to speculate. It’s a vehicle to use to hedge. It gives you some notion of what those who are speculating on it is. There are certain things that I’d like to try to get across here in our interview that I’d like to, what is the difference between wealth and money? There are certain things that if I can get across to your audience, I’d like to get across.

NIKHIL KAMATH: Do you want to go wealth and money first?

Understanding Wealth vs. Money: The Bubble Dynamic

RAY DALIO: Okay. Yeah, bubbles and wealth and money. People are not used to dealing with the difference in them. And it’s very important. Wealth can easily be created the way we account for wealth. For example, if you start a company and let’s say you want to make a unicorn, you sell $50 million worth of it, you value it at a billion dollars, you’re now a billionaire, and it counts in wealth as a billion dollars. And there’s. But nobody would pay a billion dollars for that issue combined, okay? And that’s a lot of what’s happening now with wealth.

And if you look at the 1920s bubbles, or you look at those, what you see in one way or another is that wealth goes up and people feel wealthy, but the wealth isn’t worth anything if you don’t sell it. Convert it into money to spend, right? So people should know that, okay, that when they have this wealth, they perceive they have the wealth and so on. It’s not worth anything unless you can convert it into money and spend it other than its utilitarian value, but it’s not worth what it is. And that’s how bubbles are created.

The mechanics of how that bubbles are created, in one way or another, that happens, okay? Then there comes along the need for money. So what happened and how does that work? For one reason or another, somebody’s got to get that money. That money. Who. And they have wealth, so they sell wealth in order to get money. And then the bubble comes down.

So if you look at the 20s and there. Or you look at any of the bubbles, the Japanese bubble, or you look at the 2000 bubble and so on, you can see this dynamic because it can be created without money. Money is the means that settles transactions. It’s very different from credit. Okay? When you get credit to buy something, you have an obligation to deliver money. But when you get money and you buy something, you have no obligation to deliver anything. You’ve paid for it. You’ve settled your transaction.

So now when I. When we look at this, we have right now a very high ratio of wealth to money. And this is particularly important now, okay? And there’s a. And we have a very large, also wealth gaps and values gaps. But when you have such a large wealth gap and you have populism of the left and the right and so on, and you have the notion of wealth taxes. You can have wealth tax as wealth taxes come in, and the wealth is so large relative to the money. If you’re not taxing, well, wealth, then people can get very wealthy and no money can be raised for the taxes.

So there’s a real pressure to tax wealth. And if you tax wealth, then people have to sell in order to get the money to pay the taxes. And that creates a dynamic that can pop a bubble. So in my opinion, we’re in a bubble. Okay. By various measures of it being in a bubble and. And people feeling very wealthy. But you have that vulnerability. So that is largely the dynamic of when we see these wealth booms and then the wealth bumps. I wanted to convey that. Okay, so that’s the first thing I want to convey.

The Wealth-to-Money Ratio Today

NIKHIL KAMATH: Is there a way to calculate wealth to money ratio, which is.

RAY DALIO: Yes, I do. I do. Right. Wealth to money ratio right now in the United States is about eight and a half to one and so on. And when you look at it, and then also then there’s what it’s in the stock market is right now about 3 to 1, and that’s very high. If you were to go back to 1929 or 2000, it’s at about the same level as it was in those times.

NIKHIL KAMATH: Is it higher today than 2008 and 2000?

RAY DALIO: Well, 2000 was the peak.

NIKHIL KAMATH: How much was it?

RAY DALIO: Same thing as today, the same level. If you take 1929, 2000. And now it’s all right. Now if you look at that chart, you can see that chart. So we have a lot of wealth and a lot of equity wealth relative to money.

NIKHIL KAMATH: Do you think it could be possible that tomorrow wealth taxes collected in equity and not money?

RAY DALIO: No, because they have to spend it and they have to pay it. In other words, the liability that it’s going to fund can’t be paid by. I’m going to give you a piece of my farmland. You know, you got a piece of.

NIKHIL KAMATH: The farmland, the government gets a piece of the farm.

RAY DALIO: Yeah, that’s what you’re suggesting. I don’t think that’s realistic. You got a piece of the farmland.

NIKHIL KAMATH: Right.

RAY DALIO: Okay. You’re not going to feed people in inner cities with a piece of the farmland.

NIKHIL KAMATH: Right. If that were to happen, people will have lesser incentive to work on the farm because eventually the government will own too much.

The Five Big Forces That Drive Everything

RAY DALIO: I don’t think so. So I want to talk about the five big forces that drive things. Yeah, if I can. First, there is a debt, money economy, markets, dynamic. Credit creates buying, but it creates debt. And when it creates debt, there’s an obligation to pay back. And so how that dynamic works, the second big force happens simultaneously is the internal political force. You experience in India. Every country does. We experience here.

There’s an element here of that political force that there is left and right, in other words, the rich and the poor and the conflict and how to run a country and so on. So that political force. And there’s a cycle, just as there’s a debt cycle, that means that you cannot increase your debt past a certain point and that changes. That monetary order cycle lasts something like a lifetime, and that’s the debt cycle.

There is a political cycle that goes with that, that has the left and the right and the political. And we are in the middle of that. So the nature of our governance system and the nature of democracy, the risk of do you. We’re past the point of saying that we’ll abide by the rules, okay? It’s a it. When you have populism of both sides, it’s a win at all cost type of approach. Will you accept election results? Can the government compromise? Can it govern in that way? That political cycle is number two, and it matters a lot. All these cycles relate to each other.

Number three is the geopolitical order, the world order. In other words, we came out of 1945. You come out of the end of war. And then the dominant powers determine how the world order works. Who has what power, what the rules are. That was dominated by the United States because of the power it had. And then you have changes in relative power. The emergence of China, the relative decline of the United States, India’s role and other places role.

That world order has changed. That world order has gone from a world order that it was a multilateral world order, sort of with rules like the United Nations and the World Trade Organization, in the World Health Organization and the world this is, you know, the World Bank and the world this and the world that in terms of multilateral governance. And that is over. Okay? So we no longer have that kind of a world order. We have a world order which is dominated by power, power struggles. And as we deal with that, so those three cycles, that money cycle, that debt money cycle, that internal order and disorder cycle, that international world order cycle, they tend to coincide throughout history.

When you have that convergence, you almost have a perfect storm of that. The fourth influence through time has been climate, acts of nature. Droughts, floods and pandemics have killed more people than wars and changed more orders. And number five, always through history is man’s inventiveness, particularly of new technologies.

So everything that we would ever talk about in the markets, in the economy will fall under those things. Practically everything. And it’s the interrelationship of those things and the arc through history that one needs to see in order to understand what’s going on. So my basic view is that there are many things that happen over and over through history that haven’t happened to in our lifetimes that are very educational, very valuable in being, making decisions.

Making Money with This Framework

NIKHIL KAMATH: I’m going to ask you a question, Ray. How does a youngster, this is a very candid, pragmatic question. How does a youngster in India who’s 25 years old say his name is Nikhil and he’s living in India, in Bombay? How does he make money using all this information and framework? Because that’s his objective.

RAY DALIO: Play the game.

NIKHIL KAMATH: How do I use this information to play the game better?

Learning Through Experience

RAY DALIO: I think there’s cerebral learning and there’s visceral learning. So I can tell, we can talk like this, but it’s a different thing once you start to get into playing the game, whatever the game is. Little entrepreneur on street corners selling something—that’s you play the money game. Whatever way you play the money game, maybe it’s in the public markets, maybe it’s you buy a little piece of real estate or you have a hot dog stand, I don’t know what it is.

But you play the game. And as you start to play the game, you’ll start to learn the fundamentals of the game. And we talked about this—be around people who also play the game. So while you’re playing it, you will learn through your experiences and your reflections and the help of other people.

NIKHIL KAMATH: I think everybody wants to play the game and they’re attempting to play the game. But what will be really cool is if we can get an insight from you of how to play the game. Like, if I were to be looking to begin today, should I look at value in public markets and private markets? Should I be—

Finding Your Game

RAY DALIO: I think it’s more like the opposite. What happens is you find your thing. There are many different games. If you look around you, there are many different games. I have my grandchildren sell hot cider in the winter in a park and then they understand capital formation. I have to buy the flask, I have to buy the table—that’s capital formation.

Then they understand when they go out that if I can produce it, what’s my incremental cost, unit cost for producing it, relative to—I could sell it at this, I have a margin of this. Then they understand margin. And then they understand that they make money when that overcomes their capital cost—the playing the game, they start to think about that way.

Then they start speaking with others. “Gee, can I, where can I get the cider cheaper?” Or whatever, and so on. So there are all these games around you, and start to play. Then you’ll ask the questions, then you’ll dig and so on. Or yeah, you can find somebody who will help you. They might say, “Hey, here’s this little job that you can do.”

Whatever it is, it is that little germination that then creates empires. That’s the process of going from wherever you are in India to—or wherever you are. For me, caddying on a golf course in the United States. That’s the process that allows that to grow and develop over a period of time.

Understanding Your Nature

It’s very helpful to understand your nature. People have different pulls. Some people are more risk averse. Some people like to pay attention to the big picture. Others will handle risk. Others will pay attention to the details. What is your nature?

So I created online, it’s free online, a test called Principles You. I recommend you take it. Everybody take it. And through answering questions, you’ll learn about yourself. And if you also have other people that you know, you have relationships, you’ll look at them to help to identify their nature, what are their inclinations.

And I think that what really is the journey in life is to try to know about your nature and find the connection to the right path. So there are many right paths for all your audience. I want you to know your nature and try to match it up with what the right path is for you.

What Makes a Successful Trader

NIKHIL KAMATH: For the trader in me, if I were to go back in time and be 18 years old again, if I were to specifically ask you—you model people a lot in the sense that you psychoanalyze them. You have them go through different kind of testing to figure out what psychology is suited to what. What works for a trader, Ray? What makes a trader successful?

RAY DALIO: There are many. When you use the word trader, it has an implication of a certain way of operating that is only a small percentage of the total way of investing. So it’s the person who—it could be buys this from here and sells it from here. It could be the form of, you know, you buy a bracelet here and you sell a bracelet here and you do it. Or it could be a stock trader and so on, so forth. And that implies like buy, sell, and so on.

There are many other ways. I think you have to, if you’re understanding, let’s say investing, then you have to understand the various ways of converting one thing to another thing and making a profit. And that’s why I give the example of the cider cases and so on for being able to do that. A trader, I think biases it too much to the guy who’s flipping.

NIKHIL KAMATH: But I think for this example, let’s say what is the archetype of a trader, bar investor, that would help him succeed? Psychologically.

Understanding Cause and Effect

RAY DALIO: First you’re going to go into it and you’re going to get hooked on it, like getting hooked on a game. And you’re not going to know anything. And then through those experiences, what you need to do is be curious to understand mechanics. What are the cause-effect relationships? What are the things that make the market go up or down so that you can—and whatever it is, whether you’re a day trader or whether you’re an investor, you have to get into the mechanics and you have to learn the mechanics.

And through that experience, if you think and you’re curious and you can research, then you can do that. I am creating a platform that anybody can use to help them do that. In other words, there’s information. And the way you make decisions is your brain brings in information and it puts it through criteria that determine action. That’s how the brain works. That’s all the decisions.

And so you have to learn what are the criteria. And the criteria is cause-effect relationships, because causes happen before effects. And if you understand cause-effect relationships and you understand the causes, you can bet on the effects that will be happening from that.

So you have to be curious and you have to be analytical to understand those cause-effect relationships. You begin a journey. Because if you’re just gambling and you don’t understand the cause, you won’t have an edge. You need to have an edge. And that is by knowing those cause-effect relationships and playing your bets and how to organize your bets so that there’s a diversified group of bets. Because the power of diversification means that you can greatly reduce risk without reducing returns.

NIKHIL KAMATH: What else do we have? Curiosity, understanding cause-effect relationship.

RAY DALIO: Being addicted to the game and getting the best guidance you can get.

NIKHIL KAMATH: How does one get guidance?

RAY DALIO: Oh, guidance is all around you. I’m part of the guidance here today. There are courses you can take. Once you have the curiosity, then you will dig and you will learn and you will experiment.

The Power of Curiosity

NIKHIL KAMATH: Is that what worked for you, Ray? You still come across as a very curious person. It almost feels like you’re trying to answer the question of life.

RAY DALIO: Yeah.

NIKHIL KAMATH: That can’t be answered.

RAY DALIO: In a way, I’m learning more every day.

NIKHIL KAMATH: Right.

RAY DALIO: And I can’t answer it all. Understand it all, but I understand a lot more and I get a kick out of it. You know, Albert Einstein, supposedly on his deathbed was still trying to figure out problems. I can imagine me doing that because I love the problems and like to learn. So yes, I have that addiction to learning.

And then one of the great things about this game is you bet on it and you get a score. So you can measure my performance down to three decimal places and so on.

NIKHIL KAMATH: Has this taken a lot of time? Changing world order, the research, the amount of effort?

RAY DALIO: Yes, but it’s a passion.

NIKHIL KAMATH: What do you hope to achieve at the other end?

Three Stages of Life

RAY DALIO: For me now, my main thing is, can I pass it along? I’ve got a journey and I learn and I love it and all of that. But it’s still a passion. But what I’m really also trying to do as I approach this stage in life is to pass along.

I think there are three stages. For me, there are three stages in life. There’s the first stage where you’re dependent on others and you’re learning. You go to school, you’re not really doing it, you’re just learning. And you have that dependency.

Second stage is you begin the second phase of life. Very different stage is you’re working and you’re trying to be successful and others become dependent on you. And in that phase, you’re dealing with the real world in terms of being able to do it. It’s no longer academic. And then you have your career and I started Bridgewater, largest hedge fund in the world. I started out of a two-bedroom apartment. I ran it for 50 years and then I passed it along. Wow, what a great journey. And I learned a lot.

But now I’m at a phase in my life where what I want to do, I’m in the transition to my third phase. And in this transition, I think that there’s an instinctual desire to pass along what you’ve learned, to mentor. Why am I doing your show? Because I have that desire. So that’s what’s important.

NIKHIL KAMATH: And why do you have the desire? I’m just asking.

The Instinct to Pass It Along

RAY DALIO: I think it’s instinctual and it’s intellectual. It’s instinctual almost. We learn—man’s subliminal understanding goes back millions of years. Even though man only was 250,000 years old and so on. Because of what becomes—why do we love our, raise our children? Why do we do many things? There’s a lot of subliminal things that enter into why we do things.

And then there’s—and it’s intellectual. What do I want to do? It’s the most valuable thing I can do. Karma. Karma, what goes around comes around. In other words, that notion that—so I believe it, I feel it, and I want to do that. So it’s both intellectual and emotional.

Meditation and Karma

NIKHIL KAMATH: You’ve spoken about karma and meditation. And does that play a role in your investor career? It makes you a better investor.

RAY DALIO: These are dominant things. Meditation has been the biggest source of success that I have. It’s given me an equanimity. It’s given me—when you transcend, I do transcendental meditation. Listen, when you transcend, you’re going into your subconscious. And as you go into your subconscious, it helps align your subconscious with your conscious. It brings back a creativity, brings back a flow.

Because like creativity, if you go take a hot shower and you relax and so on, ideas can come to you much better perhaps than if you try to muscle them out. So meditation has played an important role.

And then karma I believe in. And the reality is that by people mutually helping each other, and not just people, but operating in a way that’s also helpful to nature and the world, there is this greater good. And what happens is it’s very functional because little things that won’t take much for me to help somebody else can make a life difference to them. And then they, when they do something, whether it’s to me or whether others, you create an environment like that, you create a better environment.

So not only is it practical, it also has the effect of creating this wonderful environment. You look at studies of history and you find in studies of history what brings about happiness and health past a certain amount of money of basic subsistence life. There’s no correlation between the amount of money you have and the amount of healthy happiness you have.

The greatest source of health and happiness across societies is community. If you have a good community and that’s a source of helping it and well-being. So I think that these are laws of nature and they’re just reality when I look at them that way. So yes, your question was, does meditation and karma play a role? It plays a role in everything.

NIKHIL KAMATH: You spoke about community, Ray. You’re spending time in Abu Dhabi for example, how do you find that place culturally?

Building Successful Societies: Lessons from Around the World

RAY DALIO: Oh, I love it. I started going there 32 years ago because their large wealth fund hired me and hired Bridgewater as an investment. I think that they understand karma. Each society has, may call it different things and so on, but they understand most important things.

And also to grade a successful society, what is required to create a successful society is basically three things. If you knew this well, then you have a successful society. The first is teach your children, educate your children well so that they are capable of succeeding, earning money and so on and living a life. And also that they’re civil, they understand civility.

Have them come out to a civil society in which people work well together to make good things happen and stay out of wars, stay out of a domestic war and stay out of an international war. If you do those three things well, you will have a successful society.

Okay, so now if, when I look at the places you could almost look at, that is, is there harmony? Is there? Do you educate the children well and do you have broad-based prosperity? In other words, that it works well for most people, right? These are fundamentals.

And so in the Gulf countries, particularly Abu Dhabi or the UAE and Saudi Arabia and so on, even there’s a Bedouin culture and so on that has elements, a lot of elements in those things. It exists in other places, in various places. Success is their version of it.

If you go to Asia and you go to Singapore, you go to China, they do it in their Confucian way. Okay, in terms of harmony, how do you do harmony? Or what is common prosperity? How do I make it that most people are benefiting and that if you look at the accomplishments within India in terms of the development and so when I say that civility, certain basics, do you earn more than you spend? Do you have a good income statement and a good balance sheet?

Okay, these are basics. You have these basics. You will have a successful, I’m not saying not challenging, but you’ll have a successful life and you are the successful society.

NIKHIL KAMATH: You’ve had a very eclectic experience in terms of China, Russia, Abu Dhabi, Saudi. How are they like, how are these people to talk to? Can you tell us something about them?

Characteristics of Great Leaders

RAY DALIO: Well, the best leaders are reflective. They go above being how the world evolves, where they are in the cycles. They understand human nature and they care deeply about the well-being of their people. And they’re practical that those are, you know, the characteristics.

So we have conversations that are quite like this and then you get into this particular, like, what to do, you know, how do you deal with the conflict? Okay, so there’s a conflict and like a general rule, be neutral. Okay?

Because if you look at the history of wars and so on, there are winners of the wars, losers of the wars, and neutral countries. The winners of the wars lose, meaning they still get deeper in debt and they have the consequences of the wars. The losers of the wars get wiped out. They lose everything. And the neutral countries prosper from the wars even. That’s how they accumulate money and they don’t have that problem.

And so it’s always better to operate that way. Now, if you look at history and you then say, we play it today, okay, so the conversations are like that.

NIKHIL KAMATH: You’ve liked China for many years. I think one of your kids went to live in China. How do you see the global dynamic playing out between China, America, Russia? Maybe you can opine on India as well. What do you think will happen next?

The Changing World Order and Global Power Dynamics

RAY DALIO: Now we have the changing world order. The United States and other countries have a different mentality about fighting and so on and so forth. There may be that dynamic. So now you have the change. Power matters. Power in all of this. It’s not the rules of the game. It’s not etiquette. It is power matters. And that is the dynamic that we have.

What’s most important is how healthy the country is. Each country more important than the international way. If you’re strong, you’re strong. That’s the most. So be strong and healthy.

And so there, the United States is going through its challenges. We could, we talked about that. We could talk about that more. And then China is going through its challenges, India is going through its challenges. But how it goes through those challenges to do the things that I just said are effective, to make an effective country is the most important thing.

So I don’t think we’re going to, there is a greater risk that we can have. I’ll tell you. Military war. We are certainly in the classic wars that happened before a military war. We’re in a trade war, we’re in a technology war, we’re in a geopolitical influence war. All of those are in that. And that’s the dynamic that’s happening.

If you’re asking me what it means, I think that it’s probably that they’re not, it’s lower risk of, you know, a big, it can happen. You have to be careful. But I think that, and it’s how each country takes care of their own and becomes strong and healthy, that matters most.

NIKHIL KAMATH: And how do you think the dynamics between them will change? If I were to get more specific, as a proportion of world trade, who will do better? Will it be 10 years forward? Will it be China or the US and also how does India fit into this? What can we do better?

The Technology War and India’s Potential

RAY DALIO: I think the technology war is the most important war that almost whoever wins the technology war will win almost everything. I think that right now you have a situation where they recognize that each side can do harm to them and actually is using techniques.

And so we’re now in a period of time of inter, eliminate or reduce interdependencies. That there’s a list that both countries or all countries are going on and they say how can I squeeze the other? What dependency do they have that I can use to squeeze the other? Or what dependency do I have that might be used against me to create squeezes?

And that’s in capital as well as trade and so on. So everybody’s now going to kind of this independence and you know, minimizing interdependence because that’s the smart thing to do. Whatever. Because I will be squeezed if I can be, it’ll be used against me. So that’s where we are on that.

And then compete to become most effective, most powerful, most rich, most powerful. They’re both doing that. And technology will be important. So I think that over those periods of time you’re going to see that dynamic.

I think China, but they’re ahead and behind in different ways. For example, the inventiveness of new chips and the most advanced chips, the United States is a bit ahead, is ahead. But the application to use the chips, whatever AI there is to be able to integrate it into life and making it for the society most applications and most effect, China’s ahead.

I think that India is at a wonderful arc in terms of its circumstances, its potential and what it’s developing. And I think that President Modi is very much like Deng Xiaoping for China. And what I mean by that is that he’s creating changes.

And when you have a country that can build its infrastructure and can build on that so that you and you don’t have much debt and you have a large talented population in many ways that for these reasons I’ve created indicators, leading indicators of what countries have their ingredients to project the next 10 years growth rate. India’s best.

India is going to have probably the, it has the best fundamentals to have the best growth rate in that because you’re going from not having enough money to having that has infrastructure. You have to build infrastructure. When you’re building infrastructure, when you’re creating the things that are happening in that not only all the different infrastructure, including the ability to get credit and the ability to do transactions and so on, in that that produces a growth curve, particularly if you don’t have very much debt and you have talented people.

So I, for those reasons, I think India over the next 10 years has all the ingredients to really be the strongest growth rate and an improvement. However, it still has development to do. It is more akin to where China was, you know, 30 years ago maybe than where China is today. So it has that growth, the actual power of it is not as great as those other two countries.

Advice for Young Investors

NIKHIL KAMATH: Ray, I’m going to ask you the last question of today. If you were 25 years old and in India and you had either a hundred dollars to, if you had a hundred dollars to invest somewhere, where would you put the money?

RAY DALIO: The first thing I would do is ask myself, what do I need most to be most successful? And I would secure that right. It’s not just return on investment. Does that mean that I can take a little bit of that hundred dollars and I could start my little business? Or do I secure that hundred dollars to have my education, that I’m being able to operate whatever is going to, as a young person, invest in their own success to be able to learn?

How do I learn? Do I listen to your podcast? What is it that is going to allow me as that young person to be able to invest in myself and learn and get better? So that’s the most important thing. That’s the best investment I can make.

NIKHIL KAMATH: Super. Any last words for our audience?

RAY DALIO: No, just thank you. I would say if you are interested in staying in touch, you can do that online through LinkedIn and various media. And it’s my pleasure. Thank you. Thank them to be able to communicate this way and I hope it’s of some use.

NIKHIL KAMATH: Thank you, Ray. I hope you come visit India someday soon.

RAY DALIO: I will look forward to it.

NIKHIL KAMATH: Thank you so much.

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