As the guy managing the largest hedge fund in the world, Ray Dalio brought plenty of credibility to his interview with Jack Schwager in Hedge Fund Market Wizards. Dalio has a fantastic track record and is a pure system trader that exclusively uses fundamental data.
In his interview, it stuck out that he repeatedly referenced that the only decisions he makes is whether or not to adjust the system. When it comes to the actual trading, he never overrides his systems. This alone is an excellent lesson for any system trader.
Top Five Quotes From Market Wizard Ray Dalio
You can read about what happened in the market after Mexico defaulted, but that is not the same as being in the market and actually experiencing it. I particularly remember my surprises, especially the painful ones, because those are the experiences that provide learning lessons. – Ray Dalio
This is the type of thinking that provided the inspiration for my Live Trading posts. It’s one thing to debate whether you would have been able to sit through a drawdown well after the fact when you have nothing invested. I suspect it is tremendously more difficult to actually sit through it with real money on the line. This live trading case study has already taught me a great deal about system trading, and I believe it will be a great source of information for anyone just beginning to explore different types of systems.
Dalio discussed at multiple points in the interview how live trading experiences helped him when similar situations occurred later in his career. I am hopeful that my trading experiments can provide the same value to my career, and as an added bonus help anyone else who reads them.
In trading you have to be defensive and aggressive at the same time. If you are not aggressive, you are not going to make money, and if you are not defensive, you are not going to keep money. I believe that anyone who has made money in trading has had to experience horrendous pain at some point. – Ray Dalio
As traders, we must walk a fine line between going after huge returns and making sure we protect our capital. Most of the world thinks that these two things are mutually exclusive. Dalio disagrees. Many of the Market Wizards have become Market Wizards because of their tremendous returns combined with fanatical risk control. This is the ultimate ideal that all great traders are chasing after.
The last part about horrendous pain struck me funny. It’s actually kind of scary because I don’t want to experience that kind of pain.
In contrast, we test out criteria to make sure that they are timeless and universal. Timeless means that we look at a strategy during all different times, and universal means that we look at how a strategy worked in all different countries. There is no reason why a strategy’s effectiveness should change in different time periods or when you go from country to country. – Ray Dalio
I was very interested in Dalio’s definitions of Timeless and Universal. I was impressed that he made a distinction between the two. In my search for trading systems, I generally tend to gravitate towards the simpler, more robust systems. These are precisely the ones that work in any time or place.
Learning solely from actual experience, however, is inadequate because it takes too much time to get a representative sample to determine whether a decision rule works. I discovered that I could backtest the criteria that I wrote down to get a good perspective of how they would have performed and to fine tune them. – Ray Dalio
This is the flip side to my live trading argument. Luckily, it doesn’t have to be an either-or proposition. I can pursue my live trading experiments to learn from that angle, and at the same time be learning to backtest systems. I plan to start posting about those backtests very soon.
The key distinction Dalio makes is that the goal of backtesting is to test out trading ideas, not learning how to trade.
The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment. – Ray Dalio
The quote struck me because the first part is common sense investing, but the second part seems to go against typical trend following approaches. This shows a bit of the fact that Dalio’s systems trade exclusively based on fundamentals.
In an effort to make this site more interactive, leave a comment on which of these five quotes most impacted you and how it describes some aspect of your performance!