In his 2008 investor letter, Dalio said of his investing perspective, “In buying an investment, one is making a lump sum payment for a future income stream. The investment will make money if the present value of that income stream is more than the current price. So, to assess value, one has to estimate that income stream, take its present value and compare it to the prices to assess its cheapness.”
He was also George Soros-like in his beliefs about markets, “Human nature causes reactive decision making that leads to psychological swings between fear and greed that is reflected in prices.”
Dalio tends to make relatively small, but numerous equities purchases, as the chart below demonstrates. Last quarter, he added 121 new stocks to his portfolio, which contains 395 equities total. Most of these stocks are up since September 30, as the chart also shows.
One example of Dalio’s strategy of investing in market trends is apparent in his large positions in index ETFs and his activity with them recently. He bought 17,697,200 shares of the S&P 500 ETF (SPY) in the second quarter of 2009, shortly after the S&P 500 fell to a nearly 13-year closing low at 676.53 on March 9 of that year and the price hit its trough of about $69 per share. In January of 2009, Congress had passed the $819 billion stimulus package to rescue the economy. Since the beginning of the second quarter of 2009, the price for the S&P Index’s shares have increased approximately 34%.
Dalio has added shares of the S&P almost every quarter since then. Most recently, he bought 229,200 shares in the third quarter at an average price of $123. Though the index has zig-zagged greatly this year, it is down about half a point year to date.
His other ETF holdings coincide with statements he has made recently on the global economy. Dalio added 8,676,700 shares of the Vanguard MSCI Emerging Markets ETF (VWO) in the third quarter of 2011. The purchase brought his total holdings to 27,723,922 shares, or 14.8% of his portfolio. The global economy has dichotomized to developed debtor nations, which are deleveraging, and emerging creditor countries, which are increasing leverage, Dalio said in a recent Bloomberg article.
“Dalio expects emerging creditor nations to be tomorrow’s economic leaders. Countries such as China and India that have currencies and monetary policy linked to those in the U.S. are experiencing inflationary bubbles because their interest rates are too low, he says. They will have to unlink from the U.S. or face intolerable conditions. Emerging economies will account for 70 percent of global GDP in 15 to 20 years versus 47 percent now,” the article says.
The Vanguard Emerging Markets ETF contains stocks of companies in emerging markets such as Brazil, Russia, China, Korea and Taiwan, and closely approximates the return of the MSCI Emerging Markets Index over the long term. Its top holdings include Samsung Electronics Co Ltd. (SSNKF.PK), Petroleo Brasileiro SA (NYSE:PBR), Vale SA (NYSE:VALE), and Gazprom (OAO).
Vanguard cautions investors that the fund is subject to wide swings and is “only appropriate for long-term goals.” Last year would be an example of such volatility. The ETF swung to a loss of 17.5%, following a gain of 5.1% for the last three years. Since inception, it has returned about 8%.
Dalio owns 19,776,300 shares of iShares MSCI Emerging Market Income ETF (EEM) as well, a holding he has been adding to since the first quarter of 2010, aside from one minor sell. The iShares emerging markets fund also holds Samsung, Gazprom and Petrobras as some of its top stocks, as well as China Mobile Ltd. (NYSE:CHL). Its top three countries China, Brazil and South Korea, are in about equal measure. Since inception the index returned about 17%.
In a rare television interview on CNBC’s Squawk Box, Dalio said he believes macro conditions will lead to a good environment for equities. In early 2012, he said, the developed countries’ currencies will devalue in relationship to currencies of emerging countries, which will benefit equities. He also said equities are, but that portfolios have too much concentration in developed countries, stocks and bonds, relative to other assets. “The main thing now for investors is if they diversify their assets into some of these other assets I think the other assets will perform better but it will also lower the risks to your portfolio,” he commented.
The top sector weightings in Bridgewater’s portfolio are industrials, consumer services and technology. His top equity position is Computer Sciences Corp. (NYSE:CSC), which represents just 0.7% of his portfolio. Computer Sciences offers professional IT services to businesses and government markets worldwide, with offices in Asia, Australia and the UK. The $3.8 billion market cap-company has three years of declining revenue and earnings, and current trades near its historical-low valuations. The stock price declined almost 50% year to date. He increased his position in the stock 64% last quarter.
Microsoft Corp (NASDAQ:MSFT), his second-largest equity, accounts for .65% of his portfolio. He bought 49,985 shares in the third quarter, bringing his total to 1,747,604. He has traded the stock off and on since before the second quarter of 2006.
One of Dalio’s more remarkable feats was producing an 8.7% return for his Pure Alpha fund in 2008, when most other funds were losing money. He did this by assuming that to stimulate the economy, the government would resort to printing money. He then made investments that would benefit from that situation, such as going long Treasury bonds, shorting the dollar, buying gold and other commodities, according to a New Yorker article from July, 2011.
In his 2008 investor letter, he commented on his approach at the time: “In 2009, as in 2008, the most important driver of your portfolio’s returns: 1) that come from betas will be a) whether or not your beta mix (i.e. asset allocation) has the systematic bias to do well in good times or bad times and, if it does have a bias, b) whether or not we have bad times; and, 2) that come from your managers’ alphas will be a) whether or not they have systematic biases to do well in good times or bad times and, if they are not biased b) whether or not they can tell the difference between the good and bad times and position themselves to take advantage of whatever happens.”
View Dalio’s portfolio here.