Ray Dalio: management guru, economist and investor

Ray Dalio has a unique and controversial approach to fund management. Matthew Partridge looks at what the most successful hedge fund manager in history can teach us about investing.

In investing, it's generally a good idea to find out what you are good at, then focus on it.

If you like going through annual reports to find cheap companies, then don't spend time with stock price charts. Similarly, if you have a talent for spotting trend lines, there's less need to focus on economics. For most people, and a surprising number of great investors, one 'edge' is enough.

Ray Dalio is an exception to this rule. As well as coming up with his own views on economics, he has developed a unique (and controversial) approach to management. He also uses computer models to make sure that his investment decisions are consistent.

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And while he's not as well known as Warren Buffett or George Soros, his investment success has made him one of the richest men in the world.

Here's some background on Dalio and some of his lessons that you can apply to your own portfolio.

How did Ray Dalio start out?

Dalio started young very young. He used funds from a part-time job as a golf caddy to make his first dip into the stock market at the age of 12.

"It was the 1960s," he says. "The stock market was booming and everyone was talking about it, especially the people I caddied for. So I started to invest". This first investment - an airline company - tripled in value.

After university, Dalio went to Harvard Business School. A summer job as the assistant to the director of commodities at Merrill Lynch during the oil crisis fuelled an interest in the monetary system. After two years of working on Wall Street, he decided to set up his own hedge fund, Bridgewater in 1975.

The company now oversees $120bn worth of assets. The Bridgewater Pure Alpha fund, which is directly managed by Dalio, has made over $35bn for its investors.

This has turned Dalio into the 44th richest man in the US (88th in the world), with an estimated fortune of $10bn, according to Forbes. The Economist calls him "the world's most successful hedge-fund boss".

You can read more on hisbackground story in the latest edition of MoneyWeek magazine. In this piece, we'll take a look at his investment views.

Dalio's take on economics watch the money supply

So what's the secret of his success? Firstly, Dalio places great emphasis on the role of debt and credit in the economy. He thinks there are two types of cycles: the business cycle and a debt cycle. Although downturns due to the business cycle happen much more often, cutting interest rates can easily cure them.

Sadly at the moment he thinks that we are at the end of a much longer debt cycle. During this period consumers, firms and government will be focusing on paying down debt (deleveraging).

Dalio thinks that such downturns are much harder to deal with. Indeed, he suggests that debt restructuring, income transfers and money printing are all necessary.

In other words, he supports what the Federal Reserve and the Bank of England are doing. Indeed, he thinks Bernanke and Mervyn King have created what he calls a "beautiful deleveraging". However, he does caution that too much use of the printing press could backfire, leading to inflation.

Regardless of what you think of the merits of QE or otherwise, there is little doubt that the money supply is certainly a key variable to watch, whatever asset class you are investing in. Further rounds of QE look very likely though in the case of Europe they may come too late.

Discipline: stick to your guns

Dalio thinks that it is vital to have a strategy and stick to it. Indeed, he has said that "Great planners who don't carry out their plans go nowhere. You need to push through' to accomplish the goals. This requires the self-discipline to follow the script that is your design".

Now, he's hardly the first person to make this point. But to back it up, he has written a series of computer programs that make sure his asset allocation decisions follow his economic theories.

However, "systematic" doesn't necessarily have to mean "computerised". Simply sitting down and writing out a few investment rules and taping them above your computer can work wonders.

Be critical

Finally, Dalio is a big fan of what he calls "radical transparency". At Bridgewater, everyone is encouraged to be as open and as blunt as possible even to the extent of criticising co-workers and bosses in public.

Dalio takes this perhaps a little too far, with the FT describing his style as a "quasi-Maoist form of personality destruction".

However, a critical, sceptical frame of mind is a key investing skill. You should never take any advice, whether from a magazine, a financial adviser, or a mate down the pub with a hot tip, without forming your own opinion. Never go along with something just "because an expert says so".

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri