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Video: How the Economic Machine Works, According to Ray Dalio

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Ray Dalio has reached the part of his life where he is giving back.

Dalio founded Bridgewater Associates out of his apartment in 1975, and now the long-running hedge fund is recognized as the world’s largest by assets under management (AUM) with $122.2 billion, and as the fifth most important private company in the United States by Fortune magazine.

However, since 2011, the billionaire has passed the baton for the role of CEO at Bridgewater – and he’s also been focused on passing on his knowledge as well.

The Knowledge Baton

Most recently, Ray Dalio has been praised for releasing his book entitled Principles: Life and Work, where he outlines the principles that have guided his impressive success with Bridgewater.

Just as timeless, however, is this 30 minute animated video that he and Bridgewater released a few years ago, which gives their unique template for how the global economy works. It’s possible that you may have seen this before – but if not, it can be a useful tool to understand how the pieces fit together.

Dalio starts at the micro level, showing how individual transactions are part of the overall economic machine.

Then, using human nature and history as a guide, Dalio reduces the complex global economy down to just three major forces that must be understood.

Three Major Forces

Dalio says this model has guided Bridgewater for over 30 years, and that there are three major forces that shape the economy:

1. Productivity Growth
Productivity growth, which is measured as a percentage of GDP, grows over time as knowledge, technology, and innovations help to raise our productivity and living standards.

2. Short-Term Debt Cycle
Usually lasting 5-8 years, the short-term debt cycle is a repeating pattern that occurs as credit expands and contracts.

3. Long-Term Debt Cycle
Usually lasting 75-100 years, the long-term debt cycle usually ends in a period of extreme deleveraging, where global debt is unsustainable and asset prices fall.

Based on Dalio’s model and his concerns about the abuse of money printing by central banks, it’s clear why he routinely holds gold for about 5-10% of his personal portfolio, as well.

Rules of Thumb

The video ends with Dalio giving three rules of thumb – takeaways that make sense for individuals, companies, and policymakers.

Rule #1. Don’t have debt rise faster than income
Your debt burdens will eventually crush you.

Rule #2. Don’t have income rise faster than productivity
You’ll eventually become uncompetitive.

Rule #3. Do all that you can to raise productivity
In the long run, that’s what matters the most.

With an estimated net worth of $17 billion, it seems Dalio’s rules could be worth keeping in mind.

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Investor Education

Ranking Asset Classes by Historical Returns (1985-2020)

What are the best-performing investments in 2020, and how do previous years compare? This graphic shows historical returns by asset class.

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Historical Returns by Asset Class

Historical Returns by Asset Class (1985-2020)

Mirror, mirror, on the wall, is there one asset class to rule them all?

From stocks to bonds to alternatives, investors can choose from a wide variety of investment types. The choices can be overwhelming—leaving people to wonder if there’s one investment that consistently outperforms, or if there’s a predictable pattern of performance.

This graphic, which is inspired by and uses data from The Measure of a Plan, shows historical returns by asset class for the last 36 years.

Asset Class Returns by Year

This analysis includes assets of various types, geographies, and risk levels. It uses real total returns, meaning that they account for inflation and the reinvestment of dividends.

Here’s how the data breaks down, this time organized by asset class rather than year:

 U.S. Large Cap StocksU.S. Small Cap StocksInt'l Dev StocksEmerging StocksAll U.S. BondsHigh-Yield U.S. BondsInt'l BondsCash (T-Bill)REITGold
TickerVFIAXVSMAXVTMGXVEMAXVBTLXVWEAXVTABXVUSXXVGSLXIAU
2020*1.5%-5.5%-10.3%-0.7%4.9%-0.5%2.6%-0.7%-16.4%21.9%
201928.5%24.5%19.3%17.6%6.3%13.3%5.5%-0.1%26.1%15.9%
2018-6.2%-11.0%-16.1%-16.2%-1.9%-4.7%1.0%-0.1%-7.7%-3.2%
201719.3%13.8%23.8%28.7%1.4%4.9%0.3%-1.3%2.8%9.3%
20169.7%15.9%0.4%9.5%0.5%9.0%2.5%-1.8%6.3%6.6%
20150.6%-4.3%-0.9%-16.0%-0.3%-2.0%0.3%-0.7%1.6%-12.3%
201412.8%6.7%-6.4%-0.2%5.1%3.9%8.0%-0.7%29.3%-1.2%
201330.4%35.8%20.3%-6.4%-3.6%3.1%-0.4%-1.5%0.9%-29.0%
201214.0%16.2%16.5%16.8%2.4%12.5%4.5%-1.7%15.7%6.5%
2011-0.9%-5.5%-15.0%-21.0%4.6%4.2%0.8%-2.9%5.5%5.5%
201013.4%26.0%6.8%17.2%5.0%10.9%1.7%-1.5%26.6%26.0%
200923.3%32.7%24.9%71.5%3.2%35.6%1.6%-2.4%26.3%20.2%
2008-37.0%-36.1%-41.3%-52.8%5.1%-21.3%5.5%2.0%-37.0%5.4%
20071.3%-2.7%6.8%33.6%2.8%-1.8%0.1%0.7%-19.7%25.8%
200612.9%12.9%23.1%26.3%1.8%5.7%0.5%2.1%31.8%19.3%
20051.4%3.9%9.8%27.7%-0.9%-0.5%1.8%-0.5%8.3%13.0%
20047.3%16.2%16.5%22.1%1.0%5.2%1.8%-2.0%26.7%1.4%
200326.2%43.1%36.1%54.7%2.1%15.1%0.4%-0.9%33.3%19.2%
2002-23.9%-21.8%-17.6%-9.6%5.8%-0.6%4.2%-0.7%1.3%20.8%
2001-13.3%1.6%-23.1%-4.4%6.8%1.3%4.6%2.6%10.7%-0.4%
2000-12.0%-5.8%-17.1%-29.9%7.7%-4.1%5.4%2.5%22.2%-9.6%
199917.9%19.9%23.6%57.3%-3.4%-0.2%-0.6%2.0%-6.5%-1.7%
199826.6%-4.2%18.0%-19.4%6.9%3.9%10.2%3.5%-17.7%-2.4%
199731.0%22.5%0.0%-18.2%7.6%10.0%8.9%3.5%16.8%-23.2%
199618.9%14.3%2.6%12.1%0.3%6.0%8.3%1.9%31.4%-7.7%
199534.0%25.6%8.4%-1.9%15.3%16.2%14.3%3.1%10.0%-1.7%
1994-1.5%-3.1%4.9%-10.1%-5.2%-4.3%-7.3%1.3%0.4%-4.9%
19937.0%15.5%28.9%69.4%6.7%15.1%10.7%0.2%16.3%13.9%
19924.4%14.9%-14.7%7.8%4.1%11.0%3.3%0.6%11.2%-8.7%
199126.3%40.9%8.7%54.5%11.8%25.2%7.5%2.5%31.5%-12.5%
1990-8.9%-22.8%-27.9%-16.1%2.4%-11.3%-2.7%1.6%-20.3%-8.3%
198925.5%11.0%5.6%56.9%8.6%-2.6%-0.6%3.7%3.9%-6.8%
198811.3%19.7%22.8%33.9%2.8%8.8%4.4%2.1%8.6%-19.6%
19870.3%-12.7%19.3%9.3%-2.8%-1.7%4.5%1.3%-7.8%19.0%
198616.8%4.5%67.5%10.4%13.9%15.6%10.1%5.0%17.7%17.9%
198526.4%26.2%50.3%22.9%17.6%17.5%7.0%3.8%14.6%1.7%

*Data for 2020 is as of October 31

The top-performing asset class so far in 2020 is gold, with a return more than four times that of second-place U.S. bonds. On the other hand, real estate investment trusts (REITs) have been the worst-performing investments. Needless to say, economic shutdowns due to COVID-19 have had a devastating effect on commercial real estate.

Over time, the order is fairly random with asset classes moving up and down the ranks. For example, emerging market stocks plummeted to last place amid the global financial crisis in 2008, only to rise to the top the following year. International bonds were near the bottom of the barrel in 2017, but rose to the top during the 2018 market selloff.

There are also large swings in the returns investors can expect in any given year. While the best-performing asset class returned just 1% in 2018, it returned a whopping 71.5% in 2009.

Variation Within Asset Classes

Within individual asset classes, the range in returns can also be quite large. Here’s the minimum, maximum, and average returns for each asset class. We’ve also shown each investment’s standard deviation, which is a measure of volatility or risk.

Return Variation Within Asset Classes Over History

Although emerging market stocks have seen the highest average return, they have also seen the highest standard deviation. On the flip side, T-bills have seen returns lower than inflation since 2009, but have come with the lowest risk.

Investors should factor in risk when they are looking at the return potential of an asset class.

Variety is the Spice of Portfolios

Upon reviewing the historical returns by asset class, there’s no particular investment that has consistently outperformed. Rankings have changed over time depending on a number of economic variables.

However, having a variety of asset classes can ensure you are best positioned to take advantage of tailwinds in any particular year. For instance, bonds have a low correlation with stocks and can cushion against losses during market downturns.

If your mirror could talk, it would tell you there’s no one asset class to rule them all—but a mix of asset classes may be your best chance at success.

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Mining

How to Avoid Common Mistakes With Mining Stocks (Part 4: Project Quality)

Mining is a technical field that manages complex factors from geology to engineering. These details can make or break a project.

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Quality Mining Projects

Mining is a technical field and requires a comprehension of many complex factors.

This includes everything from the characteristics of an orebody to the actual extraction method envisioned and used—and the devil is often found in these technical details.

Part 4: Evaluating Technical Risks and Project Quality

We’ve partnered with Eclipse Gold Mining on an infographic series to show you how to avoid common mistakes when evaluating and investing in mining exploration stocks.

Here is a basic introduction to some technical and project quality characteristics to consider when looking at your next mining investment.

Mining Project Quality

View the three other parts of this series so far:

Part 4: Technical Risks and Project Quality

So what must investors evaluate when it comes to technical risks and project quality?

Let’s take a look at four different factors.

1. Grade: Reliable Hen Vs. Golden Goose

Once mining starts, studies have to be adapted to reality. A mine needs to have the flexibility and robustness to adjust pre-mine plans to the reality of execution.

A “Golden Goose” will just blunder ahead and result in failure after failure due to lack of flexibility and hoping it will one day produce a golden egg.

Many mining projects can come into operation quickly based on complex and detailed studies of a mineral deposit. However, it requires actual mining to prove these studies.

Some mining projects fail to achieve nameplate tonnes and grade once production begins. However, a team response to varying grades and conditions can still make a mine into a profitable mine or a “Reliable Hen.”

2. Money: Piggy Bank vs. Money Pit

The degree of insight into a mineral deposit and the appropriate density of data to support the understanding is what leads to a piggy bank or money pit.

Making a project decision on poor understanding of the geology and limited information leads to the money pit of just making things work.

Just like compound interest, success across many technical aspects increases revenue exponentially, but it can easily go the other way if not enough data is used to make a decision to put a project into production.

3. Environment: Responsible vs. Reckless

Not all projects are situated in an ideal landscape for mining. There are environmental and social factors to consider. A mining company that takes into account these facts has a higher chance of going into production.

Mineral deposits do not occur in convenient locations and require the disruption of the natural environment. Understanding how a mining project will impact its surroundings goes a long way to see whether the project is viable.

4. Team: Orchestra vs. One-Man Band

Mining is a complex and technical industry that relies on many skilled professionals with clear leadership, not just one person doing all the work.

Geologists, accountants, laborers, engineers, and investor relations officers are just some of the roles that a CEO or management team needs to deliver a profitable mine. A good leader will be the conductor of the varying technical teams allowing each to play their best at the right time.

Mining 101: Mining Valuation and Methods

In order to further consider a mining project’s quality, it is important to understand how the company is valued and how it plans to mine a mineral resource.

Valuation

There are two ways to look at the value of a mining project:

  1. The Discounted Cash Flow method estimates the present value of the cash that will come from a mining project over its life.
  2. In-situ Resource Value is a metric that values all the metal in the ground to give an estimate of the dollar value of those resources.

Mining Method

The location of the ore deposit and the quantity of its grade will determine what mining method a company will choose to extract the valuable ore.

  1. Open-pit mining removes valuable ore that is relatively near the surface of the Earth’s crust using power trucks and shovels to move large volumes of rock. Typically, it is a lower cost mining method, meaning lower grades of ore are economic to mine.
  2. Underground mining occurs when the ore body is too deep to mine profitably by open-pit. In other words, the quality of the orebody is high enough to cover the costs of complex engineering underneath the Earth’s crust.

When Technicals and Quality Align

This is a brief overview of where to begin a technical look at a mining project, but typically helps to form some questions for the average investor to consider.

Everything from the characteristics of an orebody to the actual extraction method will determine whether a project can deliver a healthy return to the investor.

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