Bridgewater Associates principles and culture

Bridgewater uses a principles-based approach developed by its founder Ray Dalio. Mr. Dalio bought his first shares in what was then Northeast Airlines at the age of 12 and tripled his money following the airline’s subsequent merger. Since then he has had a successful career, including trading on the NYSE floor before eventually leading Bridgewater into the world’s largest hedge fund.

In 2011 he self-published “Principles”, a 123-page volume that outlines his investment philosophy and corporate governance based on lifelong observations. With a net worth of $ 18.7 billion and the world’s largest institutions serving customers, it’s safe to say that Mr. Dalio’s principles have proven to be quite successful.

While Mr Dalio’s Principles are better read as a whole to fully understand them, we have summarized what we believe are five key lessons that should be important to any investor.

Diversify by placing many smaller bets versus fewer larger bets

Diversification is a common topic that most investors are familiar with, but few know how to really practice it. At Bridgewater Associates, Mr. Dalio pioneered the Holy Grail portfolio. It is invested in several uncorrelated stocks that offer numerous streams of income with the aim of generating returns similar to other investment strategies while lowering the overall risk (i.e. standard deviation).

This has enabled Bridgewater to achieve superior risk-adjusted returns. Remember, Bridgewater does not necessarily strive to “beat the market”. The fund has clients such as government agencies who are more interested in keeping up with inflation and the economy. Risk-adjusted returns are more important in this case.

Avoid false dichotomies in risk-return tradeoffs

Ray Dalio emphasizes that decisions do not always have an either / or and that there is usually a solution that makes it possible to achieve both goals.

Systematize and codify your decisions

Every investor has different criteria according to which he makes investment decisions. In his investment strategy (and that of Bridgewater Associates), Dalio explains how committed he is to documenting all of your decision-making criteria so that successful measures can be replicated in the future.

Keep an investment decision protocol

This is pretty similar to our third point, but instead of replicating past successful strategies, it aims to develop new ones. By writing down your current reasons for your decisions, you will get a less distorted view of your perspectives and views later. This will improve your process of reflecting on past decisions and can help you sharpen your future decisions.

Realize that nothing is a safe bet. The pain will be your teacher

There is always some risk involved in investing in stocks. Many companies that appear like “sure-footed profits” can fail, and companies that appear ridiculous and desperate can achieve great success. Realizing that nothing is a safe bet is a huge advantage. In addition, using the pain of past failures for growth as an investor should also be valued highly.

Bridgewater Associates’ portfolio and top 10 stock investments

Bridgewater Associates’ portfolio appears to be closely diversified by Mr. Dalio and consists of 411 individual stocks. Its top 10 holdings represent 36.4% of total capital invested, including the selection most condemned by Mr Dalio.

Source: 13F filing, author

Walmart Inc. (WMT):

Walmart is the largest company in the world by sales, with annual sales of over $ 500 billion. The stock is Bridgewater’s largest holding, accounting for just over 6% of the total portfolio. Although Bridgewater has such a high level of commitment to the company, Bridgewater only bought into Walmart recently, in the third quarter of 2020. Bridgewater is likely betting that Walmart’s e-commerce will skyrocket in the short term as the company leverages its vast logistics network to compete with Amazon.

The fund’s conviction appears to remain strong as Bridgewater increased its position by an additional 16% in the previous quarter. The stock trades at 24.3 times net income, which is a relatively attractively valued investment case given the company’s broad competitive and e-commerce growth prospects. Walmart is also a dividend aristocrat, counting 46 years of consecutive annual dividend increases.

The Procter & Gamble Company (PG):

While the consumer staples sector has lagged the overall market over the past few quarters, its components have delivered impressive underlying results. Such is the case with Procter & Gamble, which currently has an all-time high in LTM (Last Twelve Month) net income of $ 14.2 billion.

The stock trades at 23.5 times its Forward Net Income, which, when combined with management’s aggressive returns on capital and the company’s robust balance sheet, could provide an optimal entry point for those looking to hold out for the long term.

The company is also a dividend king, with 64 years of consecutive annual dividend increases. Dividends are up at a 5-year CAGR of 3.59%, outperforming inflation over the period.

Bridgewater increased its position 119% in its Q4 filing and an additional 19% in the last filing. The share currently makes up 5.7% of the total portfolio.

Coca-Cola Co. (KO) & PepsiCo, Inc. (PEP):

Coca-Cola and PepsiCo together make up around 7.4% of Bridgewater’s total holdings. The giants of the consumer goods industry are both dividend aristocrats with 58 and 49 years of consecutive annual dividend increases, respectively. Both companies have a massive gap in their respective categories. As a result, their predictable business model and operations make them excellent sources of income.

In terms of dividend growth, PepsiCo has grown at a significantly faster pace in recent years, boasting a 5-year DPS CAGR of 7.8% versus Coca-Cola’s 4.25% over the same period.

The cash flow stability of PepsiCo and Coca-Cola is a huge asset to generating strong long-term returns, which is a valuable trait for funds that serve a customer base as diverse as Bridgewater.

Both stocks are yielding around 3%, which in today’s environment of extremely low returns should result in a respectable, tangible return. Their valuation multiples move almost identically and have a forward P / E of around 24.

Bridgewater’s positions in Coca-Cola and PepsiCo increased by 25% and 21%, respectively.

Alibaba Group (BABA):

Mr. Dalio has been enthusiastic about China’s investment potential for years. Alibaba, the Chinese tech giant, has been in Bridgewater’s portfolio since 2018 and has since grown into its largest position. The company recently announced its first quarter results, beating estimates with sales of $ 28.60 billion, up 64.0% year over year.

While Alibaba remains a highly profitable company with net profit margins often in excess of 30%, its stocks have recently lagged due to ongoing concerns about Chinese stocks. Jack Ma’s long and mysterious disappearance was an unacceptable event for one of the largest publicly traded companies in the world, while the Chinese government’s involvement in steering the company’s direction also raises questions among investors.

So while those interested in investing in China’s tech world may find Alibaba to be one of the most attractive investments out there, they should also consider the risks involved. Bridgewater trimmed its Alibaba position by 12% in the quarter.


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