Bridgewater Associates principles and culture

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

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

While the Principles can be better read by Mr Dalio as a whole, in order to capture them in full, we have summarized what we believe are five key takeaways that should be well relevant to any investor.

Diversify by placing many smaller bets against fewer larger bets

Diversification is a common topic that is familiar to most investors, but few know how to really practice it. At Bridgewater Associates, Mr. Dalio pioneered the Holy Grail portfolio. It invests in multiple uncorrelated stocks that offer numerous sources of income to achieve returns similar to other investment strategies while reducing 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 that are more interested in keeping up with inflation and the economy. In this case, risk-adjusted returns are more important.

Avoid false dichotomies in risk-return tradeoffs

Ray Dalio emphasizes that decisions do not always have an either-or outcome, and there is usually a solution that is out of view and allows both goals to be achieved.

Systematize and codify your decisions

Every investor has different criteria on the basis of which he makes investment decisions. In his investment strategy (and that of Bridgewater Associates), Dalio states that he is a big proponent of documenting all of your decision-making criteria so that successful actions can be repeated in the future.

Keep an investment decision protocol

This is pretty similar to our # 3 Points, but instead of replicating past successful strategies, it aims to develop new ones. Writing down your current rationale for your decisions will give you a less distorted view of your perspectives and views later. This improves 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.

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

Bridgewater Associates portfolio and top 10 public holdings

Bridgewater Associates’ portfolio appears to follow Mr. Dalio’s diversification principle with 484 individual stocks. The top 10 positions account for 38.9% of the total invested capital including the highest conviction of Mr. Dalio.

Source: 13F filing, author

Walmart Inc. (WMT):

Walmart is the world’s top-selling company with annual sales of over $ 500 billion. The stock is Bridgewater’s largest holding, accounting for just over 6% of its holdings. Despite such high exposure to the stock, Bridgewater only recently bought into the company in the third quarter of 2020. In our view, given the timing of Mr. Dalio’s investment, Bridgwater is likely betting that Walmart’s e-commerce concept will explode anytime soon as the company uses its vast logistics network to compete with Amazon.

The stock trades at 24.2 times its forward net income and makes a relatively attractive investment case given the company’s broad growth prospects for moat and e-commerce. Walmart is also a dividend aristocrat who has counted annual dividend increases for 46 straight years. Mr Dalio increased the Fund’s exposure to Walmart by 120% based on the latest 13F filings.

Alibaba Group (BABA):

Mr. Dalio has been an enthusiast 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 released its fourth quarter results and beat estimates by posting revenue of $ 33.88 billion, up 37.0% year over year.

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

While those interested in investing in China’s tech world likely view Alibaba as one of the most attractive investments out there, they should also consider the underlying risks. Bridgewater added 19% to its position in Alibaba in the quarter.

The Procter & Gamble Company (PG):

While the consumer staples sector has lagged the overall market in recent months, its components have delivered impressive results. Such is the case with Procter & Gamble, which had record fourth quarter sales of $ 19.75 billion, of which $ 3.85 billion was in bottom line. The stock is trading at 22x its future earnings, which, when combined with management’s aggressive returns on capital and the company’s robust balance sheet, could be a great entry point for those looking to hold long-term.

Bridgewater is definitely keen on the stock as it added 119% to its position during the quarter, which is currently 5% of its total holdings. The company is also a dividend king, with 64 years of consecutive annual dividend increases.

Pinduoduo Inc. (PDD) and JD.com, Inc. (JD):

Pinduduo and JD.com are Chinese mobile e-commerce platforms that sell a wide variety of products. The two stocks are another example of Mr. Dalio’s long-term belief in China’s economic future. Both companies grew their sales quickly. However, they still represent a much riskier investment case than their bigger counterparts like Alibaba and Tencent (no e-commerce here, tech in general). Bridgewater has held both stocks since the second quarter of 2008, while on its most recent filing it posted position gains of 46% and 20%, respectively, indicating strong confidence in their long-term prosperity.

The two companies account for around 6.6% of Bridgewater’s holdings. The two positions were increased by 29% and 2% respectively during the quarter.

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

Coca-Cola and PepsiCo together make up nearly 6% of Bridgewater’s total holdings. The consumer goods giants are both dividend aristocrats with 58 and 48 years of consecutive annual dividend increases, respectively. While neither of the companies are the most exciting investments in the world, they own massive moats in their respective categories.

Your cash flow stability is a great asset for generating strong returns over the long term. This is great quality for funds serving a client base as diverse as Bridgewater. Both stocks offer a return of over 3%, which should be a respectable source of income in today’s extremely low-yielding environment.

Bridgewater’s positions in Coca-Cola and PepsiCo increased 123% and 113%, respectively.

Johnson & Johnson (JNJ):

In keeping with the motto of keeping credible dividend aristocrats, Bridgewater has allocated around 3.6% of its assets to healthcare company Johnson & Johnson. The company recently released its results for the first quarter of 2021 and posted new record sales of $ 22.48 billion.

After having grown for 58 years in a row, investors are buying into a high quality company with a highly competent management team. The stock trades at a relatively fair valuation at 18 times its future earnings, which is a decent entry point for current investors.

Johnson & Johnson’s last position increase was 120%.

Costco Wholesale Corporation (COST):

Costco’s unique consumer culture has been a powerful driver of the company’s long-term sales growth. While the business itself is low margin, Costco’s economies of scale are enormous, resulting in a robust bottom line.

Unlike its peers, the stock has always received a premium rating. With a forward P / E of 31.7, the stock is definitely not cheap. Even so, Costco’s premium valuation multiple may be justified given its stable cash flows and robust organic growth.

The last Costco position increase was 122%.

McDonald’s Corporation (MCD):

When we close the company’s top 10 key holdings, we can see again how much Mr. Dalio and his investment team value companies that have demonstrated their ability to deliver sustainable returns to their shareholders over the long term.

McDonald’s business model and brand value have been stable for decades, and the company has increased its dividend annually for 45 straight years. The stock should also be relatively recession-proof, as fast food holds up very well even in times of economic downturn. With 27x its forward earnings, the stock might not come cheap, but it should make for solid long-term exposure.

Bridgewater increased its stake in McDonald’s Corporation by 119% in the quarter.

Final thoughts

Bridgewater has grown to become the largest hedge fund in the world under the leadership of Ray Dalio and his simple but controlled principles. The company’s inventory structure is not particularly complex as the fund mainly holds traditional stocks.

Source: 13F filing, author

In view of the diverse customer base, however, such a highly diversified portfolio makes a lot of sense. While it may not outperform the market, it should generate high returns over the long term on a risk-adjusted basis. Mr. Dalio’s selection offers private investors some compelling investment ideas. So download the spreadsheet to search them all.



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