Investment
Ray Dalio’s Holy Grail of Investing
How to create wealth with limited risk
Hello, Hoddlers. Did you buy Bitcoin at 63,000 dollars and now look at a potential loss of more than 50%?
Or were you amongst the Reddit Gamestoppers who thoroughly reviewed the investment opportunity and FOMOed in mid-February at about 450 dollars per share?
Did you get cold feet as the stock collapsed back to 40 — sold and FOMOed in again at about 300 beginning of June? And now getting afraid as the price comes back down?
Then maybe you should read this article and learn more about the investment style that keeps your return growing while making you independent of the inevitable mood swings of Mr. and Mrs. Market.
How does that work?
Buy One Stock and Hodl it until the end of time.
Our favorite holding period is forever.
Warren Buffett
The name of the game is stock picking. I bet you know Tesla.
Just imagine your savings were 100,000 dollars ten years ago, and you bought 20,000 shares for 5 dollars each (stock splits already factored in).
Then you waited about ten years and sold the 20,000 shares for about 800 a couple of weeks ago. Congratulations you made
16,000,000 out of a 100,000
This principle is taught at Reddit in the Group r/wallstreetbets. Just buy a stock, hold it forever, and you get rich.
In principle, that is the right approach that creates millionaires. Also, Warren Buffett advocates this investment style. Currently, 44 percent of his Berkshire Hathaway conglomerate is Apple Stock.
If it is that easy, why are there so few stock market millionaires and more people who lost money on the market?
Diversification is Key to Success
Diversification may preserve wealth, but concentration builds wealth.
Warren Buffett
The Grandmaster of investment doesn’t recommend diversification.
One of his quotes is:
Diversification is a protection against ignorance, but it makes very little sense for those who know what they are doing.
As I wrote initially, FOMO is one of the emotional key drivers for inexperienced investors. The stock prices skyrockets, and at the highest point, many investors fear not to be part of the party. So they willingly become the latest fools who buy stock and hold on all the way down. And sell at the lowest point.
In my opinion, what all the Pros like Warren Buffett and Ray Dalio preach is, learn everything you can about a company before you bet all your net worth on just one asset.
Learning everything about a company is a process that takes weeks or months, and sometimes even years. Relax, take your time.
When an investment magazine promotes a stock well, why do you want to invest 50% of your net worth into this one asset without doing any due diligence work?
In such cases taking a first position in the company to have it on the monitor, like, let’s say 0.5% of all your capital, is sufficient.
Once you have skin in the game, you are much more aware of any news that runs through the internet regarding that company. If push comes to shove and the company goes bankrupt, all you lost is 0.5%.
If the company develops well, you can add more stock over time. I mean, look at Amazon that created about 270,000% return for its investors since its IPO. Not being 100% committed at the IPO doesn’t mean that you narrowed down your upside.
Investing in two companies with a 20–30% p.a. growth perspective reduces your risk while not limiting the upside. If one goes bust, you still have the other one.
Adding more companies with a similar growth trajectory limits the risk further while still keeping the upside alive.
So what is now the Holy Grail that Ray Dalio believes to have found?
Diversification is a great thing. It avoids losing all your possessions when one company goes bankrupt. Unfortunately, cases of bankruptcy are part of the investment game.
When I think back to my Wirecard Desaster, where I betted too much money on one stock, I learned that it is wise to diversify the portfolio to avoid total capital loss.
Yes, like everybody has an Uncle that was drunk every day, smoked 40 cigarettes, and died happily in good health at the age of 350, everybody comes up with the idea— but if you invested all your money in Tesla, Amazon, or Bitcoin, you already were a billionaire.
I hear you.
The thing is, in retrospect, it is always easy to nail the winners. But ex-ante, it is a challenge. If Bitcoin was so obvious, why didn’t everybody purchase bitcoin back in 2011 when 45 dollars got you 10,000 BTC?
Amazon — Jeff Bezos was the Nerd of The Amazon in the 90s. Many investment bankers didn’t laugh with him, and they laughed about him.
Tesla — it was often deemed a failure, a hoax, and considered dead.
The thing is, with diversification, you avoid losing everything while not limiting your upside much.
Betting everything on Wirecard is a total loss, as the company was a promising rising tech star from Germany before it went bankrupt in 2020 due to fraud. Having not everything allocated in such a company and diversified the capital over Tesla, Amazon, Bitcoin, and Wirecard would have made you decent money in the last ten years still with one being a total loss.
Ray Dalio takes it up a notch. Diversification is significant, but if all assets are perfectly correlated, your portfolio still goes down tremendously when the market moves southwards. Having drawdowns of 40–80% still keeps some people up at night.
That is what we see in Cryptocurrencies right now. In my opinion, they are almost all perfectly correlated. When Bitcoin goes down, all other go down with it. While you might not lose all your money, having a 90% drawdown at times is still nasty.
Ray Dalio says if you get 15 solid income streams and look for uncorrelated assets, you don’t limit your upside while avoiding large drawdowns.
It is suitable for your sleep quality.
What does that mean:
- First, look for assets with good growth potential
- Don’t be greedy; a steady 10–20% growth over decades is sufficient to make you rich
- As a second step, get one of those free online correlation calculators.
- When adding a new asset to your portfolio, look for those with a small correlation coefficient compared to the stock already in your portfolio.
Investing is one of the surefire ways to make a fortune. But only when you do it right.
And one of the gems of wisdom that help to unlock the door to infinite wealth is Ray Dalio’s Holy Grail of Investment.
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This article is for informational purposes only. It should not be considered Financial, Investment, or Legal Advice. Consult a financial, investment, or legal professional before making any significant decisions.
