During his recent conversation at the LSE Event, Ray Dalio explained why markets can always be beaten. Here’s an excerpt from the conversation:
Host: Many economists, as you probably know, argue that over the long-term you can’t beat the markets because all the information is rationally expressed in the price…
Dalio: That’s so stupid! It’s so stupid! Because that assumes that some people aren’t smarter than other people or some people don’t have a better way. It’s like a poker game. For the aggregate it’s like a poker game, zero sum okay.
The markets have alpha and beta. So beta is the return of an asset class. Okay that’ll happen and has its intrinsic thing but whether you can produce alpha becomes zero sum. So the fact that it’s zero sum means that in aggregation it can happen. But individually it can happen. It happens right because smarter people will take money away from those who are less smart. It happens all the time.
Well and you wouldn’t have also value-added created, you wouldn’t have productivity. Let’s say if the market for… everything’s a market, some are liquid markets, some are ill-liquid markets, but if there’s a property developer or there’s somebody else, we have a system in which there are resources that you borrow money, when you borrow money you enter a market.
When you decide that you’re going to put a product out you are creating a market, you are dealing with the market, and there’s an economics to that. The fact that we securitize something doesn’t mean that that’s the only market okay.
There is a market, you’re creating a business, when you create a business you’re creating a market, you’re dealing with the market, and the ability… the smart will take money away from the not so smart right, and so that’s just the way it is.
You can watch the entire discussion here:
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