During his recent interview with Finimize, Ray Dalio explained why stock returns appear low compared to interest rates, so careful diversification is important. He also discussed why the “best” companies aren’t necessarily the best investments; undervalued “worst” companies can offer better returns. Price matters heavily – like in a horse race, betting on the favored horse may not provide an edge if everyone expects it to win. Here’s an excerpt from the interview:
Dalio: The next thing I would say is be careful about debt. Be careful about owning too much debt assets, and also having too much debt liabilities.
I explained to you why I’m concerned about the value of money and so I would be concerned about that and I would also say that when thinking about where to diversify think about beyond just the United States.
We have a situation where a relatively few number of stocks have done very very well, and by the way they’ve become expensive, and the market as a whole has not done very well.
And stock yields expected returns are not particularly high against interest rates right now.
So to be able to diversify well in considering outside the country remember that the best investments are not necessarily the best companies.
The worst companies can be better investments than the best companies because it’s in the price you know.
It’s like a horse and a horse race. If betting on the best horse is not going to get you an edge relative to betting on the worst horse because the market discounts that.
So you have to be aware of all those things and I would say we are now in an environment in which the fundamentals of what makes a good economy are most important.
You can watch the entire discussion here:
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