Author: Ray Dalio

Compiled by: Deep Tide TechFlow

Introduction: Bridgewater Associates founder Ray Dalio published an investment note on X, providing a breakdown of the current market dominated by a few AI giants. His assessment is firm: high risk is a fact, low return is an opinion—the actual return on US stocks over the next 5 to 10 years may fall between -5% and -10%. He doesn't advise against buying AI, but rather against putting all your eggs in one basket. This is the "holy grail" of investing that he has gleaned from over 50 years of experience, and he's now sharing it publicly.

Investment principle: How should you play the hand you're dealt?

This note discusses how to play the investment game in the current situation.

You can think of it like bridge, poker, backgammon, or chess. When it's your turn, a computer is there to assess the situation and offer advice. For me, investing feels like that. Whether you have this computer at hand or not, I think you should ask yourself this question: Given the current hand, what should I do next? (In other words, what are the characteristics of the market right now, and what forces are influencing it?)

I've been playing this game for a long time. At this stage, my goal is to pass on my playing style, and the next step is to create a platform where all kinds of people can use it to explore investing, however they like—learning, reflecting on how they would have done things, and doing it well. I believe there are right and wrong ways to handle the cards you're dealt. So when you encounter a specific situation, you should ask yourself, "How should I bet in this situation?" and be able to give a reliable answer.

Next, I'd like to talk about what the market looks like right now, and what I think we should do (which is what I'm currently doing).

How do we play this game now?

What are the most crucial conditions today, and how should we place bets based on them?

In my view—and probably in everyone's—we are currently in a market where a very small number of companies, concentrated in a sector with amazing new technologies (mostly AI), dominate the overall market direction. These companies account for a high percentage of market capitalization and have a huge impact on the market and the economy. As always, this new technology sector is rife with excitement, uncertainty, and volatility, which then spreads to global stock markets. Therefore, the fluctuations and uncertainties in this sector are of great importance.

Besides that, there are several other equally important variables, which I call the "Five Forces": first, what is happening with debt and currency; second, what is happening with political and social issues (which significantly impact taxes and other politically driven market factors); third, the impact of geopolitics on markets (such as wars); fourth, what is happening in nature; and fifth, what is happening with new technologies. I input these conditions into my investment system, which calculates how to bet on them, while I myself am also thinking about what to bet on.

When considering how to place bets, the most important question to ask and the one that needs to be answered clearly is: Do you want to a) bet more heavily on new technologies than the market index (such as the S&P 500) already implies, overweighting this sector or the companies you think are the best; b) maintain a weighting similar to the index; or c) diversify out of this concentration?

Almost everyone wants to buy the best assets, and everyone is desperately trying to do so, while this new technology seems to be changing almost everything. But history tells us that at this stage of the cycle, betting a large proportion of your capital on a few leading companies producing this technology has resulted in the vast majority of people failing. There's a logic to this; it's played out every time in the past. AI is indeed a unique new technology, but there have been many unique new technologies in history that can be compared to it. You should look at them. If you choose to ignore them, you need to provide a good reason why this time is different.

The risk is indeed very high.

All the stories of great new technologies in the past have unfolded in the same way, following the same logic. High risk and immense uncertainty are inherent characteristics of these new technology companies. Looking back at their performance in similar situations, you'll find that even those revolutionary companies that ultimately triumphed in the long run (like Microsoft and Apple) were battered and bruised at similar moments along the way. Moreover, in the very early stages of a new technology company's emergence (not in hindsight), it's extremely difficult to predict who will succeed and who will fail; IBM is a prime example. Examining these cases reveals that the future of new technology companies is highly uncertain—it's simply their nature.

For example, they either bet too much or too little. The reason is: not betting enough guarantees a loss, but they can't accurately predict the future, so they can't know if they've overbet. Both betting too much and too little come at a price.

They can't accurately predict all the changes that will affect them, including exogenous ones—monetary tightening, war, tax upheavals. Therefore, they all experience dramatic ups and downs, initially exciting investors, then scaring the timid and forcing them out of the market, thus amplifying market volatility. Going deeper: these new technologies and companies that disrupted their predecessors will mostly be disrupted by even newer technologies and companies, in ways we can't even imagine now. We need to consider whether the same thing will happen to these companies today. The impact of quantum computing is one of the "known knowns." What about those that haven't been imagined yet?

What about the risks posed by competitors? For example, China is producing and distributing AI technology, and Chinese policymakers have a completely different view of the economy and AI. We are in a new technology war, and leaders of all countries believe they must win. From China's perspective, AI, because it has huge productivity dividends and can raise the overall standard of living, should be provided to everyone for free or at a low price. In their view, profits are not so important; what matters is the overall benefit brought by many people using these new technologies. I estimate that they will enter the international market to compete, just like they have done with products such as automobiles, solar panels, and batteries.

The current situation bears a striking resemblance to many historical moments that offer valuable lessons. I can't help but recall the late Dutch Empire and early British Empire, when Britain surpassed the Netherlands in shipbuilding and other crucial industries. The geopolitical conflicts surrounding Taiwan also raise the possibility that China might use the "preventing chips from leaving Taiwan" as a tool in its geopolitical maneuvering. AI stocks face other risks, such as the risk of wealth taxes and other rising taxes—forcing those with substantial wealth invested in these stocks to sell; and the potential for anti-AI sentiment to restrict company expansion.

I could list a whole bunch of things to worry about, and I could also give you an equally long list of great AI opportunities I'd like to bet on. I'm not saying how these risks will unfold, nor am I saying you shouldn't buy AI companies. I'm just saying there's a lot of concentrated risk in the market, that's undeniable, and you should know how to handle this situation. Based on my research of all similar cases, and logically speaking, I'm confident: the risk is high, and the best way to deal with this situation is:

Disperse well

As you probably know, my mantra is diversification; my "holy grail" of investing is to strive to hold 15 well-positioned, uncorrelated, and balanced investments. In other words:

"A well-diversified portfolio of good bets will outperform a concentrated bet (which has a higher risk-reward ratio and can be engineered to produce better returns with the same risk). The more concentrated the risk is in one part of the market, the more you should diversify, especially when the market is driven by a revolutionary new technology that inherently brings great uncertainty."

This isn't an opinion; it's a mathematical certainty. For example, suppose a bet has a risk-reward ratio of 0.3 (e.g., a 6% return with an 18% standard deviation, typically considered typical for stocks). Compare this to holding 5, 10, and 15 uncorrelated bets: I can still achieve the same 6% return, but the risk, measured by standard deviation, drops to 8%, 6%, and 5%, respectively. In other words, 15 good, uncorrelated investments can increase my risk-reward ratio by 4.3 times (from 0.3 to 1.29). If you wish, you can leverage this to achieve much higher returns with the same level of risk. This is a fact.

My confidence stems from backtesting, from the real returns I've delivered in my 50+ years of investing, and from a highly probable logic: diversifying your bets and adjusting them to your desired volatility level will, over the long term, generate returns far superior to the concentrated betting favored by most investors. To be more specific, proper diversification yields a better risk-reward ratio than any concentrated bet; adjusting it to your desired risk level allows you to achieve higher returns at that risk level than any other approach.

Because I've made this method public, it's now become my "less secret" path to success. But I rarely encounter people who think about investment strategies this way—that is, very few people consider portfolio construction, or how a well-structured, fully diversified portfolio would perform worse than a concentrated position betting on a few stocks in a single transformative industry. Most people only think about whether these stocks or the industry will rise, and how to bet on them. The performance difference between those who consider portfolio construction and those who don't is enormous. I'll find an opportunity to explain how to do this method more fully later.

Based on all of the above, in my opinion, when faced with a hand of cards, figuring out how to play it should lead one to ask oneself: how large should my concentrated position be, and then how should it be diversified?

The returns seem low

The high risk is an undeniable fact. Next, I'll give you an opinion that may be wrong: the expected return is very low. This judgment comes from my valuation analysis and my bubble indicator readings—the actual return on stocks over the next 5 to 10 years looks to be around -5% to -10%, although there is considerable uncertainty around these figures. In my view, these stocks are long-duration assets, very risky because it's difficult to reliably foresee the distant future, and they appear both expensive and unwise to hold.

A question from my research team

At a recent meeting, someone on the team asked me: "Why do you think the current market allocation is wrong? How do you know there aren't good reasons for the lack of diversification in the market today? For example, some investors believe that AI stocks will have very high expected returns; when an industry accounts for such a high proportion of market capitalization, it's natural for such concentration to appear in the index; or when everyone is extremely enthusiastic about an industry, many investors will buy these stocks without smartly and reliably calculating how much future profit will be and how to price that profit?"

My answer

There are various reasons for price increases, and not all of them are good ones. Some investors watch prices and push them up because they find them attractive relative to fundamentals; some hold these stocks because they believe it's a great new technology and see the price increase as confirmation that "this is a good stock"; and some investors hold index exposure, passively accumulating heavy weighting in these stocks. In my opinion, you can agonize over these questions, trying to figure out what you want to do; or you can admit that you don't need to agonize at all because you simply don't have enough information to confidently place a bet. You can simply say, "I don't know enough, I won't bet on this," and then really not bet.

What traps people is the idea that "I must form an opinion, and my opinion must be worth something," but the reality is more likely that you can't even form a sufficiently reliable and worthwhile opinion to bet on. (Note: To be clear, I'm not suggesting you shouldn't bet—besides, you can't avoid betting, because you always have to put money into some kind of investment or in cash, and most people think cash has the lowest risk, but it's actually the worst investment in the long run. My suggestion is that even if you have no tactical judgment on which market is good or bad, you should know how to diversify your bets. The way to do this is: when you have no tactical judgment you're confident in, hold a balanced, strategic asset allocation portfolio. But that's a topic for later.)

Therefore, I believe that knowing what you don't know and thus deciding when not to bet is just as important as knowing what you do know and thus betting.

To put it more simply, I believe in this principle: since it's usually difficult to gather enough information to justify concentrated betting, the best approach is to create a diversified portfolio by only having the most confident, uncorrelated bets, and then engineer that portfolio to the desired level of risk. This is my "holy grail" of investing.

Right now, facing this hand of cards, I don't think anyone can know clearly enough what will happen next in this technology-driven market to make a large, concentrated bet. In my view, avoiding concentration and maintaining diversification is the best way to deal with this "uncertainty." I know this contradicts the theories you read in your textbooks—textbooks basically say that the market is efficient, so you should "trust the market."

In summary: We now have an unusually concentrated market centered around a revolutionary new technology, which should serve as a reminder not to confuse the excitement of new technology with the appeal of new technology stocks, and then throw caution to the wind and hold a bunch of high-risk, highly correlated concentrated bets—especially when we could have achieved equally attractive returns with much less risk through smart diversification.

P.S.: I won't share my holdings or tactical decisions with you, because I don't want to be your investment advisor. But I will soon share some key perspectives behind these decisions, including my bubble indicator readings and the logic behind them.

Huang Licheng's HYPE and ETH long positions opened yesterday were partially liquidated again, resulting in a loss of over $410,000

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