Ray Dalio – Great Investor and Early Adopter
All great investors have a process for their investing. They’ve created this process over many years of arduous work, research, testing and a few failures. Paul Tudor Jones, Kyle Bass, David Tepper, Seth Klarmin, Dan Loeb, Ray Dalio and others consider this process their secret sauce. Ray Dalio, not long after founding Bridgewater Associates out of his apartment in 1975, realized he could continue improving his returns by solidifying recurring lessons into "principles” and processes.
Integration of AI into Investing Processes is Accelerating
The advancements in artificial intelligence have been rapid from robotics to big data and algorithmic trading. Both quantitative and qualitative advancements are moving at a record pace. The pace and power of these advancements are causing both optimism and fear as humans struggle for control of the technology.
Whether Zuckerberg or Musk wins the debate, these advancements are going to continue and AI is here to stay. Algorithmic and high frequency trading (HFT) have thrust the investing world into the forefront of both the huge profits and disastrous losses possible when the world moves at machine speed and scale. Text Analytics, Computational Linguistics – Not Ready for Autonomous Investing
Quantitative AI has been around for some time. Applying AI to numbers was the low hanging fruit and gave rise to the first quant shops over a decade ago. Computational linguistics or qualitative AI is new to the game. Understanding language has been a challenge for computer scientists for decades. It’s messy ambiguous, complex and constantly changing. Despite the claims of vendors, it’s just not an easy or simple problem.
Investors find it difficult to understand what it does and how it can work for them. They know what they’d like (“Alexa, what trade should I execute today to beat all the other portfolio managers?”) but its not ready yet, and besides, if Alexa could do that, why would Jeff Bezos share it? They have difficulty trusting results from something that does not reflect their own bias and is risking their money. This will change over time. Early adopters have started developing and testing, learning the technology’s limits and adjusting. They will clearly benefit and as a result, be ahead of the curve. All successful investors will work this into their process. However, AI should not and will not replace the best investors. Its success will come from augmenting his or her abilities.
Ray Dalio fits the definition of early adopter, someone who seeks out new technologies that may give him a competitive advantage. He realized “the computer could replicate my thinking…. it could actually think better than I could because what it would do is ... it could process more information, it could process it faster, it could process it less emotionally." "Because you know the same things happen over and over again," Dalio told Henry Blodget. "The same things happen over and over again in the markets — everything that we've been through, every cycle. Everything has happened in the past. The same things happen over and over again in politics. Same things happen over and over again in our lives. If you can recognize this and have a way of anticipating recurring behavior — whether it's in markets or in people,” Dalio said, "that's an effective way of approaching the game that you're playing." Dalio likened building Bridgewater's portfolio in the early days to driving with a GPS.
He was in charge of the car, but he had an automated system guiding him along. "And to have that next to me was invaluable. It would learn; I would learn." Early adopters that incorporate qualitative AI tools into their investment process will have a clear advantage. They will have more time to analyze the information pertinent to them instead spending most of their time searching and reading. They will have tools to help them see good and bad trends developing without the liability of human bias. But they will have the ability to inject their expertise into the decision process when their AI can’t see context, outside or new to what its learned.
Ray Dalio’s GPS became an invaluable tool helping him navigate the physical world, but left him in charge. He could make sure the GPS didn’t send him off a bridge that just collapsed. Investors should think of AI in the same way.
Legendary investors like Ray Dalio and Warren Buffett had decades to perfect their processes and incorporate new tools and technologies. The next legendary investors will be the ones that did their homework, embraced the changes coming and harnessed the power of AI within their own investing process.