Tonight Shen Nanpeng chatted with Dalio for an hour

The edited transcript of the conversation is here.

Tonight (June 23), Bridgewater founder Rui Dalio and Sequoia Global Managing Partner Shen Nanpeng had an online conversation on Douyin at the invitation of CITIC Publishing Group.

These two investors with world-class influence are also participants who have successfully passed through several economic cycles. In this one-hour conversation, Shen Nanpeng and Rui Dalio started from the latter’s new work “Principles: Responding to a Changing World Order”, discussing the historical cycle, current situation, investment trends, technology entrepreneurship and Topics such as the Chinese market have been discussed in depth. The topics may seem macroscopic, but they are closely related to most people .

Tonight Shen Nanpeng chatted with Dalio for an hour

There are many golden sentences on the scene, and the investment community immediately excerpted some wonderful points for readers:

  • Talking about the causes of the current world macro situation, Dalio summed up three points in his historical experience: debt monetization, disparity between the rich and the poor, and competition among major powers.
  • Talking about the core concept of investing in China, Shen Nanpeng said: The core of investment is not assets but people, and we must always have awe of the market .
  • Dalio shares another principle: Pain + Reflection = Progress .
  • Regarding the impact of the macro environment on the venture capital industry, Shen Nanpeng said: technological development has its own cycle, which is not in sync with the cycle of the macro economy. Although the technology market has its ups and downs, we should believe in the potential of technological innovation.
  • As an American who has fully experienced China’s reform and opening-up process, Dalio sighed: Unfortunately, I found that many young people did not really understand the great changes in China’s reform.
  • Shen Nanpeng talked about the growth of investors: to be like an artist, to find a field of real interest .
  • Leading Bridgewater for more than 40 years, Dalio has set a principle for the team: idea meritocracy, always ensuring that really good ideas win .
  • Having experienced many cycles in his investment career for more than ten years, Shen Nanpeng believes that in the face of market fluctuations and technological cycles, founders favor investors who can give them consistent support.
  • For investors’ “self-cultivation”, Shen Nanpeng believes that investors need to quickly understand the development of cutting-edge technology on a steep learning curve in order to maintain an advantage in the competition.

Observing the current situation from the historical cycle

Nanpeng Shen: Your new book, Principles: Responding to a Changing World Order, analyzes the most volatile economic cycle in history and discusses how we should approach the current situation. The Chinese version of this book has now been published by CITIC Publishing House. What prompted you to write this book?

Tonight Shen Nanpeng chatted with Dalio for an hour

Dalio: I’m a global macro investor, and I study history to gain information to determine how to respond to the current situation. In my 50 years of investing experience, I have identified three major factors driving the current situation, and these three things have happened many times in history:

First , the creation of huge debts and the monetization of debts by the world’s major reserve currency countries by printing money. Second , the intra-country conflicts arising from the huge wealth gap and value gap have led to right-wing and left-wing populism, exacerbating the current political and social conflicts in the United States and some other countries. Third , great power competition, on the one hand is the US-led world order that began in 1945, and on the other is the rise of China and other powers that rival the United States.

To examine these factors, I researched the past 500 years of history and decided to write a book about what I’ve learned.

Shen Nanpeng: You just talked about the widening gap between the rich and the poor in the world. From a historical perspective, how severe is the current situation?

Dalio: The current global wealth gap is at its highest level since 1930-1945 . Proportionally, the top 10% have roughly the same wealth as the remaining 90%. The huge gap between rich and poor also leads to an opportunity gap, with the rich not only having more opportunities for themselves, but also their children benefiting more, which provides the basis for populism. Traditionally, this kind of populist fighting for the people has come against the backdrop of a huge wealth gap and a gap in values, and that’s what we’ve seen, which is typical.

Tonight Shen Nanpeng chatted with Dalio for an hour

Shen Nanpeng: In terms of large-scale money printing, how does the current situation compare to the historical period of excess liquidity?

Dalio: I will explain the current situation by explaining the concept of a big cycle.

The United States established most of the world order in 1945, when World War II ended, because the United States owns 90% of the world’s gold and half of the world’s GDP, as well as military hegemony and the world’s dominant currency. When the new world order developed, we ushered in a period of peace and prosperity. During this period, individuals and businesses become more willing to take on debt and bet on the future. We’ll see debt grow relative to GDP, and it’s a natural cycle.

However, the scale of wealth accumulation is uneven, which is one of the characteristics of the economic system. Therefore, while wealth is accumulated, the gap between the rich and the poor is rising, which in turn challenges the current social order. At the same time, the power gap between other countries and the world’s leading economies has gradually narrowed after their post-war recovery and strengthening. During this period, the debt gradually builds up, but the same amount of hard currency (such as gold) does not exist, so the internal conflict of the country can occur. This internal conflict and currency issue became a political issue and international competition emerged.

Traditionally, when such international competition becomes more intense, economic warfare intensifies. Economic, monetary and capital sanctions are not new, but have occurred throughout history. For example, on the eve of World War II, the United States froze Japanese assets and restricted Japanese oil imports, the kind of economic pain Japan suffered that led to the bombing of Pearl Harbor. Because there is no international tribunal to resolve the differences caused by these conflicts, there is a good chance that economic warfare will lead to a recurrence of military warfare, with the postwar world dominant powers setting the rules and a new cycle beginning . This pattern has been used throughout history.

From this we can see the large trajectory of the cycle. I think there is a typical order, and when we understand the trajectory of that order, and when we look closely at how the situation is developing, we can match the two. This is not necessarily inevitable, but it can provide us with a good reference. For example, what happened in history can help us understand what the consequences of economic sanctions are today.

In the current stagflation, how to allocate assets effectively?

Shen Nanpeng: The Federal Reserve’s balance sheet has been greatly expanded. In 2008, it was $1 trillion, in 2020, it was $4 trillion, and in 2021, it was $9 trillion. In just one year, it created $5 trillion. Almost all central banks in Europe and the United States are raising interest rates sharply. Geopolitical conflicts and the COVID-19 pandemic have also occurred at the same time.

All of this happened simultaneously and on an unprecedented scale. Rui, what kind of risks do you think will arise in the financial markets?

Dalio: I like to explain this in a mechanical way. What has happened is that there is not enough money and money printing has increased, which has caused the value of money to fall relative to goods and services and inflation to rise. The rising rate of inflation leads to a decrease in the purchasing power of the people and a decrease in the real wealth owned by the people. When we think about what is a safe investment, people think that holding cash is a safe investment, maybe holding a safe government bond.

Not anymore. In order to avoid the economic damage caused by inflation, the government will take away some of the purchasing power they once gave, such as the Fed selling $1.1 trillion in bonds, and at the same time letting interest rates rise, which will lead to a decline in the purchasing power of the people and a stagflationary environment, while Both stagnation and inflation lead to the loss of purchasing power of the people. This is where we are currently in the cycle, which is typical.

The only way to raise living standards is to expand production , and living standards cannot be raised by printing money and providing credit, because credit always has to be repaid. One person’s debt is another person’s asset, so a balance must be set or things will go wrong. We were in and still are in a situation where those lenders who hold debt instruments will suffer very badly. So people can’t raise interest rates high enough to contain inflation or repay the holders of those assets that are affected by inflation, and to push interest rates that high is bound to have a negative impact on economic activity. Therefore, the stagflation mechanism will have its inevitable impact.

Shen Nanpeng: Based on the economic trends and conditions we just discussed, what are your suggestions for future investment strategies?

Dalio: It depends on what people are investing in and what they can invest in. But generally speaking, globally, cash investments, in other words, short- or longer-term government bonds and bonds in general, will deliver negative real returns, i.e. inflation-adjusted returns. Therefore these assets are not suitable for holding.

It is therefore important to have a diversified portfolio, i.e. a balanced portfolio. We have a strategy, called the “all-weather strategy,” which is based on balancing different asset classes as wealth shrinks in some places and grows in others. For example, in an inflationary environment, you hold inflation-resistant assets like commodities, gold, etc., which will offset negative returns on other assets. Therefore, it is important to start with a balanced portfolio. Once you achieve effective diversification, you can maintain good returns with very little risk.

So, first, don’t just hold assets like cash ; second, diversify reasonably to create a balanced situation; third, if you’re a global investor like me, do it in different places, countries, and Diversify investments across industries.

Shen Nanpeng: In terms of different asset classes, what are the main ones that global investors should hold?

Dalio : The way I think about this is, it’s like four quadrants with two main variables. The two main variables are inflation and growth rates, which can go up and down. Assign 25% risk to each quadrant, and then think about what assets you would like to own in each quadrant.

For example, if the growth rate is faster than expected, i.e. quadrant 1, you should have equity and credit spreads, because when such conditions exist, credit spreads fall and equity rises, which is what you want to see. If in the other quadrant, growth rates are falling, that’s when you should have inflation-resistant assets, usually bonds, high-quality bonds. If you are in the upper right quadrant, if inflation is higher than expected, then you should own inflation-adjusted assets such as commodities, gold, inflation-linked bonds, etc. In the lower inflation quadrant, you have the same trade-off.

Such quadrants are a guide on how to achieve balance. Investors should risk balancing these factors. This is just the beginning, once you have the balance, you have to manage the balance. This means that no matter what happens, your risk is controlled, which is determined by the nature of the balance. Then you take tactical actions based on changes in the environment. This situation applies all over the world.

Shen Nanpeng: If you want to make good diversified investments, besides China and the United States, what is the third country or region you would choose?

Dalio: I’ll look at three factors, which maybe relate to the three things I mentioned at the beginning. First, is the country fiscally stable, i.e. earning more than it spends, having a good income and balance sheet? Second, is there an internal conflict in the country that could lead to chaos or disorder? Third, is there an external risk of war or similar confusion in this country?

Usually the countries I want to choose meet these conditions, for example in terms of developing technology and so on. There are also some interesting developments in ASEAN countries , some countries in Southeast Asia, India , the Middle East , especially places like Saudi Arabia and Abu Dhabi, because they have financial resources and their situation is changing in terms of internal conflicts. So these places would interest me.

How to view China’s investment environment and potential opportunities

Dalio: Sequoia has a lot of successful investments in China, you can observe closely. Can you tell me what’s going on now, what’s the environment like, what’s the opportunity?

Nanpeng Shen: We are fortunate to work with many amazing entrepreneurs who have created tremendous value for investors. Along the way, we’ve also made many mistakes in investing, and we’ve worked hard to learn from them. There are failures caused by technical risks, failures caused by poor execution, and challenges caused by the violent volatility of the open market. Facing the market, we need to be in awe.

To many people, we are in the financial services business of managing “assets,” but we are really in the business of “people,” both internally and externally.

Internally , we provide team members with excellent career development opportunities based on their strengths and interests, and we continue to learn and grow as a team. Externally , different from secondary market investors, we have different self-positioning. Our positioning can actually be summed up in one word – service , we serve entrepreneurs. How we work with them will largely determine our performance, which will also shape our brand and reputation.

Venture capital and growth-stage investing are our main products and businesses, and we are highly tech-focused, taking a different path than hedge funds or traditional M&A.

As I listen to you describe the challenges of the macro environment, I feel lucky because changes in the macro environment have relatively little impact on a portion of our venture capital business . The challenging macro environment will certainly have an impact on many businesses, but technology development has its own cycle. For example, in the past decade, with the improvement of safety performance and the decline of cost, lithium batteries have been used in electric vehicles and energy storage. The industry has been applied on a large scale, not only in China, but also globally. The timing of such technological breakthroughs has little to do with the ebb and flow of the economy and requires a completely different skill set to anticipate emerging technological trends, which is an important part of our work.

Tonight Shen Nanpeng chatted with Dalio for an hour

Dalio: Do ​​you find it expensive to buy assets when there is a lot of liquidity? Do you think the reduction in liquidity is having an impact, like it is affecting other tech companies around the world?

Shen Nanpeng: In fact, in the past five years, most of the time we have seen a lot of liquidity, not only in the Chinese market, but also around the world, especially in the technology field. Because of this, investors are finding that business valuations are getting more expensive, and businesses are getting more money than they would otherwise need, making competition even more intense.

In the last 6-9 months, the global tech industry has been flat . For the first time, we’ve seen investors get more reasonable valuations when they actually invest in private companies. Frankly, competition among tech companies themselves has become more rational as a result. I hope this leads to a healthier environment, not only for tech innovation, but for investors as well.

Shen Nanpeng: You have been to China many times. What was your impression of China 20 years ago? It seems that the last time you came to China was 3 years ago?

Dalio: In 1984, I was invited by China International Trust and Investment Corporation to come to China to talk about the financial market. China then was completely different from now, when China International Trust and Investment Corporation was the only “window company” dealing with the outside world. There are no cars on the streets, people ride bicycles, and most people live in hutongs, which are very backward. But the Chinese are always very smart, have a mentality unlike the people in developing countries, and have great potential.

Now, China has made great strides in both artificial intelligence and cloud computing, and it also has the second largest stock market in the world. Since I first came to China, China’s per capita income has increased by 26 times, life expectancy has increased by 10 years, and the poverty rate has dropped from 88% to less than 1%. I’m seeing a boom across the country as much as you do. China is now a considerable power in all respects, and I have not only witnessed this, but have personally experienced China’s evolution over a period of time. I think this is the largest economic evolution that has ever happened, and the lives of 1.3 billion people have changed dramatically.

But I think it’s a bit of a pity that young people who haven’t witnessed all this may not have fully grasped the significance of this great change, and China has made a lot of efforts to make it happen. This is what I see.

How to manage a top investment institution?

Dalio: One of the most important things about investing is building an investment team. What are the most critical aspects of leadership and team building?

Shen Nanpeng: I think the following are important for company managers:

First, he himself has a strong desire to become a good investor , which is very important.

Second, investing requires the whole team to learn together, and most importantly, share your experiences with the team, especially those that fail, because we can learn a lot from failures.

Third, it is necessary to build strong data and IT capabilities internally. Many technologies and tools will be used behind the strong analysis and research capabilities, so that investors can make the best use of these resources.

Finally, as a platform, we should encourage young investors to develop skills based on their own interests, just like artists need to do what they are really interested in and inspired by ; if you force a person to do things, or train him to do what he thinks Boring things, he will not succeed.

Rui, you built Bridgewater into the world’s top investment firm, how did you do that?

Dalio: Let me start by saying something that you share, I think the most important thing is to shape excellence and the connection between people. What it really means is that meaningful work and meaningful relationships go hand in hand.

I have a long sentence to describe this: I want to have an ideal system of merit-based ideas , I want the best idea to win, no matter who the idea comes from, whether it’s at the top or the bottom, the best idea wins.

By being extremely truthful and extremely transparent, discussing everything in full truth, including the strengths, weaknesses, and mistakes you mentioned earlier, people need to be able to say who’s good in what and who’s not, maybe that’s a mistake ,and many more. As organizations change, there is a need to manage communication and continuity within the organization. I find it important to write down principles in order to maintain continuity in the shared mission as an organization evolves from one stage to another. Whenever I make a decision, I write down the principles for making the decision, whether it’s an investment principle or a management principle, which is like a recipe and can be read. This is my recipe for making this decision, and I find that we can all write down our own recipes along the same lines. This communication can determine what is best and effective, because corporate culture is our mission. In other words, get acquainted with your employees, they are different, and deal with those differences so that employees can complement each other. How your employees are, and how you get along with each other, will determine the level of success. I found these factors to be the most important.

I want to say a little more about the principles, I want to recommend this to the audience, to you and me and each other. I learned another principle: pain + reflection = progress . Do quality reflection and write down the principles, how reality works, and writing that down as a principle allows you to think more deeply about it, allows you to automate the process, and allows you to effectively communicate with Partner communication. These recipes are important. Think about your decision-making criteria for bringing in talent, and if you don’t write them down, you won’t be using them all the time, you won’t stress-test them, and you won’t see the criteria you use in general. I find it helpful to write down the principles, and I recommend everyone to do the same.

Shen Nanpeng: I think creative selection is also the first skill I need to master. You talked about communication, which is a key element in building a company’s internal culture. Considering the COVID-19 outbreak in the past two and a half years, our business has also changed a bit, and now it is mainly through video communication as it is now, rather than in-person meetings. What impact do you think this change has had?

Dalio: Good and bad. The advantage is that communication is no longer limited by the form, and there is a certain degree of freedom and efficiency; the disadvantage is that there is no such warm interpersonal interaction. The way we deal with this is that we ask employees to come into the office two days a week, and those two days focus on interactions between employees.

In other words, there are two kinds of work, one that does not require the employee to do it in person, and the other that is specifically required to do it in person, which may not be limited to work, but is about the quality of communication. So during the two days we are in the office, we will put special emphasis on the first type of work, which can bring people closer together. In the remaining three days, we focus on other things.

How to adapt to new changes in technology and market?

Dalio: Technological changes are happening at such a rapid rate, how do you maintain the ability to respond to these changes? In other words, how do you make an investment when you don’t understand a new technology? How to maintain liquidity in an illiquid market? How to choose the best technology when technology changes dramatically?

Shen Nanpeng: This is also a question we ask ourselves every day. The answer is that we must adapt ourselves to the rapidly changing technology market. We need to go through a steep learning curve to learn how to understand new technologies. We have to do it as fast as we can to stay ahead of the competition.

As you suggest, I also think the next decade in investing will be very different from the last, and for us, what worked before, will most likely not work in the new era. If we want to adapt effectively to the environment, we should have a flat organizational structure and an effective decision-making mechanism. This is similar to the organizational structure of some of our most successful invested tech companies.

At the same time, we need to adopt a consistent strategy with a long-term view of the market. The technology market has its ups and downs, as we have seen over the past year. But we should believe in the potential of technological innovation, such as new energy fields , synthetic biology , biotechnology and other fields. In difficult times, we need to stay sharp, maintain confidence, continue to invest, and continue to help entrepreneurs explore how to overcome obstacles and help them realize their dreams of creating great companies. CEOs of portfolio companies also welcome such board members and long-term shareholders with this consistent spirit.

Finally, you need to love what you do . I am personally interested in new trends in technology that create new products for humanity. When I read the team’s research reports and participate in discussions, it feels like I’m back in my college days, working on a new science or engineering topic. In fact the methodology for a range of research questions is similar: why? what is it? How to do it? The two are comparable in terms of approach. Therefore , the background of science and engineering training is very helpful for our business and investment . I love the process of learning and finding answers with curiosity, the same way you find answers through data and facts.

Shen Nanpeng: We are all adapting to this new environment. We just talked about mining and discovering new important markets, you mentioned Southeast Asia, India and other regions. When you look at these markets and their opportunities, do you visit these countries in person? How do you form your own opinion? What data and information do you rely on to draw your own conclusions?

Dalio: Three things: data, in-person visits, and communication with the best experts in the field .

I have been a global macro investor for over 50 years. Of course, through data and other factors, I can get a lot of information on how a place is, but that’s not enough, and there is more communication with people like you who can go to the field for inspection, which is a very important way to understand the local situation. fast way. In addition, we do need to examine directly. All three are important.

Shen Nanpeng: Back to the issue of the China business, I know you are building a team that operates in China and has launched products in China. How do these strategies differ from your global strategy?

Dalio: Yes, we have two offices in China, one in Shanghai and one in Beijing. For the past three years or so, we have made onshore investments for Chinese investors.

My strategy is this. First, there are some eternal and universal laws that exist in every country, like the example in the previous four quadrants. Things will work this way because, in all countries, investment is a one-time payment for future cash flows. It’s a timeless and universal truth that you can use the discount rate and future cash flows to figure out what you want. So we have these eternal and universal laws that apply to all countries, and that is our starting point.

Then we dive into the local state of affairs. For example, some policy changes in China will play an important role, and this situation may also occur in other countries. So how do you take this into account? How does money flow? Who is buying what? Why buy? These problems are very detailed local problems. The way we deal with these problems is analysis, and the analysis standard is still: how are the managers, how are the balance sheets and income statements, and so on.

The truth is, for most of them, eternal and universal laws are helpful. Before you cooperated with Sequoia, Sequoia had an investment philosophy about how to make good investments. After you cooperated with Sequoia, you integrated this philosophy into the local environment. is this correct?

Nanpeng Shen: When we look at companies in the US, China or Europe, we find that the best tech companies have some common characteristics. You’ll even find some of the world’s top CEOs have some similar temperaments. Usually successful business models also have some common characteristics. The same business model is often established all over the world. For example, there are a large number of successful software SaaS companies in the United States, many enterprises are turning to the “cloud”, and “software is conquering the world”. This is also happening in China, maybe 3-5 years later than the US, but the overall trend is the same. When you look at these companies, you see that companies exhibit the same parameters and can be valued according to roughly the same rules, which I find interesting.

Now there’s a new phenomenon in it: before some US companies could be very successful in the EU or China, now more Chinese companies are successfully selling to the US and Europe, so it’s the same competitiveness that drives those successes. If a Chinese SaaS company is to be successful, you have to keep pace with your US counterparts in terms of product competitiveness.

Dalio : It’s similar. The construction of our corporate cultures, the choices of investments, the way we deal with timeless and universal rules and local conditions are all similar in our two countries.

Shen Nanpeng: Yes. You know, we do venture capital and growth investments, and we have some M&A business, and your business is primarily in the public markets, across a variety of different asset classes, but I find our investment principles are similar. When it comes to building a financial services company and an investment company, there is a lot to share from the perspective of team building, culture building, and more.

Dalio: Yes. But I know we’re running out of time, although I’d love to continue talking about our differences. In terms of liquidity, for example, that’s the real difference between our industries. In my field, my ideas can change at any time and can be more flexible and adaptable; while in your field, you support entrepreneurs and are actually more like their partners, so your ideas cannot be change easily. Hope we will have the opportunity to discuss again in the future.

Posted by:CoinYuppie,Reprinted with attribution to:
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