Clay Finck (02:34):

The debt has to be eventually paid back in some way, shape or form. My belief is that policy makers aren’t going to want things to correct like they did in the great depression and they’re going to likely try and work their way out of this by simply inflating away the debt. I think this economic environment specifically can bring a lot of uncertainty to investors and how asset classes will end up performing over say the next five or 10 years. In Preston Pysh’s recent interview with Peter McCormack, Preston was asked why the conclusion of this cycle won’t resemble the great depression and he said that the big difference is the belief in society being fiscally responsible. Cutting, spending and letting the bad businesses fail is a very difficult decision and that’s what they let happen during the great depression. We live in an environment that overall thinks very short term and what can the government do for me today?

Clay Finck (03:32):

Everyone just wants that short term hit and not think about the potential consequences of those choices. So it’s Preston’s expectation that the government is likely to continue printing money and just kicking the can down the road via inflation of the currency over a long enough time horizon. I know right now they’re trying to tighten the economy, but eventually that may have to turn. So when looking at previous periods of high inflation you’ll find that stocks performed pretty poorly during the 1940s and 1970s when inflation was generally high. So if we expect inflation to be higher than the two or 3% target by the fed, and they’ll be working to inflate away the unsustainable debt levels, the stocks will not be the best place to be. This does not mean that I’m not going to own any stocks or any index funds that track the overall market.

Clay Finck (04:21):

It just means that I will not be a hundred percent allocated towards that. So that’s why I looked into some of Ray Dalio’s work. Ray Dalio has this idea of what he calls the holy grail of investing and Preston and Stig talked about this a lot in some of the early days that We Study Billionaires so it’s kind of fun going back and revisiting this idea. It’s this idea that you can have a number of uncorrelated bets in your portfolio without reducing your expected returns too much. So the idea is that you build a portfolio of a number of assets that aren’t a hundred percent correlated. Ray Dalio uses 15 or 20 good uncorrelated assets and then you can combine these into a portfolio and you still achieve a satisfactory return with much lower risk and volatility along the way. One quote I wanted to pull from Dalio is that knowing how to diversify well is more important than almost anything.

Clay Finck (05:18):

I like to also tie in a Warren Buffet quote, The first rule of investing is don’t lose money. The second rule of investing is never forget rule number one.” Another way of thinking about this approach is to put together a portfolio that is likely to do well, but at least do okay if things turn out differently than you originally expected. Currently, I am mostly allocated towards index funds and Bitcoin, but I would like to add to this and get into some other asset classes and individual stocks. So if the stock market starts doing poorly, maybe you have some value stocks or gold that will perform well or hold its value better. If there’s really high inflation and investors flock to hard assets like gold, then you participate in that upside. So it’s this idea of building like a bulletproof portfolio of assets that you believe will achieve satisfactory returns, but it’ll do well under a number of different circumstances or outcomes.

Clay Finck (06:20):

I looked back on William Green’s interview with Ray Dalio back in January, 2022 and he reiterated that balance is key. You don’t want to be overly concentrated in one particular asset class. He does however highlight that bonds are currently a poor investment because of the artificially low interest rates, but that may change for some as interest rates have actually rised recently, but they’re still not something that I’m particularly interested in and then he says that cash is trash over a long enough period as it will lose purchasing power due to inflation. We can automatically roll out those two asset classes, especially if you’re like me and you’re younger and you’re open to taking a little bit more risk. I will obviously have some cash for an emergency fund and my day to day expenses, but that is not a part of my investment portfolio. In terms of balancing and buying and selling different positions in your portfolio it is probably good to have somewhat of an idea of when particular assets in your portfolio are overheated.

Clay Finck (07:25):

For stocks you can look at a company’s historical PE ratio, for Bitcoin there are certain metrics you can look at such as the Mayer Multiple which Preston Pysh actually put together. When it is fairly obvious that there is euphoria or an asset is overheated then from a risk management perspective it is probably wise to trim some of your winners to allocate some of the others that are beaten down at that time. Lyn Alden is definitely familiar with this idea of the long term debt cycle and in this environment she likes to allocate to value stocks, commodities, cash flowing real estate, gold and Bitcoin. Currently, like I said, I’m primarily invested in index funds and Bitcoin so my first options to build this bullet proof for uncorrelated portfolio would be to add to value stocks, commodities, cash flowing real estate and gold.

Clay Finck (08:19):

Now I will say in regards to Bitcoin I looked back at Ray Dalio’s interview with William Green on Richer, Wiser, Happier, and William asked Ray what a sensible allocation was to Bitcoin and Ray thought that one to 2% is a reasonable amount. Now some of us here at TIP have a much higher allocation than that, me being one of them, but I just wanted to make it known what Ray says and Ray has much more experience in the markets than me especially. Ray is later on in his life and as an operator of a hedge fund, he is much more geared towards capital preservation. I myself am younger and believe in the future of Bitcoin and recognize the risks associated with owning it and I’ve decided that a higher allocation is appropriate for me. So if you’re somewhat indifferent about Bitcoin, but you’d like to participate in the potential upside, then Dalio’s one to 2% allocation may be reasonable for you if any.

Clay Finck (09:20):

In terms of commodities, these are really outside of my wheelhouse and after studying hard money I just really can’t get over the fact that once the price of a commodity goes way up the market is going to figure out a way to produce a lot more of that commodity and bring the price back down. So to really profit from a commodities trade you’re going to have to trade in and out at opportune times. That’s one reason I’m more comfortable owning gold or Bitcoin because for gold the supply is much harder to increase than other commodities and Bitcoin has that supply cap of 21 million coins no matter what the price is. As someone who loves analyzing and thinking about the stock market, currently I have my eyes set on building a position in Berkshire, Google, and Amazon. These are stocks that I’m very comfortable with holding for the long term as they have enormously strong moats and strong and growing free cash flows. I’m not particularly certain on how good of an inflation hedge Amazon will be, but I believe Berkshire and Google will be properly hedged against inflation.

Clay Finck (10:30):

I’ll probably eventually start looking for companies that are outside at the tech sector that are uncorrelated to Google and Amazon so I can diversify with some more uncorrelated bets. As far as Berkshire’s stock in particular, Stig Brodersen recently interviewed Chris Bloomstran on We Study Billionaires and Chris chats about how he came to an intrinsic value of $400 for Berkshire’s B shares, which currently at the time of this recording are trading in the $260 range. So that definitely seems like a decent position to add to assuming that Chris’s assumptions and coming up with that valuation are sound and conservative. The stock is also down roughly 25% from a ties which is pretty substantial for a company as stable as Berkshire. To my understanding Dalio is very much a fan of gold. This is a position I’m working on adding to more as it tends to perform well during inflationary environments. Gold seems to be very cyclical.

Clay Finck (11:31):

It seems to do very well for a number of years and then just be a drag on a portfolio for a long period of time. Over the past decade, gold really hasn’t gone anywhere. So if we do see continued inflation over the next decade I expect gold to be a big beneficiary of that over a long enough time period. I’m still somewhat undecided on how big I’ll make this position, but I’ll probably cap it at 5% or so. Also, I’m keeping my eye out to potentially purchase a property to live in with my brother especially if we see interest rates come back down. It appears that mortgage rates are north of 6% currently, but if we’re able to get a rate closer to say 4% then I’d think about getting a rate locked in on a mortgage and so I can get that mortgage payment locked in and it won’t rise as inflation pushes the dollar down.

Clay Finck (12:23):

If we enter another crisis, I think it is likely that the fed will lower interest rates yet again to stimulate the economy. But on the other side I think it’s important to be careful when getting into a home because there are a lot of these costs associated with that such as closing costs when you purchase and then maintenance, insurance, lawn care, et cetera. The list goes on that all comes with owning a home. We’ll see if that actually happens or not, but in the city I’m in you can get a pretty good two or three bedroom home for around 250,000 and this is in a city that has grown pretty fast over the years as well. So there’s always going to be strong demand. All of this discussion related to having a diversified portfolio also ties into Dalio’s All Weather portfolio. This is the portfolio that Ray and the folks at Bridgewater they designed to perform well across all types of economic environments in a passive way.

Clay Finck (13:23):

This isn’t what Bridgewater necessarily invested in themselves. It’s just the portfolio that they put together that they would use if they weren’t allowed to make any changes to it with the changing conditions in the markets so it’s like a set it and forget it style portfolio for Dalio. Ray’s also well known for his four quadrant approach to investing which looks at the four different economic environments which are a combination of falling growth, falling inflation, rising growth, rising inflation so the four combinations of growth and inflation. Stocks tend to do well in a rising growth in falling inflation environment like we saw in the 2010s, but stocks tend to do poorly in a falling growth and rising inflation environment, which is what we have seen as of late. So the All Weather portfolio Bridgewater came up with is 30% US stocks, 40% long term treasuries, 15% intermediate term treasuries, 7.5% diversified commodities and 7.5% gold.

Clay Finck (14:21):

Now, when I look at this portfolio, I kind of use it as a guide to how Dalio would start putting together a passive portfolio and then I can see how I can apply it to my own portfolio. It’s worth noting that this was put together in the mid 1990s so for being someone that is early in their career like myself I personally don’t want to hold any bonds as interest rates have been held artificially low and inflation is currently running hot. So bonds are getting crushed and I see very little upside in them and a lot of potential downside because of the risk of continued inflation. Then the others in the portfolio are stocks, commodities, and gold. If I had to guess how Dalio would adjust that to today, I would say he has a significantly lower allocation to bonds. Stocks, it’s hard to say if it is higher or lower than 30%, but I would venture to guess that his gold position is much higher than 7.5% in his portfolio today.

Clay Finck (15:20):

You know, he doesn’t use this All Weather approach. It’s just, I think it’s what he’d use if he had to invest passively today or pass on money to somebody else and then he has stated that he does own some Bitcoin as well, but I don’t expect that to be a significant position. All right, that’s all I had for you today. I hope you found this episode helpful and interesting. If you guys have any questions related to anything I discussed during this episode, feel free to reach out to me. My email is clay@theinvestorspodcast.com and on Twitter my username is @Clay_Finck. Thanks for tuning in.

Outro (15:59):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin and every Saturday We Study Billionaires and the financial markets. To access our show notes, transcripts or courses go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consultant a professional. This show is copyrighted by The Investors’ Podcast Network. Written permission must be granted before syndication or rebroadcasting.