Bridgewater Associates’ Principles And Culture
Bridgewater utilizes a principle-based approach designed by its founder, Ray Dalio.
Dalio bought his first stock in the then-Northeast Airlines at the age of 12, tripling his money upon the airline’s following merger. He worked as a trader on the NYSE floor, before eventually leading Bridgewater to become the world’s largest hedge fund.
In 2011, he self-published “Principles”, a 123-page volume that sketches his investment and corporate management philosophy based on a lifetime of observation.
With a net worth of $20 billion and the world’s largest institutions in his clientele, Dalio’s principles have proven their utility.
While Mr. Dalio’s principles are better read as a whole to fully grasp them, we have summed up what we believe are five key takeaways that should be quite relevant to any investor.
Takeaway #1: Practice Real Diversification
The ‘holy grail’ of diversification is to find multiple investments with positive expected returns that are uncorrelated from one another. Most asset classes are more correlated to one another than one might guess.
Bridgewater’s approach to diversification is the ‘All Weather Portfolio‘. A well-diversified portfolio is likely to have lower standard deviation for a given level of return. This allows one to ‘leverage up’ the portfolio to match a more volatile asset, in order to generate superior returns.
Related: See our modified Permanent Portfolio for another take on a highly diversified portfolio.
Through intelligent diversification, Bridgewater has been able to achieve superior risk-adjusted returns.
Keep in mind that Bridgewater does not necessarily strive to “beat the market.” The fund has clients like Government entities, which are more interested in keeping up with inflation and the economy. Risk-adjusted returns are more important in this case.
Takeaway #2: Avoid False Dichotomies In Risk/Reward Tradeoffs
Ray Dalio emphasizes that decisions don’t always have an either-or outcome. There is usually a solution just out of view that allows both goals to be achieved.
Takeaway #3: Systematize & Codify Your Decision Making
Each investor has different criteria that they use to make investment decisions.
In his investment strategy (and that of Bridgewater Associates), Dalio explains how he is an advocate of documenting decision-making criteria so that successful actions can be replicated in the future.
Takeaway #4: Keep An Investment Decision Log
This is quite similar to the third takeaway above, but instead of replicating past successful strategies, it aims to create new ones.
By writing down your present rationale for decisions you make, it will allow you to get a less distorted view of your perspectives and views later. This will improve your process of reflecting on past choices and can assist you in sharpening your future decision-making.
Related: Investment Thesis Template | Track & Improve Your Investing Decisions.
Takeaway #5: Be Wary Of Thinking An Investment Is A Guaranteed Success
Investing in equities always bears a certain amount of risk… Many companies that appear like “guaranteed wins” may fail, and businesses that seem laughable and desperate may go on to be huge successes.
Realizing that nothing is a completely ‘can’t miss’ bet is a great mental asset to have. Additionally, using the pain of past failures to grow as an investor should also be highly valued.
Bridgewater Associates’ Portfolio & 10 Largest Public-Equity Investments
Bridgewater Associates’ portfolio seems to be following closely Dalio’s diversification principle. The portfolio is very diversified, numbering 899 individual equities. Its top 10 holdings account for 36.3% of the total capital invested.
Source: 13F filing, Author
The Procter & Gamble Company (PG):
The consumer staples sector has gained increased investor interest over the past few quarters, as its components have been delivering resilient results during a rather uncertain market environment. This is the case with Procter & Gamble, which currently features a near all-time high LTM (Last Twelve Month) net income of $14.6 billion.
The stock is trading at 24.4 times its forward net income, which is on the high side when taking a historical perspective of Procter & Gamble’s price-to-earnings ratio.
The company is a Dividend King, featuring 66 years of consecutive annual dividend increases. Dividends have grown at a 5-year CAGR of 4.94%. The latest DPS increase was also by 5%. Based on management’s guidance and the current annualized payouts, the payout ratio stands at a rather healthy 62%.
Bridgewater boosted its position by 31% in its latest filing. The stock currently accounts for 7.1% of the fund’s total holdings. It is its largest holding.
Coca-Cola Co. (KO) & PepsiCo, Inc. (PEP):
Coca-Cola and PepsiCo collectively account for around 8.6% of Bridgewater’s total holdings. The consumer staples giants are both Dividend Aristocrats, boasting 60 and 50 years of consecutive annual dividend increases, respectively. Both companies possess a significant moat in their respective categories. Consequently, their predictable business model and operations make them excellent sources for income generation.
In terms of dividend growth, PepsiCo features a substantially higher increase pace over the past few years, displaying a 5-year DPS CAGR of 7.39% against Coca-Cola’s 3.53% during the same period.
PepsiCo’s and Coca-Cola’s cash flow stability are a great advantage to achieving strong returns over the long term, which is a valuable quality for funds catering to such a diverse client base like Bridgewater.
Coca-Cola yields close to 2.8%, while PepsiCo yields close to 2.7%, despite the latter’s likely better dividend growth prospects. While both yields may have become less special lately due to the ongoing rise in interest rates, both Coca-Cola and PepsiCo are likely to fit conservative dividend growth portfolios. Their valuation multiples are similar, featuring a forward P/E of approximately 25.
Bridgewater’s positions in Coca-Cola and PepsiCo were increased by 37% and 36%, respectively, according to its latest filings.
Johnson & Johnson (JNJ):
Following the theme of holding credible Dividend Aristocrats, Bridgewater has allocated around 4.4% of its assets to the healthcare sector giant, Johnson & Johnson. The company recently posted quarterly revenues of $22.4 billion, 4.8% higher YoY, and first-quarter adjusted EPS of $2.67, implying an increase of 3.1% YoY.
The company’s results remained resilient despite the rather shaky macroeconomic environment, resulting in the company comfortably raising its quarterly dividend once again by ~6.6% to $1.13 per share. J&J is on the exclusive Dividend Kings list, a group of just 44 stocks with 50+ consecutive years of dividend increases.
Having already delivered 60 years of consecutive annual increases, investors are buying into a high-quality company with a highly competent management team. The stock is trading at a relatively fair valuation at 17.4 times its forward net income, presenting a decent entry point for current investors.
The most recent Johnson & Johnson position adjustment implied a 40% stake increase.
Alibaba Group Holding Limited (BABA):
Mr. Dalio has been an enthusiast in regard to China’s investing potential for years. Alibaba, the Chinese tech behemoth, has been in Bridgewater’s portfolio since 2018 and has since grown to its largest position. The company recently reported its Q1 results, delivering strong revenues of $32.1 billion, a 9.9% growth year-over-year.
While Alibaba remains a highly profitable company, displaying net income margins that often surpass the 30%+ levels, its shares have been recently lagging due to the ongoing concerns surrounding Chinese equities. The Chinese government’s potential involvement in directing the company’s regulation has also been raising questions among investors. This is the reason the stock’s P/E ratio has slid to a low of just 14.5.
Hence, while those who are interested in investing in China’s tech world are likely to find Alibaba one of the most attractive investments out there, they should also consider the underlying risks involved. Bridgewater hiked its Alibaba position by 75% during the quarter.
Walmart Inc. (WMT):
Walmart is the largest company in the world by revenue, generating over $570 billion in annual sales. Its stock is Bridgewater’s sixth-largest holding, accounting for just over 3.4% of its total portfolio. Despite having such a high exposure to the company, Bridgewater initially bought into Walmart very recently, in Q3 of 2020. Bridgewater is likely betting on Walmart’s e-commerce sales expanding in the short term, as the company leverages its huge logistics network to compete with Amazon (AMZN).
The fund’s conviction seems to be remaining strong overall, as Bridgewater has grown its positions consistently through the year. In the most recent quarter, it boosted its equity stake by a further 42%.
The stock is trading at 19.2 times its forward net income, correcting from its price-to-earnings ratio around a year ago. Walmart is a Dividend Aristocrat, counting 49 years of consecutive annual dividend increases.
Costco Wholesale Corporation (COST):
Costco’s unique consumer culture has been a strong driver of the company’s long-term revenue growth. While the business itself is a low-margin one, Costco’s economies of scale are massive, resulting in significant net income.
Unlike its competitors, the stock has always attracted a premium valuation. At a forward P/E of 36, the stock is definitely not cheap. Still, with its resilient cash flows and organic growth, Costco’s premium valuation multiple may be justified.
In its latest quarterly report, net sales increased by 16.2%, to $52.6 billion, while EPS grew to $3.05, 10.9% higher YoY, comprising another report of excellent performance. We can see the stock retaining its pricey valuation, and consequently, its dividend yield staying below 1%.
The most recent Costco position increase was by a notable 29%.
McDonald’s Corporation (MCD):
With McDonald’s, we can see once again how much Mr. Dalio and his investment team value companies that have proven their ability to deliver sustainable long-term returns to their shareholders.
McDonald’s business model and brand value have remained resilient for decades, with the company raising its dividend annually for 46 consecutive years.
McDonald’s is on the exclusive Dividend Aristocrats list, a group of 65 stocks in the S&P 500 Index with 25+ consecutive years of dividend increases.
The stock should be relatively recession-proof as well, as fast food holds up very well even during economic downturns. At around 25.8 times its forward earnings, the stock may not be cheap but could make for a solid long-term holding.
Bridgewater raised its stake in McDonald’s Corporation by 37% during the quarter. McDonald’s is Bridgewater’s eighth-largest holding.
Abbott Laboratories (ABT):
Abbott Laboratories is Bridgewater’s ninth-largest holding, accounting for 1.9% of its total portfolio. The healthcare behemoth’s latest results were very strong. Specifically, in Q1 the company generated $11.9 billion in sales (58% outside of the U.S.) representing a 13.3% increase compared to Q1-2021. Results were up almost across the board with Diagnostics, Established Pharmaceuticals, and Medical Devices organic sales increasing 35.1%%, 13.4%, and 11.5% respectively. Nutrition declined 4.4% due to a voluntary recall of certain powder formulas in the U.S.
Adjusted earnings-per-share of $1.73 compared very favorably to $1.32 in the prior year.
The company’s results were robust last year, resulting in the company raising its quarterly dividend once again by ~4.4% to $1.88 per share. Abbott Laboratories is on the exclusive Dividend Kings list, a group of just 44 stocks with 50+ consecutive years of dividend increases.
Bridgewater raised its stake in Abbott Laboratories by 39% during the quarter.
Target Corporation (TGT):