Crossing The Threshold
In the early stages of his career, after losing some money in the stock market, Ray discovered that stock prices are a reflection of people’s expectations. Therefore, it’s not when the financial results are good that a stock price would go up, it is when it’s better than expectations.
Later when Ray entered college, he was introduced to commodity trading by a classmate. Since commodity trading offers higher leverage than stocks, the possibility of making bigger money (if prices move in the desired direction) are more.
Ray says, “You better make sense of what happened to other people in other times and other places because if you don’t you won’t know if these things can happen to you and, if they do, you won’t know how to deal with them.” He said these words in the context of his learnings from the event of 1971 when the US had abolished the currency Gold Standard. Earlier, for each dollar printed, the central bank of the US kept an equal amount of gold. This means that you may exchange dollars for gold. However, in the year 1971, this was abolished and hence the US could print as much currency as it wants.
Ray as per conventional knowledge thought that this was inflationary and hence negative for the markets. However, markets jumped 4% on the day of the announcement. This made him realize that one needs to study instances in history to make sense of the current situation. In his study he found that whenever similar situations happened in the past, stock markets had soared.
Ray, began his professional career as a commodity trader at Merrill Lynch. The inflationary pressure of printing dollar, sored the commodity prices, giving Ray a successful tenure at Merrill Lynch. Soon, he started consulting clients like McDonalds hedging activities through commodity futures in order to tackle raw material price volatility. In 1975, finally he started Bridgewater Associates.
By this time Ray had developed good expertise on the cause and effect relationship of the economic events and prices of commodities. This helped him model this relationship on a computer and run algorithms for buy/sell decision making. For example, Ray used to estimate the amount of meat that was going to hit the market by knowing how many cattle, chickens and hogs were being fed. These types of estimates could help companies like McDonalds that use meat as an important raw material.
This approach can not be perfected in a day. Ray used to refine his model day by day in order to achieve expertise. The approach was to visualise complex systems as machines, figuring out the cause-effect relationships and writing down the principles for decision making and finally coding them so that the computer could make decisions for you.