How to learn from failure, why lithium stocks are hot, and all about the bitcoin buzz

By any conceivable measure, Ray Dalio, head of Bridgewater Associates LP, is a wild success. The founder of the world’s largest hedge fund with $160-billion (U.S.) in assets under management is one of the world’s 100 wealthiest people; the firm he built has been called the fifth most important private company in America; his new book Principles: Life and Work is a New York Times best seller.

Given all of these accomplishments, it is surprising to learn what Mr. Dalio attributes the secret of his success: Failure.

In 1982, some eight years after he started Bridgewater, a new bull market was just getting underway. However, Mr. Dalio’s research was finding problems in the credit markets. Earlier in the year, he had warned about emerging-market bank debt as potentially a major risk for the economic recovery. Then, Mexico defaulted in August 1982. Mr. Dalio was hailed as an economic seer and market wizard.

His reputation grew, and that November he appeared on “Wall Street Week with Louis Rukeyser,” the most important financial news program at the time. There, Mr. Dalio “confidently declared we were headed for a Depression.” Only, that’s not what happened. Timely central bank interventions months earlier began to have their positive effects on emerging-market banking; Mr. Dalio’s disaster forecast never materialized.

It was, however, a disaster for Bridgewater Associates, and the firm almost went bankrupt. Mr. Dalio was forced to lay off all his employees; he borrowed money from his father to support his wife and two young children. It was a debacle, he writes: “I am still shocked and embarrassed by how arrogant I was.”

Mr. Dalio began to rebuild his firm from scratch, and in the process focused on developing a corporate culture that focuses on “idea meritocracy.” Mr. Dalio looks at failures — from ordinary flops to major disasters and every error in between — as fodder for future gains. Every error is an opportunity to learn something new, to get better at what you do. His “Principles” are what came out of his public failure.

Throughout the book, and in a recent conversation we had, Mr. Dalio insists the key to his turnaround was revisiting failure and learning from it. He is enamored of the framework described in Joseph Campbell’s The Hero with a Thousand Faces. Mr. Campbell’s book examined the evolution of mythological figures, whose failure leads to discovering new wisdom that they use to achieve their goals. Mr. Dalio wanted his failures to have the same results, so he created a broad set of rules to do so:

View mistakes as opportunities to improve. He calls this “mistake-based learning.” Own your errors. Never hide them, but bring them forward to create a learning opportunity. His advice is to “fail well.” Pain + reflection = progress. The “pain of failure” should lead to reflection, from which your wisdom derives. Track what you do; keep systemizing what you learn from your mistakes.

There are many more principles, but this gives you an idea of some of the basics.

Mr. Dalio does things that most ordinary people don’t do. Set aside for a minute his remarkable track record as an investor and note the following unusual business behavior: He writes down and reflects on everything he does. Then he systemizes it, eventually turning these into algorithms that his firm’s computer systems help backtest against earlier eras. The end result of this is a hybrid of human creativity and machine learning that produces results better than either could separately.

The entire process is then reduced to a rule or incorporated into an algorithm. Then, each trading algorithm gets tested “out of sample,” across different times, markets and geographies. Successful rules become systemized into the overall investing process.

Mr. Dalio manages the business via the same process — from how to hire people, identify their strengths, to how to hold more effective meetings. The principles drive the entire management of the firm.

What some have derisively called a cult is, in Mr. Dalio’s view, a culture. And while the fruits of failure may inform Mr. Dalio’s methods, it’s hard to argue with his success.

–Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management

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The Rundown

Six leading experts on how to invest right now

The bull market in stocks has been going on – and on, and on – for eight-and-a-half years, enriching investors but also leaving them with a nagging question: What comes next? But central banks are now tightening ultra-accommodative monetary conditions that had spurred economic activity and asset prices. Also, valuations are stretched. Based on reported profits, the S&P 500 has a price to earnings ratio of more than 22, which is its highest level since the days of the dot-com bubble. Worried? The Globe and Mail has assembled a roundtable of six experts to help you find your way through the uncertainty ahead.

Don’t worry about a bitcoin crash (unless you own it)

Matt Lundy takes a look using a number of charts on how to quantify the bitcoin boom compared to the dot-com boom of the early 2000s.

The three indicators that will tell investors when it’s time to run for cover

Is it time to run for cover? With stock valuations at towering heights, investors have every reason to be wary about what lies ahead for this elderly and expensive bull market. But, surprisingly, there’s no reason to panic just yet – at least not if the more reliable gauges of impending trouble are accurate. Right now, three major indicators – the yield curve, unemployment trends and retail sales – are unanimous. They suggest we should tilt toward cautious confidence, at least for the next few months. This may come as a shock.

Canadian ETF providers scramble to launch products as bitcoin futures begin trading

The launch of bitcoin futures on a major exchange has accelerated the race among ETF providers in both Canada and the United States to be first to market with products that track the digital currency. On Sunday, the Chicago-based Cboe Global Markets exchange became the first to offer a futures contract for bitcoin, while CME Group (also Chicago-based) is set to trade on Dec. 18. While news of these launches has sparked much debate among some of the largest asset managers globally, it’s good news for the exchange-traded-fund industry, which has been waiting patiently for a way to cash in on the bitcoin craze.

Microcap stocks: A simple strategy that has produced 16 years of stunningly good returns

Architects can reveal stunning vistas and create stimulating environments when they put ceiling-to-floor windows in office buildings. It’s something I experienced this week while pecking away at a Bloomberg terminal perched next to such a window. Peering down at the city from 15 storeys up inspired more than a touch of vertigo. Some investors suffer from a similar sort of nausea when thinking about buying microcap stocks. It was curiosity about this shunned segment of the market that drew me to the edge of the abyss to do a little back-testing. My ascent into madness was inspired by a recent paper called Microcap as an Alternative to Private Equity by O’Shaughnessy Asset Management’s Chris Meredith, CFA, and Patrick O’Shaughnessy, CFA. They argue that pension funds should invest in small companies via the public markets rather than via private equity firms.

Is the ‘Santa Claus rally’ real? Let’s find out

For almost as long as stock markets have been in existence, people have tried to identify and capitalize on seasonal patterns in the data. There’s the “sell in May and go away” strategy, for example, and the presidential election cycle theory. You can find studies supporting these hypotheses and others debunking them. What about December? It makes intuitive sense that stocks would rise when people are in a festive mood. And, looking at the historical data, it certainly seems like there is something special about the holiday season.

How to avoid the hidden brokerage fees that could be eating into your investment returns

The democratization of online investing with affordable stock-trading commissions for all has hit a speed bump. Buying and selling stocks and ETFs can be economical if you have a small account because it costs as little as $4.95 to trade online, and no more than $10 in almost all cases. The problem is the account fees that brokers may apply to small registered and non-registered accounts with less than $5,000 to $25,000 in them. These fees are referred to as inactivity fees, maintenance fees or administration fees. Their purpose is to discourage modest-sized accounts that people set up and forget about or use so infrequently they generate little or nothing in commissions.

December may be tax-loss harvest time for capital gains

At this time every year, investors are encouraged to consider tax-loss harvesting. This strategy involves selling a security that has declined in value to claim the capital loss. This loss can then be used to offset capital gains incurred in the current year or the previous three years, or even carried forward to offset future gains. All of this can mean reducing your taxes – or at least deferring them.

Raymond James reveals its top Canadian stock picks for 2018

Raymond James released its Canadian analysts’ 2018 best picks list on Monday, comprised of 18 stocks meant to represent the firm’s best ideas for the calendar year ahead. Its annual list has delivered an average holding period return of 13.3 per cent over the past 10 years, outpacing the S&P/TSX Small Cap index by 4.5 per cent on the same basis, according to Daryl Swetlishoff, the firm’s Head of Research (Canada). .

Lithium stocks have had a dazzling year – are there more profits to come?

Lithium, a lightweight metal essential to the latest generation of high-tech batteries, possesses two features most investments lack. For one thing, future demand is nearly certain to surge as battery-driven vehicles grab an increasing share of the automotive market. For another, a handful of companies now dominate production of lithium. Combine growing demand with today’s oligopoly of producers and it’s clear why three major U.S.-listed lithium miners have been among the best non-bitcoin investments of 2017. Are there more profits to come? It seems likely, although investors probably won’t see a repeat of this year’s gains any time soon. .

A dangerous complacency: Why investors should prepare for a bull-market reversal

As we draw closer to the 10-year anniversary of the global financial meltdown, a lot of investors seem convinced we won’t be revisiting anything remotely resembling that period of extreme wealth destruction any time soon. And who can blame them? The value of their rebuilt portfolios has soared during a sustained stretch of well-below- normal interest rates, strong earnings growth, inflated asset values and record-low volatility. Bullish forecasters predict more of the same for 2018, playing down a host of potential pitfalls.

Is everything in the markets over-priced right now? Not quite

The most frustrated investors these days have to be the ones who believe in the foundational “buy low” theory of building wealth. Buy low? Does any asset class qualify as under-valued these days? If you go by the semi-annual economic and market review from portfolio managers PWL Capital, the answer is yes. Rate reset preferred shares and emerging markets are rated as cheap by PWL. Almost everything else is described as expensive. .


Number Crunchers

Ask Globe Investor

Question: What if I buy a security in a registered retirement savings plan (RRSP) or tax-free savings account (TFSA) that I already own in an unregistered account, then sell the shares in the unregistered account? Can I claim the capital loss in that situation and get around the “30-day rule” pre-emptively?

Answer: No. According to the Income Tax Act, if you sell shares at a loss but you (or an affiliated person) purchase identical shares within 30 calendar days either before or after the sale – and you still maintain control of the shares at the end of that period – the loss is considered a “superficial loss” that cannot be used to offset capital gains. An affiliated person can include a spouse, common-law partner or a corporation controlled by you or a spouse.

–John Heinzl

Do you have a question for Globe Investor? Send it our way via this . Questions and answers will be edited for length.

What’s up in the days ahead

If you live and die by the recommendations of Bay Street stock analysts, two things are likely to happen. You will almost never sell anything. And you will probably underperform the market. Tim Shufelt will explain why in Wednesday’s Globe Investor. And later in the week, David Berman will tell us where to go value hunting in the preferred shares market right now.


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Compiled by Gillian Livingston

Courtesy: The Globe And Mail

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