Warren Buffett and Ray Dalio: How Their Investments Differ and Why It Matters

If you want to learn to invest from the best, Warren Buffett and Ray Dalio are two names to follow. Both have been investing for decades, and each has amassed a multibillion-dollar personal fortune.

The thing is, Buffett and Dalio have fundamentally different investing styles. A high-level look at their differences can provide a new perspective on your own investing practice. You could also use the newfound knowledge to spark fun cocktail party debates among your investing friends.

Buffett: Long-term bull

Buffett serves as chairman and CEO of the conglomerate Berkshire Hathaway (NYSE: BRK.B). Berkshire’s investment portfolio includes common stock in publicly traded companies like Apple (NASDAQ: AAPL) plus wholly owned businesses like Geico and Dairy Queen.

Each year, Buffett publishes a letter to his Berkshire Hathaway shareholders. The letter shares insights on the company’s performance and is peppered with down-to-earth investing wisdom. In his most recent shareholder letter, Buffett recalled an early investment he made in March of 1942. He then dropped this gem of knowledge:

The Dow Jones Industrial Average (DJIA) that day closed at 99, a fact that should scream to you: Never bet against America.

Today, the DJIA exceeds 35,000. This Buffett quote is significant because it shares an essential part of his strategy — faith that the U.S. stock market will always grow over long periods of time.

With that faith, you can confidently hold good companies through global turmoil, inflation, deflation, stagflation, and extreme recessions. Because, on the other side of those crises, you know a recovery will take shape.

Image source: Getty Images.

Dalio: Student of the economy

Dalio is the founder and co-chief investment officer of Bridgewater Associates, the world’s largest hedge fund. Dalio famously predicted the 2008 financial crisis and shifted Bridgewater’s holdings so the fund could turn a profit — when peers were hemorrhaging value.

Dalio is a student of global economic trends. In his view, understanding history’s greatest socioeconomic crises can help us better interpret what’s happening today. That knowledge of the past can also help predict what might happen tomorrow.

Dalio’s 2021 book Principles for Dealing with the Changing World Order: How and Why Nations Succeed and Fail demonstrates this perspective in action. The book analyzes the major economic cycles of the Dutch Empire, the British Empire, the U.S., and China. The analysis supports the conclusion that the world’s largest economies can and do fail. That failure is often preceded by signs — like rising debt, ultra-low interest rates, wealth inequality, and waning influence as a world superpower.

Dalio goes on to warn that the U.S. is demonstrating similar issues:

The fact that the U.S. is simultaneously deeply indebted, its international standing is weakening, and it is experiencing serious conflict should be concerning both to Americans and to non-Americans who depend on them.

Outside of his book, Dalio has repeated this warning. His recommendation to investors is to reduce their exposure to the U.S. dollar and economy by increasing their ownership of international assets.

The Bridgewater portfolio does have sizable exposure to emerging markets via Vanguard FTSE Emerging Markets ETF (NYSEMKT: VWO) and iShares Core MSCI Emerging Markets ETF (NYSEMKT: IEMG). Both were top 10 positions in the fourth quarter of 2021 and top three positions in the third quarter.

Note that Bridgewater is still heavily invested in the U.S. The fund’s top holding in Q4 was SPDR S&P 500 ETF Trust (NYSEMKT: SPY), which comprised 5.2% of Bridgewater’s assets.

Hold vs. take cover

Buffett believes in holding through downturns because the U.S. economy is resilient. Dalio believes the U.S. economy and the dollar are not immune to disaster. When he sees trouble ahead, he trades to protect his wealth.

Combining two opposing views

Of the two investment approaches, Buffett’s is more accessible to ordinary investors. Buying good stocks and holding them indefinitely is a straightforward way to invest. Dalio’s method, on the other hand, requires deep economic expertise. You could study for years and still not see the world the way Dalio does.

Still, there is an element of Dalio’s approach that any investor can adopt alongside a simpler buy-and-hold strategy. That element is diversification — specifically into assets that have a low correlation to U.S. stocks.

For example, you might invest the bulk of your equity portfolio in U.S. companies. If you’re worried about a recession, lean toward companies that have proven they can manage through troubled economic times. You could then invest to a lesser degree in international equities and alternative assets like crypto.

It’s risky to move in and out of these positions as Dalio does — if you predict wrong, your efforts will backfire. But you could hold them as long-term assets, with the goal of being ready for anything.

Align your plan with your expertise and goals

Buffett and Dalio prove there’s more than one way to get rich in the stock market. The trick is having an investment plan that aligns with your expertise and goals. Do that, stay consistent, and you’re on your way to building wealth over time.

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Catherine Brock has no position in any of the stocks mentioned. The Motley Fool owns and recommends Apple, Berkshire Hathaway (B shares), and Vanguard International Equity Index Funds. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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