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Source: Sequoia Hui
On June 23, Rui Dalio, founder of Bridgewater, and Shen Nanpeng, executive partner of Sequoia Global, held an online dialogue in Diaoyin at the invitation of CITIC Publishing Group.
These two investors with world-class influence are also participants who have successfully passed through several economic cycles. In this one hour long dialogue, Shen Nanpeng and Rui Dalio started from the latter's new book Principles: Responding to the Changing World Order, and discussed in depth topics such as historical cycle, current situation, investment trends, technology entrepreneurship and the Chinese market.
There were many golden sentences on the spot, and Rui Dalio and Shen Nanpeng gave their tested answers to their professional questions.
·Speaking of the causes of the current world macro situation, Rui Dalio summed up three points in his historical experience: Monetization of debt, great disparity between rich and poor, competition among big countries.
·Speaking of the core concept of investment in China, Shen Nanpeng said: The core of investment is not assets but people. We should always be in awe of the market.
·On the investment methodology of the current environment, Rui Dalio suggested: Draw four quadrants, and investors should establish "all-weather strategy".
·On the impact of the macro environment on the venture capital industry, Shen Nanpeng said: Technological development has its own cycle, which is not synchronized with the cycle of macro-economy. Although the technology market rises and falls, we should believe in the potential of scientific and technological innovation.
·As an American who has fully experienced China's reform and opening up, Rui Dalio sighed: Unfortunately, I find that many young people do not really understand the great changes in China's reform.
·On the organizational construction of venture capital institutions, Shen Nanpeng talked about the growth of investors: Like artists, we should find the fields we are really interested in.
·For more than 40 years, Rui Dalio has set a principle for his organization: Idea meritocracy is always a guarantee to make really good ideas win.
·Having experienced several cycles in his investment career of more than ten years, Shen Nanpeng believes that: In the face of market fluctuations and technology cycles, founders prefer investors who can give them consistent support.
·For investors' "self-cultivation", Shen Nanpeng believes that: Investors need to quickly understand the development of cutting-edge technology on a steep learning curve in order to maintain an advantage in the competition.
For more details, see the following text (slightly abridged).
Observe the current situation from the historical cycle
Your new book Principles: Responding to the Changing World Order analyzes the most turbulent economic cycle in history and discusses how we should deal with the current situation. The Chinese version of this book has now been published by CITIC Press. What prompted you to write this book?
Dalio: I am a global macro investor. I master information by studying history to determine how to deal with the current situation. In my 50 years of investment experience, I have found three major factors driving the formation of the current situation, which have occurred many times in history:
First, the emergence of huge debts and the monetization of debts by printing money by major reserve currency countries in the world. Second, the internal conflicts among countries due to the huge gap between rich and poor and the gap in values have led to the populism of the right and left wings, and exacerbated the current political and social conflicts between the United States and some other countries. Third, the competition among major powers. On the one hand, the world order led by the United States began in 1945, and on the other hand, the rise of China and other powerful countries, which are competing with the United States.
In order to examine these factors, I studied the history of the past 500 years and decided to write a book to share my gains with you.
Shen Nanpeng: You just mentioned that the global gap between rich and poor has widened. From a historical perspective, how serious is the current situation?
Dalio: The current global gap between rich and poor has reached its maximum since 1930-1945. In terms of proportion, the wealth of the top 10% is roughly equal to that of the remaining 90%. The huge gap between rich and poor also leads to the opportunity gap. The rich not only have more opportunities, but also their children will benefit more, which provides the basis for populism. Traditionally, such populists fighting for the people emerged against the background of the huge gap between rich and poor and the gap in values. This is what we have seen, which is typical.
Shen Nanpeng: In terms of large-scale banknote printing, what is the current situation compared with the period of excess liquidity in history?
Dalio: I will explain the current situation by explaining the concept of large cycle.
The United States established most of the world order in 1945 at the end of World War II, because the United States owned 90% of the world's gold and half of its GDP, military hegemony and the world's dominant currency. When the new world order developed, we ushered in a period of peace and prosperity. During this period, individuals and enterprises will become more willing to borrow and bet on the future. We will see the growth of debt relative to GDP, which is a natural cycle.
However, the scale of wealth accumulation is uneven, which is one of the characteristics of the economic system. Therefore, while wealth accumulation is taking place, the gap between rich and poor is rising, which challenges the current social order. At the same time, the power gap between other countries and the world's leading economies has gradually narrowed after the post-war recovery and strengthening. During this period, the debt gradually increased, but there was not the same amount of hard currency (such as gold), so national internal conflicts would occur. This internal conflict and currency problem has become a political problem, and international competition has emerged.
Traditionally, when such international competition becomes more intense, economic war intensifies. Economic, monetary and capital sanctions are not new, but have occurred continuously throughout history. For example, on the eve of World War II, the United States froze Japan's assets and restricted Japan's oil imports. The economic pain Japan suffered led it to bomb Pearl Harbor. Because there is no international court to resolve the differences caused by these conflicts, economic war is likely to lead to military war again. After the war, the world's leading countries set rules and a new cycle began. This pattern runs through the whole history.
From this we can see the large trajectory of the period. I think there is a typical order. When we understand the trajectory of this order and carefully observe the development of the current situation, we can match the two. This is not necessarily necessary, but it can provide us with a good reference. For example, what happened in history can help us understand the consequences of economic sanctions today.
How to allocate assets effectively in the current stagflation?
Shen Nanpeng: The balance sheet of the Federal Reserve has greatly expanded. It was $1 trillion in 2008, $4 trillion in 2020, and $9 trillion in 2021, creating $5 trillion in just one year. Almost all central banks in Europe and the United States are sharply raising interest rates. At the same time, geopolitical conflicts and COVID-19 epidemic also occurred.
All of these things happened simultaneously on an unprecedented scale. Rui, what risks do you think will appear in the financial market?
Dalio: I like to explain this problem in a mechanistic way. What has happened is that there is not enough money and printing money has increased, which has led to a decline in the value of money relative to goods and services and an increase in inflation. The rising inflation rate has led to the decline of people's purchasing power and the reduction of people's real wealth. When we think about what is a safe investment, people think that holding cash is a safe investment, perhaps holding safe government bonds.
Not anymore. In order to avoid the economic losses caused by inflation, the government will take away some of the purchasing power they once gave. For example, the Federal Reserve will sell $1.1 trillion of bonds, and at the same time let the interest rate rise. This will lead to a decline in the purchasing power of the people. There will be a stagflation environment, and stagnation and inflation will lead to the loss of the purchasing power of the people. This is our current position in the cycle, which is typical.
The only way to improve living standards is to expand production. Printing money and providing credit cannot improve living standards, because credit always has to be repaid. One person's debt is another person's asset, so we must set a good balance between the two, or there will be problems. We used to be in such a situation, but we are still in it. Those lenders who hold debt instruments will suffer serious losses. Therefore, people cannot raise the interest rate to a level sufficient to contain inflation, nor can they make the holders of assets affected by inflation get repaid. If they insist on raising the interest rate so high, it will inevitably have a negative impact on economic activities. Therefore, the stagflation mechanism will have an inevitable impact.
Shen Nanpeng: Based on the economic trends and conditions we just discussed, what are your suggestions for future investment strategies?
Dalio: It depends on what people invest in and what they can invest in. But generally speaking, globally, cash investment, in other words, short-term or longer-term government bonds and general bonds will bring negative real returns, that is, inflation adjusted returns. Therefore, these assets are not suitable for holding.
Therefore, it is important to have a diversified portfolio, that is, a balanced portfolio. We have a strategy called "all-weather strategy", which is based on balancing different asset classes, because wealth will shrink in some places and grow in others. For example, in an inflationary environment, you hold anti inflationary assets such as commodities and gold, which will offset the negative returns of other assets. Therefore, it is important to hold a balanced portfolio at the beginning. Once you achieve effective diversification, you can maintain good returns with low risk.
So, first, don't just hold cash and other assets; Second, carry out reasonable diversification to create a balanced situation; Third, if you are a global investor like me, you should make diversified investments in different places, countries and industries.
Shen Nanpeng: In terms of different asset classes, what are the main categories that global investors should hold?
Dalio: The way I think about this is that it's like four quadrants with two main variables. The two main variables are inflation and growth rate, which will rise and fall. Allocate 25% risk to each quadrant, and then what assets do you want to own in each quadrant.
For example, if the growth rate is faster than expected, that is, the first quadrant, you should have equity and credit spread, because when this condition exists, the credit spread will fall and equity will rise, which is what you want to see. If the growth rate drops in the other quadrant, you should have anti inflation assets, usually bonds, high-quality bonds. If you are in the upper right quadrant and inflation is higher than expected, you should have inflation adjusted assets, such as commodities, gold, inflation linked bonds, etc. In the lower inflation quadrant, you have to make the same trade-off.
Such quadrants are a guide to how to achieve balance. Investors should balance the risks of these factors. This is just the beginning, Once you have balance, you have to manage it. This means that no matter what happens, your risk is controlled, which is determined by the nature of balance. Then you take tactical actions according to the changes in the environment. This applies all over the world.
Shen Nanpeng: If you want to make a good diversified investment, what is the third country or region you will choose besides China and the United States?
Dalio: I will examine three factors, which may be related to the three things I mentioned at the beginning. First, is this country financially stable, that is, income exceeds expenditure, and has a good income and balance sheet? Second, does this country have internal conflicts that may lead to chaos or disorder? Third, is there any risk of external war or similar factors of chaos in this country?
Usually, the country I want to choose meets these conditions, for example, in terms of technology development. ASEAN countries, namely some countries in Southeast Asia, India, and the Middle East also have some interesting developments, especially Saudi Arabia and Abu Dhabi, because they have financial resources, and their situation in terms of internal conflicts is also changing. So I will be interested in these places.
Under the new situation,
How to view China's investment environment and potential opportunities
Dalio: Sequoia has a lot of successful investments in China. You can observe it closely. Can you tell me about the current situation, the environment and the opportunities?
Shen Nanpeng: We are lucky to be able to cooperate with many great entrepreneurs who have created great value for investors. In this process, we also made many mistakes in our investment and tried to learn from these mistakes. Among them, there are failures caused by technical risks, failures caused by poor implementation, and challenges caused by violent fluctuations in the open market. Facing the market, we need to be in awe.
For many people, what we do is to manage "assets" in the financial services industry, but what we do is "people" business, both internally and externally.
Internally, We provide team members with good career development opportunities, which is based on their advantages and interests. As a team, we continue to learn and grow. Externally, Different from investors in the secondary market, we have different self positioning. In fact, our positioning can be summed up in one word - service, we serve entrepreneurs. The way we cooperate with them will largely determine our performance, which will also form our brand and reputation.
Venture capital and growth investment are our main products and businesses, and we are highly focused on the technology field, whose path is different from hedge funds or traditional mergers and acquisitions.
When I heard you describe the challenges of the macro environment, I felt very lucky because the changes in the macro environment have relatively little impact on some of our venture capital businesses. The challenging macro environment will certainly have an impact on many enterprises, but technology development has its own cycle. For example, in the past decade, with the improvement of safety performance and the decline of cost, lithium batteries have been widely used in electric vehicles and energy storage industries, not only in China, but also globally. The timing of such technological breakthroughs has little to do with the ups and downs of the economy. It requires completely different skills to predict emerging technological trends, which is an important part of our work.
Dalio: Do you find that when there is a lot of liquidity, it is expensive to buy assets? Do you think the reduction of liquidity is having an impact, just like that of other technology companies around the world?
Shen Nanpeng: In fact, in the past five years, most of the time we have seen a lot of liquidity, not only in the Chinese market, but also around the world, especially in the field of science and technology. Because of this, investors find that enterprise valuation becomes more and more expensive, and enterprises also get more funds, even more than they need, which also makes the competition more intense.
In the last 6-9 months, the global technology industry has tended to be peaceful. For the first time, we see that investors can get a more reasonable valuation when actually investing in private enterprises. Frankly, the competition between technology companies themselves has become more rational. I hope this will bring a healthier environment, which is not only conducive to scientific and technological innovation, but also beneficial to investors.
Shen Nanpeng: You have come to China many times. What was your impression of China 20 years ago? It seems that the last time you came to China was 3 years ago?
Dalio: In 1984, I was invited by China International Trust and Investment Corporation to talk about the financial market in China. At that time, China was totally different from today. At that time, China International Trust and Investment Corporation was the only "window company" dealing with the outside world. There are no cars on the streets. People ride bicycles. Most people live in hutongs. The situation is very backward. However, Chinese people are always very smart, have a mentality different from that of people in developing countries, and have great potential.
Now, China has made great progress in both artificial intelligence and cloud computing. China also has the world's second largest stock market. Since I first came to China, China's per capita income has increased 26 times, life expectancy has increased by 10 years, and the poverty rate has dropped from 88% to below 1%. Like you, I see vigorous development throughout the country. China is now a considerable power in all aspects. I have not only witnessed this, but also experienced the evolution of China for some time. I think this is the largest economic evolution ever, and the lives of 1.3 billion people have changed dramatically.
But I think it is a pity that young people who have not witnessed all this may not yet fully understand the significance of this great change. China has made a lot of efforts to achieve this. This is what I saw.
How to manage a top investment institution?
Dalio: One of the most important things for investment is to build an investment team. What is the key aspect of leadership and team building?
Shen Nanpeng: I think the following are very important for company managers:
First, It is crucial for him to have a strong desire to become a good investor.
Second, Investment requires the whole team to learn together, and the most important thing is to share your experience with the team, especially those of failure, because we can learn a lot from failure.
Third, It is necessary to build a strong data IT capability internally. Many technologies and tools will be used behind the strong analysis and research capabilities, so that investors can make the best use of these resources.
last, As a platform, we should encourage young investors to develop their skills based on their own interests, just like artists need to do things that are really interesting and inspirational; If you force a person to do something, or train him to do what he thinks is boring, he will not succeed.
Rui, you have built Qiushui into a world-class investment company. How did you do that?
Dalio: Let me first say something that I feel the same with you. I think the most important thing is to create excellence and interpersonal connection. What it really means is that, Meaningful work and meaningful interpersonal relationships complement each other.
I have a long sentence to describe this: I hope to have an ideal system of selecting the best ideas. I hope the best ideas will win, no matter who the ideas come from, whether they are high-level or grass-roots, the best ideas will win.
Through extreme truth-seeking and transparency, discuss everything in a completely authentic way, including strengths, weaknesses and the mistakes you mentioned earlier. Everyone should be able to tell who is good in what aspect, who is not so good, and maybe that is a mistake. As the organization changes, it is necessary to control the communication and continuity within the organization. When an organization develops from one stage to another, I find it important to write down principles in order to maintain the continuity of the common pursuit of mission. Whenever I make a decision, I write down the principles for making a decision, whether it is investment principles or management principles. This is like a recipe, which can be read. This is my formula for making this decision. I found that we can all write down the formula for making our own decisions according to this method at the same time. Such communication can determine what is the best and effective, because corporate culture is our mission. In other words, be familiar with your employees. They are different. Deal with these differences so that employees can complement each other. How your employees are and how you get along with each other will determine the degree of success. I find these factors are the most important.
I want to say more about the principles. I want to recommend this to the audience and to you and me. I learned another principle: pain+reflection=progress. Conduct quality reflection, and write down the principles and how the reality works. Write this down as a principle so that you can think more deeply about it, enable you to make this process run automatically, and enable you to effectively communicate with partners. These formulas are important. Think about your decision criteria for introducing talents. If you don't write down these criteria, you won't always use them, stress test them, and take a holistic view of the criteria you use. I find it helpful to write down the principles, and I suggest everyone do so.
Shen Nanpeng: I think creativity is also the first skill I need to master. You talked about communication, which is the key element to build the internal culture of the enterprise. Considering the COVID-19 epidemic in the past two and a half years, our business has also undergone some changes. At present, it is mainly through video communication, rather than face-to-face meetings. What impact do you think this change has had?
Dalio: There are good and bad. The advantage is that communication is no longer limited by form, but has certain freedom and efficiency; The disadvantage is that there is no warm interpersonal interaction. Our approach to this is that we require employees to enter the office two days a week, which focuses on the interaction between employees.
In other words, there are two kinds of work. One is the work that does not need employees to do in person, and the other is the work that needs to be done in person. This may not be limited to work, but related to the quality of communication. So during the two days in the office, we will focus on the first kind of work, which can shorten the distance between people. In the other three days, we will focus on other things.
How to adapt to new changes in technology and market?
Dalio: How can you maintain your ability to cope with technological changes that happen too fast? In other words, how do you make investments when you don't know a new technology? How to maintain liquidity in a market with poor liquidity? How to select the best technology in the case of huge changes in technology?
Shen Nanpeng: This is also a question we ask ourselves every day. The answer is, We must adapt ourselves to the rapidly changing technology market. We need to experience a steep learning curve and learn how to understand new technologies. We must do this as quickly as possible to maintain an advantage in the competition.
As you suggested, I also think that the next decade in the field of investment will be very different from the last decade. For us, what worked before will probably not work in the new era. If we want to adapt to the environment effectively, we should have a flat organizational structure and an effective decision-making mechanism. This is very similar to the organizational structure of some of our most successful invested technology companies.
At the same time, We need to adopt a consistent strategy and have a long-term vision of the market. The technology market has gone up and down, as we have seen in the past year. But we should believe in the potential of scientific and technological innovation, such as new energy, synthetic biology, biotechnology and other fields. In difficult times, we should be more sensitive, remain confident and continue to invest, continue to help entrepreneurs explore how to overcome obstacles and help them realize their dream of creating a great enterprise. The CEO of the invested enterprise will also welcome such board members and long-term shareholders, with such a consistent spirit.
Finally, you need to love what you do. I am personally very interested in new trends in science and technology, which create new products for mankind. When I read the team's travel research report and participated in the discussion, it seemed that I had returned to my college days to study a new science or engineering topic. In fact, the methodology of a series of research questions is similar: Why? What is it? How do you do it? The two are comparable in ways and methods. Therefore, the background of science and engineering training is very helpful to our business and investment. I like this learning process very much, and I am curious to find the answer, just like you find the answer through data and facts.
Shen Nanpeng: We are all adapting to this new environment. We just talked about exploring and discovering new important markets. You mentioned Southeast Asia, India and other regions. When you visit these markets and their opportunities, will you personally visit these countries? How do you form your own opinion? What data and information do you rely on to draw your own conclusions?
Dalio: There are three points: Data, personal visits and communication with the best experts in the field.
I have been a global macro investor for more than 50 years. Of course, through data and other factors, I can get a lot of information about how to go to a place, but that is not enough. Also, I can communicate with people like you who can go to the site for investigation. This is a quick way to understand the local situation. In addition, we really need to investigate directly. All three points are important.
Shen Nanpeng: Returning to the business in China, I know that you are building a team operating in China and have launched products in China. How are these strategies different from your global strategy?
Dalio: Yes, we have two offices in China, one in Shanghai and one in Beijing. In the past three years or so, we have invested onshore for Chinese investors.
This is my strategy. First of all, there are some eternal and universal laws in all countries, like the example of the four quadrants above. Things will develop according to this rule, because in all countries, investment is to obtain a one-time payment of future cash flow. It is an eternal universal truth that the discount rate and future cash flow can be used to calculate the value you want. So we have these eternal universal laws that apply to all countries, which is our starting point.
Then we went into the local situation. For example, some policy changes in China will play an important role, which may also happen in other countries. So how to take this into consideration? How does money flow? Who is buying what? Why buy? These problems are very detailed local problems. The way we deal with these problems is analysis, and the analysis standard is still: how about managers, balance sheet and income statement, etc.
The fact is that for most of them, eternal universal laws are helpful. Before you cooperated with Sequoia, Sequoia had an investment philosophy. It was about how to make good investments. After you cooperated with Sequoia, you incorporated this philosophy into the local environment. Is that right?
Shen Nanpeng: When we look at enterprises in the United States, China or Europe, we will find that the best technology companies have some common characteristics. You may even find that the world's top CEOs have some similar temperament. Generally, successful business models also have some common characteristics. The same business model is often established all over the world. For example, there are a large number of successful software SaaS companies in the United States. Many enterprises are turning to the "cloud" and "software is conquering the world". This also happened in China, perhaps 3-5 years later than the United States, but the overall trend is the same. When you look at these companies, you will find that they display the same parameters, and they can be valued according to roughly the same rules. I find this very interesting.
Now there is a new phenomenon: some American companies can succeed in the EU or China in the past, and now more Chinese companies have successfully sold their products to the United States and Europe, so the same competitiveness is driving these successes. If a Chinese SaaS company wants to succeed, you must keep abreast of its American counterparts in terms of product competitiveness.
Dalio: It is similar. The construction of corporate culture, the choice of investment, and the way to deal with eternal universal rules and local conditions in our two countries are similar.
Shen Nanpeng: yes. You know, we do venture capital and growth investment, as well as some mergers and acquisitions. Your business is mainly in the open market, involving various asset classes. But I find our investment principles are very similar. When it comes to building financial service companies and investment companies, there are many common points to share from the perspective of team building and cultural construction.
Dalio: yes. But I know our time is coming, although I would like to continue talking about the differences between us. For example, in terms of liquidity, this is the real difference between our industries. In my field, my ideas will change at any time, and can be more flexible and adaptable; In your field, you support entrepreneurs, but you are actually more like their partners, so your ideas cannot be easily changed. I hope we can discuss it again in the future.
(Statement: This article only represents the author's view, not Sina.com's position.)
