Learning Based vs Reasoning Based Thinkers

As you can probably tell, I have an affinity for people who spurn conventional wisdom and think outside the box. In that vein, I recently learned about a legendary hedge fund manager named Ray Dalio who manages over $90 billion. He is known for being a little quirky and for thinking independently.  While some people criticize his eccentricities, no one criticizes his returns. Over the past 10 years, Dalio has returned 18% annualized in a flat market.

In a recent interview in Barron’s, Dalio reveals his economic outlook for the world. Dalio brings up many of the same points I do, including the over-indebtedness of the Western world. Here are some of his key quotes:

• This is a bipolar world in which there are emerging countries, which don’t have debt problems, which are saving a lot and growing at fast paces. Those include China and Brazil. Then there are the developed countries, which are the U.S., most of Europe and Japan, and they have too much debt. Each group can be broken into two other groups, those that have independent monetary policies and those that don’t

• Debtor countries’ bonds will be unattractive for the creditor countries’ lenders. What they want to buy are the assets they know they’ll need. They want to buy commodities. Commodities are considered safe. That’s why they, particularly the Chinese, are on a commodity-buying spree

• Gold is a very underowned asset, even though gold has become much more popular. If you ask any central bank, any sovereign wealth fund, any individual what percentage of their portfolio is in gold in relationship to financial assets, you’ll find it to be a very small percentage. It’s an imprudently small percentage, particularly at a time when we’re losing a currency regime. 

• I was a clerk on the floor of the New York Stock Exchange in August 1971, when the U.S. devalued. President Richard Nixon spoke to the nation on a Sunday night. Monday morning, the stock market went through the roof. In August 1982, the Latin American debt crisis occurred. More than 200% of American bank capital was lent to Latin America, and those countries defaulted. That marked the bottom 4 of the stock market at 777 on the Dow and that is because the U.S. started printing money. Those two instances were telling in terms of what currency devaluations do. Currency devaluations are good for stocks, good for commodities and good for gold. They are not good for bonds.

I can’t say I disagree with any of these points- Dalio is obviously someone who sees where the world is headed with clarity. You’ll notice that his views are based on observation, not subjective opinion. For example, Dalio lived through crises and saw first-hand how assets reacted. He is judging the popularity of gold based on statistical measures rather than his personal opinion. I can see why Dalio has been successful for so long; his views are based on experience and sound reasoning.

Dalio is known for writing Principles, which covers his views on how to be successful in life and work. In Principles, Dalio talks about the difference types of thinkers, which he separates between learning based thinkers and reasoning based thinkers. 

According to Dalio, learning based thinkers make decisions based on what they’ve been taught in the past. Since they rely on their memory for guidance, learning based thinkers tend to be more skeptical of unconventional ideas. They accept the status quo, even when the status quo is wrong. As you can probably tell, learning based thinking is good for school.

On the other hand, reasoning based thinkers look at the principles behind an idea. They are more likely to judge an idea on its merit. Reasoning based thinkers tend to be innovative and are more likely to embrace unconventional ideas. They excel at seeing what doesn’t exist, which means they are less prone to be caught off-guard when the “impossible” happens. Reasoning based thinking is not necessarily coveted at school.

I found it interesting that Dalio shares many of the same views I do on the different modes of thinking. As such, it’s not surprising that we share very similar investing outlooks. Have any of you read in your textbooks that gold is a hedge against fiscal mismanagement? Or how about the fact that no government bonds historically are “risk-free”? These are things you just won’t learn in school. It takes an open and “reasoning” mind to look at the facts and accept them even when it goes against conventional wisdom. I’ve talked to hundreds of people about the debt crisis and gold. Trust me, most people don’t have an open and reasoning mind; they are rendered braindead by what they learned in school.

The world is changing quickly and only the most flexible thinkers will prosper. The academics who have their heads buried in textbooks (aka Helicopter Ben) will show you just how useless their knowledge is in the real world. I am going to be firm until the very end that a debt crisis is going to hit that will send gold flying. Most people still don’t believe.  The learning based thinkers are still pounding their fists that gold is a barbaric relic, deficits don’t matter, and U.S. government bonds are risk-free. How they do not see the obvious storm clouds looming, I do not know.

Learning Based vs Reasoning Based Thinkers is a post from: Expected Returns

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