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Ray Dalio

What can you adopt from Ray Dalio's principles to engineer a system for investing?

  • How high are prices relative to traditional measures of value? This looks at valuation metrics like price-to-earnings ratios compared to historical norms.
  • Are prices discounting unsustainable conditions? This examines if current prices require unrealistic growth assumptions to justify them.
  • How many new buyers have entered the market? A flood of new, often inexperienced investors can be a sign of a bubble.
  • How broadly positive is investor sentiment? Extreme bullishness across the market can indicate a bubble.
  • Are purchases being financed by high leverage? Excessive use of borrowed money or margin to buy assets is a warning sign.
  • Have buyers made exceptionally extended forward purchases? This looks at things like inventory build-up or contracted future purchases that bet on continued price gains.

Modelling​

Evolve a data model for collecting and analyzing data to track the potential bubble in the stock market, particularly focusing on the "Magnificent 7" tech stocks and their impact on the broader market.

Schema​

This data model allows for comprehensive analysis of stock market conditions, with a focus on identifying potential bubble indicators. It combines stock-specific data, broader market metrics, and macroeconomic factors to provide a holistic view of market conditions, aligning with Ray Dalio's bubble gauge metrics and other relevant factors for assessing market health.

Stock​

Purpose: This table stores basic information about individual stocks.

  • Tracks both the Magnificent 7 and other stocks for comparison
  • Allows categorization by sector
  • Flags whether a stock is part of the Magnificent 7

DailyStockData​

Purpose: Stores daily price and volume data for each stock.

  • Enables tracking of price movements and trading activity
  • Allows calculation of various technical indicators
  • Provides data for time series analysis and trend identification

FinancialMetrics​

Purpose: Captures key financial ratios and growth metrics for each stock.

  • Helps assess valuation (e.g., P/E ratio, P/B ratio)
  • Tracks financial health and profitability (e.g., debt-to-equity, ROE)
  • Monitors growth rates to identify potential unsustainable conditions

MarketSentiment​

Purpose: Tracks overall market sentiment and investor behavior.

  • Measures bullish sentiment, which can indicate potential bubble conditions
  • Monitors trading volume for signs of increased market participation
  • Tracks new investor influx, a key indicator in Dalio's bubble gauge

MacroeconomicIndicators​

Purpose: Stores broader economic data that can influence stock markets.

  • Tracks interest rates, which affect stock valuations and borrowing costs
  • Monitors inflation and GDP growth, which impact corporate earnings
  • Includes unemployment rate to gauge overall economic health

AIInvestment​

Purpose: Specifically tracks AI-related investments for tech companies.

  • Monitors AI spending, which is a key driver for tech stock valuations
  • Tracks AI investment as a percentage of revenue to assess its importance to the company
  • Helps identify potential over-investment in AI, which could indicate unsustainable conditions

Data Sources​

  • Stock market APIs (e.g., Alpha Vantage, Yahoo Finance)
  • Financial news APIs
  • Social media sentiment analysis tools
  • Government economic data sources

Data Collection Process​

  • Set up daily data collection jobs for stock prices, volumes, and market caps
  • Collect quarterly financial reports for metrics
  • Use natural language processing to analyze news and social media for sentiment
  • Gather macroeconomic data from reliable sources

Analysis Techniques​

  • Time series analysis of stock prices and volumes
  • Calculation of moving averages and technical indicators
  • Comparative analysis between Magnificent 7 and broader market indices
  • Correlation analysis between AI investments and stock performance
  • Sentiment analysis trends over time

Bubble Indicators​

Track Ray Dalio's six bubble gauge metrics:

  1. Price relative to traditional measures
  2. Prices discounting unsustainable conditions
  3. New buyers entering the market
  4. Broad bullish sentiment
  5. High leverage in purchases
  6. Extended forward purchases

Visualization and Reporting​

  • Create dashboards with key metrics and trends
  • Generate alerts for significant changes in bubble indicators
  • Produce regular reports on market conditions and potential bubble risks