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Ray Dalio says investors are ‘buying dreams, not earnings’

With the US S&P 500 index at an all-time high, and with our own S&P/ASX200 (INDEXASX:XJO) index hot on its heels, it’s a time many investors would be feeling flushed with cash. But one of the world’s richest men (and most successful investors) is warning the good times may not last.

According to a report in the Australian Financial Review (AFR), Ray Dalio, founder of the world’s largest hedge fund Bridgewater Associates, is warning that ultra-dovish monetary policy and cheap money is translating into “investors accepting very low returns by buying dreams rather than earnings”.

The AFR quotes Dalio as saying:

Investors have an abundance of money and then we also don’t have much in the way of the trickling down… and we’re going to come into a period of time where that’s going to be more challenging and it will have big effects on the markets. 

What does this mean for ASX shares?

I think the most pertinent thing to draw from Mr Dalio’s comments is the warning over chasing dreams, not earnings. Some of the hottest growth stocks on the ASX have been driven to record valuations this year, despite many companies being unprofitable, or only slightly so.

As Dalio warns, higher share prices today reflect lower returns tomorrow and I think any growth investors should keep this in mind. Take Zip Co Ltd (ASX: Z1P). Zip has been one of the largest lightning rods for momentum growth investors this year, rising from $1.10 per share at the start of the year to today’s price of $4.02 (at the time of writing). Zip shares even got as high as $5.86 just last month.

There comes a point when future earnings expectation simply can’t match the price which the market is putting on a business, no matter how stellar its growth rates. I think companies that have yet to even post consistently positive earnings or profits are the red flags Dalio is warning of.

Foolish takeaway

Although markets are at all-time highs, I think it would be wise to heed the advice of someone like Dalio going forward. Good times don’t last forever, and I personally would rather be exposed to profitable businesses with robust earnings when the music eventually stops.

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Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.