Life and Work

Principles

By Ray Dalio

Principles — A history of Ray Dalio and Bridgewater

Introduction

When Ray Dalio worked for a brokerage firm he punched his boss in the face leading to him being fired. After this he went on to open Bridgewater.

“It’s senseless to have money as your goal as money has no intrinsic value. It’s value comes from what it can buy & it can’t buy everything … it’s smarter to start with what you really want, which are your real goals and then work back to what you need to obtain them”

“So for me, meaningful work & meaningful relationships were & still are my primary goals…making money was an incidental consequence of that”.

Daily Observations

“In the late 1970s, I began sending my observations about the market to clients”. The goals was for others to “understand my logic” & “help improve it”.

“It was a good discipline since it forced me to research & reflect every day.”

Later in the book he describes how when he was rebuilding Bridgewater after the crash people knew of it from reading the daily observation.

The Abyss

Dalio was wrong about Mexico heading into a depression.

As a result, the firm lost so much money that he had to let everyone in the firm go. Dalio even had to borrow $4,000 from is Dad to make ends meet.

He describes how his following mistakes were:

• “I had been wildly overconfident & arrogant”
• He had not looked at History. “Realising that led me to try to make sense of all movements in all major economies and markets going back a hundred years & to come up with carefully time tested decision making principles.”
• Not realizing the difficulty of timing markets.

This failure led to a mentality shift — “I had a great fear of being wrong that shifted my mind-set from thinking “I’m right” to asking myself. “How do I know I’m right?”.

He determined that the best way of knowing that he is right was “the best way to answer this question is by finding other independent thinkers who are on the same mission as me & who see things differently than me.”

“I just want to be right — I don’t care if the right answer comes from me”.

He describes that the only way he would be able to success is by:

• “Seeking out the smartest people who disagree with me”
• “Know when not to have an opinion”
• “Develop, test & systemize timeless & universal principles”
• “Reduce risks in ways that keep the upside while reducing the downside”.

The idea of being terribly wrong “led me to build Bridgewater as an idea meritocracy not an autocracy in which I lead and others follow.”

Decision making

“I believe one of the most valuable things you can do to improve your decision making is to think through your principles for making decisions, write them down, back test them & use them on a real time basis to run in parallel with your brain’s decision making.”

In 1994 Dalio founded “Bridgewater China Partners” to explore opportunities in China. Although opportunity was promising Dalio realised that he could not run both Bridgewater and “Bridgewater China Partners” effectively and so shut it down. He writes that “Despite passing up this great opportunity, I don’t regret my choice. I learned that if you work hard and creatively, you can have just about anything you want, but not everything you want. Maturity is the ability to reject good alternatives in order to pursue even better ones.”

Discovering the “Holy Grail of Investing” — Diversification.

• Dalio writes that “I saw that with fifteen to twenty good, uncorrelated return streams, I could dramatically reduce my risks without reducing my expected returns. It was so simple but it would be such a breakthrough if the theory worked as well in practice as it did on paper. I called it the “Holy Grail of Investing” because it showed the path to making a fortune. This was another key moment in our education….As the Holy Grail chart showed, an equity manager could put a thousand 60 percent-correlated stocks into their portfolios and it wouldn’t provide much more diversification than if they’d picked only five. It would be easy to beat those guys by balancing our bets in the way the chart indicated.”
• “Making a handful of good uncorrelated bets that are balanced and leveraged well is the surest way of having a lot of upside without being exposed to unacceptable downside.” (AntiFragile!)

Error log

Due to silly mistakes being made in the trading department an “error log” was made in which all mistakes were recorded and then properly reviewed.

Baseball Cards

Each Employee would have a baseball card with their status such as attention to detail, creativity etc. written on it.

When tasks are being assigned the cards can be reviewed in order to best align skills with tasks.

History

Looking from a higher level: Dalio tries to see all events as “another one of those” with this realization “giving me a healthy appetite for History”.

Pain

Pain: “I see pain as natures reminded that there is something important for me to learn. I learned to love my struggles”.

Principles — The Principles Themselves

Life Principles:

Embrace Reality & Deal with it — Be a “Hyper-Realist”.

“Dream + Reality + Determination = Success”

“Overtime I learned that getting more out of life wasn’t just a matter of working hard at it. It was more of a matter of working “effectively”.”

Be radically open minded & radically transparent in order to accelerate the learning process.

Evolve or Die — All companies, political parties etc. must either evolve or die with the key being to fail, learn & improve quickly.

Pain + Reflection = Progress

“Go to the Pain rather than avoid it” — “Every time that you confront something painful, you are at a potential juncture to your life — you have the opportunity to choose the healthy & painful truth or unhealthy but comfortable delusion”.

Second & Third Order Consequences

Every action has a consequence, and each consequence has another consequence. These are called Second-Order Effects. “It’s almost as though nature sorts us by throwing us trick choices that have both types of consequences & penalising those who make their decision on the basis of the first order consequences alone.”

5 Key Decisions

Dalio lays out the 5 key decisions that one needs to make:

• “Don’t confuse what you wish were true with what is really true”.
• “Don’t worry about looking good — worry instead about achieving your goals”
• “Don’t overweight first-order consequences relative to second & third order consequences”.
• “Don’t let pain stand in the way of progress”
• “Don’t blame bad outcomes on anyone but yourself”

On prioritising

“While you can have virtually anything you want- you can’t have everything you want”. “Some people fail at this point, before even starting. Afraid to reject a good alternative for a better one, they try to pursue too many goals at once, achieving few or none of them.”

Identifying Root causes

Don’t mistake a cause of the problem with the real problem. Proximate causes are typically the actions that lead to the problem such as not checking train times and then missing the train. The Root cause runs deeper than that & explains why the proximate causes happens.

Be Radically Open Minded

People tend to have 2 main barriers:

• Ego Barrier — “Subliminal defence mechanism that makes it hard for you to accept your mistakes and weaknesses.”
• Your two “you’s” — The lower level you is the primitive part of your brain while the higher level you resides in your neo-cortex and is unemotional and logic. The lower and higher level yous are constantly fighting with each other for control.

Expected Value Calculations

Dalio argues that all decisions should be viewed as expected value calculations:

Expected Value = (Reward for being right x probability of being right) — (Cost of being wrong x probability of being wrong).

If the expected value is positive than the decision should be made.

On AI

“I worry about the dangers of IA in cases where we accept, or worse, act upon — the case affect-relationships presumed in algorithm produced by Machine learning without understanding them deeply ourselves”.

On Organisations

Dalio explains that an organisation consists of “Culture” & “People”. Most companies do not focus on this which prevents them from being able to evolve — As a result “only 6 of the companies in the Dow Jones 30, 40 years ago remain in it today.”

“Nothing is more important than to get the culture and the people right”.

Believability-weighted idea meritocracy

Bridgewater aims for a “Believability-weighted idea meritocracy”:

“A system that brings together smart, independent thinks and has them productively disagree to come up with the best possible collective thinking and resolves these disagreements in a believability weighted way”.

Idea meritocracy = Radical Truth + Radical Transparency + Believability Weighted Decision Making.

Collaboration: “1 + 1 =3”. 2 people who collaborate well are 3x more productive than working individually.