Profound Lessons From Ray Dalio

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Jul 02, 2015
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Ray Dalio (Trades, Portfolio) is one of the most successful hedge fund managers in the world. While it may be safe to say that readers on this forum are unlikely to agree with his strategy, it may also be safe to say that, if we put investment philosophy aside, Dalio’s "Principles" is a hell of a read at the best price possible (free). I’ve read it over and over,and without exception, I am inspired each time. What I want to share today are some of the most profound lessons (in bold) that Dalio has taught us in the most simplistic words. I hope we can all reflect back on our lives and our investment processes, not necessarily to learn something new, but to start implementing some of the principles immediately.

On how to beat the market and make a lot of money

It was the 1960s. At the time the stock market was booming and everyone was talking about it, especially the people I caddied for. So I started to invest. The first stock I bought was a company called Northeast Airlines, and the only reason I bought it was that it was the only company I had heard of that was trading for less than $5 per share, so I could buy more shares, which I figured was a good thing. It went up a lot. It was about to go broke but another company acquired it, so it tripled. I made money because I was lucky, though I didn’t see it that way then. I figured that this game was easy. After all, with thousands of companies listed in the newspaper, how difficult could it be to find at least one that would go up? By comparison to my other jobs, this way of making money seemed much more fun, a lot easier and much more lucrative. Of course, it didn’t take me long to lose money in the markets and learn about how difficult it is to be right and the costs of being wrong.

So what I really wanted to do now was beat the market. I just had to figure out how to do it.

The pursuit of this goal taught me:

  1. It isn't easy for me to be confident that my opinions are right. In the markets, you can do a huge amount of work and still be wrong.
  2. Bad opinions can be very costly. Most people come up with opinions and there’s no cost to them. Not so in the market. This is why I have learned to be cautious. No matter how hard I work, I really can’t be sure.
  3. The consensus is often wrong, so I have to be an independent thinker. To make any money, you have to be right when they’re wrong.

So …

...1) I worked for what I wanted, not for what others wanted me to do. For that reason, I never felt that I had to do anything. All the work I ever did was just what I needed to do to get what I wanted. Since I always had the prerogative to not strive for what I wanted, I never felt forced to do anything.

...2) I came up with the best independent opinions I could muster to get what I wanted. For example, when I wanted to make money in the markets, I knew that I had to learn about companies to assess the attractiveness of their stocks. At the time, Fortune magazine had a little tear-out coupon that you could mail in to get the annual reports of any companies on the Fortune 500, for free. So I ordered all the annual reports and worked my way through the most interesting ones and formed opinions about which companies were exciting.

...3) I stress-tested my opinions by having the smartest people I could find challenge them so I could find out where I was wrong. I never cared much about others’ conclusions — only for the reasoning that led to these conclusions. That reasoning had to make sense to me. Through this process, I improved my chances of being right, and I learned a lot from a lot of great people.

...4) I remained wary about being overconfident, and I figured out how to effectively deal with my not knowing. I dealt with my not knowing by either continuing to gather information until I reached the point that I could be confident or by eliminating my exposure to the risks of not knowing.

...5) I wrestled with my realities, reflected on the consequences of my decisions and learned and improved from this process.

By doing these things, I learned how important and how liberating it is to think for myself.

On how to properly handle mistakes and truth

Since I started Bridgewater, I have gained a lot more experience that taught me a lot more, mostly by making mistakes and learning from them. Most importantly:

I learned that failure is, by and large, due to not accepting and successfully dealing with the realities of life, and that achieving success is simply a matter of accepting and successfully dealing with all my realities.

I learned that finding out what is true, regardless of what that is, including all the stuff most people think is bad — like mistakes and personal weaknesses — is good because I can then deal with these things so that they don’t stand in my way.

I learned that there is nothing to fear from truth. While some truths can be scary— for example, finding out that you have a deadly disease — knowing them allows us to deal with them better. Being truthful, and letting others be completely truthful, allows me and others to fully explore our thoughts and exposes us to the feedback that is essential for our learning.

I learned that being truthful was an extension of my freedom to be me. I believe that people who are one way on the inside and believe that they need to be another way outside to please others become conflicted and often lose touch with what they really think and feel. It’s difficult for them to be happy and almost impossible for them to be at their best. I know that’s true for me.

I learned that I want the people I deal with to say what they really believe and to listen to what others say in reply, in order to find out what is true. I learned that one of the greatest sources of problems in our society arises from people having loads of wrong theories in their heads — often theories that are critical of others — that they won’t test by speaking to the relevant people about them. Instead, they talk behind people’s backs, which leads to pervasive misinformation. I learned to hate this because I could see that making judgments about people so that they are tried and sentenced in your head, without asking them for their perspective, is both unethical and unproductive. So I learned to love real integrity (saying the same things as one believes) and to despise the lack of it.

I learned that everyone makes mistakes and has weaknesses and that one of the most important things that differentiates people is their approach to handling them. I learned that there is an incredible beauty to mistakes, because embedded in each mistake is a puzzle, and a gem that I could get if I solved it, i.e., a principle that I could use to reduce my mistakes in the future. I learned that each mistake was probably a reflection of something that I was (or others were) doing wrong, so if I could figure out what that was, I could learn how to be more effective. I learned that wrestling with my problems, mistakes and weaknesses was the training that strengthened me. Also, I learned that it was the pain of this wrestling that made me and those around me appreciate our successes.