Ray Dalio is the founder of one of the largest hedge funds in the world today called Bridgewater which has about $160 Billion in assets under management. He is also a philanthropist and most recently a New York Times best selling author. His new book Principles is an autobiography of his life, and in this book are also the principles that he created for himself to help him manage his own personal life and his hedge fund.
This post is going to delve into the ideas that I found very valuable in his book, Principles: Life and Work, but first I think it will be helpful to actually define what a principle is.
Principle – fundamental truth or proposition that serves as the foundation for a system of belief or behavior or for a chain of reasoning.
“Visualizing complex systems as machines, figuring out the cause-effect relationships within them, writing down the principles for dealing with them, and feeding them into a computer so the computer could “make decisions” for me all became standard practices.”
Whenever Ray came across a problem or something he didn’t understand, he would look for a time in history when it already happened and he would analyze it.
According to Ray, everything is just “another one of those” meaning that it has happened at some point in history in one way or another. It may not have happened the same exact way but it has happened.
When he came across his problems he would always write them down, describe certain things like his feelings and then turn it into a principle. He advises everyone to create a list of their own principles because his long list of principles that he shares in his book and that he spent decades putting together have been incredibly important to his successes in life.
“With time and experience, I came to see each encounter as 'another one of those' that I could approach more calmly and analytically, like a biologist might approach an encounter with a threatening creature in the jungle: first identifying its species and then, drawing on his prior knowledge about its expected behaviors, reacting appropriately. When I was faced with types of situations I had encountered before, I drew on the principles I had learned for dealing with them. But when I ran into ones I hadn’t seen before, I would be painfully surprised. Studying all those painful first-time encounters, I learned that even if they hadn’t happened to me, most of them had happened to other people in other time and places, which gave me a healthy respect for history, a hunger to have a universal understanding of how reality works, and the desire to build timeless and universal principles for dealing with it.”
Ray’s book kind of acts like a self-help book as well as an autobiography because of all of the advice he is giving the reader to help him or her create a better life for themselves. I was lucky to have already been familiar with some of Ray’s principles after reading a free downloadable paper that Ray put on Bridgewater’s website in 2013 and I remember finding it very valuable. That free pdf is actually how this book came to be about. A publisher from Simon & Schuster reached out to Ray about that paper and said that he should turn it into a book, which he did.
I found that paper very valuable because he was a very successful investor and he was openly sharing what made him so successful. His perception of reality and how he dealt with certain emotions was different than from what I knew at the time. One of the most important ideas I learned from Ray was how he viewed handling pain and mistakes because his views on how to handle these things were different than how most people that I know do.
We spend a lot of time going through a school system and we become trained to dislike mistakes. That is because we are penalized for making mistakes in school because our grades go down when a mistake is made. Ray is open about being a poor student in school and talks about how pain and mistakes are good and shouldn’t be avoided.
Pain is good because it gives us a signal of when we are approaching our limits and in order to improve at something and be really good, we must test those limits. Think about lifting weights. If all you ever did was lift the same amount of weight every time you went to the gym you would never get stronger. But when you increase the weight that you normally lift and you approach your maximum limit, you start to feel pain and that pain is a signal that you are approaching your limits and by fighting through this pain you get stronger.
The same applies when you are trying to learn something new. Sometimes we struggle a lot when we pick up a book on a subject that we aren’t already familiar with. We may even experience some headaches at first while trying to learn this new material, but the more we tackle this difficult subject, the smarter we get.
Here are some quotes from Ray about pain:
“I believe that the key to success lies in knowing how to both strive for a lot and fail well. By failing well, I mean being able to experience painful failures that provide big learnings without failing badly enough to get knocked out of the game.”
“It is a fundamental law of nature that in order to gain strength one has to push one’s limits, which is painful.”
“Mistakes will cause you pain, but you shouldn't try to shield yourself or others from it. Pain is a message that something is wrong and it's an effective teacher that one shouldn't do that wrong thing again.”
“I saw that to do exceptionally well you have to push your limits and that, if you push your limits, you will crash and hurt a lot. You will think you have failed but that won't be true unless you give up.”
Ray has also instilled a lot of his principles and theories into his company, Bridgewater. Bridgewater is known to have a very unique culture and a different company structure. Most organizations are built to have layers of managers and workers that tend to form a bureaucracy. In these organizations, a leader’s opinions or decisions are very rarely challenged and they are viewed to be correct.
Ray created a culture that allows even a first-year associate to challenge the thoughts of the CEO. It is based on the idea of what Ray refers to as radical transparency and idea meritocracy. Bridgewater’s idea meritocracy is all about having the best ideas win out, even if the best idea is from that first-year associate or even an intern.
“An idea meritocracy requires people to do three things: (1.) Put their honest thoughts on the table for everyone to see, (2.) Have thoughtful disagreements where there are quality back-and-forths in which people evolve their thinking to come up with the best collective answers possible, and (3.) Abide by idea-meritocratic ways of getting past the remaining disagreements (such as believability-weighted decision making).”
In order to maintain the culture though you have to be consistent with the principles and ideas that you share. As I mentioned before, Ray was big on using mistakes as ways of learning and improving. He understood that everyone makes mistakes and it is important to learn from them so you don’t continue to make them. It would be bad for the culture and the company if Ray didn’t show this to employees and instead acted differently by penalizing them for making mistakes.
That is why when an employee cost Bridgewater hundreds of thousands of dollars because he didn’t place a trade for a client, the employee didn’t get fired. The trade would have been profitable for the client so Bridgewater honored the trade and gave the client the money. Despite Bridgewater having to give away hundreds of thousands of dollars for this mistake, Ray felt that if he fired that employee it would hurt the culture of his company because the employees would hide their mistakes in fear that it may lead to them being fired. Ray wanted his employees not to hide their mistakes, but to face them head on.
Another idea that I remember from reading that paper on Bridgewater’s website that was in Ray’s book Principles also was a story from Ray about nature and reality. Ray talks about how he saw a pack of hyenas take down a wildebeest and wondered if this was good. Most people, including me at the time, would view this as an awful thing but when you really think about it, it is reality. It is reality that a hyena is going to need to eat to survive and this is how they eat which is nature at work.
“When I went to Africa a number of years ago, I saw a pack of hyenas take down a young wildebeest. My reaction was visceral. I felt empathy for the wildebeest and thought that what I had witnessed was horrible. But was that because it was horrible or was it because I am biased to believe it’s horrible when it is actually wonderful? That got me thinking. Would the world be a better or worse place if what I’d seen hadn’t occurred? That perspective drove me to consider the second and third order consequences so that I could see that the world would be worse. I now realize that nature optimizes for the whole, not for the individual, but most people judge good and bad based only on how it affects them. What I had seen was the process of nature at work, which is much more effective at furthering the improvement of the whole than any process man has ever invented. Most people call something bad if it is bad for them or for those they emphasize with, ignoring the greater good.”
Although it may still be sad to think of a wildebeest being taken down by a pack of hyenas, understanding that the world isn’t fair and is a difficult place is reality. And a lot of our troubles in life happen when we distort reality. Reality may be painful at times as we know, but circling back to what I mentioned earlier, facing our pain head on can be a good thing if dealt with properly. That is why Ray has a saying that goes like this, “Pain plus Reflection equals Progress.”
“I've learned that there is no escaping the fact that: truth - or more precisely, an accurate understanding of reality - is the essential foundation for any good outcome. Most people fight seeing what is true when it is not what they want it to be. That is bad because it is more important to understand and deal with the bad stuff since the good stuff will take care of itself.”
Ray sees evolution as one of the most powerful forces of the universe. Everyday humans and all of the rest of the world are evolving and he advises us to continue to evolve because evolving is the best way to progress through life and to get what you want out of it.
“I believe that evolving is life’s greatest accomplishment and its greatest reward.”
“No matter what you want out of life, your ability to adapt and move quickly and efficiently through the process of personal evolution will determine your success and your happiness.”
Some other great wisdom from Ray’s book before I conclude is the story he shares of how his hedge fund failed in the early 1980’s because of a call he made in the market that he felt so confident about. His call ended up being wrong so he had to lay off his workers which he viewed as family and he had to borrow $4,000 from his father to pay his bills. Ray to this day mentions that he feels embarrassed when he thinks about how arrogant he was in thinking he knew for sure how the markets worked. This failure helped him understand that he needed to be less arrogant, he needed to test his ideas with the smartest people he could find, and he needed to keep his ego in check.
“The most painful lesson that was repeatedly hammered home is that you can never be sure of anything: There are always risks out there that can hurt you badly, even in the seemingly safest bets, so it’s always best to assume you’re missing something.”
“The brilliant trader and investor Bernard Baruch put it well when he said, ‘If you are ready to give up everything else and study the whole history and background of the market and all principal companies whose stocks are on the board as carefully as a medical student studies anatomy – if you can do all that and in addition you have the cool nerves of a gambler, the sixth sense of a clairvoyant and the courage of a lion, you have a ghost of a chance.’”
Here are some final thoughts I found very valuable from Ray’s book in Ray Dalio’s own words:
Dealing with Pain:
Remember this: the pain is all in your head.
Dealing with Failure:
Jeff Bezos, “You have to have a willingness to repeatedly fail. If you don't have a willingness to fail, you are going to have to be very careful not to invent.”
Winston Churchill hit the nail on the head when he said, “Success consists of going from failure to failure without loss of enthusiasm.”
Evolution:
Everything from the smallest subatomic particle to the entire galaxy is evolving.
Management:
I saw that the only way I could succeed would be to:
1. Seek out the smartest people who disagreed with me so I could try to understand their reasoning. 2. Know when not to have an opinion 3. Develop, test, and systemize timeless and universal principles. 4. Balance risks in ways that keep the big upside while reducing the downside.
Since at Bridgewater the key shared values that maintain our culture are meaningful work and meaningful relationships, radical truth and radical transparency, and open-minded willingness to explore harsh realities including one's own weaknesses, a sense of ownership, a drive for excellence, and the willingness to do the good but difficult things, we look for highly capable people who deeply want all of those things.
Nature:
Man is just one of ten million species and just one of the billions of manifestations of the forces that bring together and take apart atoms through time. Yet most people are like ants focuses only on themselves and their own anthill; they believe the universe revolves around people and don’t pay attention to the universal laws that are true for all species.
While mankind is very intelligent in relation to other species, we have the intelligence of moss growing on a rock compared to nature as a whole. We are incapable of designing and building a mosquito, let alone all the species and most of the other things in the universe. So I start from the premise that nature is smarter than I am and try to let nature teach me how reality works.
When we look down on ourselves, through the eyes of nature we are of absolutely no significance. It is a reality that each one of us is only one of about seven billion of our species alive today and that our species is only one of about ten million species on our planet. Earth is just one of about 100 billion planets in our galaxy, which is just one of about two trillion galaxies in the universe. And our lifetimes are only about 1/3,000 of humanity’s existence, which itself is only 1/20,000 of the Earth’s existence. In other words, we are unbelievably tiny and short-lived and no matter what we accomplish, our impact will be insignificant. At the same time, we instinctually want to matter and to evolve, and we can matter a tiny bit – and it’s all those tiny bits that add up to drive the evolution of the universe.
Pyschology:
There two parts of each person's brain: the upper-level logical part and the lower level emotional part. I call these the “two you’s.” They fight for control of each person. How that conflict is managed is the most important driver of our behaviors.
The two biggest barriers to good decision-making are your ego and your blind spots.
In contrast with animals, most people struggle to reconcile their emotions and their instincts (which come from the animal parts of their brain) with their reasoning (which comes from parts of the brain more developed in humans). This struggle causes people to confuse what they want to be true with what actually is true.
Neuroscientists, psychologists, and evolutionists agree that the brain comes pre-programmed with the need for and enjoyment of social cooperation.
Individually, we are machines made up of different machines - our circulatory systems, our nervous systems, and so on - that produce our thoughts, our dreams, our emotions, and every other aspect of our distinct personalities. All these machines are evolving together to produce the reality we encounter every day.
I have found it helpful to think of my life as if it were a game in which each problem I face is a puzzle I need to solve. By solving the puzzle, I get a gem in the form of a principle that helps me avoid the same sort of problem in the future. Collecting these gems continually improves my decision making, so I am able to ascend to higher and higher levels of play in which the game gets harder and the stakes become ever greater.
Dreams plus Reality plus Determination equals Successful Life
Don't let fears of what others think of you stand in your way. You must be willing to do things in the unique ways that you think are best - and to open-mindedly reflect on the feedback that comes inevitably as a result of being that way.
Where you go in life will depend on how you see things and who and what you feel connected to (your family, your community, your country, mankind, the whole ecosystem, everything).
Aligning what you say with what you think and what you think with what you feel will make you much happier and much more successful.
Recognize that (1.) the biggest threat to good decision-making is harmful emotions, and 2.) decision making is a two-step process (first learning and then deciding).