Principles by Ray Dalio

 

A culmination of a short background and life history of Ray Dalio, his principles for how to live life, and his principles for management. This is one of the best books I’ve read. It is a lot more of a philosophy and psychology book on self-improvement than anything else probably. I read this when I was 23 or 24 and the thoughts about looking at pain not as something to run away from, but as something to understand and learn from were monumental in how I approached life. Other very important things I learned were how Ray always looks at history (“Another one of those”) to look for similarities to what he is currently experiencing so he could learn how to deal with it, and how we have “2 You’s” – an emotion “You” and a more rational “You” which are in constant disagreement with each other. This is one of my most recommended books.

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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.

I gradually learned that prices reflect people's expectations, so they go up when actual results are better than expected and they go down when they are worse than expected. And most people tend to be biased by their recent experiences.

Pg 16 Shor summary of how the overspending in the 1960’s led to largest decline in stocks and a very weak economy in the early 1970’s.

When everybody thinks the same thing – such as what a sure bet the Nifty 50 is – it is almost certainly reflected in the price, and betting on it is probably going to be a mistake.  I also learned that for every action (such as easy money and credit) there is a consequence (in this case, higher inflation) roughly proportionate to that action, which causes an approximately equal and opposite reaction (tightening of money and credit) and market reversals.

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.  

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.

There are anxious times in every investor’s career when your expectations of what should be happening aren’t aligned with what is happening and you don’t know if you’re looking at great opportunities or catastrophic mistakes.

Page 29 Timing is everything. [And the story of Bunker Hunt being ruined by riding the silver trend)

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.”

Page 33 to 34 Bridgewater and Ray Dalio are wrong on what they think is another depression in 1981 to 1982. Ray loses all his employees because he can't afford to pay them he now has to borrow $4,000 from his dad.

Here is what Ray said on Wall Street Week of the upcoming depression that he thought would happen, “There will be no soft landing. I can say that with absolute certainty, because I know how markets work.” Ray is still shocked and embarrassed by those comments today.

Ask yourself, “How do I know I am right.”

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.

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.

Pg 42  Ray wrote this in a January 1987 paper called “Making Money vs. Making Forecasts”, “Truth be known, forecasts aren’t worth very much, and most people who make them don’t make money in the markets… This is because nothing is certain and when one overlays the probabilities of all the various things that affect the future in order to make a forecast, one gets a wide array of possibilities with varying probabilities, not one highly probable outcome… We believe that market movements reflect economic movements.”

Make bets in the market that you are only confident in and diversify well.

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.

Page 61 [Ray doesn't fire an employee who forgot to put it in a trade that cost the client hundreds of thousands of dollars because he knows humans make mistakes and felt firing him would encourage others to hide their mistakes.  Bridgewater had to honor the trade and pay out of their own pocket.]

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.

I knew which shifts in the economic environment cause asset classes to move around and I knew that those relationships had remained essentially the same for hundreds of years. There were only two big forces to worry about: growth and inflation.

Page 77 [The Journey of Ray's son struggling through bipolar disorder taught Ray that much of how we think is physiological and can be changed]

Page 79 In 2008 Ray was working 80 hours per week.

To me, the greatest success you can have as the person in charge is to orchestrate others to do things well without you.

Getting a lot of attention for being successful is a bad position to be in. Australians call it the “toll poppy syndrome” because the tallest poppies in a field are the ones most likely to have their heads whacked off. I didn't like the attention and I especially didn't like the mischaracterizations of Bridgewater as a cult, because I felt it was hurting our ability to recruit great people.

It seems to me that life consists of three phases. In the first, we are depending on others and we learn. In the second, others depend on us and we work. And in the third and last, when others no longer depend on us and we no longer have to work, we are free to savior life.

Just as all human bodies work in essentially the same way, so do the economic machines in different countries. And just as physical diseases infect people without regard to nationality, so do economic diseases.

Countries behave in a more self-interested and less considerate way than what most of us would consider appropriate for individuals.  When countries negotiate with one another, they typically operate as if they are opponents in a chess match or merchants in a bazaar in which maximizing one’s own benefit is the sole objective.

We knew that leadership transitions are never easy, and modus operandi has always been to try, fail, diagnose, redesign, and try again.

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.

I'm still struggling and I will until I die because even if I try to avoid the struggles they will find me.

I believe that everything that happens comes about because of cause-effect relationships that repeat and evolve over time.

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 

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.

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.

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.

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 form the premise that nature is smarter than I am and try to let nature teach me how reality works.

Whenever I observe something in nature that I (or mankind) think is wrong, I assume that I'm wrong and try to figure out why what nature is doing makes sense. That has taught me a lot.

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.

Everything from the smallest subatomic particle to the entire galaxy is evolving.

The primary purpose of every living thing is to act as a vessel for the DNA that evolves life through time. The DNA that exists within each individual came from an eternity ago and will continue to live long after its individual carriers pass away, in increasingly evolved forms.

The key is to fail, learn, and improve quickly.

I believe that evolving is life’s greatest accomplishment and its greatest reward.

To give you a quick example of nature creating incentives that lead to individuals pursuing their own interests that result in the advancement of the whole, look at sex and natural selection. Nature gave us one hell of an incentive to have sex in the form of the great pleasure it provides, even though the purpose of having sex is to contribute to the advancement of DNA.  That way, we individually get what we want while contributing to the evolution of the whole.

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.

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).

My instinctual and intellectual goal is simply to evolve and contribute to evolution in some tiny way while I'm here and while I am what I am.

Remember “no pain, no gain”

Pain plus Reflection equals Progress

It is a fundamental law of nature that in order to gain strength one has to push one’s limits, which is painful.

The quality of your life will depend on the choices you make at those painful moments.

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.

Everyone has weaknesses. They are generally revealed in the patterns of mistakes they make.

The two biggest barriers to good decision-making are your ego and your blind spots.

From conversations with experts and my own observations, I learned that many other mental differences are physiological. Just as our physical attributes determine the limits of what we are able to do physically -some people are tall and others are short, some muscular and others weak - our brains are innately different in ways that set the parameters of what we are able to do mentally.

Neuroscientists, psychologists, and evolutionists agree that the brain comes pre-programmed with the need for and enjoyment of social cooperation.

Know that the most constant struggle is between feeling and thinking.

The most valuable have I've acquired is using pain to trigger quality reflections.

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).

The first pit fall of bad decision-making, which is to subconsciously make the decision first and then cherry-pick the data that supports it.

An organization is a machine consisting of two major parts: culture and people.

Page 315 Is the part about why I wrote this book and how you can get the most out of it.

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.

 

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.

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.”

Remember this: the pain is all in your head.

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.

Remember that people typically don't change all that much.

People's personalities are pretty well formed before they come to you, and they have been leaving their fingerprints all over the place since childhood; anyone is fairly knowable since childhood.

The real sign of a master manager is that he doesn't have to do practically anything. Managers should view the need to get involved in the nitty-gritty as a bad sign.

Bad outcomes don't just happen, they occur because specific people make, or fail to make, specific decisions.

Leverage is when you are looking for ways to achieve more with less.

Winston Churchill hit the nail on the head when he said, “Success consists of going from failure to failure without loss of enthusiasm.”

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).

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