Principles: Life and Work

by Ray Dalio

Principles are fundamental truths that serve as the foundations for behavior that gets you what you want out of life. They can be applied again and again in similar situations to help you achieve your goals.

Are they like Amazon style tenets?

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.

Systemize your decision making.

Means data driven decisions?

The most important thing is that you develop your own principles and ideally write them down, especially if you are working with others.

Hard to do but I like this

Time is like a river that carries us forward into encounters with reality that require us to make decisions. We can’t stop our movement down this river and we can’t avoid those encounters. We can only approach them in the best possible way.

In those days, Fortune magazine had a little tear-out coupon you could mail in to get free annual reports from Fortune 500 companies. I ordered them all.

At 12 years old!

between 1967 and 1979, bad economic surprises led to big and unexpected price declines. Not just the economy and the markets but social sentiment deteriorated as well. Living through that taught me that while almost everyone expects the future to be a slightly modified version of the present, it is usually very different.

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.

Meditation has benefited me hugely throughout my life because it produces a calm open-mindedness that allows me to think more clearly and creatively.

Then, on Sunday, August 15, 1971, President Nixon went on television to announce that the U.S. would renege on its promise to allow dollars to be turned in for gold, which led the dollar to plummet. Since government officials had promised not to devalue the dollar, I listened with amazement as he spoke. Instead of addressing the fundamental problems behind the pressure on the dollar, he continued to blame speculators, crafting his words to make it sound like he was moving to support the dollar while his actions were doing just the opposite. “Floating it,” as Nixon was doing, and then letting it sink like a stone, looked a lot like a lie to me. Over the decades since, I’ve repeatedly seen policymakers deliver such assurances immediately before currency devaluations, so I learned not to believe government policymakers when they assure you that they won’t let a currency devaluation happen. The more strongly they make those assurances, the more desperate the situation probably is, so the more likely it is that a devaluation will take place.

I learned that everything that was going on—the currency breaking its link to gold and devaluing, the stock market soaring in response—had happened before, and that logical cause-effect relationships made those developments inevitable.

To have a child was the most difficult decision I ever made, because I couldn’t know what the experience would be like and it would be irrevocable. It turned out to be my best decision.

Such a finance geek to say irrevocable

Making money in the markets is tough. 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.”

In retrospect, my crash was one of the best things that ever happened to me because it gave me the humility I needed to balance my aggressiveness. I learned 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?” And I saw clearly that the best way to answer this question is by finding other independent thinkers who are on the same mission as me and who see things differently from me. By engaging them in thoughtful disagreement, I’d be able to understand their reasoning and have them stress-test mine. That way, we can all raise our probability of being right.

A universal truth - the average of multiple sources of wisdom yields a better answer - though you have to be careful about what sources you use.

But I needed to have both low risk and high returns, and by setting out on a mission to discover how I could, I learned to go slowly when faced with the choice between two things that you need that are seemingly at odds. That way you can figure out how to have as much of both as possible.

I believed (and still believe) that “theoretically . . . if there was a computer that could hold all of the world’s facts and if it was perfectly programmed to mathematically express all of the relationships between all of the world’s parts, the future could be perfectly foretold.”

Coming soon

However, rather than blindly following the computer’s recommendations, I would have the computer work in parallel with my own analysis and then compare the two. When the computer’s decision was different from mine, I would examine why. Most of the time, it was because I had overlooked something. In those cases, the computer taught me. But sometimes I would think about some new criteria my system would’ve missed, so I would then teach the computer. We helped each other. It didn’t take long before the computer, with its tremendous processing power, was much more effective than me.

Wow - he was successful basically because he was the first to use data and computers for the purposes of investing.

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 out in both words and computer algorithms, back-test them if possible, and use them on a real-time basis to run in parallel with your brain’s decision making.

The computer scientist in me loves this. Not always possible though as sometimes the data isn't there or structured.

Maturity is the ability to reject good alternatives

aka focus

That simple chart struck me with the same force I imagine Einstein must have felt when he discovered E=mc2: 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.

I suspect that this is the definition of a hedge fund

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.

true in investing and life in general.

For over twenty-six years now, that new type of plane has flown exactly as we anticipated, making money in twenty-three of these years (having only modest losses in the other three) and making more money in total for our clients than any other hedge fund ever.

Amazing

So Ross and I worked to build out an “error log” in the trading department. From then on, anytime there was any kind of bad outcome (a trade wasn’t executed, we paid significantly higher transaction costs than expected, etc.), the traders would make a record of it and we would follow up. As we consistently tracked and addressed those issues, our trade execution machine continually improved.

Same as COE process at Amazon

It seems to me that life consists of three phases. In the first, we are dependent 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 savor life.

I'd prefer to savor life the whole way. But I buy that those 3 phases are different.

When faced with a choice between achieving their goal or pleasing (or not disappointing) others, they would choose achieving their goal every time.

A burning passion that nobody will get in the way of - matches what Think And Grow Rich says.

the satisfaction of success doesn’t come from achieving your goals, but from struggling well.

Lots of the masters say a version of this.

the happiest people discover their own nature and match their life to it.

It’s now clear to me that my purpose, your purpose, and the purpose of everything else is to evolve and to contribute to evolution in some small way.

Embrace Reality and Deal with It

Take a moment to reflect on where you are on the following scale, which illustrates an overly simplified choice you should think about. Where would you put yourself on it?

I want both!!

Radical open-mindedness and radical transparency are invaluable for rapid learning and effective change.

Embracing radical truth and radical transparency will bring more meaningful work and more meaningful relationships. My experience, based on watching thousands of people try this approach, is that with practice the vast majority find it so rewarding and pleasurable that they have a hard time operating any other way. This takes practice and changing one’s habits. I have found that it typically takes about eighteen months, which is how long it takes to change most habits.

Evolution is the single greatest force in the universe; it is the only thing that is permanent and it drives everything.

Evolving is life’s greatest accomplishment and its greatest reward.

Reality is optimizing for the whole—not for you.

Adaptation through rapid trial and error is invaluable.

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.

As Carl Jung put it, “Man needs difficulties. They are necessary for health.”

Go to the pain rather than avoid it.

Watching people struggle and having others watch you struggle can elicit all kinds of ego-driven emotions such as sympathy, pity, embarrassment, anger, or defensiveness. You need to get over all that and stop seeing struggling as something negative. Most of life’s greatest opportunities come out of moments of struggle; it’s up to you to make the most of these tests of creativity and character.

Very true

Have clear goals. 2. Identify and don’t tolerate the problems that stand in the way of your achieving those goals. 3. Accurately diagnose the problems to get at their root causes. 4. Design plans that will get you around them. 5. Do what’s necessary to push these designs through to results.

Humility can be even more valuable than having good mental maps if it leads you to seek out better answers than you could come up with on your own.

open-mindedness

Be humble core value?

Be Radically Open-Minded

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

Once you understand how your a) logical/conscious you and b) emotional/subconscious you fight with each other, you can imagine what it’s like when your two yous deal with other people and their own two “thems.” It’s a mess.

Ha

3.3 Appreciate the art of thoughtful disagreement. When two people believe opposite things, chances are that one of them is wrong. It pays to find out if that someone is you. That’s why I believe you must appreciate and develop the art of thoughtful disagreement. In thoughtful disagreement, your goal is not to

convince the other party that you are right—it is to find out which view is true and decide what to do about it. In thoughtful disagreement, both parties are motivated by the genuine fear of missing important perspectives.

Closed-minded people say things like “I could be wrong . . . but here’s my opinion.” This is a classic cue I hear all the time. It’s often a perfunctory gesture that allows people to hold their own opinion while convincing themselves that they are being open-minded.

I hear this a lot (and have said it too)

Get to know your blind spots. When you are closed-minded and form an opinion in an area where you have a blind spot, it can be deadly. So take some time to record the circumstances in which you’ve consistently made bad decisions because you failed to see what others saw. Ask others—especially those who’ve seen what you’ve missed—to help you with this. Write a list, tack it up on the wall, and stare at it.

Good mechansim