Principles: Life and Work

by Ray Dalio

If instead we classify these situations into types and have good principles for dealing with them, we will make better decisions more quickly and have better lives as a result.

All successful people operate by principles that help them be successful, though what they choose to be successful at varies enormously, so their principles vary.

To be principled means to consistently operate with principles that can...

If you can think for yourself while being open-minded in a clearheaded way to find out what is best for you to do, and if you can summon up the courage to do it, you will make the most of your life.

The principles you choose can be anything you want them to be as long as they are authentic—i.e., as long as they reflect your true character and values.

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’ve always had a bad rote memory and didn’t like following other people’s instructions, but I loved figuring out how things work for myself.

Experience taught me how invaluable it is to reflect on and write down my decision-making criteria whenever I made a decision, so I got in the habit of doing that.

Our principle-driven approach to decision making has not only improved our economic, investment, and management decisions, it has helped us make better decisions in every aspect of our lives.

“If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. Let him step to the music which he hears, however measured or far away.”

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

I learned that other currencies were fixed against the dollar, that the dollar was fixed against gold, that Americans weren’t allowed to own gold (though I wasn’t sure why), and that other central banks could convert their paper dollars into gold, which was how they were assured that they wouldn’t be hurt if the U.S. printed too many dollars.

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.

“Liberal” had ceased to mean being in favor of progress and had come to mean “paying people not to work.”

Because I believed that the choice was between accelerating inflation and deflationary depression, I was holding both gold (which performs well in accelerating inflation) and bonds (which perform well in deflationary depressions). Up until that point, gold and bonds had moved in opposite directions, depending on whether inflation expectations rose or fell. Holding those positions seemed much safer than holding alternatives like cash, which would lose value in an inflation environment, or stocks, which would crash in a depression.

I learned to be radically open-minded to allow others to point out what I might be missing.

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.

Typically, by doing what comes naturally to us, we fail to account for our weaknesses, which leads us to crash. What happens after we crash is most important. Successful people change in ways that allow them to continue to take advantage of their strengths while compensating for their weaknesses and unsuccessful people don’t.

I never thought of what I was doing as building (or rebuilding) a company; I was just getting the things I needed to play my game.

I had eaten enough glass to realize that what was most important wasn’t knowing the future—it was knowing how to react appropriately to the information available at each point in time.

I would start out with my intuitions as I always did, but I would express them logically, as decision-making criteria, and capture them in a systematic way, creating a mental map of what I would do in each particular situation. Then I would run historical data through the systems to see how my decision would have performed in the past and, depending upon the results, modify the decision rules appropriately.

We would do this to show them what a “risk-neutral” position would look like, which is to say, the properly hedged position one would take if one didn’t have a view of the markets.

This approach to establishing a “risk-neutral” benchmark position and deviating from it with measured bets was the genesis of the style of investment management we would later call “alpha overlay,” in which passive (“beta”) and active (“alpha”) exposures are separated. The return of a market (such as the stock market) itself is called its beta. Alpha is the return that comes from betting against others. For

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.

But even as we grew, I never thought of anybody I worked with as an employee. I had always wanted to have—and to be around people who also wanted to have—a life full of meaningful work and meaningful relationships, and to me a meaningful relationship is one that’s open and honest in a way that lets people be straight with each other. I never valued more traditional, antiseptic relationships where people put on a façade of politeness and don’t say what they really think.

I believe that all organizations basically have two types of people: those who work to be part of a mission, and those who work for a paycheck.

All great investors and investment approaches have bad patches; losing faith in them at such times is as common a mistake as getting too enamored of them when they do well. Because most people are more emotional than logical, they tend to overreact to short-term results; they give up and sell low when times are bad and buy too high when times are good. I find this is just as true for relationships as it is for investments—wise people stick with sound fundamentals through the ups and downs, while flighty people react emotionally to how things feel, jumping into things when they’re hot and abandoning them when they’re not.

I have come to realize that bad times coupled with good reflections provide some of the best lessons, and not just about business but also about relationships.

having an ability to figure things out is more important than having specific knowledge of how to do something.

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.

Having a process that ensures problems are brought to the surface, and their root causes diagnosed, assures that continual improvements occur.

when faced with the choice between two things you need that are seemingly at odds, go slowly to figure out how you can have as much of both as possible.

we became the first global inflation-indexed bond manager in the world.

Larry Summers has since said that the advice he got from us was the most important in shaping this market. When the Treasury did create the bonds, they followed the structure we recommended.

I knew what drove asset returns, but I also knew that no matter what asset class one held, there would come a time when it would lose most of its value.

(Recently I came across a study that revealed a cognitive bias in which people consistently overlook the evidence of one person being better than another at something and assume that both are equally good at a task. This was exactly what we were seeing.)

For example, people who were known not to be creative were being assigned tasks that required creativity; people who didn’t pay attention to details were being assigned to detail-oriented jobs, and so on. We needed a way to make the data that showed what people were like even clearer and more explicit, so I began making “Baseball Cards” for employees that listed their “stats.”

I learned that creative genius and insanity can be quite close to each other, that the same chemistry that creates insights can cause distortions, and that being stuck in one’s own head is terribly dangerous.

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

In 2007, this gauge indicated that a bubble of debt was nearing its bursting point because the costs of debt service were outpacing projected cash flows. Because interest rates were so close to 0 percent, I knew that central banks could not ease monetary policy enough to reverse the downturn the way they had in prior recessions. This was the exact configuration that had led to past depressions.

We “finance people” see the world very differently from the way economists do.

They are simultaneously creative, systematic, and practical. They are assertive and open-minded at the same time.

Above all, they are passionate about what they are doing, intolerant of people who work for them who aren’t excellent at what they do, and want to have a big, beneficial impact on the world.

When I asked him about his background in rocketry, he told me he didn’t have one. “I just started reading books,” he said. That’s how shapers think and act.

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

About a year into my transition, I saw that many new managers (and some older ones) still couldn’t see the patterns of people’s behaviors through time (in other words, they couldn’t connect the dots between what people are like and the outcomes they produce). Their reluctance to probe hard to get at what people are like was making things more difficult.

I told them why this approach would not be inflationary (because it is the level of spending, which is money plus credit, and not just the amount of money, that drives spending and inflation).

What?

That led me to make a thirty-minute video, How the Economic Machine Works, which I released in 2013.

Which causes we should donate to was another big question. Barbara’s biggest passion has been helping students in the most stressed public school districts in Connecticut, especially those students who are called “disengaged and disconnected.”12 A study she funded showed that 22 percent of high school students fall into one of these two categories, which was shocking because most will probably become adults who will suffer and be burdens on society rather than flourishing contributors to it. Because she has a lot of direct contact with these children and their teachers, she understands their needs. When she learned that 10,000 of them didn’t have winter coats, she felt compelled to provide them. What she showed me opened my eyes. How can clothing and nutrition be so severely deficient in this “land of opportunity”?