Principles: Life and Work

by Ray Dalio

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.

My contact with Singapore’s people and institutions also thrilled me. There was and still is no leader I admire more than Lee Kuan Yew, who transformed Singapore from a mosquito-infested backwater to a model economy. That says a lot, as I have gotten to know and admire several world leaders.

Since he had personally known virtually all of the world’s leaders over the last fifty years, we asked Lee about the qualities that distinguished the great ones from the bad ones and what he thought of those who were leading at the time. He rated Angela Merkel as the best leader in the West and considered Vladimir Putin one of the best leaders worldwide. He explained that leaders must be judged within the context of the circumstances they encounter and then went on to share his view of how difficult it is to lead Russia and why he thought Putin was doing it well.

He also reflected on his unique relationship with Deng Xiaoping, whom he regarded as the best leader of all.

human greatness and terribleness are not correlated with wealth or other conventional measures of success. I’ve also learned that judging people before really seeing things through their eyes stands in the way of understanding their circumstances—and that isn’t smart. I urge you to be curious enough to want to understand how the people who see things differently from you came to see them that way. You will find that interesting and invaluable, and the richer perspective you gain will help you decide what you should do.

For example, I took my kids on business trips. When at first I brought my son Devon and later Matt to my Chinese business meetings, our hosts were always very kind—they would give them cookies and milk.

“What could be better than to sit on the floor, dressed in pajamas, eating with my hands, with nice people?”

Bridgewater was a small community of friends who worked hard and partied hard.

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.

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.

One has many more supposed friends when one is up than when one is down, because most people like to be with winners and shun losers. True friends are the opposite.

I got a lot out of my bad times, not just because they gave me mistakes to learn from but also because they helped me find out who my real friends were—the friends who would be with me through thick and thin.

At that time, and for quite a while longer, I tended to hire people just out of school who didn’t have much experience but were smart, determined, and committed to the mission of making the company great.

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

We knew we could do a uniquely great job for Kodak, because we knew a lot about bonds and financial engineering, and we had a historical perspective unmatched in the industry.

we broke down Kodak’s pension fund into its constituent parts to better understand the “machine.”

Decades earlier, the Nobel Prize–winning economist Harry Markowitz had invented a widely used model that allowed you to input a set of assets along with their expected returns, risks, and correlations (showing how similarly those assets have performed in the past) and determine an “optimal mix” of those assets in a portfolio. But his model didn’t tell you anything about the incremental effects of changing any one of those variables, or how to handle being uncertain about those assumptions.

quality (measured by the amount of return relative to risk)

I saw that with fifteen to twenty good, uncorrelated return streams, I could dramatically reduce my risks without reducing my expected returns.

The principle we’d discovered applies equally well to all ways of trying to make money. Whether you own a hotel, run a technology company, or do anything else, your business produces a return stream. Having a few good uncorrelated return streams is better than having just one, and knowing how to combine return streams is even more effective than being able to choose good ones

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.

the systemization of our decision-making process allowed us to stress-test the performance of our decision making under a wide variety of conditions.

we made the most of our mistakes because we got in the habit of viewing them as opportunities to learn and improve.

since mistakes happen all the time, that would have only encouraged other people to hide theirs, which would have led to even bigger and more costly errors.

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.

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

The error log (which we now call the issue log) was our first management tool.

I learned subsequently how important tools are in helping to reinforce desired behaviors, which led us to create a number of tools I will describe later.

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.

people in relationships must be crystal clear about their principles for dealing with each other.

1. Put our honest thoughts out on the table, 2. Have thoughtful disagreements in which people are willing to shift their opinions as they learn, and 3. Have agreed-upon ways of deciding (e.g., voting, having clear authorities) if disagreements remain so that we can move beyond them without resentments.

for a group decision-making system to be effective, the people using it have to believe that it’s fair.

Having our work principles written out and getting in sync about them in the same way we had with our investment principles were essential for our understanding each other, especially since our unique way of operating—this radical truth and radical transparency—that led to our unique results is counterintuitive and emotionally challenging for some.

Back then, we showed that a few bright guys with computers could beat the big, well-equipped establishment players. Now we were becoming the well-equipped establishment ourselves.

As the number of decision rules and the amount of data in our systems grew more complex, we hired young programmers who were better than us in converting our instructions into code and smart new grads right out of college to help with our investment research.

We also invested in more and more powerful computers.5 Having our systems running through these machines freed us to get above the daily movements of the markets and consider things from a higher level, where we could make novel, creative connections that produced innovations for our clients.

no matter what asset class one held, there would come a time when it would lose most of its value.

I knew which shifts in the economic environment caused asset classes to move around, and I knew that those relationships had remained essentially the same for hundreds of years.

I called it the “All Weather Portfolio” because it could perform well in all environments.

It is now generically called “risk parity” investing.

Building the business while managing investments required me to do two challenging jobs simultaneously and develop two distinct skill sets, while being a good father, husband, and friend. The demands of these roles changed over time, so the skills and abilities I needed changed as well.

Going from a five-person organization to a sixty-person organization was just as challenging as going from a sixty-person organization to a seven-hundred-person organization—and from a seven-hundred-person organization to a 1,500-person one. Looking back, I can’t say that the challenges were easier or harder at any of the various phases we went through. They were just different.

By 2003, I had come to believe that we needed to grow Bridgewater into a real institution instead of remaining a typical boutique-sized investment manager. Doing this would make us better in many ways—better technology, better security controls, a deeper talent pool—all of which would make us more stable and permanent. This meant hiring more people in technology, infrastructure, and other areas, as well as additional HR and IT staff to train and support them.

whenever something new came along that required me to make a decision, I would reflect on my criteria for making that decision and write it down as a principle so people could make the connections between the situation, my principle for handling these situations, and my actions.

Over time, I encountered most everything there is to encounter in running a company, so I had a few hundred principles that covered most everything. That collection of principles, like our collection of investment principles, became a kind of decision-making library. Those principles are the basis of what you’ll find in Work Principles.

But it wasn’t enough to codify and teach our philosophy; we had to live it. As the company grew bigger, how that happened evolved.

over time we added questions to create “virtual reality” case studies that could be used for training.6 Over time, these tapes became part of a “boot camp” for new employees as well as a window into an ongoing stream of situations connected to the principles for handling them.

All this openness led to some very frank discussions about who did what and why, and as a result we were able to deepen our understanding of our different ways of thinking.

managers who do not understand people’s different thinking styles cannot understand how the people working for them will handle different situations, which is like a foreman not understanding how his equipment will behave.

Many of the differences it described, such as those between “intuiting people,” who tend to focus on big-picture concepts, and “sensing people,” who pay more attention to specific facts and details, were highly relevant to the conflicts and disagreements we were having at Bridgewater.