Principles: Life and Work

by Ray Dalio

Whatever success I’ve had in life has had more to do with my knowing how to deal with my not knowing than anything I know.

Without principles we would be forced to react to all the things life throws at us individually, as if we were experiencing each of them for the first time.

The worst thing you can be is a phony, because if you’re a phony you will lose people’s trust and your own self-respect. So you must be clear about your principles and then you must “walk the talk.” If inconsistencies seem to exist, you should explain them.

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.

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

We are all born with different thinking abilities but we aren’t born with decision-making skills. We learn them from our encounters with reality.

For me, great is better than terrible, and terrible is better than mediocre, because terrible at least gives life flavor.

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.

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.

In trading you have to be defensive and aggressive at the same time. If you are not aggressive, you are not going to make money, and if you are not defensive, you are not going to keep money. I believe that anyone who has made money in trading has had to experience horrendous pain at some point.

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.

meaningful work and meaningful relationships were and still are my primary goals and everything I did was for them. Making money was an incidental consequence of that.

Imagine that in order to have a great life you have to cross a dangerous jungle. You can stay safe where you are and have an ordinary life, or you can risk crossing the jungle to have a terrific life. How would you approach that choice? Take a moment to think about it because it is the sort of choice that, in one form or another, we all have to make. Even after my crash, I knew I had to go after the terrific life with all its risks, so the question was how to “cross the dangerous jungle” without getting killed. 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. In other words, I just want to be right—I don’t care if the right answer comes from me. So I learned to be radically open-minded to allow others to point out what I might be missing. 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.

Bridgewater as an idea meritocracy—not an autocracy in which I lead and others follow, and not a democracy in which everyone’s vote is equal—but a meritocracy that encourages thoughtful disagreements and explores and weighs people’s opinions in proportion to their merits.

people’s greatest weaknesses are the flip sides of their greatest strengths. For example, some people are prone to take on too much risk while others are too risk averse; some are too focused on the details while others are too big-picture. Most are too much one way and not enough another. 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.

beneficial change begins when you can acknowledge and even embrace your weaknesses.

to do exceptionally well you have to push your limits and that, if you push your limits, you will crash and it will hurt a lot. You will think you have failed—but that won’t be true unless you give up. Believe it or not, your pain will fade and you will have many other opportunities ahead of you, though you might not see them at the time. The most important thing you can do is to gather the lessons these failures provide and gain humility and radical open-mindedness in order to increase your chances of success.

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.

whenever I took a position in the markets, I wrote down the criteria I used to make my decision. Then, when I closed out a trade, I could reflect on how well these criteria had worked. It occurred to me that if I wrote those criteria into formulas (now more fashionably called algorithms) and then ran historical data through them, I could test how well my rules would have worked in the past. Here’s how it worked in practice: 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 tested the systems going as far back as we could, typically more than a century, in every country for which we had data, which gave me great perspective on how the economic/market machine worked through time and how to bet on it. Doing this helped educate me and led me to refine my criteria so they were timeless and universal. Once I vetted those relationships, I could run data through the systems as it flowed at us in real time and the computer could work just as my brain worked in processing it and making decisions.

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. This was great, because it was like having a chess grandmaster helping me plot my moves, except this player operated according to a set of criteria that I understood and believed were logical, so there was no reason for us to ever fundamentally disagree.

While the computer was much better than our brains in many ways, it didn’t have the imagination, understanding, and logic that we did. That’s why our brains working with the computer made such a great partnership.

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.

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.

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

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.

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 (though of course you have to do both).

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.

It was a terrible and costly error, and I could’ve done something dramatic like fire Ross to set a tone that mistakes would not be tolerated. But 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. I believed strongly that we should bring problems and disagreements to the surface to learn what should be done to make things better.

The effect reaches far beyond the single employee. The smallness of the company and the openness of communication means that everyone is affected when one person is demotivated, treated badly, not given due respect.

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. There is almost always a good path that you just haven’t figured out yet, so look for it until you find it rather than settle for the choice that is then apparent to you.

As for our agreements with each other, the most important one was our need to do three things: 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.

There are two parts of each person’s brain: the upper-level logical part and the lower-level emotional part. I call these the “two yous.” They fight for control of each person. How that conflict is managed is the most important driver of our behaviors.

There were only two big forces to worry about: growth and inflation. Each could either be rising or falling, so I saw that by finding four different investment strategies—each one of which would do well in a particular environment (rising growth with rising inflation, rising growth with falling inflation, and so on)—I could construct an asset-allocation mix that was balanced to do well over time while being protected against unacceptable losses.

while one gets better at things over time, it doesn’t become any easier if one is also progressing to higher levels—the Olympic athlete finds his sport to be every bit as challenging as the novice does.

This was enlightening to all of us in showing how differently people’s brains worked. If nothing else, I could better appreciate people I’d once wanted to strangle! Moreover, I recognized that 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.

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.” The idea was that they could be passed around and referred to when assigning responsibilities.

To me, the greatest success you can have as the person in charge is to orchestrate others to do things well without you. A step below that is doing things well yourself, and worst of all is doing things poorly yourself.

while almost all of us quickly agreed on the principles intellectually, many still struggled to convert what they had agreed to intellectually into effective action. This was because their habits and emotional barriers remained stronger than their reasoning.

by knowing what someone is like we can have a pretty good idea of what we can expect from them. So I was more motivated than ever to continue gathering lots of data on what people are like to build pointillist pictures of them to help us match people to responsibilities well.

The way the investment decision-making process works is that a small group of investment managers who created these systems see the systems’ conclusions and the reasoning of the systems while we make our own conclusions and explore our reasoning on our own. . . . The machine does most of the work and we interact with it in a quality way. . . . [And] we are not dependent on much more faulty people. Think about how different management is. While we have principles, we don’t have decision-making systems. In other words, I believe that the investment decision-making process is effective because the investment principles have been put into decision rules that make decisions that people then follow while the management decision-making process is less effective because the management principles have not been put into decision rules that people can follow to make management decisions.

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

how international relations really works. It is quite different from what most people imagine. 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. Smart leaders know their own countries’ vulnerabilities, take advantage of others’ vulnerabilities, and expect the other countries’ leaders to do the same.

most people who see the world through the lens of the media tend to look for who is good and who is evil rather than what the vested interests and relative powers are and how they are being played out.

The best behaviors one can hope for come from leaders who can weigh the benefits of cooperation, and who have long enough time frames that they can see how the gifts they give this year may bring them benefits in the future.

governance is the system of checks and balances ensuring that an organization will be stronger than whoever happens to be leading it at any one time.

it’s wrong to assume either that a person in one role will be successful in another role or that the ways one person operates will work well for another.

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 times 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 began to experience painful moments in a radically different way. Instead of feeling frustrated or overwhelmed, I saw pain as nature’s reminder that there is something important for me to learn.

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. All sorts of emotions come to me while I am playing and those emotions can either help me or hurt me. If I can reconcile my emotions with my logic and only act when they are aligned, I make better decisions.