Principles: Life and Work

by Ray Dalio

One of our clients in the mid-1980s was Alan Bond, an audacious entrepreneur who was one of the richest people in Australia. A self-made man, he was famous for being the first non-American to win the America’s Cup yacht race in its then 132-year history. Like Bunker Hunt, he eventually bet badly and was forced to declare bankruptcy. I advised him and his team on their way up and stayed on through his downfall, so I watched the tragedy unfold from up close. His was a classic case of confusing business with speculation and only hedging when it was too late. Bond borrowed U.S. dollars to buy assets like breweries in Australia. He did that because U.S. interest rates were lower than they were in Australia. Though he didn’t realize it, he was speculating that the U.S. dollar, in which he would have to pay back his loans, would not rise. When the U.S. dollar did rise against the Australian dollar in the mid-1980s and his Australian-dollar beer-sales earnings weren’t enough to pay his debts, his team called me for advice. I calculated what Bond Corp’s position would be if they hedged on currencies and saw that doing so would lock in losses that would ruin them, so I advised them to wait. When the Australian dollar rallied, I advised them to put the hedges in place, but they didn’t because they believed the currency problem had gone away. Before long, the Australian dollar plunged to new lows and they called me in for an emergency meeting. There wasn’t much they could do without l...

Organizing people to complement their strengths and compensate for their weaknesses is like conducting an orchestra. It can be magnificent if done well and terrible if done poorly.

This led to one of my most valuable management tools: Baseball Cards, which I mentioned in the first part of this book. Just as a baseball card compiles the relevant data on a baseball player, helping fans know what that player is good and bad at, I decided that it would be similarly helpful for us to have cards for all of our players at Bridgewater. In creating the attributes for our baseball cards, I used a combination of adjectives we already used to describe people, like “conceptual,” “reliable,” “creative,” and “determined”; the actions people took or didn’t take such as “holding others accountable” and “pushing through to results”; and terms from personality tests such as “extroverted” or “judging.” Once the cards were established, I created a process to have people evaluate each other, with the people rated highest in each dimension (e.g., “most creative”) having more weight on the ratings of other people in that dimension.

a discussion of the exceptions rather than the rule, and in the process we will lose sight of the rule. To help people at Bridgewater avoid this time waster, one of our just-out-of-college associates coined a saying I often repeat: “When you ask someone whether something is true and they tell you that it’s not totally true, it’s probably by-and-large true.”

By constantly looking down on the machine, its managers can objectively compare the outcomes it produces with their goals. If those outcomes are consistent with those goals, then the machine is working effectively; if the outcomes are inconsistent with the goals, then something is wrong with either the design of the machine or the people who are a part of it and the problem needs to be diagnosed so the machine can be modified.

The company should pay for above-normal work one way or another, and employees should be docked for below-normal work. The give-and-take should roughly equal out over time. Within reasonable boundaries, nobody should worry about the exact ebbs and flows. But if the needs of one side change on a sustained basis, the financial arrangement will need to be readjusted to establish a new, appropriate relationship.

I have seen people who agree on the major issues waste hours arguing over details. It’s more important to do big things well than to do the small things perfectly. But

Responsible Parties can overrule believability-weighted voting but only at their peril. When a decision maker chooses to bet on his own opinion over the consensus of believable others, he is making a bold statement

Communication aimed at educating or boosting cohesion should involve a broader set of people than would be needed if the aim were just getting the best answer. Less experienced, less believable people may not be necessary to decide an issue, but if the issue involves them and you aren’t in sync with them, that lack of understanding will in the long run likely undermine morale and the organization’s efficiency. This is especially important in cases where you have people who are both not believable and highly opinionated (the worst combination). Unless you get in sync with them, you will drive their uninformed opinions underground.

decision-making group in which those who don’t get what they want continue to fight rather than work for what the group has decided is destined to fail—you can see this happening all the time in companies, organizations, and even political systems and nations.

Ultimately, power will rule. This is true of any system. For example, it has repeatedly been shown that systems of government have only worked when those with the power value the principles behind the system more than they value their own personal objectives. When people have both enough power to undermine a system and a desire to get what they want that is greater than their desire to maintain the system, the system will fail.

So long as you bear the consequences of failure, you are the ultimate Responsible Party.

Understand that making sure people are doing a good job doesn’t require watching everything that everybody is doing at all times. You just have to know what they are like and get a sampling. Regular sampling of a statistically reliable number of cases will show you what a person is like and what you can expect from them. Select which of their actions are critical enough to need preapproval and which can be examined later. But be sure to do the audit, because people will tend to give themselves too much slack or could cheat when they see that they’re not being checked.

Understand that a great manager is essentially an organizational engineer. Great managers are not philosophers, entertainers, doers, or artists. They are engineers. They see their organizations as machines and work assiduously to maintain and improve them.

Understand the differences between managing, micromanaging, and not managing. Great managers orchestrate rather than do. Like the conductor of an orchestra, they do not play an instrument, but direct their people so that they play beautifully together. Micromanaging, in contrast, is telling the people who work for you exactly what tasks to do or doing their tasks for them. Not managing is having them do their jobs without your oversight and involvement. To be successful, you need to understand these differences and manage at the right level. a. Managers must make sure that what they are responsible for works well. They can do this by 1) managing others well (as explained above), 2) job slipping down to do work they’re not responsible for because others can’t do their jobs well, or 3) escalating what they can’t manage well. The first choice is optimal; the second signals that a change is needed in the people and the design; the third choice is harder still but mandatory. b. Managing the people who report to you should feel like skiing together. Like a ski instructor, you need to have close contact with your people on the slopes so that you can assess their strengths and weaknesses as they are doing their jobs. There should be a good back-and-forth as they learn by trial and error. With time you will be able to decide what they can and can’t handle on their own. c. An excellent skier is probably going to be a better ski coach than a novice skier. Believability applies to man...

all suspicious threads. It’s worth pulling all suspicious threads because: 1) Small negative situations can be symptomatic of serious underlying problems; 2) Resolving small differences of perception may prevent more serious divergence of views; and 3) In trying to create a culture that values excellence, constantly reinforcing the need to point out and stare at problems—no matter how small—is essential (otherwise you risk setting an example of tolerating mediocrity). Prioritization can be a trap if it causes you to ignore the problems around you. Allowing small problems to go unnoticed and unaddressed creates the perception that it’s acceptable to tolerate such things.

Keep in mind that managers usually fail or fall short of their goals for one (or more) of five reasons. 1. They are too distant. 2. They have problems perceiving bad quality. 3. They have lost sight of how bad things have become because they have gotten used to it. 4. They have such high pride in their work (or such large egos) that they can’t bear to admit they are unable to solve their own problems. 5. They fear adverse consequences from admitting failure.

Build your organization from the top down. An organization is the opposite of a building: Its foundation is at the top, so make sure you hire managers before you hire their reports. Managers can help design the machine and choose the people who complement

the big-picture visionary should be responsible for goal setting, the taste tester should be assigned the job of identifying and not tolerating problems, the logical detective who doesn’t mind probing people should be the diagnoser, the imaginative designer should craft the plan to make the improvements, and the reliable taskmaster should make sure the plan gets executed.

Use “double-do” rather than “double-check” to make sure mission-critical tasks are done correctly. Double-checking has a much higher rate of errors than double-doing, which is having two different people do the same task so that they produce two independent answers.

because an audit is only as effective as the auditor is knowledgeable, remember that a good double-check can only be done by someone capable of double-doing.