Principles: Life and Work

by Ray Dalio

I lived with people from all over the world and we partied together in an exciting, eclectic environment. There was no teacher in front of a blackboard telling us what to remember and no tests to see whether we remembered it. Instead we were given actual case studies to read and analyze. Then we gathered in groups to th...

The lesson? 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.

I also learned that for every action (such as easy money and credit) there is a consequence (in this case, higher inflation) roughly proportionate to that action, which causes an approximately equal and opposite reaction (tightening of money and credit) and market reversals. I was

It enhanced my fear of being wrong and taught me to make sure that no single bet, or even multiple bets, could cause me to lose more than an acceptable amount. In trading you have to be defensive and aggressive

enhanced my fear of being wrong and taught me to make sure that no single bet, or even multiple bets, could cause me to lose more than an acceptable amount.

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 horrend...

than a year. Much as I loved the job and the people I worked with, I didn’t fit into the Shearson organization. I

was too wild. For example, as a joke that now seems pretty stupid, I hired a stripper to drop her cloak while I was lecturing at a whiteboard at the California Grain & Feed Association’s annual convention. I also punched my boss in the face. Not surprisingly, I was fired.

the face. Not surprisingly, I wa...

Pursuing a mission with friends to help clients beat the markets was much more fun than having a real job. As long as my basic living expenses were covered, I knew I’d be happy.

As long as my basic living expenses were covered, I knew I’d be happy.

I could visualize the processes that led to those sales and see the relationships underlying them. Since livestock eat grain (mostly corn) and soymeal, and since corn and soybeans compete for acreage, those markets

are closely related. I learned just about everything imaginable about them—what the planted acreage and typical yields were in each of the major growing areas; how to convert rainfall levels in different weeks of the growing season into yield estimates; how to project harvest sizes, carrying costs, and livestock inventories by weight group, location, and rates of weight gain; and how to project dressing yields, retailer margins, consumer preferences by cut of meat, and the amounts to be slaughtered in each season.

This wasn’t academic learning: People with practice in the busine...

agricultural processes worked, and I organized what they told me into models I used to map the interactio...

For example, by knowing how m...

chickens, and hogs were being fed, how much grain they ate, and how fast they gained weight, I could project both when and how much meat would come to market and when an...

by seeing how much acreage was planted with corn and soybeans in all the growing areas, doing regressions that showed how rainfall affected the yields in each of these areas, and applying weather forecasts and rainfall data, I could ...

approach to price determination I was using was different from the one I had learned in my economics classes where supply and demand were both measured in terms of quantities sold. I found it much more practical to measure demand as the amount spent (instead of as the quantity bought)

This different approach was one of the key reasons I caught economic and market moves others missed.

From that point on, whenever I looked at any market—commodities, stocks, bonds, currencies, whatever—I could see and understand imbalances that others who defined supply and demand in the traditional way (as units that equaled each other) missed.

Visualizing comple...

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...

To me, meaningful work is being on a mission I become engrossed in,

Think about it: It’s senseless to have making money as your goal as money has no intrinsic value—its value comes from what it can buy, and it can’t buy everything. It’s smarter to start with what you really want, which are your real goals, and then work back to what you need to attain them. Money will be one of the things you need, but it’s not the only one and certainly not the most important one once you get past having the amount you need to get what you really want.

to think of their relative values so you weigh them properly. In my case, I wanted meaningful work and meaningful relationships equally, and I valued money less—as long as I had enough to take care of my basic needs. In thinking about the relative importance of great relationships and money, it was clear that relationships were more important because there is no amount of money I would take in exchange for a meaningful relationship, because there is nothing I could buy with that money that would be more valuable. So, for me, meaningful work and meaningful relationships were and

still are my primary goals and everything I did was for them. Making money was an incid...

decided it would be more efficient to write down my thoughts every day

so others could understand my logic and help improve it.

reflected on, and argued about by clients and policymakers around the world.

My ability to visualize these complex machines gave us a competitive edge

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.

different markets began to move in unison because they were more influenced by swings in money and credit growth than by changes in their individual supply-demand balances. These big moves were exacerbated

Because I had a strong tendency to be right but early, I was inclined to think that was the case.

It was, but to have missed the $40 move up was inexcusable to me. When the plunge finally did happen, in March 1980, silver crashed back down below $11.

Colman and I worked by challenging each other’s ideas and trying to find the best answers; it was a constant back-and-forth, which we both enjoyed, especially at a time when there was so much to figure out. We would debate about the markets and the forces behind them late into the night, plug data into the computer before we went to bed, and see what

spit out in the morning.

Debts continued to rise much faster than the incomes borrowers needed to repay them, and American banks were lending huge amounts—much more than they had in capital—to emerging countries. In March 1981,

No one could find any flaws in my logic, though they were all reluctant to endorse my conclusion.

rally was followed by the greatest crash of all time. In October, I laid out my prognosis in a memo. As I saw it, there was a 75 percent chance the Fed’s efforts would fall short and the economy would move into failure; a 20 percent chance it would initially succeed at stimulating the economy but still ultimately fail; and a 5 percent chance it would provide enough stimulus to save the economy but trigger hyperinflation. To hedge against the worst possibilities, I bought gold and T-bill futures as a spread against eurodollars, which was a limited-risk way of betting on credit problems

This fueled a boom. The banks were protected both because the Federal Reserve loaned them cash and the creditors’ committees and international financial restructuring organizations such as the International Monetary Fund (IMF) and the Bank for International Settlements arranged things so that the debtor nations could pay their debt service from new loans. That way everyone could pretend everything was fine and write down those loans over many years.

In retrospect, the mistakes that led to my crash seemed embarrassingly obvious. First, I had been wildly overconfident and had let my emotions get the better of me. I learned (again) that no matter how much I knew and how hard I worked, I could never be certain enough to proclaim things like what I’d said on Wall $treet Week: “There’ll be no soft landing. I can say that with absolute

certainty, because I know how markets work.” I am still shocked and embarrassed by how arrogant I was.

Second, I again saw the value of stud...

all major economies and markets going back a hundred years and to come up with carefully tested decision-making principles that are timeless and universal. Third, I was reminded of how

difficult it is to time markets.

Staring at these failings, I realized that if I was going to

likelihood of getting whacked again, I would have to look at myself objectively and change—

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.

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.