Principles: Life and Work

by Ray Dalio

but a meritocracy that encourages thoughtful disagreements and explores and weighs people’s opinions in proportion to their merits.

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. Over the years that followed,

Sometimes life hits you in the head with a brick. Don’t lose faith. I’m convinced that the only thing that kept me going was that I loved what I did.”

I saw that 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-mi...

But I needed to have both low risk and high returns,

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

Computers were among the most valuable things I acquired, because of how they helped me think. Without them, Bridgewater would not have been nearly as successful as it turned out to be.

future—it was knowing how to react appropriately to the information available at each point in time. In order to do that, I would have to have a vast store of economic and market data to draw on—and as it happened, I did.

From very early on, 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 throu...

rules appropr...

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,

Most of the time, it was because I had overlooked something. In those cases, the computer taught me.

it could do a better job of compounding my knowledge and the knowledge of the people I worked with as Bridgewater grew. Rather than argue about our conclusions, my partners and I would argue about our different decision-making criteria. Then we resolved our disagreements by testing the criteria objectively.

Of course, we always had the freedom to override the system, which we did less than 2 percent of the time—mostly to take money off the table during extraordinary events that weren’t programmed, like the World Trade Center going down on 9/11.

a January 1987 piece called “Making Money vs. Making Forecasts,” I explained that:

Truth be known, forecasts aren’t worth very much, and most people who make them don’t make money in the markets. . . . This is because nothing is certain and when one overlays the probabilities of all of the various things that affect the future in order to make a forecast, one gets a wide array of possibilities with varying probabilities, not one highly probable outcome. . . . We believe that market movements reflect economic movements. Economic movements are reflected in economic statistics. By studying the relationships between economic statistics and market movements, we’ve

developed precise rules for identifying important shifts in the economic/market environment and in turn our positions. In other words, rather than forecasting changes in the economic environment and shifting positions in anticipation of them, we pick up these changes as they’re occurring and move ou...

me. If I didn’t have these systems, I’d probably be broke or dead from the stress of trying so hard.

As you will see later, I am now developing similar systems to help us make management decisions.

felt that the strategies I was handing off were the ones I would use were I running the company myself.

would break each company down into distinct logical components and then come up with a plan for managing each part, using a variety of financial tools, especially derivative instruments.

The most important components to separate were the profits coming from the ...

that were speculative profits and losses co...

changes. 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. I would advise them to deviate from this position only when they wanted to speculate, which they should only do in measured...

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 example, some people outperform the stock market and others underperform it; they are said to have

positive or negative alpha. With alpha overlay, we were offering a way of making bets independent of underlying market performance. Approaching the market in this way taught me that one of the keys to being a successful investor is to only take bets you are highly confident in and to diversify

Essentially, I was setting up the first U.S.-based private equity firm in China. I launched

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. While I stepped away

He rated Angela Merkel as the best leader in the West and considered Vladimir Putin one of the best leaders worldwide.

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

like these have taught me that 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.

the mid-1980s, Bridgewater had grown to about ten people, so I rented a big old farmhouse. Bridgewater occupied part of it and my family occupied the rest. It was extremely informal and family-like:

You get the idea: Bridgewater was a small community of friends who worked hard and partied hard.

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 fought for what I thought was best, and I wanted them to do so as well. When I thought someone did something stupid, I said so and I expected them to tell me when I did something stupid.

Operating any other way would be unproductive and unethical.

We used our indicators to catch shifting fundamentals and our technical trend-following filters to confirm that price movements were consistent with what the indicators were suggesting. When they both pointed in

Not everyone at Bridgewater saw things as Bob and I did. Some in the company doubted that systemization could work, especially when the systems didn’t do well, which, like normal decision making, happened every now and then. It took a lot of reasoning to persuade some of the people I worked with to press on. But even if I couldn’t convince them, they couldn’t change my mind, because they

couldn’t show me why our approach of clearly specifying, testing, and systemizing our logic wasn’t preferable to making decisions less systematically.

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.

I didn’t value experience as much as character, creativity, and common sense,

having started Bridgewater two years out of school myself, and my belief that having an ability to figure things out is more important than having specific knowledge of how to do something. It seemed to me, young people were creating sensible innovation that wa...

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