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Kindle Notes & Highlights
by
Ray Dalio
Read between
December 11, 2021 - January 22, 2022
The biggest risk to democracies is that they produce such fragmented and antagonistic decision making that they can be ineffective, which leads to bad results, which leads to revolutions led by populist autocrats who represent large segments of the population who want to have a strong, capable leader get control of the chaos and make the country work well for them.
Different stages require different types of leaders to get the best results.
Civil wars inevitably happen, so rather than assuming “it won’t happen here,” which most people in most countries assume after an extended period of not having them, it is better to be wary of them and look for the markers to indicate how close one is.
Civil wars and revolutions inevitably take place to radically change the internal order. They include total restructurings of wealth and political power that include complete restructurings of debt and financial ownership and political decision making.
Almost all civil wars have had some foreign powers participating in attempt to influence the outcome to their benefit.
The beginnings of civil wars and revolutions aren’t clear when they are happening, though they are obvious when one is deeply in the middle of them.
international relations are driven much more by raw power dynamics.
wars typically occur when existential issues (ones that are so essential to the country’s existence that people are willing to fight and die for them) are at stake and they cannot be resolved by peaceful means. The wars that result from them make it clear which side gets its way and has supremacy in subsequent matters.
the two things about war that one can be most confident in are 1) that it won’t go as planned and 2) that it will be far worse than imagined.
domestic and military strength go hand in hand.
the financial strength to outspend one’s rivals is one of the most important strengths a country can have.
The greatest risk of military war is when both parties have 1) military powers that are roughly comparable and 2) irreconcilable and existential differences.
to get more win-win outcomes one needs to negotiate with consideration given to what is most important to the other party and to oneself, and know how to trade them.1,2
Winning means getting the things that are most important without losing the things that are most important, so wars that cost much more in lives and money than they provide in benefits are stupid.
have power, respect power, and use power wisely.
Raising tariffs to protect domestic businesses and jobs during bad economic times is common, but it leads to reduced efficiency because production does not occur where it can be done most efficiently.
Harmful acts of nature (e.g., droughts, floods, and plagues) often cause periods of great economic hardship that when combined with other adverse conditions lead to periods of great conflict.
During periods of severe economic distress and large wealth gaps, there are typically revolutionarily large redistributions of wealth.
In war one’s ability to withstand pain is even more important than one’s ability to inflict pain.
when there is a great increase in money and credit, it drives down the value of money and credit, which drives up the value of other investment assets.
greater polarization equals either a) greater risk of political gridlock, which reduces the chances of revolutionary changes that rectify the problems or b) some form of civil war/revolution.
when you see capital controls being put on a currency, especially when there is a big domestic debt problem, run from that currency.
during periods of great crisis, more autocratic and less democratic leadership tends to be preferred.
History has shown that all countries’ success depends on sustaining the strengthening forces without producing the excesses that lead to countries’ declines. The really successful countries have been able to do that in a big way for 200–300 years. No country has been able to do it forever.
When things are going well it is easy to keep the moral high ground. However, when the fighting gets tough, it becomes easier to justify doing that which was previously considered immoral (though rather than calling it immoral it is called moral).
History has shown that whenever a) currencies are not desired and b) there are no other currencies that are attractive to go into, the currencies are still devalued and the capital finds its way into other investments (e.g., gold, commodities, stocks, property, etc.). As a result, there is no need to have a strong alternative currency for a devaluation of a currency to take place.
What works best varies according to a) the circumstances and b) how people using these systems are with each other. No system will sustainably work well—in fact all will break down—if the individuals in it don’t respect it more than what they individually want and if the system is not flexible enough to bend with the times without breaking.
The big curveballs come when a few really big things cause a paradigm shift that alters the evolutionary rates of change. The paradigm shifts that came in the early 19th century arose from the confluence of the invention of modern tools of finance, machines that could do the work of people, the development of more inclusive societies that broadened opportunities to be inventive and productive, the increased use of books and libraries so knowledge could be more broadly shared, and the application of the scientific method.
while extrapolating the past is generally a reasonable thing to do, also be prepared to be surprised because the future will be much different than you expect it to be.
identifying, understanding, and adapting to paradigm shifts is essential, even if one can’t anticipate them—though trying to anticipate them with good indicators that help is important too.
in the markets and in life, to be successful one should bet on the upside that comes from a) evolution that leads to productivity improvements, but not so aggressively that b) cycles and bumps along the way knock you out of the game.
peace is profitable and war is costly.
All empires decline and new ones rise to replace them.
the best way to fight a war is to get strong and show one’s opponent one’s strength so they don’t want to fight violently.
Know all the possibilities, think about the worst-case scenarios, and then find ways to eliminate the intolerable ones.
As I built up from nothing, I remember regularly calculating how many weeks, then months, and then years my family and I would be fine if not another dime came in. I now have an “end of the world” portfolio that I know will keep us fine in the worst-case scenarios, and I build from there.
Diversify. In addition to making sure I’ve covered all the worst-case scenarios I can think of, I try to cover those I can’t think of by diversifying well.
Put deferred gratification ahead of immediate gratification so you will be better off in the future. Triangulate among the smartest people possible.
