#43 Ray Dalio Principles Life and Work

Summary Notes


In this episode of Founders Podcast, David delves into Ray Dalio's book "Principles: Life and Work," exploring Dalio's philosophy that success is rooted in understanding one's own ignorance and adopting a set of principles for decision-making. Dalio, who founded Bridgewater Associates from his two-bedroom apartment, emphasizes the importance of principles as recipes for success, allowing for better and faster decisions. Despite his early luck in the stock market, Dalio faced a humbling crash that nearly cost him everything. This pivotal moment led him to systematize his decision-making criteria into algorithms, enabling him to manage risk and achieve consistent returns. Dalio's "holy grail" of investing, discovered through historical testing of his investment principles, revolutionized his approach. David underscores that Dalio's journey from failure to success demonstrates the value of resilience, adaptability, and the pursuit of a life aligned with one's inherent nature. Dalio's insights challenge the allure of wealth and fame, suggesting that the happiest people are those who understand themselves and tailor their lives accordingly.

Summary Notes

Self-Awareness and Embracing Ignorance

  • David acknowledges his own limitations and emphasizes the value of recognizing what you don't know.
  • He highlights the importance of principles as fundamental truths that guide behavior and decision-making.
  • Principles help in dealing with life's challenges and achieving goals.
  • Most people don't articulate or share their principles, which David sees as a missed opportunity for collective learning.

"Before I begin telling you what I think, I want to establish that I'm a dumb shit who doesn't know much relative to what I need to know."

This quote underscores the speaker's humility and the recognition of his own knowledge gaps, which sets the stage for the importance of principles in decision-making.

The Value of Principles in Life

  • Principles are likened to recipes for success, providing a framework for handling life's myriad situations.
  • Writing down and sharing principles can benefit others and oneself, offering clarity on goals and methods.
  • David expresses a wish to understand the principles of historical figures to learn from their approaches.

"Principle are fundamental truths that serve as the foundations for behavior that get you what you want out of life."

The quote defines principles and their role in achieving personal success, establishing them as the thematic backbone of the discussion.

Introduction to "Principles: Life and Work" by Ray Dalio

  • David was compelled to read the book due to its widespread acclaim.
  • The podcast "founders" is introduced, which focuses on sharing ideas from biographies of company builders.
  • David requests support for the podcast, detailing ways listeners can contribute.

"Okay, so that is from the introduction of the book that I want to talk to you about today, which is principles, life, and work by Ray Dalio."

This quote transitions the discussion to the specific book "Principles: Life and Work" by Ray Dalio, which will be the main source of insights in the podcast.

The Premise of Founders Podcast

  • The podcast aims to extract and share actionable ideas from the lives of successful company founders.
  • David emphasizes the non-interruptive nature of the podcast, focusing on delivering value efficiently.
  • Various subscription options are offered to support the podcast and gain access to exclusive content.

"Every week I read a biography or autobiography of someone that has built a company and I share the ideas that I learn in the book that you can hopefully use in your own life."

This quote explains the purpose of the podcast and its relevance to listeners who seek to learn from the experiences of accomplished entrepreneurs.

Ray Dalio's First Principle: Independent Thinking

  • Ray Dalio's first principle emphasizes the importance of independent thinking in determining personal goals, understanding reality, and making decisions accordingly.
  • Adopting principles without reflection can lead to inconsistency with one's goals and nature.
  • Recognizing one's own ignorance is critical to personal growth and decision-making.

"Think for yourself to decide, one, what you want, two, what is true, and three, what you should do to achieve number one in light of number two."

This quote encapsulates Ray Dalio's first principle, highlighting the need for independent thinking in aligning actions with personal goals and truths.

Embracing Failure and Learning

  • Dalio believes that success involves striving for ambitious goals and learning from failures without being completely derailed.
  • He shares his experience of losing everything and starting over, which led to the development of his principles-based approach.
  • The book emphasizes the importance of systematizing decision-making and learning from mistakes.

"I believe that the key to success lies in knowing how to both strive for a lot and fail well."

The quote reflects Dalio's philosophy that embracing failure as a learning opportunity is a key component of achieving success.

Investing, Entrepreneurship, and Independent Thinking

  • Dalio draws parallels between successful investing and entrepreneurship, both requiring independent thinking against consensus views.
  • His approach to decision-making is based on principles that are designed to increase the chances of making correct decisions.
  • Dalio developed a fear of being wrong, which led to a systematized approach to reflect on and write down decision criteria.

"To be a successful entrepreneur, the same is true. One also has to be an independent thinker who correctly bends against the consensus, which means being painfully wrong a fair amount."

This quote highlights the similarity between entrepreneurship and investing in terms of the necessity for independent thought and the acceptance of potential failure.

Systematizing Decision-Making

  • Dalio advocates for systematizing decision-making by turning criteria into algorithms.
  • By comparing computerized decision-making systems with human judgment, Dalio found that computers often make better, more objective decisions.
  • Systematizing allows for the compounding of understanding and improves collective decision-making over time.

"I discovered I could do that by expressing my decision making criteria in the form of algorithms that I could embed into our computers."

The quote explains Dalio's method of codifying decision-making processes into computer algorithms to enhance the quality and objectivity of decisions.

Reflection and Continuous Improvement

  • Dalio emphasizes the shift from assuming correctness to questioning one's own rightness.
  • Writing down decision-making criteria and reflecting on past decisions is a key practice for learning and improvement.
  • The practice of documenting decisions allows for future analysis and the development of what Dalio calls his "holy grail."

"My painful mistake shifted me from having a perspective of I know I'm right to having one of how do I know I'm right?"

This quote illustrates the transformative effect of failure on Dalio's mindset, leading to a more reflective and analytical approach to decision-making.

Human Colossus: The Concept of Compounding Knowledge

  • Tim Urban describes the idea of compounding knowledge as the "human colossus."
  • The human colossus represents humanity's collective knowledge and ability to create and invent, which accumulates across generations.
  • This collective knowledge has grown exponentially from 50,000 BC to today, reaching levels beyond our comprehension.
  • Despite humans being biologically the same as in 50,000 BC, it's the amassed human knowledge that has evolved.
  • The concept emphasizes the power of compounded knowledge over time and its impact on human progress.

"The human colossus is the collective knowledge humanity has built, the collective ability to create and invent a mountain of achievement that is cumulative across generations. What's that? That's compounded knowledge. Right. It is a force that is greater than humanity himself."

The quote explains the idea of the human colossus as a metaphor for the vast, compounded body of knowledge that humanity has built over time, which is a force greater than any individual.

Ray Dalio's Life Story and Principles

  • Ray Dalio's book is divided into three parts: his life story, life principles, and work principles.
  • The life story part, titled "Where I'm Coming From," shares experiences and mistakes that led to the discovery of his decision-making principles.
  • Dalio expresses concern that his personal story may distract readers from the principles and their underlying cause-effect relationships.
  • Despite Dalio's reservations, the life story is compelling as it shows the necessity for the principles.
  • The life and work principles sections are designed as a reference for readers to consult specific topics.

"In this part, I share some of the experiences, most importantly, my mistakes, that led me to discover the principles that guide my decision making."

The quote highlights that Ray Dalio's life story section focuses on the experiences and mistakes that were critical in shaping his decision-making principles.

The Importance of Decision-Making

  • Time is likened to a river that carries us towards inevitable encounters with reality, necessitating decisions.
  • The quality of our decisions is directly linked to the quality of our lives.
  • As children, decisions are made for us by parents, but as we grow, we make our own choices and set our own goals.
  • Life is filled with millions of decisions, which Ray Dalio describes as "bets" that shape our life's quality.
  • Dalio encourages readers to look beyond his personal story to understand the cause-effect relationships in his decisions.

"Time is like a river that carries us forward into encounters with reality that require us to make decisions. We can't stop our movement down this river, and we can't avoid those encounters. We can only approach them in the best possible way."

This quote uses the river metaphor to convey that time moves us towards situations where we must make decisions, and our approach to these decisions affects our life outcomes.

Ray Dalio's Early Life and First Jobs

  • Dalio's early life was marked by a poor rote memory and a dislike for following instructions, which made him struggle with school.
  • Despite these challenges, his curiosity and independence drove him to figure things out on his own.
  • Dalio's first jobs included a newspaper route, shoveling snow, caddying, and working at restaurants and department stores.
  • These jobs taught him valuable lessons about money and responsibility that he wouldn't have learned in school or through play.

"My most obvious weakness was my bad rote memory. I couldn't and still can't remember facts that don't have reasons for being what they are, like phone numbers, and I don't like following instructions."

The quote reflects Dalio's early difficulties with memory and instruction, which contrasted with his curiosity and desire to learn independently.

Ray Dalio's Introduction to the Stock Market

  • Dalio's first investment was in Northeast Airlines because it was affordable, which led to him tripling his money due to a fortuitous acquisition.
  • His success, though based on a naive strategy, sparked his interest in the stock market.
  • Dalio began building an investment library by requesting annual reports from Fortune 500 companies, which he studied thoroughly.

"My first investment was in Northeast Airlines. I bought it because it was the only company I had heard of that was selling for less than $5 a share."

This quote illustrates Dalio's initial, simplistic approach to investing, which inadvertently led to early success and a lifelong interest in the stock market.

Embracing Risk and Independent Thinking

  • Dalio values independent thinking and is inclined to take risks for potential rewards.
  • He fears boredom and mediocrity more than failure, believing that a terrible outcome is preferable to a mediocre one because it adds "flavor" to life.
  • Dalio's perspective was shaped by his experiences and the belief that the future is not just a modified version of the present.

"I've always been an independent thinker, inclined to take risks in search of rewards, not just in the markets, but in most everything."

The quote emphasizes Dalio's philosophy of independent thinking and risk-taking as a means to achieve rewarding outcomes in all areas of life.

Learning from History and Human Nature

  • Dalio observes that while people expect the future to resemble the present, it's often very different due to unforeseen events.
  • He learned this lesson during the economic downturns between 1967 and 1979, which contrasted with his earlier belief that making money in the stock market was easy.
  • Dalio's experiences taught him to understand historical events and their patterns to better navigate future challenges.

"Living through that taught me that while most everyone expects the future to be a slightly modified version of the present, it is usually very different."

The quote highlights Dalio's realization that the future often deviates significantly from the present, and understanding historical patterns is crucial for future success.

Currency Devaluation and Government Assurances

  • Dalio's interest in currency rates began with the uptick in gold prices around 1970.
  • He learned about the currency system and started to question government assurances about the dollar's stability.
  • Nixon's decision to suspend the dollar's convertibility into gold in 1971, despite assurances, taught Dalio to be skeptical of government promises regarding currency devaluation.
  • His studies on past currency devaluations revealed recurring logical cause and effect relationships that informed his future decision-making.

"I learned not to believe government policymakers when they assure you that they won't let a currency devaluation happen. The more strongly they make those assurances, the more desperate the situation probably is."

This quote conveys Dalio's counterintuitive lesson that strong government assurances often signal an imminent currency devaluation, and skepticism is warranted.

The Nifty 50 and Economic Lessons

  • The Nifty 50 was a group of 50 stocks with fast and steady earnings growth, considered a sure thing in 1972.
  • Inflationary surge and Federal Reserve's tight monetary policy led to a severe stock market decline and economic weakening.
  • The Nifty 50 stocks were particularly affected by the market plunge.
  • The lesson learned: consensus belief in investment certainty, such as the Nifty 50 being a sure bet, is often already priced in, making it a potential mistake to invest.

"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."

This quote emphasizes the danger of following popular investment trends without skepticism, as widespread belief is usually factored into the market price, reducing the potential for profits and increasing the risk of loss.

Shift from Stocks to Commodities

  • Post-1973, stock investing lost popularity and commodity trading became more prevalent.
  • The speaker developed an interest in commodities rather than stocks early in his career.
  • This interest in commodities led to the founding of Bridgewater Associates.

"So during this whole time, he takes a for some reason, or I guess he's going to describe his reason behind it, but he falls out of love with stocks and starts to want to be in commodities."

The quote reflects the speaker's shift in investment focus from stocks to commodities, which was a significant career move leading to the establishment of his own company, Bridgewater Associates.

Early Career and Bridgewater's Founding

  • The speaker was hired by Dominic and Dominic as director of commodities due to his expertise and Harvard MBA.
  • The bad stock market led to the closure of Dominic and Dominic's retail business, prompting a move to a more successful firm.
  • The speaker's aggressive nature and an incident of punching his boss led to his dismissal, yet clients still sought his advice.
  • In 1975, Bridgewater Associates was founded, beginning as a small operation out of the speaker's apartment.

"So in 1975, I started Bridgewater Associates."

This quote marks the inception of Bridgewater Associates, illustrating the speaker's entrepreneurial spirit and ability to leverage his expertise despite setbacks in his early career.

Bridgewater's Humble Beginnings and Growth

  • Bridgewater started in a two-bedroom apartment, with the speaker converting a roommate's vacated bedroom into an office.
  • The company was initially a small team consisting of the speaker, a rugby friend, and a young woman assistant.
  • The speaker's approach to business is likened to Jeff Bezos's quote about growth from small beginnings.

"Big things start small. The biggest oak starts from an acorn."

This quote, attributed to Jeff Bezos, is used to draw a parallel to Bridgewater's beginnings, emphasizing the potential for small startups to grow into massive enterprises.

Expertise in Commodities

  • The speaker developed a deep understanding of livestock, meat, grain, and oilseed markets.
  • Commodities were preferred over stocks due to their tangible nature and less susceptibility to distorted value perceptions.
  • The speaker built models to map out agricultural processes and market interactions.

"I was really getting my head into livestock, meat, grain and oil seed markets."

This quote highlights the speaker's passion for and dedication to understanding the commodities market, which played a crucial role in his professional development and success.

Learning from Others' Failures

  • The speaker recounts the story of Bunker Hunt, who became the richest man in the world by cornering the silver market.
  • Hunt's failure to exit the silver market at the right time led to his financial ruin when the market crashed.
  • The speaker learned the importance of timing and the risks of not adapting to market changes.

"Timing is everything."

This quote encapsulates the critical lesson of market timing learned from observing Bunker Hunt's downfall, reinforcing the need for careful investment decision-making.

Personal Setbacks and Recovery

  • The speaker experienced a significant professional failure when his prediction of an economic depression following Mexico's debt default did not materialize.
  • This failure was humbling and resulted in the near-collapse of Bridgewater, forcing the speaker to reevaluate his approach.
  • The speaker's resilience and willingness to learn from mistakes led to the development of principles that guided his future success.

"I was relieved that I was out of the market, but watching the richest man in the world go broke was jarring."

The quote reflects the speaker's relief at avoiding personal financial disaster while learning a crucial lesson from witnessing someone else's catastrophic loss.

The Importance of Embracing Weaknesses

  • Successful people differ from unsuccessful ones in their response to failure.
  • Acknowledging and embracing weaknesses is the starting point for beneficial change.
  • The speaker's failures taught him valuable lessons that contributed to his later success.

"Successful people change in ways that allow them to continue to take advantage of their strengths while compensating for their weaknesses."

This quote underscores the adaptive nature of successful individuals who learn from their failures and adjust their strategies to mitigate their weaknesses while leveraging their strengths.

Ray's Post-Crash State and the New Bridgewater

  • Ray was financially devastated after a crash, unable to afford a plane ticket despite his fees being much higher than the fare.
  • He began systematizing his decision-making process, writing down criteria for market positions and reflecting upon them after closing trades.
  • Ray's approach evolved into using algorithms to test his decision-making criteria against historical data, forming the foundation of the new Bridgewater.

"Coming out of my crash, I was so broke, I couldn't muster enough money to pay for an airplane ticket to Texas to visit a prospective client, even though the fees I'd earned were many times the cost of the fare."

This quote illustrates Ray's financial hardship post-crash, which was a significant turning point leading to the systematization of his decision-making process at Bridgewater.

"From very early on, whenever I took a position in the markets, I wrote down the criteria I used to make my decision."

This quote explains Ray's methodical approach to decision-making, which involved documenting the criteria for his market positions, a practice that later became a core part of Bridgewater's strategy.

Bridgewater's Growth and Marketing Strategy

  • Bridgewater grew to six employees with no marketing; business came from word of mouth and Ray's daily telexes, known as the daily observation.
  • Ray hired a seventh employee, Rob Fried, a former door-to-door bible salesman, to help sell research packages.
  • Bridgewater's business model included consulting for fees, managing company risks for incentive fees, and selling research packages.

"By late 1983, Bridgewater had six employees. Up until then, I hadn't done any marketing."

This quote indicates the initial growth of Bridgewater was organic, relying on reputation and the distribution of Ray's insights through telexes.

"So I hired a 7th employee, a former door to door bible salesman named Rob Fried. And we hit the road, lugging around a projector and a huge stack of slides, hawking a $3,000 per month research package."

This quote details the proactive steps Ray took to market Bridgewater's research, highlighting the shift from organic growth to a more structured marketing strategy.

Investment Philosophy and Emotional Responses

  • Ray discusses the importance of not losing faith during bad patches in investing or being overly enthusiastic during good times.
  • He emphasizes that people often react emotionally rather than logically, leading to poor decision-making in investments and relationships.
  • Wise individuals adhere to sound fundamentals through ups and downs, while others react emotionally to short-term results.

"All great founders and investment approaches have bad patches. Losing faith in them at such times is as common as mistake, as getting too enamored or them when they do well."

The quote reflects on the natural cycles of success and failure in investment and business, advising against extreme emotional reactions during these periods.

"Wise people stick with sound fundamentals through the ups and downs, while flighty people react emotionally to how things feel, jumping into things when they are hot and abandoning them when they are not."

This quote underlines the importance of consistency and adherence to principles rather than being swayed by emotions, which is crucial for long-term success in investing.

The Holy Grail of Investing

  • Ray describes his realization that proper diversification is key to reducing risk without diminishing returns.
  • He discovered that a portfolio of 15-20 uncorrelated return streams could significantly reduce risk without affecting expected returns, which he termed the "holy grail of investing."
  • This principle applies to various money-making ventures, and Ray had amassed a large collection of uncorrelated return streams through systematic recording of investment principles.

"From my earlier failures, I knew that no matter how confident I was in making any one bet, I could still be wrong, and that proper diversification was the key to reducing risk without reducing my returns."

This quote captures Ray's insight into the value of diversification in investment strategy, which was a pivotal realization in his career.

"I called it the holy grail of investing because it showed me the path to making a fortune."

The quote signifies the moment Ray identified a fundamental investment strategy that would greatly influence Bridgewater's success.

Systemized Thinking and Bridgewater's Success

  • Bridgewater's systemized approach to investing, based on principles and algorithms, outperformed traditional methods.
  • Ray credits the success of Bridgewater to systems that processed information more effectively than human brains could.
  • He contrasts the difficulty of managing money the old way with the efficiency of systemized thinking.

"Our returns in 2010 were the best ever. Nearly 45 and 28% in our two funds, and close to 18% in another fund, almost exclusively because the system we had programmed to take in information and process it were doing it superbly."

This quote demonstrates the success of Bridgewater's systemized approach, highlighting the impressive returns achieved in 2010.

"Why would I want to do that? It seemed to me that way of investing or managing an organization was obsolete, like reading a map instead of following gps."

The quote compares traditional investment methods to outdated navigation techniques, emphasizing the superiority of Bridgewater's systemized approach.

Public Success and Personal Reflections

  • Ray reflects on the downsides of public success, including unwanted attention and mischaracterizations of Bridgewater.
  • He shares his perspective on the limited incremental benefits of wealth and fame, emphasizing the importance of basic life pleasures that don't improve with more money.
  • Ray discusses the burdens of being on top and suggests that the happiest people understand their nature and align their lives accordingly.

"Getting a lot of attention for being successful is a bad position to be in."

This quote reveals Ray's personal experience with the negative aspects of public success and his preference for privacy over fame.

"My assessment is that the incremental benefits of having a lot and being on top are not nearly as great as most people think."

The quote provides insight into Ray's belief that the additional benefits of extreme wealth and success are overestimated, and that fundamental human pleasures are more important.

"The happiest people discover their own nature and match their lives to it."

This concluding quote encapsulates Ray's philosophy on personal fulfillment, advocating for self-awareness and alignment of one's life with their intrinsic nature.

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