Ray Dalio is the founder of Bridgewater. Two years ago, Bridgewater surpassed Soros’ Quantum fund for the title of most profitable hedge fund of all time; returning over $46 billion since inception.
In your author’s humble opinion, Ray Dalio is one of the more original thinkers alive today. In the investing world he stands alone in his depth of understanding of how the “economic machine” works. His “principles” for life and management are like beautiful computer code designed to produce desired outcomes while stripping away the non-essential. The man is a philosophizing engineer taking apart and designing machines for all aspects of life. Dalio has devoted himself to pursuing truth at all costs (I know, it sounds like I’m fawning, but I admire the guy’s thinking. He’s also one of my three favorite traders next to Livermore and Soros.
It’s this radical devotion to “finding out what is true and what isn’t” that unnerves many and makes Ray Dalio and Bridgewater easy targets for ridicule. The two have been frequent subjects of poor journalism. Recently, a few hack reporters have tried painting Bridgewater as cultish and its founder as an egomaniacal Jonestown leader.
Nothing could be further from the truth. I’ve been lucky enough to spend some time at their headquarters in Connecticut and my opinion is that Dalio and company simply practice what they preach, which is “radical transparency”. Yes, the culture is, well, radically different than anything you’ll find elsewhere and definitely not for everyone. But it’s also completely, perfectly, logical. He refers to the company as an “intellectual Navy Seals”, which I think is a fair analogy.
Ray Dalio has built a machine to produce a desired outcome. That outcome is excellent long-term risk-adjusted returns. There’s no doubting he’s been successful at it… or actually, THE MOST successful at it. Though different, or rather because of this difference, Bridgewater’s unparalleled success is worthy of examination.
With that let’s explore and dissect the thinking and practices of the man who’s built the world’s best money making machine.
On Philosophy and How to Build the Machine to Get What You Want
The framework for Dalio’s philosophy and the way in which he views/evaluates the world is summed up in the following chart (via Principles).
That schematic is meant to convey that your goals will determine the “machine” that you create to achieve them; that machine will produce outcomes that you should compare with your goals to judge how your machine is working. Your “machine” will consist of the design and people you choose to achieve the goals. For example, if you want to take a hill from an enemy you will need to figure out how to do that—e.g., your design might need two scouts, two snipers, four infantrymen, one person to deliver the food, etc. While having the right design is essential, it is only half the battle. It is equally important to put the right people in each of these positions. They need different qualities to play their positions well—e.g., the scouts must be fast runners, the snipers must be precise shots, etc. If your outcomes are inconsistent with your goals (e.g., if you are having problems), you need to modify your “machine,” which means that you either have to modify your design/culture or modify your people.
Do this often and well and your improvement process will look like the one on the left and do it poorly and it will look like the one on the right, or worse:
I call it “higher level thinking” because your perspective is that of one who is looking down on your machine and yourself objectively, using the feedback loop as I previously described. In other words, your most important role is to step back and design, operate and improve your “machine” to get what you want.
This is a powerful model. It forces you to be objective in assessing the quality of your beliefs and habits, thus leading to improving outcomes through the feedback loop of continuous iteration.
Now compare this to how most people go after their goals. The average person’s machine is akin to throwing spaghetti at the wall to see what sticks. Most people are reactive to life; never objectively assessing the quality of their beliefs or habits. This is why they never attain their desired outcomes.
The first step in effectively working towards your goals is to clarify what they are and why you really want them. From there you work backwards.
Without clarity of purpose and planning out the “how”, you’re doomed to walk circles. Stoic philosopher Seneca the Younger mentioned this in his writings Tranquility of Mind, “Let all your efforts be directed to something, let it keep that end in view. It’s not activity that disturbs people, but false conceptions of things that drive them mad.”
Law 29 of The 48 Laws of Power is: Plan All The Way To The End. Author Robert Greene writes, “By Planning to the end you will not be overwhelmed by circumstances and you will know when to stop. Gently guide fortune and help determine the future by thinking far ahead.” The second habit in The 7 Habits of Highly Effective People is to “begin with the end in mind.”
The end is always your starting point. Here’s Ray Dalio further spelling out the process for creating optimal outcomes.
My 5-Step Process to Getting What You Want Out of Life
There are five things that you have to do to get what you want out of life. First, you have to choose your goals , which will determine your direction. Then you have to design a plan to achieve your goals. On the way to your goals, you will encounter problems . As I mentioned, these problems typically cause pain. The most common source of pain is in exploring your mistakes and weaknesses. You will either react badly to the pain or react like a master problem solver. That is your choice. To figure out how to get around these problems you must be calm and analytical to accurately diagnose your problems. Only after you have an accurate diagnosis of them can you design a plan that will get you around your problems. Then you have to do the tasks specified in the plan. Through this process of encountering problems and figuring out how to get around them, you will become progressively more capable and achieve your goals more easily. Then you will set bigger, more challenging goals, in the same way that someone who works with weights naturally increases the poundage. This is the process of personal evolution, which I call my 5-Step Process.
In other words, “The Process” consists of five distinct steps:
Have clear goals.
Identify and don’t tolerate the problems that stand in the way of achieving your goals.
Accurately diagnose these problems.
Design plans that explicitly lay out tasks that will get you around your problems and on to your goals.
Implement these plans—i.e., do these tasks.
By and large, life will give you what you deserve and it