One of our favorite investors here at The Acquirer’s Multiple is Ray Dalio, and one of the best Dalio interviews is in the book, Hedge Fund Market Wizards: How Winning Traders Win, by Jack Schwager. The book provides successful trading philosophies and strategies from fifteen traders who’ve consistently beaten the markets. In this interview Dalio talks about some of the most important lessons and experiences that he has learned from a life of investing.

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Ray Dalio

Here’s an excerpt from that interview:

As the world’s largest hedge fund, you have come quite far. I wonder what your goals were as a young man?

I played around in the markets when I was a kid. I started when I was just 12. It was like a game, and I loved the game. The fact that I could make money playing the game was good, too, but it wasn’t what motivated me. I never had any specific goals like making or managing some level of money.

It is amazing how many of the successful traders I have interviewed got started in the markets at a very young age their teens and sometimes even younger.

That makes total sense to me because the way people think is very much influenced by what they do early in their lives. Internalized learning is easiest when we are young, which is why learning to play a sport or to speak a language well is easier at an early age. The type of thinking that is necessary to succeed in the markets is entirely different from the type of thinking that is required to succeed in school. I’m sure that my being involved in the markets from an early age profoundly affected my way of thinking.

How so?

Most school education is a matter of following instructions—remember this; give it back; did you get the right answer? It teaches you that mistakes are bad instead of teaching you the importance of learning from mistakes. It doesn’t address how to deal with what you don’t know.

Anyone who has been involved in the markets knows that you can never be absolutely confident. There is never a trade that you know you are right on. If you approach trading that way, then you will always be looking at where you might be wrong. You don’t have a false confidence. You value what you don’t know.

In order for me to form an opinion about anything involves a higher threshold than if I were involved in some profession other than trading. I’m so worried that I may be wrong that I work really hard at putting my ideas out in front of other people for them to shoot down and tell me where I may be wrong. That process helps me be right. You have to be both assertive and open-minded at the same time. The markets teach you that you have to be an independent thinker. And any time you are an independent thinker, there is a reasonable chance you are going to be wrong.

Do you remember your first trade?

Yes, I bought Northeast Airlines, which flew between New York and Florida.

How did you pick that stock?

It was the only stock I had ever heard of that was also selling below $5 a share. So I could buy more shares. That was my whole analysis. It didn’t make any sense, but I got lucky. The company was about to go bankrupt, but then it was acquired, and I tripled my money. So I figured this was easy. I don’t remember anything more about any specific stocks I bought as a child. But what I do remember is that when I was about 18 years old, we had the first bear market in my experience, and I learned to go short. Then in college I got involved in trading commodities.

What attracted you to commodities?

I could trade them with low margin requirements. I figured that with low margin requirements, I could make more money.

Any early experiences in the markets stand out?

In 1971, after graduating college and before going to business school, I had a job as a clerk on the New York Stock Exchange. On August 15, Nixon took the U.S. off the gold standard, and the monetary system broke down. I remember the stock market then went up a lot, which is certainly not what I expected.

What did you learn from that experience?

I learned that currency depreciations and the printing of money are good for stocks. I also learned not to trust what policy makers say. I learned these lessons repeatedly over the years.

Any other early experiences stand out where the market behaved very differently from what you expected?

In 1982, we had worse economic conditions than we do right now. The unemployment rate was over 11 percent. It also seemed clear to me that Latin America was going to default on its debt. Since I knew that the money center banks had large amounts of their capital in Latin American debt, I assumed that a default would be terrible for the stock market. Then boom—in August, Mexico defaulted. The market responded with a big rally. In fact, that was the exact bottom of the stock market and the beginning of an 18-year bull market. That is certainly not what I would have expected to happen.

That rally occurred because the Fed eased massively. I learned not to fight the Fed unless I had very good reasons to believe that their moves wouldn’t work. The Fed and other central banks have tremendous power. In both the abandonment of the gold standard in 1971 and in the Mexico default in 1982, I learned that a crisis development that leads to central banks easing and coming to the rescue can swamp the impact of the crisis itself.

Any other events stand out as learning experiences?

Every day provides tactile learning experiences. You are asking me to describe moments. I don’t see it as moments, but rather as a string of tactile experiences. It is not so much a matter of cerebral memories as it is visceral feelings.

You can read about what happened in the market after Mexico defaulted, but that is not the same as being in the market and actually experiencing it. I particularly remember my surprises, especially the painful ones, because those are the experiences that provide learning lessons. I vividly remember being long pork bellies in my personal account in the early 1970s at a time when pork bellies were limit down every day. I didn’t know when my losses would end, and I was worried that I would be financially ruined.

In those days, we had the big commodity boards, which clicked whenever prices changed. So each morning, on the opening, I would see and hear the market click down 200 points, the daily limit, stay unchanged at that price, and know that I had lost that much more, with the amount of potential additional losses still undefined. It was a very tactile experience.

What did you learn from that experience?

It taught me the importance of risk controls because I never wanted to

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