How To Build A Successful Investment Firm – 210 Guiding Principles – Ray Dalio

How To Build A Successful Investment Firm – 210 Guiding Principles – Ray Dalio

One of our favorite investors at The Acquirer’s Multiple is Ray Dalio. Dalio is the Chairman of the largest hedge fund in the world, Bridgewater Associates. One of the best papers ever written by Dalio is the abbreviated version of what he calls his “Principles”, which provides 210 guiding principles on getting the culture right in the world’s largest hedge fund.

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One section in particular called – Recognize the Power of Knowing How to Deal with Not Knowing – provides some great insights for investors who are constantly faced with ‘unknowns’ when it comes to their investing decisions.

Here’s an excerpt from the paper:

191) Recognize that your goal is to come up with the best answer, that the probability of your having it is small, and that even if you have it, you can’t be confident that you do have it unless you have other believable people test you.

192) Understand that the ability to deal with not knowing is far more powerful than knowing.

a) Embrace the power of asking: “What don’t I know, and what should I do about it?”

b) Finding the path to success is at least as dependent on coming up with the right questions as coming up with answers.

193) Remember that your goal is to find the best answer, not to give the best one you have.

194) While everyone has the right to have questions and theories, only believable people have the right to have opinions.

195) Constantly worry about what you are missing.

a) Successful people ask for the criticism of others and consider its merit.

b) Triangulate your view.

A recent article in The New York Times describes how Dalio came up with his 210 guiding principles:

In 1993, Ray Dalio, the chairman of what is today the largest hedge fund in the world, Bridgewater Associates, received a memo signed by his top three lieutenants that was startlingly honest in its assessment of him.

It was a performance review of sorts, and not in a good way. After mentioning his positive attributes, they spelled out the negatives. “Ray sometimes says or does things to employees which makes them feel incompetent, unnecessary, humiliated, overwhelmed, belittled, pressed or otherwise bad,” the memo read. “If he doesn’t manage people well, growth will be stunted and we will all be affected.”

To Mr. Dalio, the message was both devastating and a wake-up call. His reaction: “Ugh. That hurt and surprised me.”

That moment helped push Mr. Dalio to rethink how he approached people and to begin developing a unique — and sometimes controversial — culture inside his firm, one based on a series of “principles” that place the idea of “radical transparency” above virtually all else.

He wanted to find a way for people to “get past their own ego barriers,” as he explained to me in an interview, “to put your honest thoughts on the table, to be able to have thoughtful disagreements” and, he added, “even when disagreements remain, to know how to get past them so that you’re not angry with each other.”

At first glance, his principles may not be easy to stomach, especially for those of us accustomed to sugarcoated critiques. One of his principles, for example, is “Evaluate accurately, not kindly.” Another is “Recognize that tough love is both the hardest and the most important type of love to give (because it is so rarely welcomed).”

But underneath what may seem like a clinical, emotionless approach is something different and far more poignant: Mr. Dalio is preaching for individuals to have a sense of humility and introspection, an ability to open themselves to appreciate pointed criticism and use it to improve.

On Sept. 19, Mr. Dalio will publish his codified principles in a 500-plus-page book, “Principles: Life & Work,” which is already being buzzed about as Wall Street executives and investors have passed around galley copies.

Mr. Dalio made an abbreviated version of his “Principles” available on the internet in 2011; the document has been downloaded more than three million times.

Article by Johnny Hopkins, The Acquirer's Multiple

The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”
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