Ray Dalio (Trades, Portfolio) is a billionaire investor who is the founder of Bridgewater Associates, the world’s largest hedge fund. Dalio bought his first stock at just 12 years old. He invested $300 into Northeastern Airlines and tripled his investment. After that, Dalio was hooked on investing. He started trading stocks in college before moving on to commodities and founding Bridgewater.
Dalio believes we have different stages in our professional lives. The first is when are trying to be successful, and then the next stage is about passing knowledge on. Dalio is in the later stage. He wrote a book called “Principles” in 2017, which was a best-seller globally.
More recently, in a 2022 interview with Charlie Rose, Dalio revisited his principles and even expanded on them. Here are my key takeaways from this interview.
How to invest
Dalio believes people have a tendency to extrapolate past high returning assets to expected future returns. For example, tech stocks have previously performed extremely well and many people thought this would continue. However, now the high inflation and rising interest rate environment is causing a devaluation in many tech stocks in 2022.
Dalio believes you should have a “balanced portfolio with a skew towards inflation hedge assets” in the current climate.
His "Holy Grail of Investing" focuses on investing in eight to 12 uncorrelated assets. That way when one sector is doing poorly, such as tech, another sector such as manufacturing or commodities will do better. He also believes you should never put your portfolio in a position where you can lose more than 25% of your stock or portfolio value in a worst-case scenario. This is because of the mathematical fact that if you invest in a stock and it loses 50% of its value you will need the stock price to increase by 100% to make it back.
Personal finance advice
Dalio says to be financially strong, you need to spend less than you earn and have a good balance sheet and portfolio. He says you should think about how long you could cover all your expenses if you lost your primary source of income, such as your job. The more financial security you have, the more flexibility you have to protect yourself on the downside and also take advantage of opportunities.
Self awareness
Dalio believes that self-awareness is a major key to success in investing and life. Dalio believes you should “know your nature” and “evolve well." At Bridgewater Associates, he puts his employees and himself through various personality tests in order to help everyone understand their nature and how best to work with others on a team.
For example, if a team is constructed of all abstract thinkers and “ideas people," then it is unlikely to be successful. Great teams have a mix of personality types with a mix of abstract and practical thinkers who can get stuff done. These great team members should be open to the “art of thoughtful disagreement."
Idea meritocracy
Dalio likes to create a team culture based on an what he calls an “idea meritocracy." This basically means the best idea wins, as opposed to the idea which is executed purely because a member of senior management said it. Dalio believes the seniority of the person doesn’t matter, as it’s all about the quality of the idea.
When making decisions or working in teams, it is great to exercise “radical truth and radical transparency." Firstly you have to find out what is true, and this may be your own weakness. Then from that point, you can move forward. Dalio believes an open culture of empathy is required so people can express truth freely. In addition, he records many of the meetings at Bridgewater to ensure “radical transparency."
How to make great decisions
Making optimal decisions is vital in many parts of life but especially when investing. Dalio believes you should aim to understand what you know and don’t know. This is very similar to Warren Buffett (Trades, Portfolio)’s principle of a “circle of competence." However, Dalio also believes you should have “curiosity about other people's perspectives” and even stress test your own opinions. Dalio suggests finding people who you respect and are experts in an area, but also disagree with you, to stress test your own opinions. For example, if you are really bullish on a stock, it will likely make sense to read a short seller report in order to see both sides.
“Believability weighted decision making” is another key tool Dalio uses regularly. This involves triangulating the opinions of experts in order to make informed decisions. For example, Dalio says he was diagnosed with cancer a few years ago and the first doctor he went to recommended an invasive treatment that would have destroyed his quality of life. But rather than just going along with this treatment, Dalio decided to seek out the opinions of two other experts. In the end, he found a solution that didn’t require intense surgery, and he could live his life as normal. This is a huge credit to the tactic of doing “believability weighted decision making."
Pain + reflection = progress
On the long journey of life, you will make mistakes and experience difficulties, but the important thing is learning from them. If you reflect on the lessons learned, you can improve yourself and deal with the future better.
Dalio says the biggest loss he has had was the loss of his son. This taught him how to deal with death, and how to accept reality, and it also taught him to cherish the people you love.
How to be happy
Psychologists at Harvard discovered that above a basic level of income, any extra doesn’t increase happiness by much if at all. The main source of happiness is meaningful relationships with friends, family and community.
Dalio believes one key to happiness is that you should aim to make your passion and work the same thing. This way you can put in more hours than most (and thus be more financially successful) while still enjoying the process and learning.
Dalio believes to be happy and successful in life requires two things: meaningful work and meaningful relationships. The first part of this means people need to find their work enjoyable and also see purpose in it. Psychologist Daniel Pink believes people who exercise mastery of a task are more likely to be both happy and successful. Meaning relationships refers to mutual generosity and caring with others. This can be friends and family primarily, but it's also good to get along with colleagues.
Book recommendations
Dalio says the most impactful books he's read include "A River Out of Eden" by Richard Dawkins, "Meditations" by Marcus Aurelius and "A Hero of Thousand Faces" by Joseph Cambell.
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