The head of the world's largest hedge fund explains the guiding principle to his success

Ray dalioBusiness InsiderBridgewater Associates founder, chairman, and co-CIO Ray Dalio.

Ask great investors who their biggest influences are and you’ll hear names like Warren Buffett and Paul Tudor Jones over and over again. Ask Ray Dalio, head of the world’s biggest hedge fund, about the people who shaped his career and he won’t name drop anyone. 

Instead, he tips the hat to his own experiences.

He doesn’t say it out of pride — it’s just how he’s wired. “I know those people, they’re friends of mine,” he told Business Insider CEO Henry Blodget — referring to those titans of finance — in an interview for “The Bottom Line,” BI’s new weekly business show.

“We talk about markets. Each person plays the game a little bit differently,” Dalio said. “How I do it with my economics and systems and all that is a little bit different than each one of us do. And we have interesting conversations.”

As the founder, chairman, and co-CIO of Bridgewater Associates, Dalio oversees $US150 billion in total assets under management, and his hedge fund’s Westport, Connecticut, office has about 1,500 employees. But even though he may admire and share insights with fellow elite investors, his main teacher has always been failure through a very specific lens.

“I have a principle: Pain + Reflection = Progress.”

It’s a phrase all Bridgewater employees are intimately familiar with, and it’s a highlight of his manifesto, simply titled “Principles.” The document is a collection of 210 management lessons that he began compiling in the 1990s, first made public in 2011, and is publishing as a book this fall.

Before that, he had compiled a separate set of principles through the 1980s on the investment side. These principles are automated through algorithms and are the foundation of Bridgewater’s investment strategy.

Later, Dalio and his leadership team would go on to automate the management principles as well, through applications like a proprietary iPad app that allows employees to have “believability-weighted decision making,” in which employees’ peer-to-peer ratings on certain attributes give them more influence in particular areas.

“When we’re in the moment of pain, we tend not to reflect, but after that moment of pain when anyone makes a mistake about anything — it’s not just the markets, it’s about life — there’s a message probably there,” Dalio told Blodget. “And I believe then if you reflect in a quality way on what would you do differently in the future that would prevent that mistake, you’ll come out with a principle. Write down that principle and then operate that in the future.”

Dalio’s approach to life is hyper logical, and it’s why he hasn’t been willing to take advice at face value. In his conversation with Blodget, Dalio likened his early years of compiling his investment principles as driving with a GPS system. “And to have that next to me was invaluable,” he said. “It would learn; I would learn.”

You can watch the full second episode of “The Bottom Line” below.

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