Bridgewater Associates founder Ray Dalio sat down with Business Insider EIC Henry Blodget to discuss his book “Principles: Life and Work,” the culture of Bridgewater, and his outlook for the future.
“Principles: Life and Work” is the first of two planned books, and includes a short autobiography along with an expanded version of the “Principles” that all Bridgewater employees read when joining the company. Following is a transcript of the video.
HENRY BLODGET: Ray Dalio is one of the most successful investment managers in history. He’s built a firm, Bridgewater, that is the largest hedge fund by multiples, most successful. He’s now written a book called Principles, in which he’s kind enough to tell us how he did it and how we can do it. Ray, thank you so much for joining us.
RAY DALIO: Thrilled to be here.
BLODGET: So here’s your book, congratulations. I know firsthand how hard it is to write a book, and this is a particularly long and pithy one. So congratulations.
BLODGET: So let’s start right at the beginning. The first sentence, you say I want to establish that I am a quote “dumb s***” who does not know everything he should know. What do you mean by that? It’s a very charming and disarming start, but what are we supposed to take away from that?
DALIO: Well, I think it’s important I know that the key to my success has not been so much what I know as much as how I deal with my not knowing. And that’s basically a big theme in the book. How do you have an idea meritocracy? Only two things that you need to do in order to be successful. The first is you have to know what the right decisions to make are, and then you have to have the courage to make them. And most people don’t have in their head the right decision. And I think one of the greatest tragedies of man is that they hold onto opinions in their heads that are wrong, and they don’t go out there and stress test them.
So we have an idea meritocracy. I mean, there’s a reason I wrote this book before I wrote Economic and Investment Principles ’cause that’s really more sort of my skill set. But in building an organisation and/or dealing with the markets, to be able to have independent thinking and go beyond what you all individually know in order to get the best is the key to success.
BLODGET: You share in detail your own development of coming to developing these principles. One of the events that you share would have been wildly traumatic for most people is that you talk about being fired from Shearson for punching your boss in the face. What happened there?
DALIO: Well, that was just a, you know, I was kind of wild then, and it was New Year’s Eve. And I got drunk, and he got drunk. And you know, we did that. And I punched him. I didn’t get fired for that. He was a good guy. We came in on the following Monday morning, and he said, ok, we’ll get it past us. I got fired for doing something else, not for that.
DALIO: But I was kind of a rebellious. The thing that affected me the most, I would say, was being so wrong in 1982 when the bottom of the stock market, on other words, I had anticipated that there would be a debt crisis with Mexico. And in August, Mexico defaulted on its debt, and I thought we were gonna have an economic crisis because there would be this worldwide debt crisis, which occurred, and —
BLODGET: Right, and just to set the scene, this was, you had left Shearson. You had started Bridgewater. You’d had many years of being very successful. You had gotten very confident, and you’ve made this huge controversial bet that we were headed into the next Great Depression and then.
DALIO: Right, the defaults came. Mexico defaulted in August of 1982. I thought, wow, we’re gonna go in this crisis, and everything’s gonna fall apart. That was the exact bottom of the stock market. I couldn’t have been more wrong. And it was painfully wrong because I had built the company until that point.
We were a tight group, small group of people. I had to let everybody go. I was so broke, I had to borrow $US4,000 from my dad. I had testified to Congress ’cause they asked me to explain this. I had been on Wall Street Week. All of those mistakes, and it was very painful experience. And it turned out to be probably the best experience of my life because it changed my attitude about thinking.
In other words, rather than thinking I’m right, I went to thinking how do I know I’m right? And it created this open-mindedness, to be able to then go, fine. The smartest people who disagreed with me, and to see how they would think about things, to balance my bets better. It taught me a radical open-mindedness. It taught me what you’re referring to in the beginning of the book that I’m trying to convey, that the power of radical open-mindedness and an idea meritocracy is such a powerful thing.
BLODGET: And you talk a lot about how this process of pain, and I can imagine it was just, again, a gut-wrenching experience of having to fire all of your friends. You have to rebuild from zero. You start going forward. You have to look in the mirror and say, hey, I was way too arrogant and confident. I have to effectively relearn. That’s not an easy thing to do.
DALIO: Right, I have a saying. Pain plus reflection equals progress, right. And I began to develop this knee-jerk reaction. If pain is a signal that something is wrong, that you did something, if you make those mistakes, and then to take that pain and to calm oneself down and think what would I have done differently in the future? So my instincts changed.
I view those experiences now like solving puzzles that will give me gems. The puzzle is, what would I do differently in the future so I would get a better result? The gem is the principle that I would write down as I learned it, so literally by writing down the principle, when this one comes along, what do I do with it? Everything is another one of those. Like, we have a million those.
DALIO: If you start to say, when one of those comes along, how should I bet steer with it, and you write down that recipe. Those are the principles. So I found that exercise to be great, and I also found that I could turn those principles into algorithms.
So let’s say our investment process, those criteria are built into literally algorithms and data can come in. So I found that process of encountering pain to produce reflection to produce better ways of doing it to produce principles and then carrying that forward to the decision-making has been invaluable and to do that with people who are gonna disagree with me and to know how to do that well. That’s been the key to success.
BLODGET: And one of the first and most important principles that you outline is embrace the truth whatever it happens to be.
DALIO: Right, a reality.
BLODGET: And one of the very striking moments in the book is when you talk about how your top managers after you rebuilt Bridgewater into a success again. Basically, they came to you and said, look. Here’s what Ray does well. He’s a genius money manager and thinker and so forth, but here’s what Ray doesn’t do well, and I have to read this because for anybody leading other people, just a very startling quote. It says, quote, “Ray sometimes says or does things to employees that make them feel incompetent, unnecessary, humiliated, overwhelmed, belittled, oppressed, or otherwise bad.” And you say very candidly, your first reaction was ugh.
DALIO: I’m like, I don’t want to do that. These are the people I work with. I don’t want to have those consequences. And on the other hand, it’s this radical straight forwardness, and I want them to speak to me in a straight forward way, so we were at a moment. That’s a painful moment. And then it’s a moment of reflection. Should I not be as straight forward? Should they not be? What could I do differently? So what we decided to do was deal with it together. Like I thought that I should then ask the questions. Do you not want me to tell you what I think? Do you, I would appreciate you doing the same with me in that straight forward. So how should we be with each other? And by agreeing how we should be with each other and writing those things down so that this is what we’re doing, we began to get more of the management principles of how we are with each other because it’s the key to our success.
But it can be painful. It can be not understood well. There’s things in our brain. Neuroscientists tell me that there’s a part of our brain, which we call the prefrontal cortex, the thoughtful part of our brain, in which we sort of want to be radically straight forward. We’d like to know what our weaknesses is ’cause it’s logical. And then there’s an emotional part of the brain. We understand the amygdala that is the fight or flight. And it takes disagreement and it converts that into a battle, and it’s not easy. And so those two parts of our brains are at odds, and if we understand that and we work ourselves through.
At the end of the day, can I be radically truthful with you? Like, what’s so bad about us being radically truthful with each other and radically transparent?
I want to say one more thing so you understand Bridgewater. OK, Bridgewater is an idea meritocracy in which the goal is to have meaningful work and meaningful relationships. They’re equally important. But to do those through radical truthfulness and radical transparency. So you’re on a mission together: meaningful work. And you have these relationships in which you care. If you have those relationships and you can understand that there’s caring at the same time that there’s holding each other to high standards, if there’s tough love, that that’s a very powerful force. And by being radically truthful and not political and being radically transparent, we’ve been able to do that. So that’s the secret sauce. In other words, it’s explained more comprehensively there, but the results speak for themselves.
BLODGET: And you talk about the two parts of the brain, the logical part, the emotions, a lot of the book sounds like the process you’ve created is to take the emotion out of everything. Turn the business into a machine. Make all decisions. Use computers to aid decision-making. Is there any part where emotion helps?
DALIO: Well, emotions —
BLODGET: What about passions?
DALIO: I think emotion is the most important thing, so let me distinguish between two things. There’s emotion that’s beneficial to you, and there’s emotion that’s detrimental to you. If your emotion is going to cause you to do something that you’re going to regret later, that’s a problem. If the emotion helps you do the things that you want, so I think the most important things are emotion, the emotion of inspiration, the emotion of love. These are things, that’s what I’m working for.
The emotions that we don’t want to have is those that we regret afterwards. So the notion is here is to deal emotion and not just take it out, but to put it in its right place. So for example, if somebody’s having an emotional moment in a conflict, then you say, how should we best handle it? Do we put it aside, and we’ll deal with it a little bit later? Do we have somebody help us through our conversation? Do we communicate by another vehicle, email, so that it can be logical and seem less emotion?
The important thing is in order to have an idea meritocracy you have to do three things. First, you have to put your honest thoughts on the table for everybody to see. So if everybody can put their honest thoughts on the table for everybody to see, that’s a great thing. A lot of people have problems doing that, but that’s the beginning.
BLODGET: Difficult, scary.
DALIO: But not if it’s the, you gotta do it. Otherwise it’s all the scenarios going on in your mind that might be wrong, and it’s not honest. So what should be the problem? There should be no problem. You should be feel good. Put it on the table. Let’s look at it. Let’s do it well. The second step that you need to do is to have thoughtful disagreement. In other words, to know how to disagree well, to take in information and pass it through and to think things through. And so we have protocols for doing that.
So we have a two minute rule and things that I can describe, are described in the book, that allow that protocol to have a quality exchange so that you together can get all of you to a better place than you could individually. That’s the power, right, and then you have a process that if you have a disagreement that remains, how do you get past that disagreement? And so you have to have a way.
Ours is what we call believability-weighted decision-making. And I can explain this if you want me to. But in any relationship, you need to have those things. Can you speak honestly with each other? Do you have good ways of working through disagreement in a productive way? And do you have ways of getting past your disagreement? That’s true for any relationship, right?
BLODGET: And one of the other principles that you stress is this idea that you should teach your team to fish rather than giving them fish, but you gotta give ’em room to make mistakes. This is something that Jeff Bezos and many other incredibly innovate entrepreneurs have stressed again and again. We have to get over the fear of mistakes. This seems to be a key part.
DALIO: Well, you learn from mistakes and learn from pain. Like I say, you can scratch the car, but you can’t total the car. OK. Mistakes is one of the best sources of learning, right. Successes mean you do the same thing over again, and ok, that’s fine, but mistakes that are painful stick. When I look back on my career, I think that the mistakes were the best thing that happened to me.
I remember my mistakes better than I remember my successes. Somehow there must be more of the successes to get me where I am, but I remember all the mistakes, and I remember the lessons. So that’s what I mean by pain plus reflection equals progress. So yeah, it’s ok for you to make mistakes. It’s not ok for you to not learn from those mistakes. That’s a principle in there, right. And so you have a culture that operates this way.
If you don’t have a culture that operates this way, it’s not gonna be self-reinforcing. And so the reason I’m talking about these types of principles rather than my economic and investment principles, which’ll come out in the next book is because these are the most fundamental principles, which are the basis of success. And they’re not just in investment, investment firms principles. It’s not just a hedge funds principles. It’s like life principles and how we’re gonna deal effectively with each other.
BLODGET: Let’s talk a little bit about investing. One of the things, as I’ve learned more about Bridgewater that I hear again and again, is you’ve, the radical transparency in the culture and among employees, but your actual investment book and decisions are kept to a very small group. Is that for competitive reasons? Why do you do that?
DALIO: Well, proprietary reasons on anything like the particular algorithms, the trades that we’re doing. It would be disadvantageous to our clients if we were to make that all public. But the concepts are economic and investment concepts I’m happy to share. I did this 30 minute video basically how the economic machine works, and in 30 minutes I told the most important things that I know about the economy ’cause I want to pass that along. I want to pass along things that are gonna be helpful to people.
I’m at a stage in my life where now my primary goal isn’t to be more successful. My primary goal is to help other people be successful. When I first did this, I thought this was presumptuous. In 2008, we anticipated the financial crisis and did well, which received a lot of attention, and there were stories about what this environment is like that were not accurate. And I tried to stay below the radar, no media. And then I was suggested I put the principles online. They were downloaded over three million times, and I received a lot of thank you notes and so on.
Well, at this time, I think that I sort of have a responsibility to pass along the things that I think are valuable along those lines. And I hope it will encourage other people to do it. When I think about the, if I think about Jeff Bezos, Jeff Bezos is a man who made, who has formulas for successes. He’s got recipes, and I think of principles are recipes for success.
So wouldn’t it be great if Jess Bezo had a book of recipes and that you say, when you encounter that thing, what do you do when you encounter that thing? And I hope to encourage. In fact, I am encouraging a number of people. I won’t mention their names, but they’re kind of luminaries, fabulously successful people will be giving me principles and writing principles, and I think if we look at those principles so when we encounter another one of those things we have principles to go to.
I think it would be good for you to write your principles. And each person to write their principles and also to walk the talk so that way others know what you stand for and are you operating that way? I think at this time it’s important to be principled. I think our country needs to restate, you know, what are the principles that bind us together? What are the ones that divide us? How should we be with each other? Then we have idea meritocratic decision-making. Can we deal with who knows who’s right, and how do you work those through? So this is something that’s much more pervasive and I think very important.
BLODGET: Wow, I think on behalf of everybody who reads your book, it’s been very valuable. I’ve learned a lot from you, from Jeff Bezos, Steve Jobs, and others. There’s so much to soak up from that, so it’s great. On investing, you’ve recently written that risks are rising because of the political atmosphere. You’ve talked about how it looks a lot like 1937. That sounds very scary. What do you mean by that?
DALIO: Well, let me clear up this. This is not like 2007-08 when in 2008, we could do the calculations of how much debt had to be paid by whom and we could see that that wasn’t gonna happen, and we were gonna have a financial bust and that. By and large, economically we are at the part of the cycle that is not too hot and not too cold, and assets have the right risk premiums and so on, so it’s a relatively stable kind of environment. On the other hand, it’s very much like the ’30s in that in 1929-32, like 2008, we had a debt crisis. Took your interest rates to zero, both of those times, and when interest rates hit zero, you don’t have the same kind of monetary policy, so they print money. They buy financial assets. In both cases they did. That caused an economic rebound in both of those cases. And it caused the stock market to rise a lot in those particular cases, and at the same time, it did not resolve the wealth differences.
So that today, the top 1/10 of 1% of the population has a net worth that is equal to the bottom 90% combined. OK, the wealth is the largest wealth gap that there has been since the 1935-40 period, and so while we have good conditions here, for the bottom 60% of the population, we have bad conditions. So the averages don’t convey what the picture is because of this disparity. So what was tapped into and what we see is there’s a large percentage of the population who is hurting and that there’s a conflict between the haves and the have nots and liberal ideas and conservative ideas and all of that, and we are having a greater polarity.
In the ’30s, we had populism. In other words, the selection of leaders who were strong leaders in a battle of one segment against the other segment inclined to fight for certain things. So as we come into this period, it’s somewhat similar to that. We will have, as we go forward, obligations. Demographics is going to affect our obligations. We’re right now at the point where pension obligations, not only debt obligations, pension obligations, health care obligations, all of those are going to gradually sort of squeeze us, and we have that division. And so it’s very similar to that. And we’re also at the point where 1937 was when the feds said we could tighten monetary policy. And they put a slight tightness in monetary policy.
In my opinion, the risks are asymmetric on the downside. In other words, if you tighten monetary policy certainly by more than is discounted in the market and what’s discounted in the market is very minor rise in market that that will reverberate through asset class prices as well as then you can have a situation in terms of the economy.
So it’s similar in that interest rates are close to zero, not much room on the downside. Obligations are large. There is a political division. There is more populism. Therefore, there’s more conflict. And therefore we need to be very careful at this moment. That’s what I’m basically saying.
BLODGET: And you have spent more than 45 years betting on the future. Given that picture you just painted, what is your bet for the future?
DALIO: Well, I think we’re in the process of watching how conflict is going to be handled politically, and that’s being reflected not only internationally with something like Korea or Iran and so on, but we’re also dealing with conflict on taxes and so on. I think that one of the things that Donald Trump did extremely well was to identify a constituency that was not heard, and he did that as a pro-business person. In other words, somebody who is going to be business-like and create that environment.
That group could have been tapped into also by more of a socialist, and what we have is a capitalist who is doing that. But in any case, whether socialists and capitalists working together to focus on that, I think that issue has been raised and now we deal with the issue. We’re going to find out. The question is really is Donald Trump, he’s gonna be aggressive. Is he aggressive and thoughtful? Or is he aggressive and reckless, and when we work through these situations, we’re going to find out more and more. I think the fact that he’s working across the lines, personally, I like the negotiations with the Democrat side.
BLODGET: I think a lot of Americans do.
DALIO: And so on and to see, cut that deal in a way if we can to also deal with the whole of the economy is something that I’m all in favour for. So we’re in the process of finding this out, right.
BLODGET: You recommend that most portfolios should contain some gold.
DALIO: Yeah, of course.
BLODGET: Why? A lot of people think it’s not of course. In fact, it doesn’t make sense.
DALIO: Well, first of all, the best way to structure a portfolio is to have the right kind of balance in your portfolio, and some amount of gold. Gold serves a purpose. It is first of all, a diversifier against other assets. You know, we have this risk on, risk off thing. We also have a monetary system. The Bretton Woods monetary system began after World War II, and it had the dollar as the world’s reserve currency. There’s a risk there. There’s a lot of dollar denominated debt and so on. If somebody felt they didn’t want to hold that, and so you could have exposures to that.
So it’s a diversifying asset that is sensible, and that’s the main reason to have gold in the portfolio, five to 10%. People, I don’t understand it. People will have more in terms of cash. The key in terms of being able to have a successful portfolio as your core portfolio. In other words, what’s your strategic asset allocation mix? What is your, if your, let me —
BLODGET: I got it. Let me ask you about Bitcoin.
BLODGET: Bitcoin, people say the same thing. It’s a store of value. You gotta diversify. The dollar’s not safe. It’s been going up and up and up. Yet recently it crashed. Jamie Dimon came out and said, it’s complete fraud. He’d fire anybody at JP Morgan who invested in it cause he wouldn’t want people that stupid working for him. What do you think?
DALIO: There are two purposes of a currency. Is it a medium of exchange? And is it a storehold of wealth? Those are the basic ingredients. Bitcoin is not an effective medium exchange by and large. I have a Bitcoin. I want to go buy things. It’s not easy to buy things with the Bitcoin, and in terms of a storehold of wealth, a storehold of wealth more reflects, like gold more reflects the opposite of what money is doing, right?
And so you look at it. It’s a storehold of wealth.
Bitcoin is a speculative bubble, right. Its price is like a greater fool theory in terms of its price. If you say, what is its intrinsic value? If Bitcoin was made to a more effective medium of exchange, and also operated in terms of a storehold of wealth, not of the reflection of that volatility, it would be a viable instrument. It is, to me, a vehicle for speculation that’s attracting people in, and it has all the classic ingredients of a bubble. People are leveraging themselves up. It doesn’t have that same intrinsic value. Even the privacy value, ok, is suspicious.
In other words, it has a purpose to some extent. If you’re living in a country, and you don’t know your currency, whether it’s gonna be good or not, and you might try to hold that. But that thing you’re holding is running around like crazy for reasons that you don’t understand, so it’s not gonna be an effective storehold of wealth, and the privacy will be stress-tested.
In other words, governments are examining who is operating in their own clever ways of what that, and so you can’t even assume, so it’s gonna be a privacy vehicle. So I don’t see the effectiveness of Bitcoin. I could see cyber currencies and so on, crypto-currencies, but this is not what we’re having. You know, it’s a possibility that I think has been captured as a speculative vehicle that’s in the middle of a bubble.
BLODGET: You said something else about investing that I think is very profound and simple that I think a lot of people don’t understand, which is to be successful as an investor, you have to bet against the consensus and be right. First of all, why? Why can’t we just buy stocks we think are gonna go up.
DALIO: Well, the consensus is built into the price. So because the consensus is built into the price. And assets price themselves in a way that they’re all compete, and they’re all of equal value in a certain sense. There’s risk premium of equities over cash and bonds will have that over whatever, but basically, they’re all priced that way. So like think of it as going to betting on a sports team or in other words, or horse racing.
OK, there’s handicapping that’s going on. So in order to be successful, you’re betting against the consensus, and you have to be right. That’s the game.
BLODGET: And you describe your first trade when you were a teenager. You bought a stock. It tripled. You thought, hey, this is easy. But you convey very effectively that in fact, it is extremely difficult even though it seemed so simple.
DALIO: Being successful in the markets is more difficult than being successful in competing in the Olympics. Your odds are higher to be successful competing in the Olympics because you have more people trying to do it. You have more resources. We put hundreds of millions of dollars. We have at Bridgewater, 1,500 people. We’re now competing against other teams, and that’s the kind of resources that are going into playing that particular game. So think about that in terms of handicapping it. It’s not an easy thing to do. What you can do is achieve balance. To know how to hold a balanced portfolio, and to receive something that is a return that is much better than cash achieving balance is something that you can do, and I think that that, but figure. If you’re going to enter the game, since value added is a zero sum game, you have to ask. Who are you playing against? Who are you going into the poker game with? Do you want to do that?
BLODGET: And as you talk to people in the real world, is your sense that people understand what they’re up against when they might buy a stock or try to time the market?
DALIO: Institutional investors who are smart by and large understand that. The average man tends to be much more reactive if you look at the purchases and sales that they make. When something goes up, they’re more likely to buy it. They think, ah, that’s a good investment. They don’t know how to measure that in terms of oh, is that a much more expensive investment that’s more likely to go down?
So that’s why, you know, you put in ads in newspapers, and they say, ah, that’s what had that return. That’s what they’re attracted to. They tend to buy high and sell low, and so an average man should not be playing this game in that way. They should be playing the game, or humility. If you think that you’re good at playing the game, just make sure, it’s like going to the poker table or going to the race track. Do it with a little bit of money, and watch it. And get the best advice that you can to know that you’re gonna be able to take money out of the system rather than put it in.
BLODGET: Ray, you’ve written a terrific book. Thank you so much for sharing your life and wisdom, and best of luck. Congratulations.
DALIO: Thank you.
DALIO: Appreciate it.
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