This week’s podcast with Ray Dalio has generated a lot of feedback. Enough of you requested the transcript that we rushed it, and you can find it below. The audio can be found here Bloomberg, iTunes, Overcast, and Soundcloud; all of our prior podcasts are here: iTunes, Soundcloud, Overcast and Bloomberg.
ANNOUNCER: This is Masters in Business with Barry Ritholtz, on Bloomberg Radio.
RITHOLTZ: What can I say about this week’s podcast? I sit down with Ray Dalio of Bridgewater Associates and you have to hear the whole thing that I can even preface it by describing it. He’s Ray Dalio, it’s awesome.
I will share a quick story about the first time I met Ray. I had been reading various things he had been posted, an early version of Principles, and I loved his idea of radical transparency and failure, learning from failure, error, mistakes, failures, they are an opportunity to learn and we should not ignore our mistakes, but we should own them and learn from them.
And because of that, I started doing my annual mea culpas, I’ve been doing it for about a decade. So I wanted when there was an event, I wanted the opportunity to say thank you to him. I couldn’t get anywhere near the guy after he spoke, there were a million institutional sales people all over him. I stepped outside and I’m just standing there, kind of fuming and I see the scrum coming towards me, it’s Ray and his assistant, and all the salespeople, and it was sort of like an Andy Capp cartoon with these guys all trying to get in there.
Eventually he is, the scrum works its way so he’s like 2 feet from me and I just looked up and said, hey, Ray, I don’t have a business card for you, I just want to say thank you. And he kind of swiveled around and looked to me, who are you? I introduced myself and I tell him, hey because of your concept of owning mistakes and the value of failure, I started posting my mea culpas publicly. Here’s where I screwed up, here’s what I learned, and we just chatted for two or three minutes and you could feel the white hot heat of all the salespeople who were looking for entrée for a commission business with Bridgewater and I’m just chitchatting and saying thank you.
So she can his assistant get in the car with a giant stack of papers and folders and stuff you know they’re throwing out immediately and I basically said gee, I have to sit down and have a longer conversation with that guy. He’s pretty fascinating. Well, here it is, almost a decade later, with no further ado, my conversation with Ray Dalio.
My guest this week requires the way of introduction from me his name is Ray Dalio and he is the founder chairman and outgoing CEO of Bridgewater Associates, the world’s largest hedge fund managing over $160 billion in assets for institutional clients. Ray continues to work as Chief Investment Officer there. According to Fortune, Bridgewater is the fifth most important private company in the United States. They have made more money for their clients than any other fund in history.
His new book, “Principles” is a New York Times bestseller, Ray Dalio, welcome to Bloomberg.
RAY DALIO: Thanks, nice to be here.
RITHOLTZ: I have been looking forward to this conversation for so long, let’s jump right in with Bridgewater just celebrated its 40th anniversary, how has the company’s evolution surprised you since you first launched the firm in the 1970s?
DALIO: Well, it surprised me at every day, every different which way, I mean I don’t know how to summarize it. You know, I started it out of a two bedroom apartment with a guy I played rugby with. And I was just playing my game and I just never imagined it would be anything like this.
So you go through these different phases, you know, first phase is you have to take care of everything, you have to hire people, you hire your pals, then you realize that you have to manage people and then you have to, you know, I had to get the file cabinets myself and all that you get people who get the file cabinets and then you have to manage them, you know it goes through all the phases and now I’m at the wonderful phase of being able to transition out of the management and make other people successful.
So I’m now a phase in my life which I’m describing as entering the third phase of my life of transitioning so that I make another people successful, so every phase is different, you know, lots of surprises.
RITHOLTZ: So let me tell you what surprised me in Principles in the first part of the book that describes your history, you had roles in the creation of each of the following products, TIPS, the inflation protected treasury bonds, US dollar futures index, risk parity, China stock market, and Chicken McNuggets.
Let’s discuss each of those but I have to start with the outlier. Chicken McNuggets, what was your role with Chicken McNuggets?
DALIO: Well, you know, I was trading commodities and when I say trading commodities, you know, down at a very basic level of understanding, you know, how many pounds of feed went into what chicken or beef and how that would grow. I liked it because it was very mechanical and there was no greater fool theory, you know, the value meat was what ever it sold for at the counter. And at that time I had institutional clients who were, you know, hedging and McDonald’s was a client of mine and some chicken producers were clients of mine.
RITHOLTZ: Lane Processing.
DALIO: Lane Processing, yes. And McDonald’s wanted to come up with the idea of the Chicken McNugget but the big problem that they had at the time is that there was a lot of volatility in prices — in chicken prices mostly because that was grain prices, a chick is a tiny thing, it doesn’t cost much, but it’s all the grain. And so they were worried about you put out these at a fixed-price on the menu and then the price volatility could kill them so they wanted to buy chicken at a fixed price but nobody produced chicken at a fixed-price because there was no chicken futures market.
So I went to the Lane Processing and I said would you like to do this and I calculated how they could essentially hedge their cost by buying corn and soy meal futures, and then they locked in the price for Chicken McNuggets, and I loved, really, commodities then.
RITHOLTZ: I love that story, it’s so fascinating how a little bit of financial engineering and lo and behold, you have a consistent price for Chicken McNuggets.
DALIO: It was cool.
RITHOLTZ: Yes, and you did dollar futures index was that with the pull to the Jones?
DALIO: Yup, yup, yup. Volatility in the dollar and then he figured let’s put together a basket and so we put together a basket, we’ve designed it and how would it work, we did the same thing with the CRB futures. It’s engineering, you’ve got to understand engineering, you have to understand the mechanics, it’s a fair — basic fundamental thing whatever you are doing so we understood a lot about engineering and I put together those products.
RITHOLTZ: And what about your role in the development of China’s equity markets?
DALIO: Well yeah I went to their I started going 1984 to China and because not for business or anything, because it was an interesting place and a matter of fact, the company that invited me, CITIC, was the only company in China that was allowed to deal with the outside world, they called it a window company. Anyway as they started to in 1989, start to think about we need financial markets, there were seven people who were in a room and it was sort of a dingy hotel room and they had to start to think about the markets and I got to know them and we started to think about how they would develop a stock market, a bond market and so on so I got to be a participant in that and that was a blast.
These people have become, you know, lifelong friends, so you know since that time, 1989 until now, we’ve been friends and then they’re gone on to develop the fabulous financial markets that are there, still there, so it’s great.
You know what I like is I like meaningful work and meaningful relationships, I like work that I can get my head into and I’m having an impact, that’s great, and I love the meaningful relationships. If you could do this with people you like over a period of time that’s even the greatest reward.
RITHOLTZ: That phrase, meaningful work and meaningful relationships, comes up in Principles over and over, not just in the history but in the life Principles part and it seems to be applied in the work Principles part. Tell us what led you to those two elements?
DALIO: Well, look I want it, I mean personally I want the meaningful work that I get excited about to be on a mission and then I love the meaningful relationships, it’s as much important to me as whatever business success, and if you put those two things together, being on a mission with people who you love and that greatness in mission, it’s double rewards and then it also reinforces each other because if you’re — if you’re doing the meaningful work, and you have the meaningful relationships, you can be tough with each other and you know, you get the devotion.
The people who are work at Bridgewater, a lot of the work them, worked here for a long time, they would never think of working anywhere else because it’s like an extended family. You have to understand that money as a reward is not a very satisfying reward really in comparison to meaningful relationships. If you do — studies have been done on happiness, right? And they said there’s very little correlation between the amount of money that you have passed a certain basic point.
RITHOLTZ: Once the bases are covered, there is diminishing returns, right.
DALIO: Not much correlation the number one thing in source of happiness across countries, everywhere, is a sense of community.
So if you have both of those things, great, so I wanted those meaningful work and meaningful relationships and then in order to have those, I wanted to be radically truthful and radically transparent with each other because if I’m going to have a relationship with you or the people around me, I need to have an idea meritocracy, in which we are radically truthful and radically transparent and that’s how the culture began and that’s — what the culture is.
You know, in a nutshell, the culture is an idea meritocracy, in other words, the best ideas went out in which were going for meaningful work and meaningful relationships through being radically truthful and radically transparent, and that’s been the key to the success.
RITHOLTZ: Let’s talk a little bit about mistakes you describe mistakes says opportunities to learn and improve saying the key to success in life is learning how to fail well.
Discuss.
DALIO: Well I think in order to be successful, you have to do five things basically. First you have to know what your goals, your dreams are, and on the way to going after those goals and dreams, you’re going to encounter your failures in your mistakes. A lot of people think that that’s painful. Those are your learning opportunities, so I’m saying pain plus reflection equals progress. In other words reflect what would you have done differently? So first step, goals, second step, problems on the way to goals, not tolerating it. The third step, you have to diagnose those problems to get at the root causes, many of those times, the root causes is you, how you’re handling it.
So you’ve got to learn a lesson. Most people learn lessons through painful mistakes, so I associate painful mistakes with learning. Okay? So first, goals, problems, then diagnose those problems with the root cause. Make a design of what you’re going to do differently in the future when the next one comes along, those of the Principles. I wrote down those Principles, that’s what the book is mostly about, this collection of Principles.
So number four, design ways of getting around them, number five do those things pushed through the results. You keep doing this over and over and over again, you are going to be successful.
I have another little formula that basically means that if you have your dreams, plus you embrace reality, and you learn from reality your painful realities and you have enough determination so you keep learning, you will inevitably have a successful life. So those of — that’s what I mean. The value in learning from mistakes because mistakes cues the fact that you learn something that that something is wrong but you need quality reflection. And when I start, when I did this over a period of time, my whole attitude started to change. I began to view mistakes, problems, failures, I began to view them as puzzles that were curious to me, and if I could solve the puzzle, I would get a gem.
And the gem I would get would be a lesson or a principle of what I would do differently in the future. And I wrote that down. So a big thing for me well for I don’t know, 25 years, is to write down the my Principles, every time I make a decision, writing down those Principles and then I found out I can convert those Principles to decision roles and I can have the computer help me make those decisions because it would reflect and that changed my life.
RITHOLTZ: So one of the things you wrote that really stood out to me about a related topic used you said you fear boredom and mediocrity more than failure in the line was great is better than terrible but terrible is better than mediocre, is that related to this idea of making mistakes or is it really just I don’t want to be bored, I want meaningful work/.
DALIO: Well I’d say it’s probably half and half, I mean in other words, I want flavor in my life, right? You know, and I don’t mind getting banged up a little bit on the way to learning and I love learning and I love the evolution, so boredom is the thing that is the worst for me. So pain, I could, you know, I can deal with some pain, I find even the benefit of the pain, it’s become almost like failure equals success, mounts — sounds like a weird thing.
RITHOLTZ: There’s a little process in the middle.
DALIO: Right, failure equals success, but because I’ve gotten recued, reprogrammed essentially, what that failure means is failure means learning and that’s exciting to me and then it produces success and that’s exciting to me and that changing my instinctual reaction, my knee-jerk reaction to failure gives me a more exciting life, gives me a more successful life.
RITHOLTZ: So let’s talk a little about that pain and that radical transparency, you write about a memo that your staff gave you about “Ray’s intractable people problem” and I’ll spare the details, it’s in the book, but they really call you out, they really take you to task for the way you are interacting with staff, how did this peer review affect you? What did this do to impact that philosophy that you’ve developed?
Well, I always really wanted that kind of feedback because I wanted to work with independent thinkers who would speak up just like I could radically straightforward. But as the company got to get a little bit bigger, and I think it was probably like maybe we had 85 people or so then, and that straightforwardness was making people feel uncomfortable. And I didn’t know that, so they called me out to dinner and they give me this memo and they explained to me that I’m having this effect of I don’t know, demoralizing people, upsetting people, and I didn’t want to have that effect like these are the meaningful relationships I wanted to have it.
So it paused me to make me think, well what do I do? That’s an intractable problem. Am I going to not be as straightforward with them can’t that be straightforward with me and how am I going to change?
RITHOLTZ: Let me interrupt you a SEC, you’re the boss, these people who are feeling while Ray really ripped me a new one today, did you really feel they can come up and say, hey Ray even though you’re the founder and boss here, here’s what you doing wrong and you better cut it out.
DALIO: Well in the markets and as an entrepreneur, you’ve got a bet against the consensus and be right. In other words, you’re not adding value in the markets the consensus is built into the price and you got to bet against it and be right.
You have to be an independent thinker and you’re not sure that you’re going to be right. So for always, and I have gotten my head handed to me enough times that I’m scared about being wrong and as a result of that, I want to work with independent thinkers, these are the people I respect who can then argue back and forth to try to raise our probabilities of being right, so that’s part of the process, right? And so on that type of straightforwardness is not easy for people, but that’s the way I’ve always operated, that’s the way we’ve operated and we’ve institutionalized operating that way. But at the time, some people found really that uncomfortable. So then we go back, I was in a position where I didn’t want to do that and I didn’t also not want — I didn’t want to stop doing it, so what should I do?
So I thought, I reflected on that, and I came up with the idea of let me just sit down with the people and decide how are we going to be with each other? For example, if I have critical thoughts about you, should I tell you or should I hold them to myself? If you’ve got critical thoughts about me, should you tell me or should you hold them to yourself? It is — everybody intellectually really says no, no, you want to know about those things, right?
RITHOLTZ: But emotionally.
DALIO: Emotionally, then they don’t they don’t like it, right? And what we discovered really is the two yous in everybody there were two yous, there’s this intellectual thoughtful you that would like to make decisions a certain way and then there’s an emotional subliminal you that you don’t even understand very well and it’s having a conflict. And so by making it very clear with each other, we could establish ways of being with each other.
That really led me to write down a lot of my work Principles, in other words, okay how we are going to be with each other. I wrote those down in words, we put those together, and then we move forward. So we had with that, we established what are unusual way of operating our unusual culture was with this thoughtful disagreement, this idea of meritocracy, and was like a contract, and people realize that the struggling wasn’t between me and them really as much as it was between them and them. They are emotional and they are intellectual and that changed everything.
So the writing down the Principles changed everything and the realization that everybody has those struggles between their thoughtfulness and what they want in their emotional sense and then you work on getting through that.
And we found that typically, it takes about 18 months to get to a place of you know, practicing this and getting comfortable with it. 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.
RITHOLTZ: No holding back.
DALIO: No holding back, and everybody — and everybody puts them on the table. Great. Okay, a lot of people won’t do that but when you get practiced, you don’t want to do it any other way. So you put your honest thoughts on the table. 2nd thing is you have to know the art of thoughtful disagreement, the art of thoughtfulness disagreement.
RITHOLTZ: That is a challenge.
DALIO: Right. In other words, to view that as a curiosity that you also might be wrong. If there’s disagreement, how do you know the wrong party isn’t you. So to separate oneself from one’s opinions and to be able to have a quality back and forth motivated by curiosity and the fear of being wrong so that you can take in and learn, that understanding the art of thoughtful disagreement is invaluable. So you — so that’s the second thing. Put your honest thoughts on the tables. The first — have — understand the art of thoughtful disagreement, we have protocols about how to do that and then at the end of the day, when there’s — you have to make a decision and you still have disagreements to have protocols to get around those disagreements that you consider to be fair.
I’d say this is essential for me in all my relationship, so it would be relationships with family, with friends, you know, I need them to be straightforward with me, I got to be straightforward with them. We have to know how to have thoughtful disagreement and then everybody in any relationship has to have protocols for getting around their disagreements if they still remain. If you and your wife are having a disagreement on something, you still have to have a protocol for getting around it. So by organizing that and making it clear, we were able to have this idea of meritocracy and everybody believes the idea of meritocracy is then fair.
Imagine how it is different at every other place, you know, the boss tells you what it is, people bottle it up, okay they think he is making a mistake, he would benefit from having that feedback, but they have to bottle it up with which frustrates them. Before they can have a real ownership mentality in the organization that they’re with and it undermines their relationship. That straightforwardness has been fantastic in creating better work and better relationship, so that’s been the secret sauce.
RITHOLTZ: So let me do a little radical transparency with you. In the book, you discussed two things. We discussed the people problem and the social issues you talk about bipolar running in the family and as I read those two in sequence I immediately said hey, I wonder if Ray is a little bit on the spectrum himself. So let me ask you, have you ever considered you’re an independent thinker, your perspectives are unique, you’re very different from the way the average person in finance operates, have you ever thought hey maybe I’m a little different?
DALIO: No, but look I’m sure I’m a little different, who knows, I’m probably crazy in a bunch of different ways. I’ve never been, nobody said that, but you know like who knows, we all have different spectrums, the thing I learned about it is there’s always a range of thinking so think of it as a thinking spectrum, and I don’t know where I am on that thinking spectrum but some people for example will see big pictures, some people will see detail, some people are creative, some people are reliable, on one of the things we’ve learned here is that everybody sees things differently like seeing on a spectrum of seeing.
And that knowing how one thinks, I tend to be more of a big picture thinker, I tend to be more of an original thinker, that kind of thing, but in terms of my reliability, like I have low reliability, whatever, to know those things and then to have the individuals recognize them and then put together your teams well because you need to do it all.
RITHOLTZ: Is this what led you guys to doing the Briggs Myers personality test on everybody and making sure the teams all had each of those boxes checked off?
DALIO: Yes, and a lot of tests and a lot of collecting data, like people come in there and they really do want to know what their strengths and weaknesses are because like you know, knowing a weakness do you want to know a weakness? You know, that’s one of those emotional intellectual questions.
Emotionally, a lot of people don’t, intellectually if you know your weakness, you can either do convert to a strength somehow or you can compensate for the — by working with somebody who’s got strong where you’re weak.
So knowing your weaknesses is the key to success and also from an employer’s point of view, what you want to do is you want to know what their weaknesses are and what their strengths are so you put them in the right role. People tippy toe around the stuff and in our you know where we are people want to get into it and work it out and so yes, tests personality tests, give you real sense of what your preferences are and how you approach your thinking. They have been very how helpful but all the data we collect, you know, like every meeting of every day we have a tool called the Dot Collector anybody wants to see it if you really don’t want to understand all this, in 16 minutes, it’s on a Tedtalk, go into Ted talk, I gave it there.
RITHOLTZ: I will link to than an I’ll make sure everyone has access to it.
DALIO: And it gives you said you’re going to see a device in which our people are putting in what they think during a meeting, well, all meetings are like this. And you’ll see how they think differently, it lights up in different colors and then it explores why is that thinking different? Which creates a self discovery and creates an idea of meritocratic decision-making. So it’s been evolved to that and it’s, you know, it’s been invaluable.
RITHOLTZ: Let’s talk a little about the idea of being a hyper-realist. You wrote understand how reality works then learn how to deal with it. Isn’t that what everybody is supposed to do?
DALIO: Most people I don’t think do, I think people, a lot of people feel bad about reality. Feels sorry that some realities are happening to them. Feel things are unfair, they don’t react to harsh realities well, they don’t, instead, you can instead say reality is the thing I have to deal with and I have to be clever and understand how does reality work and how do I deal with it effectively?
And those two different mindsets are on are enormous because if you own that reality is reality you know about that’s what you have to deal with and that you have to find a way of dealing with it successfully that it changes your whole latitude and your whole path really to being successful?
So let’s talk a little about the change in path that reality seems to have lead you towards you transitioned at work from I am right to what I would describe his next level thinking how can I know if I’m right? Explain the transition.
DALIO: Oh yes, it was in 1980-81, I had calculated that foreign countries borrowed enough money that they couldn’t pay back American banks and that there was going to be a big banking crisis. I did the numbers and that at the time that was extremely controversial view. I said we’re going to have a big debt crisis.
And then in August, Mexico defaulted on its debt, and so I figured we are going to have a big economic crisis. And so I was asked to appear on Wall Street Week and explain it, I was asked to testify to Congress and so on, this big economic crisis, bear market in stocks and everything. August 1982, Mexico defaults and here I am and I’m getting all that attention. I was so wrong, that was that was the exact bottom in the stock market, August 1982.
RITHOLTZ: And you are on Rukeyser basically forecasting the depression.
DALIO: Right, I couldn’t have been more wrong, right? And I lost money in the markets, I was had to let everybody in my company go, it was down to me. I was so broke I had to borrow $4000 from my dad to help take care of my family. That was one of most painful experiences of my life, but it was one of the most valuable experiences of my life because it changed my approach to decision-making. In other words, like you say, it shifted my perspective from thinking I’m right asking myself how do I know I’m right?
And it gave me the humility that I needed to balance with my audacity and that change in approach resulted in you know, some big decision-making, whether I go back to another job, would I stay out there and I’m how what I do things differently in the future?
And the first thing — the most important thing was, to find the smartest people I know who would disagree with me to understand their thinking to have that thoughtful disagreement.
RITHOLTZ: That’s part of your four step process, right? Hiring smart people, know when not to have an opinion, that’s a fascinating statement, when should you not have an opinion?
DALIO: Well a lot of times, right? I mean, opinions particularly in any, is a zero-sum game but so many people have opinions that they’re attached to and they don’t know whether they are right and that bias is killing them. I think one of the greatest tragedies of mankind is people stupidly holding onto opinions that could be wrong, that they could so easily put out there and stress test.
And that emotional attachment to these opinions is one of those things where instead you could just say let me get the best thinking I can have, it doesn’t even have to come from me, why does it have to come from me?
RITHOLTZ: But that’s a huge ego fail if, oh my god, I’m wrong, I have to go to someone else’s, isn’t that how people often operate?
DALIO: Right, and that’s screwed up. You have two basic barriers, you have your ego barrier and your blind spot barrier. Like do you want to be right or do you want to be — you want to take your lousy opinion and be attached to it being right? Like I want to be right I don’t care where you come from just as long as I’m right. That works better.
And then and so that ego barrier is terrible and then there’s the blind spot there even people who don’t have the ego of being attachment to being right see things differently.
RITHOLTZ: The unknown, unknown, so to speak.
DALIO: Yes, well right, this range, the spectrum that you are talking about, somebody sees something creatively, somebody sees detail — something we all see things differently and to be so you can’t see it all, the big picture person may not be able see the details or the detail person can’t see the big picture. If you can light up all those different ways of thinking, then and you can bring that to bare, you’re going to make much better decisions so that’s one of the reasons that great collective decision-making is much more powerful than just individual opinionated thinking.
RITHOLTZ: Sure of course, you — you’re bringing in all the advantages of the group and you’re limiting the problems of the individual.
DALIO: And that it raises your probabilities of being right so now…
RITHOLTZ: You mentioned four step, so I want to get to the steps three and four which are the Principles and upside risk versus downside risk.
DALIO: Right, so okay, so some of the other things I learned about is how — you know, risk goes with rewards but how am I going to change the ratio of risk to reward, right? And I spent a lot more time with financial engineering of understanding how to use correlations and certain ways of really radically improving the ratio of return to risk so.
So it’s explained in there and what I call the Holy Grail of investing, it’s you know, that was there. And that I also learned that everything that happened that happens practically has happened before for the most part and that the things that surprised me with the things that just happened to happen in my lifetime, before but — but they happened before like 1971 first time I had a breakdown of the currency system. Okay and I — it was first on in my lifetime that happened, but I looked in history, it happened many times before.
So I learned that I needed to make my rules timeless and universal. In other words, that I would run them back through the Great Depression, through the Weimar Republic, see how those work — rules will work and if they wouldn’t have worked well in certain periods, then I had to explain why they wouldn’t work in those periods because there were reasons for that. So these are the things that came out of my reflections as a result of you know that 1982 painful experience.
It’s such a great example that if you pain plus reflection equals progress. If you really reflect the most and you look at how reality works, and you think what should you do differently, that’s where the power of growth comes from.
So there’s one other thing in the Principles at work section have to talk to you about because I just was so tickled by it, you spend almost 5 pages on how to run a meeting effectively. So what, if that raises two issues, you obviously think meetings are important and a significant part of getting work done as a group, but it made me wonder what were the meetings like in the early days of Bridgewater? Was it — was it anarchy that led you to this sort of insight or what motivated a lot of thought about making meetings more productive?
DALIO: Well, meetings are an important thing and meetings means that is a collection of people who were in the room and they’re ideally leading to some sort of decision, okay? You have to say how we going to be with each other in order to make decisions, right?
RITHOLTZ: Sure.
DALIO: In other words, you can go around the table, I was — go around the table and the was not much attention paid to you know who knows exactly what, right? You know, what you think, Harry? What you think, Sally? And maybe they are not good at it and maybe they are good at it at so that’s a problem. Or you can have autocratic decision-making, you know the autocratic decision-making means the boss kind of makes the decision and then you sort of decide and everybody walks out.
I wanted to have believability weighted decision-making, okay? Believability weighted decision-making is, let’s say, shall I explain it quickly or not? Believability weighted decision-making, imagine if you knew the probability of each person making a high quality decision and then you decided that would be taken into consideration and when you’re making the decision, you can actually have believability weighted voting to make a decision, so that you put the weight more heavily on those who have greater abilities to make those types of decisions.
And at the same time, while you’re having this open-minded discussion — and at the same time, knowing what people know and knowing what they don’t know and being clear about that in terms of that decision-making. So that was a very, very important concepts for me and then we wanted to build that out you like how do we have believability weighted decision.
RITHOLTZ: You use that currently at Bridge…
DALIO: Every, every meeting.
RITHOLTZ: Ten people are sitting around the conference table and their expertise and I’m assuming credibility weighted, believability weighted is a function of their skill set, expertise et cetera, everybody has a different…
DALIO: That’s right, and they own a different weighting, so at the end of the day, you say I’m going to make a decision, okay? Would you do this after the thoughtful disagreement? Would you do this? And you push a button on this iPad app that we developed and it’ll show not only what the different people’s votes were now that vote tallied up, but will show a believability weighted vote.
RITHOLTZ: So I would assume that a straight yes no vote often leads to a different result in the believability weighted vote?
DALIO: Well, the yes no will get top tallied up with the weight of yeses and nos in that, and so for me, like I’m running a meeting this really what I wanted to have. I run the company, I can do any kind of decision-making I want. And but the reason I want the believability decision is if somebody knows more about the subject than I do, or if I have three believable people disagreeing with me and about something, I don’t want to I’ll just walk off and do that thing because that would be pretty stupid.
So what I think to myself is okay the right way to make that decision is believability weighted and then we come down to that like if I’m thinking these people have that that view and I have another view, there is a high probability I’m wrong, I need to even delve into it. Why is it that — and so by operating by this believability weighted decision-making, it’s fantastic, I will make better decisions, we make better decisions as a result of that, and also people feel empowered in the rules of fair.
In other words okay at the end of the day don’t just like in the United States, we might believe that democracy is fair, in other words.
RITHOLTZ: One person, one vote.
DALIO: They might believe that. I would believe in a company everybody doesn’t — it doesn’t make sense to have one person one vote because there is a difference. But to know that in the sense that you earn believability points in a variety of fair ways and that it gets carried through so that you’re making your decision-making is a decision-making process that people can believe in, it means they don’t have to bottle these things up and it makes for better decisions.
RITHOLTZ: That’s a pretty ego free approach to managing a company.
DALIO: Well this ego’s a problem, right? I mean you basically — I mean maybe the ego of being excited and doing great things and all of those types of things so maybe it’s not totally bad but I mean any time that that ego was standing in the way of your making a good decision, it’s terrible, it’s — it’s got to be controlled, you got to do something different otherwise you stand in the way of making a good decision.
Life is a matter you know, of bets, every day you’re making a bunch of different bets, and think about it, it’s the accumulated stack of chips that you accumulate from making all those life bets, so you don’t want to have something that’s going to stand in the way. If you’re playing poker, if you were playing any game, you don’t want to have the ego stand in the way of making smart decisions, right?
RITHOLTZ: Makes perfect sense to me. Let’s talk a little bit about markets and the economy. In the book “Principles” you describe back testing your trading intuition in order to develop a system for interest rate, stock, currency, and precious metals, tell us how the idea of back testing intuition developed and how you implemented that over the early history of Bridgewater?
DALIO: Well every — I got in the habit of every time I would put on a trade, I would write down the criteria for putting on that trade. And I when I would close out the trade, I’d read why did I do it and, you know, how did that go just as a learning experience? And I found that if I wrote those criteria really clearly, and I put them into equations or algorithms, I could then see how they would’ve performed in the past.
RITHOLTZ: Let me let me interrupt you a brief second, from the beginning days of Bridgewater from your earliest days as a trader, you are writing down your my trade criteria, here’s why I expect this to work and then you would do a postmortem saying here’s why this worked to here’s why this didn’t.
DALIO: Yes, very, very early, as long as I can remember.
RITHOLTZ: And then that would be eventually reduced to an algorithm.
DALIO: Well what I discovered I just did it to reflect on the trade but I discovered that if I was clear enough I could see how that decision rule would’ve worked in the past throughout history. And that was enlightening. Right? because then I could see I could test it in all different countries, I can test it in all different markets, wow, that was enlightening. And then I realized that if I could take that rule that this algorithm I could also have a process information on a real-time basis, so as information was coming in, it could go through the rule and then tell me essentially, buy, sell, and do that, so I gained the perspective and I gained a tool that was fantastic for my decision-making.
And it was it was so invaluable because the computer can do things that the mind can, it can process a lot more information a lot faster a lot more precisely and a lot less emotionally, and I can so I could build those strategies. So that’s how I started to think about those decision rules and then I found out that was great so I built the systems, these decision-making systems that would work like a GPS like from driving the car and the GPS says right, turn left, using those my criteria, yes, I could do that or I could say no I think I should turn right.
It’s like having a computer chess system next you while you’re playing chess but with your criteria and then the reconciliation of what the computer saying with what I’m saying then helped, because sometimes if I would see it differently from the computer, then I would say well why would that because those are my rules so kind of what’s going on and it could either be two thirds of the time it was that the computer was seeing things that I just wasn’t because my mind is limited in capacity to do it, but it would make sense when I would dig in and then let’s say one third of the time, I was seeing something that I hadn’t properly put into the system.
And so by putting it into the system and evolving in that way, again, I’ll emphasize the riding down of Principles putting them in there and then ideally encoding those Principles into computer to make that decision making, you know has been invaluable and that’s why, that worked so great with our investment decision-making that it became really important for our people decision-making, our management decision-making, in other words, for all decision-making, you can do this. It doesn’t have to be just investment decision-making, and this is the thing I really, really want to pass along.
If you think that you’re making decisions and you just sort of slow yourself down and you write those things down, it’ll help you clarify them and when the next times one of those comes along, you can refer to it, and you could also share it with other people so that you say, ah, yes, we understand each other why were doing that and you couldn’t refine it. And then you could build on that nowadays with and not just nowadays, we have been doing this for 25 years. You can build that on terms of that is that systemized type of approach, and that’s invaluable.
RITHOLTZ: Let’s stay with the investment thesis for second because there is a quote from the book I have to share. There are anxious times in every investor’s career when your expectations of what should be happening aren’t aligned with what is happening, and you don’t know if what you’re looking at are great opportunities or catastrophic mistakes. Is this the sort of thing that the system helps you work your way through?
DALIO: Yes, I mean, I think you must know the feeling like every investor, right?
RITHOLTZ: Sure, I’m right, everybody else is wrong.
DALIO: Well, but you don’t know, you say or am I missing something, you know, because every day it ticks, you know it’s not like you buy and then you sell, it’s that you’re sitting with that position.
RITHOLTZ: Right.
DALIO: And every day it’s doing this and somehow it’s going the wrong way and you really don’t know am I missing something or is the market just about to catch up? The system helps you, right? Because the system consists of that computer betting machine, right? It’s like the that that chess machine and so on. And you also have it down that, you know I structure it so that no one bet is such a big thing so you are placing large numbers and so you’re executing it and you’re looking at the reasons. So it helps you through, helps me through those emotionally challenging periods, because you learn to gain perspective, you know how bad it can go, that perspective is invaluable.
RITHOLTZ: So let’s give a specific example of that fork in the road where it either could have been a catastrophe or an opportunity have to bring up in 2008 when most funds were down 30% 35%, your flagship fund was up 14% and then fast forward to 2010, your returns for Pure Alpha 1 were +45%, Pure Alpha 2 which is a more modest portfolio is +28% and then the fairly conservative all weather portfolio was up 18%.
I’m looking at these as an example of that great opportunity versus great catastrophe. Would these returns of been possible without that process?
DALIO: No, again where they come from, you have to think differently, you have to think independently and then you also have to know that you could be wrong, right?
Okay is 2008 going to be my 1982 all over again? What did I do differently so the things that I did differently accounted for why we could do that comfortably, you know, that element..
RITHOLTZ: Comfortably?
DALIO: Much more comfortably, much more comfortably could have been otherwise done.
RITHOLTZ: What sort of self-doubts were plaguing you in ’08? Where you thinking, hey this is 82 all over again, did that enter your head?
DALIO: Yes, of course, right? Is that that experience? Am I going to be terribly wrong because here it is I’m calculating that we can have a meltdown that we can have that that whole exercise.
RITHOLTZ: But you had a very different system assisting you at that time.
DALIO: Right I had something like 25 years more experience with that other memory in my mind of all of those other you know, lessons I learned in compensating ways and so on, and so I so it would be like going into the hurricane the next time when a hurricane kicks the hell out of your the first time and then you build systems and things and you go through and you still say, is this scary hurricane and I hope I’m well enough protected, but that’s what it was like. Not knowing exactly but having enough cautions and diversifications and calculations and triangulations and so on which are girdered essentially are decision-making and going through that.
So I reference the all weather portfolio, let — let’s talk about that a little bit. Essentially you create the idea of risk parity earlier and then from 1996 to 2003 you set up the all weather portfolio where you were the only clients, how did this scale up? What is it $80 billion or something like that? How did that scale up from raised pocket money to a full institutional product?
RITHOLTZ: Well, I, you know, this was now the stage that I had money that was going be for my family beyond me, so I put together a trust and I had to think, I’m not going to be around to make tactical decisions, and you know making money in the market, alpha is a zero-sum game you don’t know who’s going to do it, what is the perpetual excellent portfolio? What should that strategic asset allocation be? Right? What is the mix of assets? And knew how markets behaved in relationship to each other, every market is the present value of expected future cash flows discounted present value of those cash flows, and those factors are the main drivers are inflation and growth. And so I knew how one market would go up and another market would go down depending on the circumstances. Maybe we would know what those circumstances of the future would be, but we did know that they would move around depending on those circumstances, so I did know how to engineer for balance and I knew that I could that they have comparable risk assets are approximately comparably good.
If you think about, let’s say stocks and you compare them with bonds, what a stock is a leveraged equity, right? Because the average company has a debt ratio — debt equity ratio of 1 to 1. So it’s leveraging that up.
And the one thing, I think that you know, of investing in this has been true throughout history is their cash has to have a low return lower expected return than other asset classes because if it doesn’t, the whole system implodes.
In other words, central banks put cash on deposit, people with better ideas, come along and a higher return. If that doesn’t work that way, they are all earning lower returns, the whole thing implodes.
So the notion is how to achieve that right balance and that’s what motivated me to for myself put in most of my money that was passing along structured that way. And I just, you know, I told it to other clients, you know, here’s how you do it and then they wanted us to do it for them and that’s what we’ve been you know, doing since.
RITHOLTZ: We have been speaking with Ray Dalio, he is the founder and chief investment officer of Bridgewater Associates, he is also the author of the New York Times bestseller, Principles, I strongly suggest you go out and read it.
If you enjoyed this conversation, be sure and check out our podcast extras where we keep the tapes rolling and continue to talk about all things investing.
Be sure and check out my daily column on BloombergView.com, you could follow me on twitter @Ritholtz, you are now tweeting, aren’t you?
DALIO: Yes.
RITHOLTZ: And your Twitter handle is @ Dalio? @RayDalio?
DALIO: @RayDalio.
RITHOLTZ: @RayDalio. We love your comments, feedback, and suggestions, write to us at MIBpodcast@Bloomberg.net. I’m Barry Rithotlz, you are listening to Masters in Business Bloomberg Radio.
Welcome to the podcast, Ray, thank you so much for doing this, I’ve been looking forward to this for so long and I’m really excited, I wish we had you for another two hours because I have a million questions for you that we didn’t get to, there is a handful of things that that I have to ask you before we get to our favorite questions starting with I’m sure I’m going to mangle this person’s name, Wang Qishan’s philosophy?
DALIO: Wang Qishan.
RITHOLTZ: Wang Qishan.
Okay, the unwise worry over nothing, the capable worry about the future, and heroes go for unattainable goals. Explain that philosophy because I find that fascinating.
DALIO: Well, Wang Qishan is a very, very important man in China, some would say the number two man in China in — he was an important shaper of the Chinese economy for the last 30 years or so and then he was put in responsibility of eliminating corruption in China, and he’s a very — anyway, quite a remarkable man, and he always see things at the higher level, you know the timeless and universal laws of human nature and so on.
So when there are ever discussions with him, you know they immediately rise to those high levels and discuss you know how does reality work and how does it work that way through time? so you know that’s Wang Qishan, so…
RITHOLTZ: There’s a sentence in the book that looks like it’s derived from that philosophy which is a hero — I’m going to paraphrase and give you the exact quote, a hero is an ordinary person who has achieve something extraordinary, something beyond the normal range of achievement and I think the exact quote is “Extraordinarily successful people are not successful because they are extraordinary” is that related to…
DALIO: Yes, my son in 2014 gave me a book called Hero of a Thousand Faces.
RITHOLTZ: Joseph Campbell.
DALIO: Joseph Campbell, read the book.
RITHOLTZ: Very, very famous book, assigned in colleges now all over like highly, highly regarded explanation.
DALIO: Right, and it’s so interesting from because of what it does is it characterizes a particular type of person who evolves to have a particular type of life and when we say hero like they said, it doesn’t mean you know, some unique particular person it means that a person goes down a particular path and they achieve some extraordinary things and they get themselves in a position where others are more important to them than themselves, okay? And is a journey, and you go through that journey and he recounts that journey.
It would take me too long here to recount the book but, you know, first you have a taste for adventure, you like adventure, you go out, and with those adventures you have your successes and your failures and you know your fights and so on and you learn, and inevitably, you have your crash, your big crash he calls it the abyss or the belly of the whale experience, that big crash, and how that big crash how you handle it is the defining characteristic.
In that big crash some people have a metamorphosis, they change in important ways, but most importantly they gain the fear of that crash, they gain wisdom and so on, and then they continue on. Some people get off the field, they have the big crash, They say I don’t want to do this anymore and they don’t have a metamorphosis, or if they don’t have a metamorphosis, they crash again and they keep crashing.
And so once they start to learn those lessons, they begin to find out that they could be more and more successful, I know that happened to me. I crashed in 1982, changed my whole attitude about decision-making, it was my metamorphosis and you go on and you play your game and you have your fights.
And when you do this and you do this with others, the others in the mission becomes more important to you than you in it of itself and you get to a later stage in life and at that later stage in life, you want them to be successful, you have a bunch of battles that you fought, oh, you could do that again, you could be successful again. The rewards of being successful again is not the same as the rewards of helping other people be successful. And so when he gave it to me, 2014 like I don’t like, I don’t like public attention, I stayed away from public attention, I don’t like it. And then I’m thinking I’ve got this particular these Principles that have helped me and then I and I think, okay, should I return the boon? Because he describes the returning the boon and returning the boon means sort of returning the gifts that you learned along the way to help others.
And so like as you’re asking, it’s not that, the success is not because of me, the success is not because of anybody, as much as it is the Principles that are learned along the way, the recipes that other people can have in order to make them successful. And so that was the — you know, that’s the lesson, that’s timeless, so I gave Hero of a Thousand Faces to Wang Qishan because he’s a hero, he’s a classic hero and he is at a particular stage in his life and I thought that that would be, you know helpful to him and I do find it helpful to a lot of people and a lot of people find it helpful and interesting perspective which is why as you say, it’s being read all over.
RITHOLTZ: Right, in fact the book has been described as the basis for every major piece of literature, film, it’s just the classic narrative heroes journey and kudos to Campbell…
DALIO: Star Wars, basically…
(Crosstalk)
RITHOLTZ: Right, exactly, right exactly.
So since let’s talk about returning the boon, you been exploring philanthropy as well as all you have a fascination with ocean exploration, how do you see the next phase of your life working in those areas? Be it philanthropic, anything involving what you’re doing now with oceans?
DALIO: The big picture, so three phases in one’s life, I think, the first phase is you are dependent on others in your learning, you are a kid, second phase, you are working, others are dependent on you, you try to be successful, the transition from the second phase to the third phase is returning the boon, passing along what you learn so that others can be successful without you and you are free to live and free to die as they describe it. That’s absolutely right so that’s where I am.
So now was in that the main thing about this other phrases, everybody’s good without me and I’m free of obligation, and I can have fun. Now where do I want to go and have fun? I love the markets, I love the game, I will play the markets inside until I die because that’s a game I played all along, I love it, I’ll continue to do that, that’ll be my main activity that, and I’ll continue to do that at Bridgewater and as long as they find me useful, I will continue to do that.
And then but I there’s all the other joys of life, life is this giant smorgasbord of his of exciting things and part of that is you say is philanthropy, in other words, you know, I came from nothing, I will end up with nothing at the end of the day and yet so to think about who this could be used by for in important ways is fantastic, right?
So that — you know then there’s the approach of how do I do that and you know and we do it as a family activity, different people have to find their passions. So different people have different passions. For me one of the things that passion for me is nature, I love nature, I learn from nature, it’s a big thing, and I particularly find the ocean to be unbelievable because think about it, there’s a sheet that’s the ocean layer and that basically is about half of the world surface, above at the highest point, Everest is equal to the greatest depth so it’s symmetrical, right?
So there is a world under that sheet excepts 72% of the world surface is the ocean so the ocean space is about twice as large as all the world that we know that’s above the ocean and it hasn’t been explored and it’s unbelievably fascinating, it’s unbelievably valuable in so many ways so enabling ocean exploration and exploring to go down there with scientists and all of that I’ve I do find particularly enthralling and I like to contribute to the — to people doing that so I find my ways of you know, ways of doing that.
Blue Planet is going to be coming out — Blue Planet 2, okay, it’s going to come out soon. What we did is we put scientists on it and with the exploration, I have an exploration ship, put those scientist on it and let them then do things and help to make people aware and bring them to that, that’s one of the things. But we do different things, my wife is particularly affected by what are called disconnected and disengaged youth high school student in Connecticut, unbelievable.
RITHOLTZ: Disconnected meaning there either not going to school or not taking classes?
DALIO: That is right, so disengaged means they go to school but they’re not really participating, they are you know, just they don’t study the test, they don’t try much, disconnected is they don’t know where they are. 22% of this high school students in Connecticut are one of those and that’s what kind of futures are they going to have? Where are they going to be? They are going to be on the streets and so, and she relates very much to those in terms of the tragedy so that’s where her focus of activity is for philanthropy.
And so and so we have different focuses but we share those things as activities, I share that for our sons, we share them as activities, that’s been my approach and that’s been a thrill, you know, it’s the right thing to do at my stage of my life.
RITHOLTZ: So I know I only have you for another seven or eight minutes, let me get to some at least a few of some of my favorite questions before we run out of time, tell us the most important thing people don’t know about your background?
DALIO: That I — you know, I have a very modest background and I have a very bad rote memory, so I don’t think I have much in the way of natural advantages that was…
RITHOLTZ: That was you weakness? Your bad memory led you to writing things down? Is that the weakness led to the Principles?
DALIO: I think to some extent, they contributed to me writing them down, yeah, I think it was a factor, although it was other factors more than the clarity and so on but yeah and I was a lousy student, I hated school, got into a CW Post College on probation, you know, so there’s nothing, I think that’s an important thing to know about a number of people that a lot of people think that people at the top are just naturally special people and you know, it is easy for them and that’s not true, I’ve come to know the most powerful, most successful people in the world and I could tell you they all struggle, and they all have weaknesses they just know how to struggle well and they learn along the way.
RITHOLTZ: Know how to struggle well and learn along the way, okay tell us about some of your early mentors, who guided your career, if anyone?
DALIO: You know, not very much in terms of like mentors, particular mentors that I would go to, it’s because of how I kind of learned which is I have to learn myself through experiences. You know, so I mean there are people I admire a lot, so I think they had probably an influence to watch Paul Volcker, let me to watch Paul Volker since through my lifetime since 1971, when he was the under secretary of the treasury for monetary affairs all through the 80s and to watch him as a highly respected deep person.
I look around me and I see people who I admire, and I admire Mike Bloomberg, I think Mike Bloomberg, for example, in building a business and dealing with government, becoming a government official and a philanthropist has been extraordinarily effective in all of those different ways, and why not encourage him write down his Principles, his recipes for success because wouldn’t we like to know those?
And so there are a lot of people you know in the markets, Paul Tudor Jones, a friend of mine and so I admire him and I admire him and his character and I admire you know how he makes decisions and we talk a lot about that, so I have had, you know, many people, I don’t want to name drop too much, but a lot of people in their own ways, seeing what they’re like and interacting them, I think had an influence on me. I wouldn’t say that I’ve had any classic mentors along the way.
So you mentioned Joseph Campbell’s Man of a Thousand Faces, what are some of your other favorite books?
Well, two others come to mind. A River from Eden, which is written by Richard Dawkins, which is about evolution, okay? Evolution is the greatest force in the world and the universe. And man is a very small part of evolution and to watch how evolution works those of the universal laws of life that we then really have to deal with is fascinating, it’s a brief book, it’s great.
Another brief book and remarkable looks at is the lessons of history written by Will Durant and his wife, I think it was Ariel Durant who were the probably the greatest historians that the United States has had, they covered 5000 years of history, 5000 years of on written in 5000 pages, and then they take and they created a book called lessons of history which is 104 pages, I like these high power short books and it takes those themes through history and you know, sort of distills them down through their eyes, very interesting, but you know, I don’t know, there a lot of interest, too many, too many interesting books to read and not enough time not enough time, really.
RITHOLTZ: For sure, if a millennial or recent college graduate came to you and said they are looking for considering getting into finance, what sort of career advice might you give them?
DALIO: Well first of all know your nature, know what your pulls are, get — go to your pools then expect your problems and your failures, approach those well with equanimity, and then take those problems and the failures and diagnose them and evolve in that five-step process. I would say that.
You will and recognize that what you’re going after will change and evolve as you evolve to higher levels so follow your passion, I would say here is maybe the simplest, dreams plus embracing reality, knowing how it works well and knowing how to deal with it plus determination so you do that over and over and over will give you a successful life and a lot of evolution.
RITHOLTZ: And our final question what is it that you know about the world of markets and economies and investing today that you wish you knew 40 years ago when you were first launching Bridgewater?
DALIO: Well so many things, I guess maybe the thing that I think is the most common mistake is that people think that investments that have done well are good investments rather than more expensive, in other words that if it did well lately, they like it okay so that you have to be, you have to know what something is really worth and I guess another thing that I learned that every prize — every days price is a function of buying and selling and if you know who the buyers and the sellers are and you know their quantities and you know their motivations, it helps a lot more than the theoretical notion of what equilibrium value should be.
RITHOLTZ: Since we’re talking about philanthropy, you set something up with Principles and Amazon.com, go to Principles.com/giving an and tell us what that leads to.
DALIO: For a number of years I’ve given philanthropic people, charitable people donations to their favorite charities as a holiday gift and it will it’s because there’s just so much wasteful giving, you know, you give them a sweater and whatever and to wrestle with what they’re going to give and this is really an appreciated gift and most importantly it gets — it converts a lot of waste into getting people who need it the most, the most amount of money.
So the amount of money that is given for giving candy in the holiday season is greater than the amount of money that goes for the American Heart Association annual budgets of American Heart Association, American Cancer Society, and Habitat for Humanity combined.
And so I figured, if I can pass that along, it’s a great idea, a lot of people like — I have some suggesting it and what I did for the book to help to explain that and also you know, pass it along is that for everybody who buys the book I’ll donate $10 to their favorite charity, and I set it up in through this link that you just referred to.
RITHOLTZ: Principles.com/giving is that right?
DALIO: Yeah.
RITHOLTZ: Okay and so every purchase of the book through Amazon, $10 goes to the designated charity and you donate the money to that charity.
DALIO: That’s right, and it’s so easy so you know, buy book go on I think the websites got like 1,200,000 charities or whatever, so it is easy to click in to get to the charity of your choice, and you and it just gets there, right? And so and so I’m doing it not only because I appreciate this kind of giving and I appreciate the people who are operating that way but I also want would like to get people to see how easy it is and get the idea coming along so because I think if we could tilt a little bit of holiday giving some people think it’s a good idea, then it’ll make a lot of difference, so that’s what I’m doing.
RITHOLTZ: That’s terrific, thank you, Ray, this has been absolutely fascinating. We have been speaking with Ray Dalio of Bridgewater Associates. If you enjoyed this conversation be sure to look up an inch or down an inch on Apple iTunes and you can see any of our other 170 or so such conversations. We love your comments feedback and suggestions, write to us at MIBPodcast@Bloomberg.net.
I would be remiss if I did not thank my crack staff who helped put together these conversations, Medina Pamwana (ph) is my producer/audio engineer, Taylor Riggs is our producer-booker, Mike Batnick is our head of research, I’m Barry Ritholtz, you been listening to Masters in Business on Bloomberg Radio.
