Ray Dalio on The Fine Art of Failure

A Hedge Fund Giant Found Lots of Value in Failure
The world’s biggest hedge fund springs from the wreckage of his monumental error.
Bloomberg, December 11, 2017




By any conceivable measure, Ray Dalio, head of Bridgewater Associates LP, is a wild success. The founder of the world’s largest hedge fund with $160 billion in assets under management is one of the world’s 100 wealthiest people; the firm he built has been called the fifth most important private company in America; his new book “Principles: Life and Work” is a New York Times best seller.

Given all of these accomplishments, it is surprising to learn what Dalio attributes the secret of his success: Failure.

In 1982, some eight years after he started Bridgewater, a new bull market was just getting underway. However, Dalio’s research was finding problems in the credit markets. Earlier in the year, he had warned about emerging-market bank debt as potentially a major risk for the economic recovery. Then, Mexico defaulted in August 1982. Dalio was hailed as an economic seer and market wizard.

His reputation grew, and that November he appeared on “Wall Street Week with Louis Rukeyser,” the most important financial news program at the time. There, Dalio “confidently declared we were headed for a Depression.” Only, that’s not what happened. Timely central bank interventions months earlier began to have their positive effects on emerging-market banking; Dalio’s disaster forecast never materialized.

It was, however, a disaster for Bridgewater Associates, and the firm almost went bankrupt. Dalio was forced to lay off all his employees; he borrowed money from his father to support his wife and two young children. It was a debacle, he writes: “I am still shocked and embarrassed by how arrogant I was.”

Dalio began to rebuild his firm from scratch, and in the process focused on developing a corporate culture that focuses on “idea meritocracy.” Dalio looks at failures — from ordinary flops to major disasters and every error in between — as fodder for future gains. Every error is an opportunity to learn something new, to get better at what you do. His “Principles” are what came out of his public failure.

Throughout the book, and in a recent conversation we had, Dalio insists the key to his turnaround was revisiting failure and learning from it. He is enamored of the framework described in Joseph Campbell’s “The Hero with a Thousand Faces.” Campbell’s book examined the evolution of mythological figures, whose failure leads to discovering new wisdom that they use to achieve their goals. Dalio wanted his failures to have the same results, so he created a broad set of rules to do so:

  • View mistakes as opportunities to improve. He calls this “mistake-based learning.”
  • Own your errors. Never hide them, but bring them forward to create a learning opportunity. His advice is to “fail well.”
  • Pain + reflection = progress. The “pain of failure” should lead to reflection, from which your wisdom derives.
  • Track what you do; keep systemizing what you learn from your mistakes.

There are many more principles, but this gives you an idea of some of the basics.

Dalio does things that most ordinary people don’t do. Set aside for a minute his remarkable track record as an investor and note the following unusual business behavior: He writes down and reflects on everything he does. Then he systemizes it, eventually turning these into algorithms that his firm’s computer systems help backtest against earlier eras. The end result of this is a hybrid of human creativity and machine learning that produces results better than either could separately.

The entire process is then reduced to a rule or incorporated into an algorithm. Then, each trading algorithm gets tested “out of sample,” across different times, markets and geographies. Successful rules become systemized into the overall investing process.

Dalio manages the business via the same process — from how to hire people, identify their strengths, to how to hold more effective meetings. The principles drive the entire management of the firm.

What some have derisively called a cult is, in Dalio’s view, a culture. And while the fruits of failure may inform Dalio’s methods, it’s hard to argue with his success.


Originally: A Hedge Fund Giant Found Lots of Value in Failure


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