Transcript: MIB Live with Ray Dalio

 

The transcript from this month’s MIB Live with Ray Dalio, is below.

You can stream/download the full conversation, including the podcast extras on iTunesBloombergOvercast, and Stitcher. Our earlier podcasts can all be found at iTunesStitcherOvercast, and Bloomberg.

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MIB LIVE Ray Dalio

BARRY RITHOLTZ, MIB HOST: So, I have to admit to cheating a little bit when — when we first proposed the idea of Masters in Business Live, Al and Dave were very supportive and I said, I’m going to bring in a ringer with Ray Dalio, so I really don’t have a whole lot of work to do. I assume most of the viewing and audience present knows who Ray Dalio is, but let me just give you a quick version of his background.

He is the founder, co-chairman and co-CIO of Bridgewater Associates, the world’s largest hedge fund, managing over $160 billion in assets for institutional clients. According to Forbes, Bridgewater has made more money for their clients than any other funds in history. He is the author of the New York Times Best Selling Book “Principles: Life and Work” and most recently his new book is Principles of Big Debt Crises — Ray Dalio, thank you for being our first guest on Masters in Business Live.

Let’s start with the reboot of Bridgewater, which you describe in great detail in the first book, which came about after a not so great 1982 for you; in fact, you describe it as disastrous. What happened in 1982?

RAY DALIO, FOUNDER, BRIDGEWATER ASSOCIATES: Well you know, I formed Bridgewater in ’75, so ’82 is like seven years later.

RITHOLTZ: Now that’s the reboot.

(CROSSTALK)

DALIO: Yeah, that’s the reboot, right. And I had, in 1980, ’79-’80, I had calculated that American banks had lent way more money to emerging countries and those countries were going to pay back and it was about 250 percent of their bank capital — and so we were going to have a big banking crisis, and I thought that was going to happen and I got a lot of attention for that. And then in August ’82, Mexico defaulted and there was a sequence of other defaults and there was a big debt crisis, and I thought that that was going to cause an economic crisis.

And I couldn’t have been more wrong. That was the exact bottom of the stock market, when Mexico defaulted. And anyway, I received attention at the time. I was on Wall Street Week and I was on, asked to testify to Congress and I was wrong. And I had, I think at the time, maybe eight people who worked for me — I had to let them all go.

And I lost money for me, I lost money for clients. I had to… borrow $4,000 from my dad because I didn’t have really enough money even to take care of my family at that point. That was very painful. But it was the most valuable thing, probably, that happened in my life; certainly one of those, because it changed my approach to thinking, because it made me start to think, you know, how do I know I’m right? How do I continue to take risk and not go through these mistakes? And it made me change a lot, like I wanted to find the smartest people I could who would disagree with me.

I wanted to build an IBM meritocracy in which independent thinkers would challenge each other and — and I wanted to deal with risk. How do I maintain the returns but diversify and do certain things to deal with risk? And it was from that point early on that everything started to change.

So that was my terrible experience, and I think that that’s, by the way, one of those lessons. Like there was a book that my son gave me in 2014 on Joseph Campbell, “The Hero of a Thousand Faces” — and he describes about how that crashing occurs and that changes due to a metamorphosis.

So the whole approach to learning from mistakes and painful mistakes and making the most of them and writing principles down — in other words, recipes for how do you deal with the circumstances? Learn the lesson, write those principles down — this is the thing that I would recommend to, you know, everybody — write them down. And I learned also that by being able to write them down clearly enough that they can be expressed in what were then called “equations” or now “algorithms” that allowed me to make decisions and us to make decisions in a very powerful way. So that experience was really the turning point.

RITHOLTZ: And that’s very abstract — I want to describe some of the ideas and products that came out of that post-’82. You describe in your early history some of the products that you had a roll in the creation of — TIPS, the inflation-protected treasury bonds; the U.S. dollar futures index; the entire concept of risk parity; you’re very humble in saying you had only a little bit to do with the Chinese stock market creation, but I know you consulted with very senior people there and helped that come about. And what I think is the least-known thing about you, but the most fascinating — you helped to engineer Chicken McNuggets.

(LAUGHTER)

RITHOLTZ: Explain that to us, because it’s absolutely intriguing.

(more…)