Ray Dalio is without doubt a member of the master class of the world's investors. He runs Bridgewater Associates, one of the most successful and the largest Hedge Fund in the world.
Similarly, like many of the Investment Masters, Ray believes in seeking the truth by testing investment ideas, learning from mistakes and remaining humble. This was never more evident than in his experience in predicting the Debt Crisis in the early 1980's. Whilst his prediction was uncannily accurate, Ray also predicted that the stock market would fall at the same time. The reality was something different, however, and when the market actually rose instead, Ray lost so much of his own and client's capital that he was forced to let go all of his staff, and had to borrow $4,000 from his father to simply pay his household bills. It's fair to say that Ray felt the pain of his mistake deeply. Ray stated that the pain of this error allowed him to change his attitude towards mistakes, and to see them as puzzles that needed to be solved instead. It also allowed him to start asking himself what he would do differently in the future to avoid the pain.
“I believe that anyone who has made money in trading has had to experience horrendous pain at some point. Trading is like working with electricity; you can get an electric shock. With the pork belly trade and other trades, I felt the electric shock and the fear that comes with it. That led to my attitude: let me show you what I think, and please knock the hell out of it.” Ray Dalio
"I met a number of great people and learned that none of them were born great. They all made lots of mistakes and had lots of weaknesses - and that great people become great by looking at their mistakes and weaknesses and figuring out how to get around them." Ray Dalio
Other Investment Masters have also learnt the same lesson.
“I lost my stakes a couple of times, which taught me risk control and risk management. Losing those stakes in my early 20s gave me a healthy dose of fear and respect for Mr. Market and hardwired me for some great money management tools.” Paul Tudor Jones
“My dad was a retail pharmacist and after I started attending law school he said ‘well you have to learn how to be an investor.’ He and I traded tiny amounts of tech stocks and mining stocks together. So I became very interested in markets and trading. In the period of time from 1967-1974 he and I found just about every possible way conceivable to lose money. So when I started Elliot in 1977 I was determined to engage in a trading strategy that made money all the time. So for the first 10 years of Elliot’s existence the primary strategy was convertible bond hedging.” Paul Singer
"And just as in blackjack, my first investment was a loss that contributed to my education." Ed Thorp
"I went into this tech stock with 100% short position, and all the money I saved up because I thought I had this one locked down. We had fully positioned ourselves, myself and all my customers and clients I was advising, and then a technology writer dubbed the company the 'Son of Intel'. The stock went promptly from about $16 to $40. I got margin called all the way up until I was completely wiped out. I lost all of my money. I was apoplectic. I thought the world was going to end. I remember that like it was yesterday. That was the greatest thing that ever happened to me - losing all of my money on something where I knew I was right. From an investing perspective, getting completely wiped out and thinking it was the end of the world, and thinking I was an abject failure, and this investing thing wasn't for me. Looking back at it, it couldn't have happened at a better time in my life. You want that to happen as early in your career as it can and you want it to be the most devastating blow that could possibly hit you, to teach you, to bring humility into your investing and teach you that you should never set yourself up for the knockout punch. It teaches you never to put 100% into anything. It teaches you a lot about sizing, it teaches you a lot about life, no matter how much you think you have your arms around a situation, you never do." Kyle Bass
“There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!” Jesse Livermore
"Making money through an early lucky trade is the worst way to win. The bad habits that it reinforces will lead to a lifetime of losses." Naval Ravikant
It was the recognition of the need to learn from mistakes that led to the development of Ray's Principles.
"You have to learn from mistakes to keep getting better. And it's through learning from those mistakes that you learn what reality is and how to deal with it, which is called Principles."
Interestingly, Ray is about to release a new book entitled 'Principles'. This will be an absolute must-read and I have already pre-ordered it. Ray released the first document titled 'Principles' on the Bridgewater Associates website back in 2011. The original 'Principles' focuses on Ray's most fundamental truths about life and in addition, his beliefs and ideals regarding people management. Over the years I've often referred back to the original text, and while Ray has updated it in the new book, the original document remains a favourite of mine.
Bridgewater Associates investment style differs from many of the Investment Masters in so much as they invest across a broad spectrum of asset classes and regions, both long and short, and seek approximately 100 different return streams that are roughly uncorrelated to each other. While there isn't a lot of commentary on investing per se in the original 'Principles' document, it does include the psychological insights and approach to learning that parallel with other great investors and give Bridgewater their edge.
This is evident in the company's employment philosophies. On the Bridgewater Associates website's career page, they ask potential employees to ask themselves a number of questions before applying to work there. These include:
"Do you want to: Discover your strengths and weaknesses? Work to get better fast? Put aside ego barriers to learning? And, demand others to be truthful and open, and are you prepared to to do the same?"
In conjunction with the release of the new book, Ray has given a very insightful Ted Talk [only 16 minutes ... see below] where he discusses the processes he developed to successfully navigate the markets. Ray describes himself as a hyper-realist; he's a broad thinker who meditates and recognises there are many lessons to be learnt from nature and history. It was by studying history that provided Ray with the insights to anticipate the Global Financial Crisis.
It's no surprise Ray features prominently throughout the tutorials included in the Investment Masters Class. Here's a taste of some of the Principles which are behind Ray's success..
"I learned that failure is by and large due to not accepting and successfully dealing with the
realities of life, and that achieving success is simply a matter of accepting and successfully
dealing with all my realities."
"I learned that finding out what is true, regardless of what that is, including all the stuff most people think is bad—like mistakes and personal weaknesses—is good, because I can then deal with these things so that they don’t stand in my way."
"I learned that there is nothing to fear from truth. While some truths can be scary—for example, finding out that you have a deadly disease—knowing them allows us to deal with them better. Being truthful, and letting others be completely truthful, allows me and others to fully explore our thoughts and exposes us to the feedback that is essential for our learning."
When investing, it's important to maintain humility, study history, learn from mistakes and test investment ideas - the foundations of both Ray Dalio's, and the Investment Masters success.
Further Reading:
Ray Dalio Principles - 2011
Ray Dalio - Academy of Achievement
Ray Dalio - Charlie Rose Interview
Ray Dalio - Alpha Masters
Ray Dalio - Hedge Fund Market Wizards
Ray Dalio - The New Yorker