Chit Chat Stocks - Is The World's Largest Hedge Fund a Scam? Investigating Ray Dalio and Bridgewater Associates

Episode Date: January 10, 2024

No, Bridgewater Associates is not a fraud. But it may be misleading the public. After reading The Fund, hosts Brett Schafer and Ryan Henderson thought listeners would love to know more about the secretive hedge fund with $100 billion in AUM. In this episode, we discuss: - What is Bridgewater Associates? - Who is Ray Dalio? - What story does he tell about his fund? - What is truly going on at Bridgewater - The dystopian principles - Why the fund has suffered in the last decade - Personal thoughts on Dalio, Bridgewater, and the book We highly recommend reading the book in full: https://www.amazon.com/Fund-Bridgewater-Associates-Unraveling-Street/dp/1250276934 ***************************************************** Subscribe to our YouTube channel: https://www.youtube.com/@ChitChatMoney/featured  Follow us on Twitter/X: https://twitter.com/chitchatmoney  Follow us on Substack: https://chitchatmoney.substack.com/  ********************************************************************* Chit Chat Money is brought to you by Public.com*. Sign up for a high-yield cash account today: ⁠https://public.com/chitchatmoney⁠ *A High-Yield Cash Account is a secondary brokerage account with Public Investing. Funds from this account are automatically deposited into partner banks where they earn a variable interest and are eligible for FDIC insurance. Neither Public Investing nor any of its affiliates is a bank. US only. Learn more at ⁠https://public.com/disclosures/high-yield-account⁠ ********************************************************************* Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Anything discussed on Chit Chat Money by Ryan, brett or any other podcast guest is not formal advice or recommendation now please enjoy this episode two people inside bridgewater one in investment research the other lowly information technology grunt had higher believability scores than dalio himself people were beginning to whisper about it mcdowell explained to dalio that this was a sign the system was working The Bridgewater was fishing out the pockets of talents in its ranks exactly as Dalio had asked

him to do. Dalio's voice made no secret of his irritation. Why doesn't believability cascade from me? McDowell thought back to Dalio's index card drawing. He realized that Dalio hadn't been sketching out the mere concept of believability on top. He had drawn himself quite literally at the head bestowing believability to all beneath him. The fix was obvious. McDowell assigned an underling to go into the software and program a new rule. Dalio himself would be the new baseline for believability in virtually all important categories. As the original top most believable person at Bridgewater, Dalio's rating was now numerically bulletproof to negative feedback. Regardless of how everyone else at the firm rated him, the system would work to keep him on top.

That is an excerpt from the book, The Fund, Ray Dalio, Bridgewater Associates, and the Unraveling of a Wall Street Legend by Rob Copeland. Today, we're going to be talking about Bridgewater Associates, I believe still the largest hedge fund in the world. And we're going to be going through how the fund got started, the story, the background to ray dalio what it looks like today and some uh some tidbits about the unique culture at the firm am i missing anything for the introduction here bro yeah let me say this is chit chat money that was a wonderful cold open by ryan if you were confused about what the heck they are doing with

believability at a hedge fund. Don't worry, we're going to get right into it. But yes, that was a quote there, a somber quote from the fascinating book, The Fund, Ray Dalio, Bridgewater Associates, and the unraveling of a Wall Street legend. As I said, this is Chit Chat Money. And we're going to try to answer the question, is the world's largest hedge fund a scam? Spoiler alert. In some ways, no. In some ways, possibly, but it's much different than how they portray. And we ourselves got fooled about it when we were younger, learning about investing. But we're going to get into it. But before that, housekeeping items, we're talking about this all this month. In February, we are changing our name

to Chit Chat Stocks instead of Chit Chat Money. Nothing else is going to change for the podcast, but we're going to be changing to Chit Chat Stocks. If you liked this episode, give us a review on apple podcast or spotify we'd greatly appreciate it i've seen a few more rolling in and an accelerated cadence there uh for people doing that so thank you very much for the people that are loyal listeners if you like the show you will also like our newsletter which you can subscribe to on substack the link is in the show notes for uh free you're going to sign up there and if you want to read this book we have the amazon link in the show notes but if you look up Ray Dalio book, Bridgewater book, et cetera, et cetera. It'll pop up on the Google machine.

So let's get into it. This is a different format than we've typically done. As we've said recently, we're not doing strictly forcing ourselves to research a stock every week. Now we are doing one episode that is either an interview, maybe some stock research, maybe something we've read. And we both got this book around the holiday season, or I think I got it in December. we read it and it's not a you know it's a fairly easy read but we thought hey this is a fascinating book let's talk about it on the podcast let's maybe give a little book review plus insights we took away from this and i think our listeners will enjoy it as well ryan i'm gonna get into part one but what else you got for us i was gonna say before we start what did you before you read the

book. What were your thoughts on Bridgewater? Did you have any, I think we kind of went through a similar path, but what was your overall, what'd you think of Bridgewater? What did you think of Dalio himself? So in 2023, before I read this book, I thought that Bridgewater was an underperforming hedge fund that is rarely good at accumulating assets because I'd seen their performance numbers leaked to the media. And then I also saw their AUM numbers and I thought they ran some fairly complicated strategies that have not worked out well in the era of basically large cap growth is good and everything else is underperforming. So yeah, that was it. And I thought that Dalio liked to go talk to the media. He liked to put stuff out on Twitter. He

liked to write stuff on LinkedIn. He liked to post those YouTube videos that we'll get to that went quite viral and i just thought that the guy was a little bit of a perma bear but honestly this book opened up even he's more bearish and doomerish than i even thought but what were your initial or excuse me before you read the book what were your thoughts on bridgewater uh well i was one of the people that bought the principles uh i think i got it as a gift it's and we're going to be talking about that a lot today. I bought it and you kind of get a couple chapters in and there's a lot of words, but not that much substance. And it kind of took me a while to realize, and I think I probably gave up on the book about a couple of chapters through, but

just because it's someone who's incredibly wealthy, who has accumulated tons of assets, doesn't mean that everything is accurate, that it's super, that it's a way that companies should behave. So I think over time, I kind of became a little less high on Dalio himself. I didn't know that much about Bridgewater. They're relatively secretive about their investments. And I think that's part of the allure. So limited knowledge on Bridgewater, but learned a ton through this book. So let's kick things off here with the first question. I want you to kind of take us through this part. What is Bridgewater Associates for starters? Who is Ray Dalio? And maybe give a story of how the company was started. What does he tell the world

about the company? Yeah, I'd be delighted to. So Bridgewater Associates is currently estimated to be one of, if not the largest hedge fund in the world with close to a hundred billion dollars in Assets Under Management. If you're new to investing, Assets Under Management always gets abbreviated to AUM. So we'll probably be using that as a little moniker going forward. It is one of the most powerful financial institutions in the world and has been for decades, I would say ever since the mid-1990s. They became what some might describe one of the titans on Wall Street, and they've been there ever since. It has relationships with some of the most powerful business, economic, and government actors around the world. And yet,

how it actually works has been a mystery for years, which is why this book, which I believe had hundreds of different sources throughout all sorts of places around the world, from inside the company, from outside the company, from all the people that have cycled through and signed all these non-disclosure agreements, we got some great insights into how it works. So let's go right to it we need to talk first about ray dalio because as you will see after listening to this episode or reading the book he is bridgewater and dalio and bridgewater is dalio you know we're gonna be discussing the principles uh as ryan mentioned he read them and there are over 300 of them we'll get to what they exactly are because it's the fulcrum of this maybe entire

operation. It's always confusing to me exactly what these are, what purpose they serve. The man has a fascination with them. Who are they for? Who are they for? It honestly might be how this business is unraveling. So I think part of one of the themes of the book is that the principles are important, but is it important in bringing on the stagnation and perhaps it's not downfall because they still have so much AUM, but they're way below AUM from when their peak was. And it's perhaps how they're unraveling as the book maybe portrays here. So let's get to Dalio though. Quick little backstory for him. He was born just after the end of World War II in Queens, New York. He was an only child, grew up on Long Island. As a child, he became a caddy at the Lynx Golf Club

and he started working for the financial elite at the time, which I'm assuming is around the 1960s or so during that bull market. And then most of my sourcing here is from the book, from passages here and then as a caddy he met a rich couple from the finance world he became very friendly with them so as a couple rather the guy at the time i guess women were allowed to work in these jobs but the guy worked on the i think on the new york stock exchange and they basically asked dalio to help spend time with their son who uh the son was slightly younger than dalio i think it was more of like a brotherly figure maybe they were both only child something like that And then one of his caddies who actually, I think, I don't know how they found this person for the book, but said, and here's the quote, he, Dalio, understood what relationships were about way before anyone else did, and he used it to his advantage. I think that's important. Do you have, is that a theme you found throughout the book that he is extremely good at crafting relationships that can give him access to stuff and give him access to money?

yeah i mean in general we're going to talk about this but he is an exceptional salesman and not only in selling what ultimately became bridgewater and selling the the investment in bridgewater but selling himself talking speaking at a high level that makes it sound like he has a really good purview on whatever he's talking about um and it doesn't surprise me that he did primarily through his newsletter, I think, in the early days, end up captivating a lot of people and forming relationships that way. And if you watch videos, interviews of him, he always seems very friendly and he really seems like he knows what he's talking about. And he is smart. Let's not kid ourselves here. He's smart and can hold a good conversation,

which I think probably played pretty darn well on the golf course as a caddy and elsewhere when he was coming up. Yeah. Plucky as they might say, but a little bit more on the bio, just one more paragraph here. His mom died when he was 19 from a heart attack. And then at the time he was a bad student that kind of ditched school, went to surf and then did his old job to make some money. And then he went to a small, easy to get into school called CW post. I believe that was just a local one on Long Island. But there he ended up getting straight A's and worked on the New York Stock Exchange for a summer due to his connections from the golf course. And then this, along with the relationships he had formed, helped him get into Harvard Business School. That was another

notch on his reputation. HBS, Harvard Business School, extremely helpful, I would say, when trying to attract you know people to give you money and now just in terms of relationship building that probably was one of the most useful things in his life is having that harvard business school background because it makes it very easy to relate to a lot of people on wall street which he ultimately did yep okay now let's get into actually what bridgewater associates is after graduating from harvard business school he starts at bridgewater and it's hard to actually understand what they were doing in the beginning because it was really just him and he had his connections to the wealthy families in New York he had proved that he was a little bit

of you know he had some insights on Wall Street he made a couple a few good trades and stuff like that he was interested in commodities when everyone was interested in I believe it was value investing at the time I can't honestly remember but he was you know kind of zigging when other people were zagging he had some unique thoughts and he had these people that were focused on what they described as wealth preservation, you know, not losing money in the late 1970s into the 1980s. These are the wealthy families they mentioned.

This could have been his old wife or maybe it was his current wife that was an ancestor of the, or not ancestor, yeah, descendant of the Vanderbilts. And it was more about wealth preservation, not losing money. And I will say at the time, you get earned 10% in a treasury.

So we'll get into that. But that's a little bit of a tease for later. I don't know exactly what these people are thinking. You could just, you just buy government bonds, but whatever. But Ryan, you have something to add there. Yeah. So it's important to also mention that he tried to start this early. It wasn't in exchange, but it was like a commodities importer-exporter, import-export business.

And it didn't really get off the ground. But after marrying into one of the descendants of the, I believe it's Vanderbilt family, it basically gave him the capital that he needed. And I remember them saying that he was no longer like desperate to get money. And it kind of gave him that launchpad to really build Bridgewater into what it became. Yep, I agree. And there's, I think, three other things that helped him earn a reputation on Wall Street and get just more exposure in general. So first, famously, this is probably the most famous, he implemented a soybean and corn futures contract with McDonald's to help stabilize their chicken costs. And for anyone that doesn't know, soybean and corn are the feed that chickens eat that get turned into those McNuggets that you eat.

And if soybean and corn prices go up a lot, their costs go up and the profit margins on McNuggets go down because you can't just double your price on the McNuggets like that. My take, is this kind of a played up thing? Is it that novel of an idea to say I need to hedge my input costs? Isn't that not crazy to me or am I wrong? Well, it's very mainstream now. sure i think you especially see it with the currency hedges like most businesses do it today

the at the time it may have been novel i'm not really sure but i know he garnered a lot of attention for this and it sounds like it helped mcdonald's so certainly it must have been valuable to them but it does surprise me that they wouldn't have thought and maybe it was just that the futures contracts weren't as popular as they maybe are today but it's weird that they wouldn't have thought like okay this is a major cost for us we should probably find a way to stop it from fluctuating so much but i guess stelio did that for him yeah and it's one of those stories that gets repeated ad nauseum you'll still see people doing threads on twitter about it today you know the first one is want to learn how a wall street legend helped mcdonald's lower its

chicken prices through blah blah blah you know and like stuff like that so there's two other things though he went on you know he had various media appearances he loved talking in magazines stuff that people on wall street read and then he also and this is a very great idea he started one of the first markets commentary newsletters but this is before email so it had to be sent by fax So it wasn't easy to just sign up for a sub stack or something like that. And he built up a great reputation and he started charging upwards of $3,000 per month for his quote unquote research package, which is close to $10,000 a month today. And as a tale as old as time with these newsletters, Dalio is consistently bearish.

I mean, very, very bearish. In 1982, this is what he said. This is a quote from the book. Since 1800, Dalio said The United States had experienced 14 major depressions All following the same historic patterns The 15th was plainly imminent

And as maybe Not all of you know But I think a lot of people Understand that 1982 was one of the best times To be buying stocks ever It was one of the best times to be optimistic So Did this fascinate you

That he was just a perma-bear newsletter guy to begin with, to get some of the money rolling in. Yeah. I was blown away how much money he was generating from the newsletter. I didn't realize that was the core business in the early days. I don't think it's any secret. Bearishness sells. It's the same today. Obviously, there's more to his newsletter than just purely saying the stock market's going to go down. I think some people have become broken records with it. And I'm sure he was providing more value to readers than that, but he was a good commodities analyst like that. And frankly, he was a good market analyst in general,

and he was very well-spoken. So it doesn't surprise me that he ended up becoming or writing a very successful newsletter. Yeah. And as you'll kind of see there, he's a market historian. That's a big thing with his process. And we're talking about his process because maybe a little spoiler, a lot of what Bridgewater does comes back to what he thinks, even though as we'll talk about, they claim they do the complete opposite.

So let's get back to the story. Even though in the 1980s, we're in a big bull market, you know, this consistent gloom and doom from Dalio became extremely helpful for him when the Black Monday crash in 1987 occurred. And I think stocks, what was it? It went down, was it 17% or was it 22% in one day?

Something like that. Say around 20%. Maybe Ryan can do some investigation for us here. After that, because if you call a market crash every year and then when one occurs, you can claim you're right, he hired a marketer as one of his first-time employees and in the announcement said that his firm had $700 million in AUM. Apparently, this is greatly exaggerated, here's a quote,

Streit, the marketer, knew that eye-popping sum wasn't even close to correct. He assumed that Dalio had counted the assets of everyone who received a copy of Bridgewater's newsletter, even though most had no money with the firm. Strite learned quickly that his new boss, Tua's new boss, appearances matter. Now, on the one hand, you can say this was misleading. He is a misleading guy. But it is, it worked. It's, right? We can say that, well, we have blah, blah, blah, AUM, because we know a lot of, strangely, people with not an insane amount of AUM, but people from bigger funds listen to our show, subscribe to our newsletter.

We could claim the same thing, right? Yeah, I'm curious how we worded this, because they are clients, if you want to call them that, if they subscribe to the newsletter. So their client assets were probably quite high. But were they managing those assets? Absolutely not. And just, I went and checked, 23%, 22.6% is how far it fell on Black Monday in 1987. Yeah, worst day in market history. So, Dalio's reputation improved, but it really started improving in the 1990s with, I think, inarguably, his best idea.

which, not inspired, but was a catalyst for Bridgewater's longest heyday, which was just generally throughout the entire 1990s. The other one I would say is right after the great financial crisis, more short-lived, but basically 2008, 2009, 2010. And it was in 1991 when they launched what is called the Pure Alpha Fund. Got to say, fantastic name. First off, Bridgewater is a great name means nothing but pure alpha is it's a good name wouldn't you say yeah and same with what they later later on launched all weather i mean it's very yeah it sells itself yeah they're good at that look we can talk about how much they've underperformed and we will do that later but look their marketing is quite good and the point of the fund is that it was supposed to generate

strong, absolute returns year after year, regardless of what the market does. So it's called Pure Alpha. Now, some years it might not beat the market, but it's supposed to generate consistent returns year after year. And its first few years, it crushed the market, never had a down year. And by 1999, it had $3 billion in AUM just in the Pure Alpha investment vehicle and had doubled its AUM every year since inception. So what was so special here about what Pure Alpha was and what Bridgewater was implementing and pitching to its clients? They said it was a rules-based, systematic approach to money management with major diversification

across what they pitched as, quote, uncorrelated assets. This meant using market history and quantitative measures as a guide. So this could be currency exposures across the world. This could be commodities. This could be bonds. This could be some sort of real estate thing, although I don't really remember them doing much with that. It could be stocks.

It could be long, short, whatever. But it's supposed to be all quantitative. Now, let me try to play a little hypothetically here, Ryan. If you are a, which you're not, but like a, how do I say, an allocator, someone who has a lot of money at these pension funds, sovereign wealth funds, whatever, What do you think when they have that little pitch there? Well, it sounds compelling.

It sounds convincing. And there was a lot of, I don't know, confirmation bias is the wrong word, but you felt a sense of security knowing that a lot of other people had invested. And when he would say, we have $700 million in assets in the early days, it's like, oh, okay, I'm not the only one. And if he would talk about later on, especially as they started to gather more and more assets, and they were quite secretive about how they were deploying those assets, but all you knew was this hedge fund has done well, and they have a quantitative automated machine, I think

it's very believable. And like I said, Dalio, he was an exceptional, maybe the best ever on Wall Street salesman. I mean, he gathered more assets than any other hedge fund before. So yeah, I could very easily see why a lot of allocators ended up giving him money. And the performance of the 90s, quite strong, even through the dot-com bust. So what's funny, though, is that during the 90s, there was a major U.S. bull market. Now, there's some hiccups here and there, which is why the Pure Alpha Fund was so appealing to people because it seemed to do well year after year after year. But during that time, when Dalia would talk to the media, he would basically every year call for an upcoming economic collapse.

I think he's called for an economic collapse, not exaggerating, every single year since 1982. one of his colleagues even introduced him in a meeting and this was in the book once as quote someone who was called 15 out of the last zero depressions uh apparently dahlia wasn't very amused i think they probably took a vote uh after that time to see whether they believe that i'm sure everyone agreed with dahlia if you're confused on that we'll talk about that later with ryan's section so you know credit to them though they built a solid product in the 90s around the pure alpha strategy and life was good. Fees started rolling in. We move into the 2000s, dot-com bubble bust hits, pure alpha lost just 1% in 2000 and then gained 9% in 2001.

And when people saw that, I think that was okay. They were thinking, wow, this can do well throughout the market cycle. This is incredible. It's an incredible product. And AUM went into overdrive. This is a quote from the book. The firm grew from $33 billion in AUM in 2001 to 166 billion in 2005. So they were an asset gathering machine. But like always, Dalia was starting to get bearish. And in 2005, he was bearish again. He was actually right, though, this time, foreseeing the great financial crisis and a commodity price boom. It took a few years, but he was right, rang the bell at the top on the mortgage loan troubles. However, he was very inconsistent in what he said to the media. But that's fine because the

fund did quite well in 2008. The fund was up 9%, while the average hedge fund lost 18%. Now, here's, I think that's kind of a conclusion of where we get, because I think there's two eras of Bridgewater, and there might be more. You know, the story's not over. But there's basically Bridgewater up until 2010, and then Bridgewater from 2010 to today. And it's been two entirely different stories. And the book hits really a lot after 2010. But what were your thoughts on the early to middle days of Bridgewater? Anything to surprise you? Anything? Well, I'm going to save this one about luck until later because we don't have the full context yet. But anything surprised you? What were your thoughts on the 90s, early 2000s success for them?

each at real canadian superstore when you're ready we're ready with a whole world and more uh surprised me i mean they had to gather assets somehow and it's really typically i'd say it's pretty hard to gather assets without without at least a little bit of performance to sell so i want to say i was surprised that there was a great performance that's kind of how you become the biggest fund in the world it it seems like that was them hitting their stride the kind of 1990s was them at their best but it was what's kind of brewing under the hood that and it's really not even like the if you just look at bridgewater on the investment side it's fine that's i mean it's had a really good period

for a long time. It's done a really good job. Yeah, until 2010. Yeah. But it's the business side that kind of has drawn our attention and really what the book is about because we're going to talk about this.

Dalio had ambitions a lot further beyond investing. He wanted this to be a lot more than a capital allocation company. He wanted it to be something better. yeah he got a bit of a messiah complex and that's a great teaser i'm gonna let ryan's gonna lead this next part we're gonna hit part two next what is truly going on at bridgewater um according to this author of the book which i should find who the author is and the question i think a lot of

people are asking or do ask is this business investment fund a fraud so the author is rob Copeland. He does a really good job with his book. So what is going on at Bridgewater? I said, not really a whole lot of investing because out of the roughly 2000 employees at Bridgewater's peak, it's estimated that only 20% were actually involved in the investing or research side of things. And the rest of the business was basically about building the perfect business, building this automated machine and delighting Dalio essentially making Dalio feel good is kind of what it felt like. And I'll talk about that more in a little bit, but it's, it's actually kind of, it's this common trend throughout the book. People would apply to Bridgewater.

It was really sought after hard to get a job there. They'd get the job. And then they'd realize that they had no idea what was going on with the investment portfolio. They would be investing analysts and have no input, no research about investing whatsoever. For the vast majority, they just had no involvement on that side of things. And they actually had no information about it either. It was well-protected within Bridgewater. So if you spun out and started your own fund, which was very frowned upon, and I think typically they would sue you if you did it, They'd say, you had access to Bridgewater's resources. And there was periods where people, they were young, they spun out, they started their own.

And they'd say, well, you had access to our resources. And they're like, we had no idea what was going on. We had no idea what was being invested in. We had absolutely zero visibility into it. What analysts were doing, however, is they were going through principles training. So this was what most of the book was really about. Dalio had created a list of what he called principles, and he wanted to make this basically Bridgewater's version of the Bible,

basically the governing document that everyone at the firm would live by. It's very interesting how, we're not going to talk about this forever, but how similar it is to like religious stuff where he was like, oh, I, the great leader just, this came to my head and I need to write this down and you all need to follow this because this is the way we go forward and have a great society. That's not an exaggeration

of what he's basically trying to convey with all his thoughts. Yeah, and if anything went wrong, if there was ever any dispute, they would look to the principles to see how to deal with it. Like it was a governing document. He had every employee equipped with an iPad

that had a digital version of the book. I believe they called this the book of the future. Analysts took exams on the principles. It was very much meant to be this governing document that everyone had to live by. When would you quit? When would you quit? One of them gave out exams on the principles? Probably with the rating system, which I'm going to talk about here in a second.

I think the dotting dotting would be what got me. They did pay well. That is something they paid well. So I think I could see why a lot of post Ivy League employees ended up taking these jobs. It's credible. It seems top level, so it garnered a lot of applicants. But what principles really did and the rating system, which we're going to talk about, was foster a culture of backstabbing and confirmation bias for those at the top. So before we dig any further into the culture, you asked if Bridgewater was a fraud.

I'm going to get this right out of the way. Bridgewater was not a fraud. It was weird as hell. So it's a cult, I think, maybe even sort of a religion. People have called it that. Ex-employees have called it that. But it wasn't a fraud. In fact, many people tried to investigate it.

Bill Ackman publicly questioned it. Jim Grant from Grant's Interest Rate Observer went on the record saying, we will go out on a limb. Bridgewater is not for the ages. Even Harry Markopoulos, who uncovered the Bernie Madoff Ponzi scheme, tried to investigate it. The SEC investigated it themselves, and here's what they found. It says, the world's biggest hedge fund used a complicated sequence of financial machinations, including stock options and other relatively hard to track trading instruments to make otherwise straightforward seeming investments.

In truth, it was not an investment machine. Greg Jensen, who was CEO for quite a long time and probably the second most important person at the company. at one point before you go on to this we're how hard was it for you to follow all the people that cycled through that dalio just kind of used as his whipping boy all the executives it's i don't remember any all i remember is dalio treating everyone terribly they were all given the promise that they could be ceo and even jim made him pay for that yeah the fbi guy was working there he's like, what is going on here? I think that was hilarious too, but sorry, continue. Yeah. So Greg Jensen's pretty much the second most important person at the company

at one point said, I can run this firm on a single spreadsheet. It goes on to say on page 240 of the book, this is kind of the last bit I'll talk about, about the investing strategy. It says there was essentially no grand system, no artificial intelligence of any substance, no holy grail. There was just Dalio in person over the phone from his yacht or for a few weeks, many summers from his villa in Spain calling the shots. He had really valuable relationships with a lot of world leaders, people that were heads of states that made him privy to information that he could trade on. So, yeah.

And this is the connection comes to where are they getting their AUM? I think we should mention this is a lot of these countries is where they're giving him the money. So it's almost a colluding, right? Investment because you have a lot of Chinese funds that are connected to the CCP.

You even have Russian stuff. I mean, I think at one point he was trying for years to get a meeting with Vladimir Putin. There's a lot of Middle East countries that may not have the best human rights records he is not afraid to get assets from anywhere no matter how many people at the company who like they were like do you get do we really need to go into russia and take this

guy's money but yeah and that's and then then those people would tell him what they're going to do yeah and i don't know if you could really deem this inside of trading i don't want to say it is because they went out they went after a lot of people uh that that said that bad things about So I don't want to be one of those people. And that's not what the podcast is about. But they had an quote unquote informational advantage. And that's a lot of what their trading was. It was commodities prices that could fluctuate if there was a certain storm in a region or

oil prices if they knew Kazakhstan was going to flood the market with more oil. They were producing a lot, that kind of thing, because they had the relationships with the top brass there. So it was big macro bets like that that made up most of the fund, and they would do it through options and more complicated strategies, even though it was pretty – directionally, it was typically straightforward bets. and as another note he despises is it the current yeah at the time was the federal reserve chair but now is the u.s secretary of uh the treasury janet yellen because she wouldn't rat on what they were doing so he simply for that reason has it like it seemed from the book a deep hatred for her yeah that's how he rolls that's that's that's part of the way they got good returns

anyway so that's what bridgewater was doing they had good information and they were making macro bets based on that information then there was what ray dalio wanted people to think bridgewater was doing he wanted people like brett said to believe bridgewater was this highly automated idea meritocracy that produced wonderful investing results and to do this he built internal systems that employees lived by. The most important was the dotting or the rating system. This was employees judging other employees, giving them ratings, marking them down, down dotting them, up dotting them if they liked them, or if one of them gave them a bad look, giving them a bad believability rating. There was basically all these criteria that ultimately

culminated in a believability score, which was kind of this one through 10 metric. Originally, it was meant to be your baseball card. Your baseball card at the firm and your stats were like ability to synthesize complicated information. Except it was determined by your colleagues. So people that wanted the same emotion as you, you can see how that would foster a culture of backstabbing. So there were, I'm trying to go through some of the other stuff here. There was publicly an issue log. So if you had an issue with anyone, you could just jot it down. One of the top executives made a very public issue about the coffee pot not being filled up enough. I think Dalio saw a scuff one time on the ground and they determined that it

was from someone's high heel. And so they said no more high heels at the office. He was very focused on radical transparency. And in order to be as radically transparent as possible, they had video and audio recording devices literally everywhere, it seemed. So if you were at Bridgewater, you were basically being recorded. And it was also publicly accessible via the transparency library and the transparency library was this everyone at the company could access it i think it was basically just a folder or a cloud document uh or in a place where you access a bunch of videos and audio of everything and i'm sure most of the conversations were incredibly boring but if there was any dispute anything that happened you could go back and you

could play the tape because you were probably being recorded. And this was actually really kind of a common sequence of events that happened in the book over and over and over. Someone would do something wrong, whether it was they didn't get a task done in time, they would talk bad about a colleague, maybe talk back to Ray. If you did that, you were screwed. Question the principles. If you question the principles, you're bound to be kicked out of the cult. You name it. Once Dahlia was made aware of this, and it was heavily incentivized to tattle, if you told on him, it was well incentivized because you were being transparent. He would have a trial. And often, this was a public trial. So it would be a bunch of people in a room, often executives. He would, and it was recorded and uploaded to the transparency library so that everyone can hear him attacking the person. He would play the tape. He would probe, was his term. He would probe the person, which meant basically verbally attacking him. And then if they cried, he would attack them for having an emotional reaction, because it's not good to have an emotional reaction in the workplace, in his opinion. And then typically this culminated in either a firing or a downgrading in their role, a number of different things.

Basically, the questioner in these cases was the executioner. They also would bring in the ethics committee, which was just a team of three old executives. And he would have them vote on whether or not what they did was ethical. and it was it was just this constant repeat process where he kind of seemed like a like a like a roman ruler or something where he would hold court and then determine the person's punishment well yeah i think it's unsurprising that the guy likes china i mean what this feels like you know what i mean it's unsurprising i think he likes russia this seems like something out of vladimir putin yeah the here's one example where this actually didn't end so well for bridgewater so greg jensen second most important person at the company was spending a lot of time with a subordinate lower employee named samantha holland they apparently were getting

affectionate for one another they went out to drinks with colleagues the colleagues saw them go home together after and they and you know because this is what you're supposed to do at Bridgewater, they reported them for being affectionate together. Jensen said they did not get physical and Ray needed to know. He said, Jensen, I need to know, did you guys get physical? He said, no, they were just friends. Holland said that they kind of had. And so Dalio just could not put up with the not knowing, I guess. And he had the ethics committee, which we just talked about it was a team of three men, hold a trial. Basically, they disagreed on their versions of events, even though Holland had hotel receipts of them going in together. And people had all said,

bystanders all said they were being affectionate. But Dalio couldn't say whether she was lying or not because Jensen had such a high believability score. So Dalio declared it a mistrial, then asked Holland to voluntarily leave and accept several months of severance instead. Holland, unsurprisingly, got a lawyer. Holland's lawyer spoke to Dalio on the phone, and here's what the book says. Not only had Dalio ignored all standards of procedure for investigating such workplace conduct by investigating it himself outside of human resources, he was told that he potentially impugned Holland's reputation. The ethics committee might have a catchy name, but it was a legal nightmare. In no universe, Holland's attorney said, was it appropriate for

three older men untrained in such matters to question a woman about her relationship with the CEO? Bridgewater settled, gave her three years of her salary to leave. So it was countless cases like that where he was the ultimate determiner of people's outcome, punishment whatever he wanted sometimes it seemed like it was mostly just for his own entertainment especially with some of these like he would call in newcomers wait for them to have an emotional reaction and then he'd edit edit the video where it takes out him calling him rude names or whatever he'd edit that part out and he'd upload it to the transparency library so it's like uh it's like 1984 it's it's i swear it's it's he is he's running a george orwell operation over here

And if you're thinking, well, who's doing the investing? Yeah, you're right. There's 2,000 people here. 1,500 of them are focused on this stuff. Yeah, it's mind-blowing. I was trying to think like, what do people do with their day-to-day tasks? And like most of the book, I'm thinking like, what work are they on? Are they just reading principles all day and getting paid absurd amounts to do it?

I want to talk about the dotting system for a little bit. And it's honestly a little difficult to do justice to how stupid this dotting slash rating system seems. So there are countless examples of how this creates just the absolute worst incentives. But I want to read this email from someone at the company. His name was Kent Curran. He was a junior analyst that had been there for 19 months and was getting sick of the culture.

Here's how his email reads. It says the subject was an exit interview for Kent Curran, reasons for leaving, career change slash performance comments. The immediate reason for leaving is losing my MA box due to Ray and David's data points on me. I think the MA box was kind of like your rating score. I can't remember exactly the term they used for it, but I believe it was equivalent to the rating score. So Ray and David, who I assume was another superior, gave him bad points on something. And all of a sudden his rating just downgraded because if Ray downgraded you, it had way heavier weight to your score. And then people would follow along with whatever Ray did to make him happy.

So it ultimately downgraded his score in a big way. So he says, somewhere between watching the fourth and fifth manager in my neighborhood be deemed inadequately conceptual, unable to synthesize, et cetera, while performing what would be considered modest responsibilities at another firm. the principals lost some of their magic for me. Knowing that any hour of the day, Ray might respond unpredictably to a daily update or that any casual comment in a meeting might lead to a seminar about how one's thinking is poor, generates tension and fear. It probably doesn't help that 50 plus percent of management training, I put in air quotes, consists of watching the sorting. And he says, could you find a more Orwellian word of one once respected colleague or another. Sorting was just firing, essentially. We would sort people, sort them out of the firm.

He says, there's an unhealthy drive to the negative that's often debilitating. Just a few weeks ago, I literally couldn't think of any significant strength other than the charitable hardworking. People seemed to be on the prowl to discover my weaknesses, but strengths were underappreciated. Bridgewater sold me as an empowering place where relatively young people can challenge status quo and make a big impact. Fast forward, and it was drilled into me that it's bad to have opinions on the, to the point where, and I'm not sure if I should include this or not, but I'll say it anyways. He says, to the point where it felt like I was a Catholic school boy looking at pornography whenever a non-conventional thought came into

my head. So basically he's saying he just felt so alienated if he had any thought that went against principles. And then he says to close it out on the perks and social end, the place be expectations so you got paid well yeah well what's the aum regardless of those performance fees which are quite fat as well you're bringing in two billion dollars a year on the two and 20 and then if you have a 10 up year was that's another two billion right on 100 billion dollars 10 with the 20 there so i mean yeah and what's even more interesting is how nonsensical these principles are which we'll get to at the end they don't mean anything no i mean there's this point where i want to find the quote okay it's going to be in my closing thoughts in part three but i mean

when you have so many quotes it's bound to be contradictory like you have 375 principles i feel like you could find just about any principle to back up the action that you did like there's something to support your belief because they're going to be contradictory when you have that many i agree i agree it's look as always monger's right show me the incentive i'll show you the outcome he set up some terrible incentives for workplace workplace culture i think that's really my thoughts here and it inspired the famous what's it called black mirror episode that has essentially the dotting system throughout the entire world.

Yeah, people thought... They might have been, yeah. Yeah, people at Bridgewater thought they were talking to someone at the company for inspiration for the show. Netflix had a source, yeah. They were concerned about it, which I think it shows you.

Yeah, watch that show again. I don't know if you've watched that one, but maybe you should after reading now, reading the book if you haven't, Ryan, And you're going to say like, wow, they basically copied Dahlia's dotting system. Yeah, it sounds like it. Any other thoughts here on your thoughts about the business and what it was versus what it was sold as? There's a lot of people out there that have been skeptical.

And I thought potentially it could have been a Madoff-like scheme, but it seems like it's not. It's a little bit of a different scam, I would say, where they're not actually scamming people out of money. They are being incredibly misleading about actually what is actually going on at the firm because it's really the exact opposite of what they're claiming. And there's nothing illegal about that. It's just misleading a lot of people with a lot of money. yeah i think people sign on for i bet some of the bigger clients like being associated with bridgewater maybe less so after this book has become so public they like probably a lot of the events bridgewater puts on i don't there's probably a lot of allure beyond just the recent

performance. Yeah. And speaking of that, since 2011, I mentioned there is basically two breaks. Until 2010, they had pretty good returns. But since 2011, returns have been terrible. AUM is significantly down from its peak. All the fees have been nice and fat. AUM is still at about $100 billion. So again, you're bringing in, even if you have a down year, $2 billion a year in management fees um and you can see now why dally is one of the most wealthy people in the world if we look at i have a chart that i'm going to put in the newsletter and it compares from 2011 a 70 global stock index 30 global bond index versus bridgewater pure alpha bridgewater pure alpha i believe had a kegger of around one percent since 2011 while basically any all stock 60 40 70 30

as in this example portfolio has done at least even through the end of 2022 where stocks had and bonds had a terrible year or wait the bonds have a terrible year in 2022 yeah they did um it was like at seven eight percent cagger and that's basically these passive vehicles that have no fees so they have just like they provided no pure alpha since 2011 and And I have my answer to why. But it's my hunch. It's my speculation as to why they've done bad. But I want to know what you think why they've done bad since 2011.

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Luxury sales claim based on S&P Global Mobility Canadian New Vehicle Total Registrations for Calendar Year 2025 for the Cadillac Definition of Luxury. I think for starters, they have a ton of capital. i mean it's difficult to i would imagine it's difficult to beat the market when you have 140 billion dollars you're investing like it's it's hard to get into companies it's hard to get out of companies you're gonna you're gonna make big moves unless you're a big activist investment firm like elliot but they're smaller not too small i guess i think elliot's around 100 as well yeah but they're different their private equity too they're not yeah they're all yeah i don't know i would just imagine that it gets harder maybe that's not the only reason

for underperformance i would imagine that just being pretty bearish the u.s economy for the last decade has hurt them but i don't know we don't know what's in their portfolio really true true and that's what confused people because they weren't showing up on a lot of stuff so i think it was a lot of these, like you said, these option things that they would do. But I have a hunch. One is obviously the workplace culture that deteriorated to just a point of misery for a lot of people. But my other hunch is that they had a decent strategy since 1990. They tried to be as market neutral as possible and essentially rode three decades since 1982-ish of a bull market in U.S. treasuries.

I have a chart here that'll be in the newsletters. It's a pretty famous chart that shows when interest rates peaked and they just essentially went down and down and down and down and down until the end of the great financial crisis. And yeah, in COVID, they went a little bit lower, but from 2010 to 2019,

we were at zero. The Zerp interest rate policy essentially for a lot of that time and then the Fed started raising rates. And I think Bridgewater's edge kind of ended here. Here's a quote from the book. quote another moneymaker for bridgewater was bob prince dalio had delegated the lion's share of research on bonds or fixed income to his longtime colleague prince made bonds particularly u.s

treasuries considered the safest of all a mainstay of bridgewater clients accounts the move proved prescient and profitable treasuries went on a long streak of strong performance up double digits some years including in 2000 when the stock market dragged badly and busted currency best weighed on the rest of Bridgewater's portfolio. I have a hunch that they were riding U.S. Treasuries for a long time, and it's not a coincidence that their performance ended

their strong performance ended when Treasuries stopped having their interest rates go down. Or their yield. That's certainly a big part of it. It's hard to tell without knowing what's in that portfolio. Just a hunch, yeah,

for me, yeah. That's not a fact. Let's go through part three here. Kind of conclude with our thoughts on Bridgewater, the principles, and maybe any of our favorite parts from the book. You want to go first? Yeah, and maybe we can do lessons to close things out for investors. Maybe lessons that we're trying to learn after reading this. So for me, I think the book is great. Not incredibly hard to read, but not super light either.

I'd recommend it to anyone that's interested. If you listen to the show, you will probably like this book. And it was a big kind of, you know, I love using this one. They are who we thought they were. The football coach that says that moment for me, plenty of smart people I follow in the financial world that are much smarter than me, probably just follow them on Twitter. They always claim that Bridgewater was sort of a scam, kind of a pure marketing BS stuff. And now I understand that they were right.

They probably had heard from people they knew that what was actually going on there. And now this book kind of shows that it was just a bunch of nonsense. And the principles are, frankly, incredibly stupid. Stylio, if you're listening to this, you can wipe your billions, you know, you can take your billions and wipe your tears off. But I don't think that'll insult him too much. They are very, very dumb. But he is incredibly smart in certain ways. like building his brand among people that are not curious enough to investigate further about what

they're actually doing or what he's actually saying or read this book you know for example this was me five years ago i watched what they talked about in the book which is kind of weird to experience again they talked about how he has now a couple of famous youtube videos about the quote economic machine and what he calls principles for a changing world order again so good at writing titles for things and putting names on stuff. At the time, I thought these videos were extremely smart. I was like, oh, hedge fund manager explaining the economy. It's something that's kind of confusing to me. I don't understand how the economy works. This guy's smart. He gets it. He's very convincing. He always has these constant media appearances. And it made him seem

to me as someone just getting into this that probably looked up, how does the economy work? How does finance work? How does investing work? I thought he was one of the investing geniuses there on par with Buffett. And plenty of others have too. I think I have a screenshot actually, it kind of shrunk on me a bit here. But there's these videos that probably have in total over 100 million views. And that was one of the ways that he went viral recently in the last 10 years, even though his performance has been so bad, his reputation might be even better than it was in the past. Because in the past, there was no one like me, a 20 year old trying to get into investing that can learn about him. But my favorite parts of the book are when he tries

to focus everything on building this perfect business system as Ryan went through in detail in that second part there. It is so confusing, but it shows how far they've gone from actually making investments. I think it is a great lesson on how not to run a durable business. He essentially took what Buffett does at Berkshire Hathaway and said, I'm going to do everything the complete opposite and one's i think more durable of a business yeah yeah i mean buffett tried to do i don't think there's really that many businesses like berkshire it's so unique that he manages for the most part like absurd amounts of capital all on his own and he he takes the role of probably what thousands of people do at other firms like entirely on his own anyway but uh well team of

maybe four or five because he has the trader and he has todd and ted now but yes they've got more people now yeah uh but on bridgewater yeah so working there sounds like it would be awful like i get they get paid a lot so that's you know that's definitely a perk uh good parties good parties except when dalio gets drunk and weird that would you know slide out of there before then yeah it sounds really dystopian there was a lot of stuff that reminded me of the george orwell 1984 it's like like imagine you're actually a junior analyst there you get called into a meeting and there's a point when like you're supposed to say something and you muster up the courage to say something and everyone just doesn't respond and all they do is just pull out their ipods

their ipads and you just see your score going down like okay what the hell is going on it's it's so horrible uh that just sounds awful anyway dalio for me like i said great salesman maybe one of the best ever but someone who's been right a lot so much so that now he has built the incentives and built the system around him that anything he says he thinks is truth because everyone validates everyone just you know oh yep that makes sense because i want my score to go up and i gotta approve it and you have the highest believability score so you're really smart there's no one to check him and i think that's certainly a certainly a big risk um i think the best examples of this are when and we haven't talked about this that much but

when dalio gets into an argument with subordinate subordinates and then and this happened on a number of occasions he got in some dispute with someone because the guy was like you know the the principles they're they're they're hard to follow they're distracting it's difficult i've had a lot of contradictory someone was saying the opposite of another one yeah and he Dalio will go to a room full of people that just want to please him. Do you think this guy's right or me? They're like, raise your hand if you think he's right. And it's like, you know, it's a death sentence if you raise your hand.

And then he's like, see, no one agrees with you. And it's like, he will never get, he will get whatever people, whatever he wants people to say. That's what they're going to tell him. It's a bunch of yes men, unsurprisingly. That's kind of what the culture is fostered. And I think I'll just leave with this. So the company, Bridgewater, at one point, Greg Jensen talked bad about Dalio behind his back. They demoted him from CEO to some lower role. And Dalio made him go and recruit the next CEO, which is kind of like hilarious punishment, right? I think they gave the analogy that your ex is going and getting you your next girlfriend or whatever.

It's basically what was happening. And so they brought in John Rubenstein, I'm not sure, to be CEO. Rubenstein had been a former executive at Apple. I believe he was head of the iPod Touch. And they really went out, tried to recruit him. I think they paid him something like $25 million a year or something crazy to come to Bridgewater and improve the quote-unquote technology. That was his job as CEO, to improve the technology.

It had nothing to do with investing. He said no amount of expertise could solve it. The book says, at Apple, Steve Jobs had taught Rubenstein to keep a laser focus on the end customer. The North Star of the company was to create helpful products that delighted customers. To Rubenstein, Dalio seemed focused on delighting himself. So that's my big question. Leaving this book, I thought, who on earth are the principals for? Who are all these employees at the company working for? It seems like it's an entire 1,500 person outside the investing, 1,500 person organization built to make Dalio feel more important. yeah and he's now one of the richest people in the world so that's you know i think anyone

listening to this is a little bit of a different show if you really didn't like this style of episode please let us know we think people will be interested in this i you know it's a conversation that we would enjoy having just by ourselves we thought people would help you don't like it but if you don't like it let us know but i will say it's i think important because he is now one of the most influential people in the world and one here's what i'll close on before we get to our favorite principles as kind of a fun ending here is i was for the longest time so confused on why he was just always optimistic about china and it because it seemed like it was part of his economic machine thing where they look like a debt bomb and they've turned out to kind of be a debt bomb

so far over the last couple of years but he has been bullish again and again and again i was like oh okay yeah they just gave him a lot of money and then one time he said something slightly i think bearish about or negative about china i don't know if it was about a financial thing or just in general and they almost pulled the plug so he had to like it's what he is it's kind of an orwellian uh he had to go on 10 years of like talking about how great china was after that exactly i'm like him again exactly it's like a nesting doll of orwellian stuff they gotta you know control him and then he implements the same one party thought to his company i mean it's honestly like yeah i think that's where i'd like to close things out but should we talk uh favorite

principles ryan you have a one of the best ones i'd say sure basically at one point they had to do a big reorganization or a big uh sorting and fire a bunch of the people at the company and in order to fire him he wrote his new principle he said sometimes you need to be able to shoot the ones you love and we need to love the ones we shoot yeah i mean is that you should do i think You should do a quiz of principles and you should say Joseph Stalin or Ray Dalio. Honestly.

What do we get them right? I'm not sure that was... I think that was a principle. They quoted it in different parts from the book, but basically he was like to justify the fire and he implemented a new principle,

which it was like he would just go about his day and then be like, oh, okay, that's a good principle. I was just thinking, like, when does he do any investing? Like, when is he reading about investing? I don't know. I don't know.

But he's tweeting a lot. And he tweets a principal every day. I do love following him for that. And he's got a lot of followers. I doubt he runs that account. That's, I don't know. Maybe, he definitely writes this stuff, though. It's definitely in his voice.

But I don't know if he actually is tweeting it, if you get what I mean. But who knows? Who knows? He has apparently 10 principals for 2023. three. I'm going to read them off here in order. See if you get any insights here. One, one plus one equals three. Two, pain plus reflection equals progress. Three, fail well. Four, shapers are people who can go from visualization to actualization. Five, appreciate the art of thoughtful disagreement. Six, meditate. That's it. Seven, own your outcomes. Eight, regularly use

pain as your guide towards quality reflection. That one is, I got to say, do not follow that one. um, uh, nine, don't believe everything you hear at 10. Don't let fears of what others think of you stand in the way. He is kind of like if every mom and mother in the world, and you know, those things they tell their kids, like, Hey, don't listen to everything you hear kid, kiddo, you know, you just compiled all those and put a book in and run an investment fund. Like it. This is a good example of them being contradictory. It's like one plus one equals three. Don't believe everything you hear. Okay. All right. I ignored the first one. It's like, you can back up any action with one of the principles because there's no

contradictory. So it's I don't know. Yeah. I guess obviously changed my view of the organization and I guess maybe Dalio is a really good analyst, really certainly a good commodities analyst in his prime. uh but maybe it requires another skill set to run a company yeah i was gonna say focused on other stuff at the moment so the question we started out with was is bridgewater associates a scam

i don't know we'll leave it up to the listeners there i would say possibly we don't want to get into any legal trouble it's it's up to the listener i think you can hopefully take from the hour long discussion we've had here and form your own opinion on Bridgewater Associates, the hedge fund industry, and what it takes to build a hedge fund business as well as some behind the scenes looks. If you like the book, give it a read. We're literally just giving whoever wrote this, Mr. Copeland, their free advertisement because we think it's such a great book. Seriously, if you listen to the show, you will enjoy this book. but let's hit the disclosures. We are not financial advisors. Anything we say on the

show is not formal advice or recommendation. Ryan, I, or any podcast guest may hold securities discussed in this podcast. We may have held them in the past and we may buy, sell, or hold them in the future. Next week, we have a fun discussion that we haven't recorded yet, but it's going to be coming out next week with longtime guests who have come on both multiple times before, Francisco Oliveira from Arvilo Capital Management and Alex Morris, who runs the science of hitting research, to give an update on the media industry. They're two of, I would say, the foremost experts in the investing world on that. So very excited for that extended discussion. I think everyone's going to enjoy it. And as always, we are going to have the

Investing Power Hour, live every Thursday, out on the podcast Player of Choice every Sunday. Thank you all for tuning in, and we'll see you next time. Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya, and I live in ice cold. I've made some questionable decisions that didn't end up the way I planned. And today, I'm still figuring it out. Somehow, things usually get worse before they get better. Apparently, that's how I roll.

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