Founders - #43 Ray Dalio: Principles: Life and Work

Episode Date: October 22, 2018

What I learned from reading Principles: Life and Work by Ray Dalio---Whatever success I've had in life has had more to do with my knowing how to deal with my not knowing than anything I know [0:01]Ray's first principle and why [5:35]Ray's key to success [8:07]The similarities between investors and entrepreneurs [9:27]Shift your mindset from I know I am right to How do I know I am right? [13:05]Systemize your decision making [14:09]Ray on his life story [17:30]the quality of your decisions determine the quality of your life [19:50]Like a lot of Founders, Ray was bad at school [21:45]More about his personality: stubborn and determined + his first jobs [22:45]Hungry for knowledge he could actually use [24:28]Terrible is better than mediocre [25:03]What we think to be true that is not: The future is a slightly modified version of the present [25:30]Steve Jobs [26:30]A pivotal lesson for Ray: The same things happen over and over again [28:02]the founding of Bridgewater [32:33]the humble beginning of Bridgewater [35:15]If you know your business A to Z there is no problem you can't solve – Sam Zemurray [36:06]Watching the richest man in the world go broke [38:00]Ray loses everything and has to start all over again [40:30]Successful people change in ways that allow them to continue to take advantage of their strengths while compensating for their weaknesses and unsuccessful people don't [45:10]The new Bridgewater: Systematizing his decision making process [47:35]Developing more products and out teaching his competition [48:11]The results of systematized thinking guided by principles that are written down and adhered to [53:30]Counterintuitive thoughts on public success [55:19] ----Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work.  Get access to Founders Notes here. ----“I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — GarethBe like Gareth. Buy a book: All the books featured on Founders Podcast

Before I begin telling you what I think, I want to establish that I'm a dumb shit who doesn't know much relative to what I need to know. Whatever success I've had in my life has more to do with my knowing how to deal with my not knowing than anything I know. The most important thing I learned is an approach to life based on principles that helps me find out what's true and what to do about it. Principles are fundamental truths that serve as the foundations for behavior that get you what you want out of life. They can be applied again and again in similar situations to help you achieve your goals. Every day each one of us is faced with a blizzard of situations we must respond to. Without principles, we would be forced

to react to all the things life throws at us individually, as if we were experiencing each of them for the first time. If instead we classify these situations into types and have good principles for dealing with them, we will make better decisions more quickly and have better lives as a result. Having a good set of principles is like having a good collection of recipes for success. To be principled means to consistently operate with principles that can be clearly explained. Unfortunately, most people can't do that, and it is very rare for people to write their principles down and share them. That is a shame. I would love to know what principles guided Albert Einstein, Steve Jobs, Winston Churchill, Leonardo da Vinci, and

others so I could clearly understand what they were going after and how they achieved it and compare their different approaches. My hope is that reading this book will prompt you and others to discover your own principles from wherever you think is best and ideally write them down. Okay, so that is from the introduction of the book that I want to talk to you about today, which is Principles, Life and Work by Ray Dalio. So I found this book because eventually online and other various podcasts, the praise for this book was just so effusive that I finally had to relent and read it. I experienced something very similar with the founder of Nike's book, Shoe Dog. And I usually find that when there's like a crescendo of positive responses from something,

whether it be a podcast or a book, that it's usually worth at least testing out and seeing that if I agree with that. And so similar to Shoe Dog, principles did not disappoint. Actually, I'm getting a little bit ahead of myself. If you're new here, welcome to Founders. My name is David and the premise of this podcast is simple. Every week, I read a biography or autobiography of someone that has built a company and I share the ideas that I learned in the book that you can hopefully use in your own life.

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by going to foundersnotes.co. And just like I take a lot of notes and highlights when I'm reading a book and I save them, I do the same when I listen to podcasts. And I didn't realize until recently that this wasn't a common process. So I decided to turn my note-taking into a service that emails you my notes every week. So Founders Notes are my podcast notes. I listen to podcasts with company builders. I write down their key ideas and I email them to you every Sunday. And the result is that you have tweet-sized bits of knowledge from some of the smartest people in the world talking about what they learned from building their business.

And if you're obsessed with entrepreneurship, products, creativity, work, like I am, you'll benefit greatly from this. Reading this every week will prove incredibly valuable to your own work. So please sign up and test it out at foundersnotes.co. All you have to do is input your email address. And if you like what you see, please upgrade to a paid subscription. All right. So enough of that. Let's get into the book and why the reason that we're here today. So I'm going to start just like I say with every podcast, this isn't meant to be a summary or review of the book.

This is literally just highlights and ideas that I found interesting and hopefully you find interesting as well. So let's start with Ray's first principle and why. And so his first principle is think for yourself to decide one, what you want, two, what is true, and three, what you should do to achieve number one in light of number two. And why would you want to do this? And he says, because we each have our own goals and our own natures, each of us must choose our own principles to match them. While it isn't necessarily a bad thing to use others' principles, adopting principles without giving them much thought can expose you to the risk of acting in ways inconsistent with your goals and your nature. At the same time, you, like me, probably don't know everything you need to know and would be wise to embrace that fact before I continue that he harps on this over and over again, just like you heard in the introduction about understanding that the unknown unknowns are always greater than the known knowns. So you need to develop a system in life to deal

with the fact that we've been placed in an unbelievably complex environment that we call reality and that we couldn't possibly know everything we need to know to survive. So this whole thing where he says, you'd be wise to embrace the fact that you, probably like me, don't know everything you need to know. And something I noticed while reading the book is he has a lot of ideas that he repeats in different ways. And I think he's doing that so it really sinks in. Okay, so he says, and this is probably the most important part of this paragraph. If you can think for yourself while being open-minded in a clear-headed way to find out what is best for you to do, and if you can summon up the courage to do it, you will make the most of your life.

If you can't do that, you should reflect on why that is because that's most likely your greatest impediment to getting more of what you want out of life. And I think right there, getting more out of what you want out of life, to me, that's a good summary. It's like, why are you listening to this podcast? There's a million other forms of mindless entertainment. You're listening to this podcast because you want to learn something. And so to me, let's take that one step further. When I ask myself, why am I learning this? And it usually comes down to some form of that sentence.

So I can get more of what I want out of life. Okay, so a couple paragraphs later, he specifies what he believes the key to success is. He says, I believe that the key to success lies in knowing how to both strive for a lot and fail well. By failing well, I mean being able to experience painful failures that provide big learnings without failing bad enough to get you knocked out of the game. You're going to see in a short while why he believes that. He starts his company, and I'm going to get into this,

but he starts his company. Things are going really well. He's having a lot of early success and so much that he gets unbelievably, in his own words, arrogant based on his success. And then he loses everything. And eight years into his company, he has to start from zero to the point where he had to fire everybody. He's the last employee there. He's borrowing money. He can't even pay his family's bills. He says borrow money from his dad. So this whole idea, I think this is why, in my opinion, he developed this system of developing principles, systemizing his thinking, and then making sure that everybody he works with understands that. So writing down and sharing them is the other part. Okay. So what I was struck by, something while I was reading this, is there's a lot of times where, okay, so he's both an investor and an entrepreneur.

So he's an investor first, and then he built a company, which makes him an entrepreneur. And there's a lot of times where you could take what he's talking about, investors, scratch it out, and put in the word founder or entrepreneur or whatever term you want to use, and it's still true. And so he explicitly talks about the similarities between investing and entrepreneurship right here. And I found that interesting. So let me go ahead and read that part to you. To make money in the markets, one needs to be an independent thinker who bets against the consensus and is right. That's because the consensus view is baked into the price. One is inevitably going to be painfully wrong a lot. So knowing how to do that well is critical to one's success. To be a successful entrepreneur, the same is true.

One also has to be an independent thinker who correctly bends against the consensus, which means being painfully wrong a fair amount. Since I was both an investor and an entrepreneur, I developed a healthy fear of being wrong and figured out an approach to decision-making that would maximize my odds of being right. And that approach is his principles. And I love this idea that what I always tell people that are friends of mine that are building companies or want to is that you're fundamentally bending against consensus. And they're like, I don't understand. What do you mean? Even if what

they're trying to do is nothing new, they just want to do it for themselves. It's like, well, by starting a company, you're saying that the market is not, the employment market is fundamentally mispriced the value that you bring, or else you just go work for somebody else. And what people at certain companies realize is, hey, I can actually capture that value for myself. And before I continue, if you listen to last week's podcast, you know that I'm getting over flu-like symptoms. Hopefully, I think my voice is a lot better on this podcast than it was last week. And hopefully, it's not too distracting. I did think, so after reading this book, I thought about what Ray Dalio's, one of the messages in the book is that you have to be careful because you're the easiest person to fool, right?

So you should develop systems so you don't fool yourself. And so I was like, did I make a mistake by recording when my voice might have been distracting to my overall message? And so I thought about what Ray Dalio said, and then I thought about what we learned in the autobiography of Henry Ford, where he's talking about like, a person's feelings are not important to like, you should you don't only work when you feel like working. The commitment to the work is more important than how you personally feel. And I feel that in my own life, that is accurate. And so I thought I was like, well, that could have been just my brain playing a trick on me. Oh, you don't feel good. You don't sound good. Oh, you know, take this week off. And I was like, you know what? If I could do it all over again, I would still record even if my voice was distracting because I don't, I'm the easiest,

like it's, I'm the, I can fool myself easier than anybody else can fool me. And maybe that's just me looking for an excuse to do less work. So I don't want to do that. And so I'm the I can fool myself easier than anybody else can fool me and maybe that's just Me looking for an excuse to do less work. So I don't want to do that And so I'm just gonna do it anyway, so I don't know It's just interesting how a lot of these lessons by by reading these books They kind of combine in ways that you know, I don't know where that thought came from. It just it just Appeared and I was like, oh that kind of makes sense So, you know as long as I'm not dying, then just go do the work. All right. So back to the book. It says, shift your mindset

from I know I am right to how do I know I am right? And this is at the beginning before he gets into his life story. But I think this now knowing his life story and reading the whole book, he came to this conclusion because he almost blew up completely. So he says, my painful mistake shifted me from having a perspective of I know I'm right to having one of how do I know I'm right. It's amazing how just adding one word to that sentence changes it completely. They gave me the humility I needed, meaning the failures, to balance my audacity, knowing that it could be painfully wrong and curiosity about why other smart people saw things differently prompted me to look at things through the eyes

of others as well as my own. Experience taught me how invaluable it is to reflect on and write down my decision-making criteria whenever I made a decision. So I got in the habit of doing just that. Remember that part because when he finally finds what he calls his holy grail, it's because he finds it years after he did this practice of just writing down, like, this is a decision I'm making today and here's why. And then keeping that so he can go back and the future version of him can go back and read that. So this is the next couple pages later.

It says, Ray hits on, my note to myself was, Ray hits on this point over and over and over and over again. Systematize your decision-making. This is what I mean about he's going to repeat himself a lot. And I don't mean that as a negative. I discovered I could do that by expressing my decision-making criteria in the form of algorithms that I could embed into our computers. By running both decision-making systems, the one in my mind in my head and mine in the computer next to each other,

I learned the computer could make better decisions than me because it could process vastly more information than I could, and it could do it faster and unemotionally. This is the entire premise of why he feels he was successful investing money. Doing that allowed me and the people I worked with to compound, this is so important, doing that allowed me and the people I worked with to compound our understanding over time and improve the quality of our collective decision making. So when I read that part, it made me think, the same week I was reading this book, I was re-listening to a podcast with one of my favorite writers. And I've talked about it ad nauseum on this podcast. I even did a three-part series

based on, so his name is Tim Urban. He founded the blog, Wait But Why? And calling it a blog almost does a disservice. If you haven't read it, you should. It's amazing. So he wrote... He does these posts. He did a three-part series analyzing Elon Musk companies. And I think it's 70 or 80,000 words, which is the size of a fairly good-sized book. So anyways, I came across a sentence where he's talking about, hey, doing this system allowed me to compound not only my knowledge but all of the people I work with, their knowledge as well over time. And so on this podcast with Tim Urban, he explains the idea of compounding in the best way I've ever heard it described

before, in a unique way, which is, of course, if you read his writing, not surprising. Let me just read this because I wrote down exactly what he said. And this is how Tim explains the idea of compounding. And he calls it the human colossus. The human colossus is the collective knowledge humanity has built, the collective ability to create and invent, a mountain of achievement that is cumulative across generations. What's that? That's compounded knowledge, right? It is a force that is greater than humanity himself. That's a great sentence. This collective knowledge has grown substantially between 50,000 BC and today, and it is creating a level that we can't even fathom.

Humans are the same today as they were in 50,000 BC. It is this colossus of human knowledge that has grown and changed. I love that idea a lot. Okay, so there are three parts to this book. It's the life story, his life story, which he calls, I think, where I'm coming from. Then life principles and work principles, which you would guess because it's in the subtitle, right? Now, here is the surprising thing about what he said about his life story. And why? Well, you'll see that I basically came to the exact opposite conclusion. And so now he's talking about the life story part. He says, in this part, I share some of the experiences, most importantly, my mistakes that led me to discover the principles that guide my decision-making. To tell you the truth, I still have mixed feelings about telling my personal story because I worry that it might distract you from the principles themselves and from the timeless and universal cause-effect relationships that inform them. For that reason, I wouldn't mind if you decided to skip this part of the book. If you do read it, try to look past me and my

particular story to the logic and merit of the principles I describe. So I took the opposite viewpoint. I thought his life story was the most interesting part because you can see how he arrived at the need for creating his principles and writing them down in the first place. And it's told more in like a narrative, which I personally enjoy reading. So every single thing we're going to cover from here on in comes from his life story part, which is about a third of the book. The second part, the life and work principles, he even states that it's meant more as like a reference. So you buy the book and you look at the table like table contents you pick something sounds interesting and you read it just like you would you know encyclopedia or whatnot so i have some highlights uh from those parts but

all i share that in the this week's members uh only podcast so this podcast the main part because it fits in what we're really doing here. This is really trying to get at the life stories of company builders. It's very fascinating to me seeing how they start out, their first jobs, their failures. How did they get to where they are now? Today, Ray Dalio is in his 60s. I think he has a net worth of $18 billion. It's one of the largest hedge funds in the world. That's interesting. Wonderful. Great. But it's even more interesting when you realize that he started the company 40 years ago. It's still private, by the way, 40 years ago in his extra bedroom. Like that's inspiring to me. So that's what we're going to

focus on. All right. So let's, before I get into that, I just like this quote that he has, and he talks about a lot. And he talks about time is like a river. So it says, time is like a river that carries us forward into encounters with reality that require us to make decisions. We can't stop our movement down this river, and we can't avoid those encounters. We can only approach them in the best possible way. And then before he jumps into his life story, he talks about something that is kind of obvious, but I think we all need to be reminded of. If the quality of your decisions determine the quality of your life, then you should work on improving the quality of your decisions, right? So he says, when we are children, other people, typically our parents, guide us

through our encounters with reality. As we get older, we begin to make our own choices. We choose what we are going to go after. These are our goals. And that influences our paths. If you want to be a doctor, you go to medical school. If you want to have a family, you find a mate and so on. As we move forward, as we move towards these goals, we encounter problems, make mistakes, and run up against our own personal weaknesses.

We learn about ourselves and about reality, and then we make new decisions. Over the course of our lives, we make millions and millions of decisions that are essentially bets, some large and some small. It pays to think about how we make them because they are what ultimately determine the quality of our lives. As you read my story, try to look through it and me to the underlying cause and effect relationships. Remember, he's repeating himself. He just said this earlier. So you see that it's really important. And I think he understands human nature at a fundamental level, that repetition is persuasive.

And so it says, look at the underlying cause and effect relationships, which she talked about in the introduction. At the choices I made and their consequences, what I learned from them and how I changed the ways I make decisions as a result. Ask yourself what you want. Seek out examples of other people who got what they wanted, which is the whole premise of this podcast. And try to discern the cause and effect pattern behind their achievements so you can apply them to help you achieve your own goals. To help you understand where I'm coming from, I'm giving you an unvarnished account of my life and career, placing special emphasis on my mistakes and weaknesses and the principles I learned behind them. So now we're going to jump right into his early life. And like a lot of founders that I've covered on this podcast, he was bad at school. And here's his description of why.

My most obvious weakness was my bad rote memory. I couldn't and still can't remember facts that don't have reasons for being what they are, like phone numbers. And I don't like following instructions. At the same time, I was very curious and loved to figure things out for myself, though that was a lot less obvious at the time. I didn't like school, not just because it required a lot of memorization, but because I wasn't interested in most of the things my teachers thought were important. I never understood what doing well in school would get me other than my mother's approval. My mother adored me and worried about my poor grades.

Up until middle school, she would make me go to my room and study for a couple hours before going out to play. But I couldn't bring myself to do it. Okay, so we're going to learn a little bit more about his personality and then some of his first jobs. When I didn't want to do something, I would fight it. He's very stubborn and determined, as you can imagine. But when I was excited about something, nothing could hold me back. So there's the stubbornness in the first sentence and the determination in the second. For example, while I resisted doing chores at home, I eerily did them outside the house to earn money.

Starting at age eight, I had a newspaper route, I shoveled snow off people's driveways, I caddied, bus tables, and washed dishes at a local restaurant. I also stocked shelves at a nearby department store. I don't remember my parents encouraging me to do these jobs, so I can't say how I came by them. But I do know that having those jobs and having some money to handle independently in those early years taught me valuable lessons I wouldn't have learned in school or at play. This is how he discovers the stock market and his first investment. In those years, everyone was talking about the stock market because it was doing great and people were making money this included the people playing at a local golf course where i

started caddying when i was 12. so i took my caddying money and started playing the stock market my first investment was in northeast airlines i bought it because it was the only company i had heard of that was selling for less than $5 a share. I figured that the more shares I bought, the more money I would make. That was a dumb strategy, but I tripled my money. Northeast Airlines was actually about to go broke and another company acquired it. I got lucky, but I didn't know it at the time. I just thought making money in the markets was easy so i was hooked and as you can see i'm gonna this this paragraph contrasts with the busy work at school he was hungry for knowledge he could actually use but he had to have an understanding of why he's learning it he says

in those days fortune magazine had a little tear out coupon you could mail in to get free annual reports from fortune 500 companies i ordered them all i can still remember watching the mailman unhappily lugging all those reports to our door and i dug into every one of them that is how i began building an investment library i love his this uh this idea that he has this idea that terrible is better than mediocre. I've always been an independent thinker inclined to take risks in search of rewards, not just in the markets, but in most everything. I also feared boredom and mediocrity much more than I feared failure. For me, great is better than terrible and terrible is than mediocre, because terrible at least gives life flavor.

Another idea of his that I particularly liked that he picked up on when he was rather young. So the note I left myself is, what we think to be true, that is not. The future is a slightly modified version of the present. So that's false, right? In 1966, asset prices reflected investors' optimism about the future. But between 1967 and 1979, bad economic surprises led to big and unexpected price declines. Remember, he thought, he just said a few paragraphs before, making money in the stock market is easy. Not just the economy and the markets, but social sentiment deteriorated as well. Living through that taught me that while most everyone expects

the future to be a slightly modified version of the present, it is usually very different. But I didn't know that in 1967. Certain that stocks would eventually rebound, I kept buying them even as the market fell and I lost money until I figured out what was going wrong and how to deal with it. Another idea, this is about his, now he's a college age. We've reached the time of his life when he's in college. And this is the first time he mentioned Steve Jobs. He really thought about Steve Jobs a lot. He mentions him eight or nine times in the book. So it says, my college years coincided with the era of free love, mind-expanding drug experimentation, and rejection of traditional authority. Living through it had a lasting effect on me and many other members of my generation.

For example, it deeply impacted Steve Jobs, who I came to empathize with and admire. Like me, he took up meditation and wasn't interested in being taught as much as he loved visualizing and building out amazing new things. The times we lived in taught us both to question established ways of doing things, an attitude he demonstrated superbly in Apple's iconic 1984 and Here's to the Crazy On which were ad ad campaigns that spoke to me i still watch here's to the crazy ones um a lot it's a it's on youtube but i i love that's my favorite it might be probably is my favorite ad of all time okay um so he something i've said on the podcast that you realize studying company builders throughout,

separated by sometimes hundreds of years, is that history doesn't repeat. Human nature does. He arrives at the same conclusion. He phrases it different, and he talks about it's a pivotal lesson for him. And he just says the same things happen over and over and over again. So it says, here's an example of, well, this is actually a little longer part. So you'll see. It's something he learned. So it says, around 1970 or 1971, I noticed gold was starting to tick up in the world markets.

Until then, like most people, I hadn't paid much attention to currency rates because the currency system had been stable throughout my lifetime. But as currency events increasingly appeared in the news, they caught my attention. I learned that other currencies were fixed against the dollar, that the dollar was fixed against gold, and that Americans weren't allowed to own gold, though I wasn't sure why. I didn't know that. And that other central banks could convert their paper dollars into gold, which was how they were assured that they wouldn't be hurt if the U.S. printed too many dollars. I heard our government officials poo-poo the worries about the dollar and the excitement about gold, assuring us that the dollar was sound and that gold was just an archaic metal. Back then, I still assumed that government officials were honest.

In the spring of 1971, I graduated college with a nearly perfect grade point average, which got me into Harvard Business School. The summer before I started at HBS, I got a job as a clerk on the floor of the New York Stock Exchange. By mid-summer, the dollar problem began to reach a breaking point. Then on Sunday, August 15, 1971, President Richard Nixon went on television to announce that the U.S. would renege on its promise to allow dollars to be turned in for gold, which led the dollar to plummet. Since government officials had promised not to devalue the dollar, I listened with amazement as he spoke. Instead of addressing the fundamental problems behind the pressure on the dollar,

he continued to blame speculators, crafting his words to make it sound like he was moving to support the dollar while his actions were doing just the opposite. And this is his counterintuitive conclusion. Over the decades since, I've repeatedly seen policymakers deliver such assurances immediately before currency devaluations. That's what he means about the same thing has happened over and over again. So I learned not to believe government policymakers when they assure you that they won't let a currency devaluation happen. The more strongly they make those assurances, the more desperate the situation probably is. So the more likely it is that a devaluation will take place. That's his counter to a conclusion.

To try to understand what was happening, I spent the rest of that summer studying past currency devaluations. I learned that everything that was going on, the currency breaking its link to gold and devaluing the stock market soaring response, had happened before, and that logical cause and effect relationships made those developments inevitable. My failure to anticipate this, I realized, was due to my being surprised by And so a few paragraphs later, don't, you won't know if these things can happen to you. And if they do, you won't know how to deal with them. And so a few paragraphs later, the note I left myself was this famous quote by Mark Twain. It says, whenever you find yourself on the side of the majority, it's time to pause and reflect. He's going to come to a similar conclusion. It says, stocks were in again in 1972, and the fashion

of the time was the nifty 50 again i've never heard of this before i read the book so the nifty 50 is this group of 50 stocks that had fast and steady earnings growth and were widely believed to be a sure thing the inflationary surge that followed the breakdown of the currency system sent commodity prices even higher in response the fed tightened monetary policy this in turn caused the worst decline in stocks and the worst weakening of the economy since the Great Depression. The nifty 50 were particularly affected, plunging severely.

The lesson, when everybody thinks the same thing, such as what a sure bet the nifty 50 is, it is almost certainly reflected in the price and betting on it is probably going to be a mistake. So during this whole time, he takes a, for some reason, or I guess he's going to describe his reason behind it, but he falls out of love with stocks and starts to want to be in commodities. So when he starts out his early career after college, he's not really doing too much with stocks anymore, but he's learning a lot about commodity trading. So this is the part of his life where he's working in commodities, and this leads to the founding of Bridgewater.

So it said, stock investing fell out of favor after 1973, and commodity trading became the thing to do. He'd already been working in commodities for a few years at the time. With my background in commodities and my Harvard MBA, I became a sought-after property. Dominic and Dominic, a middle-sized 100-year-old brokerage firm, hired me as director of commodities for $25,000 a year,

which was near the top of what HBS graduate starting salaries were that year. My new boss paired me with an older, experienced guy who had lots of commodities broker experience, and we were assigned the task of setting up a commodities division. I was in way over my head, though I was too arrogant to realize it at the time. I probably would have learned a lot of painful lessons had the job continued, but the bad stock market took Dominic and Dominic under before we had made much progress.

After Dominic and Dominic closed its retail business, I moved on to a bigger and more successful brokerage firm. So this is his second job now. His boss's name here, I'm skipping over a bunch of this part, but this guy Shearson, this is his boss. Shearson put me in charge of its futures hedging business, which included both commodity futures and financial futures. I was the person helping clients who had price risks in their business manage them by using futures. I developed quite an expertise in the grain and livestock markets, which often led me to West Texas and the agricultural areas of California. As much as I loved the job and the people I work with, I didn't fit into the organization.

I was too wild. I also punched my boss in the face. Not surprisingly, I was fired. But the brokers, their clients, and even the ones who fired me liked me and wanted to keep getting my advice. Even better, they were willing to pay me for it. So in 1975, i started bridgewater associates so he became a some some type of expert on commodities he started sharing that knowledge he'd he'd uh write something he did all the time he calls them daily observations uh he would just

write his publish his thinking on the market like the reason behind what he's doing and just let people you know they could follow on to his investments they could could just read it. They could disagree with whatever it was. He's just putting it out there. And that actually was really integral into his career. And this is the status of Bridgewater 40 years ago, something I jotted down. And it reminds me of one of my favorite quotes by Jeff Bezos. And this is the quote. It says, big things start small.

The biggest oak starts from an acorn. You've got to be willing to let that acorn grow into a little sapling and then finally into a small tree and then maybe one day it'll be a big business on its own. So this is Bridgewater today, like I said earlier, massive company, widely successful, one of the 100 richest people in the world, et cetera, et cetera. And this is what it started out as.

I worked out of my two-bedroom apartment. When a pal from HBS who I shared the apartment with moved out, I made his bedroom an office. I worked with another friend I played rugby with, and we hired a great young woman who worked as our assistant. That was Bridgewater. So a few weeks ago, I did this podcast on Samuel Zemuri, also known as the Banana King. And he had this great quote in the book that stuck out to me.

And it says, if you know your business from A to Z, there's no problem you can't solve. And we saw that in the book and the podcast where he does literally every single part of the banana trade. And that really reminds me of how Ray started with his commodities business. And this is what I mean by that. This is Ray talking about how he started out and like his level of dedication to it. I was really getting my head into the livestock, meat, grain, and oil seed markets. I love them because they were concrete and less subject than stocks to distorted perception of value. While stocks could stay too high or too low because greater fools kept buying or selling them,

livestock ended up on the meat counter where it would be priced based on what the consumer is willing to pay. I could visualize the process that led to those sales and see the relationships underlying them. Since livestock eat grain, mostly from corn and soy meal, and since corn and soybeans compete for acreage, those markets are closely related. I learned just about everything imaginable about them. What the planted acreage and typical yields were in each of the major growing areas, how to convert rainfall levels in different weeks of the growing season into yield estimates, how to project harvest sizes, carrying costs, and livestock inventories by weight group, location, and rates of weight grain, and how to project dressing yields, retailer margins, consumer preferences by cut of meat, and the amounts to be slaughtered in each season. This wasn't academic learning. People with practice in the business showed me how the

agricultural processes worked, and i organized what they told me into models that i used to map the interactions of those parts through time later on in the book he shares this great anecdote that i think is um valuable for all of us to know and this is him watching the richest man in the world go broke and i've never even heard of this guy before. So it's just before Thanksgiving, I met with Bunker Hunt, then the richest man in the world. We regularly talked about the economy and markets, especially inflation. Bunker saw the debt crisis and inflation risks as pretty much as I saw them. He'd been wanting to get his wealth out of paper money for the past few years. So he'd been buying commodities,

especially silver, which he had started purchasing for about $1.29 per ounce as a hedge against inflation. He kept buying and buying as inflation and the price of silver went up until he had essentially cornered the silver market. At that point, silver was trading at around $10. I told him I thought it'd be a good time to get out. So Ray's doing the same trade. Ray exits the trade at $10. But Bunker was in the oil business, and the Middle East oil producers he talked to were still worried about the depreciation of the dollar. They had told him that they were going to buy silver as a hedge against inflation, so he held onto it with the

expectation that its price would continue to rise. I got out. By early 1980, Silver had gone to nearly $50. And as rich as he was, Bunker became a lot richer. While I had made a lot of money on Silver's rise to $10, I was kicking myself for missing the ride to $50. But at least by being out, I didn't lose money. 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 you're looking at great opportunities or catastrophic

mistakes. Okay, I think that might be one of the most important paragraphs in the entire book. And now I'm going to reread that to you, changing the word from investor to entrepreneur. There are anxious times in every entrepreneur's career when your expectations of what should be happening aren't aligned with what is happening. And you don't know if you're looking at great opportunities or catastrophic mistakes. When the plunge finally did happen, silver crashed. It ruined Hunt, and he nearly brought down the whole U.S. economy as he fell. The Fed had to intervene to control the ripple effects. All of this provided, excuse me, all this pounded an indelible lesson into my head. Timing is everything. I was relieved that I was out of the market, but watching the richest man in the world go broke was jarring.

So something's going to, it's very similar, it's going to happen to him very soon. This is the crash of Bridgewater and him losing everything. In March 1981, I wrote a daily observation. That's almost like a newsletter. That's his newsletter. Entitled, The Next Depression in Perspective. And concluded it by saying, the enormity of our debt implies that the depression will be as bad or worse than one witnessed in the 30s. This view is extremely controversial. August 1982 Mexico defaulted on its debt He was worried about debt and emerging markets So he says that in 81 And later on

A year and a half later he starts to see that happen By then it was clear to most everyone That a number of other countries were about to follow Because I was one of the few people Who had seen these things coming I started to get a lot of attention Congress was holding hearings on the crisis and invited me to testify in november i was a featured guest on the wall street week the most the must watch show for anyone in the markets in both

appearances i confidently declared that we were headed for depression and explained why one of his reasons why he says because i understand how markets work he actually said that um and now in the book he talks about looking back on i just couldn't believe that he could be so dumb after mexico's default the fed responded to the economic collapse and debt defaults by making money more readily available this caused the stock market to jump by a record amount while this surprised me i interpreted it as a knee-jerk reaction to the Fed's move. After all, in 1929, a 15% rally was followed by the greatest crash of all time. In October, I laid out my prognosis in a memo. To hedge against the worst possibilities, I bought gold and T-bill futures, etc., etc., etc., and he says, I was dead wrong. The US stock market began a big bull run,

and over the next 18 years, the US economy enjoyed the greatest non-inflationary growth period in its history. My experience over this period was like a series of blows to the head with a baseball bat. Being so wrong, and especially so publicly wrong, was incredibly humbling and cost me just about everything I had built at Bridgewater. I saw that I had been an arrogant jerk who was totally confident in a totally incorrect view. So there I was after eight years in business with nothing to show for it. Though I'd been right much more than I'd been wrong, I was all the way back to square one. At that point, I'd lost so much money I couldn't afford to pay the people who work with me. One by one, I had to let them go.

Bridgewater was now down to just one employee, me. Losing people I cared so much about and fairly nearly losing my dream of working for myself was devastating. To make ends meet, I even had to borrow $4,000 from my dad until we could sell our second car. I had come to a fork in the road. Should I put on a tie and take a job on Wall Street? That was not the life I wanted. On the other hand, I had a wife and two young children to support. I realized I was facing one of the life's big turning points and my choices would have big implications for me and my family's future. So this crash, skipping ahead a little bit, this is how he develops the need for principles. And this is his thinking at the time. Staring at these failings, I realized

that if I was going to move forward without a high likelihood of getting whacked again, I would have to look at myself objectively and change, starting by learning a better way of handling the natural aggressiveness I had always shown in going after what I wanted. Imagine, this is a good metaphor, imagine that in order to have a great life, you have to cross a dangerous jungle. You can stay safe where you are and have an ordinary life, or you can risk crossing the jungle to have a terrific life? How would you approach that choice? Take a moment to think about it because it's not, because it is the sort of choice that in one form or another, we all have to make. Even after my crash, I knew I had to go after the terrific life with all of its risks.

So the question was how to cross the dangerous jungle without getting killed. In retrospect, my crash was one of the best things that ever happened to me because it gave me the humility I needed to balance my aggressiveness. And you see that, we saw that also in the famous Steve Jobs commencement speech where he talks about, you know, getting kicked out of Next was just the thing he needed at that time. And so we're seeing an echo of that in Ray Dalio's life. This is another insight he has into human nature and put another way the difference between what successful people do after a failure and what unsuccessful people do or do not. Typically, by doing what comes naturally to us, we fail to account for our weaknesses, which leads us to a crash.

What happens after we crash is most important. Successful people change in ways that allow them to continue to take advantage of their strengths while compensating for their weaknesses. Unsuccessful people don't. The important thing to note here is that beneficial change begins when you can acknowledge and even embrace your weaknesses. Over the years that followed, I found that most of the extraordinarily successful people I had the books towards the beginning of a person's life because I don't think running a hugely successful business, something that's a hugely successful business, a business that's already hugely successful is that interesting. What is way more interesting to me and way more inspiring, frankly, is understanding everything they had to do to get to that point. So he says, looking back on getting fired from, oh, he's just going to, okay, so I kind of stumbled

over my own words here. He says, looking back on getting fired from Apple in 1985, Steve Jobs said, it was awful tasting medicine, but I guess the patient needed it. Sometime life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I love what I did. End quote. I saw that to do exceptionally well, you have to push your limits and that if you push your limits, you will crash and it will hurt a lot. You will think you have failed, but that won't be true unless you give up. Believe it or not, this is so important. I love this sentence. Believe it or not, your pain will fade and you will have many other opportunities ahead of you, though you might not see them at the time.

This is Ray State after the crash. Coming out of my crash, I was so broke I couldn't muster enough money to pay for an airplane ticket to Texas to visit a prospective client, even though the fees I'd earn were many times the cost of the fare, so I couldn't make the trip. And this is the new Bridgewater, which is this, he starts to expound on systematizing his decision-making process. So it says, from very early on, whenever I took a position in the markets, I wrote down the criteria I used to make my decision. Then, when I closed out a trade, I could reflect on how well those criteria had worked.

It occurred to me that if I wrote those criteria into formulas, now more fashionably called algorithms, and then ran historical data through them, I could test how well my rules would have worked in the past. That's the fundamental foundation of the new Bridgewater. So a few years pass. He winds up doing rather successful. And I love this idea that I've heard before. It's like you can either outspend your competition

or you can out-teach them. So he decides to out-teach his competition and then turning what he's teaching into more products. So most hedge funds, you know, they just, they, they raise capital. They get paid, you know, usually 2% yearly fee on the capital and then 20% of any profits. He starts developing all these other, other, you know, he had a really public failing. He starts developing all these other, since he had a really public failing, he starts developing all these other side products. So this is by late 1983, Bridgewater had six employees. Up until then, I hadn't done any marketing.

The business we got came from word of mouth and from people reading my daily telexes. Telex, I had to look up. I didn't know what that was either. Almost like a fax machine. It's a way for businesses to transmit written information to one another. So it came from my daily telexes, which she calls the daily observation, and seeing my public appearances. But clearly there was a growing demand for our research,

and I realized we could sell it to supplement our consulting and trading income. So I hired a seventh employee, a former door-to-door Bible salesman named Rob Freed, and we hit the road, lugging around a projector and a huge stack of slides, hawking a $3,000 per month research package with my daily telexes, weekly conferences, calls, bi-weekly and quarterly research reports, and quarterly meetings. At that point, our business consisted of three main areas, consulting for fees, managing companies' risks for incentive fees, and selling the research packages. Skipping ahead, this is another part where you can change the word investor to founder and it's still accurate.

All great, I'm going to go ahead and do that preventatively or preemptively, maybe is a better word there. All great founders and investment approaches have bad patches. Losing faith in them at such times is as common as a mistake as getting too enamored of them when they do well. So this is good. Don't be too sad when things are going bad and too happy when things are going well. And here's why. Because most people are more emotional than logical, they tend to overreact to short-term results. They give up and sell low when times are bad and buy too high when times are good. i find this is just as true for relationships as it is for investments wise people stick with sound fundamentals through the ups and downs

while flighty people react emotionally to how things feel jumping into things when they are hot and abandoning them when they are not so now we're at the point where I mentioned earlier that he discovers his holy ground. This is um, he has like 26 years of success with this and it comes from all these things he did earlier in life that he didn't know he'd use. So as he'd always use computers, technology started getting better, so he could analyze more data. He was writing down and taking extensive notes on everything he was thinking and everything he was doing. And now the technology got to the point where he could have the computer synthesize his decision-making and systematize it. And they wind up running these simulations, and he comes across something he's going to call his holy grail. From my earlier failures, I knew that no matter how confident I was in making any one bet, I could still be wrong.

And that proper diversification was the key to reducing risk without reducing my returns. If I could build a portfolio filled with high-quality return streams that were properly diversified, so think about this as building a business with multiple revenue streams, I could offer clients an overall portfolio return much more consistent and reliable than what they could get elsewhere. So this is where he discovers this chart. He says, the simple chart struck me with the same force I imagine Einstein must have felt when he discovered E equals MC squared. I saw that with 15 to 20 good uncorrelated return streams, I could dramatically reduce my risk without reducing my expected returns. It was so simple, but it would be such a breakthrough if the theory worked as well in practice as it did on paper. I called it the holy grail of investing because it showed me the path

to making a fortune. This was another key moment in our education. And I highlighted and emboldened this because this is really important too. The next paragraph he says, the principle we discovered applies equally well to all ways of trying to make money. Whether you own a hotel, run a technology company, or do anything else, your business produces a return stream. Having a few good uncorrelated return streams is better than having just one. And knowing how to combine return streams is even more effective than being able to choose good ones. Thanks to my process of systematically recording my investment principles and the results they could be expected to produce, I had a large collection of uncorrelated return streams. In fact, I had something like a thousand of them. Because we traded a number of different asset

classes and with each one we had programmed and tested lots of fundamental trading rules, we had many more high quality ones to choose from than a typical manager who was tracking a smaller number of assets and was probably not trading systematically. For over 26 years now, this way of thinking made money in 23 of those years, having only modest losses in the other three, and making more money in total for our clients than any other hedge fund ever." And so now we're gonna get close to present day and this is the results of systemized thinking guided by principles that are written down and adhered to. Our returns in 2010 were the best ever, nearly 45 and 28% in our two funds and close to 18%

in another fund, almost exclusively because the system we had programmed to take in information and process it were doing it superbly. These systems worked far better than we could with just our brains. Without them, we would have had to manage money the old and painful way by trying to weight in our heads all the old and painful way. By trying to weight in our heads all the market and all the influences on them and then bringing them together into a portfolio of bets, we would have had to hire and supervise a bunch of different investment managers. And because we couldn't have had blind faith in them, we would have had to understand how each one made their decisions, which would mean watching them, what means watching what they were doing and why so we could know what to expect from

them while dealing with all their different personality issues. So that sounds basically impossible, right? That's why he systematizes his investment criteria. Why would I want to do that? It seemed to me that the way of investing, it seemed to me that way of investing or managing an organization was obsolete. Like reading a map instead of following GPS. Of course, building our system was hard work. It took us over 30 years to do it. And so at this point, he's having a lot of success.

He's getting a lot of success. He's getting a lot of attention. People start to, former employees and the like start to, there's just a lot of press coverage on Bridgewater. And they say it's almost like he's running this almost like a cult. And he didn't really like that. So he had a counterintuitive thought on public success. And then you understand why he decided to publish his principles publicly. Because he published them online before he put them into a book. So he says getting,

and this is his counterintuitive thought on public success, which to me is kind of obvious. Um, it wasn't always obvious until you start to see a lot of the negative externalities of, of being quote unquote, like public publicly successful. Um, and you realize, Oh, it's definitely not all good. And it almost, to me, I think it's smarter if, if like to be rich and anonymous than it is to be rich and famous. Um, and maybe that's just because I'm introverted and I don't like talking to people I don't know, but, uh, I guess there are people out there that, you know, they want, they crave fame. I don't understand that at all. And this is his experience with that. Getting a lot of attention for being successful is a bad position to be in.

Australians call it the tall poppy syndrome because the tallest poppies in a field are the ones most likely to have their heads whacked off. I didn't like the attention, and I especially didn't like the mischaracterizations of Bridgewater as a cult. And this is his conclusion at the end of his life story, and I'll close with this. As I look back on my experiences, it's interesting to reflect on how my perspectives have changed. When I started out, each and every twist and turn I encountered, whether in the markets or in my life in general, looked really big and dramatic up close, like unique life or death experiences that were coming at me fast. With time and experience, I came to see each encounter as another one of those, that I could approach more calmly and analytically, like a biologist might approach an encounter with a threatening creature in the jungle, first identifying its species and then drawing on prior knowledge about its expected behaviors, reacting appropriately. When I was faced with the types of situations I had encountered before, I drew on the principles

I had learned for dealing with them. But when I ran into ones I hadn't seen before, I would be painfully surprised. Studying all those painful first-time encounters, I learned that even if they hadn't happened to me, most of them had happened to other people in other times and places, which gave me a healthy respect for history, a hunger to have a universal understanding of how reality works, and the desire to build timeless and universal principles for dealing with it. While I experienced them going from the bottom up rather than the top down, my assessment is that the incremental benefits of having a lot and being on top are not nearly as great as most people think. Very interesting to keep in account. This is one of the 100 most rich.

He's very rich. That's basically what I'm saying. I think he's in the top 100. And he's saying, my assessment is that the incremental benefits of having a lot and being on top are not nearly as great as most people think. Having the basics, a good bed to sleep in, good relationships, good food, and good sex is more important. And those things don't get much better when you have a lot of money or much worse when you have less. And the people one meets at the top aren't necessarily more special than those one meets at the bottom or in between. He's summarizing his point right here. He says the marginal benefits of having more fall off pretty quickly. In fact, having a lot more is worse than having a moderate amount more because it comes with heavy burdens.

It's kind of an extension of his counterintuitive point on public success. Being on top gives you a wider range of options, but it also requires more of you. Something I didn't include in the podcast, but it was really interesting. He talks about building. So he's transitioned out of the CEO role of Bridgewater. And he talks about life having like three different phases. So anyways, he's in the sixties when he's doing this and he says something in the book. He's like, now that I'm, he basically, he's like, I'm finally free to enjoy life, which is really weird to think somebody has billions of dollars took into their six. So I don't know. I, I, it's interesting.

These thoughts that he's having with the idea. Cause you know what he's talking about there? Like, yeah, being on top gives you a wider range of options, but it also requires more of you. So like he might've been just as happy having $10 million or a hundred million dollars or whatever the number is,

then 18 billion and not, and waiting to a sixties to transition to his other part of life. And the transition to the other part of life is doing what he wants to do all day or spending time with family and helping other people be successful. It was very surprising that that was in the book. I was dumbfounded when I read it. And now that I'm reading this part to you, it kind of makes sense because he's talking about it again. Being well-known is probably worse than being anonymous, all things considered.

And while the beneficial impact one can have on others is great, when you put it in perspective, it is still infinitesimally small. For all those reasons, I cannot say that having an intense life filled with accomplishments is better than having a relaxed life filled with savoring, though I can say that being strong is being better than weak and that struggling gives one strength. Really important conclusion here. My nature being what it is, I would not have changed my life, but I can't tell you what is best for you. That is for you to choose. What I have seen is that the happiest people discover their own nature and match their lives to it. And I think that's good parting advice. Let's discover our own nature and let's

match our lives to it. If you want to read the full story, read the book. I leave a note in the show notes. You can go there and order it. You can also see this book and every single book. I think there's like 41 or 42 now. Every single book that's been featured on the podcast. If you want to support the podcast, you go to founderspodcast.com forward slash books. And if you click through and buy that book from the links that are on the page, Amazon sends me. It's very, very tiny percent of the sale at no additional cost to you. It's a great way to support the podcast and for you to get a book. Like I said, I'd buy the book just because it's meant as a reference.

As you see, if you order, I think it only comes in actually hardcover and now hardcover and Kindle, it's massive. It's a gigantic book. So and if you've made it this far and you haven't left a review or a rating or a like or a heart or a gold star or anything else that your podcast player lets you do, please do. It's very helpful. And as a reward for you spending a small amount of your time, if you take a screenshot of the heart or the star or the rating and you email it to me at foundersreviews at gmail.com, I'll reply back with a private RSS link that lets you access podcasts that I do for people that have left reviews. So far, I've done two of them.

I'm going to do probably about four a year. And so you'll get access to the two I've already done and all the podcasts that I do just for reviewers in the future. Just a way of me saying thank you for taking a moment of your time and telling others how much you appreciate the work I'm doing. Other than that, thank you very much for the support, for listening, and I'll be back next week.