To make money in the markets, you have to think
independently and be humble. You have to be an independent
thinker because you cant make money agreeing with the
consensus view, which is already embedded in the price. Yet
whenever youre betting against the consensus,
theres a significant probability youre going to be
wrong, so you have to be humble.
Early in my career I learned this lesson the hard way
through some very painful bad bets. The biggest of these
mistakes occurred in 198182, when I became
convinced that the U.S. economy was about to fall into a
depression. My research had led me to believe that, with the
Federal Reserves tight money policy and lots of debt
outstanding, there would be a global wave of debt defaults, and
if the Fed tried to handle it by printing money, inflation
would accelerate. I was so certain that a depression was coming
that I proclaimed it in newspaper columns, on TV, even in
testimony to Congress. When Mexico defaulted on its debt in
August 1982, I was sure I was right. Boy, was I wrong. What
Id considered improbable was exactly what happened: Fed
chairman Paul Volckers move to lower interest rates and
make money and credit available helped jump-start a bull market
in stocks and the U.S. economys greatest ever
noninflationary growth period.
This episode taught me the importance of always fearing
being wrong, no matter how confident I am that Im right.
As a result, I began seeking out the smartest people I could
find who disagreed with me so that I could understand their
reasoning. Only after I fully grasped their points of view
could I decide to reject or accept them. By doing this again
and again over the years, not only have I increased my chances
of being right, but I have also learned a huge amount.
Theres an art to this process of seeking out
thoughtful disagreement. People who are successful at it
realize that there is always some probability they might be
wrong and that its worth the effort to consider what
others are saying not simply the others
conclusions, but the reasoning behind them to be assured
that they arent making a mistake themselves. They
approach disagreement with curiosity, not antagonism, and are
what I call open-minded and assertive at the same
time. This means that they possess the ability to calmly
take in what other people are thinking rather than block it
out, and to clearly lay out the reasons why they havent
reached the same conclusion. They are able to listen carefully
and objectively to the reasoning behind differing opinions.
When most people hear me describe this approach, they
typically say, No problem, Im open-minded!
But what they really mean is that theyre open to being
wrong. True open-mindedness is an entirely different mind-set.
It is a process of being intensely worried about being wrong
and asking questions instead of defending a position. It
demands that you get over your ego-driven desire to have
whatever answer you happen to have in your head be right.
Instead, you need to actively question all of your opinions and
seek out the reasoning behind alternative points of view.
This approach comes to life at
Bridgewater in our weekly research meetings, in which our
experts on various areas openly disagree with one another and
explore the pros and cons of alternative views. This is the
fastest way to get a good education and enhance
decision-making. When everyone agrees and their reasoning makes
sense to me, Im usually in good shape to make a decision.
When people continue to disagree and I cant make sense of
their reasoning, I know I need to ask more probing questions or
get more triangulation from other experts before deciding.
I want to emphasize that following this process doesnt
mean blindly accepting the conclusions of others or adopting
rule by referendum. Our CIOs are ultimately responsible for our
investment decision-making. But we all make better decisions by
maintaining an independent view and the conflicting
possibilities in our minds simultaneously, and then trying to
resolve the differences. Were always in the place of
holding an opinion and simultaneously stress-testing the hell
out of it.
Operating this way just seems like common sense to me. After
all, when two people disagree, logic demands that one of them
must be wrong. Why wouldnt you want to make sure that
that person isnt you?
Raymond Dalio is founder, chairman and co-CIO of Bridgewater
Associates, the worlds largest hedge fund