The Education of Ray Dalio

In an exclusive interview with Institutional Investor, the Bridgewater Associates founder deliberates on a series of trials that led to the hedge fund’s growing into the largest of its kind — and the crystallization of his now-famous Principles, available in book form on September 19. 

II: Your personal narrative is structured around the idea of the “Hero’s Journey” — a narrative format often used in literature that describes a call to adventure, the facing of a challenge or abyss, a victory over that challenge, and returning home a changed man. The abyss — the deepest depths of misery — is what so often interests people in any Hero’s Journey. In the book you mention a number of things that could qualify as your personal abyss. What was the lowest point?

Dalio: This abyss, there are some big ones — but the biggest one was 1982.

In 1982, with inflation high and growth low, the United States Federal Reserve had few good options. A young Dalio had warned clients of impending troubles and, taking it a step further, advised them that “the enormity of our debt implies that the depression will be as bad or worse than that witnessed in the thirties.” When Mexico defaulted on its debts that summer, leaving overextended U.S. banks exposed, Dalio was asked to testify before Congress and appear on “Wall Street Week with Louis Rukeyser” because he anticipated the default and told of his depression forecast.

Dalio failed to predict what happened next: The Fed loosened monetary policy, the stock market jumped, and the economy responded positively. “I was dead wrong,” Dalio now writes. Bridgewater, which had been a growing firm, was down to one employee: its founder, who was forced to borrow $4,000 from his father to make ends meet.

II: “I saw that I was being an arrogant jerk who was totally confident in a totally incorrect view. I am still shocked and embarrassed by how arrogant I was.” People hate to write those words, to say those words — but you write them in the book. Are there specific principles that emerged from your 1982 version of the abyss, when you were down to borrowing money from your dad?

Dalio: Whenever I’m making a decision in the markets, I never know if I’m right. That taught me a fear of being wrong — and the value of independent thinking and thoughtful disagreement to raise my probabilities of being right.

That’s the main thing. It has to become a modus operandi. In 1982, I was still a small company and I . . . I was wrong. And I basically had to lay off everybody. It was down to me as an individual. The people that I worked with were like an extended family, and [letting them go] was very painful. It forced me to almost give up on Bridgewater to support my family. So, you know, that was my abyss. 

But I want to emphasize that everybody who’s been successful — and is likely to be successful — has had their versions of abysses. A lot of successful people don’t like talking about their mistakes because we’re in a society [that believes] something’s wrong with you if you make mistakes. And so a lot of people make the mistake of looking at very, very successful people — many of whom I’ve come to know personally — and they think, Wow, they just don’t make mistakes.

That’s not at all true. They make mistakes, they learn from them, and then they learn principles of how to do better in the future. So there I am [in 1982], and I know that I can’t do this anymore. And so [I think], How do I improve my probabilities of being right and how do I minimize my chances of unacceptable losses? 

Three things. First, what I wanted to do was have thoughtful disagreement. I wanted to find out who were the smartest people who disagreed with me and have thoughtful disagreements so that I could learn their perspectives and improve.

Second, I wanted to have better diversification. I realized that I could maintain my same expected return while having lower risk if I really understood engineering my risk balancing better. 

The third thing was to remind me that I needed to understand things that never happened in my lifetime better. I think everybody’s surprised by things that never happened to them before. Just because it hasn’t happened in your lifetime doesn’t mean it hasn’t happened before. 

II: What or who do you rely on if you have a question about the markets? Where do you first go? Is it to Greg Jensen and Bob Prince [longtime co-CIOs at the firm]? Is it to an outsider? Is it to find a chair to think deeply about something? What is the ground zero of your thought process on a new problem?

Dalio: Well, it’s interesting. I just came out of the meeting that we have every Monday, which we call the “What’s Going on in the World” meeting. We have about 75 people who are in that meeting. We have lead people who are what we call idea generators, but we have a number of independent thinkers who are really brilliant and are researchers — and then we have conversations.

On Friday, I and everyone in the meeting gets a 600-page compendium of research. And then over the weekend, we go over that. It’s about everything that’s happening in the world. Then we come in on Monday morning and we bang things around, [voice] different thoughts, and we value the disagreement — and then we go beyond disagreements to find out what’s most likely to be true. It’s really that exchange. We each do that in our own way, so it’s much bigger than Bob and Greg and I, although we’ve been doing it for decades together. It’s much bigger than that.

II: Have you ever wanted to be anything besides an investor? 

Dalio: No.

II: No?  

Dalio: No. You have to understand, I got hooked at 12. I knew what I wanted to do. And when I was in the abyss, I wrestled: would I go get a job or do it myself? But it wasn’t that I was going to change my game.

II: In the book you mention a 1993 memo from staff who were being very transparent with you. If the ’82 abyss really changed the way you thought about investing and humility, the ’93 memo seemed to mark a true starting point for your management technique. Tell me about that ’93 memo and the changes that came out of it.

Dalio: The real notion is, Can we be radically straightforward with each other? Can we have an idea meritocracy? I didn’t know that I was making people feel bad with that radical transparency.

The memo, written by three close colleagues, was brutally frank: Dalio was “bright and innovative,” but “sometimes says or does things to employees which make them feel incompetent, unnecessary, humiliated, overwhelmed, belittled, oppressed, or otherwise bad.” If he didn’t learn to manage people better, they warned, the future success of the business was in jeopardy.

“Ugh,” Dalio writes in the book. “That hurt and surprised me. I never imagined that I was having that sort of effect. These people were my extended family. I didn’t want them to feel ‘incompetent, unnecessary, humiliated, overwhelmed, belittled, oppressed, or otherwise bad.’ Why didn’t they tell me directly? What was I doing wrong? Were my standards too high? For Bridgewater to continue to be a one-in-ten-thousand type of company we had to have exceptional people and hold them to extremely high standards. Was I demanding too much?”

So I was at a juncture in our culture. I had to make a difficult choice between having us speak frankly and having unhappy people. That was like my difficult choice between two things I need. Back in 1982 this was between making great returns and having acceptable risk; 1982 was the [juncture] for the markets. So, as in 1982, what I had to do was pause and think it through. I had to figure something out. My solution to that was really to have us be crystal clear on how we should behave with each other. 

That led me to write down my principles. Like “Do you want me to be transparent or do you not want me to be transparent? What kind of relationships should we have?” In other words, to go above the individual questions that we had at the time and to ask how we should be with each other.That way of being was very unusual, but it was really the key to our success: We had to have thoughtful disagreement, we had to cut through things to try to figure out what each other thought. It led to the writing down of how we should be with each other through principles.

II: Now there’s one more possible abyss, and it’s the more recent issues with the management structure. Obviously, there’ve been management changes in the past five years, and because you’ve been much more prominent post–financial crisis, there’s a lot more media coverage. What do you regret, or what did you learn, out of that process?

Dalio: Well, the most important thing that we learned is that our system for having thoughtful disagreement worked.

By 2016, Dalio had stepped away from direct management of the firm, handing the CEO reins to Eileen Murray and Greg Jensen. Both were overstretched, Dalio now writes, and after a rigorous discussion it was agreed that in March of that year Jensen would step out of the CEO role and return full-time to investing. The Wall Street Journal got wind of the change and, in the eyes of many Bridgewaterians, blew the management changes out of proportion.

You know, we had disagreements, and it was a painful transition that none of us wanted. But the fact that we all could agree that the rules of decision making were meritocratic and the system was fair was what got us through that well.

The most important thing I learned is that knowing how to have an idea meritocracy, and to have the rules of the game so that it can be idea-meritocratic, is invaluable. We went through a difficult experience, and — it’s good. We’re in good shape. I think it was the media that characterized it in a sensationalistic way and never conveyed how well it worked.

They conveyed it like the PIMCO transition. It was totally distorted by the media, and they never conveyed, Wow, isn’t it amazing that you can have this emotional disagreement and get by it because you have — we have this system, this idea-meritocratic system that people think is the fair rules of the game and then they can do it? Wow.

II: You’ve now entered the phase of your journey of returning the boon, in the language of the Hero’s Journey. If you had to choose between being remembered as an investor or — and this might be too pretentious a word — a philosopher, how would you want to be remembered?  

Dalio: I really don’t like the “being remembered” thing. Don’t remember the person. Remember the principles. Are the principles right or wrong? Do they make sense to you or not? I really hate putting people on a pedestal. It’s not the individual, it’s the principles. Just please read them and say, Does that make sense? And forget about me.