Principles by Ray Dalio – Part I

I follow Ray Dalio on LinkedIn and I always feel inspired by the quotes and content he shares regularly. Dalio is a self-made man and founder of the largest hedge fund in the world, Bridgewater Associates. One of his most acclaimed books, “Principles” has been on my reading list for a while…and the time has come to absorb all its knowledge. In his book, Dalio shares the principles he has followed throughout his life that helped him become a successful investor, along with important lessons he has learned from his mistakes. So far, I’m enjoying every page of it. Dalio’s words are both inspiring and full of wisdom. While reading the book I’ve jotted down ideas I want to reflect upon here (please note that this is not a book summary in any way, but a collection of thoughts that resonated with me). This post will only cover the first part of the book “Where I’m coming from”.

Learn from History

Most of the events that will happen in our lifetime will be new….to us. Or as Winston Churchill put it: “Those that fail to learn from history, are doomed to repeat it“. There is always a cause-effect relationship that makes events (economic, social, personal) inevitable, and usually, these events have happened many times before in history. Quoting Dalio “You better make sense of what happened to other people in other times and other places because if you 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“. That’s why getting interested in history and analyzing events that happened in the past can help us anticipate how situations may develop in the present and tackle them in a more successful way.

Dalio studied and analyzed 500 years of history, uncovering patterns that emerge, decade after decade, triggered by economic swings, social change, and global conflict. This approach has proven to be very successful for his investments and also in dealing with difficult situations in his professional and personal life.

Struggling Makes you Stronger

This is one of the ideas that I liked the most. Dalio devotes the last chapter of the “Where I’m Coming From” section to reflect on how his perspective about life events has changed over time. When he was younger, every challenge he had to face was a “life-or-death” experience. As he grew older, he realized most of the problems he ran into could be classified as “another one of those”. Experience helps him to be more analytical and solve problems from a calmer perspective. Every time he faces a new challenge, he tries to first classify it and based on that, draw on his experience to solve it in the most efficient way. For the type of problems he had never seen before, he does extensive research on historic events that could have the same cause-effect relationship as the current situation (see my previous point).

Dalio stresses several times the importance of learning by doing and the crucial role of mistakes to improve processes and become a better version of yourself. This is actually one of the keys to the great success of his company, as he got into the habit of systemizing his learning from mistakes to improve their strategy.

Dalio sees every challenge as a test of his character and creativity. What is more, he sees struggles as necessary, as the rewards of achieving a goal or making a dream come true (e.g. winning the lottery) make you happy…for a while. All of us would need to find something else to go after to get excited about life. I really love the way he thought out of the box during his career, to relentlessly refine the methodology he created to optimize every process.

He also reframed pain as a reminder that there is something important to learn. He experiences challenges as a game where he should figure out the lessons learned.

Design Algorithms to Make Better Decisions

Dalio started writing down his work principles in the form of “philosophy statements”. Every time he has to make a decision, he goes through these principles and acts according to them. Soon after, he envisioned a way to convert these principles into algorithms, following his ideas that technology is really an asset that can help maximize any outcome. To back-test these algorithms, he ran historical data through them (here comes again the idea of how much can be learned from the past).

Dalio was a pioneer not only in creating these so-called algorithms but also in designing tools to reinforce desired behaviors and refining them based on the lessons learned from mistakes.

One of the most interesting ideas is his quest for “shapers” to create an archetype from which important principles can be learned, the same way as important lessons can be learned from history. Shapers are independent thinkers that “do not let anything or anyone stand in the way of achieving their audacious goals” and are “extremely resilient because their vision is stronger than the pain they experience as they struggle to achieve it“. Dalio names a few shapers, e.g. Steve Jobs, from whom he says he was a man who could “visualize and execute in breathtakingly wonderful ways”.

Following on from that, Dalio recommends a book written by Joseph Campbell “The Hero with a Thousand Faces” (which will probably be the next one I read, as I got very curious about it). In this book, Campbell describes the archetypal journey through life of real and mythical heroes from different cultures. Heroes are not born that way, they become a hero by going through a road of trials. To succeed, they need help from others, make friends and enemies and learn how to fight by overcoming their fears because of their determination to achieve their goals. Heroes also experience what Campbell calls an “abyss”. That is, a big failure that tests their resilience. This failure teaches them how to fight smarter and with even more determination.

Don’t Put all your Eggs in One Basket

Dalio invented the concept of “risk parity” investing while trying to come up with a strategy to bullet-proof the trust he wanted to set up for his family. In the economy as in life, the best way to handle risks is to diversify. Following the economic analogy, any asset we might hold will lose its value at some point in time (this also includes cash, which is, according to him and most money experts, the worst investment over time, because it will progressively lose value due to inflation and taxes)

That’s all for now…In my next post, I’ll reflect on the ideas of Part II “Life Principles”.

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