The Tim Ferriss Show: Ray Dalio, The Steve Jobs of Investing

  • Checkout Tim’s Podcast Page
  • Ray is known as the “Steve Jobs of Investing”
  • Connect with Ray: Twitter
  • Ray started his investment company Bridgewater Associates out of a 2 bedroom apartment at the age of 26. He now has roughly $160 billion in assets under management.
  • Ray has been named one of the 100 Most Influential People in the World by Time Magazine and one of the 100 Wealthiest according to Forbes
  • Ray’s new book: Principles: Life and Business – Tim HIGHLY recommends it
Ray’s Childhood
  • Where did Ray from up and how would he describe his childhood?
    • New High Park on Long Island, NY
    • Ray says he was fairly middle class
  • Any formative experiences up until the end of college that ended up informing his decision to become involved in investing?
    • As a kid, he used to caddy
    • The stock market was really hot at the time, so at age 12, Ray used his caddying money and bought stock in a company at $5 a share
    • The company was acquired and he ended up tripling his money
Ray Dalio: Professional Mistake maker
  • A quote from Ray’s book – “So there I was after 8 years in business with nothing to show for it. Though I had been right much more than I had been wrong, I was all the way back to square one. At one point I lost so much money, I couldn’t afford to pay the people who worked with me. One by one I had to let them go. We went down to two employees, and then finally one, just me.” – How did this happen?
    • Ray describes himself as a professional mistake maker
    • In 1982, he analyzed the payments that countries owed banks, and calculated that those countries wouldn’t be able to pay the US back, which was a controversal view, and led him to take certain positions in the market
    • Ray basically thought the stock market was going to crash
    • The stock market ended up rising
    • In retrospect, Ray says it was the best thing that happened to him, as it gave him the humility he needed to become more successful
    • Instead of thinking he was always right, he was now forced to ask himself, “How do I know I’m right?”
Making Mistakes
  • Ray is a fan of the book Einstein’s Mistakes
  • “Pain plus reflection equals progress”
  • After mistakes, pain passes, and it then requires thought, and making the connection of “What did I do wrong?”
  • The above scenario changed Ray’s attitude about mistakes. It made him think of mistakes more like puzzles, the puzzle being, “What would I do differently in the future?”
  • If he solved the puzzle, it would results in a principle which would help him do a better job the next time – these are the source of his book
  • Make more mistakes, successes keep you doing the same thing, growth comes from mistakes
  • Any examples of growths from mistakes in Ray’s life?
    • Shortly after college, Ray clerked at the floor of the NY Stock Exchange
    • At this time, the dollar was attached to gold, and there was a financial crisis
    • Nixon declared that the dollar would no longer be attached to gold, and to everyone’s surprise, the market soared (Ray did some research on currency declines in the past and realized that similar market rises had happened before)
    • From this, he learned that many surprises come because things that happen as surprises, just never happened in ones lifetime before, so sometimes it’s advantageous to look beyond ones own lifetime to understand how the world works
How does Ray examine history?
  • Almost everything happens over and over again through history, and the key to success is to identify which one of those it is, and see how it’s worked in the past.” – How can you add to/apply your principles?
  • “If you’re not dealing with things this way, everything is one off, and you’ll be in the middle of a blizzard of things.”
  • Apply experiences in your own life, to the past. For example, if you have a child, it’s certainly not the first time in history that’s happened.
Being Open to Weaknesses and Making Mistakes
  • In assessment sessions at Bridgewater, what does the format look like, and how does Ray help separate symptoms of problems from the root causes of actual problems?
    • Everyone’s equal in having an opinion, and everyone receives both positive and negative feedback
    • Ray approaches things as evidence based, he asks “How do we know if this is true”
    • People should be radically honest with each other
    • Ray thinks the world has a phobia of making mistakes and letting other people know their weaknesses. Mistakes are part of the process and everyone has weaknesses. 
    • “The stupidest people I know are the people who don’t open up to their weaknesses and grow”
The Pain Button App
  • “Whatever your form of pain, the best thing to do is record it”
  • As you experience, psychological pain, you log it
  • The nature of psychological pain is that it diminishes over time, and that’s when you reflect on it. You don’t reflect as the pain is occurring.
  • The app tracks pain graphically, and gives a biofeedback that allows you to see if your actions are reducing your pain
Transcendental Mediation
  • Transcendental Meditation (TM) is mantra based meditation
  • “Creativity comes from open mindedness and centeredness, seeing things in a non emotionally charged way”
  • Ray has been practicing since 1969
  • Every emotion we feel is chemical based in our brain
  • TM takes one from his conscious mind, to subconscious state
  • TM decreases activity in the amygdala (the flight or fight part of the brain) and activity in the prefrontal cortext (the more thoughtful part of the brain) is enhanced
  • This increases onces creativity
  • Ray says the best time to meditate is before breakfast, and before dinner, twice a day for 20 minutes. Ray does it 2/3rds of the days.
  • Sometimes he does it whenever he feels like it, if hes frustrated, no matter where he is (on a plane, on a train etc.), although he prefers quiet areas
Tools for Making Decisions
  • In all meetings at Bridgewater, people use a tool called a dot collector on an IPad
  • It allows people to express thoughts throughout the course of the meeting. Because of this, all the data is collected, and allows everyone to see what everyone is thinking.
  • The computer behind the program, will show how differently everyone’s brains react to something
  • They also use the program in making decisions (Ray calls it “believability weighted decision making”)
    • You want to have an “idea meritocracy” – when the best ideas win out
    • You need to do 3 things
      • Put your honest thoughts on the table
      • You have to have thoughtful disagreements
      • If disagreements were made, you have to have idea meritocratic ways of getting passed that disagreement.
        • At most places autocracy takes over (the one with the power makes the decision). Other companies use democratic methods involve voting.
        • Bridgewater uses believability weighted decision making (who’s a better decision maker at what)
        • They have ways of determining everyone’s believability at different things
      • To make decisions, everyone votes on the ipad, and the algorithm calculates the best believability weighted decision
      • This creates a fairness aspect to the decision making process
    • How Ray prevent disagreement from evolving into emotionally charged reactions?
      • The “two minute rule” – declare it and you’re allowed to speak for two minutes without interruption
      • People must repeat what a previous person said to show understandment before speaking
      • Mutually agreed upon moderators help settle disagreements
What were some of Ray’s first big wins with Bridgewater?
  • He remembers the big losses/mistakes more
  • He does remember when they got the Kodak account
    • Why did they win? – Combination of being totally unconventional, and having the most determination
  • According to Ray, three things make up a successful life:
    • Audacious goals, big dreams
    • Ability to learn from mistakes
    • Determination
What causes intelligent people to be unhappy?
  • It comes down to doing meaningful work, and having meaningful relationships. The people who are unhappy, seem to be missing these things.
  • The highest correlation with happiness is community
  • Ray’s son, a 27 year old filmmaker, dealt with bipolar disorder for a 3 year period
    • He made Touched with Fire
    • Many creative people are bipolar
    • 4 Protocols Ray reccommends for dealing with depression
      • TM – Take Medicine and do Transcendental Meditation
      • BC – Be Clean, no drugs
      • GB – Go to Bed Early
      • M – Monitoring, have people around to monitor your behavior
  • Tim has recently learned that going to bed by 11PM has been extremely helpful in mitigating depressive symptoms
  • 24% of the population has some form of mental challenge/illness
Ray’s Reading Habits
“Ask yourself whether you have earned the right to have an opinion”
  • “One of the greatest tragedies of mankind is the fact that we hold wrong opinions in our head that could so easily be tested”
  • Gain humility, ask yourself – “How do I know I’m right?”
  • To be successful: Know what the best decisions are, and have the courage to make them
  • What are some good questions one can ask to explore one’s reasoning behind their conclusions?
    • Ask if they have a real curiosity to understand why
    • Most people start with an opinion, and filter information that comes with them to fit with their opinion
Don’t Pick Your Battles, Fight Them All
  • “Little things are symptomatic of the bigger things” – this can relate to behavior etc.
How does Ray think about risk?
  • “Risky things are not in themselves risky if you understand and control them. If you do it randomly and are sloppy about it, it can be very risky.”
  • There’s different kinds of risks – the risk of ruin (being knocked out of the game) and the risk of the painful mistake
  • To improve your return to risk, diversify bets without reducing returns
  • Investing Rule – diversify bets by making sure they are uncorrelated 
  • How does Ray think about uncorrelation?
    • How did things move together in the past?
    • Are they even intrinsically different things?
    • What’s your sample size? How many years is your data set taken over?
    • Ray says his investments have to be timeless and universal
      • Timeless means that the correlation has to be the same over time
      • Universal: For example, were the correlations between stocks and bonds the same in both Brazil and Spain? Is it universal?
  • “Every investment is a lump sum cash payment now, for an income stream in the future”
A Great Leaning Tool
How would Ray assess if a potential investment opportunity like cryptocurrency is worthwhile?
  • Ray likes to examine who are the buyers and sellers, and what motivates them
    • Every buyer has behavioral characteristics for a certain reason
  • Knowing this allows you to calculate what the price is likely to do in the future
  • There are two purposes of a currency – a medium of exchange, or a store hold of wealth
  • Right now, cryptocurrency is not a practical medium of exchange. Today, it’s primarily a speculative market.
Diversification Can Reduce Risk Without Reducing Return
  • Ray’s approach to diversify is to balance risk based on the following questions: What are the intrinsic drivers of those assets? And what are the timeless and universal correlations of those assets?
  • Always look for a value adding, risk reducing trait
What’s Ray’s self-talk like if he’s stuck in a difficult investment decision?
  • “How bad is it going to get”
  • “It’s the nature of the beast, what’s the big deal”
  • “What can they take away from you; you’ll have a bed, food, friends, and the most basic good things.”
“Psychology is a big deal in the markets”
  • This is why Ray’s rule based, algorithmic approach works well
  • Taking emotions out of investing, is a real plus
Wrapping Up
  • “Every day each of us is faced with a blizzard of situations we must respond to. Without principles, we would be forced to react to all things life throws at us individually as if we were experiencing each of them for the first time. If instead, we classify these situations as types, and have good principles for dealing with them, we will make better decisions more quickly, and have better lives as a result.”
  • Maybe everyone should put out their principles or recipes for success out into the world…
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