Among asset managers, privacy is everything—especially if you’re Ray Dalio, the founder, co-CIO, and former co-CEO of Bridgewater Associates, the world’s largest hedge fund, which manages some $160 billion in assets.
With the exception of a 1982 appearance on Wall $treet Week, where he incorrectly predicted the stock market—an outlook that led to the near foreclosure of Bridgewater—Dalio for the most part labored in obscurity. He details those events leading up to the near dissolution of Bridgewater in chapter three (“My Abyss: 1979-1982”) of his just-released book, titled “Principles,” which was published on September 19. Earlier this year, Dalio stepped down from his co-CEO position at the firm.
Fortunately, Bridgewater did not foreclose, as Dalio, had developed an investment strategy that is heavily based on computer algorithms, which he characterizes as “the Holy Grail of investing.” Stemming from painful life lessons and a “terrible rote memory,” Dalio developed a series of principles in an effort to balance life, work, economic, and investing imperatives, and to establish a what he terms “radical transparency” as a guideline for Bridgewater employees.
It is these principles that he is now promulgating in a two-part “recipe” that is Principles. The first book reflects on life and work principles, while the second part—which is scheduled for release next year— will focus on economic and investing principles.
“It’s really the actual encounters of somebody who did the active management business for 42 years—and did it pretty successfully—and wrote those encounters down so others could consider them,” Dalio says of Principles. “I’m putting this book out to communicate [these principles] and sometime in the future I’ll probably want to pass along some of the tools that we’ve developed so they can help operate in this idea-meritocratic way,” he told CIO.
Dalio remained mostly out of the public eye as he developed his investment prowess—refining his principles and strategies, and making revolutionary discoveries between 1996 and 2003, such as inflation-indexed bonds and risk parity — the former in which he created during a dinner with David White, the man formerly in charge of the Rockefeller Foundation’s money. White needed to know how he could shift the portfolio in a way that it would produce a return 5% above the US inflation rate. By determining that a portfolio of leveraged- foreign inflation-indexed bonds with the currency hedged back to US dollars would meet that objective, Dalio put the plan into action. Shortly afterward, Bridgewater became the first global inflation-indexed bond manager in the world. The concept for risk parity came about when Dalio was seeking to build an asset-allocation combination that would be balanced enough to perform well in all environments, which he called the “All Weather Portfolio.” Bridgewater was the only “client” investing in the strategy, until the head of Verizon’s pension fund was looking for a similar investing tactic in 2003. The idea caught on. A decade later, Bridgewater was managing nearly $80 billion. Dalio writes that the strategy is now “generically” called risk parity investing.
Yet it wasn’t until Dalio foresaw the 2008 financial crisis on the horizon that he knew he had to emerge from his investing cocoon. It was partly because of technology Bridgewater had implemented in the early 2000s , termed a “depression gauge” by Dalio. The quant system was designed to indicate specific actions the firm should take in the event heightened risk of a debt crisis or depression presented itself. In 2007, the gauge indicated that a debt bubble was approaching its bursting point due to debt service costs outpacing projected cash flows. Since interest rates were falling towards 0%, Dalio said he knew there wasn’t much the central banks could do to relax monetary policy any further to reverse the downturn as they had in previous recessions. Based on his extensive research of debt crises throughout history and their effect on the markets, it represented a financial-market scenario that Dalio knew would trigger another collapse.
Market conditions in 2007 caused Dalio to harken back to 1982, he said, a period that ingrained in him the need to research debt crisis’ and to understand their effects on financial markets. Unnerved by the prospect of making the wrong market call again, Dalio said, this time he invited “other smart folks to poke holes in my view,” and to stress test his theories with key policy makers and inform them of the situation.
Dalio traveled to Washington at that time and spoke with officials at the US Treasury as well as at the White House, he said. Most dismissed his warnings until he met with Ramsen Betfarhad, then Vice President Dick Cheney’s deputy assistant of domestic policy. After double-checking Bridgewater’s numbers, Betfarhad was concerned, much like Dalio, who said he was as concerned about being right as he was about being wrong.
In the end, Dalio’s prescience proved correct. Bridgewater prepared for the storm and navigated it well for its clients, returning more than 14% in 2008— a year in which many investors recorded losses of greater than 30%. Tellingly, the Dow Jones Industrial Average hit its pre-recession high on October 9, 2007, closing at 14,164.43. Less than 18 months later, it had fallen more than 50% to 6,594.44 on March 5, 2009.
Emboldened by seeing his market prognostications proven correct, Dalio said he decided to step out of the shadows. “In 2008, when we had just faced the world’s financial crisis, we got a lot of media attention. And I was told that, if you stay totally behind the curtains, pictures will be taken of you and nobody will understand what’s going on, and, [this will] effectively hurt recruiting,” he said.
Since then, Dalio has made himself more accessible. His principles—which now total more than 200 in number—were initially an internal document for Bridgewater employees. Dalio made them available to all as free-downloads in 2011. The download results were astounding, giving Dalio’s principles a life of their own, leading to a book deal from Simon & Schuster.
“What I did was I put these principles in our own internal document in the form of a PDF file. I put that on our website and it was downloaded 3.5 million times. And from the people who downloaded it, I received a whole lot of ‘thank you’ notes for it, and I realized that it was helpful and it was helping people better understand what we really do.”
The Debt Crisis Over There
While meeting with European policymakers and assisting the European Central Bank through the European debt crisis, Dalio was again inspired to inform the g public of his market outlook. In 2013, he wrote, narrated, and published the 30-minute video “How the Economic Machine Works,” a guide that, in layman’s terms, provides a template on the events that drive the economy and explains why economic cycles occur. Again, Dalio said he was blown away by the response.
“It had a much bigger impact than I expected; it was watched by more than 5 million people in eight languages,” Dalio notes in Principles. “A number of policymakers told me in private that they found it helpful for their own understanding, for dealing with their constituents, and for finding better paths forward. This was very rewarding to me.”
While he doesn’t expect another financial crisis anytime soon, Dalio does see a wealth gap between the “haves” and the “have-nots,” a situation he characterizes as more “social and political.” In the months following his April departure as co-CEO of Bridgewater, he began writing LinkedIn posts expressing geopolitical concerns. In a June post regarding President Trump’s withdrawal from the Paris Agreement, he expressed his concerns with the decision.
“I believe that we are connected to our whole ecology, our whole world community, and our whole United States, such that it pays to be in symbiotic relationships with them. So, I’m concerned about [President Trump’s] path. I am especially concerned about the consequences of his pursuing so much conflict,” Dalio wrote. “At the same time, I see some encouraging moves on his part (e.g., to pursue public-private partnerships to rebuild infrastructure).”
Oftentimes, hedge funds operate in black boxes, but this year, Dalio also participated in a TED Talk. In his presentation, he gave his audience a peek into Bridgewater’s corporate culture, revealing the “Dot Collector,” a company app in which Bridgewater employees rate each other one a scale of 1-10 in different categories and give each other constructive criticism. The “dots” are applied to each employee’s profile, known as “baseball cards.” The algorithm in the app then breaks down the data and partners employees for projects based on their determined strengths and weaknesses—an ingredient in creating Dalio’s “radical transparency.” The example Dalio gives in his talk is “a creative thinker who’s unreliable” potentially becoming paired up with someone who’s “reliable, but not creative.”
“This is what we really do,” he said in the TED Talk.
For Dalio, the current issue at hand is for people to come together and have “thoughtful disagreements” concerning their conflicts, especially since the divergences are now possibly much greater than they have ever been. These political and social differences are one of the main reasons as to why he feels that—in a world where timing is everything (especially in the markets)—the best possible time to release the first phase of “Principles” is now.
“I think the book is very relevant to now because it is about the power and processes of thoughtful disagreement to get to the right answers,” he said. It’s to provide clarity on which guiding principles can help to navigate the quagmire of disagreement in a class system that, he said, creates different economies. And it’s about “being clear on the principles that unite us, and the principles that divide us and how to get past disagreements,” which, he believes, are “the most important economic issues because of the disparity in conditions,” Dalio said.
“The conditions for the top 40% of the population as a whole are very different from the conditions for the bottom 60% of the population. The bottom 60% of the population has had a very bad economy. So even talking about the economy as a whole is misleading because there are really two economies or more, and it’s important to understand them both. So that’s the big issue, I think. These things go in cycles and right now we’re in that part of the cycle.”