CIO Exclusive — Ray Dalio: Establishing My Principles

The Bridgewater founder, co-CIO, and former co-CEO reveals some of his most important principles and their foundations in an exclusive interview with CIO.

During the winter of 1993, Ray Dalio received a memo from his top colleagues at Bridgewater Associates that would change his—and his firm’slives forever.

The memo from co-CEO Bob Prince, former COO Giselle Wagner, and Senior Strategist and Director of Research Dan Bernstein delivered candid feedback to Dalio on his people skills (or lack thereof) and their effects on company morale.

While the memo highlighted Dalio’s knowledge of the markets, his intelligence, intensity, and intentions, it also expressed that his management style was detrimental to the future success of the hedge fund, which now stands as the world’s largest with approximately $160 billion in assets under management.

“Ray sometimes says or does things to employees which make them feel incompetent, unnecessary, humiliated, overwhelmed, belittled, oppressed, or otherwise bad. The odds of this happening rise when Ray is under stress. At these times, his words and actions toward others create animosity toward him and leave a lasting impression,” the memo read. “The future of the success of the company is highly dependent on Ray’s ability to manage people as well as money. If he doesn’t manage people well, growth will be stunted and we will all be affected.”

Dalio was crushed.

“I never imagined I was having that sort of effect. These people were my extended family,” he writes in his book, Principles, released last week from publisher Simon & Schuster. “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?”

After discussing the situation with Prince, Wagner, and Bernstein, Dalio had to decide between being radically truthful with his staff or keeping his employees happy and satisfied. In deciding which direction to take, Dalio opted for the Yogi Berra method: take it.

Memo Precipitates Principles

In his search for a happy medium, Dalio began the development his world-renowned principles—a life, work, economic, and investing code under which he and the company operate to create what Dalio calls “radical transparency” in an “idea meritocracy” culture. Inside the firm, every employee can be brutally honest with each other in order to produce the best results, even if there are what he describes as “thoughtful disagreements.” Over time, Dalio has expanded his principles to more than 200. In 2011, Dalio published these principles on Bridgewater’s website as a free download for the public. It has since been downloaded more than 3.5 million times. This, coupled with Bridgewater’s success, has led to two books, the first of which focuses on the life and work principles section.

“At the end of the day, what I’m trying to do is help people to understand these principles. It’s used mostly as a reference book,” he told CIO. “In other words, when somebody faces a certain type of situation, then they look up what are the relevant principles to that situation that help them.”

In his TED Talk, Dalio attributed the creation of his principles to having “a terrible rote memory.” As he reached out to the entire company for people management advice, he would write down what was said in emails and shared philosophy statements, as well as his criteria for handling situations, birthing many a principle. As Bridgewater grew, so did the principles.

“By the mid 2000s, Bridgewater was beginning to grow rapidly, and we had a number of new managers trying to learn and adapt to our unique culture—and [they] were increasingly asking me for advice,” he writes. “I was also beginning to have people from outside Bridgewater ask me how they could create idea meritocracies of their own.” The initial draft was distributed among Bridgewater’s managers in 2006 for evaluation, discussion, and analysis.

Of the many principles that help Bridgewater’s economic machine work, Dalio says the most vital of them center on embracing reality with an open mind.

“The most important ones are knowing how to deal with not knowing—embracing your not-knowing in order to make a successful decision,” he says. “It’s all the principles about knowing that what’s in your head is not good enough. And to know how to be radically open-minded.”

Know What You Don’t Know

 For example, one of these principles, principle fiveLearn how to make decisions effectivelystresses learning about the situation before acting. The principle itself is broken down into 12 sub-principles, which involve analyzing a scenario, synthesizing it over time, determining which levels the decision needs to be made at, and deciding what must be done after the decision has been “believability-weighted.

“But what you have in [your] head about the right decisions to make is probably inadequate, so know how to not be attached to your opinions and get the right thinking from wherever you can get it.”

In addition to making decisions, Dalio also believes in utilizing technology to help reach them. In principles 5.11 (Convert your principles into algorithms and have the computer make decisions alongside you) and 5.12 (Be cautious about trusting AI without having deep understanding), he insists on not only using AI to assist in these decisions, but having a thorough knowledge of the tool before putting faith in its decisions as well. The purpose of this procedure is to help take emotions out of the decision-making process, as Dalio mentions in principle 5.1 that “the biggest threat to good decision-making is harmful emotions.”

“I think that the way that we do it is we don’t let the computer determine the algorithm. For us, there has to be deep understanding, so that whenever the computer is making a decision, we’re making the decision,” Dalio says. “You always should be able to describe why you have a position and it should be logicbased. Not just algorithmicallydefined.

Dalio believes that those who follow this creed have a significant advantage over those who do not.  He says that those that fall into the latter category and allow the computer to determine their algorithms “will be subject to datamining risks and probably will have problems.”

Out of his many principles, Dalio feels that another one of the most important actually lies in the very first:

“Dreams, plus embracing reality, plus determination will equal a successful life,” he says.

He explains this by establishing that to achieve one’s ultimate goal, two things are essential: knowing what the right decisions are and having the courage to make them.

In the story behind these pieces of Bridgewater’s—and essentially Dalio’s—complicated puzzle, the hedge fund king says it all ties back to the markets and their lessons in humility.

“I went after audacious goals. I encountered problems and made mistakes, and I learned humility, and that humility gave me an open-mindedness that raised my probabilities of being right. And I found that worked very well.”

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