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Business as usual ends at the gates of Ray Dalio’s Bridgewater Associates. Inside the $125 billion hedge fund’s Westport, Connecticut-based headquarters, radically different behavior at an individual and corporate level rarely ceases to astonish. Cameras rest in every cranny; almost all meetings are recorded. Meetings are nasty, brutish, and long. One individual casts a long shadow over every decision, large or small. The question of the day is—always—What Would Ray Do?
This question is now asked outside Westport as well. Dalio has willed into existence an asset manager that has changed the industry, radically altering the way assets are managed for the world’s most sophisticated institutional investors. From client service to asset allocation to economic research to client communication to returning capital, Bridgewater has set a new bar. It is a safe bet to assume that the asset managers that dominate the institutional scene going forward are going to resemble Bridgewater more than the behemoth asset-gatherers that have reigned since the passage of the Employee Retirement Income Security Act—ERISA—almost four decades ago.
It is all too reminiscent of another company on the opposite end of America—Apple. We now have an overabundance of analysis on the impact that Apple and its recently departed prime mover Steve Jobs had on the industries they touched. To most, he was an innovator. To others, a prophet. To others still, he was but a driven and secretive executive intent on shielding his firm from outside eyes and willing to crush anyone who threatened Apple’s secrets.
The similarities are profound. From management style to product development to their founder’s legacies, Apple and Bridgewater mirror each other. Thus, it must be asked: Is Ray Dalio—philosopher, market savant, outdoorsman, and billionaire—the Steve Jobs of investing?
More than Bill Gates or Mark Zuckerberg, Jobs sits at the zenith of the Silicon Valley creation myth: A drug-experimenting college dropout starts a company in his parents’ garage with a tech-savvy, but financially ignorant, friend. They create not just a product, but a market that no one saw coming. They outgrow the garage, and each other. The college dropout becomes rich, famous, and obdurate, high on his own myth.
But what makes the Jobs’ arc so complete is what happened after the myth. Before he was 30, he had been pushed out of the company he cofounded. Smarting from his fall, he started another computer company—NeXT—whose failure was as profound as Apple’s early success had been phenomenal. Failure begat opportunity, however, and Jobs pumped his considerable wealth and talent into a small animation studio called Pixar. A Toy Story later, he was again altering the foundation of a technology-based industry. Meanwhile, Apple was floundering: Called home, Jobs would return to Apple, create the iMac, the iPod, the iTunes store, and the iPhone. In the process, he had taken the Silicon Valley myth to another level: that of the redeemer, the iconoclast who could do no wrong.
What remains to understand is what Jobs means. To some, he is the greatest American innovator since Benjamin Franklin. To others, he is a bully and a thief, poaching others’ ideas. In a November article in The New Yorker, Malcolm Gladwell dismissed him as a tweaker. Citing the theories of economists Ralf Meizenzahl and Joel Mokyr, Gladwell wrote:
In 1779, Samuel Crompton, a retiring genius from Lancashire, invented the spinning mule, which made possible the mechanization of cotton manufacturing. Yet England’s real advantage was that it had Henry Stones, of Horwich, who added metal rollers to the mule; and James Hargreaves, of Tottington, who figured out how to smooth the acceleration and deceleration of the spinning wheel; and William Kelly, of Glasgow, who worked out how to add water power to the draw stroke; and John Kennedy, of Manchester, who adapted the wheel to turn out fine counts; and, finally, Richard Roberts, also of Manchester, a master of precision machine tooling—and the tweaker’s tweaker. He creating the “automatic” spinning mule: an exacting, high-speed, reliable rethinking of Crompton’s original creation. Such men, the economists argue, provided the ‘micro inventions necessary to make macro inventions highly products and remunerative.’ Was Steve Jobs a Samuel Crompton or was he a Richard Roberts?
Gladwell comes down firmly on the side of Roberts, the man who added the finishing touch to Crompton’s genius. Jobs saw it differently: While having no problem purloining other’s ideas, he was also insistent that “real artists ship.” In other words, anyone can have an idea. It takes a Jobs—or a Dalio—to implement it.
The highest accolade Ray Dalio can bestow upon someone is that of independent thinker. Jobs—who himself urged the world to Think Different—famously labeled employees as A players, B players, or worse: “The Macintosh experience taught me that A players like to work only with other A players, which means you can’t indulge B players,” he told biographer Walter Isaacson before he died in October (to read a review of Steve Jobs, see page 62 ). In like vein, would-be Bridgewater employees go through a ruthless and exacting interview process that weeds out B players, and those who exhibit independent and resilient thinking are the ones who emerge on the other end with a job in Westport. It is this thinking that has made both men so successful and, perhaps, dismissive of those who fail to understand that there is a significant divide between conception and creation.
Jobs, for one, ridiculed earlier attempts at digital music players and smartphones as “shit.” They existed, he acknowledged, but only in the most rudimentary and immature form. Similarly, while there were clearly academics who had mapped out theories relating to what Dalio would eventually produce, few, if any, had put those theories to the test. A close reading of Dalio’s writing (more on this later) indicates that little credit is given to those who imagined but didn’t implement. Instead, it was his mistakes that led him to innovate.
For Dalio—an imposing 62-year old with a grayish, flopping hairstyle who is prone to wear clothes a size too large for his newly gaunt frame—these mistakes are personal, professional, and admitted. While his early life narrative has yet to reach anything like mythical status, it is the East Coast, financial equivalent of Jobs’ creation myth: A middle-class boy is born on Long Island, the only child of a jazz musician and a homemaker. He does badly in school, but through afternoons caddying for well-heeled golfers, soaks up stock tips. He buys his first stock—Northeastern Airlines—and is addicted. He builds up a portfolio while at Long Island University, goes onto Harvard Business School, and changes the way institutions invest their money.
As with Jobs, there is something to the myth—and much left out. It leaves out Dalio punching a superior at his first job out of Harvard Business School, a lapse that belies his lifelong dedication to transcendental meditation (an obsession Jobs also held). It fails to mention him deciding it was a good idea to pay an exotic dancer to expose all before a Californian farmers’ conference. It omits him getting fired, the result of both indiscretions. But he was 26. He was bold. He convinced a few clients from his previous firm (Shearson Hayden Stone) to stick with him, and thus was born Bridgewater, which, like Apple, was initially run out of a small, ill-suited domicile—Dalio’s apartment.
From the firm’s founding in 1975 through the monetary crisis of the early 1980s, Dalio almost exclusively traded commodities and commodity derivatives. From this foundation, he was moved to better understand and implement strategies that were focused on the separation of alpha and beta—a strategy that at that point was truly Greek to most investors. He was among the pioneers of currency overlay strategies, which helped investors hedge against the risk of currency fluctuations affecting their portfolios, and of global inflation-indexed bond management. He was also instrumental in helping the US Treasury develop its inflation-linked TIPS bond market.
In contrast to Jobs, Dalio hit his innovative stride years after founding his company. In 1985, the World Bank pension plan, then under the direction of Hilda Ochoa, seeded Bridgewater with $5 million. “Their approach to investing made me want to fund it,” Ochoa told me in early November. “Ray was one of the few macroeconomic analysis services that wanted to turn analysis into actionable decisions. Most macroeconomics, or econometric analysis, is an ‘on the one-hand, on the other-hand’ exercise. Ray was turning them into actual action points.” With that $5 million, Bridgewater took the first steps to becoming an institutional asset manager. Twenty years later, it would be the world’s largest hedge fund, almost exclusively servicing pension funds such as the World Bank’s.
The success of the firm is now largely attributed to two products. In 1991, the strategy most associated with the firm was launched: Pure Alpha, which allowed Bridgewater to dabble in almost any asset class it desired, with the goal of producing a return that was uncorrelated to other markets. If beta is the risk associated with financial markets, alpha is the return above that risk (a 10% return in a market that returns 6% equates to 4% alpha). Pure Alpha, like the purest of hedge funds, sought to have positive returns regardless of market ups and downs. Since its inception, remarkably, it has largely done so, despite extraordinarily choppy markets. The second key product is known as All Weather, launched in 1996 and meant to be the passive sibling to the active Pure Alpha. The All Weather portfolio—commonly referred to as risk parity—is meant to be balanced across risk exposures, with the implicit effect being a large bond exposure. This is at odds with the traditional portfolios of the large clients Bridgewater works with which, since the 1990s and until very recently, have been stock-dominated.
Bridgewater’s first institutional client sees it slightly differently. “I don’t want to give a glib answer,” says Ochoa—who now runs Virginia-based investment outsourcing firm Strategic Investment Group—when asked about Dalio’s innovative streak. “Ray’s true innovation is neither Pure Alpha nor All Weather, because any balanced-portfolio theory proponent would pretend to be an all-weather portfolio. Furthermore, a lot of people—Sharpe being the first—have discovered that the only free lunch is diversification. So Ray isn’t the only one who believes in diversification.” Instead, as Ochoa sees it, “Ray’s true innovation is a steadfast attention to the granularity of macroeconomic data. His firm, more than any other, is getting into the nuts and bolts of data analysis. Not data mining, but he does mine the macroeconomic data to a breadth and depth that no other firm mines it to. That is his true innovation: not giving up on mining macroeconomic data, and deciding where that data becomes valuable.”
The rise from bedroom office to billionaire was not an entirely smooth one. Like Jobs, there are points at which Dalio overreached. Bridgewater has had perhaps two NeXT equivalents, one a product, one an action. The product is Bridgewater China Partners. Dalio started traveling to China in 1984 and, by 1990, was convinced that China was going to become what China currently is. The problem, however, was one of timing—not so much relative to investment opportunities, but to Eastern Standard Time. After raising $100 million from existing clients and establishing a local office, Dalio discovered that an overabundance of 3:00 AM nights was taking focus away from other mandates. Bridgewater China Partners was shut down before it invested a single dollar.
The other, more costly error occurred recently. After a turbulent 2008, Dalio saw not recovery but depression. As markets neared their nadir, the firm put its All Weather strategy into “depression mode,” de-leveraging its portfolio at what would turn out to be an inflection point. Through September of 2009, the strategy was up approximately 7%, lagging its stated benchmark by over 15%. Of course, to Dalio and Bridgewater, no failure is really a failure. Returns in 2010 rebounded spectacularly—a result, the firm would likely attest, of learning from its errors.
In the pantheon of stories about the “cult”—or culture—of Bridgewater, one (veracity unconfirmed) has acquired a particular reverence. Perhaps embellished, it goes something like this: A senior management executive is hired to join Bridgewater. He arrives in pastoral Westport, Connecticut, and within weeks a relatively junior employee emails management asserting that he doesn’t think the new hire is able to “synthesize” well enough for the job he has been hired for. Since Bridgewater tapes and makes available to employees almost all interactions, Dalio asks the new employee’s managers to listen to the cases that prompted the comments. After a few of months of such interactions, the would-be senior manager departs Westport.
It is perhaps instructive to compare this with a quote from Steve Jobs’ biography regarding Gil Amelio, Apple’s CEO before Jobs’ took the reins in the late 1990s:
I thought to myself, I either tell him the truth, that Gil is a bozo, or I lie by omission. He’s on the board of Apple, I have a duty to tell him what I think; on the other hand, if I tell him he will tell Gil, in which case Gil will never listen to me again, and he’ll fuck the people I brought into Apple. All of this took place in my head in less than thirty seconds. I finally decided that I owed this guy the truth. I cared deeply about Apple. So I just let him have it. I said this guy is the worst CEO I’ve ever seen, I think if you needed a license to be a CEO he wouldn’t get one. When I hung up the phone, I thought, I probably just did a really stupid thing.
Both anecdotes highlight a simple truth: As at Apple, working at Ray Dalio’s Bridgewater can be an experience in humility. One senior Bridgewater executive remembers the day that he drove to work and found himself physically unable to get out of his car, so relentlessly brutal the 12 hours of interaction ahead of him loomed. Turnover at the firm is 25% within the first 18 months—a figure that concerns some investors—but the firm simply does not view this as a negative. To Bridgewater, people either leave within two years or stay much longer. It is ruthlessness in its most distilled form, and cultish in its manifestations. And, like any good alleged cult, Bridgewater does have a founding document of sorts. Available freely on the company’s website—and downloaded over 500,000 times within the last year—this document is the reason that Bridgewater has attracted much attention as of late (Dalio has rejected the idea of publishing it in book form despite being approached by virtually every major publisher). The Principles, as they are known, are constructed of three distinct subsets: The Importance of Principles, in which Dalio lays out the raison d’être for the document; My Most Fundamental Life Principles, where Dalio establishes his basic motives; and My Management Principles, the beefiest section and the one in which over 210 practical points are made about running Bridgewater and, by extension, any business.
The overarching theme running through the novella-sized document is this: Find truth. In his second section, Dalio writes, “This brings me to my most fundamental principle: Truth—more precisely, an accurate understanding of reality—is the essential foundation for producing good outcomes.” (The bolding is in the original.) This leads to paragraphs such as this:
When a pack of hyenas takes down a young wildebeest, is this good or bad? At face value, this seems terrible; the poor wildebeest suffers and dies. Some people might even say that the hyenas are evil. Yet this type of apparently evil behavior exists throughout nature through all species and was created by nature, which is much smarter than I am, so before I jump to pronouncing it evil, I need to try to see if it might be good. When I think about it, like death itself, this behavior is integral to the enormously complex and efficient system that has worked for as long as there has been life. And when I think of the second- and third-order consequences, it becomes obvious that this behavior is good for both the hyenas, who are operating in their self-interest, and in the interests of the greater system, which includes the wildebeest, because killing and eating the wildebeest fosters evolution, i.e., the natural process of improvement. In fact, if I changed anything about the way that dynamic works, the overall outcome would be worse.
We are, it seems, a long way from Pure Alpha. It is vignettes like these that have invited mainstream (and skeptical) attention, but such unorthodox thinking, Dalio believes, is essential to comprehend before moving onto his more practical management principles. The first Principle currently listed, unsurprisingly, is “Trust in Truth.” Further on: “Create a Culture in Which It Is OK to Make Mistakes but Unacceptable Not to Identify, Analyze, and Learn From Them.” Then: “Recognize that conflicts are essential for great relationships because they are the means by which people determine whether their principles are aligned and resolve their differences.” Every meeting within the company is recorded (except for those where proprietary client information is revealed), and junior employees are encouraged to openly disagree with their superiors, and vice versa—all in a quest for radical transparency and truth.
One of Dalio’s most repeated mantras is Pain + Reflection = Progress. By constantly probing for the truth, and by refusing to move on from mistakes or disagreements until a truth has been reflected upon, Bridgewater will constantly be evolving, he believes. Spend 15 minutes with a Bridgewater employee (all of whom must read the Principles) and admit to a mistake. They will, by instinct, say something along the lines of “Now what did you do, and what was expected? Why did those two deviate? Was it the design of the system that went wrong? If so, how do we redesign that system?” A forgive-and-forget culture it is not.
Some have claimed that radical transparency goes one way, from superior to inferior. One recent major profiler—John Cassidy of The New Yorker—claimed to have seen no lower-level employees challenge upper management during his day at the firm’s Westport offices. Multiple people within the firm rejected this assertion: Radical transparency and radical truth are so central to the firm’s being, they claim, that if it was not working, neither would Bridgewater.
On the investment side of the business—as opposed to the operations side—this systemized thinking has not only allowed Dalio to effectively analyze macroeconomic data for over three decades, but also enabled the creation of a system that has allowed his firm to do the same. While some argue that Bridgewater is Ray Dalio, the Principles lay claim to the idea that what he is able to achieve can be done by almost anyone willing to make mistakes, learn from those mistakes, and evolve. The real hurdle is a willingness to dismiss ego. “Typically defensive, emotional reactions—i.e., ego barriers—stand in the way of this progress,” Dalio writes. “These reactions take place in the part of the brain called the amygdala. As a result of them, most people don’t like reflecting on their weaknesses even though recognizing them is an essential step toward preventing them from causing them problems.” Put another way, the key to progress is to void the ego.
On the operations side, this philosophy has produced decisions largely void of market demands—why listen to the cry of the crowd if your entire thought process revolved around a search for logical truth? The result of this approach is that Bridgewater’s major product developments came not as a result of listening to clients, but of fighting them, according to the firm. (Similarly, Jobs’ biographer Isaacson writes, “Unlike other product developers, Jobs did not believe the customer was always right; if they wanted to resist using a mouse, they were wrong.”)
Near the beginning of the Principles, there is a telling footnote.
‘I wish everyone wrote down their principles. I wish I could read and compare the principles of all the people I’m interested in—Steve Jobs, Albert Einstein, people running for political office, people I share my life with, etc. I’d love to know what they value most and what principles they use to get what they want. Imagine how great that would be—e.g. imagine how much valuable fundamental thinking could be harnessed. I hope that my doing this will encourage others to do the same.
Jobs did not fulfill Dalio’s wish, and thus a distinction emerges between him and Bridgewater’s founder—that of the gut versus the head. “People were allowed, even encouraged, to challenge him, and sometimes he would respect them for it,” wrote Isaacson, echoing a Dalio Principle. Yet Jobs’ application of these principles was haphazard. Honesty could be respected, or it could be denigrated via a violent tirade. Dalio prides himself on explicitly applying the formula of failing, analyzing, learning, and achieving. Jobs, in a way, did the same—but where Dalio uses cold logic, Jobs seemed to rely on instinct. Ray Dalio is Steve Jobs with a business school degree.
Every extraordinary life is an exercise in obsession. So what is Ray Dalio’s obsession?
It is not the exercise of wealth—although wealthy he is. If the Eastern seaboard is littered with millionaires living like billionaires, Dalio represents the reverse: A billionaire (estimated net worth: $6.5 billion) who lives like a millionaire. His real estate holdings are relatively modest. He has signed Warren Buffett’s pledge to give away half his wealth. Unlike more than a few of his hedge fund peers, he has not left his wife for a woman half his age. He does have a few pet projects onto which he lavishes capital—the China Care Foundation fundraiser put on by his son in Greenwich entices top musical talent (Dave Matthews, Eric Clapton)—and he does travel frequently and fashionably, but in its entirety his life evidences a moderation that supports a more nuanced view of the world than almost all his peers.
“People need meaningful work and meaningful relationships in order to be fulfilled. I have observed this to be true for virtually everyone, and I know that it’s true for me,” he writes in the Principles (his writing is a good proxy for his didactic and expository speech habits). In a footnote—the document is not an exercise in succinctness—he continues: “The work doesn’t necessarily have to be a job, though I believe it’s generally better if it is a job. It can be any kind of long-term challenge that leads to personal improvement. As you might have guessed, I believe that the need to have meaningful work is connected to man’s innate desire to improve. And relationships are the natural connections to others that make us relevant to society.” Perhaps unsurprisingly, this sentiment is an echo of Steve Jobs’ philosophy. “The journey is the reward,” he told his biographer. Isaacson continued:
He had neither [Larry] Ellison’s conspicuous consumption needs nor Gates’ philanthropic impulses nor the competitive urge to see how high on the Forbes list he could get. Instead his ego needs and personal drives led him to seek fulfillment by creating a legacy that would awe people. A dual legacy, actually: building innovative products and building a lasting company.
Dalio’s needs tend more toward the philosophical than a yearning to awe, but the stark desire for a legacy is clear. Dalio’s leitmotif is to have Dalio become an enduring idea. His challenge now is to create a mode of operation that replaces the physical Dalio with the modus operandi of Dalio. He has no plans to retire, but the firm is undergoing a transition of sorts. Dalio is no longer the CEO—he currently holds the title of co-CIO and “mentor.” He has started the process of allowing Bridgewater employees to purchase more of the company’s stock, but it remains unclear, except perhaps to Dalio, who will actually take over the helm.
Few asset management firms have successfully navigated such a transition. Within any organization, there is a gravitation toward norms—a slow but seemingly unavoidable march toward a weakening of a company’s culture. Dalio himself fears as such. “Avoid the temptation to compromise on that which is uncompromisable,” he writes in the Principles. He continues:
You must have and achieve high standards. This is particularly difficult when two uncompromisable things are at odds. At such times, there is a tendency to let one of them go. However, at such times you have to allocate more time to figure out how to best handle this, be more creative, and ask for more input. But don’t compromise on one of the things that shouldn’t be compromised. For example, one of the uncompromisable things I regularly get pressure from people to compromise on is letting great people avoid exploring their mistakes and weaknesses because they find it painful. For reasons articulated throughout these principles, I believe we can’t compromise on this because that process of exploration is healthy for Bridgewater, healthy for them, and key to our culture.
In October 2008, Dalio published the Template of Understanding—his treatise, published as the world was crumbling, on the topic of what the hell was happening. “The economy is like a machine,” he wrote before explaining that the financial crisis was not a recession, but a deleveraging. The difference, he stated, was this: A recession results from the tightening of credit by a central bank; a deleveraging results from a shortage of providers and recipients of capital—and which cannot be rectified by a central bank. The global financial crisis, he wrote, was the latter. It is an elegant document, reminiscent of an Apple product of late. The world economy can be thought of as a combination of credit, money, and the goods they can purchase. All other factors are secondary to this basic equation. For Dalio, it is that simple.
Just as he has for the global economic machine, Dalio has established a template for understanding how an asset management firm should function if it is to succeed in the 21st century. Bridgewater has recently forced investors to take money back from the fund due to capacity issues, an action at odds with the dominant model of asset manager as asset gatherer. The firm has been aggressive in providing research to investors, a move that belies the common perception of asset managers as black boxes. Its products have been developed not to meet customer demand, but to lead it. Other management firms have struggled to adapt themselves to a new reality where risk, not asset returns, matters most; it’s a new world where long-only equity managers play only a bit part. It’s a hard model to get right, not least because conventional wisdom has made so many asset managers rich. But whatever else can be said about this idiosyncratic son of a Long Island musician, it is hard to deny his success at generating returns for his investors.
Indeed, a dollar invested with Bridgewater’s Pure Alpha in 1991 is now worth $7.86. A dollar invested with All Weather in 1996 is worth $3.84. Both rates of return put Bridgewater in elite company—perhaps even company all its own. Yet, like Steve Jobs, Dalio’s true impact on the industry he works within is not being the best at it—but changing it altogether. The test now is seeing whether Bridgewater, like Apple, can remain at the very pinnacle of a business it created.