Lessons From a Philosophical Billionaire
Ray Dalio is an iconic hedge fund manager that is known for his highly unusual approach to management, but no one has ever questioned his brilliance.
He turned his company Bridgewater Associates into one of world’s largest hedge fund, with over $200 billion in assets under management.
Dalio runs Bridgewater according to the theory of “radical transparency,” which means that all meetings and interviews are recorded and archived, and any level of employee is encouraged to criticize another if necessary. Every Bridgewater employee is given a copy of the 123-page manual he wrote on leadership.
I was first intrigued by Mr. Dalio after watching his simple but not simplistic video explaining the economy.
This article is not intended to spark your curiosity in investing, although if that happens that would be an added bonus.
It is instead intended to highlight some of Dalio’s key principles that contributed to his success.
“All the work I ever did was just what I needed to do to get what I wanted. Since I always had the prerogative to not strive for what I wanted, I never felt forced to do anything.” — Dalio
He started delivering newspapers, mowing lawns, and caddying, and at the age of 12 he made his first investment in the stock market.
Embrace Independent Thinking.
Coming up with the best independent opinions he could to advance his goals
When he started investing as a kid, he began cutting out coupons from issues of Fortune magazine that could be mailed in for annual reports for Fortune 500 companies. He gathered as many as possible and took an amateur shot at figuring out the market.
Follow Your Curiosity.
“I never cared much about others’ conclusions — only for the reasoning that led to these conclusions”.
Dalio says that as a novice investor, he started the habit of asking the opinion of anyone he deemed a somewhat savvy investor — his stockbroker, the people he caddied for, and even his barber.
“Sometimes when I know that I don’t know which way the coin is going to flip; I try to position myself so that it won’t have an impact on me either way. In other words, I don’t make an inadvertent bet. I try to limit my bets to the limited number of things I am confident in,” he writes.
Being wary of overconfidence and limiting exposure to high-risk situations has led to Bridgewater’s remarkable success.
Reflecting on how he made decisions and figuring out why they led to either success or failure.
“I learned that each mistake was probably a reflection of something that I was (or others were) doing wrong, so if I could figure out what that was, I could learn how to be more effective. I learned that wrestling with my problems, mistakes, and weaknesses was the training that strengthened me. Also, I learned that it was the pain of this wrestling that made me and those around me appreciate our successes.” — Dalio
Understand that making a hire is the most important decision you can make.
Before you begin a search for an employee, determine not just the job’s qualifications, but which specific qualities you want in that hire. And make sure that the person you are hiring naturally shares your values.
Recognize everyone’s differences.
Bridgewater employees are given personality tests so that managers can determine how they can best be managed. Dalio’s test is essentially his version of the Myers-Briggs test.
Build your team carefully.
When considering a job candidate, Dalio places the most importance on values (“deep-seated beliefs that motivate behaviors”), then abilities (“ways of thinking and behaving”), and then skills (“learned tools”). He suggests finding a candidate who doesn’t just want the job but wants to be part of the company.
Run your team like a machine.
“Micromanaging is telling the people who work for you exactly what tasks to do and/or doing their tasks for them. Not managing is having them do their jobs without your oversight and involvement. Managing means: 1) understanding how well your people and designs are operating to achieve your goals, and 2) constantly improving them. And to manage effectively, everyone needs to know what the team’s long-term goals are and what individual employee’s tasks are.
Be direct and honest with employees, and ask them to do the same.
“The main reason Bridgewater has improved at a much faster rate than most other companies over the past 30 years is that we seek out problems and find systematic ways of eliminating them.” — Dalio
He thinks that managers and their employees shouldn’t pick their battles but fight them all, in the sense that they should never let even small problems float by without being addressed.
Be accurate instead of kind with evaluations.
Don’t assume that criticizing your employees will harm them.
Discuss their performance with them objectively, and do so in a way that results in a plan for improvement.
And don’t wait for periodic evaluations to let them know how they’re doing. “Child psychologists, dog trainers, and other behavior modification specialists will tell you that constant, no-exception feedback is fundamental to good training.” — Dalio
Guide your employees’ evolution.
If you’re telling an employee exactly what they need to do to complete a task, then you’re either micromanaging or the employee is inept.
“So give people your thoughts on how they might approach their decisions or how and why you would operate in their shoes, but don’t dictate to them. Almost all that you will be doing is constantly getting in synch about how they are doing things and exploring why.” — Dalio
If someone isn’t working in a role, take them out of it.
“People who repeatedly operated in a certain way probably will continue to operate that way because that behavior reflects what they’re like.” — Dalio
That means that if someone isn’t clicking with their role, you’re doing neither of you a favor by manipulating the role around their tendencies. Consider whether they’d be a better fit elsewhere in the company, and if not, then it’s probably best to fire them.
Place the utmost importance on truth.
“Create an environment in which everyone has the right to understand what makes sense and no one has the right to hold a critical opinion without speaking up about it,” Dalio writes.
Teach your team that it’s okay to fail if it results in learning something.
“Create an environment in which people understand that remarks such as ‘You handled that badly’ are meant to be helpful (for the future) rather than punitive (for the past). While people typically feel unhappy about blame and good about credit, that attitude gets everything backwards and can cause major problems. Worrying about ‘blame’ and ‘credit’ or ‘positive’ and ‘negative’ feedback impedes the iterative process essential to learning,” Dalio writes.
Get in synch.
Dalio teaches his employees to work at a level where there is a mutual understanding of what needs to be accomplished. One way to achieve this is by using conversations about a certain project as a means of reaching conclusions rather than just brainstorming.
Have criteria for what constitutes a problem and identify them when they arise.
“To perceive problems, compare how the movie is unfolding relative to your script — i.e., compare the actual operating of the machine and the outcomes it is producing to your visualization of how it should operate and the outcomes you expected. As long as you have the visualization of your expectations in mind to compare with the actual results, you will note the deviations so you can deal with them.” — Dalio
Determine the root of problems.
Don’t treat problems as if they are one-time occurrences, Dalio says, since they’re just the manifestation of a certain behavior or bias. Work with your employee to find these roots so that the expectation of the mistake being repeated is then lowered.
Help employees understand their problems and how they were resolved.
Managers and their employees need to do a post-mortem on resolved problems and place them in the context of the past and the future. Place everything in the context of how you want your “machine,” your team, to operate at its peak.
Build your team around achieving your goals.
“An organization is the opposite of a building — the foundation is at the top,” Dalio says. The head of a company should determine their goals and find managers who can help them achieve them by assigning tasks to their direct reports.
Always achieve what you set out to do.
“You can make great things happen, but you must MAKE great things happen. Times will come when the choice will be to plod along normally or to push through to achieve the goal. The choice should be obvious,” Dalio writes.
Recognize what you don’t know.
“Successful people are great at asking the important questions and then finding the answers. When faced with a problem, they first ask themselves if they know all the important questions about it; they are objective in assessing the probability that they have the answers; and they are good at open-mindedly seeking believable people to ask,” Dalio says.
Dalio approaches managing people the same way he manages investments. “Recognize opportunities where there isn’t much to lose and a lot to gain, even if the probability of the gain happening is low,” he writes.
Remember the 80/20 Rule — 80% of the effects come from 20% of the causes.
Dalio says that leaders are able to determine the importance of the tasks in front of them and take care of the most important things first.
“Be an effective imperfectionist. Solutions that broadly work well (e.g., how people should contact each other in the event of crises) are generally better than highly specialized solutions (e.g., how each person should contact each other in the event of every conceivable crisis), especially in the early stages of a plan. There generally isn’t much gained by lots of detail relative to a good broad solution,” Dalio writes.
Find outcomes that will keep you improving.
Dalio recommends reflecting on the events of a day and then determining whether they exceeded your expectations, met them, or fell below them. Over a month (or any longer period of time) the frequency of met and exceeded expectations should be on an upward trajectory.