Brief Version of The Importance of Principles

(by Ray Dalio)

/// Who is Ray Dalio?

/// You can download full PDF version here

What are principles?
Why are principles important?
Where do principles come from?
Do you have principles that you live your life by?
What are they?
How well do you think they will work, and why?

My Most Fundamental Life Principles

So what I really wanted to do now was beat the market. I just had to figure out how to do it.

The pursuit of this goal taught me:

  1. It isn’t easy for me to be confident that my opinions are right. In the markets, you can do a huge amount of work and still be wrong.
  2. Bad opinions can be very costly. Most people come up with opinions and there’s no cost to them. Not so in the market. This is why I have learned to be cautious. No matter how hard I work, I really can’t be sure.
  3. The consensus is often wrong, so I have to be an independent thinker. To make any money, you have to be right when they’re wrong.

So … …

  1. I worked for what I wanted, not for what others wanted me to do. For that reason, I never felt that I had to do anything. 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 strive for what I wanted, I never felt forced to do anything.
  2. I came up with the best independent opinions I could muster to get what I wanted. For example, when I wanted to make money in the markets, I knew that I had to learn about companies to assess the attractiveness of their stocks. At the time, Fortune magazine had a little tear-out coupon that you could mail in to get the annual reports of any companies on the Fortune 500, for free. So I ordered all the annual reports and worked my way through the most interesting ones and formed opinions5 about which companies were exciting. …
  3. I stress-tested my opinions by having the smartest people I could find challenge them so I could find out where I was wrong. I never cared much about others’ conclusions — only for the reasoning that led to these conclusions. That reasoning had to make sense to me. Through this process, I improved my chances of being right, and I learned a lot from a lot of great people. …
  4. I remained wary about being overconfident, and I figured out how to effectively deal with my not knowing. I dealt with my not knowing by either continuing to gather information until I reached the point that I could be confident or by eliminating my exposure to the risks of not knowing.
  5. I wrestled with my realities, reflected on the consequences of my decisions, and learned and improved from this process.
I Want you to work for yourself, to come up with independent opinions, to stress-test them, to be wary about being overconfident, and to reflect on the consequences of your decisions and constantly improve.

My Most Fundamental Principles

Truth — more precisely, an accurate understanding of reality — is the essential foundation for producing good outcomes.

The Personal Evolutionary Process

I believe that life consists of an enormous number of choices that come at us and that each decision we make has consequences, so the quality of our lives depends on the quality of the decisions we make.

Reality + Dreams + Determination = A Successful Life

It is a fundamental law of nature that to evolve one has to push one’s limits, which is painful, in order to gain strength — whether it’s in the form of lifting weights, facing problems head-on, or in any other way.

Pain + Reflection = Progress

People who know that understanding what is real is the first step toward optimally dealing with it make better decisions.

Ask yourself, “Is it true?”

How much do you let what you wish to be true stand in the way of seeing what is really true?

People who worry about looking good typically hide what they don’t know and hide their weaknesses, so they never learn how to properly deal with them and these weaknesses remain impediments in the future.

People who are interested in making the best possible decisions rarely are confident that they have the best possible answers.

People who overweigh the first-order consequences of their decisions and ignore the effects that the second- and subsequent-order consequences will have on their goals rarely reach their goals.

Successful people understand that bad things come at everyone and that it is their responsibility to make their lives what they want them to be by successfully dealing with whatever challenges they face.

How much do you let yourself off the hook rather than hold yourself accountable for your success?

In summary, I believe that you can probably get what you want out of life if you can suspend your ego and take a no-excuses approach to achieving your goals with open-mindedness, determination, and courage, especially if you rely on the help of people who are strong in areas that you are weak.

The biggest mistake most people make is to not see themselves and others objectively

My 5-Step Process to Getting What You Want Out of Life

Have clear goals.
Identify and don’t tolerate the problems that stand in the way of achieving your goals.
Accurately diagnose these problems.
Design plans that explicitly lay out tasks that will get you around your problems and on to your goals. Implement these plans — i.e., do these tasks.
  1. You must approach these as distinct steps rather than blur them together. For example, when setting goals, just set goals (don’t think how you will achieve them or the other steps); when diagnosing problems, just diagnose problems (don’t think about how you will solve them or the other steps). Blurring the steps leads to suboptimal outcomes because it creates confusion and short-changes the individual steps. Doing each step thoroughly will provide information that will help you do the other steps well, since the process is iterative.
  2. Each of these five steps requires different talents and disciplines. Most probably, you have lots of some of these and inadequate amounts of others. If you are missing any of the required talents and disciplines, that is not an insurmountable problem because you can acquire them, supplement them, or compensate for not having them, if you recognize your weaknesses and design around them. So you must be honestly self-reflective.
  3. It is essential to approach this process in a very clear-headed, rational way rather than emotionally. Figure out what techniques work best for you; e.g., if emotions are getting the better of you, take a timeout until you can reflect unemotionally, seek the guidance of calm, thoughtful others, etc.

Values

As you design and implement your plan to achieve your goals, you may find it helpful to consider that:

  • Life is like a game where you seek to overcome the obstacles that stand in the way of achieving your goals.
  • You get better at this game through practice.
  • The game consists of a series of choices that have consequences.
  • You can’t stop the problems and choices from coming at you, so it’s better to learn how to deal with them.
  • You have the freedom to make whatever choices you want, though it’s best to be mindful of their consequences.
  • The pain of problems is a call to find solutions rather than a reason for unhappiness and inaction, so it’s silly, pointless, and harmful to be upset at the problems and choices that come at you (though it’s understandable).
  • We all evolve at different paces, and it’s up to you to decide the pace at which you want to evolve.
  • The process goes better if you are as accurate as possible in all respects, including assessing your strengths and weaknesses and adapting to them.