Ray Dalio. The founder of the world’s largest hedge fund, Bridgewater Associates, is not only one of the world’s 100 wealthiest people — he also predicted the global financial crisis of 2007.
He’s even played a role in designing financial instruments ranging from inflation-protected bonds to a poultry-related futures strategy that allowed McDonald’s to launch the Chicken McNugget.
Yet Dalio, when studying what made him successful, thanks his most epic failure. A market call he’d made 40 years ago was so off the mark — he predicted a depression right before a massive bull market that kicked off in the 1980s — that it practically wiped him out.
“At one point, I’d lost so much money I couldn’t afford to pay the people who worked with me. One by one, I had to let them go,” Dalio explains in his book, “Principles.” He even had to borrow $4,000 from his dad to hold him over until he could sell his second car.
Why would failing so miserably lead to success? This paradox is the core of “Principles,” a meticulous blueprint for success he created over decades of analysis and meditation. Picking himself up from his colossal mistake, Dalio realized that striving for goals and failing sets up a cycle of improvement. By learning from mistakes in painstaking detail, modifying future decisions and repeating the process, you reach what you want from life.
“I think he has been so successful precisely because he has a set of defined principles that he lives and works by,” says Robert Johnson, professor of finance at Creighton University.
Better yet, Dalio says lessons he’s learned about success can help anyone reach a higher level. “To do exceptionally well you have to push your limits and that, if you push your limits, you will crash and it will hurt a lot,” Dalio says in “Principles.”
“You will think you have failed — but that won’t be true unless you give up.”
How can you apply Dalio’s Principles to your life? Here are five steps from his years of reflection.
- Start with a lofty, but realistic, goal. A concrete and well-defined objective sets the direction of your life. People often chase too many things. Finding out what you have passion for — but something that’s still rooted in reality — is the key to forming an obtainable goal.
“Life is like a giant smorgasbord with more delicious alternatives than you can ever hope to taste. Choosing a goal often means rejecting some things you want in order to get other things that you want or need even more,” he wrote.
Dalio’s goal? He wanted to build an investment career, but on his terms, not as a suit on Wall Street. He long bristled under rules at school and being told what to do, but realized he would excel when on his own. The same kid — a son of a musician — who refused to mow the lawn on demand hustled on a newspaper route, shoveled snow for money and worked at a local restaurant.
Goals must be realistic, too. Dalio found his calling in the financial industry when he was 12 years old. He’d invested in his first stock, Northeast Airlines, because shares were trading for below $5 apiece. “It was a dumb strategy, but I tripled my money,” he says. It was then he saw he could make money doing what he enjoyed. “I was hooked.”
- Fail well and take meticulous notes when you do. Dalio turned failing into an art form over his decadeslong career. Watching other wealthy investors stumble and lose everything, Dalio understood the importance of constant improvement — even when on top. In his mind, success results from a series of decisions with increasingly improved outcomes. While avoiding bad decisions isn’t possible, developing a system to better address your next decision is essential.
Dalio, who is Bridgewater’s co-chief investment officer and co-chairman, sees failures as almost predictable and started to look forward to them as an opportunity to refine his strategy. “I began to experience painful moments in a radically different way. Instead of feeling frustrated or overwhelmed, I saw pain as nature’s reminder that there is something important for me to learn,” he says.
Dalio’s biggest mistake of his life is probably what ultimately put him on a path to success. What was this error? Dalio had gained recognition following a successful career trading commodities and setting up his own firm, Bridgewater, out of a two-bedroom apartment.
Following Mexico’s 1982 sovereign debt default, Dalio appeared on financial television to give his view on the markets. He declared a depression was coming. He was sure of it — his research pointed to a collapse in the system. But he was dead wrong. Instead of crashing, the stock market rallied. And an 18-year period of prosperity ensued. The mistake turned off clients. And money flowed out of his fund in the early 1980s.
But here’s the key to Dalio’s success: He didn’t fold. He studied why he was so wrong and what he missed, and started programming his findings into a computer. This painful experience improved Dalio’s ability to understand factors that affect markets. He also discovered how computer systems could help predict markets reliably and take out human shortsightedness and bias. He began building computer systems to scan markets for patterns, which put Bridgewater at the forefront of “quantitative” investing.
- Value truth over ego. Admitting you’re not always the source of every best idea is central to success. Dalio hires and consults with smart people who disagree with him. The goal is to be so open-minded that you can listen to others’ views to get to reality. “I just want to be right — I don’t care if the right answer comes from me,” he says.
To succeed, members of Bridgewater had to be completely frank with each other. Dalio started to write down the company’s “Work Principles,” giving employees a procedure to share thoughts openly, discuss them and vote on what’s best. All these rules were written down. “Even prior to publication of (his) book, he had a document of over 100 pages, summarizing the principles, that was required reading for new employees,” Johnson says. “When people know exactly what is expected of them, and don’t have to guess about the culture of the firm, they are able to focus on the work at hand.”
Dalio’s ability to find the best answer, even if it comes from elsewhere, is a key to his success, says Marcel Muenster, a managing director of several startups who has studied Dalio’s leadership style.
“Don’t just make decisions based on your own biases,” Muenster says. “Be open-minded enough to be challenged by others who have a better understanding. The collective wisdom of yourself and people you surround yourself with will lead to better decisions.”
- Quantify whatever you can. Success isn’t an accident — it requires careful accounting of what works and what doesn’t. Dalio learned this by studying the commodities markets. Predicting livestock price changes was complex. So Dalio took the time to find all the arcane drivers of prices, including the ratio of acreage of planted grain to rainfall levels.
He brings the same precision and analysis to other parts of his life. With employees, Dalio stored their strengths and weaknesses on “baseball cards.” These cards allow Bridgewater to find the people with the right skills for specific projects. “Just as you wouldn’t have a great fielder with a 0.160 batting average bat third, you wouldn’t assign a big-picture person a task requiring attention to details,” he says.
Dalio also took the time to quantify and study the habits of other great idea-shapers. He’s studied everyone from Steve Jobs of Apple (AAPL) and Jeff Bezos of Amazon.com (AMZN) to Reed Hastings of Netflix (NFLX), as well as Winston Churchill and Martin Luther King Jr. Dalio asked several successful people he knew — including Microsoft’s (MSFT) Bill Gates, Elon Musk of Tesla(TSLA), Hastings and Twitter’s (TWTR) Jack Dorsey — to take personality assessments. Dalio studied the results to find common traits and help with hiring at Bridgewater.
- Avoid stagnation and evolve. Dalio forms much of his worldview by studying the natural world. He sees the physical sciences as a benchmark of the way things work. Dalio studied psychology to better understand how the mind functions and to be a better manager and father. He studied biology to understand how organisms morph over time to ensure their survival. Dalio sees the process of evolution as the one system that endures over time — and the one worth mimicking when striving for lasting success. All systems break down over time, unless they change.
“Evolving is life’s greatest accomplishment and its greatest reward,” he says.
Dalio’s Keys
Overcame: An off-the-mark market call for a depression right before the bull market in the 1980s that practically wiped him out.
Lesson: Don’t fear failure. Expect it and begin to enjoy the lessons it teaches.
“I can say that being strong is better than being weak, and that struggling gives one strength.”
