Selva Book Club: Principles by Ray Dalio
The below is taken from Selva Ventures’ Q3 2021 Quarterly Investor Letter
After great feedback, we are continuing Selva Book Club. This section of our letters will take passages from a prominent and relevant investment or business book and share learnings and reflections directly related to Selva.
The second book comes from the founder of one of the most fascinating investment firms in the world: Principles by Bridgewater founder Ray Dalio.
Passage: I believe that the key to success lies in knowing how to both strive for a lot and fail well. By failing well, I mean being able to experience painful failures that provide big learnings without failing badly enough to get knocked out of the game.
When I started Selva Ventures I was afraid of getting things wrong: from setting up the business and process to making early investments, I viewed the risk of bad decisions as far too existential. What I’ve learned since: obviously smart risk-taking is necessary for a successful investment firm, but the learnings and reflections from decisions I got wrong have become proprietary assets of the firm. I used to look back and wish I’d made certain decisions differently; now I’m grateful for the learnings I can use to make better decisions as the stakes get higher.
Passage: I believe one of the most valuable things you can do to improve your decision making is to think through your principles for making decisions, write them out in both words and computer algorithms, back-test them if possible, and use them on a real-time basis to run in parallel with your brain’s decision making.
Bridgewater is famous for systematic evaluation of Companies that has consistently beat the market since 1975. The only way to have such repeatable outperformance is a consistent system. We don’t have the data-rich time series of the public markets, but we did very intentionally build and back-test a system called the “5Ms” when the firm was founded. My job is not to “do good deals”; it is to build a process that does them repeatedly.
Passage: In other words, I just want to be right — I don’t care if the right answer comes from me. So I learned to be radically open-minded to allow others to point out what I might be missing. I saw that the only way I could succeed.
My favorite question to ask is “why am I wrong?” It will be written on the wall when we get our first official office (I tried, but they wouldn’t let me do it in our coworking space!). My team can attest that every time we discuss an investment that question is asked — the reason is simple: to effectively make decisions you must be able to articulate both sides of an argument. Too often we as investors fall into the trap of confirmation bias or emotional commitment to a deal. It might feel better in the moment to avoid hearing dissenting opinions, but it feels much better in the long run to face hard truths in a truth-seeking culture.
Passage: In Bridgewater’s early days, everyone knew each other, so being radically transparent was easy — people could attend the meetings they wanted to and communicate with each other informally. But as we grew, that became logistically impossible, which was a real problem. (…) Without transparency, people would spin whatever happened to suit their own interests, sometimes behind closed doors.
I am admittedly an admirer of Bridgewater, though I’m not sure I would be brave enough to work there. The radical openness likely steps beyond not only my comfort zone but also the way I enjoy building meaningful relationships with coworkers. That said, I have so much respect for the recognition Ray had from the beginning that emotions are poisonous to investing decisions, and radical transparency is an effective antidote. I am committed to finding our own way, that celebrates the bravery to tell and hear the truth along with the positive impact that emotion can have on an entrepreneurial investing organization. One thing I’ve learned from Ray is that this cannot be installed retroactively: as we build the team at Selva it will be in our DNA from the beginning.
Please drop a comment on what you think of the format and what suggestions you have for future books. Next quarter’s book will be Creativity, Inc by Ed Catmull.