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What It Takes - Ray Dalio

Ray Dalio
Ray Dalio
What It Takes - Ray Dalio
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00:00:02 Meet Ray Dalio. He's the subject of this episode of What It Takes. Ray Dalio is the most successful hedge fund manager of all time.

00:00:11 RAY DALIO: I don’t know what a hedge fund is. I really don’t know.

00:00:15 ALICE WINKLER: While Ray Dalio struggles with that one for a moment, let me remind you, What It Takes is a podcast about passion, vision, and perseverance from the Academy of Achievement's archive of interviews with extraordinary people.

00:00:29 OPRAH WINFREY: "Hattie Mae, this child is gifted," and I heard that enough that I started to believe it.

00:00:35 ROGER BANNISTER: If you have the opportunity, not a perfect opportunity, and you don't take it, you may never have another chance.

00:00:42 LAURYN HILL: It all was so clear. It was just, like, the picture started to form itself.

00:00:46 DESMOND TUTU: There was no way in which a lie could prevail over the truth, darkness over light, death over life.

00:00:54 CAROL BURNETT (quoting CARRIE HAMILTON): “Every day I wake up and decide, today I'm going to love my life. Decide.”

00:01:02 JOHNNY CASH: My advice is, if they're going to break your leg once when you go in that place, stay out of there.

00:01:07 JAMES MICHENER: And then along come these differential experiences that you don't look for, you don't plan for, but boy, you’d better not miss them.

00:01:18 ALICE WINKLER: Ray Dalio founded the investment firm Bridgewater Associates, and they manage 150 billion dollars — that's billion with a B. So what does Ray Dalio mean exactly when he says he doesn't know what a hedge fund is?

00:01:35 RAY DALIO: So it's a structure within which investors can do all different things, like a mutual fund. You might say some people are value investors. Some people invest in bonds. Some people invest in stocks. People do all different things within a structure called a hedge fund. Basically, though, it allows you to invest without much in the way of restrictions, traditional ways.

00:01:53 I can sell short as well as go long. If something's going to go — if I think something will go down, I can sell short. I can go into any market. I can go into stocks or bonds or commodities or gold or anywhere that I want to go within my agreement with my client. So I give myself the freedom to approach the world to look at whatever’s good or whatever’s bad.

00:02:27 ALICE WINKLER: In short, I think what he’s saying in this 2012 interview is, it's vague, so if you don’t quite get what a hedge fund is after all these years, you can finally stop feeling bad about it. If Ray Dalio doesn’t know, why should you? But hedge funds have made Ray Dalio a wealthy man, a very, very wealthy man. He's worth about 15 billion dollars. Dalio began investing when he was a child, literally.

00:02:59 RAY DALIO: I started trading markets when I was 12. You know, it was interesting at the time. I caddied at a local golf course, but this was very, very elite, in the sense of, you know, I caddied for Richard Nixon. I caddied for the Duke of Windsor. In fact, I caddied for very interesting people at that golf course.

00:03:23 And at the time also there was the Wall Street crowd, and this was in the '60s, and at the time, the United States was on top of the world. Stocks kept going up, and there was — everybody talked about the stock market. So it looks precocious, more precocious than it was. It was just what people were talking about, and I certainly was interested in having those conversations, and I was interested in that experience.

00:03:52 So, yes, I bought stocks — or I bought a stock, Northeast Airlines, and it was the first stock I bought. And my whole criteria were — it was the only company I ever heard of that was selling for less than five dollars a share, and I figured if I — less than five dollars a share I can buy more shares. I mean dumb — right? But it turned out that that company was about to go broke. Somebody acquired it, and it tripled or went up a lot, and I made money.

00:04:26 And then as a result of that I got interested, and it was the thing to talk about. So I could talk with Wall Street people when we were walking down the course about what stocks were good and bad and that interaction. And because I was speaking to them about the stock market and they were really nice people, we had those quality conversations, and then I began the process.

00:04:51 ALICE WINKLER: That process has continued for the five decades since, but the process Dalio is really talking about here is not how he figured out the markets and accumulated unimaginable wealth. It’s more about the process of Ray Dalio’s enlightenment. Probably the most important thing to know about Dalio, besides the financial success of his firm, is that he’s a kind of self-help evangelist. He has spent a lot of time thinking about what it takes to succeed, in life as well as in business, and he loves to share those thoughts.

00:05:27 RAY DALIO: I think for everybody, in order to be successful there are five steps that you go through essentially.

00:05:33 ALICE WINKLER: One: Figuring out your goals.

00:05:42 RAY DALIO: Everybody has their goals. What is their goal and their passion? So you have goals. And then what happens is you’re going after your goals and you encounter your problems.

00:05:53 ALICE WINKLER: Two: Encountering your problems.

00:06:03 RAY DALIO: The big difference between people is how they approach those problems. People who get bummed out by the problems don’t learn from them. Who learns from them? So those who recognize that problems are exciting, that they get into those, you know, problems or mistakes. Mistakes are learning experiences. The pain that comes from that mistake — every time you have pain, it’s an indication that something is at odds.

00:06:33 And so the people who have the pain are the people then who will go into that, realize that if they solve that pain, solve that problem, understand what that is representative of — not just the one problem. But that problem is a certain type of problem that will happen over and over and over again in your life, and how do I deal with that kind of problem?

00:06:56 ALICE WINKLER: Three: Diagnosing the deeper problem that’s behind the current problem.

00:07:08 RAY DALIO: So diagnose those problems, get to the root cause, the real root cause. The real root cause is often — is typically what people are like. Can you go to what you're like? Can you go to your mistakes? Can you go to your weaknesses? Everybody has strengths, and everybody has weaknesses. The weaknesses are the other side of the strengths.

00:07:31 So let’s say if you’re, you know, a right brain, creative person, you may not be reliable because just the way you think necessitates you to think a certain way that means you can’t think in another way. That means you're going to keep bumping into that thing that's standing in your way. But unless you can embrace “I'm not reliable,” you know, right, and deal with it, you won't get around it — right?

00:07:54 So the diagnosis to the root cause is important. So then if you diagnose it, then you have to design, what are you going to do about it that works?

00:08:06 ALICE WINKLER: Four: Designing solutions.

00:08:17 RAY DALIO: So let’s say you are very creative but not reliable. Okay, you have to find the means of, first of all, embracing that, and then saying, "If I’m not reliable, what do I do? Do I work with a reliable person? Do I learn reliability? Do I have some compensating mechanism? Because I can’t let that lack of reliability stand in the way of my goal. As long as I keep doing that, I’m going to keep running into problems."

00:08:43 So you have to design what you do about the problems, and then when you’re designing what you do about the problems, then you have to follow it through.

00:08:53 ALICE WINKLER: Five: Following through. And a summary of steps one to four.

00:09:06 RAY DALIO: So you have to do the thing you designed, and the doing the thing you designed requires self-discipline and so on. So people have to do those things in order to be successful. Right? They have to know what their goals are. They will encounter their problems. They have to diagnose those problems down to the root cause, the real root cause. They have to design ways to get around them, and then they have to have the self-discipline to follow that, and it’s a continuous iterative process.

00:09:38 So that — that’s what we keep doing — right? So you’re going in that direction. I would say that all of the shapers are doing that. They’re doing that. They’re doing that well — right? So they don’t mind the problems. That’s their adventure.

00:09:52 ALICE WINKLER: Even the most tenacious people, Dalio says, don’t necessarily rise to be “shapers,” the people who make the world go around. Mastering your subject matter is not nearly enough, he says, if you want to be a shaper.

00:10:07 RAY DALIO: It’s a very internalized learning process. It’s not a memory-based process. So none of these people — shapers — unlike the population at whole, none of these people have a desire to follow instructions — right? For most people, you go to school, they tell you what class to go to, what classes to take. This goes all the way through university.

00:10:32 They do this, do this, do this, and then you go into the class and they say, "Learn this, and this is the information," and it’s largely a memory-based, instructional-based process. This is not what these people do. So the path — what they have is a strong, strong desire to understand and make sense of reality. How does reality work? Okay. And then — so they’re all very independent-thinking and rebellious. Okay?

00:11:03 They don’t mind, you know, saying, "Screw you, I am — this is what makes sense, and I’ve got to go down that path" — right? They’re comfortable with ambiguity. They love ambiguity because that's where the discovery is — right? They love making mistakes, the process. They understand that making mistakes — you know, loosen up.

00:11:23 It's like, you know, going to ski or something. You can’t learn how to ski unless you’re falling.

00:11:28 ALICE WINKLER: Dalio believes one of the biggest problems facing individuals, companies, and even countries is ego, ego that stands in the way of people seeing their own weaknesses.

00:11:40 RAY DALIO: People are so attached to being right, and yet the tragedy is, it could be so easy to find out how you’re wrong. If you just said to yourself, "I’m not sure that I’m right, and let me go find people who have alternative points of views, and let me have quality conversations" — not to pay attention even to their conclusions, but to their thought processes.

00:12:09 So go after the person who has the most different point of view, who is the most thoughtful, and then have a conversation to see their point of view, and that process itself reduces the probability of being wrong and produces a great deal of learning. People are so hung up on being right, starting their discussion and deriving some sort of satisfaction if, at the end of the discussion, they were where they began the discussion. So that doesn’t make any sense.

00:12:45 ALICE WINKLER: And here’s an interesting extension of Ray Dalio’s thoughts on weakness and failure. If you’ve got young kids in your life, this one may speak loudly to you, as it did to me.

00:12:56 RAY DALIO: Punishment is a terrible concept. Punishment means that you made a mistake and you're being punished. I think, instead of punishment, every time somebody makes a mistake, you should say, “The only thing that you need to do to get out of your punishment is first think, ‘What kind of mistake was that? So if I’m in a situation that's like that again, how would I deal with it differently not to make that mistake?’"

00:13:24 ALICE WINKLER: But when people hire you to manage and invest their money, naturally, the stakes of mistakes are a little higher, so as Dalio puts it...

00:13:33 RAY DALIO: Just the goal is, you know, don’t be too wrong; be more right than wrong.

00:13:37 ALICE WINKLER: And how do they do that at Bridgewater?

00:13:40 RAY DALIO: First, because all of the consensus is already baked into the price, in order to be correct in the markets, in order to make money in the markets, you have to see something that the consensus doesn't see. So you have to have an independent point of view. Now in order to be different from the consensus, there’s a high risk you’re going to be wrong. So if you form — for me, if I form that point of view and I’m wrong, the probability of being wrong I’m trying to reduce, and so by having other people stress-test my thinking, it’s very practical — right?

00:14:25 So I say, "I work really hard to have this independent point of view," and then I bring that independent point of view out there, and I say, "Shoot at it."

00:14:34 ALICE WINKLER: That is a favorite Ray Dalio-ism, using “stress-test” as a verb. If you work at Bridgewater, you have to be eager to stress-test your ideas. Dalio also loves to talk about radical honesty and radical transparency. He believes in them so strongly that he institutionalized them at Bridgewater. If you go to work there, you have to adhere to his principles, laid out in a 100-plus-page book he wrote about his views on management and success.

00:15:07 RAY DALIO: Every meeting is taped and made available for everybody in the company to look at. Everybody has a responsibility — the right and responsibility to make sense of things. In other words, it's got to make sense to you, and if something doesn't make sense to you, you should bring it up. You shouldn’t talk behind somebody's back or gossip. And you know, too many people talk about the other people, what they’re doing wrong, except they don’t talk to those people about what they’re doing wrong.

00:15:38 So they don’t know whether they’re actually doing them wrong or not. They haven’t heard the other side, and they’re not being productive, so that’s terrible, and also the organizations for me in which arbitrary decisions are made are terrible. You know, a boss, two bosses, will get together, and they’ll have a conversation of what a particular person is like, and then they’ll call the person into the room, and then they’ll say, "Aw, Harry" — and then they’ll give him spin. Spin is terrible.

00:16:07 It undermines trust, and so we have a policy of taping everything and letting everybody watch it and look at it, and then have thoughtful conversations about that. And there's — if you’re coming into the company, you go there because you believe that understanding what is true and having thoughtful conversation about it, including harsh realities, is healthy. So yes, that's embedded. That's — those are the ground rules. That's how to have an idea meritocracy.

00:16:40 In other words, if you want to have a real idea meritocracy that's not — doesn't have any barriers to it, will go wherever truth leads us, that's what we do, and that's very powerful. That's where the success comes from.

00:17:01 ALICE WINKLER: If you work at Bridgewater and you talk about a person behind his back, you may get fired. You might think that would make it a pretty uncomfortable place to work, but that’s not how Ray Dalio sees it.

00:17:12 RAY DALIO: No, reality is reality. Okay, which is going to produce more discomfort, denying reality? There are harsh truths, things you wish were not the case. Okay? But they're truths. Do you want to know about them, or do you not want to know about them? If you want to make success, it’s practical to know about all those harsh realities — right? Know about the harsh realities — and then deal with the harsh realities.

00:17:40 The person who doesn’t want to go there is not going to make progress. The person who loves to know all what reality is — whatever it is — is going to know how to deal with reality in the best possible way — right? So what’s the fear? Unfortunately, we have — most people have not been raised with the notion that knowing what your weaknesses are is pleasurable. Pain is associated with bad, and pleasure is associated with good, and that’s not true.

00:18:19 That most — all growth — you can’t get stronger, physically or mentally, unless you’re having pain, because you’re stretching yourself. You’re going into a new level. So pain is good if you’re exercising — right? Like, go exercise at the gym. It starts off painful, but as you start to get going with it and you start to see the benefits of it and you start to change actually your brain physiology, in terms of what actually determines whether it’s painful or not, it becomes pleasurable.

00:18:54 So behavior modification usually takes place over about 18 months of doing something, and so you start to get into an environment where it’s pleasurable. And in our case, we call it getting to the other side. People come in and they originally — they look at this and they say, "Oh, I made a mistake. I feel pain about that," or, "I’m identifying some weakness, and I feel pain about that." And then, after doing it enough and seeing the feedback, then they begin to realize that it’s producing benefits to them, and they begin to like it, and they begin to worry about being in an environment that they won’t have that.

00:19:31 That, if they go into a normal environment, they’re going to have dishonesty. They’re going to have people seeing the same things, thinking the same things about them but not telling them. They won’t have an opportunity to have a discussion. They won’t know whether it’s truthful or not that they’re operating — so it will all be under the covers. So that’s the choice. Which environment would you rather be in? You have to decide for yourself.

00:19:56 ALICE WINKLER: Finance columnist Paul Farrell once called Ray Dalio the reincarnation of Ayn Rand, high priestess of individualism and the free market. Others have disparagingly compared his book of principles to Mao’s Little Red Book. But whatever you think of Dalio’s ideas and the way he runs his company, it’s kind of hard to argue with his success or his personal fortune. Dalio is a self-made multi-billionaire.

00:20:25 He comes from a perfectly middle class family on Long Island with a stay-at-home mom and a father who was a jazz musician. During the Academy of Achievement's interview with Dalio, he didn’t have a lot to say about his childhood. He wasn’t sure how his family life contributed to the person he would become. He remembers listening to his dad improvising and liking it, and he thinks that has probably something to do with his love of communication, but he felt sure there were more clues in his feelings about school.

00:20:57 RAY DALIO: I hated school. I really hated school. I hated school, generally, right, because it was this instruction-following thing. Now I bet you it’s probably also because I wasn’t good at it. I mean I suspect I wasn’t good at it. You know, maybe to some extent it was that, yes, I wanted to pursue the understanding. I always liked the understanding, but I think it was — I think I was just built that way — right?

00:21:23 So I did terribly in high school. I hated high school. I just wouldn’t study. You know, my mother would send me to my room and say, "You have to study," and I would be alone in the room. There would be — I'd find something to think about or do, and I wouldn’t study, and I did terrible in high school. And I barely got into a college that — C.W. Post College, which people — you know, it was just a great college for me at the time.

00:21:57 And it was only then that I could begin to pick my courses. So then I began to pick things that were interesting to me. And then it was exciting. I loved it. In college, there was freedom. I always loved freedom. I remember, when I got my car or whatever it would be, anything that brought me freedom I loved. And so college allowed me freedom, the freedom to choose the subjects, the ones that I was interested in, the freedom of time. And so I did very well in college, and then I went to Harvard Business School.

00:22:33 ALICE WINKLER: That summer, between college and business school, he was a clerk on the floor of the New York Stock Exchange.

00:22:40 RAY DALIO: Which was in 1971, when there was the monetary system breakdown, which was an unbelievable experience, and it was — well, I was wrong many times in the markets up to that, but this was one of those really telling times. So imagine you're — I watched it and followed the developments day by day up until the breakdown. And what I was seeing is that the world financial system, money as we knew it — dollars — were not being accepted.

00:23:16 We had large debts around the world, and these dollars were not being accepted, and — a big crisis. And it came to a head on August 15, 1971, when I was clerking on the floor of the Exchange. President Nixon, on Sunday night, gets in front of the television and announces the floating of the dollar. In other words, we're going off the gold standard, and at that time, money had no value except as a claim against gold.

00:23:51 RICHARD NIXON: The strength of a nation's currency is based on the strength of that nation's economy, and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions...

00:24:19 RAY DALIO: I figured, "Wow, what a shock!" And I walked onto the floor of the New York Stock Exchange, where I'm clerking, and I come there, and the stock market went up the most it ever went up in a long time, in many years, and I wasn't prepared for the fact that this was a currency devaluation. People at the time, none of us, really understood the relationships because it never happened in our lifetimes before.

00:24:48 So I started to do research. I always wanted to understand how it made sense, and I realized that there were currency devaluations that happened many times in history. So it was a pattern that I would see of surprise. We would be surprised because we were stuck in our presumption that our recent experiences were going to continue. Everything happens because there are causes to make it happen. Everything. Okay, now when I looked at each one of those and said, "That thing, did it ever happen before?" — and I went back in history, and I saw these things happening before for the same cause/effect relationships...

00:25:37 And then I realized that everything that happens is just another one of those — right? The same thing happens — it may be, I don't know, a birth, a marriage, an economic downturn. If you encounter any of those, they have all happened before, a deleveraging. There's a machine. Everything works like a machine, meaning there are cause/effect relationships.

00:26:03 ALICE WINKLER: Ray Dalio didn’t last long working at the Stock Exchange. By the time he was 26, he had launched Bridgewater Associates in his two-bedroom apartment.

00:26:17 RAY DALIO: I love to trade markets. I worked, you know, at a Wall Street firm — two Wall Street firms — for about two years. I got out of school in '73. And I had problems fitting into the organization, meaning, you know, I literally, you know, got into a fistfight with my boss because on New Year’s Eve we were drunk together and — you know, it's — it was that kind of — I was not a well-behaved employee, and working within an organization was not the right thing for me.

00:26:56 So it didn’t work out, and I always loved being independent. I didn't view it as starting a business. I just viewed it as, “I get to do what I like to do, which is to play the markets, and they’ll pay me to do that.” And then I did that, and then, of course, what happens over time is you need things. So I need people to work with, and besides, I love playing the game with people.

00:27:22 You know, and I get computers, and I get other things over a period of time, and it grows, and it became a company, but I never viewed it as a company. I really viewed it more like, "I’m doing this thing, and these are the things that I needed" — those people in that group — and then I just kept doing it, and the things I needed became the company.

00:27:45 ALICE WINKLER: As Bridgewater grew, Dalio moved it from his apartment to a townhouse and eventually from New York to Connecticut, where he and his wife wanted to raise their kids. And that’s where Bridgewater is today, in Westport, Connecticut, the number one most successful hedge fund firm, with 150 billion dollars in global investments. Their clients include foreign governments and central banks, pension funds, university endowments, and charitable foundations.

00:28:14 Ray Dalio says his understanding of what he calls the “economic machine” allowed him to predict the real estate debacle that brought on the financial crisis. During 2007, while most people were hemorrhaging, Bridgewater’s main fund delivered a 9-1/2% return. In 2011, that same fund went up 45%. As Dalio said, Bridgewater didn’t just “withstand” the crisis.

00:28:42 RAY DALIO: We anticipated it and profited by it. So in 2006 and '07, we could see that it was coming, because it’s another one of those, and it seemed very, very likely that that was going to happen. And as it was happening, there was a lack of understanding of it, and the reason that there was a reluctance to embrace this is, first of all, it was controversial, so it seemed improbable because it never happened before in their lifetimes. Right?

00:29:17 And then there was a certain amount of conventional wisdom that they — and there was not enough discussion. Quality discussion. Why might something that seemed so improbable be true? Right?

So we knew — you don’t know anything, but it seemed highly likely — and we then were positioned so that our clients did well in 2008.

00:29:48 ALICE WINKLER: Dalio’s advantage, he says, comes largely from Transcendental Meditation, something he’s been practicing since the late 1960s.

00:29:58 RAY DALIO: In 1968, the Beatles went to India to learn how to meditate, and then I heard quite a bit about it. It was in the media. It was interesting, and then I learned how to meditate, and it was definitely life-changing, probably more than anything. It had a bigger effect on my life than practically anything because it's basically open-mindedness. What happens is that open-mindedness creates where creativity comes from, because creativity is not coming from the “working the brain,” and the “I will work hard and think about it,” and that “I will muscle it through.”

00:30:40 It comes from this relaxation. It’s just like it’s an opening up and, you know — take a hot shower and don’t be thinking of something, and some great idea comes through, and you grab the great idea. So meditation is very much like that. It opens the mind, creates an openness, a freedom that's — in which that, I don’t know whether we would say an intuition or those — that creativity just kind of comes through. And it creates an equanimity that, in other words, you could step back, and you can put things in perspective.

00:31:14 It doesn’t lessen your emotions. The emotions are the same, but you can step back and say, "I’m not going to be controlled by that emotion, or let me put things" — and I think it then helps to see things at a higher level. And it's what I do. I love being creative. I love, right — I go there and I encounter — the markets are just a medium. It’s just my instrument. Right?

00:31:41 It’s a vehicle, so in many ways I’ve invented many different investment concepts that have never been invented before because they just made sense — right? So it’s not just the making the money and the game as it’s structured. It’s inventing how the game should be played. That’s fun. That’s interesting. It’s just a natural extension of that. So that’s my instrument. The markets are my instrument. Somebody else might have — medicine might be somebody else’s instrument. You know, computer technology is somebody else’s medium.

00:32:17 ALICE WINKLER: And believe it or not, Ray Dalio says that making all that money is not the reward for playing his instrument well. Here's how he explained it in a speech he gave to students at the Academy of Achievement in 2012, the same year he sat for the interview you’ve been listening to.

00:32:37 RAY DALIO: I look at it mostly like, supposing I want to have a great life, and a great life is on the other side of a jungle, and I have to get to the other side of the jungle in order to have a great life. But in that jungle there are all sorts of deadly animals and things that can kill me. If I stay on this side of the great jungle, I'll have an ordinary life. If I get to the other side, I'll have a great — how should you approach that?

00:33:06 How do I approach that? I enter that with other people with whom I have relationships. For me, the most important thing is meaningful work and meaningful relationships, so that's our work. We go into that jungle, and they have different sets of eyes, all looking out for all of the different things that can bite you. And you go through that jungle that way, and you will get bit — I have been bit.

00:33:34 I have been hurt, but you continue on, and then you begin to realize that what's great is not the other side of the jungle but going through the jungle and doing that — pursuing your mission.

00:33:53 ALICE WINKLER: Ray Dalio, founder of Bridgewater Associates. I'm Alice Winkler, and I am going off to work on my radical honesty. You've been listening to What It Takes.

00:34:09 Thanks to the Catherine B. Reynolds Foundation for making What It Takes possible.


What It Takes is a podcast of conversations with well-known people in almost every field. The interviews have been recorded over the past 25 years by the American Academy of Achievement. They offer life stories of people who have had a huge impact on the world. They offer insights you can apply to your own life.