"If a man loses pace with his companions, perhaps it is because he hears a different drummer. Let him step to the music which he hears, however measured or far away." – Henry David Thoreau
The only son of a jazz musician, guru Ray Dalio (Trades, Portfolio) might have been expected to follow in his father’s footsteps. Instead, he got his bachelor’s degree in finance at Long Island University, his M.B.A. at Harvard and entered the world of investment, founding the world’s biggest hedge fund, Bridgewater Associates, in his New York City apartment in 1975.
“I loved it, unlike high school, because I could learn about things that interested me,” Dalio wrote about his college experience. “I studied because I enjoyed it, not because I had to.”
By his own admission, Dalio was “a very ordinary kid and a less-than-ordinary student.” School didn’t inspire him, “partly because I couldn’t get excited about forcing myself to remember what others wanted me to remember without understanding what all this work was going to get me.”
An “ordinary kid” he may have been, but Dalio knew at least some of the things he wanted out of life.
“One thing I wanted was spending money,” Dalio wrote in his Principles in 2011. With that objective in mind, he did things that most young people do to make spending money – he had a newspaper route, he mowed lawns, he shoveled snow, he washed dishes, and he caddied for local golfers, from whom he picked up tips on the stock market.
He made his first investment at the age of 12 – in Northeast Airlines; “the only reason I bought it,” he wrote, “was that it was the only company I had heard of that was trading for less than $5 per share so I could buy more shares, which I figured was a good thing.”
Northeast’s stock “went up a lot,” which was also a good thing, and then, when Northeast was about to go under, it merged with another company, and the stock’s value tripled. That, too, was good, but it was a misleading experience for the young Dalio.
“I figured that this game was easy,” Dalio wrote. “After all, with thousands of companies listed in the newspaper, how difficult could it be to find at least one that would go up?”
It wasn’t long before he realized just how difficult it really was to pick winners. Nevertheless, “this way of making money seemed much more fun, a lot easier and much more lucrative” compared to other ways he had earned his spending money. “So what I really wanted to do now,” Dalio wrote, “was beat the market. I just had to figure out how to do it.”
He decided that to achieve his goal, he needed principles to guide his steps.
“Principles are ways of successfully dealing with the laws of nature or the laws of life,” he wrote. “Those who understand more of them and understand them well know how to interact with the world more effectively than those who know fewer of them or know them less well.”
He credits the success he and Bridgewater have enjoyed to “operating by certain principles: Creating a great culture, finding the right people, managing them to do great things and solving problems creatively and systematically.”
Dalio learned some important things about himself in the process of determining his principles.
- “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.”
- “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.”
- “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.”
Dalio concluded that it was important, above all, to think for himself. (“Manias occur when there is group thinking,” he told Bloomberg three years ago.) Consequently, he came up with five guiding principles for his life and work.
- “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 not strive for what I wanted, I never felt forced to do anything.”
- “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 opinions about which ones were exciting.”
- “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.”
- “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.”
- “I wrestled with my realities, reflected on the consequences of my decisions and learned and improved from this process.”
His principles have enabled Dalio and Bridgewater to accumulate more than $165 billion in assets under management. He has beaten the market often enough to become the 84th richest person in the world, according to Forbes. That would be enough to make some people happy, but, in many ways, it is a means to an end for Dalio.
Dalio built Bridgewater “from scratch” and acknowledges that it is “a uniquely successful company and I am on the Forbes 400 list.
“But these results were never my goals – they were just residual outcomes – so my getting them can’t be indications of my success,” he wrote. “And, quite frankly, I never found them very rewarding.”
Dalio defined happiness as “an interesting, diverse life filled with lots of learning – and especially meaningful work and meaningful relationships. I feel that I have gotten these in abundance.”
People often give up on their dreams because they don’t believe they fit the template for success. Dalio believes that is a mistake.
“I met a number of great people and learned that none of them were born great – they all made lots of mistakes and had lots of weaknesses – and that great people become great by looking at their mistakes and weaknesses and figuring out how to get around them,” Dalio wrote. “So I learned that the people who make the most of the process of encountering reality, especially the painful obstacles, learn the most and get what they want faster than people who do not. … In short, I learned that being totally truthful, especially about mistakes and weaknesses, led to a rapid rate of improvement and movement toward what I wanted.”
Among his recent acquisitions are holdings in Apple (AAPL, Financial), General Electric (GE, Financial), Coca-Cola (KO, Financial), Bed Bath and Beyond (BBBY), International Business Machines (IBM, Financial), Intel (INTC, Financial), Hewlett-Packard (HPC, Financial), Texas Instruments (TXN, Financial), PepsiCo (PEP, Financial) and Procter & Gamble (PG, Financial).
But that desire to get more for less that Dalio demonstrated in his first stock purchase continues to be a guiding principle for him and his hedge fund more than half a century later.
“Bridgewater appears to trade less with some of Wall Street's giant banks than some large funds do,” observed James Freeman earlier this summer in the Wall Street Journal, "but Mr. Dalio says that it's not a policy of his firm to avoid Wall Street. 'We just go wherever the transaction costs are cheapest.'”
