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An Executive Summary of Principles: Life and Work
By Ray Dalio
INTRODUCTION
Ray Dalio is a billionaire investor and philanthropist who founded the largest hedge fund in the world, Bridgewater.
In this summary, we break down Dalio’s famous book, Principles. This amazing book speaks to how to live a good life based on strong relationships and the pursuit of ambitious goals, how to find career success and build a great organization, and how to map your own principles based on your unique life experiences, and so much more!
Not only is Dalio a legendary investor who we’ve discussed at length over the years, he’s also an expert at building systems to run organizations and navigating the complexities of interpersonal relationships. Whether you’re looking to improve your company, club, charity, or build one of these from scratch, or just hoping for personal wisdom to guide your own life, this book really covers it all.
To Dalio, he’s said that it’s actually a bit funny and uncomfortable for him to provide recommendations to others, as he still feels there’s a tremendous chasm between what he knows, and what he should know. That said, his advice really comes more in the spirit of effectively dealing with the unknown.
He’s found tremendous success in life and business, though he explains that he’s at an age where he’d rather spend his time sharing lessons with others, instead of using these principles to enrich himself further.
What’s more important than trying to copy Dalio’s principles, which are tailored to his unique life experiences, is learning to think for ourselves independently. This is actually his first principle: think for yourself about what is true.
By following others’ principles without adapting them for yourself, you risk living a life that’s incongruent with your values.
To accomplish this, as we make mistakes, we must reflect on them meaningfully. Dalio has a great quote for this, “Pain plus reflection equals progress.” Without reflection, we lose the opportunity to turn our pain into something productive in our favor.
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ENTREPRENEURSHIP
With the value of independent thought and reflection in mind, another thing that really stands out to me about Dalio is his courageous willingness to stand out against the crowd.
He highlights that to be a successful entrepreneur, you have to make bets against the status quo, which will sometimes just leave you embarrassingly wrong. This is the cost, though, of taking real risks with tremendous potential payoffs.
This is true for investing as well. While we could all stick to broad passive index funds or invest only in the most popular stocks, for the more ambitious among us, great returns are made, almost by definition, by investing in places that are being overlooked by everyone else.
Typically, these sorts of collective errors stem from too much extrapolation of current trends into the future.
Dalio touches on the reality that we often expect the future to be only a slightly modified version of the present. But if history is any guide, the future can be at times, vastly and unimaginably different.
Because of this, Dalio accepted early on in his career that just because something hadn’t happened in his lifetime yet, doesn’t mean that it shouldn’t be expected to happen at all. A tremendous first learning lesson in this regard came in 1971, when the United States implicitly defaulted on its debt liabilities by no longer allowing the dollar to be redeemable for gold. This seemed unprecedented, and he expected markets to collapse in panic the next day, but to his shock, the stock market boomed in response.
This triggered a lifelong journey of reflecting on his assumptions, studying history, and seeking the objective truth free of human narrative.
INVESTING
As an investor, one of his personal principles that shaped his hedge fund Bridgewater, is based explicitly on avoiding things that are priced as sure to happen in markets.
Even subconsciously, market participants may have assumptions about the future that are reflected in the prices they pay for assets, and Dalio has remained systematically determined to sidestep these consensus biases.
In other words, for all business and investing decisions, Dalio made it a part of Bridgewater’s culture and operations to always identify someone who holds an opinion that differs and listen to them thoroughly.
Even further, it’s imperative to know when not to hold an opinion, and just consider the facts. In this way, Bridgewater sought to uncover universal truths that could be objectively and systematically applied as investing strategies.
Accomplishing this has meant that the firm is able to often identify opportunities where their downside is limited, while their upside from a bet is massive.
Every time Dalio has made a trade in markets, he writes down the criteria and logic underpinning this decision, so that he can analyze the effectiveness of this logic later on and refine it over time.
He doesn’t leave anything up to chance. “Bridgewater became the largest hedge fund in the world by combining the creativity that our qualitative brains can provide with algorithms and computing power to double-check and prove or disprove theories.”
TRUTH
Moving on, Dalio makes a great comparison that I love. He says that time is like a river that pushes us forward towards encounters with fate. As we age and flow down the river, we can’t know what we’ll encounter for certain, but we can try to be as prepared as possible.
Over the course of our lives flowing down the river, we’ll have to make millions of small choices, each one slightly altering our course and final destination.
This is part of Dalio’s emphasis on embracing life and dealing with it. His guiding principle here is quote “truth is the essential foundation for producing good outcomes.”
Without truth, we cannot possibly expect to make the right choices among the many before us down the river. And if we make the wrong choices, we’ll likely be doomed to a life of mediocrity, weak relationships, and dissatisfaction.
Truth here simply refers to the ways in which the world actually works. Dalio believes that the laws of nature are before us, and we must act accordingly.
We ought to then work with reality as it is, and not as we wish it would be.
While uncovering the truth and embracing reality may expose our flaws, weaknesses, and insecurities, these are, at the end of the day, just psychological pains. Not to dismiss how discomforting these are to face, but the point is that they are surmountable, and we’ll ultimately be better off for doing so.
Encountering this kind of pain has been a great indication to him that he’s uncovered a valuable learning opportunity. And to learn from his mistakes and pains, and just to better see reality, Dalio encourages us to utilize the practice of meditation.
CREATING YOUR OWN PRINCIPLES
To create our own principles, Dalio suggests that we keep a log of every kind of encounter we have, or in other words, the types of decision points that we come across on the river of life.
With this log, we can reflect on our goals and how we wished the circumstances unfolded, while speculating on what we could have done differently to achieve these goals. As we accumulate more data, we can stress test and implement our possible solutions, and note these as well.
Another thing Dalio does is reframe the problems that he encounters. He views each one as a puzzle, and he works from there to diagnose the issue and design a solution.
Over time, we’ll find models for how to live our lives, and trends that guide our behaviors in various situations. Although it may seem like there are an infinite number of possible encounters and situations we could find ourselves in, Dalio says that in reality, there are only a few hundred different types generally, and with enough attention to detail, we can find the underlying principles that should shape our actions.
BIG PICTURE
For Dalio, this all means that he’s on a constant journey to build models for behavior, organizations, and relationships, while seeking to improve these models with learnings from the very real pains and failures he experiences along the way.
For him personally, his lowest point came in 1982, when he bet everything on an economic depression that never came to fruition. This was a hugely public mistake for Dalio, and it seemed like his career prospects had been dashed in one fell swoop.
As a result, Bridgewater had to let go of all its staff, and after years of building his company from scratch, he was back to square one as the sole employee.
He went from a proud and successful entrepreneur who cared deeply for his employees to being broke and borrowing money from his parents just to pay the bills.
The uncomfortable truth is that we will all hit low points like these, either from failures in our career, from illness or disease, or from the loss of loved ones we feel as though we cannot live without. Dalio is a testament to clawing back from these bottoms in our lives and becoming even better for having experienced it.
He says that, no matter what, the worst moments in our life will always pass, and that there’s always a best path forward should we devise a sound plan of action. Honest reflections and an embrace of the reality before you is the key to devising such a plan forward, there’s no other way around it.
TRADEOFFS
We all face a tradeoff though that Dalio cannot answer for us.
We must determine just how ambitious our goals are. It’s okay that not everyone wants to be the President, but some people surely do. If we think of our goals as being similar to financial returns in investing, as our targeted goals increase in magnitude, so does the risk and downside.
He suggests that to optimize for success and happiness, we have to figure out what these mean to us in the first place, and then find the courage to undertake the corresponding actions necessary to achieve them.
For Dalio, his tradeoff came in 1982 when his company collapsed, and he had to decide whether he would give up on his goals and just accept a day job to pay the bills, or try and restart the business. Such a conservative lifestyle didn’t match his personality and had he chosen that path, he would have had a dramatically different life.
He’s more of a risk-seeking person with big dreams of success, but this just meant that his personal path toward those goals would be more challenging and have much lower lows than for someone working in a stable nine to five job.
It’s perfectly fine to choose the conventional career and salary route. The point is really that we need a deeply intimate understanding of ourselves to discern how to best weigh life’s tradeoffs on our journey down the river.
BARRIERS
Complicating our thinking here are our egos and blindspots. We often defer to believing our own opinions without actually stress-testing them in any meaningful way due to ego. And we instinctively see self-criticisms as attacks, and our defenses surface in response to justify or dismiss our flaws.
We devise coping mechanisms that help us function day-to-day, but they cause us to lose sight of reality should we cling to them too tightly.
It’s much more logical for us to be open to feedback from others, which would enable better decisions based on more accurate data, rather than making choices inspired by self-delusions.
Should we find success in taming our egos, we still will encounter blind spot barriers, which refers to the fact that we cannot know everything, though our brain will try to fill in the gaps subconsciously. It’s hard to know what you don’t know, and these blind spots correspond to the type of person we are.
Some people are better big picture thinkers, while others are more detail-oriented. Some are more linear, and others are lateral. Some may be very creative but not all that reliable.
We are all wired differently with varying perceptions of the world around us, and correspondingly, we’ll all have different blindspots, which is why it’s necessary to have strong relationships with others who can help you paint a fuller picture of the world.
OPEN MIND AND TRANSPARENCY
To counteract our egos and blindspots, Dalio explains that we should employ radical open-mindedness. This is a chronic willingness to question yourself, listen to others, and continuously re-define your beliefs.
Financial markets are complex, and no one knows fully what’s going on, so it’s quite helpful to stay flexible and not hold onto any one idea about how things work too tightly.
Radical open-mindedness is really about replacing your joy in being proven right, with a joy in discovering what’s true.
In this regard, we can leverage thoughtful disagreement to learn how others think, and see the world through their eyes.
At Bridgewater, Dalio has upheld this to a fanatical extent, seeking always to find the best independent thinkers to join his teams that he can juxtapose his views against.
To communicate effectively amongst those with divergent opinions, Dalio learned about the principle of radical transparency and its value. This style of thinking is based in non-emotional communication that, at all times, conveys genuine expression.
No beating around the bush, no white lies, no emotional reactions to other’s pushback, just an objective and true examination of the facts as much as possible. Radical transparency and open-mindedness have become Bridgewater’s signature traits, but the principles have become an example for many other firms to follow effectively.
IDEA MERITOCRACY
He refers to the confluence of these principles as creating an idea meritocracy, where the best ideas are pushed to the top in a relatively flat organizational structure.
In such an organization, it’s okay to make mistakes, but it’s unacceptable not to learn from them.
An idea meritocracy requires then that people do three things:
- Firstly, they must put their honest thoughts on the table for everyone to see and be comfortable with this vulnerability.
- Secondly, teams must have thoughtful disagreements where there is quality back and forth in which people can evolve their thinking to come up with the best collective answers possible.
- And lastly, everyone must agree to abide by idea-meritocratic ways of getting past the remaining disagreements. This means that conflicts should never be left unresolved, and once a decision is produced by the group, everyone must support it, even if they still don’t fully agree with it.
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CONCLUSION
To tie things together, Dalio explains that happiness and satisfaction are not attained merely through achieving our goals, but rather through the constant struggle to attain them. In his life, he’s accomplished many of his audacious goals, but in those moments, he’s never felt fully satisfied.
Rather, he felt driven to push onto the next challenge, which caused him to realize that it’s the act of struggling towards greater endeavors that drives our evolution and fuels our sense of purpose in this world.
So it doesn’t matter what your goals are, just that you honestly have them, and are working towards hitting them.
Even better is when we do this with a team of people we adore, respect, and deeply care for, who embark on a shared struggle alongside us. Cultivating meaningful relationships is at the core of Dalio’s philosophy and the universal truths he believes to have uncovered.
Principles reminds us that “who” is more important than “what.” Never sacrifice the opportunity to surround yourself with great people. As Dalio said, “Have the courage to define your dreams, and work towards them, and on this journey, you’ll uncover just how great you can be.”
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