Billionaire Ray Dalio is one of the biggest names in finance.  He achieved this recognition due to Bridgewater Associate’s stellar performance over numerous decades of operations.  For instance, during the 2008 financial crisis, the US Stock market was down -50% and Dalio’s Pure Alpha fund was up 9.4%.  His company has become the largest hedge fund in the world and it trades in almost every market around the world.  In this week’s episode, we read Ray’s new book, Principles.  The book was recently released on Amazon in October, and it’s quickly rose to numerous bestseller rankings.

In this episode, you’ll learn:

  • Why you can have anything but not everything in life
  • Why 15 uncorrelated bets is the holy grail of investing
  • Ray Dalio’s 5 step process to achieve your goals in life
  • The personal advice Ray Dalio gave to Preston
  • Ask The Investors: Why is inflation so low when the economy is booming

Tweet your comments about this episode directly to Preston, Stig, and the rest of The Investor’s Podcast Community using #TIPMoney.

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Podcast Transcript and Summary

Preston: [00:00:41] All right. How’s everybody doing out there? So Stig and I, like we said in the introduction, are going to be covering Ray Dalio’s new book, Principles, and this is a fantastic book. I’m sure everyone that listens to the show on a regular basis knows that we are extremely biased in our opinion about anything that Ray writes because we are very big fans. But this book was phenomenal. I’m curious what Stig’s Initial thoughts are though.

Stig: [00:01:08] I mean where to begin. I’m looking here at my notes and I literally have eight pages of notes that I wrote down from the book there were just so many things that you can take away and that just as a businessperson. And the thing is how to live a successful life and not just a successful life in terms of a financial means but how do you live a good life. How do you find what you really want. What’s the goal in life and how to achieve them and live well with them.

Preston: [00:01:43] Know this book is. I’d like to think that we read a lot of books. This book is definitely in my top five of all time because I think that there’s things in here that are definitely life changing for people if they really dig in and try to understand what he’s doing here. So without further delay let’s go ahead and just start plowing through this. The book is broken down into three parts. Part one is titled Where I’m coming from. Part two is titled Life Principles and then part three is titled work principles so let’s just start with the first part of the book and there’s a lot of different chapters so we’re not going to go chapter by chapter but we are going to go by the three different parts. So the thing I really liked about this book was really the start of this first part because you really get a sense of where everything has matured from because you get Ray’s entire life story from the time when he started Bridgewater and even before that which were some fun little stories about him growing up and you know going to school and how he wasn’t a great student. Low and behold a few years later he finds himself at Harvard Business School because he fell in love with the markets he fell in love with trading in general and commodities and specifically commodities when he first started out. You know I think one of the things that Ray was just naturally gifted with and he doesn’t say this in the book but reading through the book reading about him whenever he was younger Ray is a guy who likes to dissect things.

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Preston: [00:03:12] He likes to take things apart and figure out what the inner workings of things are. And I think that that’s just his personality. I’d imagine that was what he was like when he was a kid because whenever he talks about his process for trying to understand how the commodities market works he goes into just great detail describing every little nuance and mapping out how each one of these little phases would happen from the very start. The most fundamental piece of a commodity clear to the point where it’s sold on some type of futures market or what have you. And so that process of him mapping those things out has given him just an intense edge over others when trying to understand how to put a trade on which side of the position to be on and then using those models to know whether you’re you’ve got a high probability of success or not. So I think that’s something that he was really gifted with and I think after he had a lot of this internal drive to succeed in the commodities market at a young age out right out of college his performance and his passion for this just drove him to become really good at it at a young age and then obviously went off to Harvard and then started Bridgewater Stig. Did you have any other highlights for that initial kind of story of his life and we’ll get into more of how it shaped him profoundly later on. But did you have any other highlights from the initial.
Stig: [00:04:38] No it was more from his first business failure that I really think was a really interesting story. And I think at least looking back it sounds like that’s something that read W. is grateful of experiences. I don’t know if we should transition into that part.
Preston: [00:04:55] Well let me started off with that. So he has some success with his company starts it up Bridgewater is pretty successful. He’s becoming an expert in derivatives and things like that specifically in commodities and currencies. Eight years of success and after eight years he put on a position that Mexico was going to default on its debt. He successfully called this in in 1982. That happened Mexico defaulted on its debt. And what happened was is because he was right about this he started getting a lot of attention and Congress was holding hearings on the crisis. And they invited Ray to come and testify. And so in 1982 in November Ray went there and testified and he basically said to Congress and he also said on all these news programs these financial news programs that he was confident that we were heading for a depression next depression and he explained why and so he wrote in the book and this is you know straight out of the book he says as I saw it there was a 75 percent chance the Fed’s efforts would fall short and the economy would move into failure. A 20 percent chance that it would initially succeed in stimulating the economy. But it would still ultimately fail and a 5 percent chance that it would provide enough stimulus to save the economy but trigger hyper inflation which you know I guess is another form of failure.
Preston: [00:06:19] So he had a 100 percent confidence that it’s great that this is what I love about Ray. It’s great that he puts us in the writing and he’s so you know transparent about this mistake and that’s what I love about race. He’s so transparent that he’s writing here. I had a 100 percent confidence that this thing is going to fail. And then in the next paragraph he starts off the paragraph he says I was dead wrong. So he eventually found out why he was wrong and he said that as the money poured out of these borrower countries and into the U.S. It changed everything it drove the dollar up which produced inflationary pressures and goes into all this stuff which actually ended up fueling a boom for the next decade and a half. So he was dead wrong. And so what he got out of all this he said that I learned a great fear of being wrong. That shifted my mindset from thinking I am right to asking myself how do I know I’m right. And so by asking that question he started to really question everything of what he thought and what his biases were on what he thought the probabilities of things so he came up with four bullet points.
Preston: [00:07:29] This is really what he learned from this painful experience because he lost every single employee in his company from this. The trade was so bad that he lost every single employee in his company. He was the only one left and he couldn’t make payroll to the people that were employed within the company. And so these were his four learning points. Number one seek out the smartest people who disagree with me so I could try to understand their reasoning. Number two though when not to have an opinion. Number three develop test and systematize timeless and universal principles. Number four balance risks in ways to keep the big upside while reducing the downside. And just reading that like I just want to go back and reread it to myself again so I can only imagine how you feel kind of hearing it because this is such profound information. This four step process is so profound as far as I’m concerned that it’s something that you know you want to print off and paste right on your computer so you can look at it on a daily basis. This is really important stuff. Tostig I’m sorry. I’m pretty sure I probably stole your point with all that but go ahead and throw it over to you. You kind of did rest.
Stig: [00:08:38] And I don’t know if this is a good thing or bad thing that we are reading the same book and we have the same notes. I don’t know if we thoughtful disagree enough with each other when it comes to that. One thing I really want to highlight is here’s another billionaire are saying the worst thing it can happen for you as an investor is if you’re right. I mean he had this silver boom. Yes. Oh hundred twenty percent. He made a ton of money on that. And like I guess all new investors they feel invincible. I mean they feel like they really know the market and they feel like just do this forever. Perhaps they expose themselves to more risk and that’s supposed to. It’s interesting to hear him and people like Jim Rogers saying the same thing. It’s just so bad to be right to begin with and people out there might think well the dollar’s worth is call it $18 billion dollars it’s probably not that bad but it wasn’t really bad. I mean at this point in time yes into his business he was publicly wrong. And even though he’s been more often right than wrong you really have nothing to show for this part time and espress is for. He couldn’t make payroll even with $4000 from his staff because he couldn’t find a buyer for his car. I mean he definitely didn’t want to go back and this was the time when he had two small cats and a wife. So he was struggling. And in that section it’s really interesting because then he would face sition like on the brink of bankruptcy. Do you want to stay safe and have an origin in life or as he puts it you will want to cross that dangerous jungle and have a terrific life. I love that.
Preston: [00:10:23] I love this. I mean for me I’m just thinking about how depressive this could have been. You know think about it you had been so right about so many things for eight years. You’re this you know young warrior of finance. You’re so good. You have Congress actually bringing you in to testify. Explain to them why things are happening. And then within like a year you’re so broke that you’re borrowing 4000 bucks from your parents and you’ve got a family and a spouse and all this. I mean I couldn’t imagine how painful this could have possibly been. And so his learning points there are those four things that we read off like guys I mean my gosh for a person to go through everything that he’s done and have the biggest hedge fund on the planet you know billions upon billions of dollars that he’s turned it into to have a comeback like that. I mean it might go down in the books as one of the biggest comebacks ever. So I tell you that’s some pretty freakin important information. I want to jump to another section in this intro part where we’re in we’re still here in the first part of the book were raised talking about basically how he arrived at his solution here Bridgewater and something that I really like this is something we’ve covered in other episodes. But I think it’s really good to bring up again. And Ray talks about what he calls the Holy Grail of investing. And I know that this was something that we covered when we did the Jack Swagger book because this is something that Ray told Jack Swagger whenever he was interviewing him for the market Wizards series and this is also something that Joel Greenblatt talks a lot about.
Stig: [00:11:54] What Ray says the Holy Grail of investing is and I like how he said for me this was I felt like Einstein when he discovered you equals MC squared. Whenever I understood this and what he discovered is that if he can make 15 to 20 uncorrelated positions let’s say you buy one stock and you buy another stock and they’re inversely correlated. If you can look for positions that are not correlated and you find 15 to 20 of them you can still get the return but you mitigate almost all the risk out of the return. And for him that was the holy grail of investing. And what he says is I could get the return but not the risk. And so that was a huge turning point for him. And so when you have your portfolio and you only have five positions in your portfolio there’s a lot of risk there. They might be completely uncorrelated but because you only have five positions you haven’t reached this threshold. He has a nice little chart in the book. I mean worth the money of the book itself as far as I’m concerned just looking at this chart because it shows you mathematically why that is. This is on page 57 of the book if you’ve got the book you can get the page 50 70 you’ll see exactly what I’m talking about.
Stig: [00:13:02] So what I really like about this section in the first part of the book is that he has this quote. This is probably not going to be the first time we’re quoting something from the book because it’s very insightful. I literally had to write it down and reread it over and over again after he said that he said you can have anything you want but not everything you want and that was his big realization after his crash. So I’m just going to say that again because it’s so profound you can have anything you want but not everything you want. Not even if you’re read all you’re not even today he talks about how he did not even have that today. Eighteen billion dollars. That was something that you could really take away.
Preston: [00:13:45] Yes. I love this quote as well stig. I’m glad that you pulled this out because he’s really getting at is you can do anything you want in your life and in fact we’re going to get into some of the recipes that he has in this book we’re eating anything that you want in life but it all comes at a cost. So let’s say you’re listening to this podcast and you want to be a billionaire that comes with an enormous cost and the cost is your time and your focus and your energy that you’re pouring into that goal that you want. And so you have to ask yourself is the cost of me spending less time with my family as the cost of me not being able to go out on Friday nights because I’m working on my business. Is the cost of you name it. Insert they’re worth it. Let’s say your goal is I want to be the fastest you know speed skater at the Olympics so I want to win the gold medal. You can have that if you work your tail off for it. You can go after that but it’s going to come at a cost of everything else that you’re passing up and that’s what Stigs getting out with this quote. That’s such a profound quote. I love that quote.
Stig: [00:14:51] Yeah. And it continuous is saying that he has this equation that he’s been using throughout his life is saying that dreams plus racing reality last termination that’s equal to a successful life nothing that’s so true. It really wants you to dream big and then prioritize because if you follow the right principles and we all have the same principles and he’s outlining isn’t the book according to read all you think is right. You can follow some core principles to get that all you need to be aware of is you to be realistic about it and you need to be willing to pay that price. That involves a lot of painful mistakes and learning from them and changing the recipe still holds then just like a final point about this he says even if you do follow this recipe even if you end up with this quote unquote successful life all you can hope for struck well because at the end of the day you don’t live a good life by achieving your goals. You need to set new goals and you will struggle. You will feel pain and you will feel progress which is true you weren’t doing so but you can only hope for life where you struggle Well that’s all that we can hope for. And I think that’s I don’t want to sound bitter when I say that but I think he’s right about that. I think that is what you can hope for.
Preston: [00:16:17] You know it’s funny at the end of the Ed Catmull book that we read about creativity Inc. He talked about this sense of emptiness after he had achieved his goal and I think that that’s what you were just kind of hitting at as far as evolving and the journey being the reward here. And we’ve heard that in other books as well. Just a critique of mine for race formula. I don’t like the word dreams. I don’t know for me like I saw that on his Twitter page. New dreams plus reality plus determination equals a successful life. I agree with all the the words there except for dreams. I think I like the word objective or like dreams seem like they’re like wishful thinking. I guess for me like whenever I hear dreams it just seems like something that you want to come true. It might not. I guess I like the word objective better like you’re setting your course in your destination for this one thing. There’s a particular way. To Ray if you’re listening there you go there’s a critique. All right. So let’s jump into the second part of the book. So I loved the first part. For me it was just fun to hear these stories because they were stories that I’ve never seen written before anywhere in the press. And that’s what I really liked because a lot of it was so fresh to read for the first time and you get a lot of his economic thinking with a lot of the different stories that he was talking about through which was really awesome.
Preston: [00:17:31] All right so then when we go into the second part of the book this is called life principles and the reason he starts off with life principles instead of work principles is because I think in his mind work principles are definitely subordinate to the life principle. So he starting with the big picture. He’s describing what that big picture is and how he feels that it’s articulated the way that he’s defining it from a very broad paint brush. And then after that then he gets into the more specific. So after you’ve set your goals after you’ve figured out what it is you want to go after it once you’ve set your objective how do you build a business how do you build an organization of people around that to achieve that objective. So that’s the third part is when he gets into all the work. So let’s talk about the second part which is the life principles I learned a lot in this section. And the thing that just stands out in my mind about this entire book is something that I learned in this second section and it’s this idea that the individual’s incentives must be aligned with the group’s goals and reality is optimizing for the whole and not for you as an individual. And I think that that’s a super insanely profound idea that I didn’t necessarily have before reading this book and not something that I had read anywhere else and would raise really getting at here is he believes that the universe rewards those that add value to the whole.
Stig: [00:19:02] And not to the individual. And I think intuitively that makes sense to people. But I think so often very few people practice this whenever they’re trying to think about how they can add value to the world or how they can create a product or service that isn’t just good for a few people but is actually beneficial to mankind as a whole. And I think when you think through that context what you’re actually doing is you’re swimming with the current you’re actually moving in the direction of the current which is a whole lot easier to get moving in the right direction when you’re going with the current opposed to against the current. And so beyond that idea which I think is really important there is another life principle in here that I think is equally as important. And this is principle 1.3 and it’s really simple. Be radically open minded and radically transparent. And anybody who knows anything about recalls knows that this is such a fundamental piece to who he is. Everything there at Bridgewater is recorded it’s openly transparent. And the reason for all of this is that there is an environment where truth is what’s important. Nothing trumps truth in the culture at Bridgewater. And because of this experience that he had back in 1982 with having just total loss because he was wrong.
Preston: [00:20:24] I think he realized at that point in his life that if I’m wrong again I don’t want to go through that pain. So I got to be radically transparent. I’ve got to surround myself with people that tell me what they think the truth is. And he talks about how if I have an opinion that the sky is blue I want to find somebody that has a very high level of credibility that is an authority that believes that the sky is green. And then I want to talk to that person who says that the sky is green and I want to troubleshoot and try to understand why they think that idea is true and then I’m going to compare it to what I think is true and then between those two vantage points the truth will emerge and you’ll be able to find exactly what it is. So he’s talking about how do I destroy my own biases by going and talking to people and being just this person who wants to absorb and shut up and listen. Opposed to a person who just wants to propagate my opinion and try to mindlessly make other people believe what I’m saying. It’s not that at all it’s the exact opposite. How can I try to find out what other people have that have the exact opposite opinions so that I can understand why am I wrong.
Stig: [00:21:31] This is not all just big talk like he’s sharing some of the feedback that is not only giving to the employees but but it’s a two way street.
Preston: [00:21:41] All right so to give you guys an idea of this radical transparency that happens at Bridgewater re provided an example in the book which is just awesome. We love this. So after this meeting that he was having had his office at Bridgewater he received this random e-mail from a person who was also attending the meeting and the e-mail was a gripe that this person had with Ray’s performance during the engagement.
Preston: [00:22:09] During the meeting and so Stig’s going to read the e-mail that they received so the e-mail said this re you to serve a e minus for a performance today in the meeting did not prepare at all because there was no way you could have been that organized in the future. I we would ask you to take some time and prepare and maybe even I should come up and start talking to you just to get you warmed up or something. Can this happen again. Anyway I think my view is wrong. Please ask the others or we can talk about it. I love this. That’s honest.
Stig: [00:22:46] It’s awesome. I mean where else would you see something like this. And the person probably got promoted after they sent it. You know that’s what I love about them.
Preston: [00:23:18] All right. So this is probably one of the most important things you’re going to find in the second part of the book The Life Principles section in this is titled use the five step process to get what you want out of life. So as I said earlier you know whatever that thing is that you want to get out of life and raise of the opin you can you can accomplish anything you want. It’s just a matter of how bad you want it. But whenever you identify whatever that thing is whatever your destination your objective your dream or whatever that thing is this is what you’re going to do to achieve it. And it’s simple really hard to apply it really simple to describe. Number one have clear goals know exactly what you want out of something. When I go back to my military roots one of the very first things that I learned at West Point was whenever you identify a mission it has five things to it. The who the what the where the why the when and so what you actually do when you write out a mission statement is you identify those five things. You make sure they’re explicitly stated in your mission of what it is you’re trying to do and that’s what I think he’s getting out here with step one is have very clear goals and know what it is that you’re going after.
Preston: [00:24:34] The second thing that he has identify and don’t tolerate the problems that stand in the way of achieving those goals. So not only are you going to say you know let’s say I want to go from one side of the forest to the other then I identify Well there’s this big rock wall and the way that’s obstacle number one. Then there’s this big giant Valley after that. Then there’s this really thick forest that I have to. You know what all those obstacles are. At least you have an idea of what those are when you’re first starting out. You have to identify those. And I think this is a really critical word in this second part. Don’t tolerate the problems that stand in your way. So you would not only identify them but you don’t tolerate them no matter what you have the opinion that there’s a way to overcome these obstacles. The third one accurately diagnose the problems to get at their root causes. This is where he does his best as far as I’m concerned. He gets in there he understands every nitty gritty detail of every one of these obstacles. He defines it he maps it back test. He does all of that stuff and he understands it better than any other person that can identify that problem.
Preston: [00:25:43] That’s where Ray Dalio is the master as far as I’m concerned. And so that’s step three step four design plans that will get you around those obstacles. So now that we know exactly how the obstacles work what the problems are how they’re going to jump out and get you. Now you’ve got to design every Not just one way around a bit probably 50 ways around them and backups to the 50 ways to get around them because you’re relentless and you don’t tolerate the problems. Number five the last step do what’s necessary to push these designs through. Two results were in other words be relentless is what he’s saying here. That’s the five step process to get what you want out of life. So another thing you probably need to write down and hang up on your computer and look at and think about every time that you want to accomplish small goals big goals mammoth goals and goals that scare you when you think about them as we’re stealing from other people’s quotes. That is really really important. He gets into the nitty gritty of all of this stuff in this book and this book is so freakin organized honestly Stig if you ever found a book that’s more organized than this book.
Stig: [00:26:54] No he’s definitely a numbers person. The way he puts everything up in bullet Parnes is almost like a textbook. He is just so organized. So this is the first part. This first chapter is take away so the bullet points that man it’s it’s in the right order. Yeah.
Preston: [00:27:10] I mean it’s just like we’re doing this book. No justice whatsoever. So like if you’re listening there’s like oh I’m getting everything I need to out of this book wrong. I’m getting everything out of this discussion from this book like we’re hitting on the basics. There’s so much more to this so much more substance than you could ever imagine. I think you’re absolutely nuts if you don’t have this on your shelf and have gone through it at least one time.
Preston: [00:27:33] So the next thing I would like to highlight from this part of the book is is talking about the cost of that decision. And I think there’s all respect to the horrible experience he had when they went bankrupt almost because it was wrong. It was only wrong on one thing but that was enough to completely destroy the life. Up till then and he talks about how the cost of it that sition is at least equal but much more off rate than the reward of a decision. So you should know what you don’t know. It’s just as valuable as knowing. And I love how he talks about the risk reward ratio. And I guess some of the next points I’m going to say they might seem simple but I would like to wrap this up talk about how insightful it really yes because he’s talking about how you should always look at so first the risk and reward you. So always make sure you have a huge upside and a very little downside. Which also gets back to what we talked about before about having 15 uncorrelated bets. Now this might be more seen in a financial perspective but this is basically like everything in life and assembly gives is that a lot of people would focus on going from trouble of being wrong. Call it 45 percent. Probably being right say 1 percent because we have this tendency as human beings to be well if it’s more than 50 percent. That is what I should do. Yes it’s probably right. And he said that based from his experiences. No not at all. Why don’t you go old and study and go from that 51 percent to say 5 percent and then make uncorrelated bet whether that’s in life or in business and it’s just profound that if you compare this to say a politician and this is not a rebellious word this is Mike’s.
Stig: [00:29:36] If you compare this to politicians you probably seen the interviews with politicians. I’m sorry is just an easy target here. But you see this politician who could be asked a question and you can see that he really doesn’t know what he’s talking about. He is saying something that he thinks is right and it turns out he’s wrong but he really can’t be what you would call a plumber right because that’s such a curse word in politics. So he’s just painting himself more and more into that corner because he said there’s one thing that he said without knowing the facts. So I really think that is what Bedel is getting in here. What is wrong by saying I understand where you coming from I don’t know if you’re right. Let me go back. Think about it that we find people who thoughtfully agreed with me and then hopefully I can go up to 85 plus before I will make a decision of what to do. We need to search for the truth and not for who set what you can to give credit that doesn’t matter. As well it’s all about how do we find truth. And I think that decision making process is one of the most important things you can take away not just from this chapter but from the book in general.
Preston: [00:30:50] All right so let’s move into the third section the third part and this is called work principles and this is broken into three different sections. The first section is a section about how to get the culture of the organization right. The next section is how to get the people right and then the last one is how to build and evolve your machine where your protocol for running the business. And you know going from the second part into the third part would I think raise expecting a person to do is to be able to identify what that big object of that big mission or that big dream is in their life and then they’re slowly growing a business around that objective that they’re trying to create the value that they’re trying to create for the world. And when you go through that if it’s something big which is you know what I think Ray would expect you to do is pick something big. And if you’re trying to accomplish something big you can’t do it by yourself. You have to do it as a team. And so this last part is how do you build that team and how do you do it in a way that has a sustainable result. It’s going to get you to where you need to go. And so he in you know the way that he has this broken down. He thinks that that’s done in a three part solution the first part is you’ve got to get the culture of the people within that organization right. You have to set that culture because after it gets so big it takes on this life of its own.
Preston: [00:32:17] And if you don’t mature those principles of what the culture is going to be early on when it gets too big and you don’t even know the name of the employee that’s working in your organization anymore because it’s so big. It’s way beyond you at that point. So that’s why there’s so much emphasis spent on these principles within the section that are oriented towards the culture. The next thing is how do you get the person to hire right. And he has three subsections underneath of that area to talk it. And then the last part where he’s talking about building the machine and the protocols and working on the things. The thing I think about in this section is going to Jim Collins book Good to Great when he’s talking about how do you perfect things at the most fundamental level so that no matter what that thing will always have a good result. Have a good protocol is the word I like to rely on. How can you find that protocol so that it is always functioning in the correct manner and that’s what this last part is about where you’re building and evolving your machines so that you refine that. All right so in that first section where he’s talking about culture one of the things that I wanted to highlight from this section was this idea that you want to create a culture in which it’s OK to make mistakes but completely unacceptable to not learn from them. And this was really big. And he gave examples in his company where people had made trading mistakes. And I mean monumental trading mistakes where they lost tons of money. And Ray talks about how he would have been so easy to fire somebody for the size of some of these mistakes but instead they were charged with the responsibility that as soon as they made a mistake they had to go to a book and they had to enter in a ledger.
Preston: [00:34:02] The mistake and then what their corrective action or what they felt would be a corrective action to the mistake in order to make sure that it never happens again. And the only way a person could get removed from the organization is if they fail to identify the mistake that they had made and basically identify this so that it didn’t happen again in the future. And so that’s a very drastic twist compared to what you see in a lot of corporations in America where you’re just fired for the mistake. You know they could care less about the learning in fact they almost ignored learning and they do the same mistake over again that this is what makes radio you rate Dahlia where is obsessive about learning from those mistakes so that was highlighted in the culture section there’s a whole lot more here for people to learn from. If you’re running a business and you’re in upper management middle management lower management and you’re not reading this last section on how you can make the organization run more effectively I think you’re you’re losing a huge opportunity. So a lot of other points in the culture section in the next section where we’re talking about getting the people right Stigs in to highlight something that he found quite interesting the way that he explains this is you see his three Cs.
Stig: [00:35:12] So just another great example of how he’s using this as a textbook. And it was really clear to see how Edelman he was about this is not talking about is life. This is more him telling us how we can run our companies differently for the greater good. Does this kind of strike. I really like that about it. Well you are the three CC has about hiring the right people that is character common sense and creativity I think is really hard to find. A business book really insightful business book you start talking about the character of the person I think that’s actually the most interesting thing here because he’s basically hitting at you should hire people you would like to share your life with because you will always have a need or being surrounded by great people and not just today with how much the world is changing and how much the landscape for almost any kind of occupation is today but just in general like if you have people with the right character first of all they will adapt to that new reality. And then you might say especially if they have fertility I really also like his point about common sense. How much common sense do people have to plug things into computer. Do they think for themselves. How do the work with other people. I really like that. And he’s getting some really good advice in terms of how can you identify these traits so how many Christians do they ask. When you speak to them that’s one thing. How interested other really. And then there’s another thing I really took to heart that was show them the bad stuff.

Stig: [00:36:50] So he actually took pride in whenever he was hiring a new candidate for a job. Tell him all the bad stuff about the session because if they still accept the job it really shows that door. So this is just a personal story. We’ve been looking to grow the organization. And after reading this segment of part 3 I was so inspired so I told one of the team members that if you can please meet up with her perhaps future coworker and say all the bad stuff about working with us. That’s a long list. And I said you know I won’t ask you what you said. I won’t ask the candidate. But if that candidate is still going back to me and saying I still want to work with you Well I have read deluges work or that is short and enduring. And I get that. I mean I know I’m almost left my essays but it actually makes a lot of sense because you don’t have to say good things more than once people will remember that you don’t have to say if you’re paying and also fair if you’re getting paid vacation if you’re having all these benefits you don’t need to say that more than once but really make sure they know what all the bad stuff are because that’s the job to the job is not just collecting that paycheck. The job is not the prestige or whatever else you can offer. It’s the bad stuff. That’s also what life is all about.
Preston: [00:38:12] I’ll tell you I would have a long list as our audio editor who’s listening to all of our mistakes get edited out of these recordings.
Stig: [00:38:20] And the last thing for us about this section that really really came to think of you is saying you want to work with people who say you should have more. And the reason I think of you is I don’t know if I remember this this is years back this is years for the podcast and you’re starting to read books together. And I was like why is this guy after me such a good deal. I don’t know if you remember that. But it’s something I really remember and honestly and I’m sorry to say but the first thing I thought was first is really about this man I came from this background as a trader and as a trader It’s all about if I can gain one dollar you need to lose the same. I mean it is a zero sum game or less. But I studied you and I talked with you several times before that and were chatting on the forum. I knew you were not a bad businessman so this was a brand new concept or me meeting people who are saying you should have more. Because what happens as you have this positive feedback loop if people are telling you you should have more. What’s typically happened and you know it might sound kind intuitive that you would go and say no you should have more. Or at the very least I should provide more value. And what we originally talked about. I really liked that about that because it was so insightful and so much it’s really a testament to his part about mean for relationships. It is a great financial decision to work with people who say you should have more but even more important it’s a good way of living your life.
Preston: [00:39:50] You know I think a lot of people underestimate the power of compounding goodwill and that’s a really powerful force that is something that’s hard to learn because you got to give away a lot in order to see the effects of it. I think a lot of people don’t have the ability to let go and actually see it matured and see it compound and work for them. Thank you. I appreciate that it was really nice. Well even though I said you were businessmen. I took it as a compliment. All right. People out there roll their eyes. All right. So that’s going to wrap up our summary of the book. Now what I want to do is talk about something that happened to me personally I was afforded an amazing opportunity by a close friend and I’m very grateful for this person who gave me this opportunity to attend a book signing with Ray that he had for a very small private group of people I’d say there was 80 people there in Washington D.C.. This happened probably about five days before the book published. The street date of the book when you could buy it on Amazon so anyone who knows me from listening to the show knows probably how excited I was to go to this event and to be able to talk with Ray. So we got to the event. I was able to meet Ray one on one and talk to them.
Preston: [00:41:08] Every person that went there got a signed copy of the book before it was released which I was really excited about because I preordered mine on Amazon probably three months before this event happened or even before I knew I was going to this event. And so like you know I went in there I got my copy of the book it’s signed by Ray and Ray made an announcement he said hey if you want me to personalize the book by writing something in there just come up to me at any point tonight and I will personalize the book for you. And so I went up and asked Ray if he could personalize it. And in my copy of the book Ray wrote then keep evolving. Well and it didn’t dawn on me the meaning of this whenever he wrote it because I hadn’t read the book yet. And so you know I got back and I plowed through this thing at a rapid pace because I was just so excited to read with him you know his thoughts and Stig hit on this during the review that we did about this idea of evolving well and when Ray talks about in the book is that a person who is evolving a person who’s progressing is a person who’s. Living life well in a person who’s happy. I think at the end of the day happiness is so closely tied to a person who’s evolving and feels like a person’s growth.
Preston: [00:42:28] You know how many people do you see that are 80 years old and are miserable. And when you think about why is that person miserable or why does a person just feel like they’re a robot going through life is because there are a lot of those people they’ve stopped evolving. They’re not learning everyday. They’re not trying new things. They’ve just settled for everyday look in the sea and I think the world becomes very gray at that point and very dark and you’re not really that’s not life anymore. That’s somebody who’s who’s just mechanically going through things and they’re not exploring and they’re not learning. And so that quote was so meaningful. One other thing I want to share about the encounter that I had with Ray is you know Ray said to me he said these are my principles and I’m sure there’s a lot of them that you can use. But than you need to develop your own principles. You need to start right down which you think is the truth and you need to start dissecting it granularity behind what you think those principles are and come up with your own challenge mind come up with your reasons on why you think mine are wrong. And so just that mindset not even what he’s saying just the mindset of what he told me is so profound because what he’s saying is I don’t have the answers to everything my answers might even be 100 percent wrong.
Preston: [00:43:51] I don’t know. That’s for you to figure out. And that’s a person that sharing true knowledge as far as I’m concerned. And if people out there listening to this can gain anything from from all this I know for me that that encounter with him was so it’s almost surreal because it was such was such a truth bomb for me to hear this and to have Ray tell me that one one was just you know I was very honored to have met him and to have this experience. And what a book. You know just what a book. I can’t recommend this book highly enough and it definitely sits on my shelf with a lot of pride. All right. I said that’s all we have for Ray’s book Principles. Life and Work. Fantastic book. We’ll have a link to the book on Amazon in our show notes. Highly recommend you guys pick this one up. It’s also an audible. I got a hard copy I also did audibles. Both are stellar. The one thing that I will say about the hard copy it’s so well organized like we said earlier and it has all these things that are really systematized inside the hard copy that to be honest with you I think the hard copies probably the best choice if you’re trying to pick between the two.
Preston: [00:45:02] I would definitely go with the hard copy so you can reference things but that’s you know that’s my two cents. So all right. That wraps up the book at this point in the show. We’re going to do is we’re going to cover a question from the audience and this question comes from tawn Preston. This is tawn calling in from Cincinnati Ohio. I’m a huge fan and so happy to see the tremendous growth of your brand. And thank you guys enough for all that you do. Since the most affected teachers are the ones who make ethical concepts understandable to their students and you guys do just that. My question today revolves around the current economy and how it relates to the market data show that recent inflation rates in the U.S. were lower than expected while the economic growth is accelerating. Subsequently bond yields or interest rates recently just hit their highest levels in this scenario. One would think that if the economy is growing in a positive manner then prices should be rising relatively along with it. But instead inflation rates are low. So I’m curious to hear what your thoughts are on why this is the case. I’m also curious to hear your thoughts on what it means for the market as billionaires like Ray Dalio are shifting or folios to a more defensive position. As always I look forward to your next show in your replies. Thank you.
Stig: [00:46:20] While thank you so much Tom for this amazing question. And it really makes me think of when I was teaching classes in macroeconomics. And for me to starting to doubt the car models we have about inflation. You all right. Like what we typically taught is that when the economy is heating up inflation should go up too and that’s what I see. And the reason for that I just say once on the same page is that whenever you have economic upswing it would lead to higher wages. It would push up price levels and then often the federal reserve with higher rates to stop the economy from overheating and just stop that inflation that will come from as a result of that. And it’s kind of like you will go in cycles and that’s kind of like what we were taught in what we what we used to think. So you’re really hitting at something good here. So what’s happening now why haven’t we seen this in this cycle and perhaps not too much in the last cycle. And the reason why is that the feedback loop I talked about before with an upswing higher wages price levels. It’s not what we have today and the whole reason for that is the productivity growth abetted by the new technology because now you have more production that can be generated from capital labor and you can grow the economy faster without cost and the supply bottlenecks that particularly give higher prices. And this is also hinting at present I mentioned before that the middle class is really getting crushed.
Stig: [00:47:50] It might sound like the average GDP for the U.S. is increasing as it is. But it’s not distributed equally. And technology is a huge reason for that. If we continue discussion about technology was really key here. If you think about the prices of something like education health and food. I mean that’s all getting more expensive and you will like it has been so for a long time and you’re looking at the inflation rate of 1 percent or 2 percent. And we’re thinking this doesn’t make any sense. And this is really a math thing because of technology. Technology has made certain products it takes up a huge part of its disposable income much cheaper. So for instance this calculation the price of cellphones dropped to sixty two percent between 2004 and 2014. Now you’ll be like that doesn’t make any sense. Phones are expensive today but what you do whenever you’re looking at the inflation index is that you are saying I need to have a comparable product. Now that makes a lot of sense if you have 10 gallons of gas if you put that into the index that makes a lot of sense because it has same utility more or less. It doesn’t make any sense because that phone wouldn’t have saved 10 years from now. So also keep in mind that the inflation number is skewed. Another thing I like to highlight is this sharing economy which is a new thing that we haven’t seen before.
Stig: [00:49:14] If you look at something like AirBNB they had more than 160 million guests last year and on New Year’s Eve they had two million guests spend the night in there listing. So in the old world just that alone would be 20000. It’s hospitals that was built to accommodate the gas and that will create a lot more demand for labor cement materials and land. And that’s not the same effect you see now because of the sharing on them. And then the last point is that you have globalization now and to an extent that we haven’t seen before so in the old feedback loop that I’ve talked about for economic growth and then you have worker demanding high wages as you said before. That’s not the way it is today because technology but also even if you can replace that knowledge you you can replace that with workers abroad. So by definition since that will work for cheaper wage you can pressure up prices. And so the wages will increase and in turn the inflation. So I guess I was kind of like my own reflection of that question is how inflation has changed and how we probably need to rethink inflation and what to do about it in this new globalized and technological. Well what I really like your questions and I thank you for allowing us the chance to talk about this in depth.
Preston: [00:50:42] So this is a very appropriate question for this episode and I’m going to hand you off to an article in our show notes re. Literally just wrote this article last week you published it on LinkedIn and it addresses this exact issue that you’re highlighting in a lot of it comes down to the effects of quantitative easing and what it actually ends up doing to the economy. So everything that you described. 100 percent accurate and what you’re seeing is this obliteration of the middle class. And so we’re you are seeing growth you’re seeing growth in the hands of the elite. You’re seeing the asset accumulation in the asset appreciation in the hands of the elite. He goes in and he he quantifies everything with stats and statistical proof to back up every one of the claims that he has to substantiate his position. All right for the second part of the question we’re asking about where do you think things are going to go. For me I took a lot of my queuing from people like Ray from Warren Buffett some of these other guys and what these guys are all talking about is the central banks starting to take a different approach moving forward here at the end of 2017 and into 2018 where they feel that a lot of the central bankers are going to start to turn off a lot of the quantitative easing that’s been so prevalent in the previous decade.
Preston: [00:52:04] You’re already seeing that with the Fed here in the U.S. you’re still seeing the ECB and the Bank of Japan doing quantitative easing at humongous rates. So for me I’m having a hard time buying it. You know I recently heard an interview with Ray on Bloomberg where Ray was saying that you know 2018 is going to be the year where the central banks start to reverse what you’re going to see is that bonds are going to start to sell off and you’re going to start to see rates on bonds going up. That’s what his expectation is moving into 2018. Ray also said that it’s not that he’s a bull on stocks but I think he’s cautiously holding. And I think he still has a fairly sizable position in stocks. But I think that he’s not looking to call a huge upside there. I think that it’s more of a sustainment thing. So my expectation is very similar to all of that. I think that the bond market is going to have a fairly substantial sell off. I think most of the sell off in the bond market is going to happen on the short end of the yield curve on the duration side like the shorter duration bonds or the things that are going to be moved into a lot with you get out near to the 30 year side of the bond yield curve.
Preston: [00:53:13] I think it’s going to probably be pretty flat maybe go up a little bit which means that it would sell off a little bit but you know I would agree with that expectation. One concern that I’m going to say is that I think the ECB and I think the Bank of Japan are much more of a wild card to pull all in their quantitative easing efforts than I think people are giving them credit for. I guess my opinion is I think they’re going to continue to print. I think they’re going to continue to you know swap cash for these bonce on their market and I think they’re going to continue to do that until we start to see some things fundamentally start to break. I don’t have any other reason to believe otherwise. Because even when the Fed was saying that they were going to pull things back and that they’re going to raise rates and they’re going to do you know for every time they said they’re going to raise rates they would do it one three every three times they would say it or once every four times they’d say.
Preston: [00:54:01] So their believability and he talks about that in the book. What’s the believability that you’re indexing them at. And for me the believability part of it is extremely low so although I think the market is extremely high with the Shiller P 31 I don’t necessarily see things I don’t see credit contracting at a rapid pace because I don’t see central bankers really changing much of their policies anytime soon. All right so taan thank you so much for submitting your question for getting this on the show. We’re going to give you a free subscription to our online intrinsic value course that’s thick and I have built probably about 10 hours of content there where we go through how to do discount cash flow models and we’ve got an online intrinsic value calculator that you can download on Excel that helps you do these models for anybody else out there that wants to get a question played on the show and potentially received this course for free. Just go to ask the investors dot com you can record your question there and if it gets played on the show then you can have recourse.

Books and Resources Mentioned in this Podcast


Ray Dalio’s book, Principles – Read reviews of this book

Ray Dalio’s article about inflation and the current state of the economy.

Ray’s white paper on Economic Principles (highly recommended)

Videos That Support this Podcast


Preston’s Review of Ray’s Book on Amazon

This book was fantastic and extremely organized. The author starts the book by giving the reader a background on who he is and how he arrived at the principles that were outlined. This part of the book is good for anyone that’s not familiar with the author’s backstory. It was somewhat astounding to learn that Mr. Dalio was literally broke in 1982 and has come-back to build a 150 billion dollar hedge fund.

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In the second part of the book, the author gets into the stuff that’s incredibly important, but difficult to implement. In short, he provides a roadmap and tools (via algorithmic means) to accomplish anything you want in life. There’s a ton of substance, definition, & practicality on how to action your objectives. He has a five-step process to achieve what you want out of life, and it couldn’t be more understandable and reasonable. The tricky part for most people (in my humble opinion) is finding a goal or objective that they can focus and remain passionate about for an extended period. If that’s not your problem, then Mr. Dalio’s advice in the second part of the book is significantly profound.

In the third section of the book, the author teaches you how to build the mastermind group/organization that’s going to achieve the goals/mission you outlined in the second part of the book. The knowledge and thought that went into these 300 pages of the book are quite impressive. In short, the reader needs to get the culture right, get the people right, and then build and evolve the protocols that run the organization at a fundamental level. There’s so much granularity behind those core concepts that it’ll keep you busy trying to absorb everything.

In my humble opinion, MBA programs should be designing management courses around the information contained in this book. It’s extremely thorough, practical, and organized.

Negatives. The book is a long read. If you’re looking for something that’s quick and easy, you’re in the wrong place. The book is so organized (which I personally liked) that some might find it too programmatic. If you’re looking for surprises and adventurous stories with your learning, you won’t get that in the last two parts of the book. Dalio is all business.

In general, I’m so impressed the author took the time and effort to teach the world everything he has learned. You can tell he truly wants to help others be successful. The book has taught me the importance of trying to understand the fundamental building blocks of my own life. I now have an appreciation for trying to understand how things work and how I can model success habits around those principles. I’ve started to list my own principles, but it’s hard identifying unique ideas beyond those found in the book (because it’s so thorough). But the important part is that I’m aware of developing my own list and co-opting or creating new principles. This book has had a profound impact on me – it’s definitely worth more than 5 stars.