BookWatch: Billionaire Ray Dalio wants his principles to guide your money and your life

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You want the truth about success? Ray Dalio is convinced you can handle the truth.

The founder of Bridgewater Associates, the world’s largest hedge fund, has made a lot of bets over almost 50 years of managing money for institutions and the world’s wealthiest. Dalio’s latest bet is that people will practice his principles — personal rules of life’s road that Dalio, 68, has developed over the decades and credits for his success.

Dalio details these fundamentals and more in the recently published “Principles” — a blunt, unsentimental portrayal of what it’s like to run your life and business as Dalio does, which is to say bluntly and without much sentimentality. Accordingly, the 567-page book is subtitled “Life & Work.” Anyone looking for how Bridgewater and Dalio face economic and investment conditions will have to wait for his next book, which he promises will cover those particular topics.

Dalio’s principles are rooted in hyper-realism — accept your realities and use the tools and talents you have to move forward. If you operate with such “radical open-mindedness,” “radical transparency,” and “radical truth” — warts and all — Dalio insists you will boost the odds of getting what you want from life. These and other unconventional ideas permeate the corporate culture at Bridgewater, which oversees about $160 billion in assets.

Of course, not everyone is open to being transparent, radically or otherwise, about their weaknesses, vulnerabilities and mistakes, and Dalio’s methods have won him both disciples and detractors. But in his view, admitting weakness is a strength — both personally and for an organization.

Dalio spoke with MarketWatch in late September about both his book and current economic conditions. Following is an edited version of this conversation:

MarketWatch: Who did you write this book for, and why?

Dalio: The main theme is about how to take advantage of failure — what you don’t know and the power of dealing well with what you don’t know. One of the greatest tragedies of mankind is that people hold onto opinions that are wrong, that stand in the way of them making the best possible decisions.

There are only two things that one has to do to be successful: know what the best decisions are, and then have the courage to make them.

What I found helpful is that whenever I would make a decision in the markets or almost any decision, I would write down the criteria for making that decision. By writing it down I would have a recipe so that when the next one of those things comes along, I would be able to look at it and say, how should I deal with it?

This is my year of transition from the second phase of my life to the third phase. As you approach the third phase of your life, the joy changes. I don’t need more success. My joy is in helping other people be successful and independent. I felt I had a responsibility to put out everything I know in this collection of principles. I was going to start with economic and investment principles but I realized that more fundamental were life and work principles.

MarketWatch: What you call “radical truth” and “radical transparency” are fundamental to your life and work. What do these principles mean, and what sort of person is willing and able to follow your lead?

Dalio: For radical truthfulness and to have an idea meritocracy, you have to do three things:

First, put your honest thoughts on the table with other people putting their honest thoughts on the table.

Second, have thoughtful disagreement. Approach that with curiosity. Maybe I’m wrong. If two people disagree, one person is probably wrong. How do you know that person isn’t you? To make sure it’s not you, have quality, thoughtful disagreement.

Third, if a disagreement remains, you have to have a way of getting past that. There’s no relationship that doesn’t sometimes have disagreement. For me there’s only two things I want from people and I want to give them: reasonableness and consideration. I don’t have to always get what I want. If I have those things, I can have a good relationship with somebody.

Radical transparency is important because otherwise you’ll get spin. If you put everything in the light of day, they can form their own opinions. If it’s behind closed doors, you don’t really know what’s going on and it stands in the way of an idea meritocracy. And when you have radical transparency, much less bad stuff goes on behind closed doors.

To have a great life, you have to make the best possible decisions — and they don’t have to come from you.

MarketWatch: You call yourself a “professional mistake maker.” People don’t like to make mistakes, and don’t like to own up to them when they do.

Dalio: Our system is bad in that regard — rewarding for being right, punishing for being wrong. Learning should begin by going out and experimenting and learning from being wrong and valuing being wrong. Honestly, that’s the best teacher. Mistakes are the best way of learning.

To have a great life, you have to make the best possible decisions — and they don’t have to come from you. Think about the best people, the most believable people who disagree with you. Then be curious about their reasons.

MarketWatch: A key principle of yours is asking “How do I know I’m right” versus “I know I’m right.” Did this insight come from the professional bottom you hit in 1982? You were then in your early 30s — smart, confident, successful, and a bad bet sank your business.

Dalio: It had the biggest effect. That’s when I transitioned from saying ‘I’m right’ to ‘How do I know I’m right?’ Then I had to make a lot of choices. How do I not do this again? I have this expression — pain plus reflection equals progress. Reflection is your instinct to say, what would I do differently in the future?

I developed this habit: Pain, let it pass, but let me reflect in an open-minded, quality way on it. What most people do is that when the pain goes away, they stop thinking about what to do about it — and the next one hits them in the same way.

MarketWatch: Another key principle is that we have nothing to fear from knowing the truth. That’s a hard pill for many to swallow. Why is it important they do?

Dalio: People have these barriers. They don’t want to look at harsh realities, like their weaknesses. The power of knowing your weaknesses is really great. By knowing what is true, you can find out the best ways of dealing with it. That doesn’t mean you have to get strengths where you’re weak; you can work with somebody who’s strong where you’re weak and operate in a way to be successful. I’ve found that once people know what people are like, and then you put together teams, it’s no problem.

MarketWatch: You regularly practice a type of meditation called Transcendental Meditation. How does this focus you?

Dalio: Essentially it both gives you calmness and equanimity and opens the connection between your conscious mind and subconscious mind. When you’re in your subconscious mind, that’s also where your creativity comes from.

We must not have a downturn in the economy. Now is when times are good, and you see what the tensions are.

MarketWatch: Switching to the financial markets, you’ve said the current global economic environment echoes 1937. What about that period reminds you of the world today?

Dalio: The 1929-to-1932 debt crisis that led to zero [percent] interest rates was basically the same dynamic that was the 2008-09 financial crisis. In both cases, the central bank printed a lot of money and bought financial assets. It pushed the prices of financial assets up and it pushed money into the economy. We had markets going up and we had economies going up. Both cases hit zero interest rates. And in 1937, the Federal Reserve began to tighten monetary policy.

At the same time, the wealth gap increased a lot. Today the net worth of the top 1/10 of 1% of the population is equal to the bottom 90%’s net worth. The last time that happened was in the 1935-40 period. The wealth gap is the biggest economic issue of our time. If you look at the economy of the bottom 60% of the population, so the majority, it’s a miserable economy. It hasn’t had income growth. Death rates are rising because of opiates, other drugs and suicides.

So we are at that analogous point of the cycle in which the Fed is beginning to tighten monetary policy. We have the wealth gap. And we have populism. The world in 1937 had a lot of populist leaders. A populist leader is somebody who is a strong personality, who is in a battle with one sector against another sector. Populist leaders tend to be more nationalistic, more protectionist, and more militarist. You go through a period that is more likely to have conflict.

At the same time we have a lot of obligations that probably can’t be met — a combination of debt, pensions and health-care obligations.

So there is asymmetric risk on the downside. We must not have a downturn in the economy. Now is when times are good, and you see what the tensions are.

This is a time for being cautious.

MarketWatch: What’s your view of the Fed turning more hawkish about interest rates and unwinding stimulus?

Dalio: I don’t think that the Fed will do the plan as they’re projecting. Just as in the past. They thought they would increase interest rates, and they never did because the circumstances did not produce the inflation they expected.

As we go forward, what they’re talking about is selling a lot of bonds, something equivalent to 2.5% of GDP in bonds. That’s a lot of bonds. In addition, we’re going to have budget deficits increasing, which is going to mean selling more bonds. And we’re not going to have much of a growth pickup. So this is a time for being cautious.

Read: ‘Bitcoin is a bubble’: Dalio

MarketWatch: What can investors learn from Bridgewater’s All Weather fund, which is built to handle any global market scenario?

Dalio: Balance. Knowing how to achieve balance in one’s portfolio.

You have to know where neutral is. I break asset classes into four boxes and two influences — inflation and growth. Either they go up or go down. For example, if the economy goes down and inflation falls, I know bonds will do well. If inflation and growth pick up, I know bonds will do badly. I put 25% of my risk exposure in each of those boxes.

There are four environments: growth/inflation and rising/declining. Now I say, what assets will be best in there? If growth is faster than expected, I know equities will go up. Inflation? Inflation-indexed bonds, some commodities, a bit of gold. I’ll have bonds, sovereign bonds, if inflation falls and growth falls.

My objective is to achieve balance. One could do it by looking at past correlations. The reason I don’t is that correlations happen because of reasons. I don’t have an environmental bias. I want to achieve balance.

The biggest mistake investors make is to look at their recent experiences and assume the future will be similar to the past.

MarketWatch: Indexing’s popularity is soaring and unprecedented. Are index investors exposed to too much market risk?

Dalio: I’ve been doing this for about 50 years. I’ve watched indexing and active come and go. Doing better than the market is zero-sum game, which means there’s always going to be smarter people who do better than the averages. The difficult question is, can you pick the winner? The biggest mistake investors make is to look at their recent experiences and assume the future will be similar to the past.

I recommend indexing for those who are not confident that they can pick the winners. But when they index, understand how to create a balanced portfolio of indexes. They tend to have portfolios that are very concentrated, that will do well when the economy does well and do poorly when the economy does poorly. They don’t think enough of their liabilities. What are they going to spend the money on? When?