More Ray Dalio Wisdom

Additional excerpts from Ray Dalio’s Principles. By presenting thoughts along similar veins by other investors, I do not wish to imply that Dalio’s thoughts are unoriginal. Instead, I am merely attempting to highlight psychological and behavioral commonalities between these investors. Random coincidence that these overlaps exist? Perhaps. But it’s much more fun to contemplate other contributing possibilities. Psychology, Process Over Outcome

“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.”

Successful investing often requires the ability to straddle a very thin line between humility (“I could be wrong”) and hubris (“I am right, they are wrong”) – seemingly paradoxical dispositions. Howard Marks dedicated a whole chapter to this concept titled “Knowing What You Don’t Know.”

“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.”

Asking others to torpedo your thesis and listening to their reasons helps avoid confirmation bias (seeking and retaining only information/facts that support your thesis while ignoring anything to the contrary). An example of this implementation in its extreme: as of 2010, Bruce Berkowitz of Fairholme didn’t employ analysts, and instead hired external experts to challenge his ideas and theses.

When To Buy

“I don’t make an inadvertent bet. I try to limit my bets to the limited number of things I am confident in.”

Charlie Munger once said the following: “…the one thing that all those winning betters in the whole history of people who’ve beaten the pari-mutuel system have is quite simple: they bet very seldom… the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.” Yes, he’s talking about horseracing, but same rules also apply to investing.

Ray Dalio on Mistakes

A long time ago, I stumbled upon this gem/manifesto by Ray Dalio, the billionaire founder of hedge fund giant Bridgewater ($154Bn AUM). It doesn’t contain his investment principles or Bridgewater’s secret sauce (which is likely constantly evolving anyway, powered by talented and creative minds). Instead, it offers a wealth of general advice on life, collected by Dalio over a lifetime of observation and reflection. The excerpts below on mistakes are merely the tip of the 106-page iceberg. Enjoy! Mistakes

“Since I started Bridgewater, I have gained a lot more experience...mostly by making mistakes and learning from them. Most importantly:

I learned that failure is by and large due to not accepting and successfully dealing with the realities of life, and that achieving success is simply a matter of accepting and successfully dealing with all my realities.

I learned that finding out what is true, regardless of what that is, including all the stuff most people think is bad—like mistakes and personal weaknesses—is good because I can then deal with these things so that they don’t stand in my way.

I learned that there is nothing to fear from truth. While some truths can be scary—for example, finding out that you have a deadly disease—knowing them allows us to deal with them better. Being truthful, and letting others be completely truthful, allows me and others to fully explore our thoughts and exposes us to the feedback that is essential for our learning.

I learned that being truthful was an extension of my freedom to be me. I believe that people who are one way on the inside and believe that they need to be another way outside to please others become conflicted and often lose touch with what they really think and feel. It’s difficult for them to be happy and almost impossible for them to be at their best. I know that’s true for me.

I learned that I want the people I deal with to say what they really believe and to listen to what others say in reply, in order to find out what is true. I learned that one of the greatest sources of problems in our society arises from people having loads of wrong theories in their heads—often theories that are critical of others—that they won’t test by speaking to the relevant people about them.

I learned that everyone makes mistakes and has weaknesses and that one of the most important things that differentiates people is their approach to handling them. I learned that there is an incredible beauty to mistakes, because embedded in each mistake is a puzzle, and a gem that I could get if I solved it, i.e., a principle that I could use to reduce my mistakes in the future. I learned that each mistake was probably a reflection of something that I was (or others were) doing wrong, so if I could figure out what that was, I could learn how to be more effective. I learned that wrestling with my problems, mistakes, and weaknesses was the training that strengthened me. Also, I learned that it was the pain of this wrestling that made me and those around me appreciate our successes.”

“I believe that our society's ‘mistakephobia’ is crippling, a problem that begins in most elementary schools, where we learn to learn what we are taught rather than to form our own goals and to figure out how to achieve them. We are fed with facts and tested and those who make the fewest mistakes are considered to be the smart ones, so we learn that it is embarrassing to not know and to make mistakes. Our education system spends virtually no time on how to learn from mistakes, yet this is critical to real learning. As a result, school typically doesn’t prepare young people for real life—unless their lives are spent following instructions and pleasing others. In my opinion, that’s why so many students who succeed in school fail in life.”

“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 weaknesses—and that great people become great by looking at their mistakes and weaknesses and figuring out how to get around them. 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.”