BillionaireHedgeFund

ManagerRayDalios
6StepSuccessFormula
ByMichaelSimmonsAndIanChew

PhotoCredit:WorldEconomicForum/MoritzHager

Pleaseexcusetypos.ThisreportisaninformalsummaryofDaliosseminalebook,P
rinciples

Overview

Beatingthemarketconsistentlyforyearsisrare.Beatingitoverdecadesisalmostunheardof
outsideofafewoftheworldstopinvestors.

RayDalioisoneofthose.Overthelast20years,itsaveragereturnhasbeen
14.7%
,resulting
inatotalof$50billioncapitalgainsforitsinvestors.Daliosnetworthisestimatedtobe$15.2B
asofAugust7,2015
byForbes
,makinghim#30ontheForbes400listoftherichestpeoplein
America.

Investorstakelimitedresourcesandinvestthemforgain.Entrepreneursandbusinessleaders
dothesamething.Except,insteadofinvestingourmoneyinstocks,bonds,andcommodities,
weinvestourtime,ourpeoplestime,andourmoneyintotheprocessofproducingandselling
productsandservices.Manyofthecoreprinciplesoffinancialinvestingaretrueintheworldof
entrepreneurialinvesting.

Daliohascreatedasystematiclifeandbusinessphilosophy,whichhelaysoutin
Principles
.
Thisdocumentcondensesthe117pagemanifestointoastepbystepprocess.

HereshowyoucanbelikeDalioandcomeupwithindependentopinionsthatgoagainst
conventionalwisdomandcreateimmensegainsforyourself:

Step#1:CreateYourOwnGoals

First,Dalioseesindependentopinionswithintheframeworkofchoosingyourowngoalsrather
thanhavingthempassivelychosenforyou:

Whilemostothersseemtobelievethatlearningwhatwearetaughtisthepathto
success,Ibelievethatfiguringoutforyourselfwhatyouwantandhowtogetitisabetter
path...afterall,isntthepointoflearningtohelpyougetwhatyouwant?Sodontyou
havetostartwithwhatyouwantandfigureoutwhatyouhavetolearninordertogetit?

GoalSettingQuestions

Rayrecommendsyouaskyourselfthefollowquestionswhensettingyourgoals

Howwelldoyouknowwhatyouwantmostoutoflife?

Whatareyourmostimportantgoals?

Areyougoodatsettingyourgoals?

Howconfidentareyouthatyourassessmentofyourabilitytosetgoalsisright?

Ifyouareconfidentofyourselfassessment,whyshouldyoubeconfident(e.g.becauseyou
haveademonstratedtrackrecord,becausemanybelievablepeoplehavetoldyou,etc)?

RayGoalSettingTruisms

Youcanhavevirtuallyanythingyouwant,butyoucant
haveeverythingyouwant.
Toachieveyourgoalsyouhavetoprioritize,andthat
includesrejectinggoodalternatives.(sothatyouhave
thetimeandresourcestopursueevenbetteronestime
beingprobablyyourgreatestlimitingfactor,though,
throughleverage,youcansubstantiallyreducetimes
constraints).
Inordertogetwhatyouwant,thefirststepistoreally
knowwhatyouwant,withoutconfusinggoalswith
desires,andwithoutlimitingyourselfbecauseofsome
imaginedimpedimentsthatyouhaventthoroughly
analyzed.

Achievingyourgoalsisntjustaboutmovingforward.

Ibelievethatitisnothingmorethangettingwhatyou
wantandthatitisuptoyoutodecidewhatthatisfor
you.Idontcarewhetheritsbeingamasterofthe
universe,acouchpotato,oranythingelseIreallydont.
Whatisessentialisthatyouareclearaboutwhatyou
wantandthatyoufigureouthowtogetit.
Also,formostpeoplehappinessismuchmore
determinedbyhowthingsturnoutrelativetotheir
expectationsratherthantheabsoluteleveloftheir
conditions.Forexample,ifabillionaireloses$200million
hewillprobablybeunhappy,whileifsomeonewhois
worth$10thousandunexpectedlygetsanother$2
thousand,hewillprobablybehappy.Thisbasicprinciple
suggeststhatyoucanfollowoneoftwopathsto
happiness:1)havehighexpectationsandstriveto
exceedthem,or2)loweryourexpectationssothatthey
areatorbelowyourconditions.Mostofuschoosethe
firstpath,whichmeansthattobehappywehavetokeep
evolving.
Anotherprincipletokeepinmindisthatpeopleneed
meaningfulworkandmeaningfulrelationshipsinorderto
befulfilled.Ihaveobservedthistobetrueforvirtually
everyone,andIknowthatitstrueforme.

Step#2:ComeUpWithIndependentOpinions
OnHowToAchieveThem

CoretoDaliosphilosophyis
becominganindependentthinker
ratherthanfocusingonwhatyou
aretaughtbyothers:

Youhavetobeanindependentthinkerbecauseyoucantmakemoneyagreeingwith
theconsensusview,whichisalreadyembeddedintheprice.Yetwheneveryoure
bettingagainsttheconsensustheresasignificantprobabilityyouregoingtobewrong,
soyouhavetobehumble.

Inotherwords,accordingtoDalio,thekeytobeingasuccessfulinvestorisfindingwhenthe
consensusiswrongandhavinganindependentopinionthatisright.

Inordertocomeupwithindependentopinionsthatareright,Daliogoesreallydeepandwide.

Whenmostpeopleanalyzesituations,theyusetheexperiencesoftheirlifeasthemaindata
source.
Earlyinhiscareer
,Daliowidenedhislenstohumanhistorymakingiteasytonotice
cyclesofdifferentlengthsthatkeeponrepeatingthemselves.Previously,hehehadbeen
surprisedwhenonceinalifetimeeventshappened.Nowhesawthesameeventsaspartsof
cyclesthatkeeprepeatingthroughouthistory.

TheEconomistgoesdeeper
intohisprocess,[he]hasconductedindepthanalysisofpast
periodsofeconomicupheaval,suchastheDepressioninAmerica,postwarBritainandthe
hyperinflationoftheWeimarRepublic.Hehasevensimulatedbeinganinvestorinmarketsin
thoseperiodsbyreadingdailypapersfromtheseeras,receivingdataandtradingasifinreal
time.

A
2011NewYorkerprofile
peelsbackthecurtainevenmoreandexplainshowtheirweekly
50personWhatsgoingonintheworld?meetingworksandhelpsDaliopullfromlotsof
differentperspectivesandgettothetruth:

AcolleaguebegandescribinghowtheEuropeanCentralBankhadjustboughtsome
Greekbondsfrominvestorsatadiscounttotheirfacevalueamovethatthespeaker
describedasapossibleprecursortoanoverallrestructuringofGreecesvastdebts.
Daliointerruptedhim.Hesaid,Hereswhereyouarebeingimprecise,andthen
explainedatlengthwhataproperdebtrestructuringwouldentail,dismissingtheE.C.B.s
moveasanexerciseinkickingitdowntheroad.

[...]

ThediscussionintheconferenceroommovedontoSpain,theUnitedKingdom,and
China,where,duringthepreviousweek,thecentralbankhadraisedinterestratesinan
attempttoslowinflation.DaliosaidthattheChineseeconomywasindangerof
overheating,andsomebodyaskedhowaChineseslowdownwouldaffectthepriceofoil
andothercommodities.GregJensen,Bridgewaterscochiefexecutiveandcochief
investmentofficer,whoisthirtysix,saidhethoughtthatevenastutteringChinawould
stillgrowfastenoughtopushworldcommoditypricesupward.

[...]

Manyhedgefundmanagersstaypinnedtotheircomputerscreensdayandnight
monitoringmovementsinthemarkets.Dalioisdifferent.Hespendsmostofhistime
tryingtofigureouthoweconomicandfinancialeventsfittogetherinacoherent
framework.Almosteverythingislikeamachine,hetoldmeonedaywhenhewas
ramblingon,asheoftendoes.Natureisamachine.Thefamilyisamachine.Thelife
cycleislikeamachine.Hisconstantgoal,hesaid,wastounderstandhowthe
economicmachineworks.AndtheneverythingelseIbasicallyviewasjustacaseat
hand.Sohowdoesthemachineworkthatyouhaveafinancialcrisis?Howdoes
deleveragingworkwhatisthenatureofthatmachine?Andwhatishumannature,and
howdoyouraiseacommunityofpeopletorunabusiness?

Initsessence,Daliosphilosophyisthat,Thereareaninfinitenumberoflawsoftheuniverse
andthatallprogressordreamsachievedcomefromoperatinginawaythatsconsistentwith
them.Theselawsandtheprinciplesofhowtooperateinharmonywiththemhavealways
existed.

Step#3:StressTestThoseOpinions

FromDaliosperspective,...oneofthegreatestsourcesofproblemsinoursocietyarisesfrom
peoplehavingloadsofwrongtheoriesintheirheads.Lateron,headds,Thebiggestmistake
mostpeoplemakeistonotseethemselvesandothersobjectively.Iftheycouldjustgetaround
this,theycouldliveuptotheirpotentials.


Tomakesureheisntoneofthosepeople,hetakesthefollowingprecautions.

Instillsacultureofradicaltransparencyathiscompany.

AllmeetingsatBridgewater
aretaperecorded
.Thegoalofthisistohavepeoplesaytheiropinionsdirectlytopeople
ratherthanhidethemortalkbehindsomeoneelsesback.Thisculturemakessurethat
peopleareconstantlyreceivingfeedbackfromothersthattheydnormallyneverreceive
inotherenvironmentsandthenlearninghowtobypasstheirowndefensemechanisms
andreallyunderstandthefeedback.

Shareshistheorieswithothers.
Istresstestedmyopinionsbyhavingthesmartest
peopleIcouldfindchallengethemsoIcouldfindoutwhereIwaswrongaboutwhich
companieswereexciting.WhenDaliotestedhisopinions,hewasntinterestedintheir
reaction.Hewasmoreinterestedinlisteningcalmlytothelogicpeopleusedtocomeup
withtheiropinion.Then,heexplainswhyandhowhedidntcometothesameconclusion.
Hecallsitbeing
openmindedandassertiveatthesametime
.

Beskepticalofhisownideas.
Oneofhistorysgreatestinvestors,PaulTudorJones,
famouslysaid,EverydayIassumeeverypositionIhaveiswrong."Daliofollowsa
similarphilosophy,andithelpshimavoidconfirmationbias,thebiastorationalizeour
ownopinionsinsteadofchallengingthem.Thisbiasisoneofthemostpervasive
cognitivebiases
asnotedbyCharlieMunger,WarrenBuffettsbusinesspartner
.

Iremainedwaryaboutbeingoverconfident,andIfiguredouthowtoeffectivelydealwithmynot
knowing.IdealtwithmynotknowingbyeithercontinuingtogatherinformationuntilIreached
thepointthatIcouldbeconfidentorbyeliminatingmyexposuretotherisksofnotknowing.I
nevercaredmuchaboutothersconclusionsonlyforthereasoningthatledtothese
conclusions.Thatreasoninghadtomakesensetome.Throughthisprocess,Iimprovedmy
chancesofbeingright,andIlearnedalotfromalotofgreatpeople.

Step#4:ReflectOnYourPsychologicalPains
AndHowToOvercomeThem

Daliostressesthathavingindependentopinionsisnotenoughonemustalsoreflecttolearn
fromthecurrentsituationandimprovenexttimearound.Inhisownwords:Iwrestledwithmy
realities,reflectedontheconsequencesofmydecisions,andlearnedandimprovedfromthis
process.

Moreimportantly,Dalioacknowledgestheimportanceofacknowledgingandovercomingthe
emotionalpainoftenassociatedwiththereflectionprocess.


Itisafundamentallawofnaturethattoevolveonehastopushoneslimits,whichispainful,in
ordertogainstrengthwhetheritsintheformofliftingweights,facingproblemsheadon,orin
anyotherway.
ThisideaissoimportanttoDaliothathediscusses5criticaldecisionsthatwereconstantly
facedwiththroughoutlife,andthedecisionofhowwereacttopainisoneofthem.

Headds:

Mostpeoplereacttopainbadly.Theyhavefightorflightreactionstoit:theyeither
strikeoutatwhateverbroughtthemthepainortheytrytorunawayfromit.Asaresult,
theydontlearntofindwaysaroundtheirbarriers,sotheyencounterthemoverandover
againandmakelittleornoprogresstowardwhattheywant.

Thosewhoreactwelltopainthatstandsinthewayofgettingtotheirgoalsthosewho
understandwhatiscausingitandhowtodealwithitsothatitcanbedisposedofasa
barriergainstrengthandsatisfaction.Thisisbecausemostlearningcomesfrom
makingmistakes,reflectingonthecausesofthemistakes,andlearningwhattodo
differentlyinthefuture.Believeitornot,youareluckytofeelthepainifyouapproachit
correctly,becauseitwillsignalthatyouneedtofindsolutionsandtoprogress.Sincethe
onlywayyouaregoingtofindsolutionstopainfulproblemsisbythinkingdeeplyabout
themi.e.,reflecting30ifyoucandevelopakneejerkreactiontopainthatistoreflect
ratherthantofightorflee,itwillleadtoyourrapidlearning/evolving.

Hethenasksthereader:Howbigofanimpedimentispsychologicalpaintoyourprogress?
Tobettermanagenegativeemotionsincomingupwithindependentopinionsthatoftendontfit
wellwiththemainstreamviewpoint,Daliopracticesmeditation,especiallywhenhesstressed.

Daliohimselfsaid
:Meditation,morethananyotherfactor,hasbeenthereasonforwhat
successI'vehad."

RayReflectionTruisms

Youwillbemuchmoreeffectiveifyoufocusondiagnosis
anddesignratherthanjumpingtosolutions.

Rootcauses,likeprinciples,arethingsthatmanifest
themselvesoverandoveragainasthedeepseated
reasonsbehindtheactionsthatcauseproblems.Soyou
willgetmanyeverlastingdividendsifyoucanfindthem
andproperlydealwiththem.
Thereisnothingtofearfromtruth.

Ilearnedthatfindingoutwhatistrue,regardlessofwhat
thatis,includingallthestuffmostpeoplethinkis
badlikemistakesandpersonalweaknessesisgood
becauseIcanthendealwiththesethingssothatthey
dontstandinmyway.
Pain+Reflection=Progress

Themostimportantqualitiesforsuccessfullydiagnosing
problemsarelogic,theabilitytoseemultiple
possibilities,andthewillingnesstotouchpeoples
nervestoovercometheegobarriersthatstandintheway
oftruth.

Toleratingproblemshasthesameresultasnot
identifyingthem(i.e.,bothstandinthewayofgetting
pasttheproblem),

Step#5:TurnYourProven,Independent
OpinionsIntoAMachine

Daliousesthemetaphorofamachinetorepresentsystemsyoucancreateinyourlifethat
produceconsistent,predictableresults.

Inhiswords,Thosewhoaremostsuccessfularecapableofhigherlevelthinkingi.e.,they
areabletostepbackanddesignamachineconsistingoftherightpeopledoingtheright
thingstogetwhattheywant.Theyareabletoassessandimprovehowtheirmachineworks
bycomparingtheoutcomesthatthemachineisproducingwiththegoals.Schematically,the
processisasshowninthediagrambelow.Itisafeedbackloop:

A
2011NewYorkerprofile
onDaliogivessomeinsightonhowheturnshislessonslearnedinto
amachine

Toguideitsinvestments,Bridgewaterhasputtogetherhundredsofdecisionrules.
ThesearethefinancialanalogueofDaliosPrinciples.Heusedtowritethemdownand
keeptheminaringbinder.Today,theyareencodedinBridgewaterscomputers.Some
oftheseindicatorsareverygeneral.Oneofthemsaysthatifinflationadjustedinterest
ratesdeclineinagivencountry,itscurrencyislikelytodecline.Othersaremorespecific.
Onesaysthat,overthelongrun,thepriceofgoldapproximatesthetotalamountof
moneyincirculationdividedbythesizeofthegoldstock.Ifthemarketpriceofgold
movesalongwayfromthislevel,itmayindicateabuyingorsellingopportunity.

Inanygivenmarket,Bridgewatermayhaveadozenormoredifferentindicators.
However,evenwhenmostoralloftheindicatorsarepointinginacertaindirection,Dalio
doesntrelysolelyonsoftware.UnlessheandJensenandPrinceagreethatacertain
trademakessense,thefirmdoesntmakeit.Whilethisinevitablyintroducesanelement
ofhumanjudgmenttotheinvestmentprocess,Dalioinsistsitisstilldrivenbythe
rulesbasedframeworkhehasbuiltupoverthirtyyears.WhenImthinking,Whatis
goingontoday?,IalsoneedtomaketheconnectiontoHowdoeswhatishappening
todayfitintoourframeworkformakingthisdecision?hesaid.Ultimately,hesays,itis
thecommitmenttosystematicanalysisandsystematicinvestmentthatdistinguishes
Bridgewaterfromotherhedgefunds.Ihearalotofpeopledescribingwhatshappening
todaywithouttheproperhistoricalcontextandwithouttheframeworkofhowthe
machineworks,hesays.
Whendesigningthemachine,Daliorecommendsdividingyourselfintotwopeople:

Observerwhocreatesthemachineandmonitorsitsperformance.
Participantwhomakesthemachinework.

Heemphasizestheimportanceofbeingobjectiveaboutyourselfasaparticipantandputting
yourselfinapositiontowinbasedonyouruniquestrengths,Letsimaginethatyourgoalisto
haveawinningbasketballteam.Wouldntitbesillytoputyourselfinapositionthatyoudont
playwell?Ifyoudid,youwouldntgetwhatyouwant.

Resource

HowTheEconomicMachineWorks[Video]
(2M+views)

Thissimplebutnotsimplisticandeasytofollow30minute,animatedvideoanswersthe
question,"Howdoestheeconomyreallywork?"BasedonDalio'spracticaltemplatefor
understandingtheeconomy,whichhedevelopedoverthecourseofhiscareer,thevideo
breaksdowneconomicconceptslikecredit,deficitsandinterestrates,allowingviewersto
learnthebasicdrivingforcesbehindtheeconomy,howeconomicpoliciesworkandwhy
economiccyclesoccur.

Forasummaryofthevideo,read
BillionairehedgefundmanagerRayDalioexplainshow
capitalismworks
.

RayMachineTruisms

Creatingadesignislikewritingamoviescriptinthatyou
visualizewhowilldowhatthroughtimeinorderto
achievethegoal.

Yourmostimportantroleistostepbackanddesign,
operateandimproveyourmachinetogetwhatyou
want.

Step#6:TurnTheMachineOn

RayTakeActionTruisms

Ibelievetheimportanceofgoodworkhabitsisvastly
underrated.

Itiscriticaltoknoweachdaywhatyouneedtodoand
havethedisciplinetodoit

Peoplewhoaregoodatthisstagecanreliablyexecutea
plan.Theytendtobeselfdisciplinedandproactiverather
thanreactivetotheblizzardofdailytasksthatcandivert
themfromexecution.Theyareresultsoriented:theylove
topushthemselvesoverthefinishlinetoachievethe
goal.