The principles of ray dalio
BACKGROUND
Ray Dalio is the founder of the world’s biggest hedge fund firm, Bridgewater Associates. A key fund that he manages is the All Weather fund which holds around half of Bridgewater’s assets under management.
Anyone interested in money management would benefit greatly from reading his commentary on the subject. A key overarching theme that comes through from examining his approach is that beyond the pure mechanics of money management, any successful investor will display an investment philosophy that permeates throughout all aspects of their lives. It is very easy to be consumed by the aim of generating alpha (that is, achieving above market returns) but ironically his approach would argue that the optimal way in which to yield such an outcome is to widen one's field of view and not to start with the idea that achieving alpha is the one and only aim.
Rather:
- develop and understand the overarching philosophy of self;
- ascertain and gain insight into how efficient thought processes work;
- challenge ideas and conclusions;
- be cognizant of the fundamental driving force behind one's actions;
and then execute on the refined framework.
In 2012, he was inducted into the Academy of Achievement, a non-profit foundation established by acclaimed photographer Brian Blaine as a means by which aspiring young future leaders may interact with the current crop of successful world leaders, be they from the arts, business, public service, science and exploration or sports related fields.
Reproduced below is a biography prepared by the Academy of Achievement, which is a nice summary of his journey from Queens, New York to one of the world’s most successful money managers.
Academy of Achievement, the Ray Dalio Biography
Ray Dalio was born in Jackson Heights, in the borough of Queens, New York City. An only child, his mother was a homemaker, his father a jazz musician who played clarinet and saxophone in night clubs such as Manhattan's Copacabana. When Ray was eight, the family moved farther out on Long Island to the suburban community of Manhasset. The young Ray Dalio enjoyed sports and playing with his friends, but disliked the routine of school, particularly rote memorization. He was far from lazy, however. For spending money, he held down a paper route, mowed his neighbours' lawns and shovelled snow from their driveways. From age 12, he worked as a caddy at the Links Golf Club, an exclusive course where his customers included the Duke of Windsor (formerly King Edward VIII of England) and the former vice president (soon-to-be president) Richard Nixon, as well as many Wall Street investors.
In the boom years of the 1960s, talk on the golf links centred on the surging stock market and Ray Dalio was intrigued. With $300 he had saved from his caddy earnings, he bought shares of Northeast Airlines. At five dollars a share, it was the only major company whose stock he could afford. As it happened, Northeast became the object of a merger effort, and the 12-year-old caddy quickly tripled his investment. Ray Dalio was hooked. He read the annual reports of major companies, and engaged older investors in conversation. By trial and error, he learned principles he has continued to apply in his investing career. He found that even careful research can result in mistakes, and that mistakes can be expensive. He also learned that the only way to beat the market is to be right when others are wrong. When he formed an opinion of the prospects of a given stock, he asked the smartest investors he knew to critique his reasoning. By the time he graduated from high school, he had assembled a stock portfolio worth several thousand dollars, a significant amount for a teenager in the late '60s.
Given his unexceptional academic performance in high school, Ray Dalio had some difficulty finding a college. He eventually enrolled at C.W. Post College, a campus of Long Island University in nearby Brookeville. Although he continued to buy and sell stocks in college, Dalio also became interested in commodity futures. The low margin requirements attracted him to this sector, where he saw an opportunity to earn a considerable profit on a minimal investment.
In addition to his business interests, he followed music enthusiastically, and when the era's most popular band, the Beatles, traveled to India to study meditation, Ray Dalio thought there might be something in it for him too. The Beatles' guru, the Maharishi Mahesh Yogi, taught Transcendental Meditation (TM), a modern adaptation of an ancient Indian practice for clearing the mind of irrational feelings to perceive reality more clearly. Ray Dalio became a daily practitioner of TM, a discipline he has continued to find helpful throughout his life. He found that meditation improved his concentration and allowed him to think more creatively, which assisted him in his college studies. Free at last to choose his own courses and follow his own interests, Dalio blossomed academically. With his excellent academic record in college, he won admission to Harvard Business School.
In the summer of 1971, between college and graduate school, he worked as a clerk on the floor of the New York Stock Exchange. There, he witnessed firsthand the effects of an international financial crisis and President Nixon's fateful decision to sever the relationship between the dollar and the value of gold. This marked the end of the post-World War II Bretton-Woods agreement, under which the exchange rates of the world's major currencies had been fixed, and the price of gold set at $35 an ounce. The day after the President's announcement, stock prices rose by 33 percent. A period of sustained inflation was about to begin, and the prices of many commodities, not least gold, were to rise dramatically over the next decades. Ray Dalio was ahead of the curve in learning about commodity prices, but the events of 1971 also taught him the importance of currency exchange rates, and he set out to master that subject as well.
The summer between Dalio's two years at Harvard was spent trading commodities at Merrill Lynch. When he returned to Cambridge, his formerly obscure specialty had become a hot topic. Dalio and some Harvard friends set up a small company they called Bridgewater Associates to trade in commodities. Little resulted from this first venture, but Dalio retained the Bridgewater name for later use. With commodity prices -- especially oil -- rising dramatically, the Federal Reserve raised interest rates to rein in inflation, the stock market plummeted, and investors rushed towards commodities. When Ray Dalio arrived in the troubled Wall Street of 1973, he was a rare creature, a Harvard MBA with expertise in commodities trading.
Dalio spent a year at Dominick & Dominick, LLC, before joining Shearson Hayden Stone as a trader. At the time, Shearson was headed by Sanford Weil, soon to become a Wall Street legend as architect of the merger that created CitiGroup. By his own account, Dalio chafed under the hierarchical structure of Shearson, and matters came to a head at a New Year's Eve party when he came to blows with his department head. Despite this altercation, a number of his trading clients retained their faith in him, and he left Shearson to trade independently for his remaining clients. Operating out of his own two-bedroom apartment, at age 26 he re-launched Bridgewater Associates as a small trading firm. Independence in business coincided with a newfound stability in his personal life when Ray Dalio met and married Barbara Gabaldoni.
At first, Bridgewater Associates advised a few corporate clients on currency exchange and interest rate risks, but as these clients benefited from his advice, his insights were sought by a wider audience of investors. McDonald's and one of its major suppliers signed on as clients, and Bridgewater began to grow dramatically. Ray and Barbara Dalio moved to Connecticut to start a family, and in 1981, the Bridgewater offices moved with them. In 1985, Bridgewater signed the World Bank's employee retirement fund as one of its clients. Kodak's retirement system followed in 1989.
As Bridgewater's client list grew, so did the scope of its investments. Dalio employs an investment approach called "global macro," investing on a large scale around the world on the basis of broad systemic factors. Dalio made a careful study of market history, finding previous examples of phenomena that his competitors believed were unprecedented. He built Bridgewater by anticipating changes in currency exchange rates, commodity prices, inflation and GDP growth in the world's economies.
In 1991, Bridgewater opened a hedge fund known as Pure Alpha. The name refers to the differential between the overall average returns of a given market, labeled "beta," and those that exceed the market return, termed "alpha." Dalio's Bridgewater was one of the first firms to clearly identify and base a strategy on the distinction between the two classes of returns. Pure Alpha has become Bridgewater's flagship fund, earning an average annual yield of 18 percent.
Over the years, Dalio applied the insights he had gained from his study of meditation to understanding the psychological factors that influence market decisions and company management. The greatest obstacle to rational decision-making, he found, was "the ego barrier," the desire to prove oneself right and others wrong, even in the face of evidence to the contrary. Under Dalio's leadership, Bridgewater has adopted a management style he describes as "radical transparency." Criticism of fellow colleagues and analysis of their mistakes are encouraged and valued, as long as they contribute to the learning process. Secrecy, gossip and behind-the-back criticism are prohibited. All meetings are videotaped and the recordings are made available to the entire organization. Dalio outlined his business management philosophy in 2005 in a 100-plus-page essay, "The Principles." Bridgewater's emphasis on transparency extends to investor relations as well. Clients receive a daily newsletter, monthly performance updates, a quarterly review and frequent conference-call briefings.
In 2006, Bridgewater analysts calculated that total debt service in the U.S. was exceeding income, and that the economy was headed towards a major deleveraging. Bridgewater made major investments in U.S. Treasury bonds, gold and the Japanese yen. Dalio foresaw that the boom in home mortgage finance in the U.S. would come to an end in 2007, and met with the Secretary of the Treasury in Washington to warn him that the large banks which were deeply invested in mortgage-backed securities were in danger of insolvency. In the spring of 2008, Bridgewater pulled out of several large banks, including Lehman Brothers and Bear Stearns. A week later, Bear Stearns failed and panic overtook the international financial markets.
In the crisis that ensued, most investment funds posted massive losses, while Bridgewater's Pure Alpha fund posted gains of nine-and-a-half percent. In the troubled year that followed, Dalio shared his understanding of the deleveraging process in an essay called, "A Template for Understanding What's Going On." The markets continued to validate Dalio's approach. In 2010, Bridgewater's Pure Alpha fund rose by 45 percent, or $15 billion, more than the combined profits of Google, Amazon, Yahoo and eBay combined.
While Bridgewater's workforce grew to well over a thousand employees, it remains an independent, employee-run organization. In 2010, Ray Dalio sold roughly 20 percent of the company to Bridgewater employees. He has declined all suggestions to take the company public, which he believes would dilute its essential identity. The common element of Dalio's strategy is to perform well in any market conditions. Following the crisis, Bridgewater opened new funds, including All Weather and Pure Alpha Major Markets, founded in 2011. The All-Weather fund charges lower fees, and seeks to match market return, whereas Pure Alpha charges a two-percent fee and 20 percent of any return over market, the usual fee structure for a hedge fund. Pure Alpha Major Markets was originally capitalized with $42.5 billion from existing clients. Its strategy is similar to that of the original Pure Alpha, but with an increased focus on the European bond market.
In 2011, Bridgewater reported returns of roughly 23 percent, while the average hedge fund was losing four percent or more. It was estimated that Ray Dalio earned $3.9 billion that year, placing his net worth in the neighborhood of $11 billion. In July 2011, Ray Dalio officially relinquished his title as CEO of Bridgewater Associates, and assumed the title "Mentor." He continues to serve as Co-Chief Investment Officer.
By 2013, Bridgewater Associates had grown to 1,400 employees, managing approximately $150 billion for its investors. While most hedge funds cater to high-net worth individuals as well as institutional clients, Bridgewater's client base consists almost entirely of institutional investors, including foreign governments and central banks, pension funds, university endowments and charitable foundations. Roughly a third of these are public pension funds, such California's state employee retirement fund (CalPERS) and the Pennsylvania Public School Employees' Retirement Find; another third are corporate pension funds such as those of Nabisco, McDonald's and General Motors, and perhaps a quarter are government-run sovereign wealth funds, such as that of Singapore. In both 2012 and 2013, Bridgewater was recognized for having earned its clients more than any other hedge fund in the history of the industry.
Investors and policy makers around the world, including central bank presidents and chiefs of state, subscribe to Bridgewater's newsletter, Daily Observations. Ray Dalio's prescient insights into the working of the world's economy have led to closely-watched appearances as a commentator in financial publications and media outlets, including CNBC, Bloomberg, and The Wall Street Journal.
Along with Bill Gates and Warren Buffet, Ray Dalio has signed "The Giving Pledge," committing to giving half of his net wealth to charity over the course of his lifetime. He has created The Ray Dalio Foundation to channel his philanthropic contributions. Today, Dalio and his wife Barbara make their home in Greenwich, Connecticut, where they have raised four sons.
Directly sourced from: Academy of Achievement, the Ray Dalio Biography
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