Ray Dalio is one of the most inspirational investors and entrepreneurs of our time.
Despite his humble upbringing—the son of a jazz musician and a homemaker in Queens,
New York—he worked hard to find his way…
Ultimately being recognized as one of Time magazine’s 100 most influential people on
the Earth.
He built what is today the world’s largest hedge fund—Bridgewater Associates—which
now employs more than 1,500 people and was listed by Fortune magazine as one of the top
5 most influential private companies in the United States.
According to Forbes, his net worth is estimated at around $20 billion dollars.
But Dalio’s path to financial stardom was not a straight line (up and to the right).
You see, throughout his career he’s made many mistakes.
Some on a very public stage…
"Mr. Chairman, Mr. Mitchell, it’s a great pleasure and a great honor to be able to appear
before you in examination with what is going wrong with our economy.
The economy is now flat, teetering on the brink of failure.
You were recently quoted in an article, you said I can say this with absolute certainty,
because I know how markets work.
I can say with absolute certainty that if you look at the liquidity base in the corporations
and the world as a whole, that there’s such a reduced level of liquidity that you can’t
return to an era of stagflation.
Arrogant!
I was incredibly arrogant!
I couldn’t have been more wrong.
That was, that was the exact bottom in the stock market.
And we had this decade of success.
And it was extremely painful.
I lost money for me.
I lost money for clients.
I lost so much money that I had to borrow $4,000 from my dad to pay for my family bills.
I had to let people go.
It was really terrible."
Breaking points like this—even smaller failures and on a far less public stage—have been
the downfall of many potential greats throughout history.
But Dalio proved different.
He was able to move past this embarrassing low in his mid-30’s and build the investment
empire we recognize as his today.
In this video, we’re going to analyze what Dalio learned from this pain that ultimately
made him so successful in investing and business and how we can easily apply those same principles
in our own investing strategies and lives in general.
“It was really terrible.
But it turned out to be probably one of the best things that happened in my life because
it changed my approach to decision making.
In other words, it gave me a humility—a fear of being wrong—to go with my audacity."
A repeated theme you’ll see through all of Dalio’s works, is his uncanny ability
to learn from his mistakes.
After interviewing him for his fourth installment of his Market Wizards series, Jack Schwager
summarized:
“If there is a single essential lesson to learn from Dalio, it is that mistakes provide
the path to improvement and ultimate success.
Each mistake offers an opportunity to learn from the error and to modify one’s approach
based on this new information.
Whenever you make a significant mistake in trading, write it down, both to reinforce
the lesson and to serve as a future reminder.
Then change your trading process based on this new experience.
In this way, mistakes can become the essential ingredient for continual improvement as a
trader, or for that matter any other endeavor.”
Everyone makes mistakes.
Some small.
Some …large.
The difference between many successful people and their counterparts is their ability to
embrace this life lesson: the idea of never-ceasing learning from your inevitable mistakes.
Dalio says:
“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.
. . . While most others seem to believe that mistakes are bad things, I believe mistakes
are good things because I believe that most learning comes via making mistakes and reflecting
on them.”
If you’re interested in being a successful investor this is absolutely key—whether
you’re trying to invest full time or whether you’re just trying to make sure you figure
out the best way to allocate your own retirement funds.
You will make mistakes along the way.
To this end, Dalio would keep a journal of every trade he made.
He diligently recorded his logic before, his observations throughout, and his thoughts
after he exited each and every trade—a discipline his firm still follows today.
Dalio openly recounts examples of his early trading and investing failures to demonstrate
the evolution in the way he approaches investing.
But we’ll save some of those examples for a video specifically about the investing lessons
we can learn from his life and experiences.
Let me know in the comments how interested you’d be in that video.
But in order for you to master learning from your mistakes, you’ll have to first learn
to be truly honest with yourself.
“The thing that I learned the best—and I learned from failure; I learned from my
failure—1982, I expected a big debt crisis that was going to cause problems.
That was the bottom of the stock market.
I couldn't have been more wrong.
And that gave me the humility to realize that what I think in my head—or that what any
one individual thinks in their head—might be wrong.”
Had he been honest with himself before his congressional testimony and before that interview,
he would have acknowledged and accepted the possibility that he COULD be wrong.
"...you have to identify and not tolerate your problems—a lot of people tolerate problems.
And then you have to diagnose those problems to get at the root cause of those problems.
And often the root cause is you.
Maybe you have weaknesses.
Maybe you make mistakes … we all have strengths and weaknesses.
And the power of being able to know our strengths and weaknesses and know how to deal with them
is enormous.
And only when you know what your problems are and you diagnose that specifically can
you create a design to get around those problems.”
Now, when you’re honest with yourself about your weaknesses, about your human frailties,
you acknowledge your potential to be wrong—no matter how much research you may have done,
or no matter that all the logic might be on your side—you still could be wrong.
I’ve been called out in some of my videos in the past for not taking a hard enough stance
on whether I believe the market or some individual stock will go up or down—one way or the
other.
This is the reason why.
Perhaps it was from studying Dalio early on in my career or just from learning from my
own many mistakes that I realized this about myself and …anyone.
I’ve discovered the importance of — even if I believe some particular scenario to be
the most likely thing to happen… — of still considering and preparing for other
potential outcomes.
That’s a big part of what I talk about in my book—the potential for the mainstream
investment paradigm (the stock and bond, buy and hold strategy) to be wrong… despite
how logical it all may seem.
By being honest with yourself about whatever conclusions you come to throughout your life,
you’ll be able to avoid the dangers of acting with false confidence.
Dalio explains:
“Most school education is a matter of following instructions—remember this; give it back;
did you get the right answer?
It teaches you that mistakes are bad instead of teaching you the importance of learning
from mistakes.
It doesn’t address how to deal with what you don’t know.
Anyone who has been involved in the markets knows that you can never be absolutely confident.
There is never a trade that you know you are right on.
If you approach trading that way, then you will always be looking at where you might
be wrong.
You don’t have a false confidence.
You value what you don’t know.
… I’m so worried that I may be wrong that I work really hard at putting my ideas out
in front of other people for them to shoot down and tell me where I may be wrong.
That process helps me be right.”
It’s not hard to find people in the world of investing, or anywhere for that matter,
who operate with this false confidence—who have no tolerance for an opposing viewpoint—who
are not open minded.
"Most of the profits that people have in real estate are going to vanish just like the profits
that people had in the dotcoms in 1999 and 2000.
It's a fantasy.
[Rude laughter!]
People can't sell their house.
Inventories are exploding all over the country.
Houses are on the market of 6 months or a year; there's no bidders.
[So!]
Prices are going to fall through the floor.
[So what!]
We heard it loud and clear..."
Proceeding with false confidence ruined countless investors in 2008.
You may find it easier early on in your life to embrace this and do it well.
But the further you get in your career—the more of a perceived expert you are—the more
difficult it becomes to be honest with yourself and operate in this way.
The more “expert” you become—the more people are looking to you to have ALL the
answers—the more tempting it will be to blame others—or outside forces—for your
failures.
A big reason Dalio didn’t flounder or even plateau earlier in his career (as many do)
was his willingness to and insistence on accepting responsibility.
One rule from an early iteration of Bridgewater’s Principles stated: “People who blame bad
outcomes on anyone or anything other than themselves are behaving in a way that is at
variance with reality and subversive to their progress.”
Dalio is known now for saying that “pain plus reflection equals progress.”
The more you’re able to acknowledge and experience the pain of being wrong, of making
a mistake, and then consequently reflect on that in order to learn from it, the more you’ll
be able to progress.
In other words, if you do not accept responsibility for any of the mistakes that you will inevitably
make, you can NOT truly progress.
The final way Ray Dalio ensures he has been able to continually grow in life is by creating
and promoting an environment of radical transparency.
Even brand new employees at Bridgewater were encouraged to call him—the Founder and CEO—to
call him out when they thought he could be better.
It’s difficult to take criticism from a superior, let alone a “subordinate.”
But Dalio says when you receive criticism—no matter from whom—the only thing that should
matter to you at that point is discovering the truth…
“I think the only question is getting at whether it’s true or not, right?
…You have to really want to find out if it’s true or not and realize the benefits
of finding out if it’s true.
… Try to do it in an evidenced based way with the realization that you’re going to
be so much more successful and so much more happy if you do it!”
Dalio gives an example of himself going through this exact process: (1) being called out by
a subordinate (who has been encouraged to do so), (2) seeking truth, and then (3) honestly
accepting and learning from his mistake.
He says:
“I was in a client meeting with a big European pension fund that was visiting managers in
Connecticut.
After the meeting, the salesperson criticized me for being inarticulate, running on too
long, and adversely affecting the meeting.
I asked others who had been at the meeting for their opinions.
I was given a grade of “F” by one of our new analysts who was just one year out of
school.
I loved it because I knew they were helping me improve and that they understood that was
what they were supposed to be doing.”
This is by no means an easy skill to master and discipline to maintain throughout your
life, but doing so—being honest with yourself and sincerely open to opposing viewpoints
and criticism—could be the key for your continued growth and long term success.
I hope to be able to help you with that however I can, so I hope you’ll join us by subscribing
and turning on notifications.
I wish you all the best.
Take care!