Principles for Success from Ray Dalio: Founder of the World’s Largest Hedge Fund

In Connecticut, the richest state in the US, Dalio's wife Barbara works with public schools and found that 22% of high school students are 'disengaged' or 'disconnected'—they either attend but don't study, or don't come at all—and are effectively destined for street life.

“She deals with public schools, with the worst kids in the public schools, and she supported the study that examined what are called disconnected and disengaged students. A disengaged student is a student who attends school but doesn't study, they just are there. A disconnected student is a student that they don't even know where they are, they don't come to school. 22% of the high school students are one of those, they're going to-- Those students are going to be on the streets.”

The lifetime economic difference between completing high school and not completing high school is approximately $1 million per person; high school completion determines whether someone lands on the street or has a viable economic path.

“The difference of a high school student completing high school and not completing high school is approximately $ 1 million in their lifetime because of the issue if you don't complete high school you're going to be on the street.”

The ocean is humanity's greatest asset and is critically important for climate issues and many other reasons, yet it is not appreciated or understood by most people.

“the ocean is our greatest asset. I won't go into all the reasons why because we're going to run out of time, but it is our biggest and greatest asset, and it's not appreciated. It's so important in terms of the whole climate issue. It's so important in so many different ways that we could get into.”

The 'Two Yous' framework distinguishes between a logical conscious mind and a subconscious emotional mind that struggle with each other; people logically want to know their weaknesses but emotionally resist that knowledge.

“I think that, and it's what I call the 'Two Yous'. I've asked neuroscientists and psychologists, and everybody agrees that it's basically that there is a logical conscious you and then there's a subconscious emotional you, and they have a struggle with each other. If I would ask you, 'Would you like to know your weaknesses,' or, 'Would you like to know what I think even if it's critical,' the logical answer to that would be, 'Yes, I would like to know those things, because then I can deal with them better,' but emotionally, that becomes a challenge.”

The basic issue with universal basic income is whether recipients will make good decisions with the cash, requiring assessment of whether shifting to individual decision-making will work for specific populations.

“The basic issue on the universal basic income is that they believe that you will lessen-- You'll take money and funding it by taking programs that are in existence and eliminating or reducing those programs to give people the money to be able to make those decisions themselves so that they can make those decisions well. I think it's really a question of whether-- When you shift that, whether that will allow them to make decisions well because they're good decision makers.”

The Constitution makes education a state responsibility, leading to wealth-dependent school funding where rich districts provide better education than poor districts, creating a structural barrier to equal opportunity that requires treating education as a national emergency.

“the biggest problem in education is-- Well, besides not recognizing it as a great national priority, is that the constitution makes it statewide and within the state, the school districts are-- If you're in a rich school district you have taxation that will pay for a better education than if you're in a poor school district, and that we don't create a bottom, there's no bottom to that society. I think there's a structural problem on that. I think it should be treated as a national emergency”

The period from now through the late 1930s economically resembles the late 1930s in terms of debt cycles; in both 1929-32 and 2008, debt crises led to near-zero interest rates, forcing central banks to print money and purchase assets, which elevated asset prices and liquidity but contributed to wealth inequality.

“I think it's important to understand that what we're in as a period of time that someone analogous to the late '30s in that in '19, they're all these debt cycles. There's a short-term debt cycle, long-term debt cycle, and in 1929 to '32 we had a debt crisis and then interest rates at zero. The only other time that's happened is 2008, we had a debt crisis and interest rates at zero. Because interest rate's at zero, the way the central bank's dealt with that was to print a lot of money and buy a lot of financial assets to push those asset prices up to lower interest rates, and to push liquidity into the system, and that caused a lot of assets to rise. With that, that contributed to a wealth gap.”

Capitalism is not working for the majority of people; this is the reality, but it also presents an opportunity because the system must be made to work for the majority.

“If you look at the condition, capitalism basically is not working for the majority of people. That's just the reality, and yet there's opportunity. We've got to make it work for the majority of people.”

Being successful has more to do with knowing how to deal with not knowing than with what you actually know; stress-testing your thinking by finding intelligent people who disagree with you and engaging in thoughtful disagreement raises your probability of being right.

“The thing that I learned is, being successful has more to do with knowing how to deal with your not knowing than anything you know. If you can then think, 'How do I know that I'm right?' and stress-test yourself, and find people who disagree with you, the smartest people you can find who disagree with you and you have thoughtful disagreements so you can take in and stress-test, not only does it provide a lot of learning, but it stress-tests your decision, raises your probabilities of being right.”

The greatest tragedy of mankind is that individuals hold wrong opinions they are attached to and could easily stress-test those opinions to determine if they are strong or weak, but fail to do so, leading to worse decisions than necessary.

“I think probably the greatest problem of mankind -- that's a big statement -- biggest problem of mankind, the greatest tragedy of mankind, is individuals who have in their minds wrong opinions that they're attached to. They could so easily stress-test those, to put them out there and find out if they're strong or weak in terms of those opinions, and to move beyond that to make better decisions. It's a tragedy because it could be so easily dealt with.”

Today, the net worth of the top 0.1% of the population equals the net worth of the bottom 90% combined, representing an extreme wealth gap that last occurred in the late 1930s.

“Today, the top one 10th of 1% of the populations' net worth is equal to the bottom 90% combined. In other words, a big giant wealth gap. That was the same-- last time that happened was the late '30s.”

A Federal Reserve study found that 40% of the US population could not raise $400 in the event of an emergency, revealing the depth of financial vulnerability and inequality in the population.

“the Fed did a study that 40% of the population could not raise $400 in the event of an emergency. It gives you an idea of what the polarity is, and we often don't have contact with that world, but that's a real world.”

Writing down decision-making principles after encountering situations creates a reusable framework because the same situations recur repeatedly, allowing you to operate from consistent principles rather than treating each instance in isolation.

“Whenever you're in a situation, and if you take the time after that situation and you write down your criteria for making decisions, then you will have that, for the next time, that thing comes along. What happens is, the same things happen over and over again for the same reasons, but you don't see that, you're operating in a way where you take them one at a time.”

Pain plus reflection equals progress: when you encounter failure or a painful situation, diagnosing the root cause and developing principles to handle similar situations differently in the future, then improving based on those principles, leads to learning and advancement.

“pain plus reflection equals progress. In other words, that painful situation, if you can diagnose what produced that failure, and then develop principles for dealing with it different at a different time, in a different way, and then you take those principles and you improve, you learn, you change things, then you improve and you make better, go on to more audacious goals.”

The Dot Collector tool at Bridgewater collects real-time assessments during meetings by allowing people to rate others on dozens of attributes on a 1-10 scale, creating a data-driven record of how people think and perform that informs both individual feedback and organizational decision-weighting.

“The Dot Collector collects these views. It has a list of a few dozen attributes, and so whenever someone thinks something about another person's thinking, it's easy for them to convey that assessment. They simply note the attribute and provide a rating from one to 10...a researcher named Jen rated me a three, in other words badly, for not showing a good balance of assertiveness and open-mindedness.”

In both business and family settings, defining how you will be with each other is extremely powerful; writing down principles and sharing them allows others to hold you accountable and creates the foundation for meritocratic, truthful relationships.

“First of all, I think that any group of people, or any relationships, benefits from the definition being very clear of how you're going to be with each other...There's no getting around the idea of writing down those principles, it's just so powerful. Then the question is, do you want to do it?”

The current economy is in the late stage of a cycle where capacity constraints and low unemployment are leading central banks to tighten monetary policy; nine years into the expansion, the capacity to manage a downturn differently than before is limited.

“We're in the part of the economic cycle, which is the later part of the cycle because as you start to run into capacity constraints, unemployment rates are low and so on, Central Banks begin to put on the brake, and they begin to tighten monetary policy. We're nine years into this expansion and the capacity to deal with that is different.”

An idea meritocracy requires three foundational practices: (1) putting honest thoughts on the table for everyone to see, (2) engaging in thoughtful disagreement to understand which party might be wrong, and (3) having protocols and believability-weighted decision-making to resolve disagreement based on credibility rather than hierarchy.

“In order to have an idea meritocracy, in other words, the best ideas winning out, wherever those ideas come from, you have to do three things. The first is that you have to put your honest thoughts on the table, honest thoughts on the table, for everybody to see and then look at...Thoughtful disagreement is the second thing...Then once you have that disagreement...you have to have ways that are going to, idea meritocratic ways, of getting past your disagreement. In other words, you have to have protocols, and we do something which we call believability weighting decision-making based on different people's credibilities.”

The shift in perspective from individually inputting opinions to viewing them from above as one of many options naturally causes people to ask themselves 'How do I know my opinion is right?' and moves conversation from arguing over individual opinions to determining objective criteria for evaluating which opinions are best.

“When Jen and others shift their attentions from inputting their opinions to looking down on the whole screen, their perspective changes; they see their own opinions as just one of many, and naturally start to ask themselves, 'How do I know my opinion is right?' That shift in perspective of going above it and seeing the full range of views, shifts the conversation from arguing over individual opinions to figuring out objective criteria for determining which opinions are best.”

A decision-making process that weights votes based on people's believability (merit) can produce completely different outcomes than a simple democratic majority vote, where the majority opinion may be overridden by algorithmic weighting of credibility.

“Here's an example of a vote that we took where the majority of people felt one way, but when we weighed people's views on the basis of their merits, the answer was completely different. This process allows us to make decisions, not based on democracy, and not based on autocracy, but based on algorithms that take people's believability into consideration.”

Basic education, family care, and supportive opportunity (like micro-finance) are foundational needs; without these, even policies are ineffective, but with them, people can build sustainable success.

“I had the benefit of parents who cared about me, loved me, and I had a school that I could go to in which I could learn. There's basic things that you need. If you have basic education, fundamental education which is not being dealt with now adequately, and you have a family that is a difficult family environment that there's not that type of care you need that. I think that you need an opportunity like a micro-finance, a little bit of money with an opportunity allows that to be paid back.”

The biggest investment surprise Dalio encountered was that almost all surprises in his lifetime were things that had not happened before in his lifetime but had repeatedly happened in other lifetimes or countries.

“First of all, I learned that almost all the surprises that happened to me were things that just haven't happened in my lifetime before, but happened repeatedly in other lifetimes or in other countries. I needed to have a criteria that I call timeless and universal.”

Dalio believes a downturn will occur and worries that wealth and opportunity gaps will become more polarized during downturns; the unity and how people approach problems together is critically important.

“We're in a situation where if you have a downturn, and we will have a downturn, I believe that-- I worry that that polarity will become greater. I think that the unity of us and how we approach our problems together is a very important thing.”

Incarceration costs between $80,000 and $120,000 per person per year, and when you include social and injustice costs, the total cost to society of not helping students complete high school is enormous.

“the cost of incarceration is between $80,000 and $120,000 a year and the social cost as well as the injustice cost.”

Approximately one-third of people cannot adapt to Bridgewater's radical transparency culture, but those who do adapt ('get to the other side') become unable to work in typical organizations where information is hidden, politics dominate, and sincerity is lacking.

“It's not for everybody. I would say probably a third of the people just can't get through it, a lot of people struggle. Then, on the other hand, we call it getting to the other side, when they get to the other side, when they're used to it, they can't work any police cells because they can't go back into a typical organization in which all of that stuff is hidden, and there's politics, and there's lack of sincerity, and the associated problems with all of that.”

Thoughtful disagreement requires understanding that when there is disagreement, somebody will be wrong, and you don't know whether it's you, which is the epistemic foundation for genuinely learning from disagreement rather than defending a position.

“You have to understand the art of disagreement, because if there's disagreement, that means somebody is going to be wrong, and how do you know the wrong person isn't you?”

Cost-effective solutions to education inequality include after-school programs that extend school hours (reducing afternoon latchkey situations) and enrichment programs (art, fun learning) that can be added without proportionally increasing costs.

“After-school programs. You have an infrastructure there with the school system and the school is there, and it creates a problem when you send the kid home at three o'clock in the day, because it's a problem for the kid and it's a problem for the parent because what's a single parent, a single mother, going to do? Now she's got to take care of the kid at three o'clock in the afternoon and you could cost effectively extend that to a full day program, and you can also then bring back the enrichment programs because the enrichment programs, things like art and the fun learning types of things that they can do, are being carved out of the school system and they could be brought back. That could be done cost-effectively.”

Life follows an arc (as described by Joseph Campbell in 'Hero with a Thousand Faces') that most people don't pay attention to; understanding where you are in your life arc and what you'll encounter is essential for navigating life effectively.

“Joseph Campbell wrote a book; there's a wonderful book, Hero with a Thousand Faces, and he goes through the life arc. It's so good for you all to almost think, where are you in your life arc, and does that arc look like, and what will you encounter; because you actually don't pay much attention to it.”

Knowing what people are like allows organizations to match creative but unreliable thinkers with reliable but uncreative thinkers, decide what responsibilities to assign, and weight decisions based on individuals' believability rather than hierarchy.

“Knowing what people are like helps to match them up better with their jobs. For example, a creative thinker who is unreliable, might be matched up with someone who was reliable but not creative. Knowing what people are like, also allows us to decide what responsibilities to give them, and to weigh our decisions based on people's merits; we call it their believability.”

For people to internalize negative feedback about their weaknesses and improve quickly, they must assess whether the feedback is true using evidence-based methods (testing or triangulation) and realize the benefits of discovering true weaknesses, then choose either to develop those weaknesses into strengths or pair with people strong in those areas.

“The only question is getting at whether it's true or not... how do you find out in an evidence-based way? Do you do a test? Or do you do triangulation? 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. Because this is the key to the success of life... There are two paths of finding out that you have a weakness, the most common path is once you get that you find out. The most common path is, do I make that a strength? And that may be a difficult path... The easiest path is to find out who's good at what you're not good at and appreciate those differences.”

The biggest barrier to implementing radical transparency and meritocracy is emotional, not intellectual; people must develop the habit and overcome the initial shock, but most people eventually adapt within about 18 months if they persist.

“The big barrier here is the emotional barrier, but people start to react to that individually, they see the struggle with themselves, and then they overcome it, and it's a matter of getting in the habit. We call the process, 'Getting to the other side'...They go through the process, and then it's shocking, it takes a little bit of adapting to it. Then they get past it...I think it's about 18 months, which is associated with behavior and modification, people then say, 'Okay. I got that.'”

In his own life, Dalio applied radical transparency and radical truthfulness even in his family during his wife Barbara's cancer scare, taking his children through the experience when they were young so they would know they could always trust him and his transparency, rather than protecting them with comforting untruths.

“For me, I can say, these are my principles, you can read it, you can hold me accountable to this, this is what I will do and you will know it, and this is what I value. And when you have that in a family, do I want to be radically truthful? I could tell you stories of difficult situations in which-- One story, my wife was possible dying of cancer situation in terms of that, and I wanted to take my kids through it when they were young, to take them through that so that they know that they could always trust in what I'm saying without spin, that radical truthfulness and that radical transparency.”

Dalio's goal in life is to evolve well and fast and contribute to evolution; his ocean exploration initiatives with submarines that reach 1,000 meters, involving scientists and media (like Blue Planet II), allow him to pursue this goal while creating virtual engagement so people can explore alongside explorers.

“My goal in life is pretty much to evolve well and fast, and contribute to evolution. That's my way that I'm excited about doing it, and I'm feeling that I'm having an impact. I have a ship that has, subs that go down to 1,000 meters that scientists use, and media most the Blue Planet II, we shot on it, we discovered giant squid, that kind of thing. We're doing another one that we're going to do an initiative where we're going to have like Jacques Cousteau series -- I'm doing that with James Cameron -- that we're going to have a series that people are watching and a lot of social media, so that there's that engagement, so people could not only explore but they can be there virtually with other explorers so that they love it.”

Investing involves writing down the decision criteria, testing how those criteria would have worked historically across countries and timeframes, and converting them into equations and algorithms for decision-making.

“I started by every time I would make a decision, I would write down the criteria. I did it basically because when I would close out a trade, I wanted then to see how my thinking worked. And then I stumbled across the idea that if I can make that clear enough, I could test how that decision would have worked in the past. I could run it through all countries, all past period of time, and that gave me a reflection on that decision rule.”

For disadvantaged populations, the most effective approach is micro-finance—providing small amounts of capital with accountability—which creates self-sustaining cycles; Dalio found that for every dollar he donated to micro-finance, $12 of lending was generated and repaid over 10 years.

“I'm very big on micro-finance in terms of being able to provide opportunities. For every dollar that I donated in micro-finance over the next 10 years, it's 12 times that amount of money gets lent and paid back to people and it becomes self-sustaining.”

Private-public partnerships combining philanthropy, government, and metrics-based accountability can cost-effectively address education and opportunity gaps, providing excellent return on investment.

“Public-private partnerships that could do that. Combination of philanthropy and government, and look at the return on the investment that you're going to get; it's a fabulous return on investment and there's a lot of that stuff.”

Most people with means do not understand the precariousness of the current state of inequity and the need for investments to address it; Dalio estimates 'nowhere near' enough understand the urgency.

“Do you think, Ray, that enough people that have means understand the precariousness of the state of our place and the need for making these kind of important analysis and investments?...Nowhere near.”

Direct contact with people in poverty is 'an incredibly enriching experience'—seeing the world through their eyes and empathizing with them is fantastic and necessary for understanding the urgency of change.

“I would say if you can have direct contact, I would say, by the way, it's an incredibly enriching experience to see the world through those people's eyes and to empathize with them and it's fantastic.”

Dalio started barely getting into college on probation, had a challenging time in school, and is a very ordinary guy who stumbled onto some approaches; he wants others to judge whether the principles have merit rather than deferring to his authority.

“you really have to understand that I barely got into college on probation, and just a number of-- I'm a very ordinary guy who stumbled on some of these particular approaches. The thing that I want to do is to pass those along. And when you leave here if you just think, does that have merit because it's you all.”

Everyone is bad at some of the five steps to success, and the key to achieving success is working with other people who are good where you are weak, making team composition critical.

“Everybody is bad at some of these steps. The key is to work with other people who are good where you're weak.”

Life exists in three distinct phases: phase one where you are dependent on others and learning, phase two where you work and others become dependent on you, and phase three where you are free of obligations and can focus on helping others be successful without you.

“life exists in three phases. You start off, phase one is you're dependent on others and you're learning. Phase two is that you're working and that others become dependent on you, and you're trying to be successful. Then you get later in stage two and the number one goal that you want more than anything else is to help people be successful without you, then you can go to stage three, which is you're free of obligations”

There are five essential things you must do to be successful: (1) be clear on what your goals are, (2) identify and not tolerate problems, (3) diagnose problems to understand root causes, (4) design specific solutions to work around those problems, and (5) be reliable in implementing that design.

“I think that I learned that there are only five things that you need to do to be successful. If you do these five ways, five things, you will be successful. The first is, to be clear on what your goals are... Along the way, so number two, is you have to identify and not tolerate your problems... Then you have to diagnose those problems to get at the root cause... Only when you know what your problems are and you diagnose that specifically, can you create a design to get around those problems... and then you have to, if you have a design, you have to be reliable in doing that.”

Radical truthfulness and transparency don't require telling absolutely everything—people must use judgment about what would hurt someone and decide together how to be with each other, but the principle is to be honest within those constraints.

“It's radical, it doesn't have to mean absolutely everything, I just want to be clear. There are certain things where if somebody is going to be hurt by it you make the judgments, because you have to decide how you're going to be with each other.”

If Dalio were addressing the situation, he would declare the wealth and opportunity gap a national emergency, have the President declare it as such, create metrics to judge conditions of people, and take responsibility for changing those metrics through private-public partnerships.

“If I was doing it, I think that you have to call that a national emergency, and the President of the United States, if they declared that a national emergency, that wealth gap and that opportunity gap, and then created metrics that literally judged the conditions of people, and then took responsibility for changing those metrics. I think there's a lot that can be done in private-public partnerships and so on to be able to change it”

For entrepreneurs and small teams, Dalio recommends starting by testing radical transparency and meritocracy with the top leadership circle rather than the entire organization immediately, then expanding if it proves workable.

“do you suggest to them that they go all in, or do you suggest they test it with a small leadership team? How do you actually see whether this is going to work in your place?...test it. You have to define how you're going to be with each other...As they're going through that, they should experiment with it...It's usually most companies or organizations, maybe there's a group top 10; then they'll experiment, do they want to be that way with each other? They start to experiment with it. Do you want to broaden it?”

Dalio plans to make Bridgewater's tools (like the Dot Collector) and apps publicly available so that other organizations can operate using these principles of radical transparency and algorithmic decision-making.

“We built a bunch of tools, and apps, and things, and we're going to make those publicly available so that people who want to do that, like the Dot Collector and those tools, will have the opportunity to be able to operate that way. We're going to make them available.”

Dalio broke down the economy for the bottom 60% of earners (the majority) and found a 'bad economy' with rising death rates from opioids and suicides and declining usefulness, indicators that the system is not working for this population.

“I broke the economy down from the top 40% to the bottom 60%. I picked 60% because that's the majority. I could have picked 80%, the conditions are basically the same. If you look at that 80% economy, it's a bad economy. The death rates are rising from opiates from suicides, the usefulness is declining.”

98% of Bridgewater's decision-making is made by algorithms, with people arguing about decision-making criteria rather than conclusions, allowing the vast majority of decisions to be systematized and tested.

“What happened was that the vast majority of our decision making over a period of time was able to be made this way. 98% of our decision making is made by algorithms, with us arguing about our criteria not our conclusions.”

Bridgewater has 1,500 employees and 104 clubs/organizations; Dalio made a policy that anyone can start a club and if it draws 20+ people, Dalio will fund up to $500 per person (50% of the cost) to build meaningful relationships outside of formal work.

“I think we have 1,500 people. I think that there are like 104 clubs and organizations. I made a policy that anybody who can come up with anything that's fun to do, they can have 20 or more people up to $500 per person, we'll pay for half. In other words, just go out and build those relationships.”

Dalio is approaching the end of his second life phase and is focused on passing along principles and tools; he plans to disappear from public view within about a year after releasing these tools.

“I'm going to pass along. I'm going to pass the tools along. I'm going to give that out, and then I'm going to disappear. In other words, you're not going to see me, this public thing I don't like too much...How much time do you have left before you disappear?...Probably a year but for the tools and so on, something like that.”

New employees at Bridgewater are screened and made aware through video documentation of what the culture is like (comparing it to 'intellectual Navy Seals'), and they make a choice to enter, but the initial experience is shocking and requires adaptation ('getting into the icy water').

“Of course, we record everything; we could show them lots of instances. We make them aware, and it's like intellectual Navy Seals, 'Okay, do you want this thing?' Everybody is going, 'Okay, I want that thing.' They make a choice -- maybe some people don't -- and then they come in, but like the intellectual Navy Seals, they say, 'Yes, I really want this thing,' then when they get in the icy water and they don't get to sleep, it's the equivalent of them going to that experience and then they're wrestling with each other”

Ray is concerned that adequate action on wealth gaps and opportunity gaps will not happen before the next downturn occurs, fearing consequences of increased conflict.

“I fear that that probably will not be done by the next time we have a downturn, and I fear for what that conflict is going to be like that.”

Some schools in Connecticut have such resource scarcity that students share pencils, breaking them in half and sharpening them from both ends, illustrating intolerable inequality within the richest state.

“You go to schools, and they share books. In some cases they literally share pencils. They'll take a pencil, and they'll either pass it back and forth, or break it in half and sharpen it from both ends.”