Principles

Dalio tells the story of his early life. He was born in 1949 to a stay-at-home mother and a father who was a jazz musician. Dalio describes his upbringing as generally ordinary, though he disliked school and had to deal with the death of his mother when he was 19. Early on, Dalio became interested in earning money, and he held several jobs as a youth. He invested some money he earned by working as a golf caddy in Northeast Airlines stock. Dalio tripled his investment, although he attributes the gain to sheer luck. The experience sparked Dalio’s interest in finance and investing. He began studiously reading financial reports and investing during a time when markets were booming.

After high school, Dalio entered C.W. Post College. He did well there because he could study what he wanted to learn. He became interested in meditation because of the Beatles’ interest in the practice. Dalio became very aware of a growing counterculture movement in the late 1960s as pessimism about the Vietnam War and the economy grew. Dalio began to distrust policymakers, especially as financial markets began to fall.

He spent time working in a stock exchange. He watched as the value of the US dollar dropped but was surprised to see markets rebound afterwards. Dalio describes feeling intensely curious about the reason for the surprise market move, and he sought to investigate why the markets did not behave the way he expected them to.

Later, Dalio entered Harvard Business School. While many people around him were focused on investing in stocks as the market soared, Dalio focused on commodities trading. He found it easy to visualize the relationship between production costs, sales, and future earnings for commodities. When an energy crisis emerged in the 1970s, oil prices increased dramatically while the stock market went down. Dalio describes making many investing mistakes but also notes that he wanted to learn from his mistakes to avoid “another one of those” financial crises (16).

Dalio’s personal life blossomed as he met his future wife, Barbara. He began working for institutions as a commodities trader but did not feel like he fit in with their cultures. He started his own company, Bridgewater Associates, initially operating out of his apartment. The company’s primary business was managing risks for clients, in addition to buying and trading for them. Bridgewater also offered consultations to clients. Dalio is particularly proud to have leveraged his knowledge of commodities when consulting with McDonalds when the company was first rolling out its chicken McNugget product. Dalio also began to write a column called Daily Observations in which he shared his thoughts on matters related to financial markets. Bridgewater sent this column to clients via Telex.

At the turn of the 1970s and 1980s, Dalio continued to research investments and consult with clients as financial markets began to tighten. He expected the Federal Reserve to restrict the money supply to control the rate of inflation. He describes meeting with Bunker Hunt, an oil tycoon who was the richest person in the world at the time. Hunt was purchasing silver as a hedge against inflation. Dalio warned him to let go of his silver holdings because the Federal Reserve planned to raise short-term interest rates to control inflation. Hunt refused, and when silver prices crashed in 1980, he lost enormous sums. Dalio writes that her learned that “[t]iming is everything” because of this experience (29).

Dalio calls 1979-1981 the most volatile market period ever. Debt was rising, and he believed that the worst depression in the United States since the 1930s would result, especially after Mexico defaulted on its debt in 1982. Dalio bought gold and Treasury bill futures as a hedge against the disaster he expected. However, the economy began instead to grow without inflation. Dalio wondered why he was yet again surprised by the way markets responded. Upon reflection, he realizes that other countries’ failures drove the value of the dollar up and led to deinflation. He was humbled at the error in his judgment, lost a great deal of money, had to borrow $4,000 from his father, and had to downsize Bridgewater so much that eventually he was the company’s only employee.

Dalio again learned from his mistake, knowing he could never again be so arrogant and certain about what markets would do. He decided to be more controlled in the future to “cross the dangerous jungle” but “without getting killed” (36). Above all, he began to put more stock in other people’s opinions and in the principles he was developing to guide his decisions.

Dalio slow rebuilt Bridgewater and invested in computer technology to help the company analyze data and make decisions. He focused the company on knowing how to react to information it had rather than predicting the future. He argues that computers helped the company think efficiently about many things at once, rapidly and objectively. Bridgewater also began to sell its financial analysis and research to other companies, in addition to consulting and managing risks. Bridgewater gained prestigious clients during this time, including the World Bank’s pension fund, Mobil Oil, and Singer.

After visiting China in 1984, Dalio becomes interested in the economic potential of China. He founded Bridgewater China Partners in 1994 but eventually closed the company. The enterprise was more complex than he initially realized, and running two companies was too much to handle. He has kept ties with China, and his son runs a charity for Chinese orphans with special needs. Bridgewater has also maintained close ties with Singapore, Abu Dhabi, Australia, and other international partners.

Bridgewater gained 22% after the Black Monday stock market crash on October 19, 1987, when most other institutions had major losses. The company remained stable throughout the crisis. Bridgewater also began to develop new products. A young Bridgewater hire, Brian Gold, helped Dalio learn to combine several uncorrelated revenue streams to see the volatility of a portfolio and determine the best mix of investments. They called the product “Pure Alpha” and began to interest clients in the product.

Dalio’s knowledge of management practice also began to grow. He was humbled when employees sent him a memo describing the faults in his management style, and he became determined to improve. He created an “error log” for Bridgewater employees to record mistakes. As long as employees honestly log their mistakes and resolve to learn from them, they will not be punished for making them.