CEOInterviews.AIRay Dalio: This is how a bubble actually pops

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Ray Dalio0:00

You want to be successful? Here's the mantra for investing. I got my pen. The most fundamental question is how do I have the upside without having the downside? That approach was the basis of Bridgewater going from having to borrow $4,000 from my dad to the largest hedge fund, most successful hedge fund in the world. I created personality tests. I gave it to Elon Musk. I gave it to Bill Gates. I gave it to Rick Hastings. Maybe I should probably not tell stories, but no, no, no. That's what we do here. You don't have to make it to the top to be happy.

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Sam0:30

What's the top? There's no correlation between the level of happiness in your life and the amount of money that you make. So, you have to have a purpose. What do you want to do with the money that is so important? You better answer that question. You were in some regard a little bit of a late bloomer in terms of like traditional metrics of success.

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Ray Dalio0:54

Oh, yeah.

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Sam0:55

I think you were 34, 35. You had like two kids. I think you had just laid off the five employees that you had had and you're like, 'Look, Dad, I've lost it all.' Can you like close your eyes and like remember that conversation?

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Ray Dalio1:09

So I started Bridgewater in 1975 and in 1981 and 82 interest rates were not the emerging countries had a lot of debt and I calculated that those countries were not going to be able to pay their debts and they were going to have big debt crisis and that was a very controversial point of view and then Mexico defaulted in August of 1982. So, I was asked to testify to Congress about what this is all about and what might happen to the economy. I thought the economy was going to be a disaster. I couldn't have been more wrong. Okay? So, I lost money for me. I lost money for my clients and I had to lay off everybody. I was so broke I had to borrow $4,000 for my dad. So then my choice was am I going to, you know, put on a suit and tie, go in, commute, and work for somebody in that capacity. And I knew that I wasn't very good at working for people. Now, that was painful. That changed everything in my life. That created the bottom at Bridgewater. And then it just kept going up because of what I learned. I learned two things. First of all, I learned humility to balance my audacity. Okay, I didn't have much humility. I'd say I'm right. I'm going to be right and all that. And then I learned how to diversify my bets and substantially reduce my risk without reducing my returns because I didn't want to have reduce the upside. I knew that I had to reduce the downside. And so I really learned and taught myself my mantra. Okay, here's the mantra for investing. You want to be successful, this is the holy grail of investing. Find 15 good uncorrelated return streams.

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Sam3:07

How did you come up with 15?

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Ray Dalio3:09

Well, I just looked at the math of it. So in other words, what are the marginal benefits of diversification given the different levels of correlation? I have that on a chart that keeps reminding me. If you can get out to 15, you can reduce about 80% of your risk without reducing your return. That means you increase your return to risk ratio by something like a factor of five. So that means you can get the upside without having the downside. And then humility, I wanted people to kick the [ __ ] out of whatever I thought. And that change in approach was the basis of Bridgewater going from having to borrow $4,000 from my dad to the largest hedge fund, most successful hedge fund in the world.

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Sam4:12

If we wanted to be better investors, what do you think the most common mistake smart guys can make when it comes to investing? They don't have a game plan.

So, what's a good game plan look like? How do you know if you have a good game plan?

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Ray Dalio4:25

Well, the way that I did it was every time I would make a decision, but this is the building of all principles I did, particularly in the markets, every time I would make a decision, I would go back and study if I made that decision in these circumstances, how would it have worked in the past? And I would know the track record of that decision. That would give me greater understanding of how things work. So then I would have a decision rule and then I would program it into the computer. When this thing came along, I started to realize I've got criteria. So rather than just the one I would see, I would say, in the computer, dump in all of them and where do they exist anywhere in the world? Give me one good decision rule that wherever it happens in the world, I have a track record of knowing how those work. Bring me that and make a collection of those kinds of things and make them uncorrelated. So it provides diversification and now you're executing a game plan. I have rules that it should be timeless and universal because if it didn't work in a long period in time, I would need to understand why it didn't work then and would work now. So that's how I built game plans and executed the game plans.

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Sam5:57

Did Bridgewater have any revenue coming in?

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Ray Dalio5:59

Nothing. So you're waking up in the morning and you're like, I got to figure this out.

It was like I'm on the edge of a jungle. I could stay out of the jungle and go to safety and have a safe life, a regular job. Or I could go into the jungle and try to get through the jungle that has all the things that can kill me. I made a choice of what I wanted in life. I have to have this great upside. I can't not do that. And part of it was if I'm going in the jungle, I want to go with people who want to go in the jungle with me, who see things differently than I do. It's like going through this jungle with animals that can kill you, but if you're in it together, you can sort of see the animals that'll kill you. I loved being in the jungle so much I didn't want to get out even after I've achieved.

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Sam7:07

You didn't want to go to the success. You'd rather be in the jungle than the zoo.

Yeah. Almost. To play off that analogy, I think a lot of successful people, you've even said this, as long as I could do what I want during the day and what I love, then I'll be happy. But I have to imagine that when you're like 33 or 34 and you have young kids and you've got a little bit of a tiger in you, you're like, I want to provide. I want to win. I want to be the best.

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Ray Dalio7:30

No, it wasn't like that at all. For me, it was two levels. Very simple. Can I pay for the basics? I don't need a big house. I don't need a big one. My kids can go to a good public school. They have great public.

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Sam7:44

Did you have a number? Like, man, if I can make 100 grand a year?

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Ray Dalio7:46

I started to count how many months and then years of living that way could I afford if it shut down?

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Sam8:00

But you said two levels. That was level one.

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Ray Dalio8:02

It's freedom money. Basically, you money.

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Sam8:06

What was that number for you? I don't remember what the number was, but it wasn't a big number. It was an easy to achieve number.

Like a million dollars?

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Ray Dalio8:14

But, oh, no.

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Sam8:16

Less.

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Ray Dalio8:17

Oh, much less at that time.

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Sam8:19

Was there ever a grand vision or was it always like, what's the next level? Let's see if we can do that.

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Ray Dalio8:23

No, no, no, no, no. I could imagine great things. I'll tell you a personality test. When I decided that I wanted to pass leadership of Bridgewater along to others, I want to be investor, let them run the business, because I'm hooked on the markets. I created personality tests. I started with Myers-Briggs and then I went to various kinds of personality tests and I gave them to people like Elon Musk, Bill Gates, Reed Hastings, Muhammad Yunus, and others to see the elements of what they are like. I put it online for free. I created it.

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Sam9:11

We took it like you took it. There's a type of person that represents a very small percentage of the population. Elon Musk is it, then Bill Gates, Reed, a number of these people are what I would call a shaper. They are people who love to go from visualization to actualization and to be on that mission. That's my personality type. I have a certain personality type. Then they have to do certain things. I remember Elon and he's that personality type. Making money is not a big deal for him. I should probably not tell stories, but um.

No, no, no. That's what we do here. We tell stories. We can all take it later.

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Ray Dalio9:57

The excitement, the compulsive thrill of climbing that and aspiring to that was my personality type. He doesn't need to. He doesn't need a house. He doesn't need security. He doesn't need anything. He didn't even need my level of needing.

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Sam10:18

It sounds like you had a story of him where that's an example of.

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Ray Dalio10:22

Well, yeah.

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Narrator10:23

Hey, everyone, pausing really quick because I know you are probably scrambling to write down all the stuff that Ray's talking about. The good news is that we did it for you. We made a guide. The link is in the description on YouTube. This guy breaks down the five frameworks behind one of the greatest investing track records of all time. So you can actually use them and spend time listening versus taking all the notes. You can get it for free right now. Click the link below in the description or scan the QR code right here. All right, back to the episode.

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Ray Dalio10:54

When he first started Tesla, he had made something like $180 million from PayPal and he decided that he was going to take half of that money and go to Mars. He had no experience in going to Mars. We had this vision. I said to him, I suggest that you put aside a little bit of money, take a piece of that, just so that if things don't work out, you've got that. He said, no, I don't need to do that. He had that strong compulsive need. But I think everybody has a certain nature. Whether you're born in your environment, you have a nature. That's why I created these personality tests. PrinciplesU is what it is. It's free. It's online. Take it. You'll understand more about your nature. There's a feature where you can have somebody else that you have a relationship with take it and then they'll tell you about the relationship.

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Sam11:58

So, we took it last night based on your after we talked the other day. Sam tells me he's like, 'I'm a shaper.' And you had told me you're a shaper, Elon. So I was like, 'Wow, okay. I hope I get shaper. I think I want to be in that club.' So I'm taking it. I'm answering as honestly as I can.

Is degenerate an option?

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Ray Dalio12:17

Degenerate.

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Sam12:17

Happy but sort of foolish.

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Ray Dalio12:20

New new type.

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Sam12:21

You a [ __ ]. Is that what?

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Ray Dalio12:22

So, I got explorer and I was like that was not what I expected at all. Did it characterize you?

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Sam12:29

Yeah. I mean it called it very much like I'm driven by curiosity, seeking new knowledge, new experiences, learning, being objective and truthful about what I'm experiencing, almost taking pleasure even when I have a bad result because it means I get to learn. That is so true for me. I get the most fun doing that. So I guess it really was true. I think why I may not have been a shaper, a lot of the questions would ask about part of the visualization to acquisition. I think I do a lot of that, but I'm not very detail oriented. I don't care about the details. I overlook details. I'm not a perfectionist. I'm much less than Sam. Sam really wants everything to be great. One of the elements of a shaper is, and by the way, that's where you're seeing your nature. You know what your satisfaction is and what you're likely to be most successful at.

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Ray Dalio13:23

Yes. The issue of a shaper is they want to go from visualization to actualization and then they go from the big picture down to the details. I remember Elon gave me the key to his car and he showed the screen and he got into the details a lot. We're talking about how he wants to put a watering can with a plant on a rocket to send it to Mars to say first life on Mars, to aspire things. So.

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Sam14:02

It's a 10,000 foot level and 10 cm level.

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Ray Dalio14:06

Right. That liking and then taking that and going. So we all have our nature. The success in life, the joy, is knowing your nature and finding the right path for your nature because you can't fight against your nature.

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Sam14:22

So look Ray, we've only known each other for 30 minutes but I'm going to show you something that might gross you out. When I was young and drunk, I gave myself a tattoo and the tattoo I gave myself is on my feet and it says, 'Act now.'

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Ray Dalio14:37

Oh, good.

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Sam14:40

So, tell me, you were at the tattoo parlor?

Have you ever heard of the phrase stick and poke?

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Ray Dalio14:44

No.

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Sam14:45

Okay. So basically, if you're in jail, this is kind of where it comes from, but a lot of punk rock people do it. You get a sewing needle, dip it in ink, and then you just make lots of little dots on your skin and that's a tattoo. When I was like 19, actually probably 22, I was angry that I wasn't moving fast enough in life. I was angsty and I partied a lot. I was drunk and I tattooed 'act now' on my feet so when I wake up that's the first thing I see: I got to take action.

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Ray Dalio15:20

And has that worked for you?

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Sam15:20

Yeah, I tend to need to tone it down. I need to think and plan because I've had a little bit of success in my career. Occasionally you need to be a little more strategic, but yeah, I'm usually like a bull in a china shop.

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Ray Dalio15:33

And the thing about it is that you have to find the people who are different from you who complement you.

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Sam15:40

Well, on my leadership test, you don't just say the personality you are. It's also where you're very weak. On mine, it was connecting, supporting, a lot of the social side. My business partner, Ben, the guy who emailed 77 times to you and your team to get you on this podcast, he's been emailing for four years trying to make this happen because he's an amazing connector. He wanted this moment to happen even though he's not at the table. To him, connecting is the win. He's been my business partner. We've had this unbelievable success as a partnership even though we couldn't be more different. So let's pause and reflect on that very important point for success: people who think differently from you, who you ordinarily get annoyed at, are your paths to success. If you can understand it, it was very interesting when I did this in Bridgewater. I did the personality tests and they started saying, 'Oh, you're an ESTP and I'm a whatever.' They started to understand how they would work together rather than get annoyed by the other person. That was a big deal. Success comes from that. Success comes from failure and learning from it. Success comes from working together. Meaningful work and meaningful relationships. If you're on a mission to do something great, go to Mars or whatever, and you have meaningful relationships and radical transparency and you know your nature and how to work with others, that's the formula for success.

Yeah. Another example is Dr. Dalio, when Sean came in, the notes were already printed off. There you go.

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Ray Dalio17:36

I'm late. I don't have it printed. But we have a very different dynamic. For six years, we've built one of the biggest business podcasts in the world despite being completely different.

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Sam17:46

So, I hope your audience hears this.

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Ray Dalio17:49

Right.

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Sam17:49

Yeah.

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Ray Dalio17:50

It's pause and reflect. Okay, what are we here for? We're here for pretty much the same reason, just a little different settings. I'm 76. I want to pass along whatever I have to help people. That's my goal. Your goal is also to be effective in helping people, otherwise I wouldn't be listening. So I just wanted to pause on that formula. Pain plus reflection equals progress. How do you work together? Follow your nature. Can you guide us on the reflection part? Everyone understands the word, but we don't talk about how each individual does it. Are you writing your reflection? Do you talk to two or three people who give you high signal feedback? What is your process?

The pain part comes involuntarily. It hits you. Eventually the pain will go away, but you can skip the reflection and be hung up in your pain. First you have to make this transition. Meditation has helped me a lot. I've done transcendental meditation since 1969.

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Sam19:06

Explain what that even is. I've only heard you and Jerry Seinfeld swear by transcendental meditation. What is it?

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Ray Dalio19:12

Transcendental meditation is a very simple exercise. You sit there calmly and repeat a sound that is a word called a mantra that doesn't have any meaning. For example, you sit there and repeat 'm' in your head. When you do that, you can't have thoughts because your thoughts are in 'm'. The thoughts can't come in. Eventually, when you get this habit down, the 'm' goes away and you go into a subconscious state, very relaxing and calm. It brings you into your subconscious mind. Your subconscious is controlling you a lot. There's a conscious, logical mind, and then subconscious means below your awareness. There are things in your mind that influence you, your emotions, subliminal stuff. It goes into that subliminal stuff and calms you down. Creativity comes from there. It's like taking a hot shower and ideas come to you. You can't muscle ideas. I found that very helpful. I've developed an instinct. Habit is a very important tool. If you know how to develop the right habit, you have an instinctual positive reaction to something. I have a reaction that pain is a lesson in reality. It's a puzzle. The puzzle is how does reality work? It tells me something about how reality works and I have to deal with reality to make it successful. What is my principle for dealing with that reality? That's my instinct. When you have that instinct, you start to say, okay, there's pain and you have curiosity. You take your curiosity and say, 'What does that tell me about how reality works and how I should deal with it?' If you solve that puzzle, you get a gem. That gem is a principle that you can carry with you to be better. Then I write it.

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Sam22:09

So what's that? What does that mean? You journal every morning, every night?

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Ray Dalio22:11

No, no, no. It's just when thoughts come to me or circumstances come to me, or I'm making decisions, I'm reflecting. What has happened to me is I found that all those reflections are cause-effect relationships because principles are if this happens, what do you do? Then I put those in computer code. That's how I built Bridgewater. I built, okay, if this happens, you do that. I put it in computer code and made computerized decision-making systems for markets and almost everything. For 35 years, I've done this on almost everything. I have thousands of these principles written down. They are ways of achieving success in whatever kind of decision. If the Fed does this, or if somebody you love dies, whatever it is. How do you reflect on them? I put out a journal that people can do so they can journal their own principles and have reflections. If they start to think that way, pain plus reflection equals that, and you reflect well. What happens in meditation is it connects your subliminal self to your conscious.

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Sam23:36

I'm on board with all that. I think if I put myself in your shoes between the ages of like 35 to 52, you went from nothing to the largest hedge fund in the world. I want to hear all that. But when you're like 34, 35, 36 in the first three years of starting your business anew, I would think like most small business owners, you're like I just got to pay the bills.

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Ray Dalio23:56

I could always find the way to pay the bills. The question is what was it? Along those lines, that's where your priorities get tested. You think about what you really want and how you weigh one thing against another. I want survival and opportunity and I want to play the game. I don't care much about convention. I don't care about how I look to the outside world. I don't care about things that can inhibit that choice. People also get stuck because they don't realize there are multiple possibilities. Some people say to me, 'But you don't understand, I'm in this job. I don't like the job. My boss is a jerk and this isn't where I want to go.' But they feel they have to be there. The reality is if you're clever and figure it out, there are many ways to have a really happy life. A lot of money is not an important thing. Sometimes we get hung up on this conventional life. I've got to do this. Is that really what it is? Listen to this quote from Sean. He said, 'I cannot say that having an intense life filled with accomplishments is better than having a relaxed life with savoring. Though I can say that being strong is better than being weak and that struggling gives one strength.' That was pretty cool.

That's true.

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Sam25:40

Yeah. I guess like you don't have to make it to the top to be happy. I think that's been our biggest.

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Ray Dalio25:43

What's the top? You work your ass off to get a lot of money. Just think about that. Is that it? What's the money for? Money doesn't have any intrinsic value. You have to have a purpose. Why are you getting the money? What do you want to do with the money that is so important? You better answer that question. What is that going to get you? Does it get you better friends? Does it get you a better marriage, a better relationship with your kids?

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Sam26:12

What is your definition of success?

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Ray Dalio26:14

Success is you knowing your nature and then finding the best path through that nature. So that you look back and say, 'Ah, that was the life I wanted to have.'

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Sam26:26

Do you think that you could answer that for yourself?

I tried to do it. I'll read what I wrote. When I was 27 years old, I wrote this out because I think I had read your principles PDF around the same time and it made me start asking these questions. One of your core principles is figure out what you want and then understand the rules of nature. Study cause and effect to understand what patterns of behavior and actions might lead to the thing you want. Here's what I wrote. You can judge it. I said, 'What I want out of life. I want to have the ability to shape my own life. I want to be my own biggest fan. I want to make adversity part of the recipe. I want to treat other people well. I want to reread this every year, every morning, so I never forget what each day is for. I want to rewrite the list every year so I see myself evolving. I want to focus on what matters. Number one, my loved ones, because they love me even if I don't do anything on this list. Number two, my health, because without it I can't do anything on the list. Number three, my work, because it makes life fun. Number four, being somebody who lights up the room because it feels good to make others feel good. Number five, learning because it's the master key that unlocks all doors.' I keep going a little bit and I say some of the things I'm weak at. I said, 'I want to be somebody who doesn't just want things, who makes them happen. I need my execution to catch up with my ideas. I want to be the most optimistic person. I want to win, not just win, but win on my terms, because that's the most satisfying way to do it.'

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Ray Dalio27:41

Congratulations. That's fantastic.

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Sam27:43

And this was 10 years ago. Then you reflect and you modify. Now you know what you want.

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Ray Dalio27:51

Do you change your goals every year?

No, my nature doesn't change. My phase of life changes. I'm at a different phase of life. Right now I'm really compelled to pass along everything that I have of value to other people. I'm late and approaching my end. That is my joy. We have different joys and circumstances. In the middle part of our lives, there's work-life balance and kids. These arcs of life are almost like a script. At each phase, you know what it's like. You have that arc, but your nature doesn't change.

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Sam28:42

I was listening to a podcast about you and there was this funny story. I think this was when you were selling research. You said you hired a guy. I forget his name, but I think he was a door-to-door Bible salesman. Did he know anything about research or finances?

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Ray Dalio28:58

Not much, but he was curious. As I say, there are three things: skills, abilities, and values. Most people look at skills and the resume. In my opinion, the opposite order is what's most important. First, values. What are the person's values? Then their abilities. Because if you have abilities, you can change your skills. We're in a world now where maybe programmers are no longer going to be the most important people. You were growing up with, 'Okay man, you need to program.' But now...

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Sam29:40

You were growing up with okay man you need to program because you're doing this and

Then all of a sudden, man, that's a lousy shot because you know something comes along. So how do you adapt? What are you going after? And then the least, so the least important is the skills. And so in thinking about that, what's our relationship going to be like? When, how do we pursue a dream? Is he bride? Is he? What is his abilities? What can we do? How do you discover? I mean, most of like your curiosity. Most of everything is in the discovery. Okay. It's not in the, you know, remember these rules and so on. The future is in the discovery. So that's what I'm, you know, I'm looking for, right? I mean, that's what even talent identification is, because talent is more important than money. Okay. The money people are trying to find those people, right? Okay. So if you look at, okay, what did Elon Musk have? He didn't have money. And how did people make money? They invested in Elon Musk. They found him and they invested in Elon Musk.

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Ray Dalio30:41

Human capital versus financial capital.

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Sam30:42

Right.

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Ray Dalio30:43

That's right.

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Sam30:43

Let's talk about you when you were younger. What would people have seen in the talent identification at that phase?

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Ray Dalio30:48

I think it would have been tough. I was, you know, a C student. I didn't like a high school education. I liked markets. I had a passion for markets. I got into CW Post College with LU on probation, but I had a passion.

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Sam31:05

So tell the story if you can of how you got that passion, how you started. You said I loved markets. I mean, most teenagers don't know they love markets. I used to do odd jobs as a kid, mow lawns, shovel driveways, and then caddy. And so I would caddy. I would walk around. I got $6 a bag when I would get up to $50. And I would talk to people about the people I caddied with about the markets, because everybody talked about the markets then. This was a time where if you got a haircut, your barber's talking about what stocks to buy. So then naturally, I took my caddying money and I put it in the markets. And the first stock I bought was the only company I heard of that was selling for less than $5 a share. And I stupidly believed that if I bought more shares, I could make more money if it went up. Okay. And so I did. The company was about to go bankrupt. Another company acquired it. It tripled in price and I said, I like this game, you know, and I thought that this game must be probably an easy game because like in the newspapers, the Wall Street Journal and the news, they had all these thousands of names of stocks, you know, on all of those things and I just figure I have to pick one or two that go up. I mean, this big selection, I should be able to do that. And then I started in the game and then I realized the game is not easy. I still know the game isn't easy, but then I got hooked on the game.

Did you have any peers at the time or were you an oddity?

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Ray Dalio32:43

No, there were no kids who were doing that.

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Sam32:46

So books or where were you getting smarter? How did you start?

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Ray Dalio32:49

I remember Fortune had the Fortune 500 and they had in the, when they had the Fortune 500, they would have little tear sheets and you could say which annual report you would want. You would check it off and mail it in. And I checked off all of them. And then, you know, the mail would log these things to the house and then it became my little library and I would talk and then I'd fiddle around. Yeah, that's how I did it.

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Sam33:16

Whenever I was reading Snowball, Warren Buffett, and now I'm hearing you talk about it, I think like the lucky thing that, I don't know what it is, that you found something that you liked at such a young age.

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Ray Dalio33:26

That for a lot of people I know that are like that, Bill Gates was like that. A lot of people are like that. They found something and then also learning is different. Learning prior to puberty is different. At around 12 or 13, it's like learn a language, learn something, learn a sport and so on. When you learn it prior to that, it almost goes into your, you know, into. So yeah, that was part of it.

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Sam33:53

Were you a hustler? Because you know, now we see you as this guy who's very wise. He's sharing all his knowledge. And when I studied Buffett, it was kind of the same. Buffett is this charming, wise, patient sort of guy. But if you read about him as a kid, he was at the horse tracks. He was studying bedding. He was finding slips on the ground and cashing them in that others had overlooked. He was setting up pinball machines in barber shops and fishing golf balls out of the pond and reselling them. He was a hustler. Were you a hustler as well?

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Ray Dalio34:23

No, on the golf course that I was at, they would hit them into the pond and I could walk around in the pond and feel them. Yeah. And then I would pick up the golf balls and sell them. Now that's funny. I didn't know he did that.

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Sam34:38

Sam called you a late bloomer. I find that term interesting. You don't know this about Sam, but he really wanted to be successful. He studied a bunch of successful people. He had a spreadsheet he shared with you. We met when we were 24 years old maybe. He shared this thing of when did our heroes make it, and he showed that like he had a timeline for Bezos, for Jack Dorsey, for all the kind of tech entrepreneurs that we were admiring. When did they start? How many years did it take for them to actually win? And he had mapped all their apprenticeship. So like to learn and then starting their first hit.

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Ray Dalio35:11

And he reverse engineered it and almost hit it exactly. He's like, by 30, I'm going to have this many millions in the bank because, and I know I'm today I'm here, but I will be here, and that's like almost the median.

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Sam35:19

But, okay, two things. First of all, I think you should publish that. Okay. And I suspect it has a big range around it. Okay. Like I was thinking, Ray Kroc, McDonald's, he was like 55. Okay. So it's a big range, but they certainly are driven.

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Ray Dalio35:40

Yeah. I basically when I was younger, I met someone who's actually my partner now, and he was successful at a very young age, and he was probably 15 years older than me, and I was like, I didn't grow up with a lot of money. And I was like, I want to be free. I want to feel, you know, I want to, I don't know. I want to feel free. And I was like, what's the number I need? And he said, $20 million. So I said, all right, that's the number. I have to make $20 million by the age of 30. And it was definitely I was money oriented and it worked. I got it basically at 31. But it was so I felt it was so easy to have a goal and then like reverse engineer and back into it, because then all I had to think was like step one, right? Step two, step three.

S

Sam36:19

Great. And that was smart because 20 million, right? We'll do it. Okay. And do it. And you also thought being free.

R

Ray Dalio36:30

Yeah. And then you can go for it. That was what I was trying to tell Elon and he said, 'No, I don't need it.'

S

Sam36:37

Don't need the safety net. Because if I'm listening to this, I'm hearing you say like, I just need a nice bed to sleep in. I want my freedom. I like to, I want my kids to be going to a good public school. All of that. At the same time, you made like $20 billion, right? So somebody listening could say, well, at some point, did he just way overshoot his needs?

R

Ray Dalio36:54

I wasn't paying for that. Yeah, I played a game that I love that pays well if you play it well.

S

Sam37:00

Right.

R

Ray Dalio37:01

I'm very passionate with personal finances and particularly amongst the average Joe of like, don't buy [__] you don't need, which people don't tend to follow. Or spend less than you make, which people don't tend to follow. Do you still do anything in your life that is a pretty frugal thing?

Oh, yeah. I instinctively can't waste. I'm reluctant to fly a private plane. I don't like expensive watches.

S

Sam37:29

I heard someone make a joke that most of your suits are from Banana Republic or something like that.

R

Ray Dalio37:34

It's something like that.

S

Sam37:36

Where do you spend? Well, right. So spending is also a skill. I spend money on the things that I enjoy. I love boats. I have a house on the water. I don't have a yacht, but I have an ocean exploration ship that I'm very excited about that I give to scientists and I'll tag along. I cannot do a normal yacht. Okay. But when they're doing this ocean exploration, Jacques Cousteau had an effect on me. When I was growing up, I watched him dive and do exploration. And then my son, I have a son who I took my son's diving and they learned how to dive and he then went to work at National Geographic as a filmmaker and so on. And then we have this common passion of ocean exploration. So to create a ship that's a laboratory that they do research and so on and so forth. That's a great joy. But I couldn't be, I'm listen, I'm not against anybody doing any of these things. I just want to be clear. It's not like I think whatever brings you joy, it's okay. It's kind of like that, right? And we're uncomfortable. My members of my family, my wife would not be comfortable with much jewelry, you know, or anything that would be fancy jewelry or something. That's just how we grew up, you know, and the kids are the same thing. My kids who have grown up, I would say whatever you enjoy, like if you enjoy the threads and the beauty or the watch and you really are enjoying it, that's fantastic.

I know you're into the ocean. Do you believe in aliens? And have you, do you have access into any cool insight into things like that?

R

Ray Dalio39:20

I have no knowledge of aliens and I have no.

S

Sam39:23

What do you believe?

R

Ray Dalio39:25

What do I believe? I have no beliefs that are just beliefs. So people who I've heard different people saying things and here's what I believe, which is there's the enormity, you know, of our galaxy. There are something like 100 billion solar systems, okay, and in the universe there are something like a 100 billion galaxies. And so there are a lot of combinations out there. So I would have to believe that the probabilities of there being life in other forms and so on are great, okay, out there. However, I've also heard scientists say that that is much smaller than one would think about those things. But I haven't gotten into the subject. All I'm giving you is, you know, what I heard about those things and, you know, it's not a subject that I've spent much time with.

S

Sam40:28

Right. Yeah. I think you had a phrase like probability-weighted beliefs or something like that, right? It's like not all beliefs are obviously equal. Some you have high conviction in and some you have much lower based on an analysis or an assessment.

R

Ray Dalio40:41

It's just my way, you know, and also markets teach you this way, right? What is the expected value? How do you have humility? Okay. If you have an opinion, what's the opinion worth?

S

Sam40:51

Hey, how much time? Like we've spent almost all of this time talking about frameworks for thinking and very little of it was about business or finances. How much time of your day do you spend thinking about some of this high-level stuff versus like actually picking or making a decision on a trade?

R

Ray Dalio41:10

They're connected to me. Okay. I'm a global macro investor. Okay. Which is by the way I think it's the best kind of investing because it brings you into, okay, global, that's cool, you deal with the whole world. Macro, that means big stuff, important stuff. Okay. And then how do you place your bets? And so it's connected to all of this stuff. You know, it's connected to the politics and the geopolitics and all of that, and it's connected to history. I did a study of the last 500 years of how things are working only because I learned in my life that if I haven't seen something before in my, that didn't happen to me in my lifetime, I should see whether it happened before my lifetime and so on. And then when I did that, because there are these big cycles, like there are orders, right? We'll call there's a monetary order, there is a political order, okay, political and social order, there is a geopolitical order. In other words, systems of how they work. They all break down. Okay. Throughout history, you read history, but they happen like in these big sort of cycles, and they break down kind of for the same reasons all the time. They break down for the same reasons. So as a global macro investor, in a sense, I'm connected to that. So the book that I ended up writing, you know, which is 'The Changing World Order', I plot things and so you see them on graphs and you could see these things happening. Simple measures of financial health and how does that all work and what are the consequences when you see that. So yeah, I'm into that because it's connected. When you said, do I see the big stuff? Okay, yeah, the big stuff matters a lot, right? But you see it in these, you realize that a lot of people are looking at the news. The news lasts a minute. Okay. Can you put the news in the context of what's happening? Watch what's happening. I mean, let's take a look at those things. You want to take a minute on that?

S

Sam43:15

Yeah.

R

Ray Dalio43:16

Okay. Okay. So one of the things that I learned about is that there are five big forces that interact over a period of time to determine that, and that is the debt, money, economic force. Okay. And there is a big debt cycle. Okay. So it's a very simple thing. If you acquire more debt than you, and then you're earning over that, your debt service payments will squeeze out your spending. Okay. They grow and that is like in your circulatory system, that's like plaque being built up in your circulatory system. And when that happens and it becomes painful, you have a debt restructuring. And also one man's debts are another man's assets. So if you're producing a lot of debt, let's say government's running a large budget deficit, that means it has to sell bonds. And then who are the buyers of the bonds and how does that work? So it has a mechanical part of it. That's one of the forces. The other force is wealth and values differences. So there's the political force which has to, wealth gaps, values gaps, as they become greater. That's a greater threat to democracy. That's a greater threat in other words when you get to do you have irreconcilable differences. So you're not going to compromise and you're not going to even follow the system. That's a risk. Okay. That's a risk now. Okay. We have the first risk. We have the second risk. Okay. Check. Check.

S

Sam44:52

Okay. Third risk is the geopolitical risk. So there's orders, right? The way the order works is who's in control? What are the rules of the game for the world? And so the way it works is you have a war, the winner of the war sets the rules, and that we call that's the order. 1945, we ended the war, America sets the rules, and so on, and we created what was a multilateral type of system, you know, almost representative, the United Nations, the World Health Organization, the World Trade Organization. So all those world organizations are out the picture. We no longer have a multilateral world order. Okay. So how do you resolve differences? You fight. Okay, you're going to have conflict. How do you get past the disagreement? There's no court you go to. You can't do it that way. Okay. So now you have those three things. Okay, that's happening. Number four, force always through nature is nature, in particular. Droughts, floods, and pandemics historically have killed more people than wars and they are a big force as they come up. And number five, all through history is man's inventiveness, particularly of new technologies, and that raises living standards. So if you were to see life expectancy always rises, productivity per capita GDP by all measures, as we learn more, we have that. And so there's the interaction of those five forces. Those five forces you can measure them and you can measure their interactiveness, and that is what is now happening. So if you know those cause-effect relationships, I think they're connected.

I've read something that your family office, I don't know if this is right. You can correct the record. Your family office has like 70% or 75% in gold ETFs right now. Is that wrong?

R

Ray Dalio46:44

Totally wrong. Totally wrong. I believe that from an investor's point of view, they should, it depends what their portfolio is constructed, and they should have between five and 15% of a portfolio for getting that 15% uncorrelated difference. That's they should have something like that, and they should have it overweighted if they're tactically doing it. Tactically means let's say there's a certain time to own it and a certain time not to own it. A certain time to own it is particularly when there's a debt crisis and the government is flooding with money. That's an ideal time to own it. So there's a timing question. So I believe that one should create a strategic asset allocation mix, meaning what is my best balance portfolio if I have no opinions? What is it's not going to be cash, because cash always is the worst performing over a period of time. People think it's the safest. It's the surest to do poorly over the longest period of time.

S

Sam47:44

High certainty, low performance.

R

Ray Dalio47:46

So what you want to have, the best thing to do is have a well-balanced portfolio of assets because you can lower their risk through diversification, because if you have one, it goes like this, but if you have another that does the opposite with it, you can have that. So there's a strategic asset allocation mix and then you make your tactical bets relative to that and so on. But here's what I would describe the mechanics. Let's say there is such a thing as bubbles. What is a bubble? A bubble is not whether the stock will pay off in the long run, because in bubbles even the most successful companies go down 80% or something along those lines. So typically when there's borrowing of money or whatever and there's an increase in wealth relative to money. Okay, wealth and money are two different things. Okay, wealth is, you can make up wealth. If you have a $50 billion, a $50 million offering on a billion dollar valuation, then all of a sudden you're tech, you're called a billionaire and it was $50 million, but then the world has a billion dollars in wealth. But what happens is as wealth builds up, you can't spend wealth. You have to sell wealth in order to get money, because you can only spend money. And so when wealth builds up a lot and then there comes the need for money. Now what creates the need for money? The need for money often is that they borrowed the money to buy the wealth, to invest in the wealth, and then maybe interest rates go up, and then all of a sudden they have to pay their debt back. And so where do they get that money from? They sell the wealth in order to get the money. And so there's this dynamic that's taking place. And then it has another number of ingredients, like it's all the rage to buy it and everybody buys it. Everybody buys maybe more than they should because they don't diversify. And what happens is it's all the rage and so is it logical? And there are these elements that create a bubble. Okay. There are right now, on that scale, I have a bubble gauge. I measure all these things and I have this bubble gauge going back across countries to about 1900, and so I can see where they are. And these, by the way, typically take place quite often when there's great new technologies, a reason to be exuberant.

S

Sam50:20

The reason to be exuberant and to bet, and people confuse investing in, they say I believe that technology is going to be great and revolutionary, and it is. Okay. But that doesn't mean the stock will be great. There's a lot of reasons that the stock could be too high and competitors come in and they, you know, there's a Google and there's a Yahoo. So what's the bubble gauge saying right now?

R

Ray Dalio50:45

So the bubble gauge is saying it's about 75% toward where it was both in 2000 and 1929. So it's pretty high up there. In Japan in its bubble in 1990, it got higher even than those cases. So it's high. But people pay too much attention. Let's say if I just did the bubble gauge, I could tell you probably with good probability that it won't be good for the next, I couldn't tell you whether it's going to be 3 years or 10 years, but it won't be a good investment. But it won't tell you timing. Timing you need the pricking of the bubble. Okay. So what causes it to prick the bubble? So if you got a bubble and then you see, okay, here are the things that prick the bubble, then you've got a good combination of things to do your market timing, because the timing is going to be on the pricking of the bubble. The pricking of the bubble typically is creating the need for the cash, for converting that wealth into cash for one reason or another. Quite often, the most typical thing is tightening monetary policy. Okay. So what you have typically is that when stocks go up and bonds go down, then what you have is the future expected return of equities becomes low relative to interest rates, and when interest rates go up, let's say a tightening of monetary policy, you know that's a classic dynamic. Other things like wealth taxes could do it. So in other words, for example, if you say you're going to have to pay wealth tax, then whoever has the wealth is going to have to sell some of the wealth to get the money in order to be able to pay. So looking out for those things in terms of the timing is my machine. Take that for whatever it's worth. I don't want people to trade on this and so on. But I'm just trying to answer the question that there are mechanics. Okay. Everything that happens has causes that make it happen. And if you understand the mechanics of the cause-effect relationships, you can see all this and understand it that way.

S

Sam52:55

Is Bridgewater the biggest hedge fund because you had the best performance? Is it the biggest because you were the best at marketing? Why did it become the biggest?

R

Ray Dalio53:05

It became the biggest hedge fund because we most consistently made excellent returns with minimal risk and we were uncorrelated with the stock market or any other market. That was the main thing. It made 11.8% a year for 31 years when I did it. The worst down in a year was 2020 because of COVID, and we didn't know how to deal with COVID. That was down about 13. The next two times were down like 2%. Okay. And that was not correlated with anything. You know, if you lose 50%, you have to have 100% to make money. And so the compounded effect of that, and it was comfortable. So that's why.

S

Sam53:59

Out of the 30 years, how many did you lose?

R

Ray Dalio54:01

I think it was like three. Three was what percent? Three, four, whatever, but not significant. But it does help your media, your work. I mean, you're charming, you're a good leader, and you've been doing it since you were in your 30s.

But Bridgewater became the largest hedge fund before anybody knew me, and it was the opposite reaction, like I was trying to be below the radar. And then two things happened. We became the largest hedge fund in the world, and at the same time, we have this culture. Okay. And the culture was perceived as a cult. And then I put online the principles, just so we have a book of how we're going to be with each other, the principles. And then that got around, 3 million copies were downloaded 3 million times. People passed it around. Otherwise it was going to be a problem like hiring people and so on. They wouldn't understand the culture, which is the culture is an idea meritocracy in which we have radical truthfulness and radical transparency. But anyway, so in answer to your question, it was not my charm had anything to do with this. I could explain the process and people can understand what was our process, and I could show how it was backtested and it worked through all of those periods of time, and that it was logical, and then there were results, and we helped people learn meaningful work and meaningful relationships. So I would have relationships with them and we would teach them and they would learn and they became better investors.

S

Sam55:40

I was walking around New York because this is my first time here in like 10 years, and I went to the Rockefeller Center and there's this giant stone and it's John D. Rockefeller Jr., and he's just writing these things. 'I believe in the sacredness of a promise, that a man's word should be as good as his bond.' And he just has, there's like 10 of these principles etched in stone sitting outside the building. You know, it's like 'I believe that love is the greatest thing in the world and that love alone can and will overcome hate.' Right? And we are missing these now more than ever. Right? The idea of what are these principles? What are the principles that bind us together? Okay. What are the principles that we follow? Really, what is most important? People are not, you know, everybody should write down their principles and then be judged of how they're living by those principles. And are they together?

R

Ray Dalio56:38

Well, this is the best part of your book. You write the principle. You're not saying these are your principles for everybody. You're like, these are my principles. If you take away anything, it should be that you should figure out what yours are.

S

Sam56:48

That's right.

R

Ray Dalio56:49

In Europe, most people don't know what theirs are. Even fewer will ever write them down. And then the fewest will be those who act in alignment, who walk their talk.

S

Sam56:57

But to get there, you have to write it down. You have to look at it. You have to have the [__] kicked out of it. You have to, you know, and you say, 'Yes, that's right.' Those that are clear, etched in stone that bring us to a higher level of how we should be. We are short of those just like we're short of heroes, okay? Role models that you say, 'Ah, that was a great man,' or that's a way to be.

R

Ray Dalio57:27

Who was yours growing up and maybe do you have a hero now?

S

Sam57:29

Like one of them was Paul Volcker, okay. Lee Kuan Yew started Singapore and ran that. But there were many, many people who will sacrifice for the things I believe that we talk about. Love, karma, okay. Or what I mean is you go across the world and you look at all religions and there's something common. Everybody can have differences in their superstitions, their beliefs and so on, but there's a commonality which is do unto others as you would have them do unto you, or karma. What goes around comes around. And it is a reality that the whole is much better than the individual parts, because a little bit of consideration and help for others can make such a world of difference. And if you do that both ways, you have a much better world, right? And then people who do that are role models to me as you look at that. Okay. As opposed to the sting from selfishness and fight, in other words, what I mean that is mutually destructive, and you see that. So I think it's a question for humanity now, can we rise above ourselves for dealing with what will certainly be better for everybody if we can get along. I don't mean that idealistically. This is practical, right? Because it doesn't cost me a lot to help you, it doesn't cost you a lot to help me, but it could make a world of difference when you have that. It's a practical thing. And then what is heroism? Contributed to that. I think that's literally what it is. And we're now operating a lot the opposite way, I think. You know, we've been doing this podcast for a little while here and we've been talking about lots of different angles, some about investing, some about life and principles and entrepreneurship. I'm curious, if somebody was listening to this and there's one thing that they were going to remember, what would be the thing that you hope people remember or take away? What's the one big one?

R

Ray Dalio59:49

Know what you want, and understand that it's a journey of having your nature and then running into your mistakes and learning from those mistakes to get what you want. And then I would say it's all about meaningful work and meaningful relationships. If you have work that you love and you've got relationships that you love, you're probably going to have a great life.

S

Sam1:00:13

Well, thanks for doing this, man.

R

Ray Dalio1:00:14

Yeah, we appreciate it. This was fun for us. I hope it was fun for you.

S

Sam1:00:17

It was fun. Yeah.

Ray Dalio: This is how a bubble actually pops

About Ray Dalio