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.
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.
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?
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.
How did you come up with 15?
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.
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?
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.
Did Bridgewater have any revenue coming in?
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.
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.
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.
Did you have a number? Like, man, if I can make 100 grand a year?
I started to count how many months and then years of living that way could I afford if it shut down?
But you said two levels. That was level one.
It's freedom money. Basically, you money.
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?
Oh, much less at that time.
Was there ever a grand vision or was it always like, what's the next level? Let's see if we can do that.
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.
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.
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.
It sounds like you had a story of him where that's an example of.
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.
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.
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?
Happy but sort of foolish.
You a [ __ ]. Is that what?
So, I got explorer and I was like that was not what I expected at all. Did it characterize you?
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.
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.
It's a 10,000 foot level and 10 cm level.
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.
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.'
So, tell me, you were at the tattoo parlor?
Have you ever heard of the phrase stick and poke?
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.
And has that worked for you?
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.
And the thing about it is that you have to find the people who are different from you who complement you.
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.
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.
So, I hope your audience hears this.
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.
Explain what that even is. I've only heard you and Jerry Seinfeld swear by transcendental meditation. What is it?
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.
So what's that? What does that mean? You journal every morning, every night?
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.
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.
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.
Yeah. I guess like you don't have to make it to the top to be happy. I think that's been our biggest.
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?
What is your definition of success?
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.'
