INVESTMENT SUCCESS PRINCIPLES - RAY DALIO

I was invited to testify before Congress to explain the debt crisis and what could happen to the economy. I thought the economy would fall into a disaster, but I couldn't have been more wrong. You know, I lost my own money, lost my clients' money, and I had to lay everyone off. I was only 34 years old at the time. I was so broke that I had to borrow 4,000 dollars from my father. At that point, I faced a choice of whether to put on a suit and tie and work for someone else. And I knew I wasn't good at working under others. That period was truly painful, but it changed everything in my life.

Yes, I started my hedge fund in 1975, and in 1981 and 1982, interest rates were rising very quickly, and emerging countries at the time were carrying massive debts. And I calculated that those countries wouldn't be able to pay their debts, leading to a major debt crisis. That was a very controversial view at the time, and when Mexico defaulted in August 1982, I was invited to testify before Congress to explain the issue and what might happen to the economy. I thought the economy would collapse into a disaster, but I couldn't have been more wrong. You know, I lost all of my money, lost my clients' money, and I had to lay everyone off. I was so broke that I had to borrow 4,000 dollars from my father. At that time, I was faced with the choice of whether to put on a suit, tie a tie, and work for someone else in that capacity. And I knew I wasn't good at working under anyone else. That period was truly painful, but it changed everything in my life and marked the bottom point for my investment fund. And from there, everything just went up thanks to what I had learned. And I learned two things. First, I learned humility to balance out my boldness. Before that, I didn't have much humility. I was always arrogant, thinking I was always right, that I would definitely be right, and things like that. And the second thing is that I learned how to diversify my investment portfolios to significantly reduce risk without lowering returns. Because I didn't want to reduce my potential profit. I knew I had to limit my risks and losses. And so, I truly learned and distilled my own mantra. This is my mantra for investing. If you want to succeed, this will be your holy grail in investing: find 15 good sources of return that are uncorrelated with each other.

Well, I just relied on the math. In other words, what is the marginal benefit of diversification when considering different levels of correlation? I have a chart that always reminds me of that. If you can reach that number of 15, you can reduce about 80% of the risk without reducing your returns. That means you increase your return-to-risk ratio by about five times. That's amazing, isn't it? It means you can achieve potential returns without having to endure massive risks. And you know, I really want people to vehemently challenge everything I say so that I can test it. Then from there, I will apply it in reverse. That change in approach was the foundation that helped me go from having to borrow $4,000 from my father to building my investment firm into one of the largest and most successful hedge funds in the world.

It is that they do not have a battle plan. And the way I do it is that every time I make a decision, this is also how I build all my principles, especially in the financial markets. Whenever I am about to make a decision, I go back and study what the outcome would have been if I had made that same decision in similar circumstances in the past. I would know the historical performance of that decision. That helps me gain a deeper understanding of how things work. Then, I create a decision rule and program it into the computer. When that situation occurs, I realize that okay, I have met all the criteria. Instead of looking at each case individually, I ask the computer to scan all the data in the world to see where those criteria appear and what the results would be. And give me a good decision rule so that no matter where it happens in the world, I have the historical data to know how it performs. No matter where in the world, bring that data here, then aggregate those things and make them uncorrelated with each other. That helps you diversify your portfolio, and now you are executing a battle plan. I have rules that are timeless and universal. Because if it did not work for a long time, I need to understand why it did not work then but works now. That is how I build and execute my battle plans.

That is exactly right. And the feeling at that time was like I was standing in front of a dense jungle. I could choose to stay outside the jungle. I was looking for safety and having a stable life with a normal job. Or I could go into the forest and try to cross it, facing all the dangers that could kill me. And I have made that choice for my life. I mean, I have to get that great reward. I couldn't not do it. Another part of the reason is that it's like going through a forest full of wild beasts that could kill you, but if you go together, you can help each other spot those dangers. And I love being in the forest so much that I don't want to leave it, even after having achieved certain successes.

No, that's not entirely the case. For me, it just comes down to two simple levels. First, can I afford my basic needs? I don't need a huge house, I don't need a luxury car. My children can go to good public schools. They have excellent public schools. And what I started doing then was calculating how many months and years I could maintain that lifestyle if this business had to close. The second thing is the money needed to be free. For you, that is the money so you don't have to work anymore.

Of course not. And I can imagine some very wonderful things. And I also have my own visions. And I will tell you about a personality test. When I decided I wanted to hand over leadership of the hedge fund to others so I could just focus on being an investor and let them run the business, as for me, I did that because I'm addicted to the markets. I created personality tests. I started with personality tests and then moved on to many different types of personality tests. Then I gave these tests to people like Elon Musk, Bill Gates, and others to see the factors that make up who they are. And I posted it online for free, and I created it with my own hands.

And there is one type of person in that test that makes up a very small percentage of the population, and Elon Musk is a typical example, as well as Bill Gates and several others. I call them the shapers; they are people who like to go from conception to realization and dedicate themselves to that mission. That is also my personality type. I have a certain personality type, and they have to do certain things. And I remember Elon Musk, he belongs to that personality type. Making money is not a big issue for him. And you know, the intense desire to climb to the top and crave that is my personality type. But he does not need that. He doesn't need a house, he doesn't need security, he doesn't need anything at all. I mean, he doesn't even need the bare minimum like I do.

When he first started Tesla, he had made about 180 million dollars from PayPal and he decided to put half of that money into going to Mars. Even though at the time, he didn't have any experience with this. And he had such a vision. And I told him that I advise you to set aside a small amount of money. Just in case things don't go well, there is still that amount. But Elon told me, "No, I don't need to do that." He has a very intense desire. It is a drive coming from within his body. But I think everyone has a certain nature, whether innate or shaped by their environment. And that is the reason why I created these personality tests and posted them on the Internet for free. Well, you should try taking this test, you will understand more about yourself. The problem with a person like Elon Musk is that they want to go from conception to realization, and they go from the big picture down to the smallest details. And I remember one time Elon handed me his car keys, saying it had this little button, and he showed me the screen, going into great detail about the car. We also talked about how he wanted to put a watering can with a plant on a rocket to Mars, to mark the first life on Mars and inspire everyone. That passion will eventually turn into action. So, we all have our own inclinations and different tendencies. Success and happiness in life really come from understanding your own nature and finding a path that aligns with it. Because you cannot fight against your own nature.

I am already 76 years old. I want to pass on whatever I can to help people in that way. And that is my goal.

As I said, pain plus reflection equals progress. Pain often arrives unconsciously, striking and hitting you. And eventually, that pain will pass. But people often skip the reflection step and get stuck in that pain. So first, you have to go through this transition step. Meditation has helped me a great deal. I have been practicing Transcendental Meditation since 1969. To explain it to you, Transcendental Meditation is a very simple practice. You just sit still and repeat a sound over and over. It is a word called a mantra that carries no meaning at all. Let me give you an example. You sit there and repeat the sound "um" in your head. When you do this, you cannot think of anything else because your mind is focused on that sound, blocking other thoughts. Gradually, as you get used to this habit, the sound fades, and you enter a state called the subconscious. It is incredibly relaxing and peaceful. It is an exercise that truly calms the mind and takes you deep into your subconscious. The subconscious is actually in control of you most of the time. We have the conscious mind, the logical mind you are aware of. And the subconscious is what lies below your level of awareness. That is where everything that influences you resides, like emotions and deep-seated messages. Meditation reaches deep into that subconscious region and calms you down. And that is also where the source of creativity lies. It is like when you take a hot shower and ideas just suddenly come to you. If you try to force your brain to think of ideas, you cannot force it. But when you take a hot shower, when your body is relaxed, they find you on their own. I find this method extremely useful, and I have cultivated an instinct for it. Habit is a very important tool if you know how to build the right ones. A habit means that you have an instinctive positive reaction to something. And now, pain is like a puzzle to me personally. And that puzzle is, how does reality operate? What does it tell me about how reality works and how I must deal with it to be successful? So, what is my principle for dealing with that reality in the best way possible? That is my current instinct. And when you have that instinct, everything is completely different, right? Because you start telling yourself, okay, there is pain here and I have curiosity. Now use that curiosity and ask, what does this tell me about how reality is working? And how should I deal with that reality? If you solve that puzzle, you will get a precious gem. That gem is a principle that you can carry with you to become better, right? And if you start looking at it that way and write it down.

No, it's just when thoughts strike or when situations arise or when I am making decisions, I reflect. And what happens to me. And I realize that all those reflections are relationships, cause and effect. Because principles are essentially if this happens, then what will you do, and so on. After that, I turn them into lines of computer code. And that is how I built my investment fund. And I set it up, okay, if this happens, then I will do this. And then I put it into a computer algorithm. From there, I created a system that makes automated decisions for the market and almost everything else. I have been doing this for about 35 years for almost everything and I have thousands of such principles written down. They are ways to be able to achieve success in any type of decision. Whether it's the Fed, meaning the Federal Reserve doing this, or if a friend you love passes away, or anything else.

I advise everyone to use the journal I published so they can record their own principles and reflections. If they start thinking in that direction, pain plus reflection equals progress. And what happens during meditation is that it connects your subconscious to your conscious mind.

I could always find a way to pay the bills. And the question is, what is your real goal? You know, how do you think about what you really want and weigh one thing against another? I mean, I wanted survival, I wanted opportunity, I wanted to be in the game, and I didn't really care about conventional norms. I didn't worry much about how I looked in the eyes of the outside world. I didn't care about things that might hinder that choice. I think people often get stuck. They are stuck because they don't realize there are so many different possibilities. So someone tells me, "You don't understand, I'm doing this job, I don't like it. My boss is a terrible person, and this is not where I want to be." But they feel they are forced to be there. The reality is that if you are wise, know how to manage, and put in the effort, there are many ways to have a truly happy life. And by the way, having a lot of money is not the most important thing. Sometimes we are too preoccupied with living life according to a conventional mold. Like, okay, I have to do this thing. But is that really what you want? You should even experiment with it. Listen to a quote like this: I cannot say that an intense life full of achievements is better than a relaxed and enjoyable life. However, I can affirm that being strong is better than being weak, and struggle gives us strength. And I find that to be a wonderful quote.

What even is the top? Are you working hard just to earn a lot of money? Think about that. Is that all there is? What is money for? Money has no intrinsic value, right? So, you must have a purpose. Why are you earning money? What do you want to do with that money that makes it so important? You had better answer that question. What will money bring you? Does it help you get good friends? And does it help you have a happier marriage or better relationships with your children?