If you want to succeed, this is the investing mantra. Let me get my pen out. The most fundamental question is how to make a profit without taking risk. That approach is the foundation of Bridgewater. From having to borrow $4,000 from my father to becoming the world's largest and most successful hedge fund, a high-risk investment fund. I created personality tests. I gave them to Elon Musk, Bill Gates, Rick Hastings. Maybe I shouldn't tell this story. But no, no, this is what we do here. You don't have to reach the top to be happy. What is the top? There is no correlation between the level of happiness in your life and the amount of money you make. [music] So you have to have a purpose. What do you want to do with that money that is so important? You should answer that question.
You're a bit late by traditional success criteria.
I think you were about 34, 35 years old, had two children, and had just fired five employees. You told your father you had lost everything. Can you close your eyes and recall that conversation?
I started Bridgewater in 1975, and in 1981 and 1982, [music] interest rates weren't the issue. Emerging markets had a lot of debt, and I calculated that those countries would not be able to repay their debts and would face a major debt crisis. That was a controversial view. And then Mexico defaulted in August 1982. So, [music] I was invited to testify before Congress on this issue and on what could happen to the economy. I thought the economy would be a disaster. I was completely wrong. I lost my money, lost my clients' money, and had to fire everyone. I was so poor I had to borrow $4,000 from my dad. Then my choice was whether I should put on a suit and tie, go to work, and work for someone else. And I knew I wasn't good at working for someone else. That was painful. It changed everything in my life. It created the bottom of Bridgewater. And then everything kept going up because of what I learned. I learned two things. First, I learned humility to balance my boldness. I didn't have much humility. I used to say I'm right, I'll be right. And second, I learned how to diversify my bets and significantly reduce risk without reducing returns. Because I didn't want to give up the returns. I knew I had to reduce risk, and so [music] I actually learned and taught myself my mantra. This is the investing mantra. If you [music] want to succeed, this is the holy grail of investing. Find 15 good sources of returns that are not correlated with each other.
So how did you come up with the number 15?
I just looked at the math of it.
Meaning what is the marginal benefit of diversification at different correlation levels?
I have a chart that always reminds me that if you diversify into 15 assets, you can reduce about 80% of the risk without reducing returns. That means the return-to-risk ratio goes up fivefold.
That means you get the upside without taking the downside. And then with humility, I wanted people to try to poke holes in what I thought, and that change in approach is the foundation that took Bridgewater from having to borrow $4,000 from my dad to becoming the world's largest and most successful hedge fund.
If we want to become better investors, in your opinion, what is the most common mistake smart people make?
They don't have a game plan.
So what does a good game plan look like? How do you know if you have a good one?
The way I do it is, whenever I make a decision, I go back and study how that decision would have performed in past circumstances. I'll know the track record of that decision. That also helps me understand more deeply how things work. Then I have a decision rule, and I program it into the computer. When this happens, I started to realize that I had criteria. Instead of just looking at one rule, [music] I put everything into the computer to see where they exist in the world. And I have a good decision rule that, whenever it happens anywhere in the world, I have a track record of knowing how they work. [music] You bring me that, and I collect things like that and make them uncorrelated with each other. So it provides diversification. And now you are executing a game plan. I have rules that must be timeless and universal. Because if it doesn't work over a long period, I need to understand why it didn't work then but works now. That's how I build and execute game plans.
Did Bridgewater have any revenue at that time?
And you wake up in the morning and tell yourself you have to find a way.
I was like being at the edge of a dense jungle. I could stay outside the jungle, go to a safe place, get a normal job, and have a comfortable life. That's fine. Or I could go into the jungle and try to get through it, where there are all sorts of things that could kill me. And I chose what I wanted in life. I mean, I had to have that extraordinary leap. I couldn't not do it. Partly because if I went into the jungle, I wanted to go with people who also wanted to go into the jungle with me. People who see things differently — it's like walking through the jungle with animals that could kill you. But if you go together, you can spot those dangerous animals. And I loved being in the jungle so much that I didn't want to leave. Even after achieving success.
You don't want to reach success, you'd rather stay in the jungle than at the top.
To continue that metaphor, I think many successful people — and maybe you've said this too — as long as I can do what I want and love every day, I'll be happy. But I imagine when you were about 33, 34, with young children and a bit of a mess, you thought, I want to provide, I want to win, [music] I want to be the best.
No, that's not it. For me, there were just two very simple levels. First, do I have enough [music] money to cover the basics? I don't need a big house, I don't need a big car. And can I send my kids to a good school? They have great schools.
Have you ever thought of a number like, if I make $100,000 a year, I start counting how many months, then how many years I could live like that if the job falls apart? But you said those two levels are level one, that's basic financial freedom. What was that number for you?
I don't remember exactly, but it wasn't a hard number to reach like $1 million.
Did you ever have a big vision, or [music] was it always just what's the next level? Let's see if I can do it?
No. No, no. No. I couldn't imagine great things. Let me tell you about the personality test. When I decided I wanted to hand over leadership of Bridgewater to someone else, I wanted to be an investor and let them run the business because I was captivated by the markets. I created personality tests. I started with Myers-Briggs, then tried many other types, and then I gave them to people like Elon Musk, Bill Gates, Rich Hating, Muhammad Yunus. I gave them to others to see what their factors were. I put it online for free. I created it. We did the test like you did. There's a type of person who represents a very small percentage of the population, and Elon Musk is one of them. And Bill [music] Gates and a few others. I call them shapers — people who like to go from imagination to realization and pursue that mission. That's my personality type. I have a certain personality type. Then they have to do certain things. I remember he was also that type. Making money wasn't a big deal for him. I probably shouldn't tell the story. But no, no. This is where we tell stories. We can laugh about it later. The excitement, the thrill of climbing, and the desire to achieve that — that's my personality type. And he didn't need that. He didn't need a house, didn't need security, didn't need anything. I mean, he didn't even need it to the degree I did.
Sounds like you have a story about him that's an example.
Everyone, I'm going to pause for a moment because I know you might be rushing to write down everything that's being said. The good news is we've done that for you. We've created a guide linked in the description on YouTube. This guide breaks down five frameworks behind one of the greatest investment achievements of all [music] time. You can use them and spend time listening instead of taking notes like you're doing. You can get it for free right now. Click the [music] link below or scan the QR code right here. Alright, back to the episode.
When he was just starting Tesla, he had made about $180 million from PayPal and decided to use half of that money to go to Mars. Even though he had no experience in that. He had this vision, and I told him, I advised him to set aside a little money, take a portion [music] just in case things don't go smoothly. He said no, I don't need to do that. He had that obsessive need. But I think everyone has a certain nature. No matter what environment you're born in, you have a nature. That's why I created these personality tests for any of your listeners. PrinciplesU is like that. It's free, online. Take the test, and you'll understand more about your own nature. And there's a feature in it that lets you invite people you have a relationship with to take the test. And then they'll tell you about that relationship.
So last night, after talking with you the day before, I took the test. X told me that he's a Shaper, a builder, someone who turns ideas into reality, and he also said he's a sub-Elon. I thought, I'd like to belong to that group too, so I took the test and answered as [music] honestly as possible. Was there an option for 'adventurer'? Adventurer — fun but a bit silly. That type. The result I got was X, the Explorer [music], and I didn't expect that at all. Does it describe you accurately?
Very accurately. It says I'm driven by curiosity, always seeking new knowledge, new experiences, learning, and very objective and honest about what I go through. I almost feel happy even when the result is bad, because that means I learned something. That's very true for me. I feel happiest doing that. I thought, why am I not a Shaper? Many questions [music] in the test revolve around going from imagination to realization. I do that a lot, but I don't focus on details. I don't care about details. I skip them. I'm not a perfectionist. I'm not like Sam, who wants everything to be perfect. One of the factors of a Shaper is — and by the way, that's where you see your nature, what gives you the greatest satisfaction and highest likelihood of success.
The thing is, a Shaper wants to go from imagination to realization [music], from the big vision down to every detail. I remember Elon gave me the keys to his car. There was a small button. He showed me the screen and went deep into the details. We talked about how he wanted to put a water bottle with a tree on the rocket to send to Mars [music] as a symbol of the first life on Mars, to inspire. So that's a vision at 10,000 feet and details at 10 centimeters, right? Liking both and connecting them. We all have our own personality. Success in life, real joy, is understanding your nature and finding the path that fits it, because you can't fight your nature.
Hey Dalio, we've only known each other for 30 minutes, but I'm going to show you something that might freak you out. [music] When I was young and drunk, I tattooed myself. The tattoo is on my leg, and it says two words: 'act now'.
Oh, that's cool. So tell me, when you were at the tattoo shop, had you heard of the stick and poke technique, tattooing by hand with a needle and ink?
Basically [music], if you're in prison, that's where this kind of tattoo comes from. But many people in the punk rock style do it too. You take a sewing needle, dip it in ink, and make lots of tiny dots on the skin. That's the tattoo. [music] Back then I was about 19. Actually maybe 22, but I don't want to admit I was that old when telling this story. At that time I was frustrated because my life was progressing too slowly. I felt anxious and bored. I was also drinking a lot back then, so I was drunk and thought I would tattoo 'act now' on the top of my foot. So that when I wake up, the first thing I see is that I have to act.
And did that work for you?
Yes. [music] But I needed to temper it because sometimes I need to think and plan. After a bit of career success, sometimes you need to be more strategic, but overall I'm still an action person, like a bull in a china shop. And the important thing is that you have to find people who are different from you, who complement your weaknesses. In the leadership test, you don't just state your personality, you also point out your weaknesses. For me, the weakness is connection, support — more on the social side. So my business partner, Ben, who emailed 77 times to you and your team to invite you to this podcast, he spent four straight years sending emails to make this happen, because he is a great connector, a great supporter. He wanted this moment to happen even though he's not sitting at this table. For him, that's a win. [music] Connection is the win. He's my business partner, and we've achieved incredible success through this partnership. Even though we're completely different — if we tried, we couldn't be more different. So let's stop and reflect on this key point for success. People who think differently from you, people you might normally find annoying, are actually the path to success. If you can understand that, when I was at Bridgewater, I did the personality test and they started saying, 'Oh, you're ESTJ, [music] and I'm some type.' Then they started to understand how to work together instead of being annoyed with each other. That's what's important. Success comes from that, success comes from failure and learning from it, and success comes from working together.
I would say meaningful work and meaningful relationships. If you're on a mission to do something great, like going to Mars or whatever, you're going to do it together, and you have meaningful relationships, radical transparency, understanding your nature, and knowing how to work with others — that's the formula for success. Another example is when I came to you, the notes were already printed. [music] I came late and there was no printed copy. We have a very big difference. In six years, [music] we've built one of the world's biggest business podcasts even though we're completely different in personality. I hope your audience hears this.
Yes. Let's stop [music] and reflect, because we're here for the same reason, just in a slightly different context. I'm 76 years old, I want to pass on what I have to help people in that way. That's my goal. Your goal is the same — not just the goal, but being effective in helping people. Otherwise I wouldn't be listening.
I want to stop on that formula: pain plus reflection equals progress [music], and how you work together. Follow your nature. Can you guide us on the reflection part? I think everyone understands the word, but I bet we don't really talk much about how each person actually does it. Do you write out your reflections? Do you talk to someone? Do you have two or three friends you call for high-signal feedback? What's your actual process for reflection?
The pain part comes involuntarily, it hits you when you experience pain. Eventually the pain will pass. But people can skip the reflection and get stuck in the pain. So first you have to make the shift. Meditation has helped me a lot. I've been practicing Transcendental Meditation since 1969.
Explain what that is? I just heard you and Jerry Seinfeld praise Transcendental Meditation. What is it?
Transcendental Meditation is a very simple exercise. You sit silently and repeat a sound, a word called a mantra that has no meaning. For example, you sit there and repeat 'ma' in your head. When you do that, you can't have thoughts because your thoughts are inside the 'ma' and can't get in. Once you get used to this habit, the 'ma' disappears and you enter a state close to the subconscious. Very relaxed, very peaceful. It's an exercise that calms the mind and brings you into the subconscious mind. Your subconscious really controls you a lot, doesn't it? Almost. There's a conscious mind, [music] a logical mind that you hope is logical and that you're aware of. And then the subconscious means below your awareness. There are all sorts of things in your mind affecting you, your emotions, hidden things, and it goes into those hidden things and calms you down. And that's also where creativity comes from. [music] Like when you take a hot shower and ideas come to you. But if you try to force ideas, you can't create them. But that hot shower, that relaxation, and things like that. I find that very useful.
You know, I know I've developed an instinct. Habit is a very important tool. If you know how to develop the right habits. [music] So a habit means you have a positive instinctive reaction to something. So I have a reaction that is, okay, that's a lesson about reality. In other words, the pain is okay. So now it's like a puzzle to me. The puzzle is how does reality work? [music] It's going to tell me something about how reality works, and I have to deal with reality to make it successful. And so what are my principles for dealing with reality, for handling it in the best possible way? Okay, that's my instinct now. So when you have that instinct, it's completely different, right? Because you start saying, okay, there's pain and you have your curiosity. Okay, now you take your curiosity and you say, what does that tell me about how reality works and how should I deal with reality? Okay. And if you solve that puzzle [music], you'll get a gem. And that gem is a principle that you can carry with you to become better, right? And so if you start recognizing it like that, and then I write bigger, bigger — what is that? What does that mean? Do you write a journal every morning and every night, bigger, bigger?
No, no, no. I just — when thoughts come to me or circumstances come to me, and I'm also making decisions, I'm reflecting. And then what happened to me is I noticed that all those reflections are cause-and-effect relationships. Because the principles are: if this happens, then you do that, and things like that. And then I put them into computer code.
That's how I built Bridgewater. I built it: if this happens, then you do that.
And you put it into computer code, and I created all the computerized decision-making systems for the markets and almost everything. And because I've been doing this for about 35 years or more for almost everything, I have thousands of these principles that I've written down, and they are ways to achieve success in any kind of decision. If the Federal Reserve does this, or if a loved one passes away, or anything.
