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Dalio breaks down ‘principles’

November 16, 2018

The head of the world’s largest hedge fund did not build his firm with a grand plan for domination. Instead, he started by compiling a record of his decisions.

Ray Dalio, founder and chief investment officer of Westport-based Bridgewater Associates, discussed during a keynote speech Friday at the inaugural Greenwich Economic Forum conference his process for developing the fundamentals that underpin his company’s operations. Those “principles” are also the subject of a bestselling book of the same name that has helped vault Dalio into the ranks of the most prominent management experts in financial services.

“When you’re in your particular situation, if you take the time and think about how you’re making decisions, almost like a diary, and you write down your recipe for making that particular type of decision, so that’s your principle, then over a period of time, you can clarify that with people you work with and critique it,” Dalio told a packed room at the Delamar Greenwich Harbor hotel.

Failures spark the greatest insights, said Dalio, who founded Bridgewater in 1975. He cited as a formative experience an episode in the early 1980s in which he inaccurately assessed market indicators. He warned in a clip from a TV interview the time, which he played for the audience, that “there’s such a reduced level of liquidity that you can’t return to an era of stagflation.”

“I could not have been more wrong; that was just about the exact bottom of the stock market … and I lost money,” Dalio told the audience.

The assessment meant Dalio would have to lay off the handful of employees working at his nascent firm and borrow a few thousand dollars from his father to make ends meet.

“That was obviously very painful for me, but it turned out to be one of the most valuable experiences that ever happened to me because it changed my approach to decision-making. It made me think ‘How do I know I’m right?’” Dalio said.

The principles that Dalio developed now support what he described as an “idea meritocracy” at Bridgewater. Cultivating such a workplace culture depends on honest interactions among employees and embracing thoughtful disagreement, Dalio said.

“Somebody is going to be wrong, and how do you know that wrong person isn’t you?” he said. “It’s logical that you want to work that through, but most people have these emotional reactions to disagreement. So you have to understand the art of thoughtful disagreement.”

Bridgewater’s performance reflects its values, its founder said. The firm manages about $160 billion for approximately 350 institutional clients including public and corporate pension funds, university endowments and charitable foundations.

“This meritocratic way and things I’m mentioning were really the keys of our success,” Dalio said. “You all are still going to have to decide how you’re going to deal with each other. … I want an idea meritocracy that is in pursuit of meaningful work and meaningful relationships through radical truthfulness and radical transparency.”

Bridgewater has automated many of Dalio’s tenets by turning them into algorithms.

“Converting written words into algorithms is extremely powerful, whether that’s in the markets or any other kinds of decision-making,” he said. “You’ve got to write the principles down and then put them into systemized decisions.”

Bridgewater has received strong backing from state officials. It has qualified for up to $52 million in tax credits, loans and grants through the Department of Economic and Community Development’s First Five Plus program.

The firm employs about 1,625 in Connecticut, according to state data. Its main offices at 1 Glendinning Place in Westport stand in a bucolic section of the town, near its border with Weston.

Dalio, a Greenwich resident, said his firm encourages feedback from all of its staff. He pointed to a 24-year-old colleague giving him low marks for his contributions in a meeting.

“The simple act of saying ‘How do I know I’m right?’ and not being unduly attached to one’s opinion, creates an enormous possibility,” Dalio said. “That is the path. Any success I’ve had has been more due to my knowing how to deal with my not-knowing than anything I know. Because there’s so much more not knowing than anything I know.”

pschott@scni.com; 203-964-2236; Twitter: @paulschott

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