Author Ray Dalio is the founder and co-chairman of Bridgewater Associates, which has become the largest and best-performing hedge fund in the world. In Episode 560 of The Traders Podcast, your hosts Rob Booker and the producer Jason Pyles discuss Palio’s book, “Principles: Life and Work.”
Rob says what was most important in building his company wasn’t knowing the future; it was knowing how to react appropriately to the information available at the time. We traders often become obsessed with a desire to know the future and with being right. Join us for this episode, and let’s explore these principles together.
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Links for this episode:
Subscribe to Rob’s YouTube channel here: https://youtube.com/robbooker
Rob on Twitter: @RobBooker
The Traders Podcast on Twitter: @TradersPodcast
Hear Jason’s movie podcasts:
Movie Podcast Weekly where we review new movies in theaters.
Horror Movie Podcast where we’re Dead Serious About Horror Movies.
Movie Podcast Network a group of eight film-related audio podcasts that cover various movie genres.
Full Episode Transcript:
Rob Booker: All right, there’s a new book out, Jason.
Jason Pyles: Oh, tell it.
Rob Booker: This is my favorite book, other than Shonn Campbell’s book Inventory Trading, which if you have not read that book, stop everything, go to Amazon. I think it’s even part of the Kindle Unlimited program. It is magnificent. Shonn’s not a writer and he’s not a professional educator, but it’s a great book. I’m just going to give him a little plug there. Other than that, I just finished reading essentially what is the best book about the financial markets I’ve ever read in my life.
Jason Pyles: Wow. That’s high praise. What is it?
Rob Booker: And I don’t ever say that, really. I said it about Shonn’s book, but there’s not a lot out there otherwise.
Jason Pyles: Yeah, okay.
Rob Booker: So a few years ago, I became enamored with, and there really is not a better word for it, enamored with Ray Dalio, the founder of Bridgewater Associates, and the story behind the building of the largest hedge fund in the world, now managing over $160 billion in assets. And I became fascinated, Jason, with this guy because of his reputation for having a culture at work of radical transparency, which I think we’ve touched on this subject before in previous episodes.
Jason Pyles: Okay, yeah.
Rob Booker: At the company, there are no meetings about other people held in private, unless it’s something sensitive to do with their health, which you don’t reveal outward. But there are no conversations about other people, there are no reviews, there are no private conversations in the company. Everything is recorded all the time, and there are editors at the company that chop up the footage into digestible chunks so that it can be archived and searched for and watched later. There is a culture of radical openness about disagreement, and there’s only about 1,500 employees there, and they have just cycled through and chewed up people left and right, because this culture just does not do well for people who are conflict avoiders. As you and I know, you and I are both world class conflict avoiders.
Jason Pyles: Oh yeah. That’s [inaudible 00:02:12].
Rob Booker: We actually almost made the US Olympic Team for conflict avoidance, but since it was a competition, we dropped out. We didn’t want to compete.
Jason Pyles: Exactly.
Rob Booker: We didn’t want to compete with … We didn’t want to take the spot from somebody else.
Jason Pyles: That’s true. That’s true.
Rob Booker: That’s the culture, and I became really fascinated by this culture that has built this great company. Anyway, they had an internal document at Bridgewater Associates, and this internal document was written by the founder and it was called Principles. Seven years ago, you could only get it by finding a copy somewhere on the deep web, like you could find someone had uploaded an original copy in PDF form somewhere on the web. And you could download it and read it and it was all formatted incorrectly and was messed up, and it was just gold to me. It was just absolute gold. And I would save it to all of my electronic devices, print it out, get it bound, highlight it, everything, because they’re these principles that he used to build his company and run his life, and principles are these universal laws that can be applied to any situation. Instead of directives, which are do this in this exact instance, a principle is a general law that can be applied in a variety of circumstances. And he wrote all 200+ of his principles out.
That became popular, then he offered it for download on his website, and then that turned into a book contract. And near the end of his career … he’s in his early 70s now … he wrote Principles: Life and Work. And I just got a copy on Tuesday, and I just blew through this book, and it was astounding. If you’re listening now and you haven’t downloaded the book or you haven’t read it, I think it’s sold out on Amazon, but you can still of course get the electronic copy. I want to read some quotes from this today, Jason, and just talk about some of the concepts that are in this book. It’s just absolutely brilliant.
Jason Pyles: Yeah, let’s do it.
Rob Booker: What was most important in building my company wasn’t knowing the future. It was knowing how to react appropriately to the information available at each point in time. And As traders, we become obsessed with knowing the future and being right. This is the world’s most consistently successful hedge fund manager ever in history. He’s the most important … other than Warren Buffett, he’s the most important financial persona in the last 50 to 100 years, and he’s telling you it’s not important to know the future, which so many people think is important, that predicting the future is really important. It’s not. It’s learning how to react appropriately to the information that you have in front of you.
An example of this would be thinking that when you plan a trade, you need to plan a trade that’s going to work out. Well, you just need to plan a trade and take it, and then all the money is made, or the success comes, from dealing with it as it is once it’s open. The money isn’t made before it’s open. The money is made from dealing with situations as they go. In other words, to be prolific in your trading at the early stages and learn as much as you can from each individual trade that you take, and then become more selective over time. Anyway.
Jason Pyles: May I ask a clarifying question there, Rob?
Rob Booker: Yes, I mean I’ll take on the persona of Ray Dalio and then I’ll answer your question.
Jason Pyles: All right, thank you. In terms of what you just said, if someone … so how does that jive with not interfering or fiddling with your trade prematurely or something like that? You know what I mean? Where’s the balance there between those two?
Rob Booker: At the beginning of one’s trading journey, there is no balance. You fiddle infinitely with it. You accept that you know nothing, but that there’s so much power and success that can come from openly admitting that you don’t know anything. For as long as you can possibly keep that attitude toward life, you don’t mind fiddling with it, but the point is that you fiddle with it consciously with the goal of learning from that. Open a hundred trades and fiddle with all of them, but make notes about what didn’t work, and in particular, make notes about what didn’t work.
Jason Pyles: Nice, okay.
Rob Booker: And then don’t repeat that. But at the beginning, instead of trying … This is so good that you brought this up. Instead of trying to be so selective at the beginning, putting so much pressure on oneself to be right and to prove to others that you know what you’re doing, don’t even try to prove to others that you know what you’re doing. In fact, openly admit that you don’t know what you’re doing, and don’t put the emphasis on that. So when you open a trade, don’t worry about whether the trade is right, worry about what you’re doing with it, and at the beginning of your trading journey, do all kinds of stuff with the trade. Open up the same trade in five different trading accounts, and treat every single one of them differently, and see what didn’t work. Then as time goes on, see what did work.
Jason Pyles: That’s good. I like that.
Rob Booker: All right, this is another great one. Maturity is the ability to reject good alternatives in order to pursue even better ones.
Jason Pyles: I like that. I like how he says maturity, because yeah, that’s the key to that right there. An immature person would just take whatever they can get, but this is having the insight to take what is best.
Rob Booker: Exactly. Exactly. And maturity … It automatically builds into it the fact that when you start off as a trader, you’re not mature, and you shouldn’t … you don’t have the ability to reject good alternatives to pursue even better ones, because you don’t know the difference. Part of maturing as a trader is taking enough trades and learning enough from them that you can sort out what doesn’t work for you and what does work for you. And he has this intense process that started manually, by hand, and then went, as the computer age evolved, he could throw all this stuff into a computer. But every single time when …
In the early ’80s when faced with the thought and the idea that inflation was spiraling out of control and it was going to lead to a depression, he basically drew a conclusion and went on Wall Street … what is the name? Louis Rukeyser, who was … he did this PBS show on Friday nights that I used to watch … and he went on there and he announced that there would be a depression. And he says, I’m certain of it. And there was no depression, and he was fantastically wrong, and he lost everything. He lost his company, he had to fire everybody, couldn’t even afford to fly to Texas to meet with a client that would have kept the company going.
That all happened because he bet the farm on … and he wasn’t mature, he didn’t know and he thought he did. So when 2007, 2008 came along, they by that point had built all these models, and they could run the data through all of these models. He went through newspapers from a hundred years ago. He went through everything, and he said when all of these economic conditions exist in this way, this is what has generally happened.
And this time, in 2007 and 2008, he didn’t bet the farm, so to speak, and he didn’t say that he was certain. He did meet with government officials and published warnings, but in his own trading and for his own clients he didn’t bet the farm. He put a bet that things were going to go wrong, and he put protections in place so that if the market dropped there would be a hedge. In the year 2008 when the market was down and the average hedge fund was down more than in any year in history, they were up like 42% or some crazy number. Or 14%, whatever it was.
And he said, I could have made even more, but what I did this time was I didn’t bet the farm. He was mature. He did all the things right because he was mature, and he only got that way because he’d been doing it at that point since the early ’70s, so for 30+ years. There are a lot of people in our industry and in our world of trading that want to be that good, and they want to be that good within 12 months.
Jason Pyles: Oh yeah, that’s the hard part. You just want to be successful and mature right off the bat, but …
Rob Booker: Somebody asked me one time, they said, I want to do a podcast. How do I do a podcast? And I said, You get a microphone and you start talking into the … well, get in touch with Jason and have him produce your show, ask him to produce your show … but get a microphone and start speaking into the microphone and start uploading the content. They said, Well, how do I have a popular podcast? I was like, Oh, do that a thousand times.
Jason Pyles: Yeah, Rob. Brilliance. That’s exactly right.
Rob Booker: At this point in time, you and I know what works and we know what doesn’t, right?
Jason Pyles: Mm-hmm (affirmative).
Rob Booker: And we’ve tried hard on some episodes and come up short, and naturally released episodes that were the best ever, to our listeners anyway. And how are you going to know the difference between those? How would we at this point know how to redirect an episode that might not be … whatever. You only know it through experience and through doing it wrong and through making the mistakes. And we’re still learning. We’re still learning how to do a full transcript of each episode and promote the … You have to just fall for the idea, fall in love with the idea that you don’t know anything, and that to the extent that you can, you’re going to figure out what generally works, a principle. And you’re going to do the best you can of implementing those principles in your trading. But you’re never going to fall for the idea that you know exactly what’s going to happen next.
Jason Pyles: It’s a marathon, not a sprint, right?
Rob Booker: Right. And there’s just an obsession with … it’s perpetrated out there by podcasts like this one, that there’s a chance that you could make a lot of money within a really short period of time. But really, there’s a chance that you can make a lot of money over a long period of time …
Jason Pyles: [inaudible 00:13:04].
Rob Booker: … if you’re stupendously lucky. All successful people operate by principles that help them be successful. Without principles, you’d be forced to react to circumstances that come at you without considering what you value most and how to make choices to get what you want. This would prevent you from making the most of your life. He also goes on to say, Three questions matter most: what do you want, what is true, and what are you going to do about it? What I love about these three questions at the very beginning of the book is that a lot of us think we know what we want. At the same time, a lot of us haven’t spent a lot of time thinking about that and thinking about the consequences of wanting something most. And that’s the first question: what do you want most? And then second, say what is true.
So let’s say I said, What I want most is a million downloads of the Trader’s Podcast within the next 12 months starting now. And then I would ask, But what is true? Will people listen to podcasts that are uploaded consistently, and people are responding to Facebook advertisements, and unless I get a lot of people to share the episodes with other people, I’m not going to get that many downloads. People are going to have to introduce the podcast to their friends. So I would have to build a plan that took advantage of that. We’d have to upload consistently, we’d have to be dependable, and then we’d have to build a program where more people that don’t know about the podcast find out about it, and then people who already know about it are incentivized to share it.
Those things are true. That’s true. At this point, we know that those things work. We know that. And we’d probably have to be … we’d have to do a bunch of things. I’d have to be interviewed by other podcasters that have a good audience and whatever else you’d have to do.
Then the third question comes into play. What am I going to do about it, meaning would I be willing to get up early, would I be willing to stay up late, would I be willing to miss stuff with my kids? What am I willing to do about it? How bad do I really … I said I wanted it. That third question asks how badly do you really want it. Our friend of the show, Scott Welsh, he’s a very successful robotic trader, and he got that way from saying what does he want. He wants to automate all of his trading. Well, what’s true? It’s true that you’re not going to find an automated system that works unless you do hundreds of hours of backtesting, even thousands of hours of backtesting.
The final question is what is he going to do about it. Then he did something about it, and that’s why he’s in the upper echelons of people who run robotic systems.
Jason Pyles: Mm-hmm (affirmative). Yes. That sounded just like him when you were asking those questions. I’m like, Yep, that’s Scott’s philosophy.
Rob Booker: This is probably my favorite quote from the book, and we can end with this one, and I recommend the book to everybody. It’s Principles: Life and Work by Ray Dalio, the founder of Bridgewater Associates. Time is like a river that will take you forward into encounters with reality, that will require you to make decisions. You can’t stop the movement down the river, and you can’t avoid the encounters. You can only approach these encounters in the very best way possible. Anyway, definitely worth reading. It’s a hard read for people that don’t like the financial world. If you’re the spouse of one of our dear listeners of the podcast, this is not the book to … Well, I don’t know, maybe it is. The stories are great. I mean it’s just fantastic.
Jason Pyles: Well, it’s a thinker book, you know? It’s not just something you breeze through. You probably have to figure out how to apply it to yourself and how to internalize the principles.
Rob Booker: Yeah, absolutely. Absolutely. If there are any books that you love as a listener, let us know in the comment section. Leave a comment on the episode 560 of traderspodcast.com. Jason, I would love to know more about movies. Where can I get …
Jason Pyles: That’s nice. Well, how about moviepodcast.network? We have a whole network now of movie podcasts. We have shows about sci-fi, if that’s your thing, even westerns. There’s a show about westerns. I mean, who talks about westerns anymore? That’s pretty cool.
Rob Booker: That’s pretty cool.
Jason Pyles: Streaming movie content, we got that covered. We got horror movies covered. Geek stuff, like if you’re into the geeky world, we’ve got that. There’s even a retro show that covers movies that are 20 years or older. It’s very nostalgic that way. And then of course new movies in theaters. At Movie Podcast.
Rob Booker: Have you seen A Ghost Story starring Casey Affleck?
Jason Pyles: Yes, it’s one of my favorite films of the year.
Rob Booker: I’m really looking forward to seeing this.
Jason Pyles: It’s profound, Rob. It might not necessarily be for everybody, but if you watch that film … like we talked about with this book here … with an open mind and thinking okay, how does this apply to me, it’s very … You will reflect a lot on your own life.
Rob Booker: Is it frightening?
Jason Pyles: No. No, it’s not actually. It kind of looks like it might be a horror movie, but it’s not at all.
Rob Booker: I’m very much looking forward to watching this.
Jason Pyles: It may … It’s definitely going to be in my top 10 list at the end of the year.
Rob Booker: Oh, that’s exciting. Oh, I can’t wait. Did you do a review of this on Movie Podcast Weekly?
Jason Pyles: Sure did, absolutely.
Rob Booker: All right. Go to moviepodcastweekly.com and search for A Ghost Story if you want to read that, or listen to that review.
Jason Pyles: Yep. Episode 251.
Rob Booker: And thank you everyone for listening. We love you so much. Don’t forget to subscribe to the episode on SoundCloud. You could follow it on SoundCloud, you could subscribe on iTunes, that’s always a big help. You can leave a comment or a review. The comments, we’d love for you to leave a comment at the traderspodcast.com website. That’s a great place to leave a comment. We’ll see you next time for 561.