Starting once again by himself, broke as when he started nearly ten years earlier, Dalio rebuilt Bridgewater. Drawing from his painful lessons, he changed his management and investing approach, leading Bridgewater to become the top-performing hedge fund in the world.
The development of microcomputers in the early 1980s gave Dalio even greater ability to turn his investment principles into automated rules. Working alongside a computer gave the team a few critical advantages:
But the computer didn’t work in isolation—the human and the computer worked alongside each other and improved each other. The human had imagination and logic that the computer didn’t, and he could introduce new rules. The human could also override the computer in unexpected situations, like September 11th.
To Dalio, trading alongside computers was like playing chess with a grandmaster standing behind him, helping him plot his moves.
Automating trading reinforced logic over emotion, and it gave them an advantage in volatile times. Most people react emotionally to short-term fluctuations, buying when it’s hot and selling at a loss out of panic. In contrast, wise people stick with sound, timeless principles through the ups and downs.
Starting from just himself, Bridgewater grew to six employees by late 1983, ten people by the mid-1980s, and twenty by the end of the 1980s.
Bridgewater had three lines of business:
Managing investments started as a small portion of their business, but it eventually grew to become the dominant arm of Bridgewater. This development made logical sense—Bridgewater’s research and consulting were making good calls that let their clients make money, so they figured they could successfully manage investments themselves.
Their first major account was a $5 million bond account from the World Bank’s pension fund. This was a turning point. Their success on this account gave them credibility to sign Mobil Oil and other accounts, eventually becoming the top-performing US bond manager. By the late 1980s, they were managing $180 million in investments. In 1990, they landed a $100 million account from Kodak’s pension fund, a huge boost to their credibility.
After his crash in 1981, Dalio tried to find a way to enjoy high returns with low risk, rather than choosing just high-risk/high-reward or low-risk/low-reward. He wanted to have his cake and eat it too.
He and his team had an epiphany: proper diversification could reduce risk without harming returns. The typical idea of diversification at the time was merely to diversify within an asset class. Instead of just holding a single stock, a fund manager might buy a hundred stocks. However, the stocks were still strongly correlated to each other. Therefore the portfolio of stocks was not all that well diversified—the stocks would generally rise together and fall together.
Bridgewater found that the key was to add assets that were uncorrelated with each other. As a result of their systematic collection of investment principles across a wide range of asset classes, they could assemble a set of uncorrelated assets. Their models showed this approach would reduce the risk of a loss in any given year, without reducing overall returns. The result was a return-to-risk ratio that was multiple times better than their previous strategies, meaning they could make more money with lower risk of losing money. This was true diversification. Dalio called this the Holy Grail of investing.
Based on these principles, Bridgewater introduced a new fund called Pure Alpha. Even though the strategy wasn’t proven in practice, some clients believed in the concepts and invested. In the 26 years since the fund started, it made money in 23 years, and it’s made more money in total than any other fund ever.
The idea of diversification can be generalized, no matter what business you’re in: make a handful of uncorrelated bets to capture the upside without having unacceptable downside.
Dalio was stung by his overconfidence in the early 1980s. He now believed that the best way to be right was for smart people to disagree with each other and explore each other’s reasoning. He never failed to point out when other people were being dumb, and he expected others to do the same to him. He saw this like playing jazz together, going back and forth on ideas and building better decisions than individuals could alone.
There was mixed reception to this radical candor. People close to him, who had worked with him for years, understood he had good intentions. But people who had less contact with him found him abrasive and oppressive. He seemed like an intellectual bully, and his tirades were demotivating.
When his senior team delivered this feedback to him, Dalio was hurt. He had never intended to humiliate other people, and he realized there was a gap in communication. This friction kicked off his process of clarifying his principles in writing, so that everyone across the company could understand his intentions and behavior, and so everyone had a common set of rules to treat each other respectfully.
In essence, he wanted to automate and systematize people management, much like he had automated financial trading.
In 1995, Bridgewater had 42 employees and $4.1 billion under management. This grew to 80 people and $32 billion by 2000, then to 738 people in 2008. All this grew from Ray Dalio being the single employee in 1983 after his disastrous mistake.
As Bridgewater grew, Dalio faced a dilemma. On one hand, Bridgewater’s increasing size would continuously give it a greater advantage in better technology and more talent; this would make the firm more stable and permanent. On the other hand, the influx of large numbers of new team members would threaten their culture, and managing the people would dilute their focus.
As always, Dalio refused to see the world as only two options. He wanted Bridgewater to have its cake and eat it too—to grow larger while strengthening their culture further.
In order for Bridgewater to scale both its asset management and its headcount, Bridgewater and Dalio introduced innovations in two areas: 1) new investment funds with new game-changing strategies, and 2) management tools to help build the culture even as the team grew into the hundreds.
Previously, Bridgewater introduced the Pure Alpha fund, which is the greatest-returning fund in history.
Dalio mentions three more funds that Bridgewater introduced, each in response to a specific investment need.
Around 1995, the Rockefeller Foundation wanted a return that was 5 percent above US inflation, and they asked Dalio how this could be possible. Dalio concocted a solution: leveraged foreign inflation-indexed bonds, hedged to the dollar so there wouldn’t be currency risk. (The bonds had to be foreign because US inflation-indexed bonds didn’t exist at the time.)
Studying this solution further, Bridgewater realized that this could earn the same return as equities, but with less risk and negatively correlated with bonds and equities.
Soon Bridgewater became the first global inflation-indexed bond manager in the world. Larry Summers, the US Treasury deputy secretary, consulted them on how the US could issue its own inflation-indexed bonds.
Dalio set up a trust for his family, and he wanted the wealth to last over as many generations as possible. He had seen firsthand how different market environments could destroy wealth, and how difficult it was to predict such situations. Even the best investors fail to do well in all economic environments, when inflation rises and falls, and when the economy grows and shrinks.
Dalio’s solution was thus to create four investment strategies, each succeeding in a particular environment—rising inflation with rising growth, rising inflation with falling growth, and so forth. By combining these strategies together, this could do well over time, no matter the economic environment. He called this the “All Weather Portfolio”—it’s also known as “risk parity.”
In 1996, he created this fund for himself, and he remained the only investor until 2003, when Verizon’s pension fund called asking for something that would do well in all environments. Bridgewater opened the All Weather Portfolio to outside clients, and by 2015 it had $80 billion under management.
The Pure Alpha fund did fantastically over time. In fact, its success was becoming somewhat of a hindrance—making trades that were too large could move the markets in unhelpful ways. Bridgewater actually had to return excess funds to its customers, even though their customers wanted Bridgewater to keep and invest them.
They discovered that they could take the Pure Alpha approach and invest them in liquid markets, preserving the returns while only slightly increasing risk. Using this strategy, they introduced “Pure Alpha Major Markets.” Within a year, the fund rose to $15 billion under management, and they ended up needing to close it to investment as well.
As Bridgewater kept doubling in size, Dalio grappled with how to preserve its unique culture built upon thoughtful disagreement and radical candor. Over the years, Dalio and Bridgewater introduced a number of management tools in response to new people challenges.
Ever since Dalio received feedback that he was unbearably abrasive, he kept careful notes of his principles so that people could understand his intentions. As he continued to encounter new management situations, he noted his principles for dealing with the situation. This included perspectives on hiring, firing, and compensation. With a large enough list of principles, no work situation was novel—it just became another “one of those.”
Dalio shared these principles with Bridgewater managers, asking them to test them and refine them over time. The list expanded to a few hundred principles, and by that point he felt pretty much every possible situation was covered by them.
New hires were given the principles and acclimated to them over 18 to 24 months. The principles enabled management at scale—anyone who had good character traits and followed the principles could be granted a large amount of autonomy and be trusted to make the right decisions.
A key of Bridgewater’s culture was radical transparency: everyone should know how everyone else feels about everything.
When Bridgewater was small, this was easy to manage—they were all meeting in the same room. But as the company grew, it was impossible to attend all the meetings and listen to all the informal conversations. This threatened radical transparency, because private conversations and office politics could skew the message.
To counter this, Dalio mandated that all meetings be recorded and accessible to anyone who wanted to listen to them. The only exceptions were personally sensitive meetings or confidential proprietary information. Having all meetings accessible allowed people to review why others made the decisions they did. They also formed valuable case studies for training new employees.
People think and behave in very different ways. For instance, in Myers-Briggs terms, some people tend to be “intuitive” types and focus on the big picture, while others tend to be “sensing” types who focus on details.
Understanding what type of person you are, and what type of people your co-workers are, is critical to working well together. A manager who doesn’t understand this is like a construction foreman not knowing the specifications of his equipment.
Dalio had most managers take the Myers-Briggs tests to find their types.
Dalio found that just knowing their personality types wasn’t enough. People would enter meetings and ignore their personality differences, assuming everyone was equally good at all tasks and assigning jobs accordingly. For example, people who didn’t care about details were given detail-oriented tasks.
To make the differences between people more explicit, Dalio started making “baseball cards” that showed each person’s strengths and weaknesses, along dimensions like inquisitiveness, outgoingness, conflict resolution ability, and assertiveness. Using these cards, people could then decide which people were best suited for which jobs.
Understandably, this level of transparency met with resistance at first, but over time the Bridgewater team found it freeing. It’s comfortable to work with people who know what you’re all about, and it’s relieving to have your weaknesses acknowledged instead of hiding them.
Just as Bridgewater used computers to automate investment decisions, Dalio wanted to automate people management using algorithms. To him, there was nothing special about management that prevented it from being codified into rules. Just as with investments, automating management would come with advantages—thinking through good rules would strengthen the logic and reasoning; decisions would be consistent and unemotional; and people could continuously improve the machines with their creativity.
By 2008, Bridgewater was already a large firm, but its performance during the 2008 recession brought it special renown.
In the years leading up to 2008, Bridgewater’s economic indicators suggested that a depression was near. The costs of servicing debt were growing faster than projected cash flows, which risked bursting the debt bubble. Furthermore, because interest rates were already near 0 percent, central banks couldn’t lower interest rates to ease the situation.
Having been burned once in the early 1980s with overconfidence, Dalio was now perpetually unconfident and always seeking something that would prove him wrong. He and his team studied past depressions thoroughly, going day by day through newspapers during the Great Depression. The signs pointed in the same direction—a recession was coming.
As a result, Bridgewater adjusted its portfolios in expectation of a recession, in ways that would capture a large upside while limiting downside. They were right. In 2008, their flagship fund earned 14%, while the market as a whole lost over 30%.
At the end, the 2008 recession was just “another one of those.” It reinforced Dalio’s insistence on studying history, learning from the many instances that came before in preparation for the ones that will come later.
In 2015, Bridgewater had its 40th anniversary, and Dalio was 66 years old. Around this time, he knew he was in the third and final phase of his life. Having achieved things beyond his wildest dreams, he was no longer as excited by being successful—instead, he became more excited by helping other people succeed when he was no longer around.
Thus Dalio turned his eye to three major transitions: passing on management of Bridgewater, passing on his money to philanthropy, and passing on his principles to the world.
Dalio continued developing the automated management tools like the baseball cards and management algorithms. By codifying his work principles and turning them into algorithms that could automate management decisions, Dalio could help Bridgewater become even more successful without his presence.
Furthermore, Dalio had served as chief executive officer and chief investment officer of Bridgewater for decades, and he was now prepared to pass on both of those roles. He wasn’t ready to stop investing totally, since he had enjoyed understanding the markets since childhood. But he wanted Bridgewater to be capable of running without him.
Therefore, Dalio stepped down as CEO in 2011, handing the reins to two co-CEOs, Greg Jensen and David McCormick. Greg was a veteran at Bridgewater, having been there for 15 years; Dalio saw him like a son. After stepping down, Dalio continued serving as a co-CIO along with Greg Jensen.
The management transition was rockier than expected, and the senior management was not succeeding at their roles. Dalio believed that Greg Jensen, who was both co-CEO and co-CIO at the same time, was stretched thin. So in 2016, the Bridgewater committees voted for Jensen to step down as co-CEO. Dalio notes this was personally painful given their history, but it was ultimately the best for the company. Dalio returned to co-CEO for a year to stabilize the company.
(Shortform note: in the book Dalio refers to sensational media coverage of the transition. A Wall Street Journal article reported that both Jensen and Dalio had grievances with each other. Jensen was disappointed that Dalio was not being as hands-off as he had promised. Dalio was disappointed that Jensen had said something about Dalio in a recorded meeting that he didn’t say to Dalio’s face, a gross violation of radical transparency.)
Dalio realized that much of the difficulty came from his unique status as a founder, having run Bridgewater for decades without any formal checks and balances. After he left, CEOs needed a governance system to hold them accountable, and to replace them if they weren’t capable. He also noted that Julius Caesar’s seizure of the Roman government was an illustration of how, in a proper governance system, no one person should be more powerful than the system.
Dalio knows that he can’t take his money with him when he dies, and that his family only needs so much. He would rather have his descendants endure a healthy struggle through life that will make them strong, rather than having too much and becoming weak.
So Dalio has committed to giving away more than half of his money to philanthropy. His whole family is involved—among them are interests in education, mental health, climate change, health care, and the ocean.
Giving money away effectively is complex. Ideally, just like in finance, you invest in projects that have great returns on society. Since it’s unclear how exactly to measure philanthropic returns, he finds himself attracted to sustainable social enterprises, which can be measured like a business.
Dalio does note that, despite their resources, the problems are often so large that it’s hard for them to have a significant impact.
Beyond Bridgewater and money, Dalio saw that leaving behind his principles could be more important and improve the lives of many more people.
Dalio cites Joseph Campbell’s idea of the Hero’s Journey, an archetype of mythology and stories. The hero sets off on an adventure, endures trials, encounters grave setbacks, learns from those setbacks, and grows stronger and strives for more. At the end of his journey, the hero shares all the knowledge he has accumulated throughout his journey with the rest of the world. (Shortform note: find more about this in our summary of Joseph Campbell’s The Hero with a Thousand Faces.)
This book, Principles, is part of Dalio’s attempt to share all that he’s learned that has made him successful. They are his understanding of universal rules that apply to situations and people throughout history and that will continue to apply well into the future. He hopes that these principles help people succeed without him, and well after he passes.