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Notes from "Principles"

These are my notes from the book "Principles" by Ray Dalio. In this book, Ray describes what he learned and the principles he used in leading the asset management company he started in 1971, Bridgewater Associates, which has one of the best investment track records of all time.

While everyone expects the future to be a slightly modified version of the present, it is almost always very different.

Prices tend to reflect people's expectations, so they go up when actual results are better than expected, and they go down when they are worse than expected, and most people tend to be biased by their recent experiences.

When everybody thinks the same thing, it's almost certainly reflected in the price, and betting on it is probably going to be a mistake.

For every action, such as easy money and credit, there is a consequence. In this case higher inflation.

In trading you have to be aggressive and defensive. If you're not aggressive you're not going to make money. And if you're not defensive, you're not going to keep the money you make.

There are times in ever investor's career where your expectations of what should be happening aren't in line with what is happening, and you don't know if you're looking at great opportunities or at catastrophic mistakes.

I saw that the only way to succeed was to:

  1. Seek out the smartest people who disagreed with me so I could try to understand their reasoning.

  2. Know when not to have an opinion.

  3. Develop, test, and systemize timeless universal principles.

  4. Balance risks in ways that keep the big upside while reducing the downside.

One of the keys to being a successful investor is to only take bets you are highly confident in, and then to diversify them.

I learned that if you work hard and creatively you can have just about anything you want, but you can't have everything you want. Maturity is the ability to reject good opportunities in favor of even better ones.

I urge you to be curious enough to want to understand how the people who see things differently from you came to see them that way.

I saw that with 15-20 good uncorrelated return streams I could dramatically reduce my risks without reducing my expected returns.

Making a handful of good uncorrelated bets that are balanced and leveraged well is the surest way of having a lot of upside without being exposed to unacceptable downside.

Good principles are effective ways of dealing with reality.

The key is to fail, learn, and improve quickly.

Pain + reflection = progress. If you can develop a reflective reaction to psychic pain that causes you to reflect on it rather than avoid it, it will lead to your rapid learning and evolving.

Most things in life are just "another one of those".

You have the opportunity to choose healthy and painful truth, or unhealthy but comfortable delusion.

Weigh second and third-order consequences.

Own your outcomes.

When encountering your weaknesses you have four choices. First, you can deny them, which is what most people do. Second, you can accept them and work at them in order to try to convert them into strengths, which might or might not work depending on your ability to change. Third, you can accept your weaknesses and find ways around them. And fourth, you can change what you're going after. Which solution you choose will be critically important to the direction of your life.

Focus on what is, before deciding what to do about it.

To be effective, you must not let your need to be right be more important than your need to find out what's true.

If you can recognize that you have blind spots and open mindedly consider the possibility that others might see something better than you, and that the threats and opportunities they are trying to point out really exist, you're more likely to make good decisions.

Open mindedness doesn't mean going along with what you don't believe in, it means considering the reasoning of others instead of stubbornly and illogically holding onto your own point of view. To be radically open minded, you need to be so open to the possibility that you could be wrong, that you encourage others to tell you so.

Most disagreements aren't threats as much as they are opportunities for learning.

Team Dimensions Profile

Getting the right people in the right roles in support of your goal is the key to succeeding at whatever it is you want to accomplish.

Make your passion and your work one and the same, and do it with people you want to be with.

Work is either a job you do to earn the money to pay for the life you want, or what you do to achieve your mission, or some mix of the two. I urge you to make it as much of a mission as possible.

If you look back on yourself a year ago and aren't shocked by how stupid you were, you haven't learned much.

You must not let your need to be right be more important than the need to find out what's true.

Reflect and remind yourself that an accurate criticism is the most valuable feedback you can receive.

Everyone has weaknesses and they are generally revealed in the patterns of mistakes they make.

Remember to reflect when you experience pain.

Don't hire people to fit the first job they will do. Hire people you want to share your life with.

When considering compensation provide both stability and opportunity. Pay people enough so that they are not under financial stress, but not so much that they become fat and happy. You want people to be motivated to perform so they can realize their dreams. You don't want people to accept the job for the security of making a lot more money. You want them to come for the opportunity to earn it through hard and creative work. Have performance metrics at least loosely tied to compensation.

Provide constant feedback.

Evaluate accurately, not kindly.

Don't treat everyone the same - treat them appropriately.

An idea meritocracy requires people to do three things. First, put their honest thoughts on the table for people to see. Second, have thoughtful disagreements where there are quality backs and fourths in which people evolve their thinking to come up with the best elective answers possible. And third, abide by idea meritocratic ways of getting past their disagreements, such as believability-weighted decision making.


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