Ray Dalio

Also working to make sure Bridgewater survives him. Dhaio moved in twenty eighteen to turn Bridgewater into a partnership and give employees more of a stake in the firm. Daio sat down with David Rubinstein, co founder of the Carlisle Group and host of the Bloomberg television show Peer to Peer Conversations. They discussed what he looks for in an employee, how he's preparing for a possible recession, and whether or

not he'd ever take a job in government. You are seen as somebody who has said it might be a chance of a recession at some point. Do you see any chance of a recession in two thousand nine or two I'm big on principles, right, so I think that it's important to understand how the economic machine works. And so when I'm looking at that, I want to maybe take a few minutes and get into the important things

that are pertained to a recession. Because a recession, you know, whether you it's two negative quarters of GDP and we're going to be hovering I think fairly close to that level, and there's a certain variation around it. But the bigger things are a combination of the absence of effectiveness of central bank policies. So I hope we can talk about those together with the wealth gap, the large wealth gap. So when the next downturn comes, what that will look

like socially, politically and so on. UM the elections, which is a issue between um let's say capitalists and socialists or the rich and the poor. And then the emergence of China UM and in relationship to the United States. Those four factors are factors that have not existed since

the thirties. I think they're unique, and so when we get into the question of the recession, I think it's how that will affect those other things, and those things affected in the investment world, your firm was quite known, well known for quite some time before the last recession. It was a very successful firm before. But in the last recession, your firm performed extremely well, maybe better than

any of any other major hedge fund. So as I recall your up or something like that during the worst year, So, um, are you anticipating a recession now and are you changing your investment approaches or your not quite where you were in two thousand seven. In two thousand seven, it was pretty easy, I think, to calculate that these debts that we're going to come do and that the there was not an adequate amount of funding, and so that sort of debt crisis was something we anticipated and we were

positioned well for. When I go through those calculations, it's not the same. In other words, the amount of maturing debt and that whole problem doesn't look the same. It looks more like a gradual squeeze having to do with quite a lot of debt of a certain type. But with that um also pension liabilities and healthcare particularly as that produces a greater squeeze. We have large deficits and

so on. So so the amount of promises that we have are large, but they're going to be coming at us at a more gradual pace, and I that's going to produce a squeeze. I think related to that, what's important is that when you don't have monetary policy being able to be effective, um what kind of monetary policy we will have, we will have more than likely a

lot of debt monetization. On fiscal policy, there's no room for additional tax cuts, you agree, because we already have such a big deficit, so you couldn't really cut taxes any anymore. Or do you not agree with that? I believe that in terms of spending that probably there will be increases in spending that probably will not be well funded. And when you ask about that, I think we have a political question, and that's which is relevant to also

the markets. Between now and the elections, we're probably going to have very different policies, but policies maybe more of the left and policies more of the right, more extreme policies, greater polarity, and the choice will be greater. And how those choice as are made are is going to be very important to not only the size of the deficits, but the nature of taxation. So I think that I

think that UM. When I'm looking at the presidential candidates, what I do is I look at what their policies are stated policies in terms of UM, any of their various policies, and I look at that as a probabilistic basis. So I think when we have to answer that, we can't um um. You you like, after the election, you might get taxes raised by UM on the wealthy or you have corporations, you can reverse those tax those tax policies, and you're probably going to get an increase in spending.

All right, let's talk for a moment about how you came to be, Let's say, one of the most respected commentators on economic and financial policy, which is starting your firm. So you grew up in Long Island and where you from a wealthy family? No, my dad was a jazz musician, very lower middle class fan. When you were a young boy, were you interested in the financial world or what were you most interested in with growing up on Long Island.

I got hooked on the markets when I was twelve because I used to caddy and I would take my money and I put in the markets and everybody was chatting about the markets. So, UM, how did you do well. The first stock I bought, I bought because it was the only company I ever heard of that was selling for less than five dollars a year, and I figured I could buy more shares, so if what up, I'd

make more money. That was my strategy work and it worked, and it worked because this company was about to go broke and somebody came along and acquired it, and it by luckily, Um, it went up. And I said, this game is easy, and I m then decided that I would be involved in the markets. And this game is anything but easy. So in high school, were you interested in academics or were you a good student? No? I hated high school. Did you go to high school you

cut classes? Or what did you do? I did cut classes a fair amount and cut classes to go surfing. Did you have a hard time getting into a good school in college? Yeah? I got into c W Post College on probation, probation on probation, okay, and but you did well there. I loved college. Okay. I love college because well, uh, besides mixing all the fun that college gives you, it also, um, what I liked is that I could pick the subjects that I was interested in

and I so I loved college. Right, you must have done recent well because you got into Harvard Business School. Yeah, I did. I got great grades when you graduated. What did you do? So in my two years? It's a two year school. Um and in my summer I like to trade commodities. I got into trade and commodities. Now this is now, uh, the summer of seventy two and um so nobody ever for more of a business school went into commodity division. But I went to Merrill Lynches

hodity division. I said, hey, can you give me a job? The director of commodities in that summer gave me a job to help him. Around three, we have the oil shock. Bear market in stocks. Commodities is the hottest thing. And I was hired as director of commodities at Dominic and Dominic, having never done anything in the director of commodities, but I was hired. And that's so that's what I So you left that eventually though, to set up your own firm. Yeah so I. Uh that was seventy seventy four, big

bear market in stocks. Uh, Dominic and Dominic essentially went broke. I went to, uh, what was Sandy Walls firm? Cbd L E. L. Hayden Stone at the time became Shearson Hayden Stone Lean blah blah blah. Because it did all those mergers, I became in charge of institutional commodities, in other words, hedging of all different things, and that put

me with all different futures markets. And then we got into the environment where um seventy four you got into this environment where interest rates, tightness of monetary policy, all of those things were driving all the markets. So that got me hooked on those markets. Anyway, I got fired from there because I was a bit rowdy. Did you punch somebody? Did you punch your boss in the face? Or yes, I punched my bost in the face. That's not a good way to print that was, but that was.

It was New Year's Eve. We got drunk on New Year's Eve and somebody other than your boss. You didn't think of that anyway, But it didn't. It didn't last long. And that's how I started the firm because I was because the clients still wanted to do business. The year was that and you started the firm. So it grew true from one or two employees to how many. Well, in nineteen two it was I think there were eight employees and at one point and then I had a terrible eighty two so UM, and then it came down

to one employee. So nineteen eighty three or so, it was just me, you have to borrow money from your father. Yeah, so let me tell you about the moment um. So nineteen eight, nineteen seventy nine, eight eight one. I calculated the American banks had lent a lot more money to emerging countries than those countries are going to get paid back. And I anticipated that there would be a debt crisis

and with that an economic crisis. So that was my thinking. UM. In August nine eighty to Mexico defaulted on its debt and a number of countries followed. And so because I said that, UM, I got a lot of attention about that, and I thought that was going to be producing a bear market in stocks. And I could not have been wrong more wrong. August nine eighty two was the exact bottom of the stock market. And I was wrong. And as a result of that, UM, let's take my employees

or UM, I had to let them go. I lost money for myself, I lost money for and I had to borrow four thousand dollars for my dad. It was the most painful, one of the most painful experiences, but it was one of the best experiences that ever happened to me in my life because it changed my perspective about decision making. It made um. It may gave me the humility that I needed and fear of being wrong in my decisions, while I was able to maintain my aggressiveness.

So it changed my whole approach to decision making. You paid your father back with equity in Bridgewater or just interest now with without interest and with a big hug. Okay, so um. From that time on, you began to rely a lot more on arithmetic or algorithms and other kinds

of things. No, no, no no. The big thing was, and this is like the biggest message that I think that I would get across that I'm trying to convey in printce of and so on, UM, is that so many people in there have opinions in their heads that might

be wrong, and they're too attached to them. And if you know how to um operate with a certain amount of uncertainty and stress test your opinions in a different way, you get away from your ego, get away from all that, you can learn a lot about raising your probablies and being right. So what it made me want to do is find the smartest people I could find who disagreed with me, and then I could have conversations with them.

Um and only after I found the smartest people that I could find who disagreed with me, would I be able to make a decision. In addition to know how to improve my return to risk ratio by being able to diversify well to create. And so I wanted all the upside, but I wanted be able to control the downside. And so I would say a number of lessons that

I'd like to, you know, sort of pass along. First of all, the value of mistakes, the value of painful mistakes and learning and reflecting on them has been a big, big thing. Finding the smartest people who could work with you. That's what created an idea meritocracy at Bridgewater. And it's that back and forth in terms of the thoughtful disagreement and then also raising your probabilities of being right in

those ways. So that's humility, that fear of being wrong, combined with still the audacity to go for the great results and how to do that well is really the most important thing I learned. But you now use a lot of computer related algorithms to help you navigate the market. You know, algorithms, or what we call them today, equations is what we used to call and so you would write that down. And what I learned is by being clear that I could tell how that decision would have

worked in the past in all different environments. So it gave me a lot of perspective on making that decision. I could test it through the Great Depression and so on, and then I could find that I used that same algorithm, I could take data from and have the computer make decisions in parallel with me, and so, and that does what I recommend for everybody. I recommend they write down their principles and then realize that almost any of those

principles can then be converted into algorithms. And so the computer was making decisions in parallel with me making decisions. That type of partnership between me and the computer and not also expressing the algorithms was invaluable not only in the quality of the decision making, but also the quality of the relationships that I had with people I worked with. Bridgewater would not be said to be an easy place

to work, or is that fair or not? Because that's fair because many people common this is a very intense environment, and some of them don't survive. Those that do, presumably are are adopting your principles. But are you love it or hated? Um, you have a big attrition rate from young people coming in or I would say in the first eighteen months probably about we have protocols and you have to understand your weaknesses as well as your strengths. And so people coming to that are almost of two types.

There are the people who say, um, well they I suppose almost all come that. I'm excited about that. And they're excited about that because they said, yes, I would like to know my weaknesses as well as my strengths, and I would like to be able to talk about anything and have it thrashed out. And uh, that's who it works for. But it takes getting used to because when you're really talking about the strengths, weaknesses and differences

and ideas. Our brains have been programmed in a certain way, partially because of genetics and partially because of our environments, in which disagreement is thought of as producing a fighting up a reaction or weaknesses are something that becomes a challenge for people to look at. So that's the essence of what I suppose. I'm a young college graduate and I want to go to Bridgewater and make money and learn.

What would be the qualities that you would look for in me to make it likely that I would succeed? Do you want somebody as a first in his class or her class? You want somebody that's a student, body, president, an athlete? What is it that you look for When I look at people, I look at them in uh three dimensions of a person, values, abilities, and skills um. Most companies higher for skills UM. I believe it should be the other way around. I look at their values.

Values means like, what are the motivations? What are the missions? So and it skills is least important. Then you look at abilities and abilities is the way of thinking? Is somebody a big picture thinker or somebody creative? And I want to put together a mix of those right people? And then skills? Can you program? Do you know those things? That's important, but it's least important. So what I look for is really character characters number one um uh and UM to be on a mission and then it applies

to the particular job they have. So when I'm referring to values, I'm referring to is this a person of good character? Number? One? Now, over your let's say thirty years as an investor at Bridgewater, what is your track? Every year you've made money virtually for your investors? Well at eighteen and the late last eighteen years? Eighteen have the last eighteen Yes, that's not too bad. Um about uh, is it too late to invest with you? Or who

can invest with you? Anybody? And any credit investor you're not taking are are? We're closed to new investments in that pure alpha strategy? And our clients are all institute large institutions. And you have two basic strategies that you provide investors. That's right, and I think that will be helpful for people to understand the nature of that. There is a strategic asset allocation. Next, what is your best diverse by portfolio? If you had no idea what was

going to happen, what would you hold. That's what we call our all weather strategy strategy. It's a portfolio of assets. Um. And then we have what we call our pure alpha strategy. Because there's a separation between alpha and beta. So most investors make the mistake of separating those two and think that they're going to make money in the market, and in the zero sum game, they're probably going to lose

money from making those bets. So there's the strategic asset allocation mix, which is the all weather beta piece, and then there's the alpha. In other words, Okay, now I think it's a good time to move this way that way, and that's the alpha stress. Um, it's too too late for friends and family to get into your fund right, there's no opening, not gonna open any anytime soon. Okay. So important part of your life has been transcendental meditation. You do this twice a day. When did you start

and why is it so important to you? Um? I started in nineteen sixty nine or so. I've started because the Beatles, uh did it and then and I learned about it and I thought it was but I it's Uh, it's a it's a very important thing. I would say. Um, it's the greatest gift that I think I can give anyone. It gives a combination of an equanimity, uh, the you know, a calmness, so no matter what's coming at you. You

can approach it with that sort of calmness. It gives one a creativity because it is a process of going transcending is a process of going into your subconscious mind and relaxing. So it's UM, it's been very helpful. So now you are one of the wealthiest up in the United States, one of the most successful investors. So you now have a fair amount of wealth to give away, and you were one of the original signers of the Giving Pledge. What are the philanthropic interests that are most

appealing to you. My interests are I guess I would say two big interests. I'm really thrilled about ocean exploration. This is something that's a big deal for me. But we we have donate to many different things. UM. And then important things for my wife and for me has to do with the education of what are called disengaged and disconnected UH students, those who would not get through high school. So when you have the kind of platform,

you now have a virtue of your success as an investor. UM. Do you find it easier to meet with heads of state finance ministers, heads of countries and do you find that to be appealing to do that? And give them your views on these subjects. We find it mutually appealing. Yes, I um, uh I that you know, from my point of view, I'm very interested in the subject matter. But I'm also interested in being able to UM have an impact, being able to help and so sometimes in policies, UM

it's had a big, big effect. And like EACB policy or other policies. So if a if somebody came to you and said I'd like you to be the chairman of the Fed or the secretary of the treasury, would you ever go into government? Or that's not for you, that's not for me. Today, the greatest pleasure of your life is your family or financial success giving away money?

What do you most enjoy? No, the financial success has never been It's an inadvertent thing that came largely because I like to play a game that if you played the game, well, you get the money. But the financial success has never been uh. Pass taking care of my family and living adequately. Uh, it's been a nice thing to have it. No, UM, for me, the most important thing in terms of saving really has been relationships. UM.

Meaningful work and meaningful relationships. These are the most important thing. Well, I on a mission, to have a passion to work with people that I liked to understand the subject. Well. I love my game because it forces me to understand macro economics the world and to bet on it in relationship to other people. So it tests whether I have that knowledge. I love that, and I'm glad that we've

taken it to a certain point. And then there's the things that I've savor even more than that above all else with seventy years old, and is the relationships, the quality of the relationships, that sense of community. That's what I treasure more than anything. Thank you very much for an interesting conversation and it's a terrific read and I highly recommend it. Thanks for writing it, Thank you for having me. That was Bridgewater Associates co Chairman and co chief investment Officer Ray Dalio.