Ray Dalio is searching for truth in business and can’t see why you wouldn’t do the same

Sixteen words into Ray Dalio’s new book, "Principles: Life and Work," he introduces himself as a “dumb shit.” He spends the next 530 pages offering a philosophy for how to thrive even if you are one, how to protect your company if you should hire someone like him, and why, in the end, such a label doesn’t mean much.

Dalio is the founder of Bridgewater, the world’s largest and among the most successful hedge funds, with $160 billion in assets under management. His book lays out the secret to his decades of success. These aren't tips for where to park your money but how to build a culture. At the heart of the Principles are the need for an “idea meritocracy,” a rigid system — divorced of emotion — for researching, surfacing, debating, testing and implementing the best ideas from anyone. Putting this meritocracy into place, he argues, will produce consistently good results, the kind of that have enabled him to thrive in an industry littered with investment geniuses whose past performance morphed into future failure.

Dalio came by the LinkedIn studio last week to talk about the book. I always enjoy talking to him because he is not (no matter what he insists) a dumb shit. He is thoughtful and so committed to “radical truthfulness” and “radical transparency” — two of his other necessary pillars, both of which are required to stop an idea meritocracy from being snuffed out by ego and emotion — that he is willing to debate most subjects.

We talked about what went into writing the Principles, which started a series of learnings he at first kept to himself, then circulated to his company, then to the world. And then he tackled current topics: Bitcoin (“a bubble”); how Bridgewater would have handled a James Damore — the Google engineer who was fired after writing an open memo critiquing his company’s push for diversity; the rise of populism; and, finally, his pivotal role in creating the Chicken McNugget.

The below interview has been slightly condensed and edited for clarity.

You’re always weighing where to invest, in terms of your money and your time. What was the calculation behind taking the time to write this book?

When I started, my exercise was for the purpose of making my thoughts clear. Particularly when I made mistakes, or whenever I made a decision, I would write down the reason that I made that decision. I at first did it for myself, and then I passed it along to the people that I'm making decisions with, everybody in the company. I found that because it was written down, they could look at those decisions, and we could agree on what the best criteria for making decisions was.

I kept that all private. I wanted to be very private. I much prefer the privacy. And then in 2008, because we anticipated the world financial crisis, and because we think differently that allowed us to do that, we received a lot of attention, and I decided that I would put these principles online. Three million people downloaded them, and a lot of people then said how helpful they were. They would write notes and everything.

So then I came to what I'll call my transition year, or my transition period. By transition period I mean that I'm moving from one phase in my life. The second phase, in which I'm working and others are dependent on me, to my third phase in my life, in which I want others to be independent and successful without me. That is what it represents. And so, it occurred to me that I really felt like I had a responsibility to pass along the things that helped me. That made me think about whether to write the book. That prompted me, at that point, to make the decision to write the book.

I've put a lot of work into it, because I want it to be clear. I want to be crystal clear. It's essentially a book of recipes that I'm trying to pass along.

A lot of the recipes come from lessons you've learned, both the hard way and through things that have worked out over your career. But you had some struggles growing up. Your mom died when you were 19. Your dad was a jazz musician, worked late. I'm curious, how did your upbringing shaped your worldview?

I was lucky enough to have a loving mother. I had a great dad. So, I wouldn't consider myself... I didn't have much financially, but I think the things that maybe had the biggest effect were, I would work. I had a newspaper route. I did a lot of other things. And most importantly, I caddied. When I caddied, it was in the middle of the stock market boom, and so I got hooked on markets.

The first stock I bought, the only reason I bought the company was because it was the only company I heard of that was selling for less than $5 a share, and I thought if I bought more shares and it went up, I'd make more money. That was a dumb strategy. But anyway, I bought it and it tripled, because some other company took it over because it was about to go broke, and I was hooked on the markets.

That got me into the markets. And then being in the markets is in itself an interesting experience, because in order to be successful in the markets, one has to make decisions that are different from and better than the consensus decisions, because the consensus is built into the price. So, it helped me think as being an independent thinker. That was part of the evolutionary process.

I would say the work, the family, not having much, was great. Right? Because it helped me to get stronger.

I was also in an environment where it was a time of great aspirations. John Kennedy. Conquer outer space. Create equality and opportunity, equality for people. All of those things. To eliminate poverty. These were very aspirational. It was also a rebellious period. Steve Jobs. Think differently. That environment where you look at each other and you say, "Okay, make magic happen. Think independently."

Others have seen where the markets are going, but haven’t been able to maintain that vision. Is there one takeaway that you would give to people to say, "This is how you make sure that you are repeating success each time."

The most important thing is, know what you don't know and how to deal with it, and know how to manage your risks of being wrong. For me, I had a whole bunch of right decisions, and then, like I described in the book, in 1982 I made a terrible decision and was wrong and it changed my whole attitude of decision-making. It changed from a confidence that I was right, to asking myself, "How do I know I'm right?"

That mindset change was the best thing in the world, and that led to the idea of thoughtful disagreement. In other words, to try to find the people who are independent thinkers and have different opinions than me, and to be curious about their points of view, and to triangulate to get to the greatest probability of being right. And to think about how, also, to diversify bets.

Another element that I learned from that experience was to look at history differently. One of the things that happens is that everybody's surprised by those things that never happened to them before. Well, a lot of things that they're going to be surprised never happened to them before, happened before. And so, to look at what has happened in history. Like now is very similar in many ways to the 1937 period. I would make a comparison. Everything is another one of those.

I want to talk about populism, but before that: When you get to the chapter about AI, you raise the potential that AI is something different, that it could bring rewards but also “our demise.” Can you look back at history and see an example of something that mirrors what we're about to go through with the AI revolution?

Algorithms have been essential [to me]. I've also found that by taking what's written down in the way of principles and converting them into algorithms, that the computer can make decisions in parallel with me. I mean literally, that's how it happens. I think, "How am I going to behave in the markets right now, and what's going on?” and I have next to me a partner in that. It can process a lot more information a lot faster, process it less emotionally. It has been one of the major big deals in terms of decision making, and I think that we're entering an era in which this can be for everybody to operate.

AI is not a new thing. It started in 1953, was the first time it was coined, the word was coined. It evolved over a long period of time. But what we're coming to is the question of, what are the criteria and how they derive? The computer gets to come up with the algorithm, rather than the thinking coming up with the algorithm.

Because of the competitive pressure to do that, the question is whether there'll be deep understanding. Do humans spend the time to understand what that is like? When the future is different than the past, it's a risky thing. If you don't have deep understanding, and the future is different than it was in the past, you're going to have a major problem. That's the challenge, that's the two-edged sword of AI, and I think it's threatening.

Let me give you an example. If it's in chess, totally fine, because there's a certain limited number. You put enough data. If it's doctors doing surgeries, totally fine, because if you watch the surgery, you could take all that data, that visual data, convert it into data, and you convert that into essentially decision rules. You say, "It's this incision, and that," and you operate within a large enough sample size, you can get a level of comfort, so that there is a level of comfort that exists in things where you're confident the future will work the same as it did in the past.

In those cases where you're not confident of that, I could never get there. I also have a problem just even believing that if I don't understand deeply, it's going be okay. When betting in the markets, I'm so afraid of being wrong that the notion of making sure I understand the reasoning [is essential]. And I'm also thrilled by the understanding of how things work. My life wouldn't be nearly as exciting if I simply got these data, and then bet on it. So for all those reasons, I particularly need the deep understanding of how things work.

There’s a lot in the book about making sure your life or your company operates like a machine. Are there times where you get feedback and you're like, "I'm going react emotionally now"?

Let me clarify. I think that emotions are the most important thing. For me, they're the rewards. Inspiration, love, friendship. I'm trying to distinguish that there are emotions that are helpful to you, and there are emotions that are detrimental to you, so it's important to distinguish.

There's this thoughtful part of your brain, which is the things I want. They can be love and relationships and those things. And then there are the emotional parts, that produce detriment and so on.

I want an idea meritocracy in which the goals are to have meaningful work and meaningful relationships. They're comparably important. They reinforce each other. Tough love. You could be tough with each other at the same time as you have love, have an appeal that you care about each other. An idea meritocracy, in which the goal is to have meaningful work and meaningful relationships, through radical truthfulness and radical transparency. Okay? Radical truthfulness is very important, and radical transparency is important to have an idea meritocracy.

The process is three steps.

First, people must put on the table what they really think. Some people have problems doing that.

Second, understand the art of thoughtful disagreement. It’s not a battle. It is to understand the other person's point of view, to do the back and forth. We have protocols for doing that well: Can we have thoughtful disagreement, not emotionally getting carried away because we're angry? There's an instinctual reaction to view disagreement as a fight, rather than a curiosity to help to make a better answer.

Beyond that, when the time comes that you have to make a decision when you still disagree, to have clear ways of doing that. In our case, we have what we call believability-weighted decision making.

You say, "Embrace the pain. Learn from it." At Bridgewater, there's a pain button that you push when you have a problem. You write down what happened, and then you later go back and revisit the emotion that you had. Do you press the pain button anymore?

Sometimes I'll feel little twinges of it, the pain. But for the most part, my whole attitude has totally changed. Through time, I've taken the cue that when I have a moment of pain, I view it as a puzzle that will give me gems if I can solve the puzzle. The puzzle is, what would I do differently in the future so I won't repeat that? The gems are these principles of what I will do in the future that won't prevent me from making those mistakes.

I have a saying, “pain plus reflection equals progress." I really believe that. When we have pain, it's indicative essentially that something is wrong. We learn best through pain.

Our successes don't teach us as well, because first of all, I must have done something right to produce these successes. I don't think they stick as well. My experience has been when I look back on my life, I think about all the mistakes that I've made. I would think I'm a failure, because I look back, and I think of all the failures. They're the ones that are the ones that stick in my memory, and also they're the things that have helped me the most.

I think if you experience those pains, and it's okay. But if you make the point of reflecting in a quality way, particularly together with other people, it's fantastic. The greatest — or one of the greatest — tragedies of mankind, I believe, is people having wrong opinions in their heads that they're stuck with, and making wrong decisions. Whereas if they can put those decisions out there, and stress test those decisions, and their criteria for making those decisions, and take in other opinions, often much better than their own opinions, then they can get the best resources that they have to make the best decisions possible.

You have a lot of principles for how to hire, but you still say it takes 12 to 18 months before you can figure out whether someone is really doing their job well at Bridgewater.

I want to be clear that this is not a place for everybody.

What we do in order to try to convey it, we try to convey what it's like. We show them videos. We have conversations about it.

We have probably in the first 18 months, two years, probably a third of the people don't work out, on average. But the people who stay there wouldn't want to work anywhere else, because they could say anything they want. Nothing's going on behind the scenes, or practically nothing, all those reasons. I haven't found a way to yet be so precise that this very big differentiating culture is something that we can test like the Navy Seals. Sometimes it's just experiences that are required.

Did you follow the news of the Google engineer who wrote a memo criticizing Google’s diversity policies? How would Bridgewater have handled the situation?

The first thing is to try to state the principles, to recognize that there are two principles at odds there: The principle that Google had [around hiring and promotion] and then the principle that can we talk about these things, can we debate those things.

Would you fire someone for writing something incendiary?

No, I love the different perspectives. I love the debate. I think it's an opportunity to collectively look at that type of question. I would've had probably quite a bit of debate on it, in terms of that choice. In my own view, I think you're dealing with the challenges of a complex issue. I think we should talk about everything. There should be a lot of tolerance about talking about everything. I like that. The key is whether people are respectful with each other and whether they deal with the issues that somebody else is facing. There should be mutual consideration. Consideration to speak up and consideration to listen is also important.

You talked a lot about the rise of populism earlier this year. Do you still feel as strongly?

Yeah. There's a phenomenon that grows populism. And that phenomenon happened in the '30s. In 1929-32, just like in 2008, there was a debt crisis. And with that debt crisis, interest rates hit zero. And when interest rates hit zero you can't have normal monetary policy. In both of those cases there was the buying by central banks, the printing of money essentially, quantitative easing that pushed asset prices up. And that happened from 1932 to 1937. And from 2008 until now.

There was then a wealth gap. A very large wealth gap. Right now the top one tenth of one percent of the population has a net worth that's [equal to the bottom 90% combined. And you'd have to go back to the 1935-40 period to find that wealth gap. And with that wealth gap, a large segment of the economy believes the economy doesn't work for them.

You have to look at the economy as really being two economies. There's what I'll call the top 40% and the bottom 60%. Or you might even do the top 20% and the bottom 80%. So don't look at it as a whole. Look at it those two economies. And that is creating a polarity. The government doesn't work for them. The economy isn't working for them.

And if you look at the bottom 60%, not only is there a bad economic situation, death rates are rising. It's the only part of the world where death rates are rising. Combination of opiates and suicides and so on. Because of economic problems.

Those circumstances typically lead to bringing in somebody who is from the outside, who is a strong leader, called a populist, who will fight for one side in a battle against the other side. So populism then happened. It happened in the '30s, and it lies here, it sometimes surfaces. Not just in the United States, but around the world. So that tension exists. That tension currently exists.

Now as we go forward, we have to think about that. We have to think about both economies. The most important element is how conflict is handled. In the past, if conflict is handled so badly that it creates divisions that split the countries and they become more antagonistic, it can be a terrible thing. It has shown in some cases to be a threat to democracy. We lost four democracies in the '30s because of that.

I think we're at a juncture in which how conflict is handled is the most important thing we're looking at. What are those principles that bind us together as a country? And like the dispute that you're asking about at Google, how will you resolve that? Can you have thoughtful disagreement? Can you have idea-meritocratic decision making? Can you work through those decisions so that you, as I was saying, have ways of getting past those decisions and operate together in dealing with those problems.

This is the question of our time.

Just imagine what an economic downturn would be like now. This is when times are good, right? The stock markets at its peak, the unemployment rate is at its low. And this is a good economy. But the truth is, it's not a good economy for a lot of those people. And if we were to have an economic downturn, I would worry about how we would handle conflict.

So that's why this is such an important economic issue. This two economy issue.

The real question is whether we work collectively to deal with it.

Two more questions and then I'll let you go. Quick ones. What's your take on Bitcoin? Are you following it?

Yup. Bitcoin is a bubble. That doesn't mean it's not a good asset. It depends on what it is. But, there are two things that are required for a currency to be effective. It has to be a medium of exchange. That's what a currency does. And it has to be a store-hold of wealth. You can hold the currency. I have Bitcoin, and say I want to go spend some Bitcoin, and it's not easy to go spend Bitcoin. And in terms of the store-hold of wealth, because it's become such a speculative market, that it's volatility is such that it's not an effective store-hold of wealth. A saver would not want to own Bitcoin from that perspective. It's a speculation on something.

We have criteria [on] how do you define a bubble. And there are things like new entrant to the markets; people who use leverage to buy it; people who buy it with the idea that I'm going to be able to sell it at a higher price rather than because of its utilization. These classic criteria which we apply to all markets to try to define a bubble, exists for Bitcoin now.

And I can't let you leave without telling the story of how the world wouldn’t have Chicken McNuggets were it not for you.

In the 1970s, I like to trade commodities and I helped organizations deal with their commodity risk. What I like about commodities particularly is you could go through the calculations of what it takes to bring something, like a chicken or piece of meat, to market. It's just like: This piece of meat is being sold in the market and what will they pay for it? I like those calculations.

At the time, McDonald's wanted to come out with the chicken McNugget but they were worried that the prices of chicken would vary a lot because there was a lot of volatility. And a chicken is just a little chick, which is very economically cheap, and it's mostly grain.

McDonald's was asking me for advice, how to deal with that. And also, I had chicken producers who were asking me for advice on how to deal with their chicken risks. And I knew the economics of it so that grain could be bought so that I was able to arrange for the same big chicken producers to cover their risks by hedging in a certain way. So that they could offer a fixed price for McDonald's to get a fixed price for its chicken, so it's menu prices wouldn't have to vary. Or they wouldn't be squeezed. And they were then able to come out with the chicken McNugget knowing that it was going to have a stable price.

So every time my kids eat Chicken McNuggets they have you to thank. I appreciate that.

Yeah.