Ray Dalio released his book Principles last year. He is the seventeen billion dollars founder of Bridgewater Associates. I’ve compiled a list of lessons that I learned from Ray:
Test your assumptions with real data
Build a financial model and see how it fares out against 100 years of market data. If it does well, then there is a good chance that it’ll do well in the future. Always build models and use data to test any assumptions. Gut feeling is not enough. Believability test everything, that’s how you win.
Build simple models
The economy is defined by a line of productivity as well as small and large cycles. That economic model explains every boom and bust in history. Simple, isn’t it. Build models that simplify your life. That’s my key to understanding the quirks of life.
Base your decisions on merit only
Every decision must go through a stress test governed by a culture built and people trained to accept an idea meritocracy. In other words, make decisions based on merit alone. Not through power struggles or flipping a coin. And not through gut feelings or the popular vote.
Find the root cause of problems
Analyze second and third order consequences. Don’t take anything at face value. Try to discover the root cause of any problem. Use techniques such as the 5 Whys to get to the bottom of any problem.
Automate, automate, automate
Ray, well versed in the bond market and later the stock market did face many tough situations. The most nagging question he had was how to make copies of himself throughout his organization. How would you maintain a constant level of excellence with or without the founders? For 40 years, he tried and failed and tried again to perfect his organization’s culture and people as well as the underlying machine the runs the business.
This is the change from depending on resources to depending on processes. These processes should be independent from any one employee within the business. Employees come and go but the quality must remain consistent. Remember Tim Ferris’s pursuit of automation in his search for a truly passive income?
Find your way around obstacles
Ray’s success is in his fanatic pursuit of excellence. Any problem is just an obstacle in the way forward. Any business undergoes a series of cycles. The decisions made either help improve the organization or lead to its unfortunate demise. Therefore, any problem is fixed with this simple method using the following four steps:
- Discover the problem
- Analyze the problem
- Find a way around the obstacle
- Move forward