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Principles: Life and Work, by Ray Dalio
“WHATEVER success I’ve had in life has had more to do with my knowing how to deal with my not knowing, than anything I know,” says Ray Dalio.
To put the author in perspective: his company was rated by Fortune magazine as the 5th most important private company in the US. Dalio himself was rated by Time magazine as one of the 100 most influential people in the world. Forbes rates him as the 100th wealthiest person in the world.
The book opens with an introduction to the man and his company, Bridgewater Associates, a US head-quartered, investment management firm. The firm consults to institutional clients such as pension funds, endowments, foundations, governments, and central banks.
What makes this company worth knowing about, and this book worth reading, is the way the company is run. The title comes from Dalio’s view that principles - fundamental truths that are the foundations for behaviour - will help you achieve what you want in your life and business, again and again.
The first part, a description of the vicissitudes in the fortunes of Bridgewater, is a case study. “I learned my principles over a lifetime of making a lot of mistakes and spending a lot of time reflecting on them.” Dalio’s mistakes included one that forced him to reduce his company to one person – himself, and borrowing money to pay his living costs.
“My painful mistakes shifted me from having a perspective of 'I know I’m right' to having one of 'How do I know I’m right'?"
This led him to the conclusion that it would be invaluable to reflect on decisions one makes, and then to write out the decision-making criteria. The result is being able to systematise your decision-making rather than having to relearn from recurring mistakes, again and again.
Dalio built his company on humility, open-mindedness and systematised, principle-based decisions.
The brilliant trader and investor Bernard Baruch explained: “If you are ready to give up everything else and study the whole history and background of the market and all principal companies whose stocks are on the board as carefully as a medical student studies anatomy - if you can do all that and in addition you have the cool nerves of a gambler, the sixth sense of a clairvoyant and the courage of a lion, you have a ghost of a chance.”
So, what are the principles that allow one to advise successfully in this complex arena? It starts with finding the smartest people who disagreed with you, and to try and understand their reasoning. This is 180 degrees from how almost all corporations operate. Their fundamental principle is consensus in a hierarchy of authority, where you succeed by knowing your place in the hierarchy, and having respect for your superiors.
An idea-meritocracy
Bridgewater is an idea-meritocracy – a company designed (the critical point) to ensure that the best idea wins.
To turn any company into an idea-meritocracy requires that you only employ people who want to be part of a mission (e.g. we sell well-priced fruit to those on a tight budget; we give the soundest advice to our clients, etc.) and not those who work for a paycheque.
Good people are not perfect people. Rather, they learn from mistakes, record them so they can be learned from, and move on. “If a mistake happened and you logged it, you were okay. If you didn’t log it, you would be in deep trouble.” The error log was Bridgewater’s first management tool.
In an idea-meritocracy people put their honest thoughts on the table. There is thoughtful disagreement, and people are willing to shift their opinions as they learn. There are agreed-upon ways of deciding so that the people can move beyond them without resentments.
People cannot participate in the company productively if they don’t know everything that is going on. Without the principle of transparency, problems would be hidden instead of being resolved. To have a real idea-meritocracy, there must be transparency so that people can see things for themselves.
Why bother with this approach, which is VERY difficult to implement, and will require years of diligent minding to embed?
The answer will be clear if you answer these questions posed by Dalio. Would you prefer to have a company in which people are truthful and transparent, or one in which most people keep their real thoughts hidden? Would you prefer to have a company where problems, mistakes, weaknesses, and disagreements are brought to the surface and thoughtfully discussed, or where they are suppressed? Would you prefer a company in which the right to criticise is non-hierarchical, or one in which you don’t criticise upward – publicly?
Is the effort and discomfort worth it?
The most compelling reason to change the way a business operates is to look at the financial benefits. Here is what the idea-meritocracy did for Bridgewater. In 2008 their flagship fund made over 14% in an awful year when many other investors recorded losses of more than 30%. In an economy still reeling, their returns were nearly 45% and 28% for their two ‘Pure Alpha’ funds, and 18% for their ‘All Weather’ fund.
Need I say more?
Readability: Light ---+ Serious
Insights: High +--- Low
Practical: High +---- Low
- Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Executive Update. Views expressed are his own.
