Ray Dalio is amongst the most talked about hedge fund managers in the world. When he speaks, people listen and when he takes action, others do too.

His methods have sometimes been criticised, but more often, they have been imitated and spurred on new approaches to investing and business. The way he runs his company has influenced how companies are run, even outside the financial services industry.

His company, Bridgewater Associates, has consistently been one of the largest hedge funds in the world. Over the decades Dalio has been in business, he has stayed ahead of the curve, truly understanding and anticipating the macro picture, while delivering consistently enviable returns for his investors.

This is a man that shaped the direction of an entire industry. This is his story.

Early Years

Raymond Dalio was born on August 1st 1949 in Queens, New York. His father was a jazz musician and his mother was a homemaker, Raymond was the only child.

Ray had a very close relationship with his mother who died when he was 19. His dad worked late hours, which meant he didn’t have a close relationship with him as a child. Dalio describes him as a reasonable man dealing with an unreasonable kid. They did, however, become close after his mother had died, and he admired his father’s strong character.

Dalio describes himself as a curious, independent thinker as a child. He was enthusiastic and excited about visualising his goals. He would strive to achieve ambitious things and then learn from any failures; something he credits as a key to his success.

He didn’t enjoy school, as he wasn’t interested in what he was being taught. He found it hard to remember facts and follow instructions, but he was curious about finding things out for himself. When Dalio was excited about something, nothing could hold him back and he would give it his full determination.

He had a newspaper round at the age of 8, and many other paid jobs. He would struggle to complete his chores at home, but away from home, he was really keen to do them because it meant earning money.

Starting to Invest

Dalio began to find out about investing when he was 12 years old when he began caddying at a golf club. It was an exclusive golf club with many members that worked on Wall Street.

He would hear everyone talking about the stock market because it was doing so well at the time and people were making good returns. He would pick up tips for hot stocks while doing his job.

He eventually saved up his wages and used $300 to buy shares with North East Airlines. He chose this stock because it was the only company he had heard about which was less than $5 per share. He got very lucky with this position, as he managed to triple his money. However, this win got him hooked; he thought trading in the stock market was an easy way to make money.

He began collecting coupons for free annual reports from Fortune 500 companies. This was the start of him building his investment library.

Dalio continued to invest in stocks throughout high school and managed to build up thousands of dollars.

Between 1967 and 1969 there were big and unexpected price declines in the markets. Dalio learned a lot from this period of time and realised that the future was not always going to unfold in the way he expected it to. He hadn’t realised this at the start of 1967 though, as he continued buying more stocks even as they were going down. Once he had lost a lot of money, he realised what was going wrong.

He believes to be a successful trader or entrepreneur you need to accept being ‘painfully wrong’ a lot of the time. You need to look at things through the eyes of others to enable you to learn more. These early experiences shaped the way he approached investing for the rest of his career.

Due to not taking much interest in school, Dalio’s grades suffered and he didn’t achieve the grades he needed to get into college, but fortunately managed to get in on probation instead.

College was a very different story to High School for Ray. He loved it because he could learn about subjects he was interested in and he enjoyed the freedom that came with living away from home.

It was in college that he took up transcendental meditation, which he still performs to this day. He says it has helped him a lot through his life; allowing him to keep thinking clearly.

Dalio learned about commodity futures from an older classmate. Commodities were attractive to him because they could be traded with low margin requirements, meaning he could leverage his money and invest even bigger amounts.

Working For Different Companies

Ray majored in finance and got accepted to Harvard Business School. However, before starting at Harvard, he took a job on the floor of the New York Stock Exchange in the Summer. He spent this time learning about the currency market, and the cause-effect relationships that lead to price movements, including how people reacted to different news releases.

The following summer, while everyone else was interested in currencies and stocks, he got a job at Merrill Lynch trading commodities futures as this was what he was interested in.

While he was working, some of the currency markets crashed. He learned that when everyone thinks the same thing and bets on the same thing, it’s often going to affect the price and should lead you to be more cautious.

Dalio believes most things have happened before because of the cause-effect relationships that lead to these events. The means, everything can be broken down from a logical perspective if you approach it correctly. These sort of experiences really shaped the way he built his approach to investing and trading.

After this, stock trading stopped being so popular and commodities trading was back in fashion again. Thanks to Dalio’s experience in this and his MBA from Harvard, he became highly sought after. He ended up working for a brokerage called Dominick and Dominick as director of commodities, setting up a commodities division for them.

Whilst working for the company, he still worked on his own investment accounts and continued to learn a lot through his profitable and losing trades. He especially learned a lot about risk control.

He says,

“In trading you have to be defensive and aggressive at the same time. If you are not aggressive, you are not going to make money, and if you are not defensive, you are not going to keep money.”

He left Dominick and Dominick for a more successful firm, Shearson, where he was in charge of the futures hedging business. He would help clients to manage price risks in their business through the use of futures, which allowed him to learn a lot about grain and livestock. He spent a lot of time in Texas and got to know all the cattle producers and grain growers very well. He said he built a ‘second life’ with them.

However, he was only at Shearson for a year, until he was fired for punching his boss in the face. He says he was too wild to work there. Everyone in the company and all the associates really liked Dalio and trusted his information and advice, so he decided to set up his own firm.

Setting up Bridgewater

Dalio established Bridgewater Associates in 1975, working out of his 2-bedroom apartment. The name Bridgewater arose because he initially attempted to sell commodities from the U.S. to other countries, therefore, they were ‘bridging the waters’. However, the company moved on to focus more on being a consultancy firm.

Essentially, he would put himself in the shoes of his clients and tell them what he would do if he was them, looking at their accounts and breaking down the financial or market risks and how to manage them.

It was during this time that he began taking note of his models or principles that drove the decisions he was making. It was also where he took his belief in cause-effect relationships a step further.

When he was learning about commodities such as grain, he would learn about every single part of the business, so he could predict every detail and the yields this would lead to. This would later mean he could predict how much cattle would be eating the grain and therefore how much grain would be sold and produced.

He says,

“By knowing how many cattle, chickens and hogs were being fed, how much grain they ate and how fast they gained weight, I could project both when and how much meat would come to the market and when and how much corn and soymeal would be consumed, likewise by seeing how much acreage was planted with corn and soybeans in all of the growing areas, doing regressions that showed how rainfall affected the yields in each of these areas and applying weather forecasts and rainfall data, I could project the timing and the quantity of corn and soybean production.”

To him, it was all just a machine of logical cause-effect relationships. These relationships are what dictated his decision-making rules and principles, which he recorded each time.

He used to write on the back of envelopes and other bits of paper until he got his first PC and was able to start programming what he needed. This way he could work out exactly how prices would move and what would be best for him to invest in.

The whole principles process became something he would stick with from then on. Writing down principles, inputting them into the system and then following them. The system would end up working things out for him, once he inputted the information, so it would effectively be making a decision for him.

Clients would call him for advice and to ask for his macro observations. This took too much time, so he decided to write it all down instead. He says this was a good process, as it would force him to reflect on everything every day. He still does this now and millions of people still read this each day. It has been praised for being ahead of the market with predicting major events, although has also gained criticism, particularly in recent years.

McDonalds Chicken McNugget

Dalio started managing companies’ financial exposure by buying and selling financial instruments on their behalf. Two of his biggest clients were McDonald’s and Lane Processing, which was one of the biggest chicken producers in the country.

McDonald’s approached Dalio to tell him about a new product called the Chicken McNugget. They were reluctant to begin producing them due to the unstable price of chicken. It would make it difficult to sell the nuggets at a standardised price.

Chicken sellers didn’t want to sell at a fixed price, as they were worried their costs would go up and they wouldn’t make a big enough margin.

Dalio thought about the cause-effect and realised that the chicken could be seen as a ‘machine’ consisting of a chick and its feed. This meant the most volatile cost the chicken producer had to consider was the price of feed.

Dalio showed Lane Processing how to use corn and soy futures to lock in their costs. This way, they would be able to offer fixed prices and reduce the risk for McDonald’s.

Thanks to this logical thought process, McDonald’s was able to release the McNugget. All hail, Ray Dalio!

Almost Losing It All

Between 1979 and 1981 the economy was not looking good and markets were very volatile. In March 1981, Dalio wrote a controversial observation predicting a bad depression and was confident about this. He even got his associates to scrutinise his observations and calculations to find any flaws, but they couldn’t see anything different.

Dalio held onto his bets and it looked like he was going to be correct in his predictions. He was featured publicly declaring that he was predicting a depression.

However, in late 1982 Ray Dalio lost almost everything because of this prediction. In his own words:

“The stock market began a big bull run and over the next 18 years the U.S. economy enjoyed the greatest non-inflationary growth period in its history.”

Dalio says this period of time felt like ‘a series of blows to the head’.

It was a humbling experience for Dalio because he was wrong so publicly. He says, in retrospect, it was one of the best things that happened to him because it taught him a lot.

This loss forced him to dismiss all his employees, as he could no longer afford to pay them. He borrowed money from his dad and had to sell his possessions. It was devastating for him to consider giving up on his dream, but he had to make a decision about whether to give up and find a job or continue. He chose to continue.

He spent a lot of time working out his mistakes and realised he would need to look at himself objectively and change himself. He realised he had developed a fear of being wrong, so instead of thinking he was right all the time, he needed to change this and begin asking “how do I know I am right?”.

He decided the best way would be to find other independent thinkers who see things differently to him, so they could challenge his thinking and discuss their opinions to hopefully arrive at the correct final answer.

Dalio is a strong believer in a system he calls ‘idea meritocracy’, which allows everyone to have a voice in any discussion. The more valuable you are in that field, the more weight your opinion carries.

Dalio gradually gained more clients and grew a new team. He managed to re-build the company back to its former levels of success. New technology helped with this over the years, as it would assist his decision-making process.

Bridgewater

Dalio says his formula for a successful life is:

Dreams + Embracing Reality = A Successful Life

He says that first, you must dream big; you can have anything you want but not everything you want, so you need to prioritise.

“Life is like a game where you seek to overcome the obstacles that stand in the way of achieving your goals. You get better at this game through practice. The game consists of a series of choices that have consequences. You can’t stop the problems and choices from coming at you, so it’s better to learn how to deal with them.”

There are a number of points that define Dalio’s approach, which we can all learn from.

Firstly, he lives his life by a series of principles, which he has also written down for his employees to learn. He recommends that everyone writes down their principles and processes they use to make decisions.

This also ties in with his belief in the cause-effect relationships in everything. If you can figure out these relationships, you can figure out what you need to do to trade or invest successfully in something.

Finally, Dalio is willing to accept being wrong. In fact, he took this a step further and actually sought out people that were intelligent and independently minded enough to really put his thinking to the test. If you always want to be proven right, you are unlikely to achieve high levels of success, particularly in the markets. Being wrong is just part of the process.

Learn from your mistakes, find out what went wrong and what was behind it, write it down and then move onto the next decision.

Ray Dalio became one of Time Magazine’s top 100 most influential people in the world. He has vowed to donate more than half his fortune to charitable causes within his lifetime; a fitting gesture for a man that put people and relationships ahead of his wealth, and succeeded just the same.