Principles

Ray Dalio Sep 2017


INTRODUCTION

Whatever success I have had in life has had more to do with my knowing how to deal with my not knowing than anything I know. The most important thing I learned is an approach to life based on principles that helps me find out what's true and what to do about it.

Principles are fundamental truths that serve as the foundations for behavior that gets you what you want out of life. They can be applied again and agin in similar situations to help you achive your goals. Having a good set of principles is like having a good collection of recipes for success. All successful people operate by principles that help them be successful.

To be principled means to consistently operate with principles that can be clearly explained.

Think for yourself to decide

1) what you want

2) what is true

3) what you should do to achieve 1) in light of 2)

and do that with humility and open-mindedness so that you consider the best thinking available to you.

Make believability-weighted decision

Operate by principles

...that are so clearly laid out that their logic can easily by assessed and you andothers can see if you walk the talk. I write down my decision-making criteria whenever I made a decision, so I got in the habid of doing that.

With time, my collection of principles became like a collection of recipes for decision making.

Systemize your decision making

I discovered I could do that by expressing my decision-making criteria in the form of algorithms that I could embed into our computers.

The most important thing is that you develop your own principles and ideally write them down, especially if you are working with others.

I will give them to you in two books - Life and Work Principles in one book, and Economic and Investment Principles in the other.


PART I. WHERE I'M COMING FROM

Time is like a river that carries us forward into encounters with reality that require us to make decisions. We can't stop our movement down this rive and we can't avoid those encounters. We can only approach them in the best possilbe way.

As we get older, we begin to make our own choices. We choose what we are going after (our goals), and that influences our paths.

As we move toward these goals, we encounter problems, make mistakes, and run up against our own personal weaknesses. We learn about ourselves and about reality and make new decisions. It pays to think about how we make these decisions because they are what ultimately determine the quality of our lives.

Chapter 1. MY CALL TO ADVENTURE: 1949 - 1967

Born in 1949 and grew up in a middle-class Long Island neighborhood

Our DNA gives us our innate strengths and weaknesses. My most obvious weakness was my bad rote memory. I couldn't and still can't, remember acts that don't have reasons for being what they are, and I don't like following instructions. At the same time, I was very curious and loved to figure things out for myself, though that was less obvious at the time.

In my early years the psychology of the 1960s U.S was aspirational and inspirational - to achieve great and noble goals. It was like nothing I have seen since.

I built my investment library from Fortune's 500 comapnies annual reports. The stock market continues to climb. It would certainly go up, the common knowledge held, because managing the economy had developed into a science.

As a result, "dollar-cost averaging", was the strategy most people followed.

I have always been an independent thinker inclined to take risks in search of rewards - not just in the markets, but in most everything. I also feared boredom and mediocrity much more than I feared failure. For me, great is better than terrible, terrible is better than mediocre.

Chapter 2. CROSSING THE THRESHOLD: 1967 - 1979

In 1966 asset prices reflected investors' optimism about the future. But between 1967 and 1979, bad economic surprises led to big and unexpected price declines. Not jsut the economy and the markets but social sentiment deteriorated as well.

I gradually learned that prices reflect people's expectations, so they go up when actual results are better than expected and they go down when they are worse than expected. And most people tend to be biased by their recent experiences.

Learning to meditate helped too. Meditation has benefited me hugely throughout my life because it produces a calm open-mindedness that allows me to think more clearly and creatively.

Watching the news and the market move together, I began to see the whole picture and understand the cause-effect relationship betewen the two.

Over the decades since, I have repeatedly seen policymakers deliver such asurances immediately before currency devaluations, so I learned not to believe government policymakers when they assure you that they won't let a currency devaluation happen.

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.

Starting Bridgewater

Modeling Markets as Machines

Visualizing complex systems as machines, figuring out the cause-effect relationships within them, writing down the principles for dealing with them, and feeding them into a computer so the computer could "make decisions" all became standard practices.

Building The Business

While making money was good, having meaningful work and meaningful relationships was far better. Meaningful work is being on a mission I become engrossed in, and meaningful relationships are those I have with people I care deeply about and who care deeply about me.

In 1970s, I began sending my observations about the markets to clients via telex - "Daily Observations". Today, almost forty years and ten thousand publications later, our Daily Observations are read, reflected on, and argued about by clients and policymakers aroud the world.

In addition to providing clients with these observations and advice, I began to manage their exposures by buying and selling on their behalf.

Chapter 3. MY ABYSS: 1979 - 1982

From 1950 until 1980, debt, inflation, and growth moved up and down together in steadily larger waves, with each bigger than the one before, especially after the dollar's link to gold was broken in 1971.

In 1978-80 different markets began to move in union because they were more influenced by swings in money and credit grwoth than by changes in their individual supply-demand balances. These big moves were exacerbated by the oil shock that followed the fall of Shah of Iran.

Because all markets were being driven by these factors, I immersed myself in macroeconomics and historical data to improve my understanding of the machine at play.

The economy was in even worse shape in 1979-81 than it was during financial crisis of 2007-08 and the markets were move volatile. Some would say this was the most volatile period ever.

It was the most pivotal times in the last hundred years. The political pendulum throughout the world swung to the right, bringing Mragaret Thatcher, Ronald Reagan, and Helmut Kohl to power. "Liberal" had ceased to mean being in favor of progress and had come to mean "paying people not to work".

The worsening problem showed up in both progressively higher levels of inflation and progressively worse levls of economic activity. Debts continued to rise much faster than the incomes borrowers needed to repay them.

Because I believed that the choice was between acelerating inflation and delfationary depression, I was holding both gold (performs well in accelerating inflation) and bonds (perform well in deflationary depression).

At first the markets went against me. But my experience with silver and other trades had taught me that I had a chronic problem with timing, so I beleived I was just early.

As money poured out of these borrower countries and into the U.S., it changed everything. It drove the dollar up, which produced deflationary pressures in the U.S., which allowed the Fed to ease interest rates without raising inflation. This fueled a boom. The banks were protected both because the Fed loaned them cash and the creditors' committees and international financial resructuring organizations such as IMF arranged things so that the debtor nations could pay their debt service from new loans. Everyone could pretend everyting was fine and write down those loans over many years.

My experience over this period was like a series of blows to the head with a baseball bat. Being so wrong, and so publicly wrong, was incredibly humbling and cost me just about everything I had built at Bridgewater.

At one point, I'd lost much money I couldn't afford to pay the people who worked for me. One by one, I had to let them go. We went down to two employees - Colman and me. Then Colman had to go. Bridgewater was now down to just one employee: me. Losing people I cared so much about and very nearly losing my dream of working for myself was devastating. I had come to a fork in the road: should I put on a tie and take a job on Wall Street? That was not the life I wanted.

Find a Way Past My Intractable Investment Problem

Making money in the markets in tough. Bernard Baruch said "if you are ready to give up everyting else and study the whole history and background of the market and all pricipal 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."

The mistakes that led to crash seemed embarrassingly obvious. First, I had been wildly overconfident and had let my emotions get the better of me. I learned that no matter how much I knew and how hard I worked, I could never be certain enough to proclaim things I'd said on Wall Street Week: "there will be no soft landing. I can say that with absolute certainty, because I know how markets work."

Second, I again saw the value of studying history. I should have realized that debts denominated in one's own currency can be successfully restructured with the government's help, and when central banks simultaneously provide stimulus, inflation and deflation can be balanced against each other.

Third, I was reminded of how difficult it is to time markets. My long-term estimates of equilibrium levels were not reliable enough to bet on; too many things could happen between the time I placed my bets and the time that my estimates were reached.

Staring at these failings, I realized that if I was going to move forward without a high likelihood of getting whacked again, I would have to look at myself objectvely and change - starting by learning a better way of handling the natural aggressiveness I have always shown in going after what I wanted.

I learned a great fear of being wrong that shifted my mind-set from thinking "I'm wright" to asking myself "how do I know I'm right? The best way is by finding other independent thinkers who are on the same mission as me and who see things differently.

  1. Seek out the smartest people who disagreed with me so I could try to understand their reasoning
  2. Know when not to have an opinion
  3. Develop, test and systemize timeless and universal principles
  4. Balance risks in ways that keep the big upside while reducing the downside

This experience led me to build Bridgewater as an ideal meritocracy - no an autocracy. Bringing thse opposing opinions into the open and exploring them taught me a lot about how people think. I came to see that people's greatest weaknesses are the flip side of their greatest strengths. Typically, by doing what comes naturally to us, we fail to account for our weaknesses, which leads us to crash. What happens after we crash is most important. Successful people change in ways that allow them to continue ot take advantage of their strengths while compensating for their weaknesses and unsuccessful people don't.

I saw that to do exceptionaly well you have to push your limits and that, if you push your limits, you will crash and it will hurt a lot. You will think you have failed - but that won't be true unless you give up. Your pain will fade and you will have many other opportunities ahead of you.

But I needed to have both low risk and high returns, and by setting out on a mission to discover how I could, I learned to go slowly when faced with the choice between two things that you need that are seemingly at odds.

Chapter 4. MY ROAD OF TRIALS: 1983 - 1994

As I wrote in a Dec 1981 article, I believed that "theoretically...if there was a computer that could hold all of the world's facts and if it was perfectly programmed to mathematically exprss all of the relationships between all of the world's parts, the future could be perfectly foretold."

Between 1979 and 1982, I realized that what was most important wasn't knowing the future - it was knowing how to react appropriately to the information available at each point in time. In order to do that, I would have to have a vast store of econoimc and market data to draw on, and I did.

From very early on, whenever I took a position I wrote down the criteria I used to make my decision. Then when I closed out a trade, I could reflect on how well these criteria had worked. It occurred to me that if I wrote those criteria into formulas and then ran historical data through them, I could test how well my rules would have worked in the past.

We tested the systems going as far back as we could, typically more than a century, in every country we had data, which gave me great perspective on how the economic/market machine worked through time and how to bet on it. Doing this helped educate me and led me to refine my criteria so they were timeless and universal.

The result was Bridgewater's original interest rate, stock, currencies, and precious metals systems. Our system was like an EKG on the economy's vital signs, as they changed, we changed our positions.

While the computers was much better than our brains in many ways, it didn't have teh imagination, understanding, and logic that we did. In Jan 1987 a piece called "Making money vs. Making forecasts: "Truth be known, forecasts aren't worth very much, and most people who make them don't make money in the markets...one gets a wide array of possiblities with varing probabilities, or one highly porobable outcome... we beleive that market movements relfect economic movements. By studying the relationships between economic statistics and market movements, we've developed precise rules for identifying important shifts in the ecoomic/market environment and in turn our positions. Rather than forecasting changes in the economic environment and shifting positings in anticipation of them, we pick up these changes as they are occuring and move our money around to keep in those markets which perform best in that environment.

Today, as real-time data is released, our computers parse infomration from over 100 million datasets and give detailed instructions to other computers in ways that make logical sense to me. I am now developing similar systems to help us make management decisions. I believe one of hte most valuable things you can do to imporve your decision making is to think through your principles for making decisions, write them out in both words and computer algorithms, back-test them if possible, and use them on a real-time basis to run in parallel with your brain's decision making.

At that point, our business consisted of three main areas: consulting for fees, managing companies' risks for incentive fees, and selling research packages. For example, we would buid a plan to help a multinational company deal with the currency exposure it faced from operating in different countries.

I would break each company down into distinct logical components and then come up with a plan for managing each part, using a variety of financial tools, especially derivative instruments. The most important components to separate were the profits coming from the core business and those that were speculative p&l coming from price changes. We would do this to show them what a "risk-neutral" position would look like. I would advice them to deviate from this position only when they wanted to speculte, which they should only do in measured ways. This approach was eye-opening for most of the firms we worked with. It gave them clarity and control, and yielded them better results.

This approach to establishing a "risk-neutral" benchmark position and deviating from it with measured bets was the genesis of the sylte of investment management we would later call "alpha overlay", in which passive ("beta") and active ("alpha") exposures are separated. With alpha overlay, we were offering a way of making bets independent of undelrying market performance.

Unlike most people who work in the markets, I never had any desire to bulid investment products, especially conventional ones, just becasue they would sell well. All I wanted to trade the markets and build relationships, doing for our clients exactly what I would do if I were in their shoes. But I also loved building brand-new things, especially if they were great and revolutionary.

By mid 1980s, a ocuple of things were clear to me: 1) we were making good calls in the interest rate and currency markets, and the institutional investment managers who were buying our research were using it to making money, 2) we were successfully managing companies' interst rate and currency exposures. With those two things going as well as they were, I figured we could become successful institutional investment manager ourselves. The strategy we used for World Bank shifted between holding cash and holding twenty-year U.S. Treasury bonds, because these positions would give us leveraged bets on the direction of interest rates. We went on to become the top performing U.S. bond manager in the world.

Venturing Behind the "Closed Door" of China

The curiosity drew me to Beijing in 1984. This first trip, which I made with my wife and a few other people, began an incredibly rewarding 30+ year journey that has had a profound impact on my family and me.

There were no financial makrets in China at the time, eventually a small group put together by seven Chinese companies known as Securities Executive Education Councile began to develop them. They started in 1989. They operated out of a small hotel room and hardly had any financing.

In 1994 I set up a company called Bridgewater China Partners. I was convinced that China was poised to become the greatest economy in the world in the 21st century. I was setting up the first U.S. based private equity firm in China.

I launched the company by brining a small group of institutional investor clients, who together managed 70 billion in assets, to China for a visit. We agreed to move forward by setting up a jointly owned merchant bank in Beijing. I soon realized I had solely underestimated the complexity of the task we had set for ourselves and the amount of time it would take.

After about a year, I could see that running both Bridgewater and Bridgewater China Partners wasn't going to be possible, so I closed its doors. If you work hard and creatively, you can have just about anyting you want, but not everything you want.

Lee Kuan Yew, in 2015, rated Angela Merkel as the best leaders in the West and considered Vladimir Putin one of the best leaders worldwide. He explained that leaders must be judged within the context of the circumstances they encounter. He also reflected on his unique relationship with Deng Xiaoping, whom he regarded as the best leader of all.

I believe that all organizations basically have two types of people: those who work to be part of a mission, and those who work for a paycheck.

We used our indicators to catch shifting fundamentals and our technical trend-following filters to confirm that price movements were consistent with what the indicators were suggesting. Until then our systems had been compeletely discrete - we would flip from a fully long position to a fully short one when we crossed a predetermined threshold. But we weren't always equally confident in our views, and we'd also get killed paying transaction costs when we crossed back and forth. So at the end of the year, we moved to a more variable system that allowed us to size our best in relation to how confident we were.

The Next Foothold for Bridgewater

I tended to hire people just out of school who didn't have much expereine but were smart, determined, and committed to the mission of making the company great. I didn't value experience as much as character, creativity, and common sense.

We broke down Kodak's pension fund into its constituent parts to better understand the "machine". Our proposed solutions drew on the portoflio-engineering ideas that would later become core to Bridgewater's unique way of managing money.

Disvoering the "Holy Grail of Investing"

From my earlier failures, I knew that no matter how confident I was in making any one bet I could still be wrong - and that proper diversification was the key to reducing risks without reducing returns. If I could build a portfolio filled with high-quality return streams that were properly diversified, I could offer clients an overall portfolio return much more consistent and reliable than what they could get elsewhere.

Harry Markowitz's Nobel Prize winning model didn't tell you anything about the incremental effects of chaning any one of those variables, or how to handle being uncertain about those assumptions. I was terribly fearful about what would happen if my asumptions were wrong, so I wanted to understand diversification in a very simple way.

Build a model to show - how the volatility of a portfoio would decline and its quality (return relative to risk) would improve if I incrementally added investments with different correlations.

I saw that with fifteen to twenty good, uncorrelated return streams, I could dramatically reduce my risk without reducing my expected returns. I called it the "Holy Grail of Investing" because it showed the path to making a fortune.

The principle we'd discovered appiles equally well to all ways of trying to make money. Whether you own a hotel, run a technology company, or do anything else, your business produces a return stream. Having a few good uncorrelated return streams is better than having just one, and knowing how to combine return streams is even more effective than being able to choose good ones. Most investment managers didn't take advantage of this. They managed investment in a single asset class: equity managers managed equities, bond managers managed bonds, and so on. Their clients gave them money with the expectation that they would receive the overall return of the asset class plus some added returns from the bets managers took by over- and under-weighting particular assets. But individual assets within an asset class are generally about 60% corrleated with each other.

Thanks to my process of systmatically recording my investment principles, I had a large collection of uncorrelated retrun streams. In fact, I had a thing like a thousand of them.

The success of this approach taught me a principle that I apply to all parts of my life: Making a handful of good uncorrelated bets that are balanced and leveraged well is the surest way of having a lot of upside without being exposed to unacceptable downside.

Pure Alpha fund - because Pure Alpha didn't have any betas, it didn't have any bias to go up or down along with any market. Its returns depended only on how good we were in outperforming others.

Getting Our Killer System Out Into the world

Pure Alpha represented the best way we knew to actively manage money, but we also knew that if we wanted to manage a meaningful amouont of institutional money, we had to accept the reality that only a limiteed number of innovative clients would try the approach. In 1991, we had become the first currency overlay managers for institutional investors.

Chapter 5. THE ULTIMATE BOON: 1995 - 2010

In 1995, Bridgewater had grown to 42 employees and 4.1 billion under management.

Discovering Inflation-Indexed Bonds

David White asked me how I would engineer the Rockefeller foundation's portfolio to produce a return that was 5 percent above the U.S. inflation rate. I answered that portfolio of leveraged foreign inflation-indexed bonds with the currency hedged back to U.S. dollars should deliver exactly that. Thinking about this later, I realized that we could create an entirly new and radically different asset class. It would be uniquely effective because we could engineer it to have the same expected return as equities but with less risk and with a negative correlation with bonds and equities over long time frames. Before long, we became the first global inflation-indexed bond manager.

Discovering Risk Parity

I knew what drove asset returns, but I also knew that no matter what asset class one held, there would come a time when it would lose most of its value. This included cash, which is the worst over time as it loses value after adjusting for inflation and taxes. I had to create a mix of assets that could be good in all economic environments.

I knew which shifts in the economic environment casued asset classes to move around, and I knew that those relationships had remained essentially the same for hundreds of years. There were only two big forces to worry about: growth and inflation. Each could be either rising or falling, so I saw that by finding four different investment strategies, each for a particular environment. I could construct an asset-allocation mix that was balanced to do well over time while bing protected against unacceptable losses. I called it "All Weather Portfolio". It was another industry-shaping concept. It is now generically called "risk parity" investing.

Fleshing Out Principles

I had been much more explicit in writing down and sharing my work principles. The nubmer of principles started small and grew over time. In 2006, I prepared a rough list of about sixty Work Principles and distributed them to managers so that they could begin to evaluate them, debate and make sense of them. Over time, I encountered most everything there is to encounter in running a company, so I had a few hundred principles that covered most everything. That collection, like our investment principles, became a kind of decision making library.

To make sure this happened, I required that virtually all our meetings be recorded and make available to everyone, with extremely rare exceptions. All this openness led to some very frank discussions about who did what and why, and as a result we were able to deepen our understanding of our differnt ways of thinking. This was enlightening to all of us in showing how differntly people's brains worked.

Discovering Psychometric Testing

In 2006 I took MBTI assessment and found its description of my preferences to be remarkably accurate.

Making Bridgewater Rock-Solid and Cutting-Edge

The Financial and Economic Crisis of 2008

Back in early 2000s, we had included a 'depression gauge" in our systems that specified the actions we should take if a certain configuration of events began to play out in a way indicating a heightened risk of a debt crisis and depression. In 2007, this gauge indicated that a bubble of debt was nearing its bursting point because interest rates were so close to 0, I knew that central banks could not ease monetary policy enough to reverse the downturn the way they had in prior recessions. This was the exact configuration that had led to past depressions.

My fear of being wrong pushed me to seek out other smart folks to poke holes in my view. I also wanted to walk key policymakers through my thinking, both to stress test it and to make them aware of the situation as I saw.

Because everything we saw lined up and we couldn't find anyone who could refute our views, we prepared our clients' portfolios by balancing our positions in a way that there would be considerable upside and limited downside in the portfolios if we were right and putting in a backup plan in case we were wrong.

Our flagship fund made over 14 percent in 2008, when many other investors recorded losses of more than 30 percent.

Making Great Returns

We quickly discovered that if we just tweaked what we did and created a new fund that managed money the same way as Pure Alpha but invested it solely in the most liquid markets, our expected returns would be the same and the expected risk only slightly higher. We programmed this new approach into our computers, backtested it in all countries and time frames. As much as I love and have benefited form aritifical intelligence, I believe that only people can discoer such things and then program computers to do them. That's why I believe that right people, working with each other and with computers, are key to success.

Chapter 6. RETURNING THE BOON: 2011 - 2015

I was begining my transition from my second to my third phase. Both intellectually and emotionally, I was no longer as excited about being successful as I was excited about having the people I cared about for successful without me.

I spoke with proven shapers I knew - Bill Gates, Elon Musk, Reed Hastings, Muhamad Yunus, Geoffrey Canada, Jack Dorsey, David Kelley and more. They had all visualized remarkable concepts and built organizations to actualize them, and done that repeatedly and over long periods of time. It turns out they have a lot in common. They are all independent thinkers who do not let anything or anyone stand in the way of achieving their audacious goals. They have very strong mental maps of how things should be done, and at the same time a willingness to test those mental maps in the world of reality and change the ways they do things to make them work better. They are extremely resilient, because their need to achieve what they envision is stronger than the pain they experience as they struggle to achieve it. Perhaps most interesting, they have a wider range of vision than most people, all are able to see both big picutres and granula details and synthesize the perspectives they gain at those different levels, whereas most people see just one or the other. They are simultaneously creative, systematic, and practical. They are assertive and open-minded at the same time. Above all, they are passionate about what they are doing, intolerant of people who work for them who aren't excellent at what they do, and want to have a big, beneficial impact on the world.

As time passed, the European debtor countries fell into deeper depressions. This led Mario Draghi to make the bold decision to buy bonds in Sep 2012. This move averted the imminent debt crisis, saved the euro, and as it would turn out, made a lot of money for the ECB. But it failed to immediately stimulate credit and economic growth in the countries that were in depression. Inflation, were below target 2 percent and falling. The move toward quantitative easing appeared obvious and necessary to me so I visited Draghi to share my concerns. I told them why this approach would not be inflationary. I focused on how the economic machine works because I felt that if we could agree on that - most importantly, how buying bonds moves moeny through the system - we could agree on its impacts on inflation and economic growth.

A major impediment to this action was that there is no single bond market for the entire Eurozone, and the ECB, like most central banks, isn't supposed to favor one area/country over another.

The ECB would have to do what was best for Europe, which was to print the moeny and buy bonds in the way I had suggested. Draghi finally announced the move in Jan 2015. It had a great effect and created a precedent that would allow more QEs in the future if needed. The market reaction was very positive. On the day of Draghi's announcement, European equities were up a percent and a half, government bond yields fell across the major EU economies and euro fell 2 percent against dollar. These moves continued over the following months stimulating EU economies, supporting a pickup in growth, and reversing the decline in inflation.

The ECB's decison was obviously the right thing to do, for reasons that were relatively simple. But seeing how controversial its move was, it occurred to me that the world needed a simple explanation of how the economic machine works, they led me to make a 30 minute video - How The Economic Machine Works, released 2013. A number of policymakers told me in private that they found it helpful for their own understanding, for dealing with tehir constituents and for finding better paths forward.

A number of the policymakers I met were real heroes, meaning that they put others and the mission they comitted to above themselves. One of those heroes I have been fortunate enought to learn from and I hope, help is China's Wang Qishan, who has been a remarkable force for good for decades. In brief, Wang is a historian, a very high-level thinker, and a very practical man. I have rarely known a person to be both extremely wise and extremely practical. A leading shaper of the Chinese economy for decades who is also responsible for eliminating corruption, he is known to be a no-nonsense man who can be trusted to get stuff done.

Every time I go to China, we meet for 60 or 90 minutes. We talked about what's happening in the world, and how that relates to thousands of years of history and the never-changing nature of mankind. We discuss a wide range of other topics as well, ranging from physics to artifical intelligence. We are both keenly interested in how most everyting happens over and over again, the forces behind those patterns, and the principles that work and don't work in dealing with them.

I gave Wang a copy of Joseph Campbell's great book "The Hero With a Thousand Faces". I also gave him "The Lessons of History" by Will and Ariesl Curant, and "River Out of Eden" by Richard Dawkins. He gave me Georgi Plekhanov's "On the Role of the Individual in History". All these books showed how the same things happened over and over again throughout hisotry.

Most of the conversation with Wang are at the principle level, he sees the rhythm of history and puts the particulars we speak of in that context. "Unattainable goals appeal to heroes", he once told me. "Capable people are those who sit there worrying about the future. the unwise are those who worry about nothing. If conflicts got resolved before they became acute, there wouldn't be any heroes." His advice has helped me in my planning for Bridgewater's future. I asked him about checks and balances of power, he pointed to Julius Caesar's overthrow of the Roman Senate and Republic as an illustration of how important it is to make sure no one person is more powerful than the system.

Returning the Boon

Chapter 7. MY LAST YEAR AND MY GREATEST CHALLENGE: 2016 - 2017

Chapter 8. LOOKING BACK FROM A HIGHER LEVEL

With time and experience, I came to see each encounter as "another one of those" that I could approach more calmly and analytically, like a biologist might approach an encounter with a threatening creature in the jungle: first identifying its species and then, drawing on his prior knowledge about its epcted behaviors, reacting appropriately. When I was faced with types of situations I had encountered before, I drew on the principles I had learned for dealing with them. But when I ran into ones I hadn't seen before, I would be painfully surprised. Studying all those painful first-time encounters, I learned that even if they hadn't happened to me, most of them had happened to other people in other times and places, which gave me a healthy respect for history, a hunger to have a universal understanding of how reality works, and the desire to build timeless and universal principles for dealing with it.

Watching the same things happen again and again, I began see reality as a gorgeous perpetual motion machine, in which causes become effects that become causes of new effects, and so on. I came to understand that my encounters were tests of my character and creativity.

PRINCIPLES

Good principles are effective ways of dealing with reality. To learn my own, I spend a lot of time reflecting. So rathing than just giving you my principles, I will share the reflectiions behind them.

Look to the patterns of those things that affect you in order to understand the cause-effect relationships that drive them and to learn principles for dealing with them effectively.

Having good principles for dealing with the realities we encounter is the most important driver of how well we handle them. If you were to write down what types of encounters you have every time you have one and compile them in a list, it would probably total just a few hundred items and only a few of them would be unique to you.

Whatever success I have had is because of the principles I followed and not because of anything unique about me, so anyone following these principles can expect to produce broadly similar results.


PART II. LIFE PRINCIPLES

1. EMBRACE REALITY AND DEAL WITH IT

There is nothing more important than understanding how reality works and how to deal with it. The state of mind you bring to this process makes all the difference. I have found it helpful to think of my life as if it were a game in which each porblem I face is a puzzle I need to solve.

All sorts of emotions come to me while I am playing and those emotions can either help me or hurt me. If I can reconcile my emotions with my logic and only act when they are aligned, I make better decisions.

Learning how reality works, visualizing the things I want to create, and then building them out is incredibly exciting to me. I find it exhilarating being caught up in the feedback loop of rapid learning.

1.1 Be a hyperrealist

1.2 Truth - or more precisely, an accurate understanding of reality - is the essential foundation for any good outcome.

1.3 Be radically open-minded and radically transparent

Radical open-mindedness and radical transparency are invaluable for rapid learning and effective change.

Don't let fears of what others think of you stand in your way.

You must be willing to do things in the unique ways you think are best and to open-mindedly reflect on the feedback that comes invevitably as a result of being that way.

Embracing radical truth and radical transparency will bring more meaningful work and more meaningful relationships.

1.4 Look to nature to learn how reality works.

While our higher-level thinking makes us unique among species, it can also make us uniquely confused. Most people struggle to reconcile their emotions and their instincts with their reasoning. This struggle causes people to confuse what they want to be true with waht actually is true.

Don't get hung up on your views of how things should be because you will miss out on learning how they really are.

Evolution is the single greatest force in the universe, it is the only thing that is permanent and it drives everything.

1.5 Evolving is life's greatest accomplishment and its greatest reward

I personally believe there is a good chance man will begin to evole at an accelerating pace with the help of man-made technologies that can analyze vast amounts of data and "think" faster and better than we can. It will take us to evolve into a higher level species that will be much closer to omniscience than we are now.

The individual's incentives must be aligned with the groups goals.

Adaptation through rapid trial and error is invaluable. There are at least three kinds of learning that foster evolution: memory-based learning, subconscious learning, and learning that occurs without thinking at all, such as the changes in DNA that encode a species' adaptations.

Realize that you are simulatneously everthing and nothing and decide what you want to be.

What you will be depend on the perspective you have. Where you go in life will depend on how you see things and who and what you feel connected to.

For me personally, I now find it thrilling to embrace reality, to look down on myself through nature's perspective, and to be an infinitesimally small part of the whole. My instinctual and intellectual goal is simply to evolve and contribute to evolution in some tiny way hwile I'm here and while I am what I am.

1.6 Understand nature's practical lessons

Maximize your evolution. The thinkings are just the bait. Chasing after them forces us to evolve, and it is the evolution and not the rewards themselves that matters to us and to those aorund us. As Freud put it, "Love and Work are the cornerstones of our humanness".

The work doesn't have to be a job, it can be any kind of long-term challenge that leads to personal improvement. I believe that the need to have meaningful work is connected to man's innate desire to improve. And relationships are natural connections to others that make us relevant to each other and to society more broadly.

It is fundamental law of nature that in order to gain strength one has to push one's limits, which is painful. As Carl Jung put it, "Man needs difficulties. They are necessary for health". This is true whether we are talking about buiding the boday or mind (frustration, mental struggle, embarrassment, shame) and especially true when people confront the harsh reality of their own imperfections.

1.7 Pain + Reflection = Progress

There is no avoiding pain, especially if you are going after ambitious goals. Believe it or not, you are lucky to feel that kind of pain if you approach it correctly, because it is a signal that you need to find solutions so you can progress. If you can develop a relfexive reaction to psychic pain that causes you to refelct on it rather than avoid it, it will lead to your rapid leanring/evolving. If you choose to push through this often painful process of personal evolution, you will naturally ascend to higher and higher levels.

1.8 Weigh second and third-order consequences

1.9 Own your outcomes

Whatever circumstances life brings you, you will be more likely to succeed and find happiness if you take responsiblity for making your decisions well instead of complaining about things being beyond your control. Psychologists call this having an "internal locus of control" and studies consistently show that people who have it outperform those who don't.

1.10 Look at the machine from the higher level

Higher level thinking gives you the ability to study and influence the cause-effect relationships at play in your life and use them to get the outcomes you want.

Think of yourself as a machine opearting within a machine and know that you have the ability to alter your machines to produce better outcomes.

By comparing your outcomes with your goals, you can determine how to modify your machine.

Distinguish between you as the designer of your machine and you as a worker with your machine.

The biggest mistake most people make is to not see themselves and other objectively, which leads them to bump into their own and others' weaknesses again and again.

Successful people are those who can go above themselves to see things objectively and manage those things to shape change. They can take in the perspectives of others instead of being trapped in their own heads with their own biases.

If you are open-minded enough and determined, you can get virtually anything you want. Whatever your nature is, there are many paths that will suit you.

Don't confuse what you wish were true with what is really true. Don't worry about looking good - worry intead about achieving your goals. Don't overweight first-order consequences relative to second- and third-order ones. Don't let pain stand in the way of progress. Don't blame bad outcomes on anyone but yourself.

Don't Avoid facing "harsh realities" - Face "harsh realities" Don't Worry about appearing good - Worry about achieving the goal Don't Make your decisions on the basis of first-order consequences - Make your decision on the basis of first-, second- and third-order consequences Don't Allow pain to stand in the way of progress - Understand how to manage pain to produce progress Don't Not to hold yourself and others accountable - Hold yourself and others accountable

2. Use the 5-Step Process to Get What You Want Out of Life

  1. Have Clear Goals
  2. Identify and don't tolerate the problems that stand in the way of your achieving those goals
  3. Accurately dianose the problems to get at their root causes
  4. Design plans that will get you around them
  5. Do what's necessary to push these designs through to results

2.1 Have clear goals

a. Prioritize: while you can have virtually anyting your want, you can't have everything you want.

b. Don't confuse goals with desires

c. Decide what you really want in life by reconcilling your goals and your desires

d. Dont' mistake the trappings of success for success itself

e. Never rule out a goal because you think it's unattainable

f. Remember that great expectations create great capabilities

g. Almost nothing can stop you from succeeding if you have flexibility and self-accountabiity

h. Knowing how to deal well with your setback is as important as knowing how to move forward

2.2 Identify and don't tolerate problems

a. View painful problems as potential improvements that are screaming at you

b. Don't avoid confronting problems because they are rooted in harse realities that are unpleasant to look at

c. Be specific in indentifying your problems

d. Don't mistake a cause of a problem with the real problem

e. Distinguish big problems from small ones

f. Once you identify a problem, don't tolerate it

2.3 Diagnose problems to get at their root causes

a. Focus on teh "waht is" before deciding "what to do about it".

b. Distinguish proximate causes from root causes

c. Reconize that knowing what someone is like will tell you want you can expect from them

2.4 Design a Plan

a. Go back before you go forward

b. Think about your problme as a set of outcomes produced by a machine

c. Remember that there are typically many panths to achieve your goals

d. Think of your plan as being like a moving script in that you visualize who will do what through time

e. Write down your plan for everyone to see and to measure your progress against

f. Recognize that it doesn't take a lot of time to desing a good plan

2.5 Push through the completion

a. Great planners who don't execute their plans go nowhere

b. Good work habits are vastly underrated. People who push through successfully have to-do lists that are reasonably prioritized, and they make certain each item is ticked off in order.

c. Establish clear metrics to make certain that you are following your plan

2.6 Remember that weaknesses don't matter if you find solutions

a. Look at the patterns of your mistakes and identify at which step in the 5-step process you typically fail

b. Everyone has at least one bit thing that stands in the way of their success; find yours and deal with it

2.7 Understand your own and others' mental maps and humility

Some people are good at knowing what to do on their own; they have good mental maps. Maybe they acquired them from being taught, maybe they were blessed with an especially large dose of common sense. Humility can be even more valuable than having good mental maps if it leads you to seek out beter answers than you could come up with on your own. Having both open-mindedness and good mental maps is most powerful of all.

3. Be Radically Open-Minded

This is probably the most important chapter because it explains how to get around the two things standing in most people's way of getting what they want out of life. These barriers exist because of the way that our brains work, so nearly everyone encounters them.

3.1 Recognize your two barriers

The two biggest barriers to good decision making are your ego and your blind spot.

a. Understand your ego barrier. Referring to your subliminal defense mechanisms that make it hard for you to accept your mistakes and weaknesses. Your deep seated needs and fears - such as the need to survive and the fear of not surviving, the need to be important and the fear of not mattering - reside in primitive parts of your brain such as the amygdala, which are structures in your termporal lobe that process emotions. Because these areas of your brain are not accessible to your conscious awareness, it is virtually imposssible for you to understand what they want and how they control you. They oversimplify things and react instinctively. They crave praise and respond to criticism as an attack, even when the higher-level parts of the brain understand taht constructive criticism is good for you. They make you defensive, especially when it comes to the subject of how good you are.

At the same time, higher level consciousness resides in your neocortex, more specifically in the part called the prefrontal cortex. Thi sis hte most distinctively human feature of your brain; relative to teh rest of the brain, it is larger in humans. This is where you expereience the conscious awareness of decision making as well as the appication of logic and reasoning.

b. Your two "yous" fight to control you. The confilct is universal. For example, when someone gets "angry with himself" his prefrontal cortex is sparring with his amygdala. When your deep-seated hidden motivations are in control, it is impossible for you to logically explain what "you" are doing.

To be effective you must not let your need to be right be more important than your need to find out what's true. If you are too proud of what you know or of how good you are at something you will learn less, make inferior decisions, and fall short of your potential.

c. Understand your blind spot barrier. Areas where your way of thinking prevents you from seeing things accurately. Naturally people can't appreciate what they can't see.

Differences in thinking can be symbiotic and compementary instead of disruptive. For example, lateral apporach common among creative poeple can lead them to be unreliable, while linear thinkers are often more dependable, some people are more emotional while others are more logical, etc.

3.2 Practice radical open-mindedness

Radical open-mindedness is motivated by the genuine worry that you might not be seeing your choice optimaly. It is the ability to effectively explore differnt points of view and differnt possiblities without letting your ego or your blind spots get in your way. It requires you to replace your attachment to always being right with the joy of learning what's true. Radical open-mindedness allows you to escape from the control of your lower-level you and ensures your upper-level you sees and considers all the good choices are makes the best possible dicisions.

a. Sincerely believe that you might not know the best possible path and recognize that your abiilty to deal well with "not knowing" is more important than whatever it is you do know.

b. Recognize that decision making is a two-step process: take in all relevant infomration, then decide.

c. Don't worry about looking good, worry about achieving your goal.

d. Realize that you can't put out without taking in.

e. Recognize that to gain the perspective that comes from seeing things through another's eyes, you must suspend judgment for a time.

f. Remember that you are looking for the best answer, not simply the best answer that you can come up with yourself.

g. Be clear on whether you are arguing or seeking to understand and think about which is most appropriate based on your and others' belieavability.

3.3 Appreciate the art of thoughtful disagreement

In thoughtful disagreement, your goal is not to convince the other party that you are right - it is to find out which view is true and decide what to do about it. Both parties are motivated by the genuine fear of missing important perspectives.

To do this well, apporach the conversation in away that conveys that you are just tyring to understand. Use questions rather than make statements. Conduct the discussoin in a calm and dispassionate manner, and encourage the other person to do that as well.

3.4 Triangulate your view with believeable people who are willing to disagree

3.5 Recognize the signs of closed-mindedness and open-mindedness that you should watch out for

Closed-minded people:

  • don't want their ideas challenged
  • are more likely to make statements than ask questions
  • focus much more on being understood than on understanding others
  • say things like "I could be wrong... but here is my opinion"
  • block others from speaking
  • have trouble holding two thoughts simulatneously in their minds
  • lack a deep sense of humility

Open-minded people:

  • are more curious about why there is disagreement
  • genuinely believe they could be wrong
  • always feel compelled to see things through others' eyes
  • knwo when to make statements and when to ask questions
  • are always more interested in listening than in speaking
  • can take in the thoughts of others without losing their ability to think well - they can hold two or more conflicting concepts in their mind and go back and forth between them to assess
  • approach everything with a deep seated fear that they may be wrong

3.6 Understand how you can become radically open-minded

a. Regularly use pain as your guide forward quality reflection. Mental pain often comes from being too attached to an idea when a person or an event comes along to challeng it.

b. Make being open-minded a habit. The life you will live is most simply the result of habits you develop. If you consistently use feelings of anger/frustration as cues to calm down, slow down and approach the subject at hand thoughtfully, over time you will expereince negative emotions much less frequently and go directly to the open-minded practices.

c. Get to know your blind spots.

d. If a number of different believable people say you are doing something wrong and you are the only one who doesn't see it that way, assume that you are probably biased

e. Medidate. I practice Transcendental Meditation and believe that it has enhanced my open-mindedness, higher level perspective, equanimity and creativity. It helps slow things down so that I can act calmly even in hte face of chaos.

f. Be evidence-based and encourage others to be the same

g. Do everything in your power to help othes also be open-minded

h. Use evidence-based decision makeing tools

i. Know when it's best to stop fighting and have faith in your decision making process

4. Understand That People Are Wired Very Differently

I discovered that though it is obvious to all of us that we are born with different strengths and weaknesses in areas such as common sense, creativity, memory, synthesis, attention to detail and so forth, examining these differences objectvely makes even more scientists uncomfortable. As a result I have learned a lot that helped me and that I believe can help you. In fact, I attribute as much of my success to what I have learned abou thte brain as I do to my understanding of economics and investing.

Why I turned to Neuroscience

I wanted to work with independent thinkers who were creative, conceptual and had lot of common sense.

But I had a hard time finding those sorts of people and even when I didn, I was shocked at how differenetly their brains seemed to work. It was as though we were spkeaing different languages.

Conceptual people who visualized what should be done in vague ways expected more literal people to figure out for themsevles how to do it.

4.1 Understand the power that comes from knowing how you and other are wired

Eventually I found Dr. Bob Eichinger, who opened the world of psychometric testing to me. Using Myers-Briggs and other assessments, we evolved a much clearer and more data-driven way of understanding our differnt types of thinking.

Our differences weren't a product of poor communication, it was the other way around. Our different ways of thinking led to our poor communications.

I learned that many of our mental differences are physiological. Our brains are innately different in ways that set the parameters of what we are able to do mentally.

Once I understood that it's all physiological, many things became clearer to me.

a. We are born with attributes that can both help us and hurt us, depending on their application

4.2 Meaningful work and meaningful relationships aren't just nice things we chose for ourselves - they are genetically programmed into us

Leonard Mlodinow, in his book "subliminal" writes, "we usually assume that what distinguishes us is IQ. But it is our social IQ that ought to be the principal quality that differentiaes us". He points out that humans have a unique ability to understand what other people are like and how they are likely to behave.

A few years ago, I had a conversation with the Dalai Lama in which I explained to him the contemporary neuroscience view that all of our thinking and feeling is due to physiology. This implied that spirituality is due to these physiological mechanics rather than something coming from the above, so I asked hime what he thought about that. Without hesitation, he responded "absolutely" and told me that the next day he was meeting with the University of Wisconsin profession of neuroscience who had helped me learn about this. His view was that prayer and mediation seemed to have similar effects on the brain in producing feelings of spirituality (the rising above oneself to feel a greater connection to the whole) but that each realigion adds its own different superstitions on top of that common feeling of spirituality.

4.3 Understand the great brain battles and how to control them to get what "you" want

a. Realize that the conscious mind is in a battle with the subconscious mind. When thoughts and instructions come to me from my subconscious, rather than acting on them immediately, I have gotten into the habit of examing them with my conscious, logical mind.

b. Know that the most constant struggle is between feeling and thinking. There are no greater battles than those between our feelings and our rational thinking. It's important to reconcile what you get from your subconscious with what you get from your conscious mind. That demand amygdala. It controls your behavior. When something upsets us, the amygdala sends notice ot our bodies to prepare to fight or flee: the heartbeat speeds up, the blod pressure rises, and breathing quickens.

c. Reconcile your feeling and your thinking.

d. Choose your habits well. Habit is probably the most powerful tool in your brain's toolbox. It is driven by basal ganglia at the base of cerebrum. It is so deep-seated and instinctual that we are not conscious of it, though it controls our actions. If you do just about anything frequently enough over time, you will form a habit that will control you. Good habits are those that get you go do what your uppder-level you wants, and bad habits are those that are controlled by your lower-level you and stand in the way of your getting what your upper-level you wants. You can create a better set of habits if you understand how this part of your brain works. Developing this skill takes some work. Habit is essentially inertia. Research suggests that if you stick with a behavior for approximately eighteen months, you will buld a strong tendency to stick to it nearly forever. "The power of habit" - Duhigg's core idea is the role of three-step "habit loop". The first step is a cue - some trigger that tells your brain to go into automatic mode and which habit to use; step two is teh routine, which can be physical or mental or emotional; finally there is a reward, which helps your brain figure out if this particular loop is worth remembering for the ruture. Repetition reinforces this loop unitl over time it becomes automatic. If you really want to change, the best thing you can do is choose which habits to acquire and which to get rid of and then go about doing that. The most valuable habit I have acquired is using pain to trigger quality reflections.

e. Train your lower-level you with kindness and persistence to build the right habits.

f. Understand the differences between right-brained and left-brained thinking.

g. Understand how much the brain can and cannot change. Brain plasticity is what allows your brain to change its softwiring. The best way to change is through doing mental exercises.

4.4 Find out what you and others are like

Psychometric assessments are much more reliable. The four main assessments we use are the Myers-Brigs Type Indicator (MBTI), the workplace personality inventory, the team dimensions profile, and stratified systems theory.

a. Introversion vs extroversion. Introverts focus on the inner world and get their energy from ideas, memories, and experiences while extroverts are externally focused and get their energy from being with people. Introverts often prefer communicating in writing rather than speaking in group settings and tend to be less open with their critical thoughts.

b. Intuiting vs sensing. Some people see big pictures and others see details.

c. Thinking vs. feeling.

d. Planning vs perceiving. Some people like to live in a planned orderly way and others prefer flexibiity and spontaneity.

e. Creators vs refiners vs advancers vs executors vs flexors. Creators generate new ideas and original concept. They prefer unstructured and abstract activities and thrive on innovation and unconventional practices. Advancers communicate these new ideas and carry them forward. They relish feelings and relationships and manage the human factors. They are excellent at generating enthusiasm for work. Refiners challenge ideas. Thye analyze projects for flaws, then refine them with focus on objectivity and analysis. They lover facts and theories and working with sysmteatic approach. Executors can also be thought of Implementers. They ensure that important activies are carried out and goals accoumplished, they are focused on details and the bottome line. Flexors are a combination of all foudn types. They ca dapt their styles to fit certain needs and are able to look at a problme from a variety of perspectives.

f. Focusing on tasks vs. focusing on goals.

g. Workplace personality inventory.

We have found that something like twenty-five to fifty attributes can pretty well describe what a person is. Each one comes in varying degrees of strength.

h. Shapers are peolpe who can go from visualization to actualization.

4.5 Getting the right people in the right roles in support of your goal is the key to succeeding at whatever you choose to accomplish

a. Manage yourself and orchestrate others to get what you want

5. Learn How to Make Decisions Effectively

5.1 Recognize that

1) the biggest threat to good decision making is harmful emotions, and

2) decision making is a two step process (learning and deciding)

5.2 Synthesize the situation at hand

5.5 Logic, reason and common sense are your best tools for synthesizing reality and understanding what to do about it

5.6 Make your decisions as expected value calculations

a. Raising the probability of being right is valuable no matter what your probability of being right already is.

b. Knowing when not to bet is as important as knowing what best are porbably worth making.

c. The best choices are the ones that have more pros than cons, not those that don't have any cons at all.

5.8 Simplify

5.9 Use Principles

5.11 Convert your principles to algorithms and have the computer make decisions alongside you

5.12 Be cautious about trusting AI without having deep understanding

Expert systems are what we use at Bridgewater, where designers specify criteria based on their logical understandings of a set of cause-effect relationships and then see how differnt scenarios would emerge udner different circumstances.

The main thrust of machine learning in recent years has gone in the direction of data mining, in which powerful computers ingest massive amounts of data and look for patterns. It's risky in cases when the future might be differnt from the past. Investment systems built on machine learning that is not accompanied by deep understanding are dangerous because when some decision rule is widely beleived, it becomes widely used, which affects the price. In other words, the value of awidely known insight disappears over time.

Remember that computers have no common sense. A lot of people vest tehir blind faith in machine learning because they find it much easier than developing deep understanding. For me, that deep understanding is essential, especially for what I do.

Given enough computing oppwer, all possible variables can be taken into consideration.

LIFE PRINCIPLES: PUTTING IT ALL TOGETHER

Embrace reality and deal with it well.

5-step process for getting what you want.

radically open-minded.

understand that people are wired very differently.


PART III. WORK PRINCIPLES

For any group or organization to function well, its work principles must be aligned with its members' life principles.

An organizatin is a machine consisting of two major parts: culture and people.

a. A great organization has both great people and great culture.

b. Great people have both great character and great capabiities.

c. Great cultures bring problems and disagreements to the surface and solve them well.

Tough love is effective for achieving both great work and great relationships

a. In order to be great, one can't compromise the uncompromisable. Money is a byproduct of excellence, not a goal. Our overriding objective is excellence and constant improvement at Bridgewater. To be clear, it is not to make lots of money. The natural extension of this is not that you should be happy wiht little money. On the contrary - you should expect to make a lot.

A believability-weighted idea meritocracy is the best system for making effective decisions

Radical truth and radical transparency

Idea Meritocracy = Radical Truth + Radical Transparency + Believability-Weighted Decision Making

  1. We went from one independent thinker who wanted to achieve audacious goals to a group of independent thinkers who wanted to achieve audacious goals
  2. To enable these independent thinkers to have effective collective decisionmaking, we created an idea meritocracy based on principles that ensured we would be radicaly honest and transparent with each other, have thoughtful disagreements, and have idea-meritocratic ways of getting past our disagreemnets to make dicisions
  3. We recorded these decision-making principles on paper and later encoded them into computers and made our decisions based on them
  4. This produced our successes and failures, which produced more learnings, which were written into more principles that were systemized and acted upon
  5. This process resulted in excellent work and excellent relatinoshps that led us to having well-rewarded and happy empoloyees and clients
  6. That led us to be able to bring in more audacious independent thinkers wiht more audacious goals to strenghten this elf-reinforcing upward spiral

Make your passion and your work one and the same and do it with people you want to be with

Work is either 1) a job you do to earn the money to pay for the life you want to have or @) what you do to achieve your mission, or some mix of the two. I urge you to make it as much as 2) as possible, recognizing the value of 1).

Work principles is written for those for whom work is primarily the game that you play to follow your passion and achieve your mission.

TO GET THE CULTURE RIGHT...

You have to work in a culture that suits you. That's fundamental to your happiness and your effectiveness.

1. Trust in Radical Truth and Radical Transparency

Understanding what is true is essential for success, and being radically transparent about everything, inlcuding mistakes and weaknesses, helps create the understanding that leads to improvements.

Radical truth and radical transparency are fundamental to having a real idea meritocracy.

While concealing the truth might make people happier in the short run, it won't make them smarter or more trusting in the long run. As Winston Churchill said, "there is no worse course in leadership than to hold out false hopes soon to be swept away."

1.1 Realize that you have nothing to fear from knowing the truth

1.2 Have integrity and demand it from others

a. Never say anything about someone that you wouldn't say to them directly and don't try people without accusing them to their faces. Managers should not talk about people who work for them if they are not in the room.

b. Don't let loyalty to people stand in the way of truth and the well-being of the organization.

1.3 Create an environment in which everyone has the right to understand what makes sense and no one has the right to hold a critical opinion without speaking up

a. Speak up, own it, or get out

b. Be extremely open

c. Don't be naive about dishonesty

1.4 Be radically transparent

Radical transparency isn't the same as total transparency.

1.5 Meaningful relatinoships and meaningful work are mutually reinforcing, especially when supported by radical truth and radical transparency

2. Cultivate Meaningful Work and Meaningful Relationships

To me, a meaningful relatinoship is one in which people care enough about each other to be there whenever someone needs support and d=they enjoy each other's company so much that they can have great times together both insdie and outside of work.

2.1 Be loyal to the common mission and not to anyone who is not operating consistenly with it

2.2 Be crystal clear on what the deal is

2.3 Recognize that the size of the organization can pose a threat to meaningful relationships

2.4 Remember that most people will pretend to operate in your interest while operting in their own

2.5 Treasure honorable people who are capable and will treat you well even when you're not looking

3. Create a Cultrure in Which It Is Okay to Make Mistakes and Unacceptable Not to Learn from Them

3.1 Recognize that mistakes are a natural part of the evolutionary process

3.2 Don't worry about looking good - worry about achieving your goals

3.3 Observe the patterns of mistakes to see if they are products of weaknesses

3.4 Remember to reflect when you experience pain

3.5 Know what types of mistakes are acceptable and what types are unacceptable, and don't allow the people who work for you to make the unacceptable ones

4. Get and Stay in Sync

4.1 Recognize that conflicts are essential for great relationships

4.2 Know how to get in sync and disagree well

4.3 Be open-minded and assertive at the same time

4.4 It's your meeting to run, manage the conversation

a. Make it clear who is directing the meeting and whom it is meant to serve

b. Be precise in what you are talking about to avoid confusion

c. Make clear what types of communication you are going to have in light of hte objectives and priorities

d. Lead the discussion by being asertive and open-minded

e. Navigate between the different levels of the conversation

f. Watch out for "topic slip"

g. Enforce the logic of conversations

h. Be careful not to lose personal responsiblity via group decision making

i. Utilize the two-minute rule to avoid persisten interruption

j. Watch out for assertive "fast talkers"

k. Achieve completion in conversations

l. Leverage your communication

4.5 Great collaboration feels like playing jazz

4.6 When you have alignment, cherish it

4.7 If you find you can't reconcile major differences - especially in values - consider whether the relationship is worth preserving

A lack of common values will lead to a lot of pain and other harmful consequences and may ultimately drive you apart. It might be better to head all that off as soon as you see it coming.

5. Believability Weight Your Decision Making

It is far better to weight the opinions of more capable decision makers more heavily than those of less capable decison makers. The most believable opinions are those of people who 1) have repeatedly and successfully accomplished the thing in question, and 2) have demonstrated that they can logically explain the cause-effect relationships behind their conclusions.

At Bridgewater everyone's belivability is tracked and measured systematically, using tools such as Baseball Cards nd Dot Collector that actively record and weigh their experience and track records.

5.1 Recognize that having an effective idea meritocracy requires that you understand the merit of each person's ideas

5.2 Find the most believable people possible who disagree with you and try to understand their reasoning

5.3 Think about whether you are playing the role of a teacher, a student, or a peer...

5.4 Understand how people came by their opinions

5.5 Disagree must be done efficiently

5.6 Recognize that everyone has the right and resonsiblity to try to make sense of important things

5.7 Pay more attention to whether the decision making system is fair than whether you get your way

6. Recognize How to Get Beyond Disagreements

At Bridgewater, our princiles and policies work in essentially the same way as legal system, providing a path for settling disputes that's not unlike what you'd find in courts. Having such a system is essential in an idea meritocracy, because you can't just encourage people to think independently and fight for what they believe is true.

In the end, people who join our idea meritocracy agree to abide by our policies and procedures and the decisions that come out of them, just as if they had taken a dispute to court and had to abide by its procedures and the resulting verdict.

6.1 Principles can't be ignored by mutual agreement

The same standards of behavior apply to everyone

6.2 Make sure people don't confuse the right to complain, give advice, and openly debate with the right to make decisions

6.3 Don't leave important conflicts unresolved

6.4 Once a decision is made, everyone should get behind it even though individuals may still disagree

Never allow the idea meritocracy to slip into anarchy. Don't allow lynch mobs or mob rule.

6.5 Remember that if the idea meritocracy comes into conflict with the well-being of the organization, it will inevitably suffer

Be wary of people who argue for the suspension of the idea meritocracy for the "good of the organization"

6.6 Recognize that if the people who have the power don't want to operate by principles, the principled way of operating will fail

Ultimately, power will rule. This is true of any system. For example, it has repeatedly been shown that systems of goernment have only worked when those with the power value the principles behind the system more than they value their own personal objectives. When people have both enough power to undermine a system and a desire to get waht they want that is greater than their desire to maintain the system, the systme will fail.

TO GET THE PEOPLE RIGTH

7. Remember That the WHO Is More Important than the WHAT

"Hire someone better than you".

7.1 Recognize that the most important decision for you to make is who you choose as your responsible parties

8. Hire Right, Because the Penalties for Hiring Wrong Are Huge

During hiring, the questions we asked our candidates, unlike the questions on a scientifically constructed personality test, were unlikely to elicit answers truly indictive of what they were like.

Those of us who were linear thinkers tended to hire linear thinkers, same for lateral thinkers. As a result, we continued to make a lot of bad hires.

Improve our hiring results in 2 ways: 1) by always being crisp and clear on exactly what kind of person we were looking for, and 2) by developing our vocabulary for the means of evaluating people's abilities at a much more granular level.

At a high level, we look for peolpe who think independently, argue open-mindedly and assertively, and above all else value the intense pursuit of truth and ecellence.

8.1 Match the person to the design

Start by creating a spec sheet so that there will be a consisten set of criterai that can be applied from recruiting through performance reviews. Don't design jobs to fit people.

a. Think through which values, abilities and skills you are looking for. It's improtant for you to know what mix of qualities is important to fit each rol and what values and abilities are required in people with whom you can have successful relationship.

b. Make finding the right people systematic and scientific.

c. Hear the click: find hte right fit between the role and the person

d. Look for people who sparkle, not just any ol one of those

e. Don't use your pull to get someone a job

8.2 Remember that people are built very differently and that differnt ways of seeing and thinking make people suitable for different jobs

a. Undrstand how to use and interpret personality assessment

b. Remember that people tend to pick people like themselves, so choose interviewers who can identify what you are looking for

c. Look for people who are willing to look at themselves objectively

d. Remember that people typically don't change all that much

8.3 Think of your teams the way that sports managers do: No one person possesses everything required to produce success, yet everyone must excel

8.4 Pay attention to people's track records

8.5 Don't hire people just to fit the first job they will do, hire peolpe you want to share your life with

8.6 When considering compensation, provide both stability and opportunity

You want people to be motivated to perform so they can realize their dreams.

a. Pay for the person, not the job. Never pay based on the job title alone.

b. Have performance metrics tied at least loosely to compensation

c. Pay north of fair

d. Focus more on making the pie bigger than on exactly how to slice it so that you or anyone else gets the biggest piece

8.7 Remeber that in great partnerships, consideration and generosity are more improtant than money

8.8 Great people are hard to find so make sure you think about how to keep them

When you know what someone is like, you know what you can expect from them.

9. Constantly Train, Test, Evaluate, and Sort People

Helping people acquire skills is easy. Improvements in abilities are more difficult but essential to expanding what a person can be responsible for over time. And changing someone's value is something you should never count on.

9.1 Understand that you and the people you manage will go through a process of personal evoluation

9.2 Provide constant feedback

9.3 Evaluate accurately, not kindly

9.4 Recognize that tough love is both the hardest and the most important type of love to give

9.5 Don't hide your observations about people

a. Build your synthesis from the specifics up

b. Squeeze the dots

c. Don't oversqueeze a dot

d. Use evaluation tools such as performance surveys, metrics and formal reviews to document all aspects of a person's performance

9.6 Make the process of learning what someone is like open, evolutionary, and iterative

9.7 Knowing how people operate and being able to judge whehter that way of operating will lead to good results is more improtant than knowing what they did

9.8 Recognize that when you are really in sync with someone about their weaknesses, the weaknesses are probably true

a. when judging people, remember that you don't have to get to the point of "beyond a shadow of a doubt".

b. It should take you no more than a year to learn what a person is like and whether they are a click for their job

c. Continue assessing people throughout their tenure

d. Evaluate employees with the same rigor as you evaluate job condidates

9.9 Train, gaurdrail, or remove people, don't rehabilitate them

9.10 Remember that the goal of a transfer is the best, highest use of the person in a way that benefits the community as a whole

9.11 Don't lower the bar

TO BUILD AND EVOLVE YOUR MACHINE...

The successful people get above the blizzard so they can see the causes and effects at play. This higher-level perspective allows them to see themselves and others objectively as a machine.

10. Manage as Someone Operating a Machine to Achieve a Goal

No matter what work you do, at a high level you are simply setting goals and bulding machines to help you achieve them.

I built the machine that is Bridgewater by constantly comparing its actual outcomes to my mental map of the outcomes that it should be producing, and finding ways to improve it.

10.1 Look down on your machine and yourself within it from the higher level

a. Constantly compare your outcomes to your goals

b. Understand that a great manager is essentially an organizational engieer Great maangers are not philosophers, entertainers, doers, or artists. They are engineers. They create process-flow diagrams to show how the machine works and to evaluate its design. They build metrics to light up how well each of the individual parts of the machine and the machine as a whole are working. They do this systematically, always keeping the cause-effect in mind.

The higher up you are in an organization, the more important vision and creativity become, but you still must have the skills required to manage/orchestrate well.

c. Build great metrics

d. Beware of paying too much attention to what is coming at you and not enough attention to your machine

e. Don't get distracted by shiny objects

10.2 Remember that for every case you deal with, your approach should have two purposes

1) to move you closer to your goal 2) to train and test your machine (your people and your design)

a. Everything is a case study

b. When a problem occurs, conduct the discusson at two levels: 1) hte machine level (why that outcome was produced) 2) the case-at-hand level (what to do about it)

c. when making rules, explain the principles behind them

d. Your policies should be natural extensions of your principles

e. While good principles and poilcies almost always provide good guidance, remmeber that there are exceptions to every rule

10.3 Understand the differences between managing, micromanaging, and not managing

10.4 Know what your people are like and what makes them tick, because your people are your most important resouce

10.5 Clearly assign responsiblities

10.6 Probe deep and hard to learn waht you can expect from your machine

10.7 Think like an ower, and expect the people you work with to do the same

10.8 Recognize and deal with key-man risk

Every key person should have at least one person who can replace him or her. It's best to have those people designated as likely successors and to have them apprentice and help in doing those jobs.

10.9 Don't treat everyone the same - treat them appropriately

a. Don't let yourself get squeezed Plenty of people have threatened me over the years by saying they'd quit, bring a lawsuit, embarass me in the press. While some people have advised me that it's easier to just make such things go away, I've found doing that is almost always shortsighted. Giving in not only compromises your values, it telegraphs that the rules of hte game have changed and opens you up to more of the same. Fighting for what's right can be hard in the short term. But I'm willing to take the punch. What I worry about is the right thing and not about what people think about me.

b. Care about the people who work for you

10.10 Know that great leadership is generally not waht it's made out to be

a. Be weak and strong at the same time

b. Don't worry about whether or not your people like you and don't look to them to tell you what you should do

c. Don't give orders and try to be followed; try to be understood and to understand others by getting in sync

10.11 Hold yourself and your people accountable and appreciate them for holding you accountable

10.12 Communicate the plan clearly and have clear metrics conveying whehter you are progressiong accroding to it

10.13 Escalte when you can't adequately handle your responsibilities

11. Perceive and Don't Tolerate Problems

Every problem you find is an opportunity to improve your machine. Identifying and not tolerating problems is one of the most important and disliked things people can do.

11.1 If you are not worried, you need to worry - and if you are worried, you don't need to worry

11.2 Design and oversee and machine to perceive whether things are good enough or not good enough or do it yourself

11.3 Be very specific about problems; don't start with generalizations

a. Avoid the anonymous "we" and "they", because they mask personal responsibility

11.4 Don't be afraid to fix the difficult things

12. Diagnose Problems to Get at Their Root Causes

The most common mistake I see people make is dealing with their problems as one-offs rather than using them to diagnose how their machine is working so that they can imporve it.

The second most common mistake is to depersonalize the diagnosis. Not connecting problems to the people who failed and not examing what it is about them that caused the failure will not lead to imporovements of the individuals or the machines.

The third is to not connect what one is learning in one diagnosis to what was learned in prior ones.

12.1 To diagnose well, ask the following questions:

1) Is the outcome good or bad?

2) Who is responsible for the outcome?

3) If the outcome is bad, is the Responsible Party incapable and/or is the design bad?

12.2 Maintain an emerging synthesis by diagnosing continuously

12.3 Keep in mind that diagnoses should produce outcomes

12.4 Use the following "drill-down" techniques to gain an 80/20 understanding of a department or sub-depaertment that is having problems

1) list the problems

2) identify the root causes

3) create a plan

4) execute the plan

12.5 Understand that diagnosis is foundational to both progress and quality relationships

13. Design Improvements to Your Machine to Get Around Your Problems

13.1 Build your machine

13.2 Systemize your principles and how thye will be implemented

13.3 Remember that a good plan should resemble a movie script

13.4 Recognize that design is an iterative process. Between a bad "now" and good "then" is a "working through it" period

13.5 Build the organization aorund goals rather that tasks

13.6 Create an organizational chart to look like a pyramid, with straight lines down that don't cross

13.7 Create guardrails when needed - and remember it's better not to guardrail at all

13.8 Keep your strategic vision the same while making appropriate tactical changes as circumstances dictate

13.9 Have good controls so that you are not exposed to the dishonesty of others

a. Investigate and let people know that you are going to investigate

b. Remember that there is no sense in having laws unless you have policeman (auditors)

c. Beware of rubber-stamping

d. Recognize that people who make purchases on your behalf probably will not spend your money wisely

e. Use "public hangings" to defer bad behavior Make sure everybody sees the consequences.

13.10 Have the clearest possible reporting lines and delineations of responsibilities

13.11 Remember that almost everything will take more time and cost more money than you expect

14. Do What You Set Out to Do

14.1 Work for goals that you and your organization are excited about

14.2 Recognize that everyone has too much to do

14.3 Use checklists

14.4 Allow time for rest and renovation

14.5 Ring the bell

15. Use Tools and Protocols to Shape How Work Is Done

15.1 Having systemized principles embedded in tools is especially valuale for an idea meritocracy

a. To produce real behavioral change, understand that there must be internalized or habituated learning

b. Use tools to collect data and process it into conclusions and actions

c. Foster an environment of confidence and fairness by having clearly-stated principles that are implemented in tools and protocols so that the conclusions reached can be assessed by tracking the logic and data behind them

16. And for Heaven's Sake, Don't Overlook Governance!

Governance is hte oversight system thta removes the peole and hte processes if they aren't working well. It is the process that checks and balances power to assure that the principles and interest of the community as a whole are always placed above the interests and power of any indivdual or faction. Because power will rule, power must be put in the hands of capable people in key roles who have the right values, do their jobs well, and will check and balance the power of others.

16.1 To be successful, all organizations must have checks and balances

a. Even in an idea meritocracy, merit cannot be the only determining factor in assigning resopnsbility and authority

b. Make sure that no one is more powerful than the system or so importnat that they are irreplaceable

c. Beware of fiefdoms

d. Make clear that the organization's structure and rules are designed to ensure that is checks-and-balances system functions well

e. Make sure reporting lines are clear

f. Make sure decision rights are clear

g. Make sure that hte people doing the assessing 1) have the time to be fully informed about how the person they are checking on is doing, 2) have the ability to make the assessment, and 3) are not in a conflict of interest that stands in the way of carrying out oversight effectively

16.2 Remember that in an idea meritocracy a single CEO is not as good as a great group of leaders

16.3 No governance system of principles, rules, and checks and balances can substitute for a great partnership

We work with others go get three things:

1) Leverage to accomplish our chosen missions in bigger and better ways than we could alone

2) Quality relationships that together makes for a great community

3) Money that allows us to buy waht we need and want for ourselves and others

WORK PRINCIPLES: PUTTING IT ALL TOGETHER

CONCLUSION

My goal is to pass along the principles that worked well for me.

I of course hope that they will help you visualize your own audacious goals, navigate through your painful mistakes, have quality reflections and ocme up with good principles of your own that you will systematically follow to produce outcomes that vastly exceed your expectations.

TOOLS AND PROTOCOLS FOR BRIDGEWATER'S IDEA MERITOCRACY

COACH

DOT COLLECTOR

An APP used in meetings that allows people to express their thoughts and see others' thoughts in real time, then helps them collectively reach an idea-meritocratic decision.

BASEBALL CARDS

ISSUE LOG

DISPUTE RESOLVER

DAILY UPDATE TOOL

For years, I have asked each person who reports to me to take about ten to fifteen minutes to write a brief email of what they did that day, the issues pertaining to them, and their reflections.

CONTRACT TOOL

PROCESS FLOW DIAGRAM

POLICY AND PROCEDURES MANUALS

METRICS