My interview with hedge fund king Ray Dalio

I
N 1994, the Government of Sin-
gapore Investment Corporation
(GIC) recruited a small and lit-
tle-known hedge fund in the US
called Bridgewater Associates as
one of its external fund manag-
ers. Led by a maverick founder
named Ray Dalio, Bridgewater
had a staff of 39, an unorthodox approach
to investing and a corporate culture that
wasconsideredunconventionalandevenbi-
zarre.
Fast forward to the present. Last month,
Bridgewater and GIC celebrated the 20th an-
niversary of their relationship. With a client
base that includes many of the world’s top
sovereign wealth funds, central banks and
institutional investors, Bridgewater has
grown to become the world’s largest hedge
fund, with a staff of 1,500 and assets under
management in excess of US$150 billion.
Mr Dalio, 65, the son of a jazz musician,
is one of America’s richest individuals with
a net worth estimated by Forbes at US$15.2
billion. A cult-like figure who dispenses ad-
vicenotonly aboutinvestmentandeconom-
ics but also about life, he is the new king of
hedge funds.
Candid, communicative and philosophi-
cal, Mr Dalio is a man of eclectic interests
that include neuroscience and hunting, scu-
ba-diving,oceanography,musicandmedita-
tion – the last of which he credits for much
of his success as an investor.
That success has been phenomenal.
Bridgewater is reported to have made re-
turnsofcloseto14percentayearforaquar-
ter of a century. For GIC, it has returned 18
per cent a year on average over the last 20
years.
ItsPureAlphafundhasconsistentlybeat-
en not only the US market but also most oth-
er hedge funds.
But Bridgewater’s “killer-app” for which it
is arguably most famous is its pioneering
concept of the “all-weather” portfolio, which
is constructed to make money under any
economic scenario – whether it’s rising
growth and rising inflation, falling growth
and falling inflation, rising growth and fall-
ing inflation or falling growth and rising in-
flation.Theall-weatherportfolioissegment-
ed into assets – stocks, bonds and curren-
cies – that do well in each of these scenarios.
Sonomatter whathappens,theoverallport-
folio tends to outperform the market.
TIMELESS AND UNIVERSAL
One of Mr Dalio’s key investing rules is what
he describes as “timeless and universal”.
“Those rules should be timeless,“ he says. “If
I go back 100 years, they should work. And
they should be universal – so they should
work in any country. To me, the economy
and the markets are like a machine. They
have cause and effect relationships.”
The criteria for making investments are
put into computers as formulas, which are
constantly updated as new data comes in.
These formulas then help determine invest-
ment decisions. “It’s like a GPS,” Mr Dalio ex-
plains. “I’m driving my car and wondering
what turns I should make. I have a GPS that
says, ‘now you are going to buy this’. There
is this totally automated decision-making
system which takes in data and says ‘buy
this, or sell that’.”
But the final investment decision is a
blend of judgment and automated instruc-
tion. “If the machine says do something and
wethinksomething different,thereconcilia-
tion of those things alerts me to the fact that
I forgot some of the criteria that I have used
in the machine. Two thirds of the time, the
machine wins. One third of the time, I say
there’s something else we need, to make the
machine work better.”
Mr Dalio’s quest for a “timeless and uni-
versal” system of investing has led him to
delve deep into economic history. “I learnt
that the times I was wrong (about invest-
ments) was whenthingshappened to mefor
the first time, but they had always hap-
pened before.”
For example, after the dollar crisis of
1971 when then US President Richard Nixon
took the decision to de-link the dollar from
gold, the dollar became a floating currency
and was effectively devalued. “This looked
like the biggest crisis I had ever seen,“ re-
calls Mr Dalio. “The next morning, I thought
the stock market would be down a lot. But
the market jumped the most it had jumped
for years. It turned out that there had been
currency devaluations before – just that I
had just never experienced them, because I
had only experienced fixed exchange rates.
And when I looked at those past devalua-
tions, I saw that all of them caused stock
prices to rise.
“In history, everything happens over and
over again. Every single thing is ‘another
one of those’. And if you find out which ‘one
of those’ it is you can learn how to handle
‘those’.”
Mr Dalio believes that patterns repeat in
life as well. “Principles are the way of deal-
ing with all the things that happen over and
over again,” he suggests. “Individuals in
their lifetimes make millions of decisions. If
you look at them individually, you can get
confusedbythem.Butifyourealisethateve-
ry one of them is ‘just another one of those’,
that makes it easier.”
Hehas written a 123-pagetract on princi-
ples – which is said to be required reading
for everyone at Bridgewater. “All my deci-
sions on management came down to about
200 principles. So while there may be mil-
lions of decisions, actually they come down
to 200. Or if you look at how the economic
machine works, it comes down to 30 min-
utes.” Mr Dalio has made a 30-minute video
on “How the economic machine works”,
which is posted on YouTube.
“I LOVE MY MISTAKES”
He claims that his greatest source of learn-
ing, as an investor, has been his own mis-
takes. “I love my mistakes,“ he says. “I have
an expression: pain plus reflection equals
progress. Every mistake is a learning oppor-
tunity. Every time you make a mistake,
thinkofit asa puzzleyou have tosolveas to
what you should do differently next time. If
you crack that puzzle, you will get a gem.”
His biggest mistake – one that he says
changed his life – happened in 1979-82. The
US had double-digit inflation and interest
rates. Banks had lent hundreds of billions of
dollars to Latin American countries and
wereinbad shape.“Itwasaperiodofgreater
uncertainty and turbulence than 2008,” Mr
Daliopointsout.“It lookedto methere wasa
choice between inflation and depression. I
anticipated that these countries would de-
fault on their debts and, in August 1982,
Mexico defaulted.
“And that was the bottom of the stock
market. Mexico defaulted on its debts and
theUSandtheworldbegan 15yearsofdisin-
flationary growth. That stuck in my mind.
Latin American countries went into depres-
sions but because of that dynamic, we went
into a boom. Depression in other countries
gave us a deflationary force that allowed the
easing of interest rates.”
From that episode, he learnt many
things, he says – notably, the power of cen-
tral banks and the importance of being ag-
gressive and defensive at the same time. “If
you’renotaggressiveyouwon’t achieveany-
thing, but if you’re aggressive without being
defensive, you will get killed,” he says.
Up to that time he had been making a lot
of discretionary decisions, but the experi-
ence of 1979-82 inspired him to build sys-
temstoinvest–bothaggressivelyanddefen-
sively. The seeds of the “all-weather port-
folio” were planted.
Systemsandautomateddecisionrules al-
so helped him take emotion out of deci-
sion-making. “When you’re in the middle of
a chaos that’s moving fast and you’re hold-
ing positions – winning positions and losing
positions – I learnt that by computerising
the decision-making
process, I could make
decisions better.”
He never gets emo-
tionally affected. “You
just look at it as a ma-
chineanddon’tletyour-
self get caught up in the
minute-by-minute. If
you can have perspec-
tive, stay back and re-
main calm – that’s the
test of you.”
Nor does he trust
“gut-level” decisions,
which many money
managers and corpo-
rate leaders rely on. “Our gut is determined
by our experiences,” he points out. “And the
things that happen in our lifetime make up
our experiences. You’re going to be fooled
bythe experiencesthat haven’t happened to
you yet. So it’s not good enough to go by
your experiences and your gut.”
His decisions come more from intuition,
tempered by logic. He claims that his most
creative ideas come from his subconscious.
“Some of the best thinking takes place in the
subconscious part of the brain,“ he says.
“For me, the way to know whether some-
thing is good or bad is when it comes up to
the conscious. If I can reconcile it with my
logic and bring the two together, then they
become a decision rule.
“I think this is true for all people. You will
have subconscious motivations and they
will come up. If you can reconcile them with
your conscious logic, then they’re probably
good for you.”
THE POWER OF MEDITATION
Meditation helps him a lot, he says. “It gives
me equanimity. It allows me to take myself
out of the situation and look at reality as a
beautiful machine. I can get rid of my con-
scious thoughts and go into the subcon-
scious state. That is where good things
comefrom. Ithelpsbringupthingslikeintu-
ition and imagination into my conscious
mind.” He meditates twice a day for 20 min-
utes each time.
“RADICAL TRUTH, RADICAL
TRANSPARENCY”
Aside from automated decision rules and
creative ideas, Mr Dalio also attributes
Bridgewater’s success to its unique corpo-
rate culture. All meetings are recorded for
viewing by anyone in the company. Mis-
takes are openly pointed out. There are no
pretences. Egos are not allowed to hold
sway. Or at least that’s the theory.
“Meaningful work and meaningful rela-
tionships through radical truth and radical
transparency” is how he describes it. He ex-
plains:“Ithinkeverybody hastobeonamis-
sion and be excited about their work. Mean-
ingfulrelationshipsareasourceofgreat sat-
isfaction to me. So if you can put meaning-
ful work and meaningful relationships to-
gether, it’s a wonderful combination.
“Radical truth means being able to talk
about anything, particularly problems and
weaknesses. This is the main differentiating
quality of our culture. Most people do not
like to talk about weaknesses. Yet every-
body has weaknesses. Successful people –
and I have been able to meet many success-
ful people in the world – all have weakness-
es, and what has made them successful is
that they recognise their weaknesses and
have developed compensating mecha-
nisms. So they’re not afraid to face their
weaknesses. Radical truth means looking at
problems and weaknesses and embracing
them.”
As for radical transparency – the record-
ing of all meetings, for instance – Mr Dalio
suggests that it helps people know the full
truthofwhat’sgoingonallthetime –andit’s
a good thing.
“Imagine you’re in a place where you
know that nobody can talk about you with-
out you seeing that conversation. So you
cansee every conversation that I have or the
leadership of the company has with each
other, on every topic. Nothing is hidden.”
He acknowledges that this may not work
for everybody. “It certainly selects people –
people hate it or they can't do without it ...
It’s like going into the Navy Seals.
“But the key is, are you afraid of the
truth? Are you afraid of being embarrassed?
We all stumble, we all make mistakes, we’re
all humanly flawed. If you can be comforta-
blebeingthiswaytogether,somethingmagi-
cal happens. It’s fantastic.”
Mr Dalio is exacting
in his selection of peo-
ple – and there are
thousands of gradu-
ates who want to join
Bridgewater. “It’s al-
ways more difficult
when you’re on top
and so many people
want to join you – it’s
almost like being rich
and so many people
want to be your
friend,” he says wryly.
He looks for three
main qualities – char-
acter, common sense
andcreativity.“By character I meanintegrity
– to be the same on the outside as on the in-
side and to have the ability to do the things
you don’t want to do, to do the right things
that are the difficult things. And common
sense – there’s a saying that common sense
is anything but common.”
Paper qualifications and mere intelli-
gence do not impress him. “I find that there
areway toomany brightpeople;peoplewho
graduate from the best universities with the
best grades are a dime a dozen. You have to
sort through that. Unconventional, inde-
pendent, thoughtful people are not as easy
to find. That’s what we look for.”
Thirty-nineyearsonfromstartingBridge-
water from his Manhattan apartment and
then guiding it into the force it has become,
MrDalio is handing over the reins to his suc-
cessors. While he is still chairman, he is not
the CEO any more. “Right now, my role is
largely as a mentor,” he says. “It’s a little bit
like Lee Kuan Yew becoming mentor.” And
Bridgewater is going through “a good,
smooth transition”.
With a net worth equivalent to more than
5 per cent of Singapore’s GDP, Mr Dalio is
stupendously rich. He readily admits: “I
have quite a bit of excess money.” He has
committed to the Giving Pledge – that is, to
donate most of his wealth to philanthropic
causes. A great believer in creating opportu-
nity, he particularly favours microfinance –
“because Ican see the power of giving some-
body US$1,500” – and education. As a na-
ture lover, his foundation also supports
groupsthat worktowards preservingnature
and the oceans.
His attitude to money is pragmatic. He
wants to ensure that his family has enough
for what he calls “HEM” – health, education
and maintenance, but not much more be-
yond that. “The best gift I can give my chil-
drenisself-sufficiency,”he says.“Ineverun-
derstood how people would trade off their
free time to get a bigger house or a bigger
car, or status – I think status is a very un-
healthy thing. Even luxury is an unhealthy
thing.” He folds up his sleeve cuff to show
off his watch. “It’s an Orvis watch. It costs
about US$150.”
Making money for himself was, in fact,
never his goal, he says. “It was an accident. I
just happened to be in an industry that pro-
duced money. It was a game for me. I could
have been playing chess, or some other
game that didn’t make money. I just loved
the game.”
THE HEDGE
FUND KING
IN trying to understand the relationship
between the Government of Singapore
Investment Corporation (GIC) and
Bridgewater Associates, the first question
thatcomesto mindiswhy GICchoseBridge-
water as one of its external fund managers.
After all, back in 1994 the firm was little
known and nowhere near the world leader it
is today. And few people had heard of Ray
Dalio.
AccordingtoGIC’sformerGroupChiefIn-
vestment Officer (CIO) Ng Kok Song, who
took the decision to hire Bridgewater: “I
found that Ray had a deep understanding of
financial markets at the global level and had
a systematic way of translating those in-
sights to investment strategy. It was a rare
combination. We knew we could learn a lot
from him. He wanted to deploy his skills on
a greater scale, which GIC offered. So there
was a mutuality of interests. We took a
chance with him when Bridgewater was
small and untested. It has paid off hand-
somely for GIC beyond investment returns.”
“A20-yearfriendship”ishowMr Daliode-
scribes the relationship, which he says has
gone far beyond a typical commercial deal –
and remains that way under GIC’s current
CIO, Lim Chow Kiat.
There are two types of relationships, Mr
Dalio explains. One is a purely contractual,
functional relationship. “The dynamic here
is: ‘We will negotiate and I will seek the best
for me, and you will seek the best for you’.”
“But a quality relationship cannot be ful-
ly captured in a contract; you can’t have a
quality relationship with your friends or
your spouse through a contract.”
What GIC and Bridgewater were able to
do, he says, is “to put the quality of the rela-
tionship above the contract”. In other
words, “there was mutual consideration;
there was an ability to look out for each oth-
er’s well being”.
He adds : “We’ve given them a return of
about 18 per cent a year for 20 years. But
that’s not the most valuable thing. We gave
them some ideas, and vice-versa. So there
was a commercial aspect that was mutually
profitable, but when we sit here today and
lookback, it was a 20-year friendship, based
on mutual consideration and high stand-
ards.”
To be sure, there were cultural challeng-
es. Bridgewater had a corporate culture of
open debate on investment issues, even
with its clients. Mr Dalio said that GIC and
Bridgewater often disagreed – for example
onwhatthebest assetallocationmixshould
be.“Butwhatwasuniqueinourparticularre-
lationship was how they could embrace this
thoughtful disagreement. Usually, if I tell
you, ‘you’re doing something wrong’, many
organisations don’t like that. In GIC’s case,
they would say: ‘Why?’ And they would ex-
plore it. So there was a two-way open-mind-
ed relationship that was very unique.”
Mr Ng, who now serves as the chair of
GIC Global Investments, corroborates the
factthatthe twoorganisationsoftenhad dif-
ferences.“There were many occasionswhen
we debated vigorously. Ray did not pull his
punches ... He did not sugarcoat his criti-
cism of our views because we were clients.
At Bridgewater, there is almost a compul-
sion to challenge the consensus. Otherwise
how can you beat the market?”
He acknowledges that GIC took home
many lessons. “To be innovative, we learnt
fromBridgewater that wemust create an en-
vironmentforvigorousdebate.Mostorgani-
sational managers dislike challenging oth-
ers,especiallythe bosses,andfinddisagree-
ment unpleasant. But the financial market is
an expensive place to discover how far you
were from reality. Thoughtful debate can
sometimes avert going down the wrong
path.”
At the end of the day, what mattered was
the outcome. “GIC was always an organisa-
tion in which the individuals really cared
about the outcome,”’ said Mr Dalio. “They
wanted to do the right thing.” And to get
there,they couldriseaboveacontractualre-
lationship. “That was very much a function
of Ng Kok Song,” he added. “There are peo-
ple who understand principles and have
great character. He is such a person.”
Ray Dalio talks about
his approach to investing,
and his life philosophy.
BY VIKRAM KHANNA
Mr Dalio has a net worth equivalent to more than 5 per cent of Singapore’s GDP and
readily admits: “I have quite a bit of excess money.”
GIC and Bridgewater: A 20-year friendship
“If you’re not
aggressive you won’t
achieve anything, but
if you’re aggressive
without being
defensive, you will
get killed.”
RAY DALIO
“I found that Ray had a deep
understanding of financial
markets at the global level and
had a systematic way of
translating those insights to
investment strategy... We took
a chance with him when
Bridgewater was small and
untested. It has paid off
handsomely for GIC beyond
investment returns.”
Ng Kok Song, GIC’s former Group CIO
The Business Times | Friday, October 10, 2014
OPINION | 27

My interview with hedge fund king Ray Dalio

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My interview with hedge fund king Ray Dalio