The Tim Ferriss Show#264: Ray Dalio, The Steve Jobs of InvestingTim @ 4:46:Hello my little munchkins, boys, and girl, this is Tim Ferriss, and welcome to another episode of theTim Ferriss Show, where it is always my job to deconstruct world class performers to share thethinking, the habits, the tips and tricks that you can apply in your own life, whether those people comefrom the worlds of sports, from chess, from entertainment, and in this case, from investing.

I’m very, very excited about this conversation you are about to hear. I had a blast. It is with Ray Dalio,who has been called “The Steve Jobs of Investing.” We’ll get to why that is the case. This is Ray’s firstlong form podcast ever, which I’m extremely happy to debut here. On Twitter @raydalio. You can sayhello.

Grew up a middle class kid from Long Island. He started his investment company, BridgewaterAssociates, out of a two bedroom apartment at age 26. Now has roughly $160 billion in assets undermanagement. Over 42 years, he built Bridgewater into what Fortune considers the fifth mostimportant private company in the United States.

Now along the way, he also became one of the 100 most influential people in the world according toTime, and one of the 100 wealthiest people in the world according to Forbes. Because his uniqueinvestment principles have changed the industry, CIO Magazine is the one who dubbed him “TheSteve Jobs of Investing”.

Very important, Ray believes that his success is the result of principles he’s learned, codified, andapplied to his life in business, and certainly at Bridgewater. Those principles are detailed in his newbook, Principles: Life and Business. I highly, highly recommend this book. It has already changed howI think about making decisions in my life, and in my business, how I think about managing, how I thinkabout communications between teams, I could go on, and on, and on.

It features … Just check out the blurb from Bill Gates on the cover, and it’ll give you an idea of thetype of people who listen to Ray very, very closely.

In this interview, we cover all sorts of ground, including how Ray thinks about investment decisions,how he thinks about correlation for instance, and so on, the books he would give to every graduatinghigh school or college senior, how he might assess something like cryptocurrencies, walking throughthe thought process, and much, much more.

We do get into his back story and how he became an investor and so on. If you want to just jump rightinto a bunch of nitty gritty investing detail, which does get into the weeds, then you can jump about 90minutes in, but we do cover a lot of really good stuff, and many principles that apply in the first 90.

I suggest that you listen to the whole thing, but if you’re super impatient, and you want to jumparound, you can jump about 90 minutes ahead and check that out. I hope you enjoy this as much as Idid.

Without further ado, here is Ray Dalio.

Tim @ 7:54:Ray, thanks for coming on the show.

Ray @ 7:56:Looking forward to it. Thank you for having me.

Tim @ 7:59:I have been such a follower and fan of your work and your writing. My audience has been askingwhen I would reach out to you to have you on the show, so this is a very exciting moment for me. Iwould love to start at the beginning, because it seems like we have some, at least, shared geographicbeginnings. Where did you grow up, and how would you describe your childhood?

Ray @ 8:27:I grew up in New Hyde Park, Long Island, and I would describe my childhood as being middle class ormaybe a little bit lower, middle class family. My dad was a jazz musician. My mother was a stay athome mom. I was an only child.

Tim @ 8:47:Were there any formative experiences you had, say up until the end of college, that ended upinforming your decision to become involved with investing?

Ray @ 8:58:Yeah. When I was a kid, I used to caddy. At the time, the stock market was hot. When I was 12, I gothooked on the markets. I bought a company that … Everybody was talking about the markets, and Idecided I would take my caddying money and put it in the stock market. I picked a stock, the onlystock I knew that was selling for less than $5 a share. It was kind of a stupid idea, but I thought if Ibought more shares and it went up, I’d make more money.

The company was about to go bankrupt, and somebody came along and acquired it, and I tripled mymoney. I was lucky, and I was hooked on the stock market, so that had a big effect. From then on, itdrove my whole addiction to the game, and everything I’ve been doing since, related to my career.

Tim @ 9:50:I think that many people who are listening to this, who know your name and your bio, have theimpression, perhaps, that every time you’ve stepped up at bat, you’ve hit home runs. It’s just been anunending streak of home runs. I’d like to maybe humanize the experiences you’ve had a little bit bytalking about 1982. I’ll back into it by reading just a short excerpt from your book, which I think paintsa good picture.

It begins with…

“So there I was after eight years in business with nothing to show for it. Though I had been right muchmore than I had been wrong, I was all the way back to square one. At one point, I’d lost so muchmoney, I couldn’t afford to pay the people who worked with me. One by one, I had to let them go. Wewent down to two employees, Coleman and me. Then Coleman had to go. With tears from all, hisfamily packed up and returned to Oklahoma.”

At that point you were down to one employee, that’s you. To make ends meet, you had to borrow$4,000 from your dad until you could sell your second car. How did that happen? Could you describewhat happened that brought you to that point?

Ray @ 11:03:

Let me first say that, by the way, I’m a professional mistake maker. Being in the markets, or being anentrepreneur requires one to bet against the consensus. When one does that a fair amount of times,you’re gonna be wrong a fair amount of times. I’ve learned a lot more from my mistakes, so I just wantto let you know that any perception that being right is part of it, no … The main thing is knowing whatyou don’t know and how to deal with it.

Anyway, what happened at the time is I analyzed the payments that countries owed banks. Icalculated that those countries were not going to be able to pay the U.S. back. It was a verycontroversial view at the time. As a result of that, I took positions in the markets. I got a lot ofattention, because Mexico defaulted on its debt, and not many people had expected that, and I did,and I had these positions on.

I thought we were gonna go into a depression. I thought the stock market was gonna go through thefloor. I just didn’t understand, really. The stock market rose, and this was after I had testified toCongress and I was on Wall Street Week, and then I lost the money that you referred to, and that’show it happened.

In retrospect, it really was the best thing that ever happened to me, because it gave me the humilitythat I needed to become more successful. That was because I shifted my attitude from thinking I’mright, to asking myself, “How do I know I’m right?” That opened my mind a lot. It made me look forpeople who disagreed with the smartest, and it also made me manage my risks better and so on.

That’s the story.

Tim @ 13:03:I’d like to dig into mistakes. I think this will be a common thread throughout the conversation. I’veread, and correct me if I’m wrong, but that you’re a fan of, for instance, the book Einstein’s Mistakes:The Human Failings of Genius.

Ray @ 13:18:Yeah.

Tim @ 13:19:He was one of the greatest minds of the 20th century, made a lot of mistakes. You have anexpression, “Pain plus reflection equals progress”. My understanding is that at Bridgewater you have,for instance, lengthy assessment sessions, in which employees discuss their mistakes. What type ofpost-mortem did you do after all that happened in 1982? Or did that come later, the type of post-gameanalysis that you would do on what led to that mistake?

Ray @ 13:51:I think for everyone, and for me at the time, when you encounter the mistake, and you’re experiencingthat pain, and there’s an emotional pain, and that was true for me at the time. Then the pain passes,and it requires thought, and making the connection of, “What did I do wrong?”, and being analyticalabout it.

That was that experience, and that led me to do that as a habit. It became an increased habit. I wouldliterally, every time I would make a mistake, I would develop an instinct. It changed my attitude aboutmistakes. I think basically, they became like puzzles. If I solved the puzzle, the puzzle being, “Whatwould I do differently in the future?”, I would get a gem. That gem would be a principle that would letme do a better job the next time that sort of thing came about, and I wrote those principles down andrefined them over a period of time, which is what makes up my book. But it was that process of

making enough mistakes and having painful mistakes that led to an instinctual reaction to havereflections on what I could’ve done different, that led to the progress that I’m referring to when I say“pain plus reflection equals progress.” And I think we all learn. I don’t think it’s particularly just true ofme, I mean I think anybody who’s open-minded and smart knows you’re going to learn more frommistakes. There’s so much more that you can learn from mistakes because I mean mistakes … Well,first of all they’re giving you a loud signal, and rewards keep you doing the same things, and so youdon’t grow from successes. Successes keep you doing the same thing, so you don’t grow fromsuccesses. Mistakes, if you can deal with them in the right way, is where the growth … Plus thereflection is where the growth comes from, so anyway that’s what happened.

Tim @ 16:00:Could you give an example from your life of a particular mistake and how you did that analysis orreflection after the fact, and what you learned from it?

Ray @ 16:14:Well, I mean, there just so many mistakes. When I was just getting out of college, I clerked on thefloor of the New York Stock Exchange, and this is when the dollar was attached to gold, and therewas a financial crisis and Richard Nixon gets on the television and says there’s no more attachmentto gold. Back then, money was like checks in a checkbook that didn’t have much value, what reallymattered was the fact that you could get something tangible in the form of gold that you can make theconversion, so it was a crisis. Our money wouldn’t be taken in other countries and so on. I walked onthe floor of the New York Stock Exchange expecting a collapse, and the stock market went throughthe roof.

It never happened to me before, so that was the case, and I went and researched currency declines inthe past, and I learned that it happened before but just not in my lifetime. And one of the things thatI’ve learned over the years is that many surprises come because they note things that happened assurprises, never happened in one’s lifetime before. So that it’s advantageous to look at beyond one’slifetime or beyond one’s own experiences to understand how the world works so that one cananticipate all of those things and learn all the rules of how the world works. That’s the beauty of it,right? And that’s the excitement. To learn how does reality work. What are the cause/effectrelationships, and then how do I deal with my realities.

So that’s a case, but there are so many mistakes.

Tim @ 18:02:I would like to dig into the research of history, things that have happened out of your lifetime. BecauseI read that for instance, while on one hand you have Soros who might credit the influence of KarlPopper, who is one of his teachers at one point. You’ve talked about diving very deeply into pastperiods of economic upheaval, right? The great depression, reading daily newspapers from thoseeras. Are there other practices or approaches that you’ve taken to examine history? Are there anyparticular types of books or resources that you go into like that to try to get a better picture of reality?

Ray @ 18:46:Before I deal with the particular economic history, I’ll start off by saying, I believe that basicallyeverything is another one of those. In other words, almost everything happens over and over and overagain through history, and that the key to success is to identify what one of those it is, and to look howit’s worked in the past many, many, many times. And then to understand the cause/effect relationshipsto develop one’s principles for dealing with it. So it could be applied to anything. We were talkingabout economics to talk about politics. Nowadays, we’re hearing the term populous, and populism issomething that is a bigger phenomenon than we’re used to in our lifetimes. The time that populism

was flourished the most was in the 1930s, pretty much leading up to World War II. And so I use thatas an example. I think, “Okay, where were the populists in history? Where were those cases? Howdoes this thing happen? How does it grow? How does it develop? What are the usual linkages, andwhy?”

That’s been I think very helpful more recently in my understanding quite a bit about what’s going on.It’s affected my perspective, so it doesn’t have to be just reading history books. You know, it’s inanything. People have a new child, and they treat it as though that’s the first time anybody’s had achild. But to gain perspective, you can apply it, gain that perspective of what’s happened over andover, and it could be applied to anything. If you start thinking that way, it’s radically beneficial. Thatway, when I’m referring to that is, in other words, “What is this? What one of these is it? And how dothose things work? And what are my principles for dealing with it?” Then life is a whole lot easier.

If you’re not dealing with it that way, everything is a one-off and you’ll be in the middle of a blizzard ofthings. You won’t step above those and deal with those instinctual principles. For example, you haveyour principles. I really admire your stoicism, and I think you could rattle those principles off and youmake the connection and it’s connected to your realities.

We each have our own, I don’t want to keep it in the realm of just economics because it applies toeverything.

Tim @ 21:27:Definitely. I would love to talk about problem solving and I’m sure principles will tie in here, but let’sjust say, hypothetically, and I’m sure this is maybe a real case at Bridgewater over many, many years,but if you have someone who’s working at Bridgewater, very very smart, very ambitious, and they’vemade a mistake. And they enter an assessment session. What does the format look like, and how doyou help them separate symptoms of problems from the root causes and the actual problems?

Ray @ 22:03:I think the first thing that I have to convey is that we have an idea of meritocracy, so it’s not likesomebody is called into a room and the people like me or the bosses think that they know the answer.

Tim @ 22:17:Right.

Ray @ 22:18:And that they’re making an assessment of how that person is, and then they write down those notes.No, no, no. Everybody’s equal in having opinion, and by and large, if the person that’s receiving, theyreceive great and bad feedback. I receive great and bad feedback in a non-hierarchical way. Weapproach it with the idea of “How do we find out if it’s true?” So it’s got to be evidence-based. Andthen we will set up tests, lets say if you get bad feedback, we’re down talking about bad feedback, itcould be for good feedback. But if somebody’s thinking somebody’s not very good at something,they’re speaking honestly. Most importantly, it’s that people can be radically honest with each other.They’ll say, “I don’t think you’re very good at that.” And they said “I am very good at that”, and thenyou go through a series of tests to think it’s evidence-based, to try to find out if somebody’s good orbad at that. And then you move beyond it to think, “Okay, well what can I do to get better, or how can Iguardrail myself so that if I’m weak at something and somebody else is strong at that thing, we canwork together?”

The main thing here is to get at what people are like. This is, to me, it’s a weird world that there’s a

phobia about making mistakes, and there’s a phobia about knowing one’s weaknesses. Mistakes arepart of the process, and everybody has weaknesses. The greatest people I know have weaknessesand have become successful because they know how to compensate for the weaknesses. They’reaware. The stupidest people I know, least successful people I know, are people who don’t own up tothose weaknesses and grow. So the exercises that we’re going through are by people who choose towant to be in a radically truthful, or radically transparent environment, and be evidence-based.

But it’s difficult. It’s difficult because we’re not brought up that way. It takes about 18 months to getused to it, because there’s these subliminal reactions.

Tim @ 24:42:Now maybe this is related to the pain button app, maybe not, but could you describe the function ofthe pain button app and why that was created?

Ray @ 24:56:Yeah. It’s like I said, pain plus reflection equals progress. Whatever your form of pain, the best thing todo is record it. This app, the way it works is as you experience psychological pain, you just quickly logit. You don’t analyze it at the time, but you capture it. What was it about? Who was it with? Whathappened exactly?

The nature of psychological pain is that it passes fairly quickly. The amygdala, this part of the brain, isthe part that’s the fight or flight part that gets adrenaline and it reacts quickly. Then over a period oftime, whatever the form of psychological pain, it diminishes. That’s an opportunity to reflect. Becauseit’s been captured in the app, it then can allow somebody to go back and reflect on that and reflect onwhat you should do about it when the next one comes along. Is it speak to the person who causedyou the pain? Is it … Whatever it might be.

You write that down and you record it, and because it keeps in a graphic way a presentation– graphsyour pains, the different types of pains and the causes– it gives you sort of a biofeedback that allowsyou to see if your actions are reducing that pain. That might prompt you to change your actions or italso shows whether you’re following through on your actions.

Let’s say you’re having a problem with the same person doing the same thing causing you pain, butyou’re just bottling it up. Then if you choose to keep bottling it up, you’re not going to resolve it. It’s justgoing to happen over and over again. That’ll show up in the graph. But if you do something about itand you write it down and you can analyze it, and so it provides that kind of biofeedback that allowspeople to make that progress.

A lot of people have told me that it’s better than the psychologist because it’s there every day of theweek and you can see yourself, how you’re … What’s causing your pain, what sorts of pains youhave, and it makes it an intellectual exercise to come up with strategies to do those things that stopcausing you those pains and get you what you want.

Tim @ 27:21:For developing, in addition to using this type of logging tool whether it’s the app or if someone’scarrying around a small journal with them so that they don’t have misremember the details of whenthey’re triggered for instance, are there any tools that you have found helpful for people in general,employees, yourself?

One that comes to mind – maybe you could chat about and I’d love to hear about any others – istranscendental meditation. I’ve read, for instance, that you’ve said creativity comes from openmindedness and centeredness, seeing things in a non-emotionally charged way. Could you talk about

TM and any other tools that you have found to compliment the pain button?

Ray @ 28:10:Yeah. Let me say in tools in general, we have developed a whole bunch of tools that would be fun toexplain to you in all different ways that are constantly being used. They’re just invaluable. They’regreat, but I want to turn my attention to transcendental meditation which unlike, let’s say, an adapttype tool or some other kind of tool is a practice that I’ve been doing for – I don’t know – since 1969,whatever that is. Anyway, a long time.

I think it’s worth noting that everything in our brain, every emotion we feel is physiological. There arechemicals that go through our brains, electronics that go through our brain. They produce theseimpacts. Transcendental meditation is a practice that takes one from one’s conscious mind into almosta subconscious state and allows one to relax. It’s almost a blissful experience. It relieves all stress,and it brings one into the subconscious mind. Through brain scans, they see that the amygdala whichis that fight or flight part of the brain calms down actually, and in some cases they conjecture that itphysically changes. The prefrontal cortex part of the brain, which is kind of that more thoughtful part,lights up and is enhanced.

That practice not only creates an equanimity, but by bringing one into the subconscious part of thebrain, it significantly enhances the creativity. It essentially opens a passage from the subconscious tothe conscious so there can be a reconciliation of those. It’s really from the subconscious wherecreativity comes from. I mean if you think about it, one doesn’t go muscle creativity like doing amathematical calculation or something. It’s really like if you’re ultra relaxed. Maybe you take a hotshower and these great ideas come to you or you’re sleeping and these things pop up. They comefrom your subconscious part of your brain where the intuition and that comes from.

By opening that passage essentially between the subconscious part of the brain and the consciouspart of the brain, it’s wonderful. It makes one more creative. It makes one calmer. It makes one almosta little bit like a ninja in the sense that everything with that equanimity seems to be coming at you in amore controlled centered way so that you can react to it well. So I found transcendental meditation tobe invaluable.

Tim @ 31:15:The specifics here are of great interest to me for a number of reasons. The first is that I practice a fewdifferent types of meditation, but I did a TM session this morning for instance for 21 minutes because Ifind it takes about a minute for me just to stop fidgeting and get settled. When do you typically … Doyou do two sessions a day? When do you typically do your TM? Do you have a particular location?

Any specifics of that practice would be very great to hear because TM has come up a number oftimes – and I find it very secular which appeals to me – from people like Rick Rubin, legendary musicproducer, Chase Jarvis, extremely accomplished photographer and CEO. What are some of thedetails of your practice?

Ray @ 32:06:Well I think one of the things is don’t over worry about the details too much. Just do it. But the bestway to do it is you do it before breakfast and you do it before dinner having not eaten much or noteaten. You do it for the 20 minutes as you point out and that you do it twice a day. That’s theestablished practice.

I basically do it, let’s say, sort of two-thirds of the days. I would say I probably maybe some days willdo it once and not twice, but I also always do it in addition whenever I have that feeling of doing it. Asa meditator, you probably know that you can feel the difference. So as you’re going through the day,

you carry through almost an ability to shift yourself from a state of mind where there might be atwinge of anxiety, and then you can bring yourself into that equanimity type of state.

But you also … I also find that there’s a time where I say “I need to go meditate.” Then I’ll justmeditate. I’ll meditate where I can when I can. I mean I prefer a quiet place, a comfortable spot. I’mnot rigid about the location, but if it was standing in my way … My circumstances were standing in myway, I would meditate on a plane. I would meditate wherever I could if it was … If it was noisy and Iwas on a train, I would still meditate. The mediation may not be as deep. It won’t be as deep, but it isso good. It could be noisy outside and I can still go from one state to another. Not the deepsubconscious state but the state of, let’s say, tension to relaxation. That’s how I do it.

Tim @ 34:11:For those people who are familiar with transcendental meditation, it’s thought of as mantra-basedmeditation. So it’s the repetition typically characterized by the repetition of a mantra or a one or twosyllable sound that you do not say out loud. Do you sit down and immediately go into the repetition ofthe mantra or do you take time to focus on your breathe or your bodily sensations before you go intothe mantra repetition?

Ray @ 34:37:I take a few minutes to settle myself down just as you’re describing.

Tim @ 34:42:Got it.

Ray @ 34:43:Yeah, just as you’re describing. It feels good at that moment, and then you go enter it.

Tim @ 34:49:Got it. And you mentioned before we delved into the TM, other tools that you and the people atBridgewater have developed, I’d love to hear you describe any of those.

Ray @ 35:02:Those tools are … People carry around an iPad with them, and whenever we go into meetings,there’s a tool we call a dot collector, and it’s a very easy tool to allow people to express what theythink is going on and how people are doing. And so in all meetings, there’s this data that’s collectedthat shows what everybody’s thinking while the meeting is going on. Now, it’s invaluable in manycases, because you’re seeing what everybody’s thinking, so it’s so different and in an ordinarymeeting, it’s silent, largely. There’s one person speaking at a time, and you don’t know what the otherpeople are thinking.

In this particular case, what you do is all the time, you see how people are seeing things differently.And so what we do is we take that data as it’s happening and, the computer does, we have itprogrammed with algorithms that will look at that data, and we’ll then communicate back to themadvice. ‘Cause they– this computer mind– will then use that to know how they think differently. And bythe way, it’s enlightening. You would have no idea how differently people’s brains are working in ameeting, or work in general. The things they pay attention to, they ways they interpret it are startlinglydifferent. And they have the same kind of patterns to them. And so that discovery allows people toknow how they see things different, and appreciate how other people see things different.

And then when they take that, then that allows them to know how to interact better. So the computer,through this iPad, is doing processing in the background, and it will then also coach them. In other

words, when they’re dealing with somebody else, or there, it will provide guidance, it will providefeedback that’s continuous. So it’s a tremendous tool, but because you know what everybody’sthinking, it’s analyzing how everybody’s thinking, provides that feedback, and gathers informationacross all of those people and processes it by being able to see relationships that no one personsees. So it’s invaluable in an idea meritocracy. We also use it for making decisions. We do somethingthat we called believability weighted decision making.

Tim @ 37:51:Yeah, if you could elaborate on that I’d love to hear more about it.

Ray @ 37:54:Well you want to have an idea meritocracy. If you and I were partners, and we had a group of peopleand we were partners, how are we going to decide on the best things to do? We’re … I think we’regonna want an idea meritocracy is when the best ideas win out. You have to have rules for doing that.You have to have procedures. So there are three things you need to do. The first is that you have toput your honest thoughts on the table. A lot of people are hesitant to do that, they keep their honestthoughts back. But if you have a culture in which you can put your honest thoughts on the table andeverybody does and that’s the way it operates, now you see what people are really thinking. Great,that’s a good first step.

Second step is you have to have thoughtful disagreements. You have to know the art of thoughtfuldisagreement. So there are processes that we go through in which people are really hearing eachother, and as you go through that process, to make better decisions than they could individually. Andthen the third thing is, if disagreements remain, you have to have idea meritocratic ways of gettingpast that disagreement. So how are you gonna do that? In most places, it’s either autocratic ordemocratic. Autocratic means the one with the power makes the decision. The boss makes thedecision. Democratic is one man, one vote, and it treats everybody as though they’re equally valuable.So we do what we call believability weighted decision making. We have ways … Well let’s justimagine what it is before we get to how we get to it.

Imagine you knew each person’s believability, who’s a better decision maker at what. So I’ll use anexample … if you had a medical condition and you went to doctors and you had a friends, well youwould know your doctors better than your friend, and some doctors are better than other doctors. Andso, consciously, you’re probably weighing those decisions with consideration given to theirbelievabilities. In our place, we have ways of determining people’s believabilities in many differentdimensions. Maybe if it’s an accountant, they would have greater believability in accounting or maybeif it’s somebody who is more creative, we’d give them, there are more points that they actually get andthey know that that person’s more creative. And somebody else might be more reliable and wouldwork well with the person who’s creative, and so what we … because if we have this believabilitiesaccording to all those dimensions, when we make a decision, we make a believability weighteddecision.

We literally, on the iPad, say would you do this? And then everybody votes, and it calculates what thevote is on a believability weighted basis as well as on a absolute basis. And that idea meritocracy notonly produces better decision making, but it also produces a fairness that everybody believes that thesystem is fair. And that is invaluable, because when you have disagreements, or you even haveassessments, which people are sensitive to, and you do that in a way that everybody agrees are, isfair, that means that they will go along with it more, that they, that the game is fair and it’s … it worksmuch better in getting past disagreements. So as I said the third step is how do you get past thedisagreements if they remain, and we try to do that in an idea meritocratic way through believabilityweighted decision making.

Tim @ 41:55:What are some of the rules or guidelines that you have for preventing disagreement from devolvinginto highly emotionally charged fighting? In other words, is it similar to say, non violentcommunication? Are there specific rules that you think perhaps listeners could also borrow that youfound to be very helpful for a thoughtful disagreement?

Ray @ 42:24:There’s a whole series of protocols. For example, there’s what we call the two minute rule. Two minuterule means that if I say the two minute rule, I’m allowed to speak for two minutes without aninterruption.

Tim @ 42:38:Right.

Ray @ 42:39:And you said the two minute rule, you’re allowed to speak for two minutes without an interruption.There are protocols like you repeat what the person is saying. You must repeat what the person issaying and the points they are making. So that it demonstrates that you’ve taken in and understandwhat they’re saying. And then you repeat it. We allow disagreement to take place in different formats.It might, rather than being in person, if it, if somebody maybe is too emotional in the moment, ormaybe they’re not good at thinking on their feet, we allow that disagreement to take place in a formatthat’s essentially the equivalent of email exchanges. In other words, in written format.

Anyway, there’re a bunch of those kinds of procedures. They mutually agree on who an arbiter is. Inother words, whenever there’s a disagreement that you can’t seem to get by, as a standard practice,the protocol is to say let’s find the person we can agree who will be a moderator, and help us throughthat. And because they mutually agree on that person, then the rules of fairness are an easy thing todo. So there are many of those types of protocols that we use. It’s also culturally like a big faux pas, ora big thing to lose your cool, in that way. You know I mean culturally, okay, it’s … Maybe you need atime out. So all those things enter into it.

Tim @ 44:31:No, those are very helpful and actionable. And I’d like to look at the dynamics of making decisions asa solo operator, or close to solo operator just as a compliment or a contrast. If we flash back to whenyou first began Bridgewater Associates, so out of your two-bedroom apartment at 26 years old, doyou recall any of your first big wins, or things that you considered big wins, at the time? I’d love to justhear you describe what made those a big win? In other words, the thinking behind it.

Ray @ 45:17:You know, the funny thing is, I can hardly ever remember my big wins. I do remember my big losses,or big mistakes.

Tim @ 45:29:We could talk about those, too. Yeah.

Ray @ 45:32:It’s so funny because I look at it, and I said, “Well, I guess I must have had a bunch of wins orsuccesses because of how things have went.” The business is good, and I’ve done well, and all ofthat. But, I think of my history and I really think of those mistakes and I think that’s so great, becauseit shows that that’s a much better learning tool.

Okay, so my big wins. You know, no, I think about that, at that time, I think, no, the things I rememberwere the fun things, guys I played rugby with, and parties, and those kinds of things. I don’t remembera particularly big winning … Well, I do remember some things. I remember one time when we got theKodak account. The position is, here’s a guy and he’s analyzing the markets, and then, he has a smallteam of people who’s analyzing the markets. So, I didn’t have a long track record, and I didn’t have ainstitution, and sort of competing with the big institutions of the world, the JP Morgans and everybodyand, by the way, we beat them.

But, anyway, which shows that the individuals, the powers within the individual, but anyway, Iremember when we got the Kodak account. Because, at the time, Kodak was a big important client,and them giving us that account was a big deal for us because it was kind of a stamp of institutionalapproval, and it was … All I remember is that the money mattered, too, because we would know thatwe were a bit more financially secure, so I remember that as a big win.

I remember it so terrifically because we were asked to submit research information, and we were justa small team of people. We stayed up all night and with pizza and beer and all of that. I remember itso sweetly because it was the dream of making our miracle happen and pulling together. That’s themeaningful relationships part. I believe that I want meaningful work and meaningful relationships, andso, that was what that was about. We got the account, and we won, and that was a big deal.

Tim @ 48:20:Why did you guys win?

Ray @ 48:21:I think it’s a combination of being totally unconventional and having better processes, and then,there’s a hell of a lot of determination.

I think three things make up a successful life by and large. First, you have to have audacious goals,big dreams. Then, when you are headed toward those goals, you’re going to have problems, you’regoing to deal with reality. You have to deal with those problems and that reality realistically, learningfrom mistakes, writing down those principles, and the like. That’s the second part, dealing with realityin a practical way where you learn about mistakes. The third is determination because if you’re goingfor your goals, and you’re encountering your mistakes, and you’re learning, and you do that withdetermination, you’re going to get better all the time. You can’t help but get better. You do that a longenough amount of time, and you’re going to far exceed your dreams. My success has far succeededwhat I ever imagined one bit at a time and it’s just that process.

Tim @ 49:42:If you were to conversely look at intelligent people who are unhappy, what do you think the primarycauses of that unhappiness are?

Ray @ 49:54:I think it goes back to this notion of meaningful work and meaningful relationships. Intelligence andhappiness probably have no correlation with each other, and studies it’s repeatedly been shown, andmoney is very little correlated with happiness. The highest correlation with happiness is community.Am I part of a community? Do I feel connections with other people?

That’s been literally genetically programmed into us from, it’s estimated, between a million and 2million years ago before we were even mankind, so that sense of meaningful relationships, I think isvery, very important. If you have meaningful work, like you’re on a mission, and you have meaningfulrelationships, I think it’s almost impossible not to be happy. I mean there’ll be unhappy moments in

your life that you would encounter this thing or that, but the people who are unhappy seem to bemissing those things.

Tim @ 51:03:I think this might be a good place to give listeners a little bit of background that they probably don’thave, which is a conversation you and I had that I really appreciated when I was very nervous at TEDnot too long ago, doing a rehearsal of my talk, which explored some of my experiences with manicdepression, and even a close call with a near suicide in college, and you were very kind. You came upand spoke to me after I came offstage.

I was hoping perhaps you could talk about some of what you shared with me, and perhaps your son’sexperience, and what he’s found helpful in mitigating some of these darker or harder moments thathe’s also had.

Ray @ 51:56:Sure, I’d be happy to. I should say that when I described unhappiness in answer to your prior questionbefore, I was not dealing with those who has clinical depression, which is also a different thing. It is achemical reaction having to do with serotonin, dopamine coming in spurts and sputters and so on.There’s a physiological element that is driving it, so that’s a big thing.

My son when he was, I think, about 27, filmmaker, very creative, was in his new job in Los Angeles.Very excited, stayed up all night, smoked marijuana, partied all night, very energetic, and basicallywent crazy. At the hotel, he took the computer that was at the reception, and smashed it. The policecame, he was rebellious, they beat him up, and so on, and so forth. We then began our journeythrough three years of his bipolar episodes. That was an incredibly difficult and eye-opening and, inretrospect, wonderful experience. Some of the most painful experiences in retrospect give youappreciations that you wouldn’t otherwise have. That was that experience, and so, ask your questionspertaining to it. I’d be happy to tell you.

The quick answer to this, by the way, is he did things right, eventually. He made a lot of wrong thingsin between, but he came out of that three-year period, and he became a successful filmmaker. Thefirst movie he made was called Touched with Fire, which was love story with Katie Holmes, bipolar.He has, through that movie and his speeches and so on, we know saved a number of lives, and alsohelped to really destigmatize that because those with bipolar are often very creative people. I learnedthat genius, creative genius, is at the edge of insanity. Anyway, what questions do you have about thatexperience?

Tim @ 54:45:I’d love to hear what your son has found to be helpful. In terms of tools, or resources, approaches,routines, anything. That he’s found to help him better navigate, and manage everything that is part ofhis makeup I supposed. Much like it is part of my makeup.

Ray @ 55:09:Sure. There’s these really four protocols, and I gave him a Saint Christopher metal, and on the back Iput the initials of those four protocols. So that he would keep it close to him, and so I know them well.First of all, the first one we have TM, those are the initials. And that represented “take medicine” andby the way, the amount of medicine that he’s taken has, because of his improvements and so on, hasdiminished quite a lot.

But take medicine, and it also represented TM, transcendental mediation. So do the transcendentalmeditation, and take the medicine. No drugs or substance abuse. None, be clean. Go to bed never

too late. It’s not a matter of just a eight hour sleep, it’s we have our rhythms, and that basically go tobed by 11, and maybe once a week you could be up ‘til one o’clock in the morning.

And then what we call “monitoring”. Now monitoring is much less important to him now, but at thetime his being open about his bipolar, and having people around him know, and actually sort ofmonitoring his behavior. So that they can raise a red flag, and help him deal with that, if he was goingin one way or another. But those were the things that were very helpful.

In addition, have to be very careful about changing time zones. So if you’re flying to Europe, or faraway. You have to do that in a way that you pace it, so that it doesn’t get triggered. And as I said, hewent through this. You would never … He’s now, one of the most centered people I know. Happilymarried, given us two grandkids. It’s just been a miracle, and I really do believe it’s that combination.And he’s learned, and shown other people that, that combination could work for anybody.

Tim @ 57:24:That’s extremely helpful, and I think valuable for a lot of people listening. And I want to reiteratesomething that you mentioned, because I only realized it in the last maybe two years. And that is thegoing to bed earlier. I’ve always been very, very nocturnal, and a night owl, and particularly say onbook deadlines, and so on. Going to bed at four or five, six in the morning. Waking up very late.

And that has historically absolutely been correlated with a much more severe and extended downtimes. So I do just want to reiterate what you said, which is that going to by say 11 o’clock has for meat least been extremely helpful in mitigating a lot of what we’re talking about.

Ray @ 58:18:By the way, it is so great that he is open, and you are open, and you can communicate it. Because Ifound out … You know that 24 percent of the population in one form or another has been diagnosedwith some form of mental illness. Some form of challenge, because the brain is like an organ. It is anorgan, and it has those things.

And some of the most creative people you would know that… Abraham Lincoln, and WinstonChurchill, and Tchaikovsky, and the list goes on and on. Of unbelievably great, brilliant, creativepeople simultaneously have been challenged by this. And by making people aware, and in onedimension or another. Either whether they’re dealing with somebody who has such a challenge, or tode stigmatize it, and realize …

I look at you, what a role model you are, and by being open about that particular challenge, peoplecan really appreciate that. We have a number of bipolar people who work here, and when you knowhow to deal with it, there are tremendous advantages to it too. Because it’s a way of thinking. I meanthere’s these mood shifts, but there is also an unbelievably high percentage of those people arecreative.

So, and certain professions and so on. But anyway I just want to compliment you, or express myappreciation for you having this conversation, and being so open with it. And I’m sure you would say,as my son would, it’s very helpful. Because when everybody around you understands it, it’s helpful toyou too.

Tim @ 1:00:20:It is helpful, and I really appreciate the kind words, Ray, and I should also mention that for decades Ikept this secret, and close to the chest. And I was very ashamed of just the nature of how myphysiology worked ultimately. And I was so fearful about talking about a lot of this publicly, and eventhe TED Talk was …

I had a very separate, very different TED Talk that I scrapped a few weeks before hand, because I feltmorally obligated to talk about this more publicly. And in doing so, felt quite the opposite of what Ifeared. It was actually an enormous burden and weight lifted off of my shoulders. And it’s really beenliberating to talk more freely about it.

Ray @ 1:01:13:I understand that completely, because that’s what my son does. I mean that’s my son’s reaction. If youwant to talk about it, in a more serious way, I’m quite an expert on the whole thing. The best doctors,and I really believe that I could probably be of some help if you feel that it’s not entirely under control.

Tim @ 1:01:34:Thank you, no, I appreciate it. And it’s to segway a bit here, so absolutely appreciate the offer, andthat’s something I’ll remember. You seem like a very astute cultivator of talent, and what I’d love toknow is if there were any particular mentors of your own. Who you could describe, or share with us?That could be very early on. It could be in your investing career. But any mentors who come to mind,and what they taught you, or help to cultivate in you.

Ray @ 1:02:13:I remember nice, kind people … Not a mentor. I couldn’t go to a mentor, but I remember somebodywho when I was caddying, and he was clerking on the floor of the New York Stock Exchange. A verysuccessful Wall Street guy, and I used to caddy for him. And we would talk about markets, and hegave me not only advice, but it was the kindness, and the caring, and the direction that was helpful.

I don’t know that he was an ongoing mentor, but he was a role model in many ways, and did provideguidance. So maybe I think, maybe he was, but not an ongoing mentor. I remember teachers thatserved that role, but not much. Most of my learning has been from mistakes. I have a terrible rotememory by the way. I mean it. Terrible. Anything that doesn’t’ have a reason for being what it is, Ipractically can’t remember.

I can’t remember phone numbers, names, anything along those lines. So I tend to learn not by beingtaught, or going to my memory. I learn through my experiences, and my kind of more subliminalmemory.

Tim @ 1:03:40:It seems also that you’re well read, and I’d love to actually just go back for a second to Einstein’sMistakes. When you pick up a book like that, it’s two questions. Number one, how did you chose thatbook, or find it? And number two, is how do you read? What is your reading process?

Ray @ 1:03:59:The book was given to me, ‘cause people know that I like that stuff. And the way I read, it depends onwhat I’m reading, but I will kind of skim, and it depends on how much time, and a lot of things. Butgenerally speaking I’ll try to go through a book pretty quickly by being able to sort out what the mainideas are. From the digression. So, there’s this kind of little bit of a strategy.

You know how they’ll tell you the story, and the story might go on for a while. And then it then gets tothe point they’re trying to make. So when I’m going through the stories, I might go quicker. I might bescanning for the top of the paragraph, to get an idea what they’re doing and then go into the sectionthat I’m most interested. I would say I would be typically reading that way, unless it is something inwhich there’s not that sort of a book. That there’s either something where I’m enjoying the flavor of thewording and the sentence structure and the beauty or the thoughtfulness in that I really want to take

that in and I don’t want to scan. I like to get the most out of each book as quickly as I can because thenumber that I’m trying to go through is comparatively large. So I’ve got a pile of books here sitting infront of me and they torment me because they tempt. I’m very curious. I would say curiosity is a bigmotivator for me. The world is got much too much to offer relative to my capacity to digest it.

Tim @ 1:05:52:What are the books that you currently have in front of you or that are sitting there like undonehomework assignments? What are you currently have on the roster or potential roster?

Ray @ 1:06:04:I have Sapiens, I have The Greek Hero, Micheal Lewis’ The Undoing Project, The Upside ofInequality, The Serengeti Rules, From Bacteria to Bach and Back, which is about the evolution of themind, A Magic Web, there’s a whole pile over there.

Tim @ 1:06:29:This is fantastic.

Ray @ 1:06:30:I do mostly original research. So in addition to looking through books and going through it, I really liketo get into the data, I’m a researcher basically.

Tim @ 1:06:47:Is there anything that you’re researching right now or that you’ve researched recently?

Ray @ 1:06:53:The bottom 60% of the population and what the world, life and the economy is like for them becausethere are two different economies in the world, the averages are very, very misleading. The top twotenths of one percent of the population has a net worth, which is about equal to the bottom 90%combined. So I’m researching more about what that’s like and it’s quite a bleak, difficult picture, sothat’s the thing I’m researching right now.

Tim @ 1:07:28:What drove you to research that? Is it just to understand the implications and secondary and tertiaryimplications of that or was there something driving that?

Ray @ 1:07:39:I think right now we’re in the midst of an era that’s very much like the thirties, in which wealth andopportunity gap and the populism that’s coming from it and the divisions, which are great, I meanlarge is a defining moment of our time and this exists around the world. If economies were to go downnow, I do believe that there would be a great deal of conflict and I think that we’re seeing the conflictplay out politically, not only in the United States but you’re seeing it in different places or interactions. Ithink it’s the defining issue of… maybe that’s over reaching… but it is certainly one of the mostimportant issues of our time and I mean this year, next year, the year following because that’s thebasis at which are we going to have conflict or where one side is fighting the other side.

This is a matter of principles, we’re talking about principles again. Are the principles that hold ustogether as Americans, greater than those that divide us? How are we going to be with each other?So this understanding and all of these perspective I think is very important at the time.

Tim @ 1:09:21:I’m definitely going to come back to a related thread on that but before I get there I wanted to ask you

of the books that you mentioned that you were not gifted, how did you or why did you choose any ofthem like The Greek Hero, The Undoing Project, Sapiens, From Bacteria to Bach and Back, any ofthose why did you choose them?

Ray @ 1:09:46:I would suppose that each one is different because of the themes of interest. I’m fascinated byevolution. I think evolution is the greatest force in the universe and the purpose of everything is toevolve. We as individuals are just vessels for our DNA is evolving. I’m fascinated in evolution. I’mfascinated in how the brain works. The Greek Hero’s very, very, very interested in terms of one of thegreatest books is Joseph Campbell’s, Hero of a Thousand Faces. Which takes the character of goingthrough life and what are the attributes that different people have, so difference in values. So it’s aneclectic group of interests. I’m interested in nature a lot. So I tend to … I’m also particularly interestedin the ocean, so I will read about nature in the ocean. These are just curiosities, but they becomethemes I guess. I’m not interested in cooking. I’m not interested in a whole bunch of things, so they docome in these categories.

Tim @ 1:11:05:Are there any particular books that you could mention and don’t worry I won’t belabor the book stuffforever. But any books you mentioned Joseph Campbell, that have had a string impact on your life oryour thinking? Maybe a way to frame that would be if you were and certainly one of the books inanswer to the question that I’m about to pose could be your own certainly. But if you were to give sayevery graduating senior in college or high school a handful of books, what might you give them?

Ray @ 1:11:43:The books I’d give them would be, Lessons From History, this is the Durantes, they were maybe thegreatest historians of all time, any way, wrote 5,000 years of history, probably wrote 5,000 pages andthey took this book I think it’s 104 pages, and they took the themes of history, it could be from religion,natural resources who knows, each one of these things. And they looked at it for themes of historythrough history. I think that, that would be great. River From Eden by Dawkins, Richard Dawkins.Another very short book on evolution, it just really puts things in perspective. Again, I would sayJoseph Campbell’s, Hero of a Thousand Faces. Those would be the three books that I would say thatwould be the combination. The beauty of particularly two of those books is, it’s not going to take longto read them. Hero of a Thousand Faces little bit dense but it’s so rich, so it’s a good one.

Tim @ 1:13:00:Why is it… these are fantastic … I need to get on buying those as soon as we get off the phone but,why is it, and maybe this isn’t true across the board but whether it’s in early stage start ups or in therealm of say broadly speaking hedge funds or asset structures or asset management, the bestinvestors that I’ve met almost all have a fascination with evolution. Why is that?

Ray @ 1:13:33:Don’t have a clue. I didn’t even know that.

Tim @ 1:13:36:Okay.

Ray @ 1:13:37:I didn’t know that.

Tim @ 1:13:39:All right then we don’t have to dwell on it. For whatever reason yeah, it just seems to be a pattern.

There are a few maxims I’d like to ask you about and if these are misquotes, please correct me. Thefirst is ask yourself whether you’ve earned the right to have an opinion. Can you elaborate on that?

Ray @ 1:14:01:Yeah, all you want is the right answer, right?

Tim @ 1:14:07:Mm-hmm (affirmative).

Ray @ 1:14:08:And there’s such a bias to think that just because you have an opinion that it’s valuable or to be sostuck with it. That’s really stupid, right? In everything, you just want the right opinion where ever it’sgoing to come from. So if you gain humility, I believe that one of the greatest tragedies of mankind,individuals is to hold wrong opinions in their head that so easily could be stress tested to find out ifthey’re right or wrong. If you can sort of give that up and think, “How do I know I’m right?” You’re goingto significantly raise your probabilities of making better decisions. I mean, that’s the big thing. Theonly two things you need to do in life in order to be successful. First, you need to know what the bestdecisions are. Second, you have to have the courage to make them, to do what’s necessary. On thefirst, the greatest problem is that people just look inside their heads for their opinions where they canreally get rid of the bad ones and take the best that they can get elsewhere. By doing that, byexploring different people’s views, not just their conclusions but the reasoning behind theirconclusions, they can learn such a tremendous amount.

We talk about books. Well, conversations are much better than books. You can have thoseconversations and learn when people have differences and just pick the best opinions, right? Isn’t thatsensible?

Tim @ 1:15:59:Yeah, no, it’s definitely sensible. How do you … What are some good questions that someone can askto explore someone’s reasoning behind their conclusions? I think that it’s so easy for people tobecome charged. Are there any good questions, for those people who … The vast majority are notgoing to operate within say Bridgewater Associates. What are some good ways to explore orinvestigate someone else’s reasoning behind their conclusions?

Ray @ 1:16:36:Well, I think the real driver of it is when there’s a difference of opinions to … Do you have a realcuriosity to understand why? It’s really through the fear of being wrong combined with the curiosity ofwondering why somebody would have another opinion. That becomes the motivator and so you kindof ask why, and you think, does that make sense? Then come back with other questions. I would say Ithink most people are … Too often, they start with opinion. There’s psychological tests that show thatpeople start with an opinion and filter information that comes to them to be consistent with theiropinion.

Tim @ 1:17:39:Right. Yeah, well, then you’re not living in reality, you’re living in a sort of illusion of confirmation bias.Right?

Ray @ 1:17:48:Right. Besides being so damaging it’s so much less enriching.

Tim @ 1:17:53:

This, I think, is related in a sense to, maybe, another maxim that I’d love for you to elaborate on whichis don’t pick your battles, fight them all. What does that mean?

Ray @ 1:18:06:That’s one of the most misunderstood so I’m glad you asked me because it’s clear that many littlethings are symptomatic of bigger things. Under that principle it explains if somebody’s behaving in acertain way and you think, “Well, that’s not a big thing,” but you don’t understand why somebodywould do that, it may be symptomatic of a bigger thing. When you start to, almost I might say, pullevery thread, as you start to pull the threads you start to see the connections. Because you’rechewing to get at what’s everything symptomatic of. That’s what you’re really trying to get at. Is thatwhat is the person like? What is that situation like? Why would it manifest itself that way? It’s probablya principle that throws people off and I probably haven’t articulated very well.

Tim @ 1:19:11:What are some of the biggest challenges that you’ve had within Bridgewater at different phases of itsdevelopment? Were there any particular sort of forks in the road that are memorable to you, whereyou had to improve or fix something?

Ray @ 1:19:30:I’d like to start with the overarching challenge that is a constant challenge, and then we can go backto some of the actuals at various forks in the road. The overarching challenge is people’s two thems,in other words think about it in this way: there are two yous inside you. There is the thoughtful you,prefrontal cortex type of thoughtful you. Then there’s the subliminal emotional you, and you’re notaware, actually, of the subliminal emotional you. That’s why it was Freud’s great discovery in thatthere’s this subliminal that’s really controlling you but you’re not in your consciousness. There arethose two yous and they’re often at odds.

The classic example would be, of course, something where you did something that you didn’t want todo. You ate the cake that you didn’t want to eat but, anyway, or you punched somebody or something.There are these two yous that are in a battle for each other. What we’ve observed on a constant basisis that, in addition to having disagreements between people, we see that that emotional subliminalthem often can be in control of their more thoughtful them. Those are ongoing battles.

That’s basically the battle. That’s the battle that almost everybody all the time is doing. Imagine howconfusing it is. You have two yous within you that are battling with each other. Then somebody elseyou’re dealing with has two within them, and so it can get difficult.

Tim @ 1:21:28:Every conversation has at least four people involved.

Ray @ 1:21:33:Yeah. So that’s it. If you can know how to deal with that that’s a constant struggle. The thing that wefind is that very, very few people have a problem intellectually liking what’s going on here. It’s fair, it’shonest, there’s no politics. Anybody can, in an idea meritocratic way, can argue their case. It’s nothierarchical. It’s fantastic in all of those ways. The challenges that they have are then with theiremotional you reconciling with their intellectual you, and that’s an ongoing challenge that’s all thetime.

That’s a theme, I would say, is a constant theme. Okay, well then, twists and turns, at every phase inlife you have different challenges. I mean, not having any money, any resources, and then having todo things from myself. You’re an entrepreneur, no money, no resources and then having to do … Buy

the computer, rent the place, do all of that was one kind of challenge. Then you have the small teamand you have those dreams and you work with them and it’s fantastic but you didn’t have enoughresources. Then you grow and you have the exact opposite things happening to you and they producetheir own challenges. You have too many people and you don’t get to know each other as well as youdid before but you have plenty of resources but you might have the challenge of how do you maintainthat quality relationship with that large a group of people.

Then one has to figure out how you … We have 1,500 people that work at Bridgewater… how doesthat connectivity, that same kind of excitement and mission and togetherness that happened when wehad five or 50, how is that maintained and that’s a new strategy. One always has these differentproblems and the various inflection points that lead one … There are the forks in the road that are thepoints that you’re referring to and they’re the junctures your referring to. There’s just so many of them.

Tim @ 1:24:16:What I’d love to maybe dig into is a word that gets used a lot and I’d love to hear how you define andthink about risk specifically. I have a quote here that maybe we could use as a jumping off point. I’mnot sure exactly where it’s from, but, “Risky things are not in themselves risky if you understand themand control them. If you do it randomly and you are sloppy about it, it can be very risky.” Then it goeson. Their words, not yours. The key to success, their words, is “figuring out, ‘Where is the edge, andhow do I stay the right distance from the edge?’” How do you think about risk because that’s a wordthat a lot of people throw around. I have a feeling that you think about it maybe in more specific termsor more clearly than a lot of folks. How do you think about or define risk?

Ray @ 1:25:14:I think the most important thing is there’s the risk of the ruin, risk of being knocked out of the game,risk of the unacceptable, and then there is risk of the painful mistake and their world of difference likeI have to know how not to die, not how to get knocked out of the game. That’s an important risk, sothinking about all the different ways that that can happen and making sure all of those ways arecovered is number one.

Then, there is the other kind of risk, which is take it. Have the experiences. I guess maybe theexample would be if I was saying skiing comes to mind. Don’t kill yourself, but if you’re not falling a lotand hurting yourself a lot, you’re probably not learning. To distinguish between when you risk-averse,be very risk-prone in terms of being able to have the experiences that are the learning riskyexperiences that even produce some of the pains that allow the learning, but don’t get knocked out ofthe game.

Then, I think of risk as, “How do you do that? How do I improve my return-to-risk ratio?” I know that,the most important way that you can do that. There’s a few ways, but one of the most important waysis knowing how to diversify one’s bets without reducing one’s returns. There are a bunch of things thatare equally good, and you know how to take all those equally good things, but they’re not correlatedwould mean that I could do a much better job.

Just to give you an idea, think of something as being correlated like something like some … a bet.Something. We think of that as correlation, but you can almost think of it as a different kind of bet. If itis 60% correlated, and you start with a particular level of risk, and you add in the second, and third,and fourth, and fifth, and a thousand different items to diversify yourself, you will only reduce your riskby about 15%. Maybe a little bit more than 15% if they’re correlated.

If you do that with uncorrelated things, uncorrelated bets, at 15 uncorrelated bets, you will reduce yourrisk by over 80%. So now, the holy grail of investing, the thing that I learned and that’s the mostimportant is that if I can have 10 or 15, ideally, 15, but even if it’s five good, uncorrelated bets, that’s

the holy grail. The holy grail is 15 good uncorrelated bets because it will … If they’re all equally goodand expected return … In other words, let’s say they were all going to have an expected return of10%, by the way of example, on average. You won’t lower your expected return because they were allon average about 10%, but in terms of the risk, you will eliminate 80% of the risks, so you improveyour return-to-risk ratio by a factor of five.

What I’m saying is that knowing the value of uncorrelated bets is incredibly important. When you’rethinking about it as a business, i think about it as … Basically, a betting strategy in every one of thebets that I make, but if you’re thinking about, let’s say, your businesses, if you can create good, butuncorrelated things, that power of diversification is so much more valuable than trying to make anyone bet much greater.

I think about diversification, and I also think that in terms of, let’s say, bets, we’re raising my probabilityof being right. One of the most important ways of raising my probability of being right is not beingconfident that I’m right and being able to go out there and gather the triangulation, so something forme is it … Technique is quality triangulation, basically. If I can find three people … I don’t know… let’ssay it’s a medical condition, but it could be any decision.

If I can find three people who are excellent experts who will disagree with each other because they’recommitted to the right answer, and I can get triangulation and also listen to their disagreements, I’msignificantly raising my probabilities of being right, so there are techniques like that. Humility andtriangulation of great people is an excellent way of raising one’s probability of making good decision.

Tim @ 1:31:05:I’d love to unpeel the layers a little bit on uncorrelated bets. What I’m wondering is … so I think aboutthis just say in my own life with various types of investing and I’m by no means anyone with a trackrecord like yours, but how … The question that comes to mind for me is … or the observation rather,and I’d love for you to smash it to pieces if it’s not accurate, but that with a limited dataset, you can, ifyou’re able to crunch some numbers, identify say things that go up at the same time or down at thesame time so the correlation or that are inversely correlated, so when A goes up, B tends to go down.At what point do you consider yourself confident something is uncorrelated because it seems like youwould need a much larger dataset to conclude confidently that something is uncorrelated?

Ray @ 1:32:01:I think there are two ways of determining the correlation … that they’re uncorrelated, and that is, arethey in … You referred to the first, but I think it’s the worst. It still has value, which is, how did theymove together in the past? I think the more important is to understand like, are they intrinsicallydifferent things? If you were going to say, “I’m going to invest in this Silicon Valley startup and timberin Colorado or something.”

Tim @ 1:32:44:Right.

Ray @ 1:32:45:You know that those are intrinsically different things, and I think you can get a good sense of that byjust even knowing what they are. That particular startup will have a particular thing that will make itsuccessful. I don’t know what we could imagine it might be, but it might be having nothing to do withsomething else. Now, I think of, “What are the fundamental determinants of the price movement?” Youdon’t have to get so precise about it. I like to think it through probably maybe an overly-analytical way,but knowing that they’re intrinsically different is good enough. Now, back to your question of thedataset. It then becomes a … I’m going to give you a more complex answer than you probably want,

but …

Tim @ 1:33:44:No, I love complex. Let’s do it.

Ray @ 1:33:45:Okay. It has to do with a combination of sample size and environmentally biases differences. In otherwords, first, how much sample size do you have? Is that over many years, or did they have somethingin common that would affect them? If I have many years and a large number of samples in thatnumber of years, I can have a higher level of reliability if I’m just looking at the numbers than if I had ashort-term period because correlations will change.

Tim @ 1:34:36:Right.

Ray @ 1:34:37:Is it a number of years, and is it in a different environment? I have a rule in terms of most of mydecision making. It has to be timeless and universal. Timeless means if I take a period of time, withthe correlations or that which I’m discovering, true in all of those periods of time. I like to go back along time, but let’s say you have a limited amount of data. That’s a handicap. The more data you havethe better, but still, if I change the periods … In this year, did that correlation … Was it the same asthe correlation in the prior year, and was the correlation the same in the year before that? Thecorrelation, let’s say, of daily returns? Or, you could have correlation of minute returns?

So, timeless, and as far back as you go, and I like to deal with universal. What I mean by universal isthat if I have a decision rule, or equities or bonds or an asset class or something, and I see itsbehavior, did it behave the same in, with the same drivers, in another country, in another country?Were the correlations, for example, between stocks and bonds in Spain similar to the correlationsbetween stocks and bonds in Brazil, similar to the correlation between stocks and bonds in the UnitedStates?

Okay, that’ll give you more of a sense that the correlation between stocks and bonds is X than if youhave just it happening in one place. So, timeless and universal are just, for most decisions, are rulesthat I look at, but at the end of the day, I get really more comfort by being able to understand theintrinsic determinants. So, if I’m talking about investments, because that’s the subject. We can talkabout a lot of other things, but anyway, if I’m talking about correlations of investments, everyinvestment is a lump-sum cash payment now for an income stream in the future.

If I buy a bond, I give a lump-sum payment and they’re going to give me so much per month, all theway for whatever the length of the bond is. The majority of them go 20 years or whatever that is. If I’mhaving a stock, it’s a lump-sum payment, and then we estimate, what are the future cash flows? Thisis uncertainty about those cash flows, but you will look at those cash flows. They will all be affected bythe discount rate, the interest rate, we use to calculate the present value. There will be an intrinsicreason that they will be correlated, and there will be intrinsic reasons that drive their correlation.

Let’s say … If I’m getting too technical, please excuse me, but all of those investments are going tohave the interest rate that we’re using to calculate the present value in common and therefore that willdrive a correlation between that, while the items that affect their cash flows could be different, and thatwill drive, then, something that one can analyze and see that their correlations would be different fromthat attribute. If you break investments down and you look at what the causality is, it’s better than ifyou’re just looking at past numbers, but you could look at it either of those two ways, ideally both.

Tim @ 1:38:45:For those people who would like to get a better understanding of some of the underlying factors thataffect the economic engine so to speak, interest rate, et cetera, what would your recommendation beif they wanted to educate themselves?

Ray @ 1:39:01:I did a 30-minute video called How the Economic Machine Works, in which everything that I know thatis of most value describes in 30 minutes. It’s on YouTube, I’d recommend that they go there. In 30minutes they’ll have most of what I think is valuable in understanding how it works.

Tim @ 1:39:24:Perfect.

Ray @ 1:39:25:It’s a pretty simple machine. It’s like almost anything, if you think about it, most of the important thingsthat are driving almost anything, can be described pretty simply, so that’s what I attempted to do inthat video on YouTube.

Tim @ 1:39:40:Great.

Ray @ 1:39:41:It’s been downloaded five million times. I mean people … it’s rated highly, so I think it’s helpful.

Tim @ 1:39:51:I will … to everybody listening, I’ll link to that in the show notes as well, so people can easily accessthat. Just to pose a hypothetical, because I’d love to hear how you approach, not necessarily if it’s along or short decision, although it could be, but just to hear how you would even go about assessing apotential opportunity. Because for instance, a very primitive compared to how your operation or howyou would approach investing, but living in Silicone Valley for instance as long as I have, 17 yearsnow, I have an informational advantage when it comes to choosing and assessing different startupopportunities. Elsewhere, people might have an analytical or behavioral advantage, or fill in the blank,if you were to look at for instance, cryptocurrency, Bitcoin, all this other stuff, how would you evenbegin to assess that in whether it poses a good or bad opportunity for investment?

Ray @ 1:41:01:Well, everything I look at is, I try to look at who are the buyers and sellers, and what motivates themand what are they gonna do. I break it down, I analyze … now, I wouldn’t know how I would do that inBitcoin, and I don’t know if it would apply to everything, but as a general theme, if you know who thebuyers and sellers are and what their motivations are, how big they are, and so on, you can prettymuch calculate … you can go a long way to understanding what the price is likely to do in the future.That’s very different from something like value investing, which is something that says, my lump sumpayment today is this, and the future cash flows over the next number of years will be this, so I’m verymuch more driven to the buying and selling. In terms of something like a cryptocurrency … first of all,not an expert on the cryptocurrencies, I would think that what I’m describing is super important to getat, because there are two purposes of a currency. Any currency is a medium of exchange or a storehold of wealth.

When we think of dollars, you use it as a medium of exchange, or if we’re holding it as a bond, it’s apayment over a period of time, and it’s a store hold of wealth. In the case of cryptocurrencies right

now, it’s not a very practical medium of exchange yet. I have my Bitcoins and I try to go spend themand it’s not easy to go spend them.

Tim @ 1:42:57:Yeah.

Ray @ 1:42:59:When we think of it as a store hold of wealth, no, today it’s primarily a speculative market. It’ssomebody knowing … it’s not its intrinsic value that you’re going to be looking at. It’s really thinkingabout who are the buyers, who are the sellers, and what they are likely to do, and projecting that that’sgoing to be the driver of investing in a cryptocurrency.

Tim @ 1:43:26:Could you talk a little bit more about assessing the motivations of buyers and sellers? You could do itwith any class or any hypothetical, but specific example, because I guess in my mind as someonewho’s very much a junior varsity with all of this, that the motivations would seem to be, at least ifpeople are speculating, to get rich, both on the selling side and on the buying side. How do you digdeeper than that, and any examples would be super helpful.

Ray @ 1:43:54:Every buyer has behavioral characteristics for certain reasons, so if you say, let’s say stocks, to use avery simple example, a typical individual, maybe mutual fund buyer, will buy after something’s goneup because they think it’s a better investment. They’ll sell, they’ll get scared when it goes downbecause they’ll get scared, and they think it’s a worse investment. Whereas, a typical institutionalinvestor or pension fund, will buy when it goes down because they have to rebalance their portfolio tokeep an asset allocation mix at a certain level. If they’re losing money in something, and makingsomething another, they will rebalance in a mechanical way. There are many different ways ofknowing. Of saying, “Okay, who are the biggest ones? Who are the littlest ones?” But mostimportantly the biggest ones, and, “What are they motivated to do?” And by my understanding, and inthat way it’s important. So you have a lot of different buyers, and sellers in different markets fordifferent reasons. That when you examine it, it kind of makes sense. That somebody might … Stockmay go public, and then the owners have a window that is closed for them to sell it-

Tim @ 1:45:30:Right.

Ray @ 1:45:31:And then the window opens up, and then they’re going to sell at that time. I’m just give you a wholebunch of examples that one can know, or attempt to know. That are more than just people wanting tomake money. Somebody squeezed. You have a financial squeeze, and they need cash. So thatthey’re motivated to sell it because they need cash. There are lots of different reasons.

Tim @ 1:46:01:Right. Meaning a distressed seller in the last case.

Ray @ 1:46:06:Right, and to know on and ongoing basis, that the market is made up of that mixture. And so, as muchas one can, it is a good way of getting a sense of that.

Tim @ 1:46:21:Very common where I’m sitting right now. I’m in San Francisco, and so I’ve read, and please correct

me if I’m wrong. But from Tony Robbins book, which included you, that I suppose over a long enoughperiod of time, anyone’s favorite asset class … I’m paraphrasing this will decrease by 50 to 70percent, or something like that.

Ray @ 1:46:45:Yeah, that’s what I said.

Tim @ 1:46:46:Okay got it. So, what are the most important implications of that from the behavioral standpoint ofinvestors. How should that change their thinking, or behavior?

Ray @ 1:46:59:Well it goes back to the point I was making before. That you can come up with a bunch of equallygood investments. I mean generally speaking, all investments are competing, and what that means isif one was clearly better than another, more money would go into it, bid up it’s price, and then it wouldbe comparably … According to the market place, and the market place is pretty smart. In order to besuccessful, and being tactical you have to better than the market place. And that isn’t easy.

Therefore the market place is pretty smart. That all of those assets are going to have roughlyspeaking, comparable expected returns. Other than the surprises that will take place in the future, andyou have a choice. You’re either gonna be smart enough, that you think you’re gonna bet againstsomebody else. That they’re gonna go up or down, or you’re gonna diversify. So, you can take theseassets, and achieve a level of balance with those assets. That doesn’t cost you in expected return, butprovides you a much lower level of risk.

And if you can reduce your risk, and keep your expected return the same, you gotta do that. Sodiversification as we were talking about before, can allow an individual … I explained in that book, bythe way it’s a great book. ‘Cause what Tony did was to take concepts, and make them very clearlyconveyed for the average reader. I explained, and he interviewed me in the book, how to achieve thatkind of balance. So that you’re not gonna have that.

Because if you lose 50, or 75 percent of your money in a decline. Let’s say 50 percent, that meansyou need a hundred percent return to get back-

Tim @ 1:49:03:Right to where you started, yeah.

Ray @ 1:49:05:So you can’t allow yourself to do that. That’s the risk of ruin thing. So diversification, properdiversification can reduce your risk, without reducing your return.

Tim @ 1:49:21:There are many different ways to diversify. How would your approach differ most, if it does from say aDavid Swenson?

Ray @ 1:49:29:My approach as I was describing it, is to balance the risks based on the two factors that we were …The two determinates that we talked about before, what are the intrinsic drivers of those. And thenalso what are the timeless, and universal correlations of those assets. And to achieve balance. I’malways looking for a value added, risk-reducing trade. The issue it to look at the intrinsiccharacteristics, and achieve balance.

Tim @ 1:50:08:Where diversification can get very tricky in the world of say startup investing. You mentioned in briefthis lockup period is where someone … I mean, perfect example of this … Has made investments thatare liquid for a period of god knows how long– seven to 12 years in some cases– and what started offas a plan to have say 10 percent of ones liquid net worth invested into startups, suddenly becomes 80percent of the pie chart.

Ray @ 1:50:38:I think … Are you saying, if you have an 80 percent of your portfolio concentrated in the one particularasset?

Tim @ 1:50:48:That’s right.

Ray @ 1:50:49:I would urge you to find out how you’re gonna hedge that thing.

Tim @ 1:50:53:Yeah.

Ray @ 1:50:54:And there are different ways that you can make that hedge. To some extent it’s to buy something, butto some extent you might go into a contract … It could be done almost … I don’t know the nature ofthe particular types of investments, but if it’s a particular company, with a particular profile that’ll beunique to it. The only way that you’re gonna be able to hedge that, is to go into some probablyinvestment bank, and actually explain to them their circumstances. And find out a structure that theymight be able to come across.

It’s gonna be a highly impure hedge, and it needs to be engineered. So it’s a very difficult thing, andbecause 80 percent of your net worth is tied up, you can’t go have the cash and go buy somethingthat’s going to balance it. And you wouldn’t want to borrow, and then borrow the cash to buysomething different. Because, probably it’s correlation with whatever you’re using as a diversifier is notgonna be reliable, and so you could really get screwed. So, I don’t know that I have a good answer forthat.

Tim @ 1:52:21:Yeah, it’s a tough one, because like you said, looking because I don’t have anywhere close to thecash required to say, take a sort of derivative position to try to hedge. It is very challenging, and likeyou also observed, the impure nature of trying to do any kind of secondary with a forward lookingpromissory note, or something like that. In any case, I don’t want to bore people to tears, but it’s avery common problem in Silicon Valley.

Ray @ 1:52:48:It’s difficult because it’s also a illiquid. So much money is a illiquid. So people can be real rich onpaper, but pretty poor cash wise.

Tim @ 1:52:59:I mentioned tactical and psychological. So in a situation like this, where you can’t … There is nomagic answer. There is no necessarily non obvious solution to this. It’s just a tough position to be in.Where you stand to potentially lose a lot. What do you say to yourself? What’s your self talk in a

situation like that, where you may just be stuck in a position? Or that you can’t get out of. From aninvesting perspective.

Ray @ 1:53:29:Well I think of, “How bad am I gonna get hurt?” Kinda thing. And I almost think in portfoliossometimes. That it’s better to take a portfolio when you have a certain amount of cash. And you think,“How bad am I gonna get?” And then you could take your risk, and put it in another portfolio. Andseparate the portfolios, rather than to blend them together so that you’re actually thinking, “Okay howbad is it gonna get?” And also, “Okay so, it’s the nature of the beast.” And, “What’s the big deal?” Imean, you’re going to … When it comes down to it, you’re gonna have a … What can they take awayfrom you?

Tim @ 1:54:16:Right.

Ray @ 1:54:17:You’re gonna have a bed to sleep in. You’re going to have food. You’re going to have friends. The mostbasic good things, you’re playing the game, and it’s the nature of the beast. So I guess that’s … Forme, it’s like I keep thinking, “What are they gonna take away from me? And what’s it really gonnamean?”

Tim @ 1:54:39:Have you ever … I’ve read for instances this book titled More Money Than God, which I read a fewyears ago. And there were a number of cases in that book of very, over the long term, successfulinvestors who had hit a point of overwhelm. Or such high levels of stress that they, based on myrecollections, which could be faulty … But effectively hit the reset button. They liquidated all theirpositions, and kind of started over. Is that something you’ve ever done? And if so, how did you thinkabout that?

Ray @ 1:55:08:No, I’ve never done it because of stress. I’ve liquidated positions to take risk off the table, becausecertain things have happened, and I’d say, “Listen, I just don’t know, and I’d rather now take risk offthe table.” But I do know of one terrific investor who got into a very bad mindset. I mean he justcouldn’t make anything work for a period of time. And that started to affect his psychology, thatworsened his decision making.

And what he did was he brought his positions down to such a small level. That he was continuing toplay the game, but with amounts that wouldn’t have that psychological effect, until he could get backinto that mindset, and get back into the groove.

Tim @ 1:56:05:Did that work for him?

Ray @ 1:56:06:That worked for him. Psychology is a big deal. Psychology’s a big deal in the markets. That’s why Ialso find that my rule based algorithmic type of trading, and rule meaning I take a rule, decision rule.So it’s not a … It’s just the algorithm is just an expression of my criteria. And then I put it into analgorithm. But by knowing how that algorithm works, and having it operate next to me.

In other words I’m doing my decision making in my way, and then all my thinking is programmed intothe computer, so that there is a parallel decision making going on, by the computer. Has been

fabulous, because that computer ain’t got no emotions. And it’s just like, I don’t know, a computerchess game, and it’s great. And it’s been a fabulous experience to have me, and it playing the gametogether. So, the taking the emotions out of it, is a real, real plus.

And I’m a meditator, so I would say, “I don’t get as emotional as some people do.” But when you gothrough it, because you go through a process in which you’re thinking let’s say, something’s goingagainst you. And of course trades will always go against you. It’s not like you buy something, and fromthat point forward it goes up. That you then sell it, and …

I meant there’s … It’s not like that. And so, if you buy something that’s good value, it might go downbefore it goes up. And then when you’re wrestling with, “Okay, now do I sell it?” It’s not like that’s themoment either. So, now all, every moment you don’t know whether you’re … Are you missingsomething? Or are you wrong? Or is it just to early?

All of that psychology enters into it, and you start to think about multiple possibilities, and then, “Okaythere’s more opportunity.” That’s why the strategies I’m describing, the combination of diversification,so no one bad bet is gonna matter so much. So I have the casino of bets. So yeah, if I’m wrong I’m onone or here, it’s okay, but that casino means all my games on balance are gonna pay off. And thenthat notion of systemizing the decision rules. These things have been very helpful to me.

Tim @ 1:59:01:And I think this is a great place to wrap up, and I think it’s … I’m just gonna read a small piece fromyour book, which I highly recommend everybody check out. I mean, just to give everybody an idea,one of the testimonials blurbs on the book is from Bill Gates, “Ray Dolio has provided me withinvaluable guidance and insights that are now available to you in principles.”

So I think that this is gonna do a lot of good in the world, and help people to make better decisions.And here’s a quick quote so, “Everyday each of us is faced with a blizzard of situations we mustrespond to. Without principles, we would be forced to react to all things life throws at us individually,as if we were experiencing each of them for the first time. If instead we classify these situations intypes, and have good principles for dealing with them, we will make better decision more quickly, andhave better lives as a result.” And I’m very excited to see what this book does in the world. And Isuppose just as one of the very last questions, why did you decide to put this book out? Why now?

Ray @ 2:00:07:I’m at a stage in my life where my objective is no longer to be more successful myself. I’m in atransition. I’m 68 years old, and I felt that my number one goal is to help people be successful withoutme. And having this collection of recipes that it’s been built up over that period of time, and passing italong. So that basically everything that I know is of value in the book, frees me of that responsibility.And it is what I feel is a sense of responsibility. And I hope everybody … I wish everybody would dothat same.

Like I’d love to know … How many peoples principles would you love to know? By the way, I’ve beenspeaking to a number of, I won’t use the names, but a number of very successful people. And I knownow that they are going to be more inclined to put their recipes out. And I think it’ll be fabulous. Youshould write your principles, how you do share your principles in many ways.

But as those recipes, and you give these recipe books, and people then can compare one to another,and debate them in operating at that principle level I think, is a responsibility that I have to do. And itkind of frees me up to go to my next stage of life.

Tim @ 2:01:42:

Well I’ve been taking notes throughout this entire conversation. I’m going to simulate my own painbutton, and I have a number of homework assignments that I’m looking forward to tackling. And forpeople listening, they can certainly learn a lot about the book, and dig in at principles.com. They canfind you on Twitter and elsewhere @raydalio. Is there anything else you would like to suggest, or ask,or encourage people to do, before we wrap this up?

Ray @ 2:02:18:No just have their own principles that they believe in, and be open minded. Write their principlesdown. Compare them with others. Be guided by principles. Be a principle person. I would say thatthose things probably will help them be not only more successful, but comfortable with themselves.

Tim @ 2:02:39:Perfect. Well, Ray, I really appreciate all the time. This has been a lot of fun for me, and I’ve beenlooking forward to this every since we met. And you’re so kind, after bolstering my confidence after myrehearsal at TED. So, I really appreciate all of it, and the work that you do.

Ray @ 2:02:57:You nailed it. It was great. We were both nervous that we were going to do a lousy job, and we bothgot through it well. So anyway, thank you also for your very interesting questions, and the wonderfulexchange. Thank you.

Tim @ 2:03:15:My pleasure entirely, and for everyone listening, links to the book, to Ray’s video explaining theeconomy … Everything that we talked about can be found in the show notes. I will link to everything attim.blog/podcast, where you can find the show notes for this episode, and every other. And until nexttime, thank you for listening.