Bridgewater Associates

Dalio's 1982 bust: a wrong crisis call left him borrowing $4,000 from dad

Ray Dalio predicted the 1982 emerging-market debt crisis would wreck the economy, testified to Congress, and was badly wrong: he lost money for himself and clients, laid off everyone, and had to borrow $4,000 from his father. He says the failure taught him humility to balance his audacity and how to diversify bets, which became the foundation of Bridgewater.

“And then Mexico defaulted in August of 1982. So I was asked to testify to Congress about what this is all about and what might happen to the economy. I thought the economy was going to be a disaster. I couldn't have been more wrong. Okay. So I lost money for me. I lost money for my clients. And I had to lay off everybody. I was so broke I had to borrow $4,000 from my dad.”

The Holy Grail of investing: 15 good uncorrelated return streams

Dalio's investing mantra is to find about 15 good, uncorrelated return streams. His math shows that at roughly 15 you cut about 80% of portfolio risk without cutting returns, improving the return-to-risk ratio by about 5x: upside without the downside.

“Well, I just looked at the math of it. Okay. So in other words, what are the marginal benefits of diversification given the different levels of correlation? And I have that on a chart that keeps reminding me, okay, if you can get out to 15, you can get down to about— reduce about 80% of your risk without reducing your return. That means that you increase your return to risk ratio by something like a factor of 5.”

Steal thisBefore adding a new bet, check how correlated it is with what you already hold, and build toward ~15 return streams that don't move together.

Backtest every decision rule and keep only the timeless, universal ones

Dalio's investing game plan: for each decision, study how that rule would have performed in past circumstances, codify it into a computer system, then scan the whole world for places it applies and combine the uncorrelated ones. Rules must be timeless and universal; if one failed in some past period, he needs to understand why before trusting it now.

“Every time I would be— make a decision, I would go back and study if I made that decision under these circumstances, how would it have worked in the past? And I would know the track record of that decision. And that would give me also greater understanding of how things work. And so then I would have a decision rule and then I would program it into the market, into the computer.”

Steal thisWrite each recurring decision as an explicit rule, test it against past situations, and only trust rules that held up across eras and markets.

Hire on values, then abilities, then skills: the reverse of the resume

Dalio once hired a former door-to-door Bible salesman to sell research. His rule: most people judge candidates on skills via the resume, but the real order of importance is values first, abilities second, and skills last, because people with ability can learn new skills, and skills like programming can lose their value fast in the AI era.

“Not much, but he was curious and he was, you know, like I say, there are 3 things. There's skills, abilities, and values. And most people look at skills. And they look at the resume to determine what skills they have. In my opinion, it's the opposite order is what's most important. First, values. What are the person's values like? Then what are their abilities? Because if you have abilities, you can change what your skills are.”

Steal thisIn your next interview, spend most of the time probing values and raw ability; treat resume skills as the tiebreaker.

Bridgewater: ~11.8% a year for 31 years, uncorrelated, worst year about -13%

Dalio says Bridgewater became the largest hedge fund not through marketing but by consistently earning excellent returns with minimal risk while staying uncorrelated to stocks: about 11.8% a year over roughly 31 years. Its worst year was down about 13% (during COVID), with only around three losing years.

“It became the biggest hedge fund because we the most consistently made excellent returns with minimal risk, and we were uncorrelated with the stock market or any other market. That's, that was the main thing. It made, I think, 11.8% a year for, for something like 31 years when I did it. The worst down in a year was 2000 because of the COVID and we didn't know how to deal with the COVID well. That was down through about 13%.”

Bridgewater's 'cult' reputation led Dalio to post his Principles: 3M downloads

Dalio says Bridgewater became the largest hedge fund while he tried to stay under the radar, but its culture of idea meritocracy, radical truthfulness and radical transparency was perceived as a cult. He put his principles online so recruits would understand the culture, and the document was downloaded about 3 million times.

“We have this culture. Okay. And the culture was perceived as a cult. And then I put online the principles just so we have a book of how we're going to be with each other, the principles. And then that got around. 3 million copies were— it was downloaded 3 million times. People passed it around. Otherwise it was going to be a problem, like hiring people and so on. They wouldn't understand the culture. Which is the culture is an idea meritocracy in which we radical truthfulness and radical transparency.”