Ray Dalio is the founder of Bridgewater Associates, a hedge fund described by many to be “creepy” and “cult-like” that happens to also be the world’s largest. Virtually all meetings are taped to keep an objective record of what was said and for training purposes. Dalio has an usual obsession with the open discussion of mistakes and doesn’t hesitate to point out his subordinate’s mistakes in a blunt, tact-less manner. What is more disturbing is that he encourages everyone to act in the same way, resulting in a culture in which every single misstep is questioned and debated at length. He also gives each new hire a copy of his “Principles”, a hundred-page manifesto which is essentially a self-help book:
Dalio’s philosophy has created a workplace that some call creepy. Last year, Dealbreaker, a Wall Street Web site, picked up a copy of the Principles and made fun of a section in which Dalio appeared to compare Bridgewater to a pack of hyenas feeding on a young wildebeest. In March, AR, a magazine that covers hedge funds, quoted a former colleague of Dalio’s saying, “Bridgewater is a cult. It’s isolated, it has a charismatic leader and it has its own dogma.” The authors of the article noted that Dalio’s “emphasis on tearing down an individual’s ego hints at the so-called struggle groups of Maoism,” while his search for “human perfection devoid of emotion resembles the fantasy world in Ayn Rand’s ‘The Fountainhead.’”
Could it be that Bridgewater’s unusual corporate culture is the reason for its success? Dalio certainly thinks so. A fascinating article in the New Yorker provides an excellent background on Dalio’s early life, the formation of Bridgewater, and more importantly, Dalio’s personal philosophy. The article also touches briefly on Dalio and Bridgewater’s investment style and strategy which I found the most useful as an investor:
What accounts for Dalio’s success? His colleague Bob Prince describes him as “a big-picture thinker connected to a street-smart” trader. Many economists start at the top and work down. They look at aggregate statistics—inflation, unemployment, the money supply—and figure out what the numbers mean for particular industries, such as autos or tech. Dalio does things the other way around. In any market that interests him, he identifies the buyers and sellers, estimates how much they are likely to demand and supply, and then looks at whether his findings are already reflected in the market price. If not, there may be money to be made. In the U.S. bond market, Bridgewater scrutinizes the weekly U.S. Treasury auctions to see who is buying—American banks, foreign central banks, mutual funds, pension funds, rival hedge funds—and who isn’t. In the commodities markets, the firm goes through a similar exercise, trying to figure out how much demand is coming from corporations and how much from speculators. “It all comes down to who is going to buy and who is going to sell and for what reasons,” Dalio explained.
To guide its investments, Bridgewater has put together hundreds of “decision rules.” These are the financial analogue of Dalio’s Principles. He used to write them down and keep them in a ring binder. Today, they are encoded in Bridgewater’s computers. Some of these indicators are very general. One of them says that if inflation-adjusted interest rates decline in a given country, its currency is likely to decline. Others are more specific. One says that, over the long run, the price of gold approximates the total amount of money in circulation divided by the size of the gold stock. If the market price of gold moves a long way from this level, it may indicate a buying or selling opportunity.
In any given market, Bridgewater may have a dozen or more different indicators. However, even when most or all of the indicators are pointing in a certain direction, Dalio doesn’t rely solely on software. Unless he and Jensen and Prince agree that a certain trade makes sense, the firm doesn’t make it. While this inevitably introduces an element of human judgment to the investment process, Dalio insists it is still driven by the rules-based framework he has built up over thirty years. “When I’m thinking, ‘What is going on today?,’ I also need to make the connection to ‘How does what is happening today fit into our framework for making this decision?’ ’’ he said. Ultimately, he says, it is the commitment to systematic analysis and systematic investment that distinguishes Bridgewater from other hedge funds. “I hear a lot of people describing what’s happening today without the proper historical context and without the framework of how the machine works,” he says.