Ray Dalio: Principles Behind the World’s Biggest Hedge Fund

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Ray Dalio: Principles Behind the World's Biggest Hedge Fund

Ray Dalio is not only the manager of the world's largest hedge fund but in doing so he has developed a set of principles for life and trading that everybody can learn from to cultivate success.

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Ray Dalio created an investment company that uses a specific philosophy to create a winning culture. The process of creating this method took years. Dalio, he believes that trading works best for those who adhere to life principles.

Dalio says that to learn about your principles, you need to experience life. Nobody can teach you your principles; you need to learn from each scenario. Here Dalio demonstrates the same trading psychology ideals that we presented in our blog Demo to Live trading.

Ray Dalio has described his life experiences in the book “Principles”.

Embed video: principles

These principles have helped him develop a culture at his hedge funds Bridgewater Associates. Dalio’s principles focus on defining your goals and facing the problems that generate road bumps. You understand how to get to the cause of these issues and create a plan to mitigate these problems.

Contents: Ray Dalio Principles

•        Who is Ray Dalio?

•        Ray Dalio's philosophy about trading

•        How did Ray Dalio Start Investing?

•        The Bridgewater trading psychology

•        Famous Ray Dalio quotes

Who is Ray Dalio?

Ray Dalio has used his principles to mold and refine Bridgewater Associates, a fund he founded. He is the Co-Chairman and Co-Chief Investment Officer of the firm, which he created in 1975.

Source: CNBC

He is considered one of the most influential investors worldwide. Mr. Dalio grew up on Long Island in New York, going to a local university, and then attended Harvard to receive a master’s in business administration.

As of mid-2021, Ray Dalio has a net worth of more than $20 billion made from his investment process and his trading psychology that we are learning here.

How did Ray Dalio Start Investing?

Ray Dalio’s investing started at a very early age. He was born in Queens, New York, in 1949, and after graduating in 1973, he founded Bridgewater Associates in his apartment. In 2021 the company was listed as the largest hedge fund globally. In 2020, Ray Dalio was listed as the 79th wealthiest person in the world.

Dalio got his first taste of trading from a friend. Wall Street veteran George Leib’s son, a Wall Street Trader, gave Dalio a summer job at his trading firm. Dalio’s first foray into investing came when he was 12 when he bought shares and tripled his investment. The money that he used was saved from earnings he made as a golf caddy.

Ray Dalio's philosophy about trading

Throughout the decades, there have been thousands of money managers that have a style that is unique and allows them to generate huge returns.

What separates Ray Dalio from the herd is that few money managers have specific principles in the way they want ideas discussed and executed.

The majority of investment managers create operations that are segmented into sectors. For example, you might have an investment arm that strictly focuses on financial stocks. This group could have the mandate to generate a specific return on capital and make decisions purely based on their view of the markets.

Ray Dalio’s principles are different. He believes in a culture where ideas are shared and argued until a clear decision about the direction of a stock, sector, or macro view is thoroughly discussed before any decisions are made.

Source: Jareddees.com

Dalio also strives to create inward recognition of your skills and falts. Dalio believes that it is okay to make a mistake. Your goal is to learn from each error so you will understand how you might alter the outcome when facing a similar issue. Dalio believes that once you figure out your significant weakness, you should talk to others about it to collect more information and find ways to turn it into a strength.

He also wants people to use others to generate better ideas. The approach of finding other people that have area expertise is not complex if you have the trading mindset that allows you to find help. As we have discussed, there are many emotions in trading and many people, especially wealthy investors suffer from emotions like pride and arrogance, which prevent them seeking out alternative opinions.

Dalio believes that you don’t need to know everything. You need to understand where your strengths lie and how you can bolster your weaknesses.

Ray Dalio's trading strategy at Bridgewater

Bridgewater Associates focuses on macro trading strategies, a top-down concept rather than a bottom-up method. The main strategies used by Bridgewater are the “Pure Alpha” strategy and the “All Weather” strategy.

Pure alpha is more about directional bets within macro markets like forex, indices, and commodities and the All-Weather uses a risk parity strategy. To mitigate volatility, he incorporates bonds. The portfolio’s lower volatility allows him to leverage his assets and generate higher returns with lower volatility. At Bridgewater, higher volatility assets receive a lower piece of the pie while lower volatility assets retain a higher portion of the total.  

At the core of both strategies is the concept that every investment starts with a pool of capital that will generate cash flow in the future. The value of the future cash flows makes up the value of the asset when it is invested.

The Bridgewater trading psychology

Ray Dalio understands the importance of psychology for investing and developed some radical psychological techniques at his company Bridgewater. Dalio developed three core pillars to harness the skills of the staff at Bridgewater and limit destructive emotions.

Trading psychology is essential to the investment philosophy developed by Bridgewater associates. Dalio introduced several core pillars to harness the methods of the employees at Bridgewater, which also help mitigate their negative emotions.

1. 
   

   Principles

   
   

Every investment made at Bridgewater starts with this premise. Dalio believes that everyone should have ambitions and dreams but needs to combine that through the process with reality. He describes the need to help you decide on how to have a successful life. When you have problems combined with weaknesses, you need a principal to help you solve these issues.  One of Dalio’s mottos is that pain plus reflection equals progress. When you embrace your reality and think logically about yourself and your circumstances, you can follow a simple 5-step process to be successful.

1. Define your goals.


2. Encounter the problems that will be hurdles


3. Diagnose these problems to get at the route cause


4. Design a plan to eliminate the problems


5. Execute those designs

Most people cannot do all five steps well. It’s incumbent upon you to figure out your strengths and weaknesses and search out those who can help you with the other issues.

2. 
   

   Radical transparency

   
   

Bridgewater requires that investment professionals are radically open-minded and transparent. The best way to do this is to seek out people that will help you find the truth. That requires thoughtful disagreement. Find people who have different views and see it from their point of view. The best way to generate clarity is to constantly discuss ideas with people that do not agree with your opinion. The radically open-minded approach helped Dalio find the best investment opportunities.

The pros of this type of thinking are it helps you avoid your blind spots. It can help you with your success and how you could find the best investments. Dalio’s success was enhanced by the access he has to open-minded people who also focus on investments.  Dalio found that success is satisfaction, not the ultimate goal. The struggle to evaluate is the reward. According to Dalio, the shared journey process is more important than the returns he generates.

3. 
   

   Automating Risk Management

   
   

A lot of the data used by Bridgewater for investment decisions is automated using mathematical algorithms and machine learning. Ultimately a human makes the trading decision but the machines help connect the dots in the data and limits the capacity for human error or emotional trading decisions. This is something retail traders can do on a smaller scale with MT4 EAs and scripts. Dalio puts it like this:

"As these machines help us, they will learn about what we are like--what we value, what our strengths and weaknesses are--and they will be able to tailor the advice they give us by automatically seeking out the help of others who are strong where we are weak." – Ray Dalio

Famous Ray Dalio quotes (and what they mean)

Dalio has several well-recognized quotes. For example:

“It’s far more common for people to allow ego to stand in the way of learning.”

“If you’re not failing, you’re not pushing your limits, and if you’re not pushing to your limits, you’re not maximizing your potential.”

‘He who lives by the crystal ball will eat shattered glass.”

The bottom line is that Ray Dalio has created core principles that garner a culture and psychology at Bridgewater that has been very successful. His book principles show this is something we can all use in our own lives and for trading.

The Real 'Trader'

In the next article in our series of the masters of trading, we meet the man who is probably the closest to a real day trader like us. He started out trading cotton in the pits of Chicago before going to be one of the world's best market timers and billionaire traders.

The post Ray Dalio: Principles Behind the World’s Biggest Hedge Fund appeared first on Key To Markets Blog.

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