Principles – Ray Dalio

Principles - by Ray Dalio
Principles – by Ray Dalio

ISBN: 1501124021 READ: February 2018

I hyped this book up a lot in my mind because it is by someone I really admire who has been quite private for a long time. Though I did enjoy parts of the it, it seemed to drag after a while and had a ton of repetition. The first part is Ray’ life principles which I enjoyed and got a decent amount out of, and the second part is his principles he used to run his hedge fund. The second part seems very useful to someone starting or running a company, but I’m not there just yet, so it was very difficult to find principles that applied to me. I’d recommend this to an upcoming startup CEO or someone in a management position, but if you aren’t there in life, I’d say the first half is valuable, and you can skip the second half.

 


NOTES

LIFE PRINCIPLES

Whatever success I’ve had in life has had more to do with my knowing how to deal with my NOT knowing than anything I know.

Think for yourself to decide 1) what you want, 2) what is true, and 3) what you should do to achieve #1 in light of #2.

To make money in the markets, one needs to be an independent thinker who bets against the consensus and is right.

In trading you have to be defensive and aggressive at the same time. If you are not aggressive, you are not going to make money, and if you are not defensive, you are not going to keep money.

The only way I would succeed would be to:
1. Seek out the smartest people who disagreed with me so I could try to understand their reasoning.
2. Know when not to have an opinion.
3. Develop, test, and systemize timeless and universal principles.
4. Balance Risks in way that keep the big upside while reducing the downside.

Typically, by going what comes naturally to us, we fail to account for our weaknesses, which leads us to crash. What happens after we crash is most important. Successful people change in way that allow them to continue to take advantage of their strengths while compensating for the weaknesses and unsuccessful people don’t.

From very early on, whenever I took a position in the markets, I wrote down the criteria I used to make my decision. Then, when I closed out a trade, I could reflect on how well these criteria had worked.

I believe that organizations basically have two types of people: those who work to be part of a mission, and those that work for a paycheck.

A principle that I apply to all parts of my life: Making a handful of good uncorrelated bets that are balanced and leveraged well is the surest way of having a lot of upside without being exposed to unacceptable downside.

Having a process that ensures problems are brought to the surface, and their root cause diagnosed, assures that continual improvements occur.

I knew which shifts in the economic environment caused asset classes to move around, and I knew that those relationships had remained essentially the same for hundreds of years. There were only two big forces to worry about: growth and inflation. Each could either be rising or falling, so I saw that by finding four different investment strategies – each one of which would do well in a particular environment (rising growth with rising inflation, rising growth with falling inflation etc.) – I could construct an asset-allocation mix that was balanced to do well over time while being protected against unacceptable losses. I called it the All Weather Portfolio because it could perform well in all environments.
It is now generically called “risk parity” investing.

Having the basics – a good bed to sleep in, good relationships, good food, and good sex – is most important, and those things don’t get much better when you have a lot of money or much worse when you have less.

Dreams + Reality + Determination = A Successful life.

Radical open-mindedness and radical transparency are invaluable for rapid learning and effective change.

Whenever I observe something in nature that I (or mankind) think is wrong, I assume that I’m wrong and try to figure out why that nature is doing makes sense.

The individual’s incentives must be aligned with the group’s goals.
Reality is optimizing for the whole – not for you.
Adaptation through rapid trial and error is invaluable.

This constant drive toward learning and improvement makes getting better innately enjoyable and getting better fast exhilarating. Though most people think that they are striving to get the things (toys, bigger houses, money, status, etc.) that will make them happy, for most people those things don’t supply anywhere near the long-term satisfaction that getting better at something does.

Pain + Reflection = Progress
If you can develop a reflective reaction to psychic pain that causes you to reflect on it rather than avoid it, it will lead to your rapid learning/evolving. After seeing how much more effective it is to face the painful realities that are caused by you problem, mistakes, and weaknesses, I believe you won’t want to operate any other way. It’s just a matter of getting in the habit of doing it.

Go to the pain rather than avoid it.
If you don’t let up on yourself and instead become comfortable always operating with some level of pain, you will evolve at a faster pace. That’s just the way it is.

1. Don’t confuse what you wish were true with what is really true.
2. Don’t worry about looking good – worry instead about achieving your goals.
3. Don’t overweight first-order consequences relative to 2nd and 3rd order ones.
4. Don’t let pain stand in the way of progress.
5. Don’t blame bad outcomes on anyone but yourself.

The personal evolutionary process has 5 distinct steps:
1. Have clear goals.
2. Identify and don’t tolerate the problems that stand in the way of your achieving those goals
3. Accurately diagnose the problems to get at their root causes.
4 .Design plans that will get you around them.
5. Do what’s necessary to push these designs through to results.

*** What you think is attainable is just a function of what you know at the moment ***

Thinking about problems that are difficult to solve may make you anxious, but not thinking about them (and hence not dealing with them) should make you more anxious still.

The two biggest barriers to good decision making are your ego and your blind spots.

Replace your attachment to always being right with the joy of learning what’s true.

Open-mindedness doesn’t mean going along with what you don’t believe in; it means considering the reasoning of others instead of stubbornly and illogically holding on to your own point of view.

In thoughtful disagreement, your goal is not to convince the other party that you are right – it is to find out which view is rue and decide what to do about it.

People who change their minds because they learned something are the winners, whereas those who stubbornly refuse to learn are the losers.

Open minded people are more curious about why there is disagreement. They are not angry when someone disagrees.
Open minded people genuinely believe they could be wrong; the questions that they ask are genuine.
Open minded people know when to ask questions and when to make statements.
Open minded people are always more interested in listening than in speaking; they encourage others to voice their views.

Are you willing to fight to find out whats true?

You could have all they money you’ve ever wanted, a successful career, and be in good physical health, but without loving relationships, you won’t be happy. The good life is built with good relationships.

When you say “I just thought of something” you noticed your subconscious mind telling your conscious mind something. With training, it’s possible to open this stream of communication.
While it may seem counter intuitive, clearing your head can be the best way to make progress.

Habit is probably the most powerful tool in your brain’s toolbox. It is driving by a gold ball sized lump of tissue called the basal ganglia at the base of the cerebrum.

Habit Loop
The first step is a cue – some “trigger that tells your brain to go into automatic mode and which habit to use.” Step 2 is the routine, “which can be physical or mental or emotional.” Finally, there is a reward, which helps your brain figure out if this particular loop is “worth remember for the future”

A brain imaging study by Harvard-affiliated researchers at Massachusetts General Hospital found physical changes in the brain after an eight-week meditation course. Researchers identified increased activity in parts of the brain associated with learning, memory, self-awareness, compassion, and introspection as well as decreased activity in the amygdala.

Introverts focus on the inner world and get their energy from ideas, memories, and experiences while extroverts are externally focused and get their energy from being with people.

Recognize that
1) the biggest threat to good decision making is harmful emotions.
2) Decision making is a two step process. First learning and then deciding.

Be an imperfectionist. Perfectionists spend too much time on little differences at the margins at the expense of the important things.

Think of every decision as a bet with a probability and a reward for being right and a probability and a penalty for being wrong.

Anything is possible. Its the probabilities that matter.

To acquire principles that work, it’s essential that you embrace reality and deal with it well. Don’t fall into the common trap of wishing that reality worked differently than it does or that your own realities were different. Instead, embrace your realities and deal with them effectively. After all, making the most of your circumstances is what life is all about. The includes being transparent with your thoughts and open-mindedly accepting the feedback of others. Doing so will dramatically increase your learning.

WORK PRINCIPLES

In order to be great, one can’t compromise the uncompromisable. Yet I see people doing it all the time, usually to avoid making other or themselves feel uncomfortable, which is not just backward but counterproductive. Putting comfort ahead of success produces worse results for everyone.

It seems to me that the best students in school tend to be the worst at learning from their mistakes, because they have been conditioned to associated mistakes with failure instead of opportunity. Intelligent people who embrace their mistakes and weaknesses substantially outperform their peers who have the same abilities but bigger ego barriers.

Reflect and remind yourself that an accurate criticism is the most valuable feedback you can receive.

Pain + Reflection = Progress.

Those who change their minds are the biggest winners because they learned something, whereas those who stubbornly refuse to see the truth are losers.

Watch out for people who think its embarrassing not to know. They’re likely to be more concerned with appearances than actually achieving the goal. This can lead to ruin over time.

Repeating what you’re hearing someone say to make sure you’re getting it in invaluable.

If you’re feeling pressured, say something like “Sorry for being stupid, but I’m going to need to slow you down so I can make sense of what you’re saying.” Then ask your questions. All of them.

Opinions are easy to produce; everyone has plenty of them and most people are eager to share them – even fight for them. Unfortunately many are worthless or even harmful, including a lot of your own.

Remember that believable opinions are most likely to come from people 1. who have successfully accomplished the thing in question at least three times , and 2. who have great explanations of the cause-effect relationships that lead them to their conclusions. Treat those who have neither as not believable, those who have one as somewhat believable, and those who have both as the most believable.

I believe that the ability to objectively self-assess, including one’s own weaknesses, is the most influential factor in whether a person succeeds.

At a high level, we look for people who think independently, argue open-mindedly and assertively, and above all else value the intense pursuit of truth and excellence, and through it, the rapid improvement of themselves and the organization.

Smart people are the ones who ask the most thoughtful questions, as opposed to thinking they have all the answers.

No matter what work you do, at a high level you are simply setting goals and building machines to help your achieve them.

If you keep your focus on each individual task, you will inevitably get bogged down. If instead you pay attention to building and managing machines, you will be rewarded many times over.

Know what your people are like and what makes them tick, because your people are your most important resource.

Train your ear: For example listen to the anonymous “we” as a cue that someone is likely depersonalizing a mistake.

Force yourself and the people who work for your to do difficult things. It’s a basic law of nature: You must stretch yourself if you want to get strong.

If you give too many orders, people will likely resent them, and when you aren’t looking, defy them. The greatest influence you can have over intelligent people – and the greatest influence they will have on you – comes from constantly getting in sync about what is true and what is best so that you all want the same things.

Problems are like coal thrown into a train engine because burning them up – inventing and implementing solutions for them – propels us forward. Every problem you find is an opportunity to improve your machine. Identifying and not tolerating problems is one of the most important and disliked things people can do.

Beware of group think: The fact that no one seem concerned doesn’t mean nothing is wrong.

Avoid the anonymous “we” and “they,” because they mask personal responsibly. Things don’t just happen by themselves – they happen because specific people did or didn’t do specific things. Don’t undermine personal accountability with vagueness.

Remember that everyone must be overseen by a believable person who has high standards. Never trust people to do their jobs well.

Don’t build the organization to fit the people.
That’s backward. Instead, they should imagine the best organization and then make sure the right people are chosen for it. Jobs should be created based on the work that needs to be done, not what people want to do or which people are available.

Recognize that is is far better to find a few smart people and give them the best technology than to have a greater number of ordinary people who are less well equipped.

Remember that almost everything will take more time and cost more money than you expect.

If you’re focused on the goal, excited about achieving it, and recognize that doing some undesirable tasks to achieve the goal is required, you will have the right perspective and will be appropriately motivated.

Success consists of going from failure to failure without loss of enthusiasm. – Winston Churchill

Use checklists:
When people are assigned tasks, it is generally desirable to have them captured on checklists. Crossing items off a checklist will serve as both a task reminder and a confirmation of what has been done.

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