Technology is a double-edged sword: It helps corporate profitability; but by replacing people in jobs, it hurts employment, a contributing cause to the slow-growth U.S. economy. This is one reason that, even as the stock market is at an all-time high, the economy continues to grow at a slow pace. So says Ray Dalio, founder of $160 billion Bridgewater Associates, the largest hedge fund in history.
The famed investor explains the current economy and market, issues warnings, discusses unconventional ways his firm operates and offers blunt advice to financial advisors, in an interview with ThinkAdvisor.
Early in his career, Dalio, 68, worked in the brokerage business, notably at Shearson. The firm fired him for unruly behavior, an event prompting him, in 1975, to start his own firm, to which his clients were all too happy to move, he writes.
This past spring he handed over management of his 1,500-employee company to Eileen Murray and David McCormick, co-CEOs, while he remains co-chief investment officer and co-chair.
In his just-published book, “Principles: Life and Work” (Simon and Schuster), Dalio sets forth hundreds of his principles, or rules — many of them unconventional — under which his company operates. A second book, to focus solely on his economic and investment principles, will arrive by 2019.
Technology is Dalio’s vital partner, and he has been at the forefront of using it in unique ways. Indeed, for the last 30 years, Bridgewater techies have converted his investing principles into algorithms, which are employed in tandem with managers to make investment decisions. Other principles-converted algorithms help make management decisions.
Bridgewater, whose clients are mainly large firms, pensions and banks, is the fifth most important private company in the U.S., according to Fortune. Fund of funds LCH Investments says the firm has made more money for clients than any other hedge fund ever. Its best known strategies are the All Weather (beta) and the (value-added) Alpha portfolios.
Dalio’s 567-page “Principles” is partly autobiographic, partly a guide on how his life and work principles can be broadly used by others to run their companies. In fact, he plans to make available to large firms a smartphone app of tools based on these principles.
In the interview, Dalio gives a peek into what his economic and investment principles book will and won’t reveal. He also discusses his reported plan to launch an investment fund in China.
Bridgewater, based in Westport, Connecticut, is run as an “idea meritocracy,” as Dalio describes it: Disagreement is encouraged, and the best ideas win out. The system requires “radical truth” — an accurate understanding of reality — and “radical transparency” — employees not hiding what they really think.
Some uncommon practices, such as videotaping meetings, have been criticized as Big Brother-ish. Dalio’s response: “Sensationalistic writers,” who have never worked at Bridgewater or even visited, have served up “distorted” representations.
On the other hand, Dalio’s M.O. scores high praise from academics who have studied Bridgewater’s culture: “When employees share independent viewpoints instead of conforming to the majority, there’s a much higher chance that Bridgewater will make investment decisions no one else has considered and recognize financial trends no one else has discerned,” writes Adam Grant, a professor at the Wharton School of the University of Pennsylvania.
ThinkAdvisor recently spoke by phone with Dalio, a native New Yorker, born in Jackson Heights, Queens, bred in New Hyde Park, on Long Island. As a risk-taker betting on what’s likely to occur in the economy and markets, he calls his role essentially that of “economic mechanic.” Here are highlights of our interview:
THINKADVISOR: Your website says: “Bridgewater is even more a technology company than it is a hedge fund.” How’s that?
RAY DALIO: We use computers to take our thinking and convert it into algorithmic decision-making. So the technology pieces are as important as the investment pieces.
How does that systematic decision-making work with regard to investing?
We write down the criteria and principles of how to deal with a certain type of situation and then convert those into algorithms. Every time we go through an experience or think about making a decision, we test those back in time to gain good perspective. The computer makes the decisions next to us. It’s very much like running with your GPS. If it says that you turn right, you think, “Do I turn right here?”
What about people-management issues?
We operate similarly. We write down the principles of how we’re going to deal with each other — knowing how to make the most of disagreeing to get the better decisions — and in some cases we put those into algorithms.
There doesn’t appear to be much room for improvising in your decision-making. Seems very scientific.
It starts with improvising, and then it goes to systemization. It starts with imagination, and that has to be carried down to execution. It’s probably very similar to [the M.O. at] Steve Jobs’ Apple. Systematizing decision-making is very powerful, but the imagination part is equally as powerful.
You begin the introduction of your book: “…I want to establish that I’m a ‘dumb shit’ who doesn’t know much relative to what I need to know.” And then you take nearly 600 pages to tell how smart you are.
No. I don’t. As I explained further on, whatever success I’ve had in life has been because of my knowing how to deal with my not knowing things. It isn’t what’s in my head that’s most valuable, although I did learn a lot along the way; it’s knowing how to deal with not knowing that’s been the source of my success.
You’re writing another book about your economic and investment principles. Will you reveal how your firm has made so much money investing?
No. We’re not going to reveal any algorithms or anything that would do us harm or threaten our well-being. These are going to be concepts [in the book], which are not proprietary.
You plan to share your apps with some large companies. Will they be tools for investing?
No. They’re for people management rather than investment management.
Reports are that you plan to raise a fund in China. True?
Our involvement in China will develop. I’ve been going there since 1984 and have a unique relationship with it. We manage money for large Chinese institutions. The markets right now have developed an openness to foreign investment and a liquidity, which means there’s no good reason not to invest in China. If there are no barriers to entry, there’s no reason we shouldn’t be as active in China as we are in other countries.
Do you see a disconnect between the U.S. stock market’s being at an all-time high, while at the same time the economy continues to grow slowly?