Bridgewater’s Dalio: ‘Radical’ Methods, ‘Radical’ Results

No, I don’t. Markets, in general, are driven by the interest rate. As interest rates go down, as they have, that’s helped. Second, the purchases of financial assets by central banks have pushed asset prices up. Third, the expected returns of bonds and equites going forward are at relatively normal premiums to the existing short-term interest rate.

What are the implications of all that?

People buy profits, not the economy. So if the corporate tax rate is cut, a company is worth more even though the economy might or might not pick up on that. If regulation is reduced, that stimulates business. It might have other consequences, but it causes profits to rise.

Any other critical reason for what’s happening in the economy and market?

Technology, which is improving profitability, is also worsening [employment]. That worsens the economy because technology is replacing people [in jobs]. Improving profitability [through technology] is good for companies but not good for the economy as a whole because the people losing jobs are also the people who are more inclined to spend income. I call that group the lower 60%. So technology helps profits but hurts employment and helps to cause a slower economy at the same time it has caused companies to be worth more.

Has the U.S. ever been in a situation like that before?

We had a similar one between 1935 and 1940. I would say that 1937 [during the Great Depression, two years before start of World War II] is most like the year today. We had the same sort of debt crisis; interest rates went to zero; and the central banks printed a lot of money and bought financial assets, which went up in price. We had the same sort of wealth gap and the same sort of populism around the world.

So is there a lesson from 1937?

It’s very important that the Federal Reserve be very cautious and slow to tighten monetary and fiscal policy because we have asymmetrical risks: many more risks on the downside than on the upside. And be cautious about how political and social conflict is handled. Can we work together, or are we going to be split? Even though the stock market is at its peak and the unemployment rate is at a low, for the bottom 60% it’s a bad economy. We must not have an economic downturn.

What advice can you offer financial advisors?

I was in their shoes. I’d have my products, so to speak, to sell. The advice I have for wealth managers is to find clients you have a simpatico with, who let you do what’s important to you so that you can be honest [open]. In the long run, don’t be two-faced. Don’t lose integrity. Be authentic. If you’re two-faced and put the product and your own interest ahead of the client’s interest, that will be a problem.

What did you do to become successful in the brokerage business?

I needed to be an original, independent thinker. So I did investments strategies that had never been done before. I created risk parity, the separation of alpha and beta, and currency overlay. At first, it would separate my clients because these were unusual strategies, but I needed to do what I felt was best.

You write that collective decision-making is the “secret sauce” behind your success. How so?

In order to be successful in the market, as I said, you have to be an independent thinker who bets against the consensus and is right. It’s so easy to be wrong. If you have quality collective decision-making with people who are willing to disagree well and work themselves through it well, you raise the probability of being right.

You stress in your book that one of the greatest tragedies is people’s persisting to hold opinions in their head that are wrong. Why is that a tragedy?

They don’t put them out to stress-test, and that causes them to make worse decisions. If people could be more open-minded and assertive at the same time, they can learn a lot. You can’t be attached to what you know. That’s the most important thing in my book. And also, to learn from painful mistakes.

Have you made any of those?

Yes. In 1982 I made a terrible [investment] decision and had to let everybody in my company go. I had to borrow $4,000 from my dad to help take care of my family. I was broke. It was one of the most painful experiences of my life, but it changed my mindset from thinking, “I know” to asking myself, “How do I know?” That led to [using a system of] idea meritocratic thinking.

Please explain.

The most important secret to our success is to have an idea meritocracy in which the goals are meaningful work and meaningful relationships — that is, you hold each other at a high standard. The way you get there is through radical truthfulness and radical transparency, where people put their honest opinions on the table for all of us to look at. The second step is to have a quality back-and-forth so you can take full advantage of different perspectives. Third, you need a way of getting past disagreements. If you can do those things, magic happens.

One of your firm’s practices is videotaping meetings. That strikes some outsiders as strange. Do you do that as a practical matter or to capture people’s opinions and ideas?

It’s for the purpose of radical transparency so that people can see things themselves. If you don’t see something yourself, you’re subject to “spin” — somebody else describing it. By being able to see what’s going on yourself, you can have that idea meritocracy.

Another rule is that managers reporting to you send you a daily memo describing what they’ve done that day. How does that translate into helping Bridgewater make smart investments?

Whenever I’m dealing with people, whether it’s through investing or management work, I’ve found it very helpful to stay in touch that way, and [vice-versa]. We built that into a tool that allows other people to stay in touch and also to collect, on an ongoing basis, a lot of data about what they’re encountering; for example, if they’re finding inefficiency someplace or what the mood or the work level is.

What’s your take on the long-running debate about active vs. passive management and the move toward ETFs and other passive investments?

The question is: How much alpha can I buy by going to [a manager]? That alpha game is a zero-sum game. So don’t expect, on average, to get alpha because when somebody buys, somebody else has to sell. It’s like at a poker table: somebody will take money from somebody else — and there will be better players. There will always be smart people who will be able to make better decisions and pursue alpha. The challenge is to find them because those who are good at it are largely closed to new investors.

How did you get interested in trading stocks when you were only 12?

I caddied at a golf course, and everybody was talking about the market. So I took my caddying money and put it in the market. The first stock I bought was the only company I ever heard of that was selling for less than $5 a share [Northeast Airlines]. I figured if I bought more shares, I’d make more money. That was a dumb strategy. I was 12 years old! The company was about to go bankrupt, but some other company acquired it. I tripled my money and was hooked. I’ll always invest. Economics and investing are my passions.

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