Ray Dalio on The David Rubenstein Show

in the last recession your firm performed extremely well so are you anticipating a recession now in 2007 it was pretty easy I think to calculate that there were these debts that we're going to come due when I go through those calculations it's not the same bridgewater would not be said to be an easy place to work is that fair people love it or hate it so in high school were you interested in academics or were you a good student I don't cut classes to go surfing would you fix your time please well people wouldn't recognize me if my tie was fixed but just seeing it this way all right I don't consider myself a journalist and nobody else would consider myself a journalist I began to take on the life of being an interviewer even though I have a day job running a private equity firm how do you define leadership what is it that makes somebody tick you are seen as somebody who has said there might be a chance of a recession at some point do you see any chance of a recession in 2019 or 2020 I'm big on principles right so I think that it's important to understand how the economic machine works and so when I'm looking at that I want to maybe take a few minutes and get into the important things that are pertain to a recession because a recession you know whether you is two- quarters of GDP and we're going to be hovering I think fairly close to that level and there's a certain variation around it but the bigger things are a combination of the absence of effectiveness of central bank policies so I hope we can talk about those together with the wealth gap a large wealth gap so when the next downturn comes what that will look like socially politically and so on the elections which is a issue between let's say capitalists and socialists or the rich and the poor and then the emergence of China and in relationship to the United States those four factors are factors that have not existed since the 30s I think they're unique and so when we get into the question of the recession I think it's how that will affect those other things and those things affect it in the investment world your firm was quite known well known for quite some time before the last recession it was a very successful firm before but in the last recession your firm performed extremely well maybe better than any of any other major hedge fund so as I recall you're up 28% or something like that during the the worst year so are you anticipating a recession now and are you changing your investment approaches or you're not quite where you were in 2007 in 2007 it was pretty easy I think to calculate that there is debts that were going to come due and that the there was not an adequate amount of funding and so that sort of debt crisis was something we anticipated and we were positioned well for when I go through those calculations it's not the same in other words the amount of maturing debt and that whole problem it doesn't look the same it looks more like a gradual squeeze having to do with quite a lot of debt of a certain type but with that also pension liabilities and healthcare particularly as that produces a greater squeeze we have large deficits and so on so so the amount of promises that we have are large but they're going to be coming at us at a more gradual pace and I think that's going to produce a squeeze I think related to that what's important is that when you don't have monetary policy being able to be effective what kind of monetary policy we will have we will have more than likely a lot of debt monetization on fiscal policy there's no room for additional tax cuts do you agree because we already have such a big deficit so you couldn't really cut taxes and eat many more or do you not agree with that I believe that in terms of spending that probably there will be increases in spending that probably will not be well funded and when you ask about that I think we have a political question and that's which is relevant to also the markets between now and the elections we're probably going to have very different policies but policies may be more of the left and policies more of the right more extreme policies greater polarity and the choice will be greater and how those choices are made are is going to be very important to not only the size of the deficits but the nature of taxation so I think that you're I think that when I'm looking at the presidential candidates what I do is I look at what their policies or our stated policy in terms of any of their various policies and I look at that as a probabilistic basis so I think when we have to answer that we can't you you might get after the election you might get taxes raised by on the wealthy or you have corporations you could reverse those tax Jake those tax policies and you're probably going to get an increase in spending alright let's talk for a moment about how you came to be let's say one of the most respected commentators on economic and financial policy which is starting your firm so you grew up in Long Island hmm and were you from a wealthy family no my dad was a jazz musician very at lower middle-class family when you were a young boy were you interested in the financial world or what were you most interested in with growing on Island I got hooked on the markets when I was 12 because I used to caddy and I would take my money and I put in the markets and everybody was chatting about the markets so how did you do well the first stock I bought I bought because it was the only company I ever heard of that was selling for less than $5 a share and I figured I could buy more shares so for what up I make more money that was my strategy and it worked and it worked and it worked because this company was about to go broke and somebody came along and acquired it and it buy luckily it went up and I said this game is easy and I then decided that I would be involved in the markets and this game is anything but easy so in high school were you interested in academics or were you a good student no I hated high school did you go to high school do you cut classes or what did you do i I did cut classes a fair amount I don't cut classes to go surfing did you have a hard time getting into a good school college yeah I got into CW post college on probation and probation on probation okay and what you did well there I loved College okay I love College because well besides mixing that all the fun that College gives you it also what I liked is that I could pick the subjects that interested in and I so I loved college right you must have done recent well because you got into Harvard Business School yeah I did I got yeah great grades let's suppose I'm a young college graduate and I want to go to Bridgewater and make money and learn what is it that you look for when I look at people I look at them in three dimensions of a person when you graduated what did you do so in my two years it's a two-year school and in my summer I like to trade commodities I got in trading commodities now this is now the summer of 72 and so nobody ever put more of a business school went into commodity division but I went to Merrill Lynch's commodity division I said hey can you give me a job the director of commodities in that summer gave me a job to help him around 1973 we have the oil shock bear market in stocks commodities is the hottest thing I was hired as director of commodities at Dominic and Dominic having never done anything in the director of commodities but I was hired and that's so that's what I say you left that eventually though to setup your own firm yeah so I that was 73 74 big bear market in stocks the Dominic and Dominic essentially went broke I went to what was sandy Wells firm CBD Leo Hayden stone at the time became Shearson Hayden stone Lehman blah blah blah because it did all those mergers I became in charge of institutional commodities in other words hedging of all different things and that put me with all different futures markets and then we got into the environment where 7405 you got into this environment where interest rates tightness of monetary policy all of those things were driving all the markets so that got me hooked on those markets anyway I got fired from there because I was a bit rowdy did you punch somebody did you punch your boss in the face yes I punched my boss in the face that's not a good way to print Kippur that was but that was it was New Year's Eve we got drunk on New Year's Eve and you plant somebody other than your boss didn't think of that anyway he but it didn't it didn't last long okay so it's yours okay so that's how I started the firm because I was because the client still wanted to do business what year was that did you started the firm 1975 so it grew to one or two employees two how many well in 1982 it was I think there were eight employees hey and you're at one point and then I had a terrible 82 so and then it came down to one employee so 1983 or so was just me you can't borrow money from your father yep so let me tell you about the moment so 19a 1979 80 81 I calculated that American banks had lent a lot more money to emerging countries than those countries are going to get paid back and I anticipated that there would be a debt crisis and with that an economic crisis so that was my thinking and August 1982 Mexico defaulted on its debt and a number of countries followed and so because I said that I got a lot of attention about that and I thought that was going to be producing a bear market in stocks and I could not have been more wrong August 1982 was the exact bottom in the stock market and I was wrong and as a result of that let's take my eight employees or I had to let them go I lost money for myself I lost money for and I had to borrow $4,000 from my dad it was the most painful one of the most painful experiences but it was one of the best experiences that ever happened to me in my life because it it changed my perspective about decision making it made it may give me the humility that I needed and fear of being wrong in my decisions while I was able to maintain my aggressiveness so it changed my whole approach to decision making oh you paid your father back with equity in Bridgewater or just interest now with without interest and with a big hug okay so from that time on you began to rely a lot more on arithmetic or algorithms and other kinds of things no no no the big chip thing was and I think this is the biggest message that I think that I would get a course that I'm trying to convey in principles and so on is that so many people in there have opinions in their heads that might be wrong and they're too attached to them and if you know how to operate with a certain amount of uncertainty and stress test your opinions in a different way use get away from your ego get away from all that and you can learn a lot about raising your probabilities of being right so what it made me want to do is find the smartest people I could find who disagreed with me and then I could have conversations with them and only after I found the smartest people that I could find who disagreed with me would I be able to make a decision in addition to know how to improve my return to risk ratio by being able to diversify well to create and so I wanted all the upside but I wanted to be able to control the downside and so I would say a number of lessons that I'd like that you know sort of pass along first of all the value of mistakes the value of painful mistakes and learning and reflecting on them has been a big big thing finding the smartest people who could work with you that's what created an idea of meritocracy at Bridgewater and it's that back and forth out in terms of the thoughtful disagreement and then also raising your probabilities of being right in those ways so that's humility that fear of being wrong combined with still the audacity to go for the great results and how to do that well is really the most important thing I learned but you now use a lot of computer related algorithms to help you navigate the market yes you know algorithms are what we call them today equations is what we used to call and so you would write that down and what I learned is by being clear then I could tell how that decision would have worked in the past in all different environments so it gave me a lot of perspective on making that decision I could test it through the Great Depression and so on and then I could find that I thought use that same algorithm I could take data from and have the computer make decisions in parallel with me and so and that is what I recommend for everyone I recommend they write down their principles and then realize that almost any of those principles can then be converted into algorithms and so the computer was making decisions in parallel with me making decisions that type of partnership between me and the computer and not also expressing the algorithms was invaluable not only in the quality of the decision-making but also the quality of the relationships that I had with the people I worked with today the greatest pleasure of your life is your family or a financial success giving away money what do you most enjoy no the financial success has never been it's an inadvertent thing that came largely because I like to play a game that if you played the game well you get the money bridgewater would not be said to be an easy place to work is that fair or not because that's fair because many people come in say it's a very intense environment and some of them don't survive those that do presumably are adopting your principles but are you love it or hate it you have a big attrition rate from young people coming in or I would say in the first 18 months probably about 30% we have protocols and you have to understand your weaknesses as well as your strengths and so people coming to that are almost of two types there are the people who say well they I suppose almost all come that I'm excited about that and they're excited about that because they said yes I would like to know my weaknesses as well as my strengths and I would like to be able to talk about anything and and have it thrashed out and that's who it works for but it takes getting used to because when you're really talking about the strengths weaknesses and differences in ideas our brains have been programmed in a certain way partially because of genetics and partially because of our environments in which disagreement is thought of as producing a fighting type of reaction or weaknesses or something that becomes a challenge for people to look at so that's the essence of what though as men suppose I'm a young college graduate and I want to go to Bridgewater and make money and learn what would be the qualities that you would look for in me to make it likely that I would succeed do you want somebody it's the first in his class or her class you want somebody that's a student body president or an athlete what is it that you look for when I look at people I look at them in three dimensions of a person values abilities and skills most companies hire for skills I believe it should be the other way around I look at their values and values means like what are their motivations what are the missions so it and it skills is least important then you look at abilities and abilities is the way of thinking is somebody a big-picture thinkers somebody creative and I want to put together a mix of those right people and then skills can you program do you know those things that's important but it's least important so what I look for is really character characters number one and to be on a mission and then it applies to the particular job they have so what i'm referring to values i'm referring to is this a person of good character number one now over your let's say thirty years as an investor at Bridgewater what is your track every year you've made money virtually for your investors well eighty nine the late last eighteen years with a bunch are 18 of the last 18 yes that's not too bad about there's a too late to invest with you or who can invest with you anybody and any credit investor you're not taking although are we're close to new investments in that pure alpha strategy and our clients are all instance large institutions and you have two basic strategies that you provide investors that's right and I think that'll be helpful for people to understand the nature of that there is a strategic asset allocation next what is your best diversified portfolio if you had no idea what was going to happen what would you hold that's what we call our all-weather surrounded strategy it's a portfolio of assets and then we have what we call our pure alpha strategy because there's a separation between alpha and beta so every most investors make the mistake of separating those two and think that they're going to make money in the market and in this zero-sum game they're probably going to lose money from making those bets so there's the strategic asset allocation mix which is the all-weather beta piece and then there's the Alpha in other words okay now I think it's a good time to move this way or that way and that's the alpha stress so it's too late for friends and family to get into your fund right it's there's no opening you're not gonna open any anytime soon no okay so important part of your life has been Transcendental Meditation you this twice a day when did you start and why is it so important to you I started in 1969 or so I started because the Beatles did it and then and I learned about it and I thought it was and but I it's it's in him it's a very important thing I would say it's the greatest gift that I think I can give anyone it gives a combination of an equanimity the you know a calmness so no matter what's coming at you you could approach it with that sort of calmness it gives one a creativity because it is a process of going transcending is a process of going into your subconscious mind and relaxing so it's it's been very helpful so now you are one of the wealthiest people in the United States one of the most successful investors so you now have a fair amount of wealth to give away and you were one of the original signers of the Giving Pledge what are the philanthropic interests that are most appealing to you my interests are I guess I would say two big interests I'm really thrilled about ocean exploration this is something that's a big deal for me but we we have donate too many different things and then important thing for my wife and for me it has to do with the education of what are called disengaged and disconnected students those who would not get through high school so when you have the kind of platform you now have by virtue of your success is an investor do you find it easier to meet with heads of state finance ministers heads of countries and do you find that to be appealing to do that and give them your views on these subjects we find it usually appealing yes I I think that you know from my point of view I'm very interested in the subject matter but I'm also interested in being able to have an impact being able to help and so sometimes in policies it's had a big of big effect and like he's ECB policy or other policies so if a if somebody came to you and said I'd like you to be the chairman of the Fed or the secretary of the Treasury would you ever go into government or that's not for you that's not for me today the greatest pleasure of your life is your family or a financial success giving away money what do you most enjoy no the financial success has never been it's an inadvertent thing that came largely because I like to play a game that if you played the game well you get the money but the financial success has never been past taking care of my family and living adequately it's been a nice thing to have it know for me the most important thing in terms of saving really has been relationships meaningful work and meaningful relationships these are the most important things well I'm on a mission to have a passion to work with people that I liked to understand the subject well I love my game because it forces me to understand macro economics the world and to bet on it in relationship to other people so with tests whether I have that knowledge I love that and I'm glad that we I've taken it to a certain point and then there's the things that I've savor even more than that above all else and with 70 years old and is the relationships the quality of the relationships that sense of community that's what I treasure more than anything thank you very much for an interesting conversation and it's a terrific read and I highly recommend it Thanks for writing in thank you for having me you

Channel: David Rubenstein

Views: 357,922

Keywords: Bloomberg, philanthropy, billionaire

Id: BLwujF7BbGQ

Length: 24min 6sec (1446 seconds)

Published: Thu Oct 31 2019