Ray Dalio: 'You need independent thinking for success'

Ray Dalio is the founder of the world's largest hedge fund Bridgewater associates the firm employs a unique management process and as you may have heard ray is out with a new book about it ray welcome thank you so talk about your management practices do they really make a difference and how do you know they make a difference how do you measure that well I'll take the first question first it ought to be successful in the markets you have to have independent thinking because the consensus is built into the price so I've got to have a bunch of independent thinkers right and we better get at what's true so that idea of radical truthfulness and radical transparency Xand having procedures to get by them being a idea meritocratic is fantastic let me just explain how it works right only three things you need to do to have an idea meritocracy first you have to have everybody put on the table their honest thoughts it's not easy to do but in our culture that's an important thing second you need to have thoughtful disagreement you have to know how you can bang it around and get a better answers than any individual has and then third you have to have ways of getting past that protocols then that our idea meritocratic ways so the answer to the question is we wouldn't be half as successful or we wouldn't maybe even be successful at all because nobody in their mind has though all the right answers I mean the markets teach you humility so you need idea meritocratic decision-making to get the best ideas to raise your probabilities of being right at least that's at what's worked for us but the end of the day though ray I mean aren't you looking for the best people and you promote them and the worst people they get shown the door and isn't that just the same as any other kind oh no I mean how do you first how do you know who the best people are so what there's the selection and then second how are those people going to deal with each other okay so let's say you get the best people and you're you still gonna have to deal with how they're dealing with each other can they deal in an idea meritocratic way can you how do you get to the best and Stane same question or like think about it are you going to have autocratic decision-making like the boss knows the right answer and he's going to tell you or are you gonna have democratic decision-making which is one man one vote this whole idea of believability but decision-making is important and then in addition to that what was key is right down the principles okay right down to principles and then convert those to algorithms like this has been a big deal for us so if we look the same things happen over and over again every time right so what's decision-making what am I gonna do if I'm in that set of circumstances okay you got to write it down there's a power but to writing it down if you write it down then you can agree on what the best ones are and then you can convert those to algorithms we convert those algorithms and they become the decision rules that think better than us it's so it's been fantastic this process is somewhat controversial ray and is it worth it I mean you've opened yourself up to criticism people have written negative things about this process is it really worth it yeah it's not for everybody okay it's not one it's the real question is can you get past your egos and your blind spots can you in an idea meritocratic way find out what your weaknesses and your strengths are I mean that's the defining difference right is it worth it I look back on 42 years of doing this and you know and I'm at the stage of my life I've had not just the success of the business but I've had the best possible relationships right let me give you one sentence that characterizes what we're doing and that's why explaining it in the book is important we have an idea meritocracy in which the goals our goals are to to have meaningful work and meaningful relationships or to be great at work and to be have great relationships because they support each other it's tough love you can have tough love so they have an idea meritocracy with the goals being meaningful work and meaningful relationships through radical truthfulness and radical transparency in other words put what you think on the table and let everybody see and have that meritocracy it attracts people because it makes people everybody a part of that decision in other words if what if I'm not gonna be able to tell you what I think and you're not gonna be able to tell you what you you think and we're not gonna be able to work that through what kind of relationship we're gonna have just the boss telling everybody you can't make people part of the organization that can't be essentially owners in the outcome if they don't feel like they can make sense of things and be part of that so that's been the magic I know I can't describe it briefly to you here but that's why I tried to explain it so I think the real question for organizations other organizations and this is not by any means a investment business thing this is far broader than investment business thing would you like to have an idea Maris meritocracy would you like to have the best ideas when out if you want to do that and that is your goal then the question is only how and that's why I try to explain it clearly in the book are shifting gears a little bit as a student of management practices how do you assess Donald Trump as a manager I'm not gonna make an assessment of Donald Trump's Imagi I don't see him up close I don't know what he's like I haven't had that that type of interaction can't comment not now that you won't of I would say what's important here is the processes that I'm describing which is to say what you what's important is first of all to make his principles clear and then to walk the talk and then to have thoughtful disagreement to know that what is in his head may be right or may be be wrong and to be able to gather others around him and to have that thoughtful disagreement so that he can get that the best answer and ideally also know for the country as a leader of the country what are the principles that bind us together and how can we get past our disagreements so that we together are rowing in the right direction to be making the best possible decisions those are important things for any leader I don't know I'm not in the middle of the conversations with the people and I don't know how that works but I would say that that would be the best I advice I can get given those would be you know the relevant thoughts and that would apply to the White House is what you're saying it applies to any any entity right right applies to any relationship yeah if you get I guess the notion that you might not have the right answer in your head and your goal is only to have the right answers that's the key you only have to do two things to know to be successful you have to know what the right decisions to make are and you have to have the courage to make them and when you're making to know what the right decisions are you got to know that they're not necessarily the ones that you're stuck in your head with your opinions right right so you've got to go beyond your opinions so it's I think it's one of the greatest tragedies of man for mankind that individuals hold on to their opinions and don't put them out in stress test them so put them out there stress test them and get them from others so that you can raise your probabilities of being right that's how we've raised our probabilities of being right I mean the book is really wide-ranging you talk about science finance psychology what's your favorite discipline what's your favorite part of the book mm-hmm I don't know you know I'm I got interested in neuroscience because of how brains are working I got interested in history because everything repeats over time one of let's say one of the greatest reasons that people are surprised and I've been surprised is because things that never happened in our lifetime but happened repeatedly surprised us so I've gotten interested in history I can't say the parts of the parts of the book I'd say the most valuable part of the book is the section about radical open-mindedness and how to do that well okay I'm gonna ask you a kind of personal question here okay and that is do you believe in God are you an atheist agnostic and and what is the driving principle in your life so I think it depends on I think it depends on what God is right I don't know that if God is the forces of nature and so on I definitely believe in the for those fortunes of nature and so on if it is man in summary our incarnation and no one I would say I would probably doubt that it I but you know that's a bigger question that I know I believe in that these forces of nature and evolution and I think that that's like the most beautiful thing you you read in the book I think that nature is such a great teacher for me because it shows how reality works and so when I look at it and you know man is only one of 10 million species right man is 200 thousand years old earth is 3.9 billion years old every species evolves or breaks into another species so seeing these things and realizing that I'm part of that and that everything works like a machine reality works like a machine and just embracing it and learning how to deal with it in a realistic way has been thrilling to me as well as helpful alright let's talk about something somewhat related artificial intelligence yeah you wrote I suspect that AI will lead to incredibly fast and remarkable advances but I also fear it could lead to our demise in our lifetime can you elaborate the beautiful thing about it that we've enjoyed is the capacity of the computer to have to do things much better than weekend right so the thinking the way we do it is we specify our criteria we test those criteria we see how they would have worked over a period of time and so on the real question is how you come up with the algorithm is that algorithm just by testing the past and most importantly do you understand the logic behind that algorithm is there deep understanding as well as the algorithm or do you believe the algorithm and if you have deep understanding or if the future is going to be the same as the past I think it's really great but if the future is different from the past and you don't have the deep understanding to make to know the difference that what your decision is going to make sense I think that's very dangerous I think in a competitive environment there's going to be a lot of desire to throw a lot of information into computers and derive algorithms that are not understood and may not work well will not work well if the future is different from the past so I think it's a tremendous asset but it also could be a threat - it could be a threat to our existence yeah I'm inferring that the future is not necessarily going to be the same as the past right well in some ways some things it is and so yes because it's right yeah if you're if I'm doing something we're the sample playing chess let's say if I take enough data and put it into the computer and comes up with the algorithms because I know that that set that data said is large enough and has enough observations I could be comfortable with that if I'm having a doctor do surgeries let's say and I have a bunch of doctors do surgeries those same movements and everything can be mimicked essentially that could be converted to data and you can have robots essentially do those surgeries and be comfortable that the robots will do the surgeries even if you may not understand the algorithm because that surgery that mix of of of conditions is going to bring remain largely the same however when something is different in the future that it hasn't been a case that has happened in the future and particularly in syv seen it in markets we've used algorithms for almost our entire existence and I've seen most firms that have used algorithms and what's called artificial intelligence blow up because the future is not the same as the past so I'm personally you know I need to have deep understanding I mean my own approach to this is that if I can't describe why it makes sense and write down these principle and you look at them and say okay that make sense it's very difficult for me to have faith because I have a big fear of that being wrong I'm not saying it's a problem in those things that could be mimicked like that so on I believe the chess game but the way I like to play the game is I like to have the computer chess game my version of it operate together with me okay that's how it works the system's make decisions that are our criteria and then I'm making the decisions next to it so I'm still thinking and then when they're at odds at the reconciliation I've found that to be very effective I do believe it'll be very effective I think that we're entering a world where that's what you're going to experience that you're gonna go to principles when you encounter them and you're gonna say I have another one of those situations and what should I do and increasingly you will have assistance that is very similar to a GPS that will be giving you instructions and you could think it simultaneously and that's what the world will be like I think right in writing about why you wrote the book you address those inside Bridgewater with I have done my best to bring you to this point now is the time for you to step up and for me to fade away how serious are you on this fade away part and what is the future hold in store for you well first of all I love the game and I'll always play the game of the markets as long as I'm welcome to but I'm at a stage in my life that the greatest thing is to have not be anybody need me right I think there are three stages in life there's how I approach it first stage in life you're dependent on others and you're learning second stage in life you're working and others are dependent on you and you want to be successful as you go into the third stage in life where you want others to be successful without you that's that's the stage that's where I am that's what 2017 represents to me that's why I wrote that book that book is to pass along to people those essentially recipes for different handling different situations that I could pass along to be help help for others because my greatest enjoyment and satisfaction is to watch other people be successful if you have kids that are a certain age let's say I don't know 35 is whatever what do you want you want them to be strong without you that's what I want shifting gears again ray it's fed day and I wanted to ask you about that do you agree with the policies that Janet Yellen has pursued by and large I agree and and in the following sense they set out a path for tightening interest rates the raising interest rates and a rate of tightening and every track that they set out they didn't adhere to in other words they slowed they tighten monetary policy much more slow eat tighten monetary policy much more slowly than they projected and also the market projected and that was appropriate okay I think that they they're making they're questioning their own decisions appropriately I think that they're making the mistake of thinking that the unemployment rate linkage and inflation linkage is as tight as they believe and I think that they're that they need to continue to have a bias toward an easing and and not tighten until we get closer to seeing the whites of the eyes of inflation and that's because of a few reasons first of all we don't have an inflation or too hot growth problems so that's clear and the breakdown between the link of employment and inflation is connected largely with what we're redefining the work force as the work force it consists of technology a robot equivalent that are competing with people so we don't have that same sort of need to tighten monetary policy secondly we have asymmetric risks we know the tightening will work if you have a downturn in the economy and a downturn most importantly a downturn and you're starting where you are with almost zero interest rates and you have to go back to quantitative easing the tools don't work as effectively quantitative easing doesn't work and there's not much interest rates so there's an asymmetric risk in addition there's a big social risk because when we think about the economy it's really that we have two economies let's call it two economies an average doesn't anymore represent it the top two-tenths of one 1/10 of 1% of the population today has a net worth that is equal to the bottom 90% combined so if you carve out an economy and we've done the exercise of literally saying what is the economy for the bottom 60% of the population looked like it's a bad economy and that bad economy it hasn't had growth it has rising death rates from opiates and from suicides and so on there is it it has a major problem that is a major problem and that's causing what I think is our most important economic social political issue of our time which is that dilemma that clash those gaps between those people imagine if you were to have a downturn now ok what would it be like socially what will it be like economically so if you take into consider all of those reasons I can't see any reason for tightening I think the issue about how fast the balance sheet rolls off is an important issue there may not be a rise in rates much or at all but there's the rolling off of the balance sheet and I those are significant numbers I don't believe that the Fed is going to be able to have those numbers anymore than they were be able to tighten with their interest rates the way they did so I think I think a good job I think but you know cautiousness also in the markets those that term structure of interest rates is built into the wall asset classes if you tighten faster than as discounted in the markets that's dangerous for the markets too so we have all those issues I think they're doing a good job in being cautious all right a lot to chew on there Ray Ray Dalio founder of Bridgewater associates thanks so much for coming by thank you for having me

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Id: KKeQxxl17Fc

Length: 19min 48sec (1188 seconds)

Published: Fri Mar 01 2019