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17-09-2013, 01:28 PM
Interview: Ray Dalio
Hedge Fund Master
October 27, 2012
Washington, D.C.
You've spoken about individuals who shape the world we live in and the particular qualities they share. What is the process these people, "the shapers," go through that perhaps the rest of us do not?
Ray Dalio:
I think for everybody, in order to be successful, there are five steps that you go through essentially. But everybody has their goals. What is their goal and passion? So you have goals. And then what happens is you're going after your goals and you encounter your problems. So encountering problems, and then the big difference between people is how they approach those problems. People who get bummed out by the problems don't learn from it. Who learns from them? So those who recognized the problems are excited that they get into those problems or mistakes. Mistakes are learning experiences. The pain that comes for that mistake, every time you have pain it's an indication that something is at odds. So the people who have the pain are the people then who will go into that and realize that if they solve that pain, solve that problem, understand what that is representative of -- not just the one problem -- but that problem is a certain type of problem that will happen over and over and over again in your life, and if you can solve, "How do I deal with that kind of problem?" The third thing that everybody needs to do is, if they have problems on the way to their goals, that they diagnose those problems and they get to the root cause -- the real root cause. The real root is often -- is typically -- what people are like. Can you go to what you're like? Can you go to your mistakes? Can you go to your weaknesses? Right. Can you go to other people's mistakes and weakness? Some people, because of ego barrier, can't do that, so if they don't recognize their own mistakes, their own weaknesses, or other's mistakes and weaknesses -- what the root cause may be and what they're like because of ego barriers -- if they can't go there, they're going to repeat those mistakes. They're going to have them over and over again. So it's the process essentially of saying, at that stage, "What am I like?" Everybody has strengths and everybody has weaknesses. The weaknesses are the other side of the strengths. So let's say if you're a right brain/creative person, you may not be reliable. Because just the way you think necessitates you to think a certain way, that means you can't think in another way. That means you're going to keep bumping into that thing that's standing in your way. But unless you can embrace, "I'm not reliable," right, and deal with it, you won't get around it. It's still going to continue to be a barrier. Right. So the diagnosis to the root cause is important. So then if you diagnose, then you have to design what you are going to do about it that works. So let's say you are very creative but not reliable. Okay, you have to find the means of first of all embracing that, and then saying, "If I'm not reliable, what do I? Do I work with a reliable person? Do I learn reliability? Do I have some compensating mechanism?" Because I can't let that lack of reliability stand in the way of my goal. As long as I keep doing that I'm going to keep running into problems.
So you have to design what you do about the problems. And then when you're designing what to do about the problems, you have to follow it through. You have to follow through, or do the thing you design. Doing the thing you design requires self-discipline and so on. People have to do those things in order to be successful. Right. They have to know what their goals are. They have to diagnose their problems down to the root cause, the real root cause. They have to design ways to get around them, and then they have to have the self-discipline to follow that. It's a continuous iterative process. So that's what we keep doing. I would say that all of the shapers are doing that. So they don't mind the problems. That's their adventure. A wonderful book is Einstein's Mistakes. You hear his struggles. He wouldn't have been cutting-edge, he wouldn't have been inventive if he didn't go through that. So when you're looking at the personality characteristics, the personality characteristics lend themselves to doing that five-step process well.
In his book The Outliers, Malcolm Gladwell says it takes something like 10,000 hours of working at something to become remarkable, to become extraordinary. I think you're also describing a person who is very driven, who has great tenacity and doesn't let things get in the way of the goal.
Ray Dalio:
Yes, of course. It's an element, but...
It's the mixture of the elements that matter. You could have a tremendous tenacity, but you're studying, you're learning, you're trying to memorize and remember everything that you're being taught and you're really trying hard. You could have great tenacity. You need the making sense of something, you need to embrace reality. You need these other dimensions. Right. So I think the things that we started to talk about just before, the things that these people have a need for is: First, they need to -- most fundamentally - make sense of things, which is a very different kind of learning process. It's a very internalized learning process. It's not a memory-based process. So none of these people -- unlike the population as a whole -- none of these people have a desire to follow instructions.
How is that different from other people?
Ray Dalio:
For most people, you go to school, they tell you what class to go to, what classes to take. This goes on all the way through university. "Do this, do this, do this..." and then you go into the class and they say, "Learn this," and, "This is the information," and it's a largely memory-based and instructional-based process. This is not what these people do. Right? This is not. So the path, what they have is a strong, strong desire to understand and make sense of reality. How does reality work? So they're all very independent-thinking and, and rebellious. They don't mind saying, "Screw you. This is what makes sense and I've got to go down that path." They're comfortable with ambiguity. They love ambiguity. Some people don't like ambiguity. Most people, they say, "I'm nervous about ambiguity." They love to go in the space of what's ambiguous, because that's where the discovery is. They love making mistakes, the process, they understand that making mistakes -- you know, loosen up! It's like you're going to ski or something. You can't learn how to ski unless you're falling. So they don't mind the falling. They're not embarrassed about making mistakes. They're not worried also about the approval of others. So many people are constantly saying, "Oh well, risk!" The whole different definition of risk -- what's risky? They're not worried about what people think of them, right? Is that risk or failure? The term of failure is a totally different thing. Failure is part of a learning process. Right? What's the risk of failure? What, you'll be embarrassed? Risk of failure? How do you distinguish failure from learning? In your whole life, "failure" implies that it stopped, that the game stops. If it's part of a "You're failing and then you learn," then that learning is part of the moving forward. So that is what the process is like. Fail, learn, move forward. And constantly do that, because you're cutting-edge. You're going where people haven't been before, in inventiveness. That's exciting to those people. So that's a different kind of approach to life. It's a different way of being.
You said earlier that "ego barriers" keep people from recognizing their own weaknesses. Why is that, and where did you get your ability to look at your own weaknesses?
Ray Dalio:
You're asking a two-part question, so I think I probably should explain what I mean by this ego thing. I think that the ego barrier is the worst problem. This is going to take a few minutes.
People are so attached to being right, and yet the tragedy is it could be so easy to find out how you're wrong. If you just said to yourself, "I'm not sure that I'm right, and let me go find people who have alternative point of views and let me have quality conversations." Not to pay attention to their conclusions, but to the thought process. So thoughtful discussion, worrying about being wrong but not to the sense of being paralyzed. Or moving forward, but in the sense of trying to create discovery, to have an exchange. To go after the person who has the most different point of view, who is the most thoughtful, and then have a conversation to see their point of view. Whether a person could be both open-minded and assertive at the same time, that creates a discovery process. It creates a fabulous learning. That process itself reduces the probability of being wrong and produces a great deal of learning. People are so hung up on being right. Starting their discussion and deriving some sort of satisfaction if, at the end of the discussion, they were where they began the discussion. That doesn't make any sense, because there's not going to be any learning. So ego plays an important role in that. The people that feel like, "I'm good. I've got it," won't learn. If you've got it, you won't learn. So you have to get rid of this ego barrier, "I've got it" thing.
Every human being has weaknesses. And, as I say, it's the opposite side of thinking. In other words, if you have a brain that works one way, and you're doing certain things that allow you to do things that way that you're excelling, it means that your brain is working in a manner that has its pluses that will cause minuses. So the creative person who is not reliable, or the reliable person who is not creative. But if they don't embrace that they're going to continue to encounter that. Ego barrier is the worst thing, and if we were raised differently, just imagine in the schools all along that people will always say, "Everybody makes mistakes. Everybody has weaknesses. The key is really to understand what your mistakes and weaknesses are so that you can learn from them." I think punishment is a terrible concept. Punishment means that you made a mistake and you're being punished. I think instead of punishment, every time somebody makes a mistake you should say, "The only thing that you need to do to get out of your punishment is, first, think, "What kind of mistake was that?" So if I'm in a situation like that again, how would I deal with it differently? Not to make that mistake. So that learning should come from the mistake, not punishment, because you're teaching people not to make mistakes, which is where the learning comes from. Not the appreciation that if you keep doing this over and over again, you're going to keep encountering the same outcomes.
How did you first become involved in the markets, in trading?
Ray Dalio:
In my particular case I started trading markets when I was a kid, when was 12. And the markets -- there are certain things about being in the markets, in terms of decision making, that are unique, that encourage this kind of thinking. First, because all of the consensus is already baked into the price. In order to be correct in the markets, in order to make money in the markets, you have to see something that the consensus doesn't see. So you have to have an independent point of view. Very different than most other professions. Most other professions you can build on existing knowledge. You don't have to have a point of view. If you're a doctor and somebody breaks a leg or whatever, you can repair that leg. It's not zero-sum, in the sense that you have to be smarter than the next person or different from the consensus. Now in order to be different from the consensus, there's a high risk you're going to be wrong. So for me, if I form that point of view and I'm wrong... the probability of being wrong I'm trying to reduce. So by having other people stress-test my thinking, it's very practical, right?
I work really hard to have this independent point of view, and then I bring that independent point of view out there and I say, "Shoot at it. How am I going to be wrong?" So let's have that quality back-and-forth. And so that was just a practical approach. Find people of alternative points of view and have quality conversations back and forth. Not to let them think for me, not for me to follow their point of view, but for me to understand the different perspectives. Right? Very, very practical. Because it increases my probability of being right, and it reduces my probability of being wrong. And what I've discovered in that process is that I was learning so much. So just imagine what a fantastic path to think, "Let me go after the person who has got the opposite point of view, who is really smart, and let me have quality conversations, quality disagreement." So in my case, it was very much motivated by that, and then I have clear measures of whether I'm right or wrong, so there's a clear accountability. In other words, I could do whatever I want, it's my responsibility if I made a purchase for a sale, I can measure on a day-to-day basis how good that process is. So I get clear feedback. The goal is: don't be too wrong. Be more right than wrong. So in that process I can take personal accountability. If I don't learn personal accountability, if I don't learn, then I'm going to pay a terrible price. So that process itself lent itself to this kind of very open-minded decision. Also the making mistakes, and the loving the mistakes.
We have a culture of radical transparency. So every meeting is taped and made available for everybody in the company to look at. And all we have are conversations of, "What makes sense?" Everybody has the right to make sense of things. Now in that environment I get to see how differently people think. I realize how radically different people think. So that was a curiosity to me. Really. Because it's masked, you have no idea what's going on behind other people's eyeballs. You know, they're in their heads. They all look a lot alike but their brains work so differently. So that led me to brain science. In other words so I'm very, very interested in understanding literally how the brain works and the physiology of the brain. We have different physiologies. So what we think is just our interpretations, our things like love. Love is physiological. There is a chemical in your brain -- I forgot the name it begins with "o" (oxytocin) -- that is where love comes from. So this physiology, our brains, are structured differently. When you start to realize that the brain is very much like the body -- in other words there are parts of your body you can exercise and change certain parts of that. You have a certain body, and maybe you can get more muscular to a certain degree and maybe you can't. Then there are parts of your brain, parts of your body that you can't change. You can't change your bone structure. That's just the reality of the brain. And that is what people are like. So the recognition of that, the embracing of that reality is great, yet we don't talk about that, and that's a tragedy.
Note: the interview (68506 characters) is too long to be posted here (65535), those who are interested can find the complete interview at http://www.achievement.org/autodoc/print.../dal1int-1
Hedge Fund Master
October 27, 2012
Washington, D.C.
You've spoken about individuals who shape the world we live in and the particular qualities they share. What is the process these people, "the shapers," go through that perhaps the rest of us do not?
Ray Dalio:
I think for everybody, in order to be successful, there are five steps that you go through essentially. But everybody has their goals. What is their goal and passion? So you have goals. And then what happens is you're going after your goals and you encounter your problems. So encountering problems, and then the big difference between people is how they approach those problems. People who get bummed out by the problems don't learn from it. Who learns from them? So those who recognized the problems are excited that they get into those problems or mistakes. Mistakes are learning experiences. The pain that comes for that mistake, every time you have pain it's an indication that something is at odds. So the people who have the pain are the people then who will go into that and realize that if they solve that pain, solve that problem, understand what that is representative of -- not just the one problem -- but that problem is a certain type of problem that will happen over and over and over again in your life, and if you can solve, "How do I deal with that kind of problem?" The third thing that everybody needs to do is, if they have problems on the way to their goals, that they diagnose those problems and they get to the root cause -- the real root cause. The real root is often -- is typically -- what people are like. Can you go to what you're like? Can you go to your mistakes? Can you go to your weaknesses? Right. Can you go to other people's mistakes and weakness? Some people, because of ego barrier, can't do that, so if they don't recognize their own mistakes, their own weaknesses, or other's mistakes and weaknesses -- what the root cause may be and what they're like because of ego barriers -- if they can't go there, they're going to repeat those mistakes. They're going to have them over and over again. So it's the process essentially of saying, at that stage, "What am I like?" Everybody has strengths and everybody has weaknesses. The weaknesses are the other side of the strengths. So let's say if you're a right brain/creative person, you may not be reliable. Because just the way you think necessitates you to think a certain way, that means you can't think in another way. That means you're going to keep bumping into that thing that's standing in your way. But unless you can embrace, "I'm not reliable," right, and deal with it, you won't get around it. It's still going to continue to be a barrier. Right. So the diagnosis to the root cause is important. So then if you diagnose, then you have to design what you are going to do about it that works. So let's say you are very creative but not reliable. Okay, you have to find the means of first of all embracing that, and then saying, "If I'm not reliable, what do I? Do I work with a reliable person? Do I learn reliability? Do I have some compensating mechanism?" Because I can't let that lack of reliability stand in the way of my goal. As long as I keep doing that I'm going to keep running into problems.
So you have to design what you do about the problems. And then when you're designing what to do about the problems, you have to follow it through. You have to follow through, or do the thing you design. Doing the thing you design requires self-discipline and so on. People have to do those things in order to be successful. Right. They have to know what their goals are. They have to diagnose their problems down to the root cause, the real root cause. They have to design ways to get around them, and then they have to have the self-discipline to follow that. It's a continuous iterative process. So that's what we keep doing. I would say that all of the shapers are doing that. So they don't mind the problems. That's their adventure. A wonderful book is Einstein's Mistakes. You hear his struggles. He wouldn't have been cutting-edge, he wouldn't have been inventive if he didn't go through that. So when you're looking at the personality characteristics, the personality characteristics lend themselves to doing that five-step process well.
In his book The Outliers, Malcolm Gladwell says it takes something like 10,000 hours of working at something to become remarkable, to become extraordinary. I think you're also describing a person who is very driven, who has great tenacity and doesn't let things get in the way of the goal.
Ray Dalio:
Yes, of course. It's an element, but...
It's the mixture of the elements that matter. You could have a tremendous tenacity, but you're studying, you're learning, you're trying to memorize and remember everything that you're being taught and you're really trying hard. You could have great tenacity. You need the making sense of something, you need to embrace reality. You need these other dimensions. Right. So I think the things that we started to talk about just before, the things that these people have a need for is: First, they need to -- most fundamentally - make sense of things, which is a very different kind of learning process. It's a very internalized learning process. It's not a memory-based process. So none of these people -- unlike the population as a whole -- none of these people have a desire to follow instructions.
How is that different from other people?
Ray Dalio:
For most people, you go to school, they tell you what class to go to, what classes to take. This goes on all the way through university. "Do this, do this, do this..." and then you go into the class and they say, "Learn this," and, "This is the information," and it's a largely memory-based and instructional-based process. This is not what these people do. Right? This is not. So the path, what they have is a strong, strong desire to understand and make sense of reality. How does reality work? So they're all very independent-thinking and, and rebellious. They don't mind saying, "Screw you. This is what makes sense and I've got to go down that path." They're comfortable with ambiguity. They love ambiguity. Some people don't like ambiguity. Most people, they say, "I'm nervous about ambiguity." They love to go in the space of what's ambiguous, because that's where the discovery is. They love making mistakes, the process, they understand that making mistakes -- you know, loosen up! It's like you're going to ski or something. You can't learn how to ski unless you're falling. So they don't mind the falling. They're not embarrassed about making mistakes. They're not worried also about the approval of others. So many people are constantly saying, "Oh well, risk!" The whole different definition of risk -- what's risky? They're not worried about what people think of them, right? Is that risk or failure? The term of failure is a totally different thing. Failure is part of a learning process. Right? What's the risk of failure? What, you'll be embarrassed? Risk of failure? How do you distinguish failure from learning? In your whole life, "failure" implies that it stopped, that the game stops. If it's part of a "You're failing and then you learn," then that learning is part of the moving forward. So that is what the process is like. Fail, learn, move forward. And constantly do that, because you're cutting-edge. You're going where people haven't been before, in inventiveness. That's exciting to those people. So that's a different kind of approach to life. It's a different way of being.
You said earlier that "ego barriers" keep people from recognizing their own weaknesses. Why is that, and where did you get your ability to look at your own weaknesses?
Ray Dalio:
You're asking a two-part question, so I think I probably should explain what I mean by this ego thing. I think that the ego barrier is the worst problem. This is going to take a few minutes.
People are so attached to being right, and yet the tragedy is it could be so easy to find out how you're wrong. If you just said to yourself, "I'm not sure that I'm right, and let me go find people who have alternative point of views and let me have quality conversations." Not to pay attention to their conclusions, but to the thought process. So thoughtful discussion, worrying about being wrong but not to the sense of being paralyzed. Or moving forward, but in the sense of trying to create discovery, to have an exchange. To go after the person who has the most different point of view, who is the most thoughtful, and then have a conversation to see their point of view. Whether a person could be both open-minded and assertive at the same time, that creates a discovery process. It creates a fabulous learning. That process itself reduces the probability of being wrong and produces a great deal of learning. People are so hung up on being right. Starting their discussion and deriving some sort of satisfaction if, at the end of the discussion, they were where they began the discussion. That doesn't make any sense, because there's not going to be any learning. So ego plays an important role in that. The people that feel like, "I'm good. I've got it," won't learn. If you've got it, you won't learn. So you have to get rid of this ego barrier, "I've got it" thing.
Every human being has weaknesses. And, as I say, it's the opposite side of thinking. In other words, if you have a brain that works one way, and you're doing certain things that allow you to do things that way that you're excelling, it means that your brain is working in a manner that has its pluses that will cause minuses. So the creative person who is not reliable, or the reliable person who is not creative. But if they don't embrace that they're going to continue to encounter that. Ego barrier is the worst thing, and if we were raised differently, just imagine in the schools all along that people will always say, "Everybody makes mistakes. Everybody has weaknesses. The key is really to understand what your mistakes and weaknesses are so that you can learn from them." I think punishment is a terrible concept. Punishment means that you made a mistake and you're being punished. I think instead of punishment, every time somebody makes a mistake you should say, "The only thing that you need to do to get out of your punishment is, first, think, "What kind of mistake was that?" So if I'm in a situation like that again, how would I deal with it differently? Not to make that mistake. So that learning should come from the mistake, not punishment, because you're teaching people not to make mistakes, which is where the learning comes from. Not the appreciation that if you keep doing this over and over again, you're going to keep encountering the same outcomes.
How did you first become involved in the markets, in trading?
Ray Dalio:
In my particular case I started trading markets when I was a kid, when was 12. And the markets -- there are certain things about being in the markets, in terms of decision making, that are unique, that encourage this kind of thinking. First, because all of the consensus is already baked into the price. In order to be correct in the markets, in order to make money in the markets, you have to see something that the consensus doesn't see. So you have to have an independent point of view. Very different than most other professions. Most other professions you can build on existing knowledge. You don't have to have a point of view. If you're a doctor and somebody breaks a leg or whatever, you can repair that leg. It's not zero-sum, in the sense that you have to be smarter than the next person or different from the consensus. Now in order to be different from the consensus, there's a high risk you're going to be wrong. So for me, if I form that point of view and I'm wrong... the probability of being wrong I'm trying to reduce. So by having other people stress-test my thinking, it's very practical, right?
I work really hard to have this independent point of view, and then I bring that independent point of view out there and I say, "Shoot at it. How am I going to be wrong?" So let's have that quality back-and-forth. And so that was just a practical approach. Find people of alternative points of view and have quality conversations back and forth. Not to let them think for me, not for me to follow their point of view, but for me to understand the different perspectives. Right? Very, very practical. Because it increases my probability of being right, and it reduces my probability of being wrong. And what I've discovered in that process is that I was learning so much. So just imagine what a fantastic path to think, "Let me go after the person who has got the opposite point of view, who is really smart, and let me have quality conversations, quality disagreement." So in my case, it was very much motivated by that, and then I have clear measures of whether I'm right or wrong, so there's a clear accountability. In other words, I could do whatever I want, it's my responsibility if I made a purchase for a sale, I can measure on a day-to-day basis how good that process is. So I get clear feedback. The goal is: don't be too wrong. Be more right than wrong. So in that process I can take personal accountability. If I don't learn personal accountability, if I don't learn, then I'm going to pay a terrible price. So that process itself lent itself to this kind of very open-minded decision. Also the making mistakes, and the loving the mistakes.
We have a culture of radical transparency. So every meeting is taped and made available for everybody in the company to look at. And all we have are conversations of, "What makes sense?" Everybody has the right to make sense of things. Now in that environment I get to see how differently people think. I realize how radically different people think. So that was a curiosity to me. Really. Because it's masked, you have no idea what's going on behind other people's eyeballs. You know, they're in their heads. They all look a lot alike but their brains work so differently. So that led me to brain science. In other words so I'm very, very interested in understanding literally how the brain works and the physiology of the brain. We have different physiologies. So what we think is just our interpretations, our things like love. Love is physiological. There is a chemical in your brain -- I forgot the name it begins with "o" (oxytocin) -- that is where love comes from. So this physiology, our brains, are structured differently. When you start to realize that the brain is very much like the body -- in other words there are parts of your body you can exercise and change certain parts of that. You have a certain body, and maybe you can get more muscular to a certain degree and maybe you can't. Then there are parts of your brain, parts of your body that you can't change. You can't change your bone structure. That's just the reality of the brain. And that is what people are like. So the recognition of that, the embracing of that reality is great, yet we don't talk about that, and that's a tragedy.
Note: the interview (68506 characters) is too long to be posted here (65535), those who are interested can find the complete interview at http://www.achievement.org/autodoc/print.../dal1int-1