[Another's Stone] Ray Dalio: Master of Principles for Navigating the Economic Machine

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"Pain + Reflection = Progress".

In the world of investing, most people strive for precise market predictions, but Ray Dalio has taken a completely different path. The founder of Bridgewater Associates believes that understanding the timeless universal laws of economics and making systematic decisions is far more important than predicting the next fluctuation. Starting from a basement apartment to managing the world's largest hedge fund, Dalio has spent 50 years proving that transforming investing into a replicable system is the ultimate answer to dealing with uncertain markets.

Legendary Career: From Being Fired to Building a Trillion-Dollar Empire

Ray Dalio's investment career began at the age of 12 when he first encountered stocks while working as a caddy at a golf course. After studying at Harvard Business School, he founded Bridgewater Associates in 1975 in the basement of a two-bedroom apartment in New York.

Early setbacks and fundamental turning points

· Misjudgment of the 1982 debt crisis: Dalio calculated through analysis that the loans American banks lent to the country exceeded the amount it could repay, and judged that a debt crisis would occur. After Mexico's debt default, he anticipated the market would decline, but the market instead surged significantly.
· Near-zero and deep reflection: This misjudgment caused him heavy losses, nearly losing everything, and he was forced to lay off all employees. He later recalled, "That was one of the most important learning experiences in my life. It made me understand the principle that 'pain plus reflection equals progress.'"

The pillar of the empire rebuilt from the ruins
Dalio distilled three core principles to change the future from this failure, and rebuilt Bridgewater based on them:

1. Embrace humility: Start questioning your own judgment and recognize the possibility of being wrong.
2. Decentralized Power: Recognizing that by investing in more than 15 unrelated income streams, one can significantly reduce risk without lowering returns.
3. Culture of Creativity First: Build an environment that prioritizes "creativity first," encouraging extreme authenticity and extreme transparency.

These principles ultimately propelled Bridgewater to become the world's largest hedge fund managing around one trillion dollars in assets, with its "Pure Alpha" fund generating nearly 50 billion dollars in returns over 20 years.

Core Trading Philosophy: Economic Machines and Principles Systems

Dalio's trading philosophy is based on viewing the economy as a machine driven by simple rules and understanding and navigating it through systematic decision-making.

The economy is like a machine.
Ray Dalio believes that the economy operates according to eternal and universal laws, primarily driven by three forces:

1. Growth in productivity: In the long term, this is the fundamental trend line of economic rise.
2. Short-term debt cycle: Typically lasts 5-8 years, including periods of expansion and contraction.
3. Long-term debt cycle: lasts about 50-75 years, with debt growth exceeding income growth ultimately leading to deleveraging.

Understanding the interaction between these three provides a foundation for systematic investment.

Five-step process and evolution cycle
Ray Dalio proposed a five-step process for personal and organizational growth, which is the core of achieving continuous improvement:

1. Set Goals
2. Identify the problem
3. Diagnose the problem and find the root cause
4. Design solutions to problems
5. Execution Plan

He emphasized: "You make progress, but you will encounter problems and mistakes. The key is to reflect and diagnose these issues, find the root cause and make changes to reach new heights." This cycle is a continuously repeating process; he even stated: "I have come to appreciate mistakes because they are the best learning opportunities."

Systematic decision-making surpasses personal judgment.
Dalio believes that relying on personal intuition in a market full of uncertainty is dangerous. He has developed a systematic decision-making framework:

· Credibility-weighted decision making: Consider the viewpoints of more relevant and trusted individuals comprehensively, rather than blindly relying on individual opinions or one's own judgment.
· Principle-based algorithms: Transforming investment principles into specific algorithms to make Bridgewater's investment decisions more objective and systematic.
· Do not act when you do not understand: He reminded that "if you're unsure, do not take large-scale actions."

Classic Strategy: All-weather Portfolio

Ray Dalio's most famous contribution may be the "All Weather Portfolio," whose core insight is: by balancing asset allocation, the portfolio remains neutral to any changes in the economic environment.

Build logic

· Divide the economic environment into four quadrants: growth rate above expectations/below expectations, inflation rate above expectations/below expectations.
In different quadrants, certain asset classes always perform better.
· By configuring unrelated asset classes (such as stocks, bonds, gold, etc.), the portfolio will always have some assets that can perform well in any economic environment.

Actual configuration
A typical all-weather portfolio allocation is approximately as follows:

· 30% U.S. stocks
· 40% Long-term U.S. Treasury Bonds
· 15% Mid-term U.S. Treasury Bonds
· 7.5% gold
· 7.5% Commodities

This configuration is not a prediction market, but rather acknowledges that no one can accurately predict the future of the economy, thereby constructing a robust portfolio that can withstand various economic environments.

The Three Stones Revelation

1. Extract the nutrients of progress from failure.
Ray Dalio uses "Pain + Reflection = Progress" as his core philosophy. He openly shares his judgment errors from 1982, demonstrating the courage to face mistakes honestly and improve from a systematic level. For modern traders, establishing a detailed trading journal and regularly reviewing mistakes is the foundation for continuous evolution.
2. Decentralization is not a free lunch.
The principle of "more than 15 uncorrelated sources of return" discovered by Dalio breaks the limitations of traditional diversification in investment. Modern traders can apply this concept to allocate assets across markets (stocks, bonds, commodities), regions, and strategies, truly achieving risk diversification.
3. Build your own "principle" system
Dalio's success lies not in how smart he is as an individual, but in the fact that he has established a replicable decision-making system. Traders should summarize their experiences into written principles and checklists, gradually forming their own trading systems to reduce emotional interference.
4. Stay humble in uncertainty
"I learned to be humble and began to question my own judgments." Dalio said this while reflecting on the lessons of 1982. In today's age of information overload, traders need to acknowledge their cognitive limitations and adopt a critical thinking approach of "believe nothing, doubt everything" in order to survive long-term in an uncertain market.

Three Stones Conclusion

Ray Dalio once said: "Making money is secondary; the most important thing is to do your best as much as possible." This quote reveals the true secret to his success—not the pursuit of profit, but the relentless quest for truth and excellence.

In Dalio's view, the market is like a huge machine, and understanding its operational rules is more important than predicting its next move. The principles he distilled from early failures not only reshaped his investment approach but also provided a roadmap for all traders navigating the market.

What he left us is not only a specific method like an all-weather strategy, but also a fundamental attitude towards the market: to rescue individuals from the whirlpool of emotions through a systematic and principled approach, allowing investment decisions to return to calmness, rationality, and replicability.

A true investment master is not someone who occasionally makes accurate market predictions, but rather someone who has built systems capable of withstanding various storms and adheres to principles as the highest priority, embodying long-termism. In tomorrow's series, we will continue to explore the wisdom of another trading master and see how his systematic thinking compares to that of Ray Dalio.