Here is the full transcript of American billionaire investor Ray Dalio’s TED Talk: How to Build a Company Where the Best Ideas Win.
Ray Dalio – American billionaire investor
Whether you like it or not, radical transparency and algorithmic decision-making is coming at you fast, and it’s going to change your life.
That’s because it’s now easy to take algorithms and embed them into computers and gather all that data that you’re leaving on yourself all over the place, and know what you’re like, and then direct the computers to interact with you in ways that are better than most people can.
Well, that might sound scary. I’ve been doing this for a long time and I have found it to be wonderful.
My objective has been to have meaningful work and meaningful relationships with the people I work with. And I’ve learned that I couldn’t have that unless I had that radical transparency and that algorithmic decision-making.
I want to show you why that is, I want to show you how it works. And I warn you that some of the things that I’m going to show you probably are a little bit shocking.
Since I was a kid, I’ve had a terrible rote memory. And I didn’t like following instructions, I was no good at following instructions. But I loved to figure out how things worked for myself.
When I was 12, I hated school but I fell in love with trading. The markets I caddied at the time, earned about five dollars a bag.
And I took my caddying money, and I put it in the stock market. And that was just because the stock market was hot at the time. And the first company I bought was a company by the name of Northeast Airlines.
Northeast Airlines was the only company I heard of that was selling for less than five dollars a share. And I figured I could buy more shares, and if it went up, I’d make more money.
So, it was a dumb strategy, right? But I tripled my money, and I tripled my money because I got lucky. The company was about to go bankrupt, but some other company acquired it, and I tripled my money.
And I was hooked. And I thought, “This game is easy.” With time, I learned this game is anything but easy.
In order to be an effective investor, one has to bet against the consensus and be right. And it’s not easy to bet against the consensus and be right.
One has to bet against the consensus and be right because the consensus is built into the price. And in order to be an entrepreneur, a successful entrepreneur, one has to bet against the consensus and be right.
I had to be an entrepreneur and an investor — and what goes along with that is making a lot of painful mistakes.
So I made a lot of painful mistakes, and with time, my attitude about those mistakes began to change. I began to think of them as puzzles. That if I could solve the puzzles, they would give me gems.
And the puzzles were: What would I do differently in the future so I wouldn’t make that painful mistake? And the gems were principles that I would then write down, so I would remember them that would help me in the future.
And because I wrote them down so clearly, I could then — eventually discovered — I could then embed them into algorithms.
And those algorithms would be embedded in computers, and the computers would make decisions along with me; and so in parallel, we would make these decisions.
And I could see how those decisions then compared with my own decisions, and I could see that those decisions were a lot better. And that was because the computer could make decisions much faster, it could process a lot more information and it can process decisions much more — less emotionally.
So it radically improved my decision-making.
Eight years after I started Bridgewater, I had my greatest failure, my greatest mistake.
It was late 1970s, I was 34 years old, and I had calculated that American banks had lent much more money to emerging countries than those countries were going to be able to pay back and that we would have the greatest debt crisis since the Great Depression.
And with it, an economic crisis and a big bear market in stocks. It was a controversial view at the time. People thought it was kind of a crazy point of view.
But in August 1982, Mexico defaulted on its debt, and a number of other countries followed. And we had the greatest debt crisis since the Great Depression.
And because I had anticipated that, I was asked to testify to Congress and appear on “Wall Street Week,” which was the show of the time.
Just to give you a flavor of that, I’ve got a clip here, and you’ll see me in there.
(Video: Mr Chairman, Mr Mitchell, it’s a great pleasure and a great honor to be able to appear before you in examination with what is going wrong with our economy. The economy is now flat — teetering on the brink of failure.
Martin Zweig: You were recently quoted in an article. You said, “I can say this with absolute certainty because I know how markets work.”
Ray Dalio: I can say with absolute certainty that if you look at the liquidity base in the corporations and the world as a whole, that there’s such reduced level of liquidity that you can’t return to an era of stagflation. – Video concludes.)
I look at that now, I think, “What an arrogant jerk!” I was so arrogant, and I was so wrong. I mean, while the debt crisis happened, the stock market and the economy went up rather than going down, and I lost so much money for myself and for my clients that I had to shut down my operation pretty much.
I had to let almost everybody go. And these were like extended family, I was heartbroken. And I had lost so much money that I had to borrow 4,000 dollars from my dad to help to pay my family bills. It was one of the most painful experiences of my life.
But it turned out to be one of the greatest experiences of my life because it changed my attitude about decision-making. Rather than thinking, “I’m right,” I started to ask myself, “How do I know I’m right?”
I gained a humility that I needed in order to balance my audacity. I wanted to find the smartest people who would disagree with me to try to understand their perspective or to have them stress test my perspective.
I wanted to make an idea meritocracy. In other words, not an autocracy in which I would lead and others would follow, and not a democracy in which everybody’s points of view were equally valued, but I wanted to have an idea meritocracy in which the best ideas would win out.
And in order to do that, I realized that we would need radical truthfulness and radical transparency. What I mean by radical truthfulness and radical transparency is people needed to say what they really believed and to see everything. And we literally tape almost all conversations and let everybody see everything, because if we didn’t do that, we couldn’t really have an idea meritocracy.
In order to have an idea meritocracy, we have let people speak and say what they want. Just to give you an example, this is an email from Jim Haskel — somebody who works for me — and this was available to everybody in the company: “Ray, you deserve a ‘D-‘ for your performance today in the meeting; you did not prepare at all well because there is no way you could have been that disorganized.”