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Ray Dalio

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Ray Dalio

Intro
Founded by Ray Dalio during 1975 from his two-bedroom apartment, today Bridgewater manages $169 billion for
a wide array of institutional clients, including foreign governments and central banks, corporate and public pension
funds.
Over its 40-year history, Bridgewater has been recognized as a top-performing manager and an industry innovator.
The fund manager was one of the few firms to register a positive performance during the 2008 financial crisis.
In 2012, Ray Dalio appeared on the annual Time 100 list of the 100 most influential people in the world. And he made
Bloomberg Markets list of the 50 Most Influential people during 2011 and 2012. According to Forbes, at time of
writing (06/12/2015) Ray Dalio is worth $15.4 billion, making him the 29th richest person in the United States, 2nd
richest hedge fund manager and #60 richest in the world.

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Ray Dalio

Part One

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Ray Dalio

The Pre-Bridgewater Years


Ray Dalio was born in Jackson Heights, Queens during 1949. At the time, his family had no connections to the finance
industry. Rays father was a jazz musician who played the clarinet and saxophone at Manhattan jazz clubs. Ray Dalio
first started to gain an interest in the financial world when he was around 12. At the time, he was working as a caddy
at the Links Golf Club, which was close to his school. Wall Streeters used to frequent the club and Dalio soon started
to learn.
It was the 1960s and the market was booming. Dalio, who was only 12 at the time, was obsessed with the talk on the
golf course, which usually revolved around the markets.
Ray picked up tips and advice from the clubs members and soon purchased his first stock; Northeastern Airlines.
At $5 per share, Northeastern was the only stock Dalio could afford, he had saved up $300 from his job at the golf
course.
Ray was extremely lucky with this first pick. Soon after he purchased the stock, Northeastern received a takeover at
three times the price Dalio had paid for it. Ray Dalio was hooked immediately. In his own words, I figured that this
was an easy game.

Hooked
Ray Dalios career in finance started at this point. After the Northeastern trade, he was hooked and immediately
started to look for other investments. This time around, Ray paid close attention to the companies he was looking at.
The young Dalio began reading annual reports and sought out advice from older, more experienced investors. Over
the years between his first investment and starting college Ray built the foundations for his success at Bridgewater. He
learned through trial and error and discovered that the only way to outperform is to be right when others are wrong.
Whats more, when he had an idea, Dalio found it best to ask the opinions of other investors, asking them to critique
his reasoning.
By doing his research, seeking out other opinions and studying market movements, by the time Dalio went to college,
he had built a stock portfolio worth several thousand dollars. After achieving an excellent academic record at college,
Ray Dalio went on to win admission to Harvard Business School.

Harvard Business School


Between college and graduate school, during the summer of 1971, Dalio worked as a clerk on the floor of the New
York Stock Exchange. From his position on the floor, Dalio was able to see firsthand the effects of Nixons decision
to abandon the gold standard. The day after this decision, stock prices jumped 33%.
As Dalio already had a solid grasp of the financial markets, after his first year at Harvard, he spent the summer trading commodities at Merrill Lynch for his own account. Dalio had taken a keen interest commodity trading while in
college. He was intrigued by the high level of leverage that could be used to trade, along with the outsized profits in
comparison to stock trading. In other words, Dalio saw the opportunity to earn a considerable profit on a minimal
investment. Taking the experience from Merrill, Dalio returned to Harvard, and, with a group of friends, set up a
small commodity trading company called Bridgewater Associates.
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Dalio in demand
Unfortunately, this Bridgewater Associates didnt really take off, but Dalios experience running the business, as well
as his work at Merrill didnt go unnoticed. After leaving Harvard, Dalio himself became a sought-after commodity; a
Harvard graduate with commodity trading experience.
Dalio went to work for a Dominick & Dominick, LLC after leaving Harvard but only stayed for a year, before moving
to Shearson Hayden Stone, the brokerage firm run by Sanford Weill -- who later went on to help create CitiGroup.
At Shearson, Dalio worked in the commodity-futures department. His job; to advise farmers, cattle ranchers and grain
producers in particular on how to hedge risks. By his own account, Dalio was frustrated with Shearsons management
structure, which ultimately lost him his job. From The New Yorker:



On New Years Eve in 1974, Dalio went out drinking with his departmental boss, got into a
disagreement, and slugged him. About the same time, at the annual convention of the
California Food & Grain Growers Association, he paid an exotic dancer to drop her cloak in
front of the crowd.

Bridgewater take two


Despite his disgrace, a number of Dalios clients continued to support him and he persuaded some to hire him as a
consultant when he departed Shearson. Ray Dalio bought his old commodity trading company for Harvard back to
life and Bridgewater Associates was reborn. Trading out of his two-bedroom apartment at the age of 26, Dalios new
business advised a few corporate clients on currency exchange and interest rate risks.
To begin with, there was nothing special about Bridgewater, but Dalios clients soon started to boast of the impressive
returns he was helping them to generate. More potential clients started to approach Dalio. Bridgewaters big break
came when McDonalds and one of its major suppliers signed on as clients, and Bridgewater began to grow dramatically.

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Part two

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Bridgewater Grows
Bridgewater began to grow rapidly during 1985.
After signing up McDonalds and one of the companys major suppliers as a client, Ray Dalio persuaded the World
Banks employee retirement fund to let Bridgewater manage some of its capital. Then, during 1989 Bridgewater signed
up Kodaks retirement system.
In Bridgewaters early days, the funds philosophy was much the same as it is today. The fund sought to achieve steady
returns by investing in a variety of markets such as U.S. and international bonds, using leverage to boost its exposure.
Take, for example, Bridgewaters Pure Alpha fund. Ray Dalio likes to spread his bets on the market and will typically
have 30 to 40 different trades on at any one time.
Its always a matter of controlling risk, Dalio has said in the past.Im always trying to
figure out my probability of knowing, andgiven that Im never sure, I dont want to have
any concentrated bets.

Achieving alpha
Bridgewater usually places spread bets, where the fund will purchase one security it considers undervalued and selling short another one it considers overvalued.
The returns from spread bets tend to be uncorrelated with the overall market, and, this is the key driver behind Bridgewaters unparalleled ability to achieve alpha.
For instance, during the dot-com bubble and the following September 11, 2001 terrorist attacks, Bridgewater held
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steady. In 2000, 2001 and 2002 Bridgewater reported strongly noncorrelated performance, -3.5%, 6.1% and 14.2%
respectively. During 2008, the fund reported a positive performance of 8.7% while the S&P 500 fell 38.49%.
Earlier this year, within Bridgewaters monthly presentation to clients, the company discussed their method of separating alpha, or manager skill, from beta, or the general market environment, the key principle behind the Pure Alpha
strategy.

Pure Alpha
Bridgewaters Pure Alpha strategies together manage $81 billion, making the two --Pure Alpha and Pure Alpha Major
Markets -- the largest funds managed by Bridgewater. The groups All Weather strategy comes in a close second with
$79 billion in assets.
The Pure Alpha portfolio is spread across eight different asset subcategories: Developed Currencies, Nominal Interest
Rates (Directional), Nominal Interest Rates (Spread), Inflation Linked Bonds, Sovereigns and Corporate Credit, Equities, Commodities and Emerging Currencies. The Nominal Interest Rates group is by far the largest of the portfolio
with around of a third of Pure Alphas AUM invested.
Bridgewaters Pure Alpha strategy targets 12% volatility and has, since 1991, returned 9.91% per year excluding fees.

Far from simple


Most of the worlds most successful hedge fund managers have been able to achieve outsized returns by placing large
directional bets on one security, or asset class.
But this strategy would be too simple for Bridgewater.
The firms Pure Alpha strategy is far from simple. Indeed, Bridgewater uses a complex set to strategies across a broad
portfolio to achieve results. Ideas are discussed with the funds investment officers and then carefully monitored to
ensure that they are performing in a manner consistent with expectations.
Still, even with 40 years experience managing money Bridgewater still makes mistakes, and, by managements own
admission, even Bridgewaters best ideas are only right around 60% of the time: without significant diversification
our results would inevitably produce periods of unacceptable risk. Therefore, we have assembled a portfolio with a
sufficient number of uncorrelated strategies to ensure the reliability of our investment returns.
As a result of Bridgewaters diversification, managers expect the Pure Alpha fund to make money in five out of six
years:
Pure Alpha is a highly diversified set of uncorrelated alpha return streams.
Our positions in each market are driven by a systematic assessment of the
unique underlying fundamental drivers of that market. Our performance is
driven primarily by our winning percentage across these markets. Our winning percentage normally oscillates within a range of roughly 40% to 80%
with a norm of about 60%...

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In recent years outperformance has remained uncorrelated to other markets and asset managers. Our alpha returns are independent from the returns of other markets
because we explicitly separate our alpha from our beta and have no bias to be long
or short any particular market. And our returns are uncorrelated to the returns of
other managers because our skill in trading market has no relation to the skill of other
managers, and to the extent that other manager have embedded beta exposures we are
uncorrelated to those betas. -- Bridgewater 2013 Strategic Report

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Part Three

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Investment Strategies
Alongside its key Pure Alpha strategy, Bridgewaters second largest fund, in terms of AUM, is its All Weather fund.
As described in Bridgewaters The All Weather Story:
The principles behind All Weather relate to answering a deceptively straight-forward
question explored by Ray with co-Chief Investment Officer Bob Prince and other
early colleagues at Bridgewater - what kind of investment portfolio would you hold
that would perform well across all environments, be it a devaluation or something
completely different?
While Bridgewaters Pure Alpha strategy targets, alpha, the groups All Weather strategy targets beta. All Weather is
based around the principle that different asset classes act differently in different market environments. Therefore,
by balancing asset exposure and assets classes, the fund can outperform with limited risk. All Weather is designed to
perform across all economic environments.

All Weather example


An example is the best way to highlight the benefits of the All Weather strategy.
During 2012, every quarter saw a different market environment with various risks and a broad range of opportunities.
Specifically, during the first quarter of the year, global growth picked up, the ECBs LTRO programs buoyed European banks and cyclical assets such as equities while oil surged. Defensive assets like bonds underperformed.
By balancing its exposure, the All Weather fund gained 3.6% during the first quarter of 2012. The second quarter saw
a reversal of gains in cyclical assets, defensive bonds outperformed while equities struggled. Once again, All Weather
produced a positive return of 3.4%.
Q3 2012 was a good quarter for all assets. Central Bank easing pushed both defensive and cyclical assets higher. All
Weather returned 5.5% during the period. During the final quarter of 2012, the markets didnt do much, and All
Weather produced a return on 1.5%.
Since its inception during 1996, the All Weather has produced a total return of 10.4% per annum, beating the returns
on a conventional portfolio by around 3.3%.
This is a simplified description of the All Weather strategy and doesnt do the strategy justice. However, Im going to
take a closer look at this strategy further on in the series.

Alpha/beta separation
Ive given a run-down of Bridgewaters two key strategies so early on in this series as I wanted to give an idea of what
kind of style Bridgewater uses to manage its funds. The two key funds, All Weather and Pure Alpha are managed in a
highly sophisticated way, using quant models to calculate and predict returns.
Bridgewater has also developed several innovative investment strategies one of which is the separation of alpha and
beta, a strategy few other managers have been able to follow.

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Put simply, beta is the risk/reward of a portfolio that is explained by being in a particular market. While alpha is the
excess return, outperformance in other words. Buying an index fund is abandoning any hope of being able to achieve
alpha. Studies have shown that the vast bulk of returns offered by traditional equity mutual funds were Beta returns.
Bridgewater also pioneers the portable alpha, which the fund manager then named the alpha overlay. As described
in the paper: Portable alpha - - Philosophy, Process & Performance:
Active investment managers provide two types of return: the return generated from market
exposure or beta and the return that comes from selection skill or alpha. Active beta returns typically come from market timing. That is, increasing market exposure in up-markets and
decreasing it in down-markets. Passive beta returns come from index fund exposure. Alpha
comes from security selection within an asset class. As such, the value-added from a true alpha
strategy does not depend upon the direction of the market. A true stock-picker, for instance,
would have a beta of 1.0 relative to their market benchmark, and all value-added would come
from their active risk or stock picking. Portable alpha refers to the process of separating the
alpha from the beta and then applying it to other portfolios.

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Understanding Bridgewater
Bridgewaters goal is to be the worlds best money manager, not the biggest. Accordingly, the manager wont sacrifice
returns for growth. Although, so far, even though the group is one of the worlds largest hedge fund managers, its size
has not stood in the way of performance.
Since the firms inception to the present day, Bridgewater has been committed to the same set of goals and values.
Ray Dalio runs Bridgewater, according to a set of principles and values that encourage openness, meaningful working
relationships, and creativity.

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Part Four

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Running Bridgewater
The secret to Bridgewaters success can be traced to owner, and founder, Ray Dalios set of principles he runs Bridgewater according to.
Over the years, Bridgewater has built a systematic approach to investing. The firm looks to continually improve and
learn, compounding experience and developing the groups understanding of global markets. Part of this process is
learning from mistakes, deal with errors quickly, and assess the cause of the mistake, so it never happens again.
Bridgewater is 100% employee owned and with approximately 1,000 employees, the company has to make sure that
the group acts as one.
To ensure that all employees are working towards the same goal, Ray Dalio has published a list of 210 principles that
all Bridgewater employees must read and adhere to.
Radical transparency
Ray Dalio believes in radical transparency, which means that everything at Bridgewater is under constant surveillance -- all meetings, all interviews, and all interactions are taped to ensure that Bridgewaters employees dont stray
from the principles. It may sound strange, but this is the way Bridgewater has worked for decades. Ray Dalio believes
that this approach leads to meaningful work and meaningful relationships through radical truth.
I believe that the biggest problem that humanity faces is an ego sensitivity to finding out
whether one is right or wrong and identifying what ones strengths and weaknesses are.
-- Ray Dalio
There are no boundaries either. Bridgewater has no titles and uses an open seating plan for the whole office. All employees are treated equally, and Ray Dalio believes in delegating down; forcing all employees to take responsibility for
pieces of the operation. And by using this approach, Dalio has commented in the past that, to him, Bridgewater is not
a job but a mission he gets to complete with his friends every day.
During 2011, The New Yorker published an interview with Ray Dalio, which contained a great example of his leadership style:
After a few pleasantries, he grabbed a thick briefing book and shepherded me into
a large conference room, where his firm was holding what he described as its weekly
Whats going on in the world? meeting.
Dalio sat down near the front of the room. A colleague began describing how the
European Central Bank had just bought some Greek bonds from investors at a discount to their face value--a move that the speaker described as a possible precursor
to an over-all restructuring of Greeces vast debts. Dalio interrupted him. He said,
Heres where you are being imprecise, and then explained at length what a proper
debt restructuring would entail, dismissing the E.C.B.s move as an exercise in kicking
it down the road.
And another example:

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Dalio said that the Chinese economy was in danger of overheating, and somebody
asked how a Chinese slowdown would affect the price of oil and other commodities.
Greg Jensen, Bridgewaters co-chief executive and co-chief investment officer, who is
thirty-six, said he thought that even a stuttering China would still grow fast enough to
push world commodity prices upward.
Dalio asked for another opinion. From the back of the room, a young man dressed
in a black sweatshirt started saying that a Chinese slowdown could have a big effect on
global supply and demand. Dalio cut him off: Are you going to answer me knowledgeably or are you going to give me a guess? The young man...Jack, said he would hazard an
educated guess. Dont do that, Dalio said. He went on, You have a tendency to do this...
Weve talked about this before. After an awkward silence, Jack tried to defend himself,
saying that he thought he had been asked to give his views. Dalio didnt let up. Eventually, the young employee said that he would go away and do some careful calculations.

The principles
With 210 principles on Ray Dalios list, its not possible to publish the whole list here. Therefore, Ive cherry-picked
15 key examples that give the best example of the list and its intentions. You can find the full PDF manual of 210
principles here; Principles by Ray Dalio - Bridgewater Associates.
1. Find outcomes that will keep you improving
Like Charlie Munger, Dalio believes that everyone should always strive for continual self-improvement. Over a month
(or longer period) the frequency of met and exceeded expectations should be on an upward trajectory.
Dalio says that your decisions should be made with this trajectory in mind. Avoid the temptation to compromise on
that which is uncompromisable, and dont try to please everybody with every choice you make for the team.
2. Teach your team that its okay to fail if it results in learning something
Dalio believes that managers need to expect mistakes from both their employees and themselves.
Create an environment in which people understand that remarks such as You handled that badly are meant to
be helpful (for the future) rather than punitive (for the past). While people typically feel unhappy about blame and
good about credit, that attitude gets everything backward and can cause major problems. Worrying about blame and
credit or positive and negative feedback impedes the iterative process essential to learning,
3. Be direct and honest with employees, and ask them to do the same
The main reason Bridgewater has improved at a much faster rate than most other companies over the past 30 years
is that we seek out problems and find systematic ways of eliminating them,
Dalio places an emphasis on employees telling the truth at Bridgewater. He has actually fired employees for talking
behind a coworkers back. If you talk behind peoples backs at Bridgewater you are called a slimy weasel.
4. If someone isnt working in a role, take them out of it
People who repeatedly operated in a certain way probably will continue to operate that way because that behavior
reflects what theyre like. If a person doesnt fit a role, move that person to another role.

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In Bridgewater interviews it is often the case that interviewers will focus not on the applicants skills but their work
ethic and personal motivations. Its often the case that interview discussions will be completely unrelated to the nature
of the position.
5. Be accurate instead of kind with evaluations
This follows Dalios methodology of being truthful and getting to the root of all problems. Dalios advice to Bridgewaters managers is to discuss employees performance objectively and plan for improvement.
Child psychologists, dog trainers, and other behavior modification specialists will tell you that constant, no-exception
feedback is fundamental to good training.
6. Recognize everyones differences
In order for everyone to work well as a team each team member must understand their own and everyone elses differences.Bridgewater employees are given personality tests so that managers can determine how they can best be
managed.
7. Build your team carefully
Staying on the topic of team building, Dalio notes that it is essential to build a strong team around you that wont let
him, or other managers down.
Dont hire people just to fit the first job they will do at Bridgewater; hire people you want to share your life with...
look for people who sparkle, not just another one of those.
8. Run your team like a machine
Micromanaging is telling the people who work for you exactly what tasks to do and/or doing their tasks for them.
Not managing is having them do their jobs without your oversight and involvement. Managing means: 1) understanding how well your people and designs are operating to achieve your goals, and 2) constantly improving them. To be
successful, you need to manage.
9. Recognize what you dont know
Successful people are great at asking the important questions and then finding the answers. When faced with a problem, they first ask themselves if they know all the important questions about it; they are objective in assessing the
probability that they have the answers; and they are good at open-mindedly seeking believable people to ask,
10. Minimize risk
Recognize opportunities where there isnt much to lose and a lot to gain, even if the probability of the gain happening is low. This rule doesnt just apply to investing it also applies to business opportunities and Bridgewaters new
recruits.
11. Remember the 80/20 Rule 80% of the effects come from 20% of the causes
Be an effective imperfectionist. Solutions that broadly work well (e.g., how people should contact each other in the
event of crises) are generally better than highly specialized solutions (e.g., how each person should contact each other
in the event of every conceivable crisis), especially in the early stages of a plan. There generally isnt much gained by
lots of detail relative to a good broad solution, The best leaders are able to determine the importance of the tasks in
front of them and finish the important ones first.
12. Place the utmost importance on truth

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Create an environment in which everyone has the right to understand what makes sense and no one has the right to
hold a critical opinion without speaking up about it,
13. Guide your employees evolution
So give people your thoughts on how they might approach their decisions or how and why you would operate in
their shoes, but dont dictate to them. Almost all that you will be doing is constantly getting in synch about how they
are doing things and exploring why.
14. Understand that making a hire is the most important decision you can make.
This follows on from several of the points above. The new team member must share the same values as the rest of
the company and fit will into the existing company structure. Hiring the right people is key to business success.
15. Always achieve what you set out to do.
You can make great things happen, but you must MAKE great things happen. Times will come when the choice will
be to plod along normally or to push through to achieve the goal. The choice should be obvious.

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Part Five

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Finding Trades; Financial Crisis protection


So far Ive looked at how Bridgewater Associates came to be, Ray Dalios history, the hedge funds two main strategies
and the key principles that the firm is built on.
Across the next two parts of this book, Im going to take a look at Bridgewaters investment process; how the group
finds investment opportunities and the complex process, it follows before placing a trade.

Independent strategy
Unlike the majority of Hedge Funds, Bridgewater does not place large bets on one company or asset class. Moreover,
the funds managers do not just consider a few quarters of data before placing a trade. Reading through Bridgewaters
investor correspondence, all of their analysis is rigorous and well-thought out.
In many cases, data used to draw conclusions goes back several decades, or if the data is available, a century. Bridgewater also studies data on a continual basis, in an attempt to pick up trends as they develop but before they play out.
Possibly the most telling example of Ray Dalio and Bridgewaters style is to look at how Dalio and the hedge fund
acted in the run-up to the financial crisis.

Crisis protection
During the pre-crisis years (before 2007) Ray Dalio had been paying close attention to the amount of credit that banks
and other financial institutions were creating -- a metric he still watches to this very day -- which he regards as a key
factor in over-all spending.
With Ray Dalios data showing an explosion in credit creation, during 2007 he wrote in Bridgewaters daily newsletter
that he wanted to avoid these crazy lending and leveraging practices, what Dalio later called lunacy.
A few weeks after Ray Dalio warned of lunacy in the credit markets, the subprime-mortgage market froze up and
Dalio declared:
This is the financial market unraveling we have been expecting. . . . This will run
through the system with the speed of a hurricane.
From The New Yorker:
Searching for historical precedents, Bridgewater put together detailed histories of previous credit crises, going back to Weimar Germany. The firms researchers also went
through the public accounts of nearly all the major financial institutions in the world
and constructed estimates of how much money they stood to lose from bad debts.
Bridgewaters analysts estimated that bad debts around the world totaled $839 billion. Ray Dalio took this data to the
Treasury Department in December 2007 and then the White House.

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His warnings ignored in Washington, Dalio issued more jeremiads to his clients. If the
economy goes down, it will not be a typical recession, his newsletter said in January, 2008.
Rather, it would be a disaster in which the financial deleveraging causes a financial crisis that
causes an economic crisis. . . . This continues until there is a reflation, a currency devaluation
and government guarantees of the efficacy of key financial intermediaries. As the crisis
deepened, Dalio continued to assess it far more accurately than many senior policymakers
did.
Ray Dalio also believed that the Fed would be forced to print money to revive the economy as lending dried up. With
this in mind, Bridgewater placed directional bets on Treasury bonds, the dollar, gold and a number of other commodities. These bets helped the Pure Alpha fund achieve a positive return during 2008.

Constant vigilance
In reality, its wrong to think of Bridgewater as a traditional hedge fund. The manager has more in common with a
global financial institution like the World Bank or IMF.
Bridgewater keeps a constant eye on economic developments around the world; key leading indicators such as capital
flows inflation measures and market volatility. All of these figures are then compared to historic trends to arrive at a
suitable conclusion and generate trade ideas.
Once again, the best way to explain Bridgewaters strategy is to use a selection of examples. These examples are taken
from the fund managers second quarter 2014 Pure Alpha Major Markets fund commentary:

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On an outright basis, we see major asset classes as roughly in equilibrium, with moderate
scenarios priced in. But substantial divergences continue to widen across markets, creating
uncorrelated alpha opportunities.
So far this year, over half of our alpha has come from diff positions of various sorts, and
we continue to hold primarily diff positions across markets.
We hold long positions in European assets relative to US assets. Bunds are attractive as Euroland remains in an ugly deleveraging, with core inflation rates below 1%, very depressed
levels of activity, and a need for further easing.
Options markets have shifted over the last few years from pricing in high volatility and fat
tails to very low volatility and significantly decreased risk of tail events...low market volatility, and ample liquidity have led to a further movement of money from cash to assets and
produced a further compression of risk premiums...Stable environments normally sow the
seeds of their own demise by drawing traders into more highly leveraged positions as they
try to magnify smaller asset returns into the desired level of return on equity. Subsequent
shifts then produce magnified reactions.
From an investment standpoint we protect ourselves from such reversals by limiting the
leverage that we use, and our valuation measures naturally adjust our position for overpricing.
We remain moderately bullish on global equities. From a flows perspective, money continues moving out on the risk curve, encouraged by the low rates and easy liquidity conditions
from central bank monetary policies. This favorable liquidity environment is having effects
across asset classes, pushing money into riskier assets like equities, and within asset classes,
reducing the dispersion in pricing within the stock market.
On commodities:
We think of commodities from a few different perspectives: as an alternative currency and storehold of
wealth, as a growth-sensitive asset class, and as an asset with specific supply and demand considerations.
...we dont see many compelling opportunities. The global economy is still awash with liquidity, and real
yields are low, which are supportive for commodities but less so than in recent years, as this liquidity is being
gradually pulled back.
Bridgewater also achieved alpha during the period through notoriously difficult currency trading.
Bridgewaters preferred method of currency trading is to place a lot of spread bets, purchasing one currency it
considers undervalued and selling short another one it considers overvalued. This strategy is used by the firm for
almost all of its trades across all asset classes -- commodity, equity and bond trading -- the strategy isnt just limited
to currency trading.

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In the second quarter, our largest developed currency positions were long the British pound
and Japanese yen and short the euro and the dollar. We also held a set of long emerging currency positions. The Canadian dollar and the pound were the strongest developed world
currencies during the period, while emerging currencies were broadly stronger against developed currencies. We made 1.52% in our currency trading during the quarter...
Some more examples of Bridgewaters style:

Bridgewater Shines In 2015 Returns And Correlation Performance

Did Bridgewater Associates Call The Recent China Slide?

Bridgewater Sees Stability In Cross-Border Asset Flows

Bridgewater Disagrees With Yellen Over Issue Of Strong Dollar

Bridgewater Says Future Looks Bright For Housing

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Part six

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Complex Business; Investment Process


Bridgewater uses quant style strategies to find trades. After analyzing the market and coming up with a set strategy
or outlook, Ray Dalio translates the insights of himself and those of his analysts into algorithms and scours global
markets for mispriced assets and other opportunities.
Unlike other Hedge Funds, which concentrate solely on equities and single-equity plays, Ray Dalios preferred asset
classes are the currency and fixed-income markets.

No hedge fund manager


According to Fortune, Ray Dalio dislikes being called a hedge fund manager. Also, Dalio doesnt consider himself to
be one of the worlds greatest investors:
Does Dalio think of himself as one of the worlds great investors? No, he says, shaking
his head, visibly agitated. First of all, I dont know what the definition is of one of the great
investors. Its a totally irrelevant question. I have the fear of messing up. And that fear drives
me to ask, Well, could this thing happen? Could that thing happen? If it happened in Japan,
how do I know it wont happen to me?
In an article written earlier this year, Ray Dalio elaborated on this view:
To make money in the markets, you have to think independently and be humble. You have
to be an independent thinker because you cant make money agreeing with the consensus
view, which is already embedded in the price. Yet whenever youre betting against the consensus, theres a significant probability youre going to be wrong, so you have to be humble.
Ray Dalio doesnt trade in the same, highly leveraged bets hedge funds have become known for. Bridgewaters average
leverage ratio is less than five, far less than that of other managers. (Although, based on data from 2012 the average
hedge fund industry leverage ratio is around 2.5.)

Bottom up
Its easy to assume that, based on the evidence present throughout the first half of this series that Ray Dalio is a topdown investor, placing bets based on macroeconomic market trends.
However, Dalio is, in fact, a bottom-up investor. In a market that interests him, using quant strategies based on economic factors, Ray Dalio identifies the buyers and sellers, estimates how much they are likely to influence demand
and supply.

It all comes down to who is going to buy and who is going to sell and for what reasons,
But on top of the human decision making, Ray Dalio has put together hundreds of decision rules that influence
and guide the trading decisions of Bridgewaters analysts, and traders. From The New Yorker:

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These are the financial analogue of Dalios Principles. He used to write them down and
keep them in a ring binder. Today, they are encoded in Bridgewaters computers. Some of
these indicators are very general. One of them says that if inflation-adjusted interest rates
decline in a given country, its currency is likely to decline. Others are more specific. One says
that, over the long run, the price of gold approximates the total amount of money in circulation divided by the size of the gold stock. If the market price of gold moves a long way from
this level, it may indicate a buying or selling opportunity.

Making mistakes
Ray Dalio hasnt got where he is today without making a string of mistakes over the years. Since 1975 Bridgewater has
only lost money in three years -- a commendable record -- and each one of these down-years has taught the company
valuable lessons.
Bridgewaters most recent down year was 2014 -- Ill get to that later -- the firms biggest mistake occurred during 1981
-- 82 when Ray Dalio was convinced that the US economy would fall into a depression.
I was so certain that a depression was coming that I proclaimed it in newspapers columns,
on TV, even in testimony to Congress. When Mexico defaulted on its debt in August 1982,
I was sure I was right. Boy, was I wrong. What Id considered improbable was exactly what
happened: Fed chairman Paul Volckers move to lower interest rates and make money and
credit available helped jump-start a bull market in stocks and the U.S. economys greatest
ever noninflationary growth period.
This event taught Ray Dalio a valuable lesson; you should always fear being wrong, no matter how confident you are.
As a result, Dalio:
...began seeking out the smartest people I could find who disagreed with me so that I could
understand their reasoning. Only after I fully grasped their points of view could I decide to
reject or accept them. By doing this again and again over the years, not only have I increased
my chances of being right, but I have also learned a huge amount.
Dalio replicates this approach at Bridgewater. Ray Dalio tries to put in place what he calls true open-mindedness.
This, as Dalio describes it, is a process of being intensely worried about being wrong and asking questions instead of
defending a position.

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Part seven

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Making Mistakes 2013

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This approach comes to life at Bridgewater in our weekly research meetings, in which our
experts on various areas openly disagree with one another and explore the pros and cons
of alternative view. This is the fastest way to get a good education and enhance decisionmaking. When everyone agrees and their reasoning makes sense to me, Im usually in good
shape to make a decision. When people continue to disagree and I cant make sense of their
reasoning, I know I need to ask more probing questions or get more triangulation from
other experts before deciding. -- Ray Dalio on his unconventional wisdom.
But even though Ray Dalio works 24/7 to ensure that Bridgewater avoid making serious mistakes, mistakes do happen. Bridgewater has lost money in three years since its inception, and some speedbumps along the way have slowed
growth.
For example, Bridgewaters All Weather fund stumbled during the first half of 2013. Dalio was bullish on the market,
betting that both stocks and bonds would head higher throughout the year. Then in May, a mini taper-tantrum sent
stocks and bonds plunging.
Bridgewaters exposure to bonds, like Treasury inflation protected securities, or TIPS held the fund back. TIPS lost
over 8.2% during the first half of 2013. (All Weather is designed to perform best when there is a sharp sell-off in
either stocks or bonds.)Whats more, Bridgewater was hit by a large level of leverage on the fixed income side, which

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magnified losses -- we know this as Ray Dalio actually wrote in Bridgewaters 300-page 2013 report (issued at the
beginning of 2014 and reviewed by ValueWalk) that borrowing cash to hold risky assets is as attractive as it has ever
been. From theNew York Times:
A number of risk-parity funds like All Weather were caught off guard by a sudden rise in
Treasury yields last summer. Treasury yields began to rise last May after speculation began
that the Federal Reserve would soon scale back its monthly purchases of United States
Treasurys and mortgage-backed securities. The Fed began slowly scaling back its purchases,
which are intended to stoke economic growth, last month. Last year also was a particularly
rough one for TIPS and other inflation-protected securities. TIPS tend to perform poorly
when Treasury yields rise and inflation is low. Last year, iShares TIPS, an exchange traded
fund that tracks the inflation-protected securities market, fell about 9 percent.

Dismal year
At the end of June 2013, Bridgewaters All Weather fund was down 8% for the year. However, it managed to recover
some of these losses during the second half. The fund ended the year down 3.8%. Unfortunately, these returns looked
dismal compared to the wider markets performance. The S&P 500 rose by more than 30% during the year. Bridgewaters Pure Alpha fund rose 5.25% for the year.
The blog Zerohedge provided an explanation as to why Bridgewater had such a dismal 2013:
Long story short, the internal assumptions behind Risk Parity blew up spectacularly in a
year in which yield soared, while equity markets dipped initially only to rebound furiously,
without a concurrent spike in inflation expectations.
Which is an assumption that goes against Ray Dalios own advice to anticipate everything and plan for every eventuality:
...how it would work in all circumstances, including circumstances that did not occur within
the period thats your frame of reference, you will inevitably do badly.
Simply put, during 2013, Bridgewater was caught off guard.

Defying critics
All Weather performance during 2013 dented Ray Dalios reputation. Nevertheless, criticism of his strategy didnt last
for long. During the first half of 2014 All Weather returned 11.2%, almost double the return of the S&P 500 over
the same period.
Over the 12 months to the end of June 2014 the fund returned 17.0% erasing all of the losses racked up during 2013.
During the first half of 2013 Bridgewaters Pure Alpha fund returned 7.8%.

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Part Eight

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The Man Behind The Machine


Throughout this series, Ive concentrated mainly on Bridgewater and the firms successes. One element that Ive only
really touched on is the man behind Bridgewater; Ray Dalio.
That said, its easy to build a rough idea of Ray Dalios life, personality and philosophy just by studying Bridgewaters
history. Although there are a few key things that dont show through in Bridgewaters successes.

Complex character
It is difficult to describe Ray Dalio in one sentence. Hes an avid fisherman, bow hunter, and a member of the board
of the National Fish and Wildlife Foundation. He enjoys snowboarding and meditates about five times a week for 20
minutes -- a practice he says he started when the Beatles started doing it in 1968. In addition, Dalio keeps a box at
the opera in New York City, enjoys salsa dancing and has a passion for the blues.
Like other billionaire hedge fund managers, Ray Dalio has his own charitable foundation. The Dalio Foundation had
total assets of around $900 million at the end of 2013 and Dalio has signed Warren Buffetts Giving Pledge.
Also, Ray Dalio is an avid reader, yet another trait shared with many of the worlds most successful hedge fund managers. From Forbes:
...his desk is piled high with some 20-odd books on economic debacles, such as Essays on
the Great Depression by Ben Bernanke and The Great Crash of 1929 by John Kenneth
Galbraith. Inside each are Post-it notes and hand-scribbled thoughts in the margins. He also
keeps close at hand a binder hes put together with detailed, 100-page timelines of the four
major deleveraging episodes of the past century - the hyperinflation of the Weimar Republic in the 1920s, the worldwide crash during the Great Depression in the 1930s, the Latin
American debt crisis of the 1980s, and Japans lost decade of the 1990s. He says the timelines
provide a virtual experience of what it would be like to trade through each scenario.
A current example of Dalios historic studies playing out in real-world events is the current interest rate debate.
Namely, should the Federal Reserve hike interest rates this year?
Bridgewater has drawn parallels between the current environment and that of 1937. In both periods, interest rates
fell to zero, simulative monetary policy fueled a rally in asset prices and the U.S. economy rebounded. However, when
the Fed finally started to raise rates during 1937, bonds sold off and stocks fell by more than 50%. The Fed quickly
reversed course. The question is, will the same happen this time around?

The holy grail


Ray Dalio believes, to an extent, that he has discovered the holy grail of investing at Bridgewater. His returns do seem
to support this conclusion. Dalios holy grail is Bridgewaters Pure Alpha and All Weather risk parity strategies, (as
explored in earlier parts of this series) which are complex computer driven strategies with 15 or more uncorrelated
return streams, either betas or alphas. According to Dalio, such a portfolio reduces risk by 80%.
But Ray Dalios holy grail strategies are only part of his success. The other key factor thats been instrumental in
keeping Bridgewater alive and ahead of the market is Dalios lack of confidence

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People tend to think that my success, or whatever you want to call it, has been because Im
a really good decision-maker. I think it is actually because Im less confident in making decisions. So in other words, I never know anything really. Everything is a probability.
Ray Dalio is always looking for someone to shot a hole in his ideas or assertions:
I draw my conclusions...and I say, Please shoot holes in this. Tell me where Im wrong.
If I had to make lots of long-term bets, my track record would be much worse than it is...
The beauty of my position is that I have the ability to change my mind tomorrow.
Source: Forbes 2009: The worlds biggest hedge fund.
...you cant make money agreeing with the consensus view, which is already embedded in
the price. Yet whenever youre betting against the consensus, theres a significant probability
youre going to be wrong, so you have to be humble.
Theres an art to this process of seeking out thoughtful disagreement. People who are successful at it realize that there is always some probability they might be wrong and that its
worth the effort to consider what others are saying -- not simply the others conclusions, but
the reasoning behind them --- to be assured that they arent making a mistake themselves.
They approach disagreement with curiosity, not antagonism, and are what I call openminded and assertive at the same time. This means that they possess the ability to calmly
take in what other people are thinking rather than block it out, and to clearly lay out the
reasons why they havent reached the same conclusion. They are able to listen carefully and
objectively to the reasoning behind differing opinions.
Ray Dalio via Institutional Investor.

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Part nine

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Risk Parity
The way Bridgewater is run mystifies many. Some have called the firm and its employees, bunch of f**king nutcases,
-- Bridgewaters workers are well aware what outsiders think of their processes.
But whatever you might think of Bridgewater, the firm has been able to achieve results. And behind these results there
are two key pillars of Bridgewaters strategy that Ive not yet explored in-depth.
The first, covered briefly during the first half of this series, are the risk parity methods employed by Bridgewaters All
Weather and Pure Alpha funds. The second is Ray Dalios thesis on how the economic machine works, which forms
the basis of most of Bridgewaters trading decisions and computer driven models.

Ray Dalio: Risk Parity


The construction of Bridgewaters risk parity models began soon after the firms creation. Throughout the 1980s and
90s the company started working on the fundamental principles of the strategy, separating alpha and beta, allocating
risk capital and establishing that concentrated risk is imprudent.

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These findings lead to the firms first ultra-long duration nominal bond and global inflation-linked bond portfolios,
designed to balance clients equity risk.
By 1996, Bridgewater had formed its risk parity models into its All Weather strategy, although it wasnt until 2003 that
the firm opened All Weather to outside investors.
Risk Parity is about balance. It is about balancing a portfolios risk exposures to attain a
greater chance of investment success than what is offered by traditional, equity-centric approaches to asset allocation.
Bridgewater set out to create the risk parity strategy with the goal of generating steady, predictable results over a long
period. One thing the firm noticed quickly was the fact that the old pension fund asset allocation model was flawed.
Pension funds tended to allocate a higher weighting to equities, in an attempt to produce higher returns over the longterm. In many cases, this approach has failed.
The long-term risk of holding a portfolio that is concentrated in equities is greater than most investors realize. Every
asset is susceptible to poor performance that can last for a decade or more, caused by a sustained shift in the economic
environment. Equities are no exception.
On the other hand, a balanced portfolio will have some short-term risk but it can be neutralized to sustained shifts
in the economic environment. Short-term risks can be canceled out over time allowing more consistent long-term
returns.
With this established, Bridgewater asked the question:
What mix of assets has the best chance of delivering good returns over time through all
economic environments?

Not good enough


Using traditional approaches that depend upon correlation and volatility assumptions werent reliable enough for
Bridgewater. So, the firm turned to the principles of asset pricing in an attempt to find basic truths that could be
relied upon.
Two timeless and universal truths about asset pricing were established:
1.
Asset classes outperform cash over time.
2.
Asset prices discount future economic scenarios.
An investment needs to offer you compensation (a risk premium) over and above what you could earn by keeping
your money in cash. Moreover, the more risk you take, the more compensation you require.
Additionally, the price of any asset reflects the discounted value of the assets expected future cash flows. However,
cash flow assumptions can change dramatically if the economic environment changes.

Flawed and unreliable


Im summing up here and missing a few key points of Bridgewaters findings. (Bridgewaters risk parity document is
highly recommended reading.) Nevertheless, the fact of the matter is that these findings showed that the traditional
methods of using correlation and volatility assumptions to achieve the goal of delivering real returns over time,
through all economic environments, are flawed and unreliable.
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...the only way to achieve reliable diversification is to balance a portfolio based on the relationships of assets to their environmental drivers, rather than based on correlation assumptions, which are just fleeting byproducts of these relationships. To do this, we recognize that
while asset classes offer a risk premium that is by and large the same once adjusting for risk,
their inherent sensitivities to shifts in the economic environment are not the same. Therefore you can structure a portfolio of risk-adjusted asset classes so that their environmental
sensitivities reliably offset one another, leaving the risk premium as the dominant driver of
returns.
Therefore, to achieve the best returns in any economic environment, Bridgewaters All Weather approach holds similar risk exposure to assets that do well during four fundamental economic conditions. Bridgewaters exposure is linked
to assets that do well when:
1.
Growth rises
2.
Growth falls
3.
Inflation rises
4.
Inflation falls
Assets are spread across four sub-portfolios with risk spread across the asset classes. The result of this strategy:
...underperformance of a given asset class relative to its risk premium in a particular environment (e.g., nominal bonds in higher than expected inflation) will automatically be offset
by the outperformance of another asset class with an opposing sensitivity to that environment (e.g., commodities), leaving the risk premium as the dominant source of returns, and
producing a more stable overall portfolio return.
Source: Risk Parity & Portfolio Construction White Papers

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Part ten

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The Economic Machine


Throughout this series Ive looked at Bridgewaters beginnings, the firms key trading strategies, principles and the
man behind the machine, Ray Dalio. In this, the last part of this ten-part series, Im going to take a look at Ray Dalios
economic machine hypothesis.
Foundations for growth
Bridgewaters All Weather trading strategies are, as covered in earlier parts of this series, built around global economic
developments, specifically, four scenarios:
1.
Growth rises
2.
Growth falls
3.
Inflation rises
4.
Inflation falls
At the heart of these strategies is Ray Dalios framework of the economic machine:
The economy works like a simple machine but many people dont understand it or they
dont agree on how it works, and this has led to a lot of needless economic suffering. I feel
a deep sense of responsibility to share my simple but practical economic template. Though
its unconventional, it has helped me to anticipate and to side step the global financial crisis
and it has worked well for me for over 30 years. -- Ray Dalio: How The Economic Machine
Works
Ray Dalio has released a short 30-minute video on his economic machine theory that you can view in full here. Im
going to sum up in my limited space here.
Though the economy might seem complex, its made up of a few simple parts and simple transactions that are repeated zillions of time times. These transactions are driven, for the most part, by human nature, creating the three
main driving forces for the economy:
1.
Productivity growth
2.
Short-term debt cycle
3.
Long-term debt cycle.
Every time you buy something, you create a transaction and transactions are the building blocks of the economic
machine. Understanding transactions is the key to understanding the whole economy. An economy consists of all of
the transactions and all of its markets. Adding up the total quantity of transactions in all markets gives you everything
you need to know to understand the economy.
The biggest buyer and seller is the government, which a) through a central bank controls the credit in the economy
and b) collects taxes and spends money.
Credit is the most important part of the economy, because its the biggest and most volatile part. Credit can help both
lenders and borrowers get what they want and on both sides of the equation, for both borrowers and lenders, when
a borrower receives credit, he is able to increase his spending and spending drives the economy. Increased spending
drives higher wages, which in turn creates more credit as borrowers are now more worthy of credit. This in turns drive
spending and the cycle continues.
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tion -- this pattern is why we have cycles.

Two main cycles


Debt swings usually occur in two big cycles. One lasts around five to eight years, while the other last 75 to 100 years.
Anytime you borrow you create a cycle, it sets into motion, a mechanical, predictable series of events that will happen
in the future, this makes credit different from money.
Let me give you an example, suppose you earn $100,000 a year and have no debt, you are
credit worthy enough to borrow $10,000, say on a credit card. So, you can spend $110,000
even though you only earn $100,000, since your spending is another persons income, someone is earning $110,000. The person earning $110,000 with no debt can borrow $11,000, so
he can spend $121,000 even though he has only earned $110,000. His spending is another
persons income, and by following the transactions, we can begin to see how this process
works in a self reinforcement pattern. -- Ray Dalio: How The Economic Machine Works
As economic activity increases theres expansion in the first phase of the short-term debt cycle. Spending continues
to increase and create inflation, which the central bank looks to control via interest rates. With higher interest rates,
fewer people can afford to borrow money and the cost of existing debts rises. Spending slows, economic growth
slows and you have a recession.
When credit is easily available, there is an economic expansion. When credit isnt easily
available, there is a recession and note that this cycle is controlled primarily by the central
bank. -- Ray Dalio: How The Economic Machine Works
With every short-term debt cycle, the longer term debt cycle is brewing. The top and bottom of each short-term cycle
finish with more growth than the previous cycle and with more debt because borrowers are pushing borrowing limits
creating the long-term debt cycle. Obviously this borrowing cannot continue forever, and it doesnt. Over decades,
debt burdens slowly increase creating larger and larger debt repayments. We saw the result of what happens when a
long-term debt cycle ends during 2008.
Borrowers are forced to sell the assets they borrowed against when the long-term cycle ends forcing a deleveraging.
Debt burdens have become too high and many borrowers find themselves unable to repay their loans, which has a
knock-on effect across the system. Credit dries up, assets are sold, lenders stop lending, debt is restructured, businesses fail, unemployment rises and the government has to step in. People who thought they had money, find that this
money is in fact credit, so when credit disappears, people dont have enough money. People are desperate for money,
which forces the central bank to act, print money and buy assets.

Central banks act


People ask if printing money will raise inflation, it wont if it offsets falling credit. Remember, spending is what matters. A dollar of spending paid for with money has the same effect
on price as a dollar spending paid for with credit. By printing money, the central bank can
make up for the disappearance of credit with an increase in the amount of money. -- Ray
Dalio: How The Economic Machine Works

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By buying government bonds, the central bank essentially lends money to the government. The extra cash
allows the government to run a deficit and increase spending on goods and services through its stimulus
programs and unemployment benefits. This increases peoples income, as well as the governments debt,
however it will lower the economys total debt burden.
The trick is bringing down the debt burden without causing too much disruption. The right balance would
see income rise faster than debt, inflation remain low and economic growth continues.
If the right balance is struck, debt burdens fall, borrowing increases people can spend more. The long-term
debt cycle begins once again.
And the key takeaway from all of this:
So, in summary there are three rules of thumb that Id like you to take away from this. First,
dont have debt rise faster than income because your debt burdens will eventually crush you.
Second, dont have income rise faster than productivity because youll eventually become
uncompetitive. And third, do all that you can to raise your productivity because in the long
run, thats what matters most. -- Ray Dalio: How The Economic Machine Works

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Part eleven

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So You Want To Work At Bridgewater?


As you would imagine, getting a job at Bridgewater isnt easy. And once you get your foot in the door, its even harder
to keep up with the firms demands and out-of-the-box work environment.
Ray Dalio believes that that psychological pain is required to become stronger and only those who are psychologically
strong can survive at Bridgewater. Indeed, Bridgewaters new employees just simply cant keep up with the demanding
work schedule. Bridgewater has a 25% turnover rate for employees in their first 18 months on the job.

Step one: Getting noticed


Before potential employees find themselves being interviewed by Bridgewater, they need to attract the groups attention. Ray Dalio prefers to hire recent undergrads from schools like Princeton and Dartmouth, who may not be
experienced investors but they are easy to mould.
The logic behind this mentality is simple. Bridgewaters challenging work environment, where all employees are pushed
to challenge the decisions of their peers both up and down the corporate ladder, would not suit an experienced professional coming from another firm with a strict corporate hierarchy.
If you take someone whos led a thousand-person group at a bank and bring them to a
place where they can be challenged by their 28-year-old analyst, its not going to be easy for
them. -- Source

Step two: The interview


The second step is an interview. From the information available, this interview looks to establish the potential employees personality and work ethic more than anything else.
Applicants are given Myers-Briggs tests and some are asked to conduct mock debates with other candidates for the
same job. Interviewers focus on the interviewees personality as well as mistakes in life, why did they make the mistakes? What did they do to prevent them from happening again? Before the interview potential employees are asked
to read Dalios principles document and his brief on how the economic machine works.
Like all other meetings at Bridgewater the interview are taped and reviewed. If the firm likes you, but believes you
would be suited to another position, its possible they will conduct another interview after laying the foundations
within the first review.
One thing I can say is that they are completely and shockingly honest with you. They will
tell you right away if they dont like something you said, or if youre not right for the role.

Step three: The real work begins


After interviewees have been offered a position, the real work begins.
Trying to keep up with Bridgewaters corporate culture is a full-time job in itself. Former employees have described
the work demands as:

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...set the bar as high as possible, then triple that. If you find the idea of being stretched with
incredibly difficult work, told very precisely and very critically where you have succeeded and
where you have come up short, Bridgewater is for you.
Source: One Day, One Job
But if the workload is too much, if you can explain why, management will listen:
Thats the beautiful thing about Bridgewater if you get too much work, and can explain
why its unreasonable, you can change your situation. If you cant communicate this, youll
fail.
Although, some people struggle with this method of operation:
In theory the culture of the place sounds great, no hierarchy, you are encouraged to challenge authority, completely open environment. In practice though, the place is a nightmare.
There are many opportunities for rapid advancement. While the culture encourages a candor that is refreshing, there are many ways in which the way the culture is adopted that are
bureaucratic and can grate on the nerves of a thinking individual.
And it youre really unhappy with something thats going on at the firm, you can always submit an issue:
Submit an issue refers to the companys practice of rigorous transparency. All employees
are encouraged to criticize each other openly -- even, in theory, their superiors.
...someone forgot their badge, so they had to call a bwater employee to let them in, would
you believe the employee that let that person in submitted an issue log basically stating that
time was lost, their activity for the day had been negatively impacted due to having to get up
and walk downstairs to let the person in
Apparently that kind of hypercritical environment is not the exception at the firm, but the
norm.
Source: Business Insider

Another story details how one employee complained about the state of the food at Bridgewaters headquarters. As the
story goes the peas werent to the employees liking. The complaint made its way to Ray Dalio who brought it up with
other members of the firms executive team. The quality of the food began improving soon after.

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Part Twelve

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Bridgewater Market Wisdom


Some of these views may be out of date but the underlying principles that back up the conclusions remain valid.
On long-term performance:
Our fundamental, systematic process is reliable over time with the expected degree of
shorter-term randomness along the way. We control short-term risk by holding a broad set
of diversifying positions and by explicitly capping our exposure to any one type of risk.
Over time the randomness that naturally exists in a given quarter gives way to a tendency
toward our positive expected value. Over the long term we expect to make money in each
market we trade.
On competitiveness and indebtedness
For reasons that we believe are both logical and empirical (and explained here), we believe
that competitiveness and indebtedness are the most important drivers of relative growth.
Like the people and companies that make them up, countries which offer the most value
for money (i.e., are most competitive) do better than those that dont. On the other hand,
countries that finance their growth in spending and production by raising their debts faster
than their incomes (i.e. are essentially borrowing their growth from the future) are destined
to have lower growth. Countries that are both most competitive and least indebted will grow
faster than those that are not. -- Bridgewater Daily Observations November 1 2012.
On market forces:
In our view, there are many markets but just a few primary market forces, and these forces
influence all of them. A market price is the discounted present value of future cash flows.
Economic growth and inflation are the two most significant drivers of those cash flows, and
discount rates and risk premiums determine how these cash flows are reflected in current
prices. Given this, prices largely reflect discounted future economic scenarios, which are a
combination of discounted growth, discounted inflation, risk premiums and discount rates.
The magnitudes of price changes reflect shifts in these four forces. -- Bridgewater Q2 2014
letter to investors.
On the long-term debt cycle:
The developed world is now six years into its deleveraging, private sector debt levels are
moderately lower, debt service burdens have been materially reduced (by low interest rates),
and the credit pipes are largely functioning. This is allowing for more responsiveness to
stimulation, an upturn in the business cycle, and a slower pace of deleveraging. Nonetheless,
we are still very much dealing with the consequences of being on the backside of the longterm debt cycle, with debt levels still high and borrowers remaining sensitive to increases in
rates and debt service costs. -- Bridgewater Q2 2014 letter to investors.

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ValueWalk
2015 - All rights Reserved
Charlie
Munger

47

Ray Dalio
On engineering targeted returns and risks:
In order to achieve a targeted return (to use our example, 10% annually) that is higher than
the return than can be locked in via market pricing (say, 5%), the investor must take some
risk. The question then becomes, which risks are you most comfortable taking? If you are
comfortable taking beta risk and uncomfortable taking alpha risk because you are not confident in your ability to pick active managers that will add value, you may decide to engineer
your portfolio to only have beta risk. In this case, you will have to engineer a beta portfolio
to provide 100% of your 10% targeted return. Alternatively, if you believe you can select
managers who can add value, you may instead choose to engineer an alpha portfolio to produce 100% of your targeted return. -- Bridgewater Engineering Targeted Returns & Risks
white paper.
On commodities:
We think of commodities from a few different perspectives: as an alternative currency and
store hold of wealth, as a growth-sensitive asset class, and as an asset with specific supply
and demand considerations. At this time, our commodity positions are fairly small, as we
dont see many compelling opportunities. The global economy is still awash with liquidity,
and real yields are low, which are supportive for commodities but less so than in recent years,
as this liquidity is being gradually pulled back. -- Bridgewater Q2 2014 letter to investors.
On gold:
We remain long gold, though we are less bullish than earlier in the easing cycle. Significant
global liquidity continues to support prices, but less so than it has in prior years. Central
banks are gradually reducing liquidity, and more of the existing liquidity is moving away from
safer storeholds of wealth, like gold, toward riskier assets. -- Bridgewater Q2 2014 letter to
investors.

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VALUEWALK LLC
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(C)
ValueWalk
2015 - All rights Reserved
Charlie
Munger

48