The 5 Life Principles from Principles by Ray Dalio
In this blog, I’m going to introduce and talk about The 5 Life Principles from Principles by Ray Dalio. Ray Dalio wrote a book Principles to help people understand how he became the leader of the biggest hedge fund in the world, and how he manages his innovative company culture of radical open-mindedness and radical transparency.
Life Principles
Ray begins the book with his life story, discussing how he grew up from humble origins. He liked trading the markets and grew up in a period of great optimism. The USA was sending astronauts to the moon and the feeling was anything could happen.
As a young adult he realized he enjoyed working with futures and commodities, which was a rare specialty at the time and focused on that. He helped structure futures contracts between chicken producers and McDonald’s so that they could afford to produce chicken mcnuggets at a low and set price.
Ray Dalio ended up being highly sought after for his expertise in Futures contracts. He also really enjoyed working with commodities because he loved to meet new people and make new friends. For him, it’s the relationships that matter, and the money is secondary.
He has some big failures that took his first investment company down. He made bold predictions on the economy crashing and also set up investments with that prediction in mind. When it failed the public lost faith and he lost his clients a lot of money.
From this he realized that no one can predict the future. He became more humble and stopped predicting altogether. Instead he and his team built up systems so that when various factors are a certain way, he moves investments accordingly.
He would plug in all these factors into computers, and use computers to help him and his team make better investment decisions. He said that most of the times the computers recommend the best course, but sometimes they need to ignore the computer, as in when 9-11 occurred. Computers cannot handle terrorist attacks or sudden events that are unpredictable.
When his company Bridgewater, successfully navigated the 2008 housing crisis, the world started paying attention to him and his company again. With this attention he decided to write this book to answer all of the questions that people keep asking him, and to pass on his wisdom to others.
Life Principle 1 – Embrace Reality and Deal With It
His first life principle is to embrace reality and deal with it. How many times has something happened and you wish it wasn’t true? For me when I was at the lowest with my money problems, I wouldn’t even open my mail and would just lie on my bed and cry. How would I handle that with Ray’s recommendations?
He recommends:
1.1 Be a hyperrealist – Dreams + Reality + Determination = Success
I wanted to be financially free, but I had to deal with the reality of various credit cards and line of credits that had debt accruing at interest rates. I was determined to create passive income and reduce my expenses while still enjoying and doing the things that I loved.
1.2 Truth – or more precisely, an accurate understanding of reality-is the essential foundation for any good outcome
I knew the truth of my situation, that I was crying and avoiding bills. I knew that in order for things to get better I had to change.
1.3 Be radically open-minded and radically transparent
I looked at myself and knew that I was not good with money at that time. I also knew that I was a smart person and that I could make things better.
1.4 Look to nature to learn how reality works
Ray suggests looking at things in 2 perspectives, top down and bottom up. So from top down I can see that credit cards and debt companies actually encourage Americans to go into debt. In fact, according to Ray Dalio and others, the country actually requires credit to grow. Understanding this top down view of our country made it easier for me to understand how I got into so much debt in the first place.
From a bottom up perspective, I took it one day at a time. I started by paying off the highest interest credit cards first, and negotiating down their rates as much as possible. I also started auto transfers and studying investing for passive income.
a. Don’t get hung up on your views of how things “should” be because you will miss out on learning how they really are.
In the beginning I wondered a lot about how I could get myself in such a big financial mess. I then realized that because of my situation, I am now more humble, and more understanding of others who get into personal messes. I became a nicer person.
b. To be “good” something must operate consistently with the laws of reality and contribute to the evolution of the whole; that is what is most rewarded.
I realized that in order for me to become financially free, I had to do it in a way that allowed me to do what I loved. I wanted to be a stay at home mom and an investor. I also realized that I had to make it financially better for me to quit and be home, than to stay at my job, which is what I did.
c. Evolution is the single greatest force in the universe; it is the only thing that is permanent and it drives everything.
I needed to change. I knew the kind of job I had at the bank was going out with the times. I knew I had to find another way to create income and wealth.
d. Evolve or die
I got educated and started investing. I knew I had to start and move in a forward direction.
1.5 Evolving is life’s greatest accomplishment and its greatest reward
a. The individual’s incentives must be aligned with the group’s goals.
b. Reality is optimizing for the whole-not for you.
c. Adaptation through rapid trial and error is invaluable.
d. Realize that you are simultaneously everything and nothing-and decide what you want to be.
e. What you will be will depend on the perspective you have.
I love learning about money, and getting better at investing. It is fun to make new friends, to have more free time, to spend time with my family..
1.6 Understand nature’s practical lessons
a. Maximize your evolution
b. Remember “no pain, no gain”
c. It is a fundamental law of nature that in order to gain strength one has to push one’s limits, which is painful
1.7 Pain + Refection = Progress
Ray constantly says that if we go through pain it’s only valuable if we reflect on it, and learn from it.
a. Go to the pain rather than avoid it.
I looked at my finances and even though it was negative at the time, I calculated and charted my Net Worth. And even though my passive income wasn’t that high, I calculated and charted that too. I knew I had to create new habits in order to improve my finances.
b. Embrace tough love.
I understood I needed to stop spending on education, and learned to say no when offered seminars, classes and so on.
1.8 Weigh second – and third-order consequences
First order consequences are the pain of deciding to live within my means, accept the fact that I had a negative Net Worth and that I needed to spend time learning more about finance and money.
The second order consequence is that my finances improved, I had more peace of mind around money.
1.9 Own your outcomes
As a I calculated and charted my progress each month I saw that I was slowly improving. I celebrated all my successes. Each time I paid off a credit card I celebrated! When I got them to lower their rates I celebrated! When my Net Worth changed from Negative to Positive I celebrated!
1.10 Look at the machine from the higher level
a. Think of yourself as a machine operating within a machine and know that you have the ability to alter your machines to produce better outcomes.
b. By comparing your outcomes with your goals, you can determine how to modify your machine.
c. Distinguish between you as the designer of your machine and you as a worker with your machine.
d. The biggest mistake most people make is to not see themselves and others objectively, wich leads them to bump into their own and others’ weaknesses again and again.
e. Successful people are those who can go above themselves to see things objectively and manage those things to shape change.
f. Asking others who are strong in areas where you are weak to help you is a great skill that you should develop no matter what, as it will help you develop no matter what, as it will help you develop guardrails that will prevent you from doing what you shouldn’t be doing.
g. Because it is difficult to see oneself objectively, you need to rely on the input of others and the whole body of evidence.
h. If you are open-minded enough and determined, you can get virtually anything you want.
Life Principle 2 – Use the 5-Step Process to Get What You Want Out of Life
Ray breaks down the process he uses to get what he wants. For example, when I realized I could change my circumstances around poor finances, I decided I wanted to be financially free. Ray recommends:
2.1 Have clear goals.
So I made a clear goal, I wanted my expenses to be less than or equal to my passive income.
2.2 Identify and don’t tolerate problems
I realized that I was overspending, and creating larger and larger debt on credit cards and lines of credit. I also realized that I wasn’t paying myself first (saving and investing at least 10% of my income for passive income before paying for anything else).
2.3 Diagnose problems to get at their root causes
I realized that I was trying to please others, and needed to focus on my own happiness. I realized I needed do the actions that made me happy. Then I would value myself and save and invest in myself.
2.4 Design a plan
I decided to spend within my means, pay myself first (save and invest at least 10% of my money), divide my money into a budget, write a journal on my progress and celebrate my successes.
2.5 Push through to completion
I set up the savings and investment accounts, saved in jars first and then in my accounts, contributed to my 401K, put my credit cards in a drawer and stopped using them, called my creditors and asked for lower interest rates, said affirmations everyday, figured out what I liked to do and did it, journaled and celebrated my successes
2.6 Remember that weaknesses don’t matter if you find solutions
I had no idea how to make passive income when I started aside from really tiny savings interest. I started studying Money Magazine, and other books and started making dividend income investing in stocks. I also asked people I knew who made more money than I did what they did.
2.7 Understand your own and others’ mental maps and humility
I understood that I knew some things, like how to start saving. That was my mental map. I also understood that I knew very little, so I took advice from others wealthier than me.
Life Principle 3 – Be Radically Open-Minded
3.1 Recognize your 2 barriers – Ego and Blind Spots
In my case, my ego is the one that doesn’t want me to quit my job and become a homemaker. It thinks that I should be in the limelight, and not someone’s wife in other people’s eyes.
My blindspot is not something I can see lol. It comes from other people telling me what I’m missing. I keep getting feedback from others to make sure I’m not getting in trouble in my blind spot.
3.2 Practice Radical Open-mindedness
a. Sincerely believe that you might not know the best possible path and recognize that your ability to deal well with “not knowing” is more important than whatever it is you do know.
b. Recognize that decision making is a two-step process: First take in all the relevant information, then decide.
c. Don’t worry about looking good; worry about achieving your goal.
d. Realize that you can’t put out without taking in.
e. Recognize that to gain the perspective that comes from seeing things through another’s eyes, you must suspend judgment for a time – only by empathizing can you properly evaluate another point of view.
f. Remember that you’re looking for the best answer, not simply the best answer that you can come up with yourself.
g. Be clear on whether you are arguing or seeking to understand, and think about which is most appropriate based on your and others’ believability.
3.3 Appreciate the art of thoughtful disagreement
When you find someone who is doing better financially, and the numbers will tell, then I get as much advice as I can.
I listen carefully and if it’s something that I can improve on, I adopt it and take action.
I have discussed business with many different people, and some use methods that I’m not interested in pursuing.
I have learned to thoughtfully disagree.
3.4 Triangulate your view with believable people who are willing to disagree
I discuss my big financial ideas with my husband, who is very conservative and good for me. He always makes me address angles that are important but that I’m glossing over trying to get to the big score.
I never make a financial decision with our money without his agreement.
He always makes me consider the worst case scenario, and I’ve been better and better at recognizing it and planning for it.
3.5 Recognize the signs of closed-mindedness and open-mindedness that you should watch out for
Sometimes I get emotional about a financial decision that makes me not want to listen. I recognize this as a sign and know to wait until I’m thinking more clearly before making any decisions.
I usually admit that I’m feeling emotional and need time.
3.6 Understand how you can become radically open-minded
a. Regularly use pain as your guide toward quality reflection.
b. Make being open-minded a habit.
c. Get to know your blind spots.
d. If a number of different believable people say you are doing something wrong and you are the only one who doesn’t see it that way, assume that you are probably biased.
e. Meditate.
f. Be evidence-based and encourage others to be the same.
Life Principle 4 – Understand That People Are Wired Very Differently
4.1 Understand the power that comes from knowing how you and others are wired.
4.2 Meaningful work and meaningful relationships aren’t just nice things we chose for ourselves-they are genetically programmed into us.
4.3 Understand the great brain battles and how to control them to get what “you” want.
4.4 Find out what you and others are like.
4.5 Getting the right people in the right roles in support of your goal is the key to succeeding at whatever you choose to accomplish.
Life Principle 5 – Learn How To Make Decisions Effectively
5.1 Recognize that 1) the biggest thread to good decision making is harmful emotions, and 2) decision making is a two-step process (first learning and then deciding).
5.2 Synthesize the situation at hand.
5.3 Synthesize the situation through time.
5.4 Navigate levels effectively.
5.5 Logic, reason, and common sense are your best tools for synthesizing reality and understanding what to do about it.
5.6 Make your decisions as expected value calculations.
5.7 Prioritize by weighing the value of additional information against the cost of not deciding.
5.8 Simplify!
5.9 Use principles.
5.10 Believability weight your decision making.
5.11 Convert your principles into algorithms and have the computer make decisions alongside you.
5.12 Be cautious about trusting AI without having deep understanding.