Preston Pysh (04:11):
He likes to take things apart and figure out what the inner workings of things are. And I think that that’s just his personality I’d imagine that was what he was like when he was a kid. Because whenever he talks about his process, for trying to understand how the commodities market works. He goes into just great detail, describing every little nuance in mapping out how each one of these little phases would happen from the very start, the most fundamental piece of a commodity clear to the point where it’s sold on some type of futures market or what have you. And so that process of him mapping those things out has given him just an intense edge over others when trying to understand how to put a trade on, which side of the position to be on, and then using those models to know whether you’ve got a high probability of success or not.
Preston Pysh (05:05):
So I think that’s something that he was really gifted with. And I think after he had a lot of this internal drive to succeed in the commodities market at a young age, right out of college, his performance and his passion for this just drove him to become really good at it at a young age. And then obviously went off to Harvard and then started Bridgewater. Stig, did you have any other highlights for that initial kind of story of his life? And then we’ll get into more of how it shaped them profoundly later on. But did you have any other highlights from the initial?
Stig Brodersen (05:37):
No, it was more from his first business failure that I really think was a really interesting story. And I think at least looking back, it sounds like that’s something that Ray Dalio is grateful of experience. And so I don’t know if we should transition into that part.
Preston Pysh (05:54):
Well, let me start it off with this. So he has some success with his company. Starts it up Bridgewater, it’s pretty successful. He’s becoming an expert in derivatives and things like that. Specifically in commodities and currencies, eight years of success. And after eight years, he put on a position that Mexico was going to default on its debt. He successfully called this. And in 1982, that happened, Mexico defaulted on its debt. And what happened was is because he was right about this, he started getting a lot of attention. And Congress was holding hearings on the crisis and they invited Ray to come and testify. And so in 1982 in November, Ray went there and testified. And he basically said to Congress, and he also said on all these news programs, these financial news programs, that he was confident that we were heading for a depression next depression.
Preston Pysh (06:51):
And he explained why. And so he wrote in the book and this is straight out of the book. He says, “As I saw there was a 75% chance the fed’s efforts would fall short and the economy would move into failure. A 20% chance that it would initially succeed at stimulating the economy, but it would still ultimately fail. And a 5% chance that it would provide enough stimulus to save the economy, but trigger hyperinflation.” Which I guess is another form of failure. So he had 100% confidence, this is what I love about Ray. It’s great that he puts us in the writing and he’s so transparent about this mistake. And that’s what I love about Ray’s, he’s so transparent. So he’s writing here. I had 100% confidence that this thing was going to fail.
Preston Pysh (07:36):
And then on the next paragraph, he starts off the paragraph. He says, “I was dead wrong.” So he eventually found out why he was wrong. And he said that as the money poured out of these borrower countries and into the US, it changed everything. It drove the dollar up, which produced deflationary pressures. And goes into all this stuff, which actually ended up fueling a boom for the next decade and a half. So he was dead wrong. And so what he got out of all this, he said that I learned a great fear of being wrong that shifted my mindset from thinking, I am right to ask myself, how do I know I’m right? And so by asking that question, he started to really question everything of what he thought and what his biases were on, what he thought the probabilities of things. So he came up with four bullet points.
Preston Pysh (08:28):
This is really what he learned from this painful experience because he lost every single employee in his company. The trade was so bad that he lost every single employee in his company. He was the only one left and he couldn’t make payroll to the people that were employed within the company. And so these were his four learning points. Number one, seek out the smartest people who disagree with me, so I could try to understand their reasoning. Number two, know when not to have an opinion. Number three, develop, test, and systematize timeless and universal principles. Number four, balance risks in ways to keep the big upside while reducing the downside. And it’s just reading that, I just want to go back and reread it to myself again. So I can only imagine how you feel kind of hearing it because this is such profound information.
Preston Pysh (09:19):
This four-step process is so profound, as far as I’m concerned, that it’s something that you want to print off and paste right on your computer so you can look at it on a daily basis. This is really important stuff. So, Stig, I’m sorry, I’m pretty sure I probably stole your point with all that, but go ahead. I will throw it over to you.
Stig Brodersen (09:35):
You kind of did Preston and I don’t know if this is a good thing or a bad thing that we read the same book and we have the same notes. I don’t know if we’re thoughtful, disagree enough with each other when it comes to that. One thing I really want to highlight is here’s another billionaire. We’re saying the worst thing that can happen for you as an investor is if you’re right. He hit the silver boom, just 120%. He made a ton of money on that.
Stig Brodersen (10:04):
And like, I guess, all new investors, they feel invincible. They feel like they really know the market and they feel like they can just do this forever. Perhaps they expose themselves to more risks than they’re supposed to.
Stig Brodersen (10:19):
It’s interesting to hear him and people like Tim Rogers saying the same thing. It’s just so bad to be right, to begin with. And people out there might be thinking, well, Ray Dalio’s net worth is, call it $18 billion. It’s probably not that bad, but it was really bad. I mean, at this point in time, eight years into his business, he was publicly wrong. And even though he’s been more often right than wrong, you really had nothing to show for it this part of the time. And as Preston said, he couldn’t make payroll, even borrowed $4,000 from his dad because he couldn’t find a buyer for his car.
Stig Brodersen (10:55):
I mean, he definitely didn’t want to go back. And this was the time when he had two small cats and a wife. So he was struggling. And the next section is really interesting because then you’re faced with a decision, like on the brink of bankruptcy, do you want to stay safe and have an oriented life or as he puts it, do I want to cross the dangerous jungle and have a terrific life? I love that.
Preston Pysh (11:22):
I love this. I mean, for me, I’m just thinking about how depressive this could have been. Think about it, you had been so right about so many things for eight years, you’re this young warrior of finance. You’re so good that you have Congress actually bringing you in to testify, to explain to them why things are happening. And then within like a year, you’re so broke that you’re borrowing 4,000 bucks from your parents, and you’ve got a family and a spouse and all this.
Preston Pysh (11:51):
I mean, I couldn’t imagine how painful this could have possibly been. And so his learning points there, there’s four things that we read off, like guys. I mean, my gosh, for a person to go through everything that he’s done. And then to have the biggest hedge fund on the planet. Billions upon billions of dollars that he’s turned it into and to have a comeback like that. It might go down in the books is one of the biggest comebacks ever. So I tell you that’s some pretty freaking important information. I want to jump to another section in this intro part where we’re still here in the first part of the book, where Ray’s talking about basically how he arrived at his end solution here, Bridgewater. And something that I really liked. This is something that we’ve covered in other episodes, but I think it’s really good to bring up again.
Preston Pysh (12:37):
And Ray talks about what he calls the holy grail of investing. And I know that this was something that we covered whenever we did the Jack Schwager book because this is something that Ray told Jack Schwager whenever he was interviewing him for the Market Wizards Series. And this is also something that Joel Greenblatt talks a lot about. What Ray says the holy grail of investing is and I like how he said, for me, I felt like Einstein when he discovered E = mc2, whenever I understood this. And what he discovered is that if he can make 15 to 20 uncorrelated positions. Let’s say you buy one stock and you buy another stock and they’re inversely correlated. If you can look for positions that are not correlated and you find 15 to 20 of them, you can still get the return, but you mitigate almost all the risks out of the return.
Preston Pysh (13:25):
And for him, that was the holy grail of investing. And what he says is I can get the return, but not the risk. And so that was a huge turning point for him. And so when you have your portfolio and you only have five positions in your portfolio, there’s a lot of risks there. And they might be completely uncorrelated, but because you only have five positions, you haven’t reached this threshold. He has a nice little chart in the book that’s worth the money, the book itself, as far as I’m concerned, just looking at this chart because it shows you mathematically why that is, and this is on page 57 of the book. If you’ve got the book, you can flip to page 57 and you’ll see exactly what I’m talking about.
Stig Brodersen (14:00):
So what I really like about this section in the first part of the book is that he has this quote and this is probably not going to be the first time we are quoting something from the book, because it’s very insightful.
Stig Brodersen (14:14):
I literally had to write it down and reread it over and over again after he said that. He said you can have anything you want, but not everything you want. And that was his big realization after his crash. So I’m just going to say that again because it’s so profound. You can have anything you want, but not everything you want. Not even if you’re Ray Dalio, not even today. He talks about how he does not even have that today with $18 billion. That was something that you could really take away.
Preston Pysh (14:44):
Yeah. So I love this quote as well, Stig, I’m glad that you have pulled this out because what he’s really getting at is you can do anything you want in your life. And in fact, we’re going to get into some of the recipes that he has in this book for getting anything that you want in life, but it all comes at a cost.
Preston Pysh (15:01):
So let’s say you’re listening to this podcast and you want to be a billionaire. That comes with an enormous cost. And the cost is your time, and your focus, and your energy that you’re pouring into that goal that you want. And so you have to ask yourself is the cost of me spending less time with my family. Is the cost of me not being able to go out on Friday nights because I’m working on my business. Is the cost of you name it, insert there, worth it? Let’s say your goal is I want to be the fastest speed skater at the Olympics. So I want to win the gold medal. You can have that if you work your tail off for it, you can go after that. But it’s going to come at a cost of everything else that you’re passing up. And that’s what Stig’s getting at with this quote. And it’s such a profound quote. I love that quote.
Stig Brodersen (15:49):
Yeah. And he continuous and he’s saying that he has this equation that he’s been using throughout his life. He’s saying that dreams plus embracing reality, plus determination, that’s equal to a successful life, and a thing that’s so true. He really wants you to dream big and then prioritize because if you follow the right principles, and we don’t all have to have the same principles and he’s outlining his in the book. According to Ray Dalio and I think he’s right, you can follow some core principles to get that. All you need to be aware of is to be very realistic about it. And you need to be willing to pay that price. That involves a lot of painful mistakes and learning from them and changing. But the recipe is still holds. Then he has like a final point about this.
Stig Brodersen (16:40):
He says, even if you do follow this recipe. Even if you end up with this “successful life” all you can hope for is you struggle well. Because at the end of the day, you don’t live a good life by achieving your goals. You need to set new goals and you will struggle and you will feel pain and you will feel prosperous, which is your reward for doing so. But you can only hope for a life where you struggle well, that’s all that we can hope for. And I think that’s, I don’t want to sound bitter when I say that, but I think he’s right about that. I think that is what we can hope for.
Preston Pysh (17:15):
It’s funny at the end of the Ed Catmull book that we read about Creativity Inc. He talked about this sense of emptiness after he had achieved his goal.
Preston Pysh (17:24):
And I think that that’s what you were just kind of hitting at as far as evolving and the journey being the reward here. And we’ve heard that in other books as well. Just a critique of mine for Ray’s formula. I don’t like the word dreams. I don’t know for me I saw that on his Twitter page, new dreams plus reality, plus determination equals a successful life. I agree with all the words there except for dreams. I think I like the word objective, or dream seems they’re wishful thinking, I guess for me. Whenever I hear dreams, it just seems something that you want to come true, but might not. I guess I like the word objective better. You’re setting your course and your destination for this one thing. That’s just a critique of mine. So Ray, if you’re listening, there you go, there’s a critique.
Preston Pysh (18:10):
All right. So let’s jump into the second part of the book, so I love the first part. For me, it was just fun to hear these stories because they were stories that I’ve never seen written before, anywhere in the press. And that’s what I really liked because a lot of it was so fresh to read for the first time. And you get a lot of his economic thinking with a lot of the different stories that he was talking about too, which was really awesome. All right. So then when we go into the second part of the book, this is called, life principles. And the reason he starts off with life principles instead of work principles is because I think in his mind work principles are definitely subordinate to life principles. He starting with the big picture, he’s describing what that big picture is and how he feels that it’s articulated, the way that he’s defining it from a very broad paintbrush.
Preston Pysh (18:54):
And then after that, then he gets into the more specific. So after you’ve set your goals, after you figured out what it is that you want to go after, once you’ve set your objective, how do you build a business? How do you build an organization of people around that to achieve that objective? So that’s the third part, is when he gets into all the work principles.
Preston Pysh (19:14):
So let’s talk about the second part, which is the life principles. I learned a lot in this section and the thing that just stands out in my mind about this entire book is something that I learned in this second section. And it’s this idea that the individual’s incentives must be aligned with the group’s goals. And the reality is optimizing for the whole and not for you as an individual. And I think that that’s a super insanely profound idea that I didn’t necessarily have before reading this book and not something that I had read anywhere else. And what Ray’s really getting at here is he believes that the universe rewards those that add value to the whole and not to the individual.
Preston Pysh (20:03):
And I think intuitively that makes sense to people. But I think so often very few people practice this whenever they’re trying to think about how they can add value to the world or how they can create a product or service that isn’t just good for a few people but is actually beneficial to mankind as a whole.
Preston Pysh (20:21):
I think when you think through that context, which you’re actually doing is you’re swimming with the current. You’re actually moving in the direction of the current, which is a whole lot easier to get moving in the right direction when you’re going with the current as opposed to against the current. And so beyond that idea, which I think is really important, there’s another life principle in here that I think is equally as important. And this is principle 1.3 and it’s really simple, be radically open-minded and radically transparent. And anybody who knows anything about Ray Dalio knows that this is such a fundamental piece to who he is.
Preston Pysh (20:57):
Everything there at Bridgewater is recorded. It’s openly transparent. And the reason for all of this is so that there’s an environment where truth is what’s important. Nothing trumps truth in the culture at Bridgewater. And because of this experience that he had back in 1982 with having just total loss because he was wrong. I think he realized at that point in his life that if I’m wrong again, I don’t want to go through that pain. So I got to be radically transparent. I’ve got to surround myself with people that tell me what they think the truth is. And he talks about how, if I have an opinion that the sky is blue, I want to find somebody that has a very high level of credibility, that is an authority that believes that the sky is green. And then I want to talk to that person who says that the sky is green. And I want to troubleshoot and try to understand why they think that idea is true. And then I’m going to compare it to what I think is true.
Preston Pysh (21:57):
And then between those two vantage points, the truth will emerge, and you’ll be able to find exactly what it is. So he’s talking about how do I destroy my own biases by going and talking to people and being just this person who wants to absorb and shut up and listen, opposed to a person who just wants to propagate my opinion and try to mindlessly make other people believe what I’m saying. It’s not that at all. It’s the exact opposite. How can I try to find out what other people have that have the exact opposite opinion so that I can understand why I might be wrong?
Stig Brodersen (22:29):
This is not all just big talk. He’s sharing some of the feedback that he’s not only giving to his employees, but it’s a two-way street.
Preston Pysh (22:40):
All right. So to give you guys an idea of this radical transparency that happens at Bridgewater, Ray provided an example in the book, which is just awesome, we love this. So after this meeting that he was having at his office at Bridgewater, he received this random email from a person who was also attending the meeting. And the email was a gripe that this person had with Ray’s performance during the engagement, during the meeting. And so Stig’s going to read the email that Ray received.
Stig Brodersen (23:12):
So the email said this, “Ray – you deserve a “D-” for your performance today in the meeting … you did not prepare at all because there is no way you could have and been that disorganized. In the future, I/we would ask you to take some time and prepare and maybe even I should come up and start talking to you just to get you warmed up or something, but we can’t let this happen again. If you in any way think my view is wrong, please ask the others or we can talk about it.”
Preston Pysh (23:41):
I love this.
Stig Brodersen (23:42):
Wow, that’s honest.
Preston Pysh (23:44):
It’s awesome. And where else would you see something like this? And the person probably got promoted after they sent it. that’s what I love about him.
Stig Brodersen (23:52):
And basically what he said afterward was that the reason why he really appreciated this is he can’t grow as a person or just as important the organization can’t grow if you don’t have this honest feedback or what Ray Dalio calls, radical transparency. And it’s not just big talk, as you could tell, he shared it with the world afterward. It was that good, even though it’s probably sounded mean to a lot of people.
Preston Pysh (24:17):
All right. So this is probably one of the most important things you’re going to find in the second part of the book, the life principles section. And this is titled, use the five-step process to get what you want out of life.
Preston Pysh (24:30):
So as Stig said earlier whatever that thing is that you want to get out of life. And raise of the opinion you can accomplish anything you want. It’s just a matter of how bad you want it. But whenever you identify, whatever that thing is, whatever your destination, your objective, your dream, whatever the thing is, this is what you’re going to do to achieve it. And it’s simple, really hard to apply, but really simple to describe. Number one, have clear goals. Know exactly what you want out of something. When I go back to my military roots, one of the very first things that I learned at West Point was whenever you identify a mission, it has five things to it. The who, the what, the where, the why, the when.
Preston Pysh (25:15):
And so what you actually do when you write out a mission statement is you identify those five things and you make sure they’re explicitly stated in your mission of what it is you’re trying to do. And that’s what I think he’s getting out here with step one is have very clear goals and know what it is that you’re going after.
Preston Pysh (25:32):
The second thing that he has, identify and don’t tolerate the problems that stand in the way of achieving those goals. So not only are you going to say let’s say I want to go from one side of the forest to the other. Then I identify while there’s this big rock wall on the way, that’s obstacle number one, then there’s this big giant valley after that. And then there’s this really thick forest that I have to… You know what all those obstacles are.
Preston Pysh (25:57):
At least you have an idea of what those are when you’re first starting out. You have to identify those. And I think this is a really critical word in this second part. Don’t tolerate the problems that stand in your way. So you will not only identify them, but you don’t tolerate them. No matter what, you have the opinion that there’s a way to overcome these obstacles.
Preston Pysh (26:18):
The third one accurately diagnoses the problems to get at their root causes. This is where he does his best as far as I’m concerned. He gets in there, he understands every nitty-gritty detail of every one of these obstacles. He defines it, he maps it, he back-test it, he does all of that stuff and he understands it better than any other person that can identify that problem. That’s where Ray Dalio is the master as far as I’m concerned. And so that’s step three.
Preston Pysh (26:46):
Step four, design plans that will get you around those obstacles. So now that is exactly how the obstacles work, what the problems are, how they’re going to jump out and get you. Now, you’ve got to design not just one way around them, but probably 50 ways around them and backups to the 50 ways to get around them. Because you’re relentless and you don’t tolerate the problems.
Preston Pysh (27:08):
Number five, the last step, do what’s necessary to push these designs through to results. Or in other words, be relentless is what he’s saying here. That’s the five-step process to get what you want out of life. So another thing that you probably need to write down and hang up on your computer and look at and think about every time that you want to accomplish small goals, big goals, mammoth goals, and goals that scare you when you think about them as we’re stealing from other people’s quotes, that is really, really important.
Preston Pysh (27:41):
He gets into the nitty-gritty of all of this stuff in this book. And this book is so freaking organized. Honestly, Stig, have you ever found a book that’s more organized than this book?
Stig Brodersen (27:52):
No, he’s definitely a numbers person. The way he puts everything up in bullet points is almost like a textbook. He is just so organized. So this is the first part. This is the first chapter. This is the takeaway. These are the bullet points that… I mean, it’s-
Preston Pysh (28:07):
It’s in the right order.
Stig Brodersen (28:08):
Yeah.
Preston Pysh (28:10):
We’re doing this book no justice, whatsoever. So if you’re listening, and it’s like, oh, I’m getting everything I need to out of this book, wrong. You’re not getting everything out of this discussion from this book. We are hitting on the basics. There’s so much more to this. So much more substance to this than you could ever imagine. I think you’re absolutely nuts if you don’t have this on your shelf and have gone through it at least one time.
Stig Brodersen (28:32):
So the next thing I would like to highlight from this part of the book is he’s talking about the cost of a bad decision. And I think this is all Ray’s back to the horrible experience he had whenever he went bankrupt, almost because it was wrong. He was perhaps only wrong on one thing, but that was enough to completely destroy the life he knew until then. And he talks about how the cost of a bad decision is at least equal but much more often greater than the reward of a good decision. So you should know what you don’t know is just as valuable as knowing. And I love how he talks about the risk-reward ratio. And I guess some of the next point I’m going to say, they might seem simple, but I would like to wrap this up and talk about how insightful it really is. Because he’s talking about how you should always look at, so first the risk and reward ratio.
Stig Brodersen (29:28):
So always make sure you have a huge upside and a very little downside, which also ties back to what we talked about before, about having 15 uncorrelated bets. Now, this might be more seen in a financial, but this is basically like everything in life. And the example he gives is that a lot of people would focus on going from probably being wrong, called it 45%, to probably being right, say to 51%. Because we have this tendency as human beings to be, well, if it’s more than 51%, that is what I should do, because it’s probably right. And he said the best from his experiences. No, not at all. Why don’t you go home and study and go from that 51% to say 85% and then make an uncorrelated bet, whether that’s in life or in business.
Stig Brodersen (30:27):
And it’s just profound that if you compare this to say a politician, and this is not Ray Dalio’s words, this is my example. If you compare this to the politicians, you probably see a ton of interviews with politicians. I’m sorry, it’s just an easy target here. But you’ll see this politician, he’ll be asked a question and you can see that he really doesn’t know what he’s talking about. He is saying something that he thinks is right, and it turns out he’s wrong. But he really can’t be, what you would call a flip-flopper. Right? Because that’s such a curse word and politics. So he’s just painting himself more and more into that corner because he said, there’s one thing that he’s said without knowing the facts. So I really think that is what Ray Dalio’s getting in here.
Stig Brodersen (31:10):
What is wrong by saying, I understand where you’re coming from. I don’t know if you’re right. Let me go back and think about it. Let me find people who thoughtfully disagree with me. And then hopefully I can go up to 85 plus before I will make a decision of what to do. We need to search for the truth and not for who said what? Who can we give credit? That doesn’t matter in Ray Dalio’s world. It’s all about, how do we find the truth? And I think that the decision-making process is one of the most important things you can take away, not just from this chapter, but from the book in general.
Preston Pysh (31:48):
All right, let’s move into the third section, the third part, and this is called work principles, and this is broken into three different sections. The first section is a section about how to get the culture of the organization right. The next section is how to get the people right. And then the last one is, how to build and evolve your machine, where your protocol for running the business.
Preston Pysh (32:13):
And going from the second part into the third part, what I think Ray’s expecting a person to do is to be able to identify what that big objective or that big mission or that big dream is in their life. And then they’re slowly growing a business around that objective that they’re trying to create, the value that they’re trying to create for the world. And when you go through that, if it’s something big, which is what I think Ray would expect you to do is pick something big. And if you’re trying to accomplish something big, you can’t do it by yourself. You have to do it as a team. And so this last part is how do you build that team and how do you do it in a way that has a sustainable result, that’s going to get you to where you need to go.
Preston Pysh (32:59):
And in the way that he has this broken down, he thinks that that’s done in a three-part solution. The first part is you got to get the culture of the people within that organization right. You have to set that culture because after it gets so big, it takes on this life of its own. And if you don’t mature those principles of what the culture is going to be early on, when it gets too big and you don’t even know the name of the employee that’s working in your organization anymore, because it’s so big, it’s way beyond you at that point. So that’s why there’s so much emphasis spent on these principles within the section that is oriented towards the culture. The next thing is, how do you get the person to hire right?
Preston Pysh (33:39):
And he has three subsections underneath of that area to talk about it. And then the last part where he’s talking about building the machine and the protocols and working on the things. The thing I think about in this section is going to Jim Collins’ book, Good to Great. When he’s talking about how do you perfect things at the most fundamental level, so that no matter what, that thing will always have a good result and have a good protocol, is the word I like to rely on. How can you define that protocol so that it’s always functioning in the correct manner? And that’s what this last part is about, where you’re building and evolving your machine so that you refine those.
Preston Pysh (34:20):
All right. So in that first section where he’s talking about culture, one of the things that I wanted to highlight from this section was this idea that you want to create a culture in which it’s okay to make mistakes, but completely unacceptable to not learn from them.
Preston Pysh (34:34):
And this was really big. And he gave examples in his company where people had made trading mistakes. And I mean, monumental trading mistakes, where they lost tons of money. And Ray talks about how it would have been so easy to fire somebody for the size of some of these mistakes. But instead, they were charged with the responsibility that as soon as they made a mistake, they had to go to a book and they had to enter in a ledger the mistake, and then what their corrective action or what they felt would be corrective action to the mistake in order to make sure that it never happens again. And the only way a person could get removed from the organization is if they failed to identify the mistake that they had made and basically identify this so that it didn’t happen again in the future.
Preston Pysh (35:23):
And so that’s a very drastic twist compared to what you see in a lot of corporations in America, where you’re just fired for the mistake. They could care less about the learning. In fact, they almost ignore the learning and they do the same mistake over again. But this is what makes Ray Dalio, Ray Dalio where he is obsessive about learning from those mistakes. So that was highlighted in the culture section, there’s a whole lot more here for people to learn from. If you’re running a business and you’re in upper management, middle management, lower management, and you’re not reading this last section on how you can make the organization run more effectively, I think you’re losing a huge opportunity. So a lot of other points there in the culture section. And the next section where we’re talking about getting the people right, Stig’s going to highlight something that he found quite interesting.
Stig Brodersen (36:06):
The way that he explains this using his three Cs. So just another great example of how he’s using this as a textbook. And it was really clear to see how adamant he was about this is not him talking about his life. This is more him telling us how we can run our companies differently for the greater good. I don’t want to sidetrack here, but I really liked that about Ray Dalio. But the three Cs he has about hiring the right people, that is character, common sense, and creativity. I think it’s really hard to find a business book, a really insightful business book that’s not talking about the character of the person. I think that’s actually the most interesting thing here because he’s basically hitting at, you should hire people you will like to share your life with because you will always have a need for being surrounded by great people. And not just today with how much the world is changing and how much the landscape for almost any kind of occupation is today.
Stig Brodersen (37:09):
But just general. If you have people with the right character, first of all, they will adapt to that new reality. And then you might say, especially if they have creativity. I really also liked his point about common sense. So how much common sense do people have, do they plug things into a computer? Do they think for themselves? How do they work with other people? I really like that. And he’s given some really good advice in terms of how can you identify these traits? So how many questions do they ask when you speak to them? That’s one thing, how interested are they really? And then there’s another thing I really took to heart that was to show them the bad stuff. So he actually took pride in whenever he was hiring a new candidate for a job, telling him all the bad stuff about that position, because if they still accept the job, it really shows that they endure.
Stig Brodersen (38:01):
So this is just a personal story. We’ve been looking to grow the organization. And after reading this segment of part three, I was so inspired. So I told one of the team members that if you can please meet up with her, perhaps a future coworker, and say all the bad stuff about working with us, that’s along with this. And I said I won’t you what you said, I won’t ask the candidate. But if that candidate is still getting back to me and saying, I still want to work with you.
Stig Brodersen (38:32):
Well, I have Ray Dalio’s word for it that shows that endurance. And I get that. I mean, I know I’m almost laughing when I say this, but it actually makes a lot of sense because you don’t have to say the good things more than once. People will remember that. You don’t have to say if you’re paying north affair, if you’re giving paid vacation, if you’re having all these benefits, you don’t need to say that more than once. But really make sure they know all the bad stuff are because that’s the job too, the job is not just collecting that paycheck. The job is not the prestige or whatever else you can offer. It’s the bad stuff. That’s also what life is all about.
Preston Pysh (39:11):
I’ll tell you who would have a long list is our audio editor, who’s listening to all of our mistakes that get edited out at these recordings.
Stig Brodersen (39:19):
And the last thing, Preston, about this section, I really came to think of you. Because he saying you want to work with people who say you should have more? And the reason why I think of you is, I don’t know if you remember this, this is years before the podcast and we were starting to write books together. And I was like, “Why is this guy offer me such a good deal?” I don’t know if you remember that call, but it’s something I really remember. And honestly, Preston, I’m sorry to say. But the first thing I thought was Preston is really a bad businessman. I came from this background as a trader and as a trader is all about if I can gain $1, you would need to lose the same.
Stig Brodersen (39:58):
I mean, it is a serious sum game more or less. But I’ve studied you and I’ve talked with you several times before that, and we’re chatting on the forum. I knew you were not a bad businessman. So this was a brand new concept for me, meeting people who are saying, you should have more. Because what happens is you have this positive feedback loop. If people are telling you, you should have more, what’s typically happening, even though it might sound counterintuitive, is that you would go and say, no, you should have more. Or at the very least, then I should provide more value than what we originally talked about. I really like that about the book. It was so insightful and so much… It’s really a testament to his part and about meaningful relationships.
Stig Brodersen (40:40):
It is a great financial decision to work with people who say you should have more, but even more important it’s a good way of living your life.
Preston Pysh (40:48):
Yeah. I think a lot of people underestimate the power of compounding goodwill and that’s a really powerful force. That is something that’s hard to learn because you’ve got to give away a lot in order to see the effects of it. I think a lot of people don’t have the ability to let go and actually see it mature and see it compound and work for them. Thank you, Stig. I appreciate that, that was really nice of you.
Stig Brodersen (41:12):
Well, even though I said you were a bad businessman.
Preston Pysh (41:15):
I took it as a compliment. All right, people out there rolling their eyes. All right, so that’s going to wrap up our summary of the book. Now, what I want to do is talk about something that happened to me personally. I was afforded an amazing opportunity by a close friend, and I’m very grateful for this person who gave me this opportunity to attend a book signing with Ray that he had for a very small private group of people. I’d say there were 80 people there in Washington, DC.
Preston Pysh (41:46):
This happened probably about five days before the book got published. The street date of the book when you could buy it on Amazon. So anyone who knows me from listening to the show knows probably how excited I was to go to this event and to be able to talk with Ray. So we got to the event, I was able to meet Ray one-on-one and talk to him. Every person that went there got a signed copy of the book before it was released, which I was really excited about because I’d pre-ordered mine on Amazon probably three months before this event happened, or even before I knew I was going to this event. And so I went in there, I got my copy of the book, it’s signed by Ray and Ray made an announcement.
Preston Pysh (42:27):
He said, hey, if you want me to personalize the book by writing something in there, just come up to me at any point tonight and I will personalize the book for you. And so I went up and asked Ray if he could personalize it. And in my copy of the book, Ray wrote, “Preston keep evolving well.” And it didn’t Dawn on me, the meaning of this, whenever he wrote it, because I hadn’t read the book yet. And so I got back and I plowed through this thing at a rapid pace because I was just so excited to read his thoughts. And Stig hit on this during the review that we did about this idea of evolving well. And what Ray talks about in the book is that a person who is evolving, a person who’s progressing is a person who’s living life well, and a person who’s happy.
Preston Pysh (43:19):
I think at the end of the day, happiness is so closely tied to a person who’s evolving and feels like a person’s growing. How many people do you see that are 80 years old and are miserable? And when you think about why is that person miserable, or why is that person just feels like they’re a robot going through life is because, for a lot of those people, they’ve stopped evolving. They’re not learning every day. They’re not trying new things. They’ve just settled for every day, look in the seat. And I think the world becomes very gray at that point and very dark. And you’re not really, that’s not life anymore. That’s somebody who’s just mechanically going through things and they’re not exploring and they’re not learning. And so that quote was so meaningful. One other thing I want to share about the encounter that I had with Ray is Ray said to me, he said, these are my principles.
Preston Pysh (44:13):
And I’m sure there’s a lot of them that you can use, but Preston, you need to develop your own principles. You need to start writing down which you think is the truth. And you need to start dissecting the granularity behind what you think those principles are. And come up with your own challenge mind, come up with your reasons on why you think mine are wrong.
Preston Pysh (44:35):
And so just that mindset, not even what he’s saying, just the mindset of what he told me is so profound because what he’s saying is I don’t have the answers to everything. My answers might even be 100% wrong. I don’t know, that’s for you to figure out. And that’s a person that’s sharing true knowledge as far as I’m concerned. And if people out there listening to this can gain anything from all of this, I know for me, that encounter with him was so… It’s almost surreal because it was such a truth bomb for me to hear this and to have Ray tell me that one-on-one was just, I was very honored to have met him and to have this experience. And what a book, just what a book I can’t recommend this book highly enough. And it definitely sits on my shelf with a lot of pride.
Preston Pysh (45:29):
All right, guys. So that’s all we have for Ray’s book, Principles: Life & Work. Fantastic book. We’ll have a link to the book on Amazon in our show notes. I highly recommend you guys pick this one up. It’s also on Audible. I got a hard copy. I also did Audibles, both are stellar. The one thing that I will say about the hard copy it’s so well-organized like we said earlier, and it has all these things that are really systematized inside the hard copy that… To be honest with you, I think the hard copy is probably the best choice if you’re trying to pick between the two. I would definitely go with the hard copy so you can reference things. But that’s my 2 cents. So, all right, that wraps up the book.
Preston Pysh (46:08):
At this point in the show what we’re going to do is we’re going to cover a question from the audience. And this question comes from Ton.
Ton (46:14):
Hi Stig, hi Preston. This is Ton calling in from Cincinnati, Ohio. I’m a huge fan and so happy to see the tremendous growth of your brand. Can’t thank you guys enough for all that you do since the most effective teachers are the ones who make difficult concepts understandable to their students. And you guys do just that.
Ton (46:33):
My question today revolves around the current economy and how it relates to the market. Data show that recent inflation rates in the US were lower than expected while the economic growth is accelerating. Subsequently, bond yields or interest rates recently just hit their highest levels. In this scenario, one would think that if the economy is growing in a positive manner, then prices should be rising relatively along with it.
Ton (46:59):
But instead, inflation rates are low. So I’m curious to hear what your thoughts are on why this is the case. I’m also curious to hear your thoughts on what it means for the market as billionaires like Ray Dalio are shifting portfolios to a more defensive position. As always I look forward to your next show and your replies. Thank you.
Stig Brodersen (47:19):
Wow. Thank you so much, Ton, for this amazing question. And it really makes me think of whenever I was teaching classes in macroeconomics and for me to starting to doubt the current models we have about inflation.
Stig Brodersen (47:34):
You all right, what we are typically taught is that when the economy is heating up, inflation should go up too, and that’s not what we see. And the reason for that, and just so everyone’s on the same page is that whenever you have an economic upswing, it would lead to higher wages. It would push up price levels. And then often the federal reserve will then hype rates to stop the economy from overheating and to stop that inflation that will come from as a result of that. And it’s kind of like, it will go in cycles and that’s kind of like what we were taught and what we used to think. So you’re really hitting at something good here.
Stig Brodersen (48:08):
So what’s happening now? Why haven’t we seen this in this cycle and perhaps not too much in the last cycle? And the reason why is that the feedback loop I talked about before with upswing, higher wages, higher price levels. It’s not what we have today. And the whole reason for that is the productivity growth abetted by the new technology. Because now you have more production that can be generated from capital and labor. And you can grow the economy faster without causing the supply bottlenecks that potentially give higher prices.
Stig Brodersen (48:43):
And this is also hinting at what Preston mentioned before that the middle class is really getting crushed. It might sound like the average GDP for the US is increasing and it is, but it’s not distributed equally. And technology is a huge reason for that. If we continue the discussion about technology was really key here. If you think about the prices of something like education, healthcare, food. I mean, that’s all getting more expensive and you’re like, “It has been so for a long time.” And you’re looking at the inflation rate of 1% or 2%, and you’re thinking this doesn’t make any sense. And this is really a math thing because of technology, technology has made certain products that takes up a huge part of a disposable income much cheaper. So for instance, this calculation, the price of cell phones dropped 6% to 2% between 2004 and 2014. Now, you’ll be like that doesn’t make any sense, phones are expensive today.
Stig Brodersen (49:43):
But what you do whenever you’re looking at inflation index is that you’re saying, I need to have a comparable product. Now, that makes a lot of sense if you have 10 gallons of gas. If you put that into the index, that makes a lot of sense because it has the same utility more or less. But it doesn’t make any sense because that phone wouldn’t have the same utility 10 years from now. So also keep in mind that the inflation number is skewed. Another thing I would like to highlight is the sharing economy, which is a new thing that we haven’t seen before. If you look at something like Airbnb, they had more than 160 million guests last year. And on New Year’s Eve they had 2 million guests spending a night in the Airbnb listing. So in the old world, just that alone would be 20,000 mid-sized hotels that was built to accommodate the guests.
Stig Brodersen (50:35):
And that will create a lot more demand for labor, cement, materials, and land. And that’s not the same effect you see now because of the sharing economy. And then the last point is that you have globalization now, and to an extent that we haven’t seen before. So in the old feedback loop that we talked about before with economic growth, and then you will have workers demanding high wages, as you said before. That’s not the way it is today, part because technology, but also even if you can replace that technology very often you can replace that with workers abroad. So by definition, since they will work for a cheaper wage, you can’t pressure up prices. And so the wages will increase and ensuring the inflation. So I guess that was kind of like my own reflection of our macro has change, how inflation has changed, and how we probably need to rethink inflation and what to do about it in this new globalized and technological world. But I really like your question Ton and thank you for allowing us the chance to talk about this in-depth.
Preston Pysh (51:40):
So this is a very appropriate question for this episode, Ton, and I’m going to hand you off to an article in our show notes. Ray literally just wrote this article last week. He published it on LinkedIn and it addresses this exact issue that you’re highlighting. And a lot of it comes down to the effects of quantitative easing and what it actually ends up doing to the economy. So everything that you described, 100% accurate. And what you’re seeing is this obliteration of the middle class. And so where you are seeing growth, you’re seeing growth in the hands of the elite. You’re seeing the asset accumulation and the asset appreciation in the hands of the elite. He goes in and he quantifies everything with stats and statistical proof to back up every one of the claims that he has, to substantiate his position.
Preston Pysh (52:33):
All right, for the second part of the question where you’re asking about where do you think things are going to go? For me, I took a lot of my queuing from people like Ray, from Warren Buffett, some of these other guys. And what these guys are all talking about is the central banks starting to take a different approach. Moving forward here at the end of 2017 and into 2018, where they feel that a lot of the central bankers are going to start to turn off a lot of the quantitative easing that’s been so prevalent in the previous decade. You’re already seeing that with the fed here in the US. You’re still seeing the ECB and the Bank of Japan doing quantitative easing at humongous rates. And so for me, I’m having a hard time buying it. I recently heard an interview with Ray on Bloomberg, where Ray was saying that 2018 is going to be the year where the central banks start to reverse.
Preston Pysh (53:23):
What you’re going to see is that bonds are going to start to sell off and you’re going to start to see rates on bonds going up. That’s what his expectation is moving into 2018. Ray also said that it’s not that he’s a bull on stocks, but I think he’s cautiously holding. And I think he still has a fairly sizable position in stocks, but I think that he’s not looking to call a huge upside there. I think that it’s more of a sustainment kind of thing. So my expectation is very similar to all of that. I think that the bond market is going to have a fairly substantial sell-off. I think most of the sell-off in the bond market is going to happen on the short end of the yield curve, on the duration side. So like the shorter duration bonds are the things that are going to be moving a lot.
Preston Pysh (54:08):
If you get out in near to the 30-year side of the bond yield curve, I think it’s going to probably be pretty flat, maybe go up a little bit, which means that it would sell off a little bit, but I would agree with that expectation.
Preston Pysh (54:21):
One concern that I’m going to say is that I think the ECB and I think the bank of Japan are much more of a wild card to pull in their quantitative easing efforts than I think people are giving them credit for. I guess my opinion is I think they’re going to continue to print. I think they’re going to continue to swap cash for these bonds on their market. And I think they’re going to continue to do that until we start to see some things fundamentally start to break. I don’t have any other reason to believe otherwise because even when the fed was saying that they were going to things back and that they’re going to raise rates and they’re going to do. For every time they said they were going to raise rates, they would do it one for every three times they would say it. Or once every four times they’d say it.
Preston Pysh (55:00):
So their believability and Ray talks about that in the book. What’s the believability that you’re indexing them at? And for me, the believability part of it is extremely low. So although I think the market is extremely high with a Shiller PE at 31. I don’t necessarily see things, I don’t see credit contracting at a rapid pace because I don’t see central bankers really changing much of their policies anytime soon.
Preston Pysh (55:24):
All right. So Ton, thank you so much for submitting your question, for getting this on the show. We’re going to give you a free subscription to our online intrinsic value course that Stig and I have built. Probably about 10 hours of content there, where we go through how to do discount cashflow models. And we’ve got an online intrinsic value calculator that you can download on Excel that helps you do these models. For anybody else out there that wants to get a question played on the show and potentially receive this course for free, just go to asktheinvestors.com. You can record your question there, and if it gets played on the show, then you get a free course.
Stig Brodersen (56:00):
All right, guys, that was all that Preston and I had for this week’s episode of The Investor’s Podcast. We see each other again next week.
Outro (56:07):
Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcaster Network. Written permission must be granted before syndication or rebroadcasting.
