[By WORLD ECONOMIC FORUM/swiss-image.ch/Photo Moritz Hager (CC BY-NC-SA 2.0), via Flickr]
There is no ambiguity on this. If you can come out of no place and create something like Bridgewater Associates, the world’s largest hedge fund, the founder Ray Dalio must be one heck of a smart man. Some perspective is needed here, because as Dalio articulates from every forum that matters, “Be precise.”
- As reported by Institutional Investor’s Alpha, of the top 100 firms that make it to the list, Bridgewater Associates had a firm capital marginally in excess of $122 billion.
- As against that, No. 2 on the list is AQR Capital with a firm capital of $69.6 billion and JP Morgan Asset Management is at No. 3 with $45 billion.
Managing a hedge fund of this size brings in fees and profits that make Dalio one of the richest men in the world and Bridgewater Associates the most successful hedge fund on the planet. That is also why investors of all kinds across the world are waiting with much anticipation for September 27 when his book, Principles: Life and Work will be out on the shelves. Everybody wants to know what is it about his “Principles” that make Dalio as rich as he is and the firm—a hedge fund at that, as opposed to a private equity or venture capital firm which he can simply buy out—as wildly successful as it is. That suggests he can deal with alarmingly high levels of complexity.
Now, by his own admission, Dalio is the kind of creature who does not mince words. He places a premium on reason and logic over all else and believes in a culture of “radical transparency”. In his books, that means, you don’t state anything behind somebody’s back. Either you tell them what you think to their face, as brutally as you possibly can, or shut up. Some people can take it. Most cannot. They have no place in his scheme of things and are expelled out of the system.
That is why, in keeping with the spirit of Dalio, allow me to place this on the record: I do not intend to invest a single rupee to buy his “Principles”.
In his world, the future can be predicted on the back of track record. And if his track record on how to think about the world and the principles it ought to operate by is anything to go by, I believe the 500-plus pages in the book will contain regurgitated tripe from a 123-page book (or manual if you will) that every employee is expected to commit to rote. If you may be inclined to go over what it contains, it is available for downloads in multiple formats.
If that may be painful, may I point you instead to a platform like TED, where in this 16-minute video, people talk and applaud in awe as he articulates all of what he believes in.
As for the future, I’m going to put my neck on the line and make a prediction. When the epitaph to Dalio’s “Principles” will be written, it will read as: Here lies a man who did not know when to let go. He was good at what he did post the Industrial Revolution.
But in the dog-eat-dog world that is the hedge fund business, artificial intelligence and machine learning are increasingly doing the job of managing complex financial instruments far better than humans can. This is evident from the jump in rankings of hedge funds that deploy algorithms to trade better. Dalio hasn’t come to terms with that. He imagines he has adopted these sciences. But he hasn’t. His is a one-man show and he is a one-trick pony.
Now, Dalio’s philosophy also insists that opinion and feedback ought to be blunt and brutal and must be supported with evidence. Much poring over his manuals, what is available in the public domain, and listening to his statements later, I am going to attempt just that. Be blunt and brutal.
Ray Dalio, you reap what you sow
Now, Journalism 101 insists you attempt to reach out to a person and seek comment before attempting to write about them. I did not. My reasons are straightforward. And to show Dalio the mirror, I seek cover using the Principles he espouses. The statistical probability of Dalio responding to my request for any comment is close to zero. Various reason for this exist.
- Hedge funds are misunderstood in practically every part of the world. In India, it is a nascent industry and policy makers are still grappling with the real nature of this beast. Now, when there are problems with understanding what are hedge funds exactly and how they operate in mature markets, why should it be any better in India? In fact, probability and reason suggests, it will be lower. If that be the case, when looked at from Dalio’s eyes, why would he want to expend time on blokes like me?
- Whenever Dalio has spoken to the media, it has been with “insiders” in the business like Henry Blodget—after much deliberation and arriving at certain ground rules. While I am interested in the decisions men like Dalio makes because it can impact economies across the world—India included, I refuse to engage on the terms of engagement Blodget did with “cranky” man like Dalio from 10,000 miles away.
- Now again, I need to “be precise” here. Why will I not engage with Dalio on the terms he agreed to engage with Blodget?
As far as I am concerned, Blodget is an accidental journalist. In his earlier avatar, he was head of the global internet research team at Merill Lynch at the peak of the dotcom boom in 2001. Much later in 2007, the US Securities and Exchange Commission (SEC) found him guilty of violating the code of conduct. The views he articulated in private were inconsistent with what he put out in the public domain. Much investor wealth was destroyed and he was among those indicted for the creation of the dotcom bubble.
That is why the SEC barred him permanently from the securities industry and fined him $4 million. Left with not much else to do, the media business presented itself as an attractive alternative, which welcomed him as “scum”. His transition from the consummate finance professional to a wannabe media magnate was capture by Ken Auletta in The New Yorker and aptly titled Business Outsider.
That is why it does not surprise me that Blodget offers Dalio a sympathetic ear. He listens in patiently as Dalio tells him that The Wall Street Journal report, which attributed the story to multiple employees at the firm and others who have seen him from close quarters, got him all wrong. He also makes it clear that the suggestion in the report that “Bridgewater wants day-to-day management—hiring, firing, decision-making—to be guided by ‘software that doles out instructions’ ” is something he has not taken kindly to.
Is Dalio a cranky man?
A little earlier, I used the word “cranky” to describe Dalio. In Dalio’s world, that is an “opinion”. And all opinions must be qualified. Again, I have my reasons.
He is the kind of man who has governments and heads of state eating out of his hand or waiting to meet up with him. In any which case, hedge funds have a reputation for being notoriously impervious. But that is because the nature of their business is such and no malice ought to be attributed on that count. That is why, a report in The Wall Street Journal ought not to have bothered Dalio as much. But it did. So much so that he mounted a rant against The Wall Street Journal on Linkedin, “…we’ve had a history of (Rob) Copeland and (Bradley) Hope writing misleading stories about Bridgewater even when we co-operated with them…”
I would have given Dalio the benefit of doubt if he had explicitly pointed out to other instances of where the journalists whom he has named in the post on LinkedIn have attempted to malign him. On every note he writes, he qualifies any statement he makes with a footnote that contains data or caveats. There were none here. Instead, it contained allegations. Minus data or caveats, my mind feels compelled to dismisses his allegations.
Not just that, he went on the rampage and tried to tarnish The New York Times as well which had nothing to with the episode. But he had statistics that suggested public confidence in the media is at an all-time low, and that the media business must be regulated much like the financial services industry is.
This raises a few issues that violate all the “Principles” he espouses:
- The hedge fund industry of which Dalio is the largest player is not subject to scrutiny in the US by the SEC like others in the financial services industry. By what yardstick then, can he ask for regulation when he is the beneficiary of an unregulated environment? To my mind, this makes Dalio a cranky character.
- And if he has data, which is what he swears by in any case, to prove public confidence in the media is at an all-time low, why did he have to feel hurt by a report in the WSJ? The emotion he displays is at conflict with the data he quotes. This too violates his Principles, and suggests crankiness to me.
- Then there is no escaping that he insists on “radical transparency” in his firm and that free speech in all form be encouraged. If that be the case, why feel “hurt”? Why insist free speech be curbed? This is out of character for a personality that has always argued in favour of free markets. Episodes like this suggest he is not just cranky, but churlish as well.
- But over all else, his responses to a news report displays “emotion”. As Dalio has articulated in his manifesto repeatedly, reason must prevail over emotion. He failed.
Dalio is out of synch
To gain a job at Bridgewater, potential employees must go through much scrutiny. This includes psychological profiling as well. No rocket science here. Many organisations practice it through the much-hyped Myers-Briggs Type Indicator (MBTI). The problem with MBTI though is that it has been rubbished in peer reviewed journals. It owes its origins to work done in the early 20th century by a mother-daughter duo, has not been peer reviewed, and the insights it offers are as good as Linda Goodman’s Sun Signs.
MBTI is a theme that had gotten my attention as well in the past because a lot many organisations continue to persist with this ridiculous practice. I have invested much time on the test and engaged in multiple conversations around it with practicing psychologists. All of them concur on that it is not a reliable indicator and that we do not live in a black and white world where only 16 kinds of people exist. There are nuances and this test cannot capture all of it.
My grouse with Dalio and the entity that is Bridgewater is that when it comes to economics and the markets, they have consistently managed to beat everybody else because they could spot what others couldn’t. That is why they got to where they are now.
Why is it that Dalio and his company refuse to look at something as ridiculous as MBTI for what it is? Instead, to gain an entry into the organisation, MBTI is among the first tests people must go through, the data it throws is captured, and all of it goes into a proprietary software system. This again violates Dalio’s Principle of questioning the convention. If anything, it insists the man is not just cranky, but pig-headed.
Dalio is certainly not a ninja
Then there is more crock that Principles is filled with. Dalio tries too damn hard to be a philosopher. “With practice, you will eventually play this game like a ninja, with skill and a calm centeredness in the face of adversity that will let you handle most of your numerous other challenges as well.”
But he ends up sounding like a shaman. He is hardly calm and a ninja he most certainly is not. I’ve attempted to place some evidence to that extent above. If any more evidence be needed, consider his take on Donald Trump as a case in point. To put it mildly, Dalio’s prognosis on the Trump presidency has been nothing short of disastrous.
As recently as November 2016, he wrote to investors in Bridgewater:
“Let’s get back on track regarding whether the Trump administration will be…
“…Capable or Incapable?
“Our very preliminary assessment is that on the economic front, the developments are broadly positive—the straws in the wind suggest that many of the people under consideration have a sufficient understanding of how the economic machine works to run reasonable calculations on the implications of their shifts so that they probably won’t recklessly and stupidly drive the economy into a ditch.”
That he was horribly off the mark is one thing. President Trump’s team is leaving the ship. Even as this dispatch is being written, Gary Cohn, the chief economic advisor to the Trump administration, has expressed his displeasure at the way things are going, and has suggested he may be on his way out. On his part, Dalio is petrified. Because his analysis of the Trump presidency has always gone wrong.
Incidentally, this is the kind of analysis that ought to compel him to go back to the “Principles” and appears on Page 32 of his manual, and ask himself the questions he insists everybody ask of themselves:
- In diagnosing problems, how willing are you to “touch the nerve” (i.e., discuss your and others possible mistakes and weaknesses with them)?
- Are you willing to get at root causes, like what people are like?
- Are you good at seeing the patterns and synthesising them into diagnoses of root causes?
- How confident are you that your assessment of your ability to diagnose is accurate?
- If you are confident of your self-assessment, why should you be confident (e.g. because you have a demonstrated track-record, because many believable people have told you, etc)?
If these questions are any indicator and Dalio’s notes on Trump a pointer, “Ray Dalio—like the market he so dearly loves—will always fail to analyse Trump if they continue to rely on the fact-based analysis that drive both Ray Dalio and the market.”
We can dig a level deeper and ask why is it that Dalio gets it wrong? In going over the manual that is Principles, he makes it clear that the world and the economics that govern it are very simple to understand. All you’ve got to do is think about it as a machine. Or, adopt a binary approach.
For instance, if this is what you expect will happen, follow a certain course of action. But if the probability of something else is higher, then there is another course of action that must be taken. These are “either-or” decisions in his world-view. But like President Trump has shown him, Dalo is falliable and can be trumped.
If you may be inclined to understand how Dalio looks at the world, there is a video that captures his “mechanistic world view”. And I use the word “mechanistic” very deliberately because like I said earlier, it was good for an “industrial” era. It has held many people enthralled and has been upvoted on multiple forums across the world. But it’s time he called it a day.
Dalio sounds maniacal
Then there are some passages from his Principles that strike me as particularly perverse. Consider a few for instance.
a) “I believe that what is bad and most punished are those things that don’t work because they are at odds with the laws of the universe and they impede evolution.”
By these yardsticks, the law of the jungle ought to prevail. Only the most powerful ought to survive. There is no place for the weak or the meek. So, what is it that you are trying to suggest Mr Dalio?
b) “I believe that pursuing self-interest in harmony with the laws of the universe and contributing to evolution is universally rewarded, and what I call “good.” Look at all species in action: they are constantly pursuing their own interests and helping evolution in a symbiotic way, with most of them not even knowing that their self-serving behaviours are contributing to evolution. Like the hyenas attacking the wildebeest, successful people might not even know if or how their pursuit of self-interest helps evolution, but it typically does.”
- If I were to look at this very clinically, are you trying to justify the “Greed-is-Good” culture on Wall Street and other markets across the world?
- I see another problem here. When you are constantly pursuing your own interests, do you know when to stop? When do you give up on, say, earning money, and chase some other goal? When do you know this much is enough? When do you tell yourself, I need to look at something else?
c) “In return, society rewards those who give it what it wants. That is why how much money people have earned is a rough measure of how much they gave society what it wanted—NOT how much they desired to make money. Look at what caused people to make a lot of money and you will see that usually it is in proportion to their production of what the society wanted and largely unrelated to their desire to make money. There are many people who have made a lot of money who never made making a lot of money their primary goal. Instead, they simply engaged in the work that they were doing, produced what society wanted, and got rich doing it.”
This sounds like a specious argument. You just happen to be in the business of money where the return on investment (ROI) is measured in terms of money. That is the only metric you have to go by. Take that metric out and what will Dalio measure his life by?
For instance, while researching the recent tragedy that happened in Gorakhpur following the outbreak of encephalitis, I heard of Milind Gore, a scientist who now works in Gorakhpur and has been researching the theme for many years. I am still to meet him. But I have heard very many good things about what he has managed to accomplish.
Or for that matter, there are people like Drs Abhay and Rani Bang. By any which yardstick, they can live the First World life in any part of the world of their choosing. But they chose to live their lives out in the Naxal-infested Gadchiroli district of Maharashtra. Their mission in life is to reduce infant mortality rate in one of the most poverty-stricken parts of the world. I plan to visit them later this year.
By Dalio’s metrics, the contributions to society of people like Gore and Drs Bang are significantly lower than his. How much more stupid can that argument get? A footnote in to the Principles that elucidates this hypothesis suggests that people like them are not rewarded handsomely because it is a function of demand and supply.
I’d go on to say that is both ridiculous and specious. Demand for people like Gore and Drs Bang’s services are high. The challenges against them continue to be the highest, and the ROI they have generated cannot be imputed into their personal net worth, but in the GDP of the region over generations to come.
This is wealth that is concentrated not in the hands of an individual, but will proliferate over generations and make a society richer. When the grim reaper comes calling, More and Drs Bang may perhaps smile and say they did their job.
Given that you, Ray Dalio, have expended some thought in your pages on death being the natural order of things, with examples such as hyenas attacking the wildebeest being in the natural order of things, the hyenas are barking at your doorstep. It’s a pity really that a man as smart as you still hasn’t seen the writing on the wall.
(This is an expanded and mildly modified version of what was first published in Mint on Sunday)