- by Ray Dalio
The Call to Adventure
Before we begin, let me just establish the fact that I don’t know much relative to what I need to know. Whatever success I’ve had in life has more to do with my knowing how to deal with my not knowing than anything I know. That I should be telling other people what to do sounds kind of presumptuous to me. But I’m going to do it because I believe that the principles that have made me successful could help other achieve their own goals. I’m now at a stage in my own life in which it is much more important to me to pass along what I’ve learned about how to be successful than to seek more success for myself. What you choose to do with these principles is up to you. You have to be an independent thinker because only you can develop your own principles based on your own values. This brings me to my first and most fundamental principle which is that you need to think for yourself about what is true. So let’s get started. Early on, I’ve discovered I needed principles. Principles are smart ways for handling things that happen over and over again in similar situations. There are principles for everything. From skiing, to parenting, to cooking, and so on. I’m going to share some of my most important overarching life principles that influence how we approach everything that we do. I didn’t start out with principles, I acquired them over a lifetime of experiences. Mostly from making mistakes and reflecting on them. My life principles are simple but they’re not complete. I still struggle to make the best decisions and I still make mistakes and learn new principles all the time. This is the reality. At the beginning, I needed to escape the conventions that surrounded me which meant that I needed to think for myself. Unless you want to have a life that is directed by others, you need to decide for yourself what to do and you need to have the courage to do it. But I didn’t know that at first. I only learned that from going on my adventure. Looking back on my own journey, I now see that time is like a river, that carries us forward into encounters with reality that require us to make decisions. We can’t stop our movement down this river and we can’t avoid the encounters. We can only approach them in the best possible way. In your lifetime, you will face millions of decisions. The quality of your decisions will determine the quality of your life. Over the course of my lifetime, the most valuable things I’ve learned were the results of mistakes I’ve reflected on to help form principles so I wouldn’t make the same mistakes again. These principles took me from being a very ordinary middle-class kid from Long Island to becoming very successful as judged by conventional measures. They also gave me the meaningful work and meaningful relationships that I value even more than these conventional successes. People often ask me how I did it. I can assure you it wasn’t because of my uniqueness as a person. It was the result of a unique approach to life I believe almost anybody can adopt. It starts with embracing reality and dealing with it.
Embrace Reality and Deal With It
The path you take in life is your most important decision. In my case, I wanted my life to be great and I feared boredom and mediocrity more than I feared failure. Since I didn’t start out with money, and I didn’t need much more than a bed to sleep in and food to eat, I could skew my decisions to pursue my adventures. So ever since I was a kid, I ran after the things I wanted, crashed, got up and ran again, and crashed again. And each time I crashed I learned something, got better, and crashed less. By doing that over and over again, I learned to love this process, even the crashing part of it. Through it, I encountered reality, and I learned how to deal with it, which inspired another one of my most fundamental principles which is that truth is the essential foundation for producing good outcomes. By truth, I don’t mean anything more than the way the world works. I believe that we were given the laws of reality by nature. Humans didn’t create them, but we can use them to foster our own evolution and achieve our goals. Realizing that made me a hyperrealist, by which I mean I became someone who has discovered the great rewards of deeply understanding, accepting, and working with reality as it is and not as I wish it would be. When I say I’m a hyperrealist, people sometimes think I’m saying that dreams can’t come true. That’s absolutely not true. Without pursuing dreams, life is mundane. What I mean is that to me, hyperrealism is the best way to choose one’s dreams and then achieve them. Having big dreams plus embracing reality plus having lots of determination will bring you a successful life. I believe this formula is true for everyone, but what does a successful life look like? We each have to decide for ourselves what success is. I don’t care whether you want to be a master of the universe or to live under a palm tree or anything else. I really don’t. Each of us chooses goals based on our values and decides on the best path to achieve them, but we all need approaches to making decisions that work well, especially when facing problems, mistakes, and weaknesses that stand in our way. To succeed, we must embrace all our realities, especially the harsh realities that we wish weren’t true. At first, looking at these harsh realities caused me a lot of pain, but I learned that this pain was just psychological and that by seeing things differently made all the difference. I came to view problems like puzzles that would reward me if I could solve them. They would help me deal with the problem at hand, and they would give me principles for dealing with similar problems in the future. I learned to treat pain as a cue that a great learning opportunity is at hand, which led me to realize that pain plus reflection equals progress. Meditation has been invaluable in helping me see things that way. I found that when I calmed myself down and embraced my realities and dealt with them, the rewards brought me pleasure and the pain faded. Each of us has the unique capability to think logically to reflect on ourselves and our circumstances and to direct our own personal evolution. Doing this well is just a matter of following a simple five-step process. In episode three, we’ll explore what that process is and how to use it.
The Five Step Process
We’ve discussed how important it is to reflect carefully after experiencing pain. When I did this, I was usually able to discover principles that would prevent me from repeating the same mistakes in the future, and I could see that being successful simply consisted of five steps. Step one is to know your goals and run after them. What is best for you depends on your nature, so you need to really understand yourself and know what you want to achieve in life. Step two is to encounter the problems that stand in the way of getting to your goals. These problems are typically painful. If handled badly, some of them can lead to your ruin. But to evolve, you need to identify those problems and not tolerate them. Step three is to diagnose these problems to get at their root causes. Don’t jump too quickly to solutions. Take a step back and reflect in order to really distinguish the symptoms from the disease. Step four is to design a plan to eliminate the problems. This is where you will determine what you need to do to get around them. And step five is to execute those designs, pushing yourself to do what’s needed to progress towards your goal. A successful life essentially consists of doing these five steps over and over again. This is your personal evolution, and you see this process everywhere. It’s just a law of nature. Think of any product, any organization, or any person you know, and you will see that this is true for them. Evolution is simply a process of either adapting or dying. Conceptually, it looks just like the five step process I’ve described. As you push through this often painful process, you’ll naturally ascend to higher and higher levels of success. I’ve found that when I did it better, my struggling never became easier because the more capable I became, the greater the challenges I would take on. Because different people are strong and weak at different things, most people can’t do all five steps well. Not facing this reality means you could stretch further than you should, and as the heights get greater, your falls could also be greater. Sometimes terrible things happen to all of us in life. They can ruin us, or they can profoundly improve us, depending on how we handle them. Something like this happened to me in 1982. In episode four, I’ll show you what happened and the lessons I learned.
We progress forward until we encounter setbacks. Whether or not we get out of them and continue forward or spiral downward depends on whether or not we’re willing to face the failure objectively and make the right decisions to turn the loop upward again. Something terrible happened to me in 1982, when I bet everything on a depression that never came. The period between 1979 and 1982 was one of extreme turbulence. For the global economy, the markets, and for me. And I believed that the U.S. economy, with the world economy tied to it, was headed toward a catastrophe. This view was extremely controversial. I wanted the great upside and very publicly took a big risk and was wrong. Dead wrong. After a delay, the stock market began a big bull market that lasted 18 years and the U.S. economy enjoyed the greatest growth period in its history. This experience was like a blow to my head with a baseball bat. I had to cut my losses so that my company, Bridgewater, was left with one employee: Me. I was so broke, I had to borrow $4,000 from my dad to pay my bills, but even worse was having to let go the people I cared so much about. I wondered whether I should give up my dream of working for myself and play it safe by working for someone else in a job that would require me to put on a tie and commute every day. Though I knew that, for me, taking less risk would mean having a less great life. Being so wrong, and especially being so publicly wrong, was painfully humbling. I am still shocked and embarrassed by how arrogant I was in being totally confident in a totally incorrect view. Though I’d been right much more than I’d been wrong, I had let one bad bet erase all my good ones. I thought very hard about the relationship between risk and reward and how to manage them, but I couldn’t see a path forward that would give me the rewards I wanted without unacceptable risk. This kind of experience happens to everyone. It will happen to you. You will lose something or someone you think you can’t live without. Or you will suffer a terrible illness or injury. Or your career will fall apart before your eyes. You might think that your life is ruined and that there’s no way to go forward, but it will pass. I assure you that there is always a best path forward and you probably just don’t see it yet. You just have to reflect well to find it. You have to embrace your reality.