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00:00In the last recession your firm performed extremely well. So are you anticipating a recession. Now in two thousand seven . It was pretty easy I think to calculate that there were these debts that were going to come due when I go through those calculations. It's not the same. Bridgewater would not be said to be an easy place to work. Is that fair. People love it or hate it. So in high school were you interested in academics or were you a good student. I will take classes to go surfing . Would you fix your tie please. People wouldn't recognize me if my tie was fixed but it just seemed to sway . All right . I don't consider myself a journalist and nobody else would consider myself a journalist. I began to take on the life of being an interviewer even though I have a day job running a private equity firm . How do you define leadership . What is it that makes somebody tick . You are seen as somebody who has said there might be a chance of a recession at some point. Do you see any chance of a recession in 2019 or 2020. I'm big on principles right. So I think that it's important to understand how the economic machine works . And so when I'm looking at that I want to maybe take a few minutes and get into the important things that are pertain to a recession because a recession. You know whether you is two negative quarters of GDP and we're going to be hovering I think fairly close to that level. And there's a certain variation around it. But the bigger things are a combination of the absence of effectiveness of central bank policies. So I hope we can talk about those together with the wealth gap large wealth gap. So when the next downturn comes what that will look like socially politically and so on . The elections which is a issue between let's say capitalists and socialists or the rich and the poor and then the emergence of China and in relationship to the United States. Those four factors are factors that have not existed since the thirties. I think they're unique. And so when we get into the question of the recession I think it's how that will affect those other things and those things affect it in the investment world. Your firm was quite known well known for quite some time before the last recession. It was a very successful firm before. But in the last recession your firm performed extremely well maybe better than any of any other major hedge fund. So I I record clear up 28 percent or something like that during the worst year. So are you anticipating a recession now and are you changing your investment approaches or you're not quite where you were in 2007 . In 2000 7. It was pretty easy I think to calculate that there were these deaths that were going to come due and that the there was not an adequate amount of funding. And so that sort of debt crisis was something we anticipated and we were positioned well for. When I go through those calculations it's not the same . In other words the amount of maturing debt and that old problem doesn't look the same. It looks more like a gradual squeeze having to do with all of a quite a lot of debt of a certain type . But with that also pension liabilities and health care particularly as that produces a greater squeeze. We have large deficits and so on. So. So the amount of promises that we have are large but they're going to be coming at us at a more gradual pace . And I think that's going to produce a squeeze. I think related to that what's important is that when you don't have monetary policy being able to be effective what kind of monetary policy will have we will have more than likely a lot of debt monetization on fiscal policy. There's no room for additional tax cuts to agree because we already have such a big deficit. So you couldn't really cut taxes and eat many more. Or do you not agree with that. I believe that in terms of spending that probably there will be increases in spending that probably will not be well funded. And when you ask about that I think we have a political question. And that's which is relevant to also the markets between now and the elections. We're probably going to have very different policies but policies may be more of the left and policies more of the right more extreme policies greater clarity and the choice will be greater. And how those choices are made are is going to be very important to not only the size of the deficits but the nature of taxation. So I think that you're right. I think that when I'm looking at the presidential candidates what I do as I look at what their policies are stated policies in terms of any of their various policies. And I look at that as a probabilistic basis. So I think when we have the answer that we can't you you like get after the election you might get taxes raised by on the wealthy or you have corporations. You can reverse those tax rate those DAX policies and you're probably going to get an increase in spending. All right. Let's talk for a moment about how you came to be. Let's say one of the most respected commentators on economic and financial policy which is starting your firm. So you grew up in Long Island . And where you from a wealthy family. No. My dad was a jazz musician very lower middle class family. When you were a young boy were you interested in the financial world or what were you most interested in when growing up. I when I got hooked on the markets when I was 12 because I used to caddy and I would take my money and I'd put it in the markets and everybody was chatting about the markets. So how did you do . Well the first stock I bought I bought because it was the only company I ever heard of that was selling for less than five dollars a share . And I figured I could buy more shares. So if what up I make more money. That was my strategy. And it worked and it worked . And it worked because this company was about to go broke and somebody came along and acquired it. And by luck quietly it went up. And I said this game is easy. And I then decided that I would be involved in the markets. And this game is anything but easy. So in high school were you interested in academics or were you a good student. No I hated high school . Did you go to high school. You cut classes or what did you do . I did cut classes a fair amount and cut classes to go surfing . Did you have a hard time getting into a good school in college . Yeah I got into C.W. Post College on probation and probation . On probation OK. And but you did well there. I loved college . OK. I love college because well besides mixing all the fun that college gives you. It also what I liked is that I could pick the subjects that I was interested in. And I saw I I loved college. Right. You must have done recent. Well because you got into Harvard Business School . Yeah I did. I got great grades but I suppose I'm a young college graduate and I want to go to Bridgewater and make money and learn. What is it that you look for. When I look at people I look at them in three dimensions of a person . When you graduated what did you do. So in my two years it's a two year school and in my summer I like to trade commodities. I got into trading commodities. Now this is now summer of 72 . And so nobody ever from Harvard Business School went into commodity division. But I went to Merrill Lynch's commodity division. I said hey can you give me a job . The director of commodities in that summer gave me a job to help him around 1973. We have the oil shock bear market in stocks . Commodities is the hottest thing. I was hired as director of commodities at Dominic and Dominic . Having never done anything and the director of commodities. But I was hired. And that's so that's what I. So you let him out eventually though to set up your own firm. Yeah. So I. That was 73 74. Big bear market in stocks. Dominic and Dominic essentially went broke. I went to what was Sandy Wilde's firm Leo Hayden Stone at the time became Shearson Hayden Stone Lehman and blah blah blah. Because it did all those mergers I became in charge of institutional commodities . In other words hedging of all different things. And that put me with all different futures markets . And then we got into the environment where 74 75. You got into this environment where interest rates tightness of monetary policy all of those things were driving all the markets . So that got me hooked on those markets. But anyway I got fired from there because I was a bit rowdy. Did you punch somebody . Did you punch your boss in the face. Yes I punch my boss in the face. That's not a good way to get for that was. But that was it was New Year's Eve. We got drunk on New Year's Eve. And you played somebody other than your boss. You didn't think I had a right but it didn't. It didn't last long. OK. So you're OK. So that's how I started the firm because I was at because the clients still wanted to do business. What year was that. And you started the firm 1975. So it grew to from one or two employees to how many. Well in nineteen eighty two it was I think there were eight employees in here at one point and then I had a terrible 82 . So and then it came down to one employee. So 1983 or so was just me. Did you have to borrow money from your father. Yup . So let me tell you about the moment . So nineteen a nineteen seventy nine eighty eighty one. I calculated that American banks had lent a lot more money to emerging countries than those countries are going to get paid back. And I anticipate that there would be a debt crisis and with that an economic crisis. So that was my thinking. In August nineteen eighty 1982 Mexico defaulted on its debt and a number of countries followed. And so because I said that I got a lot of attention about that and I thought that was gonna be producing a bear market in stocks and I could not have been more wrong. August 1982 was the exact bottom in the stock market and I was wrong . And as a result of that I take my employees or I had to let them go. I lost money from myself. I was money for and I had to borrow four thousand dollars from my dad. It was the most painful one of those painful experiences but it was one of the best experiences that ever happened to me in my life because it it changed my perspective about decision making. It made it may give me the humility that I needed and fear of being wrong in my decisions while I was able to maintain my aggressiveness. It changed my whole approach to decision making. You paid your father back with equity in Bridgewater or just interest now with without interest and with a big hug. Okay. So from that time on you began to rely a lot more on arithmetic or algorithms and other kinds of things. No no no. The big thing was and this is the biggest message that I think that I would get across that I'm trying to convey and principles and so on is that . So many people in there have opinions in their heads that might be wrong and they're too attached to them. And if you know how to operate with a certain amount of uncertainty and stress test your opinions in a different way. Use. Get away from your ego . Get away from all that. And you can learn a lot about raising your probabilities of being right. So what it made me want to do is find the smartest people I could find who disagreed with me. And then I could have conversations with them . And only after I found the smartest people that I could find who disagreed with me. Would I be able to make a decision. In addition to know how to improve my return to risk ratio by being able to diversify well to create. And so I wanted all the upside. But I wanted to be able to control the downside. And so I would say a number of lessons that I'd like that you know sort of pass along. First of all the value of mistakes. The value of paying for mistakes and learning and reflecting on them . It's been a big big thing. Finding the smartest people who could work with you. That's what created an idea. Meritocracy at Bridgewater. And it's that back and forth in terms of the thoughtful disagreement and then also raising your probabilities of being right in those ways. So that's humility. That fear of being wrong combined with still the audacity to go for great results and how to do that well is really the most important thing I learned. You now use a lot of computer related algorithms to help you navigate the market. Yes. You know algorithms are what we call them today. Equations is what we used to call. And so you would write that down. And what I learned is by being clear then I could tell how that decision would have worked in the past in all different environments. So gave me a lot of perspective on making that decision. I could test that through the Great Depression and so on. And then I could find that I thought use that same algorithm I could take data from and have the computer make decisions in parallel with me. And so and I is what I recommend for everybody. I recommend they write down their principles and then realize that almost any of those principles can then be converted into algorithms. And so the computer was making decisions in parallel with me making decisions that type of partnership between me and the computer and also expressing the algorithms was invaluable not only in the quality of decision making but also the quality of the relationships that I had with the people I worked with today. The greatest pleasure of your life is your family your financial success. Giving away money. What are you most enjoying. No the financial success has never been. It's an inadvertent thing that came largely because I like to play a game that if you play the game well you get the money . Bridgewater would not be said to be an easy place to work. Is that fair or not. Because here. That's fair because many people come and say this is a very intense environment and some of them don't survive. Those that do presumably or are adopting your principles. But you love it or hate it . You have a big attrition rate from young people coming in or I would say in the first 18 months probably about 30 percent. We have protocols and you have to understand your weaknesses as well as your strengths. And so people coming to that are almost of two types. There are the people who say well they I suppose almost all come that I'm excited about that and they're excited about that because they said yes I would like to know my weaknesses as well as my strengths. And I would like to be able to talk about anything and and have it thrashed out. And that's who it works for. But it takes getting used to because when you're really talking about the strengths weaknesses and differences and ideas our brains have been programmed in a certain way partially because of genetics and partially because of our environments in which disagreement is thought of as producing a fighting type of reaction or weaknesses or something that becomes a challenge for people to look at. So that's the essence of what I suppose. I'm a young college graduate and I want to go to Bridgewater and make money and learn what would be the qualities that you would look for in me to make it likely that I would succeed. Do you want somebody who's the first in his class or her class. You want somebody that's a student body president an athlete. What is it that you look for. When I look at people I look at them in three dimensions of a person values abilities and skills . Most companies hire for skills . I believe it should be the other way around. I look at their values and values means like what are their motivations. What are the missions. So it skills is least important. Then you look at abilities and abilities is the way of thinking. Is somebody big picture thinker or somebody creative. And I want to put together a mix of those right people and then skills . Can you program do you know those things. That's important but it's least important. So what I look for is really character characters number one and to be on a mission and then it applies to the particular job they are. So when I'm referring to values I'm referring to is this a person of good character that number one now over your let's say 30 years as an investor in Bridgewater what is your track. Every year you've made money virtually for your investors. Well at 18 in the last 18 years we've made 18 over the last 18. Yes. That's not too bad about because it's too late to invest with you or who can invest with you. Anybody and any credit investor you're not take on are. We're close to new investment in that pure alpha strategy. And our clients are all in large institutions . And you have two basic strategies that you provide investors . That's right. And I think that'll be helpful for people to understand the nature of that. There is a strategic asset allocation next. What is your best diversified portfolio. If you had no idea what was going to happen what would you hold . That's what we call our All Weather Stroud strategy. It's a portfolio of assets . And then we have what we call our pure alpha strategy because there's a separation between alpha and beta . So most investors make the mistake of separating those two and think that they're going to make money in the market. And in the zero sum game they're probably going to lose money from making those bets. So there's the strategic asset allocation mix which is the wall weather beta piece. And then there's the alpha. Another words. OK. Now I think it's a good time to move this way or that way. And that's the alpha story. So did choose to leave for friends and family to get into your fund right. There's no opening. You're not gonna open an AK anytime soon. OK. So important part of your life has been transcendental meditation. You do this twice a day. When did you start and why is it so important to you . I started in 1969 or so. I started because the Beatles did it . And then and I learned about it and I thought it was. And but I it's it's an it's a very boring thing. I would say it's the greatest gift that I think I can give anyone. It gives a combination of an equanimity that you know a calmness. So no matter what's coming at you you can approach it with that sort of calmness. It gives one to creativity because it is a process of going. Transcending is a process of going into your subconscious mind and relaxing. So it's it's been very helpful. So now you are one of the . Wealthiest people in the United States are the most successful investors so you now have a fair amount of wealth to give away and you are one of the original signers of the Giving Pledge . What are their philanthropic interests that are most appealing to you. My interests are. I guess I would take two big interests. I'm really thrilled about ocean exploration. This is something that's a big deal for me. But we we have to donate to many different things. And then important thing for my wife and for me has to do with the education of what are called disengaged and disconnected students. Those who would not get through high school. So when you have the kind of platform you now have a virtue of your success as an investor do you find it easier to meet with heads of state finance ministers heads of countries. And do you find that to be appealing to do that and give them your views on these subjects . We find it mutually appealing. Yes I I . I think that you know from my point of view I'm very interested in the subject matter but I'm also interested in being able to have an impact being able to help. And so sometimes in policies it's had a big big effect in like he's ECB policy or other policies. So if a if somebody came to you and said I'd like you to be the chairman of the Fed or the secretary of the Treasury would you ever go into government or. That's not for you . That's for me. Today the greatest pleasure of your life is your family your financial success giving away money. What are you most enjoy. No the financial success has never been. It's an inadvertent thing that came largely because I like to play a game that if you played the game well you get the money. But the financial success has never been passed. Taking care of my family and living adequately. It's been a nice thing to have it. No . For me the most important thing in terms of saving really has been relationships meaningful work and meaningful relationships. These are the most important thing. When I go on a mission to have a passion to work with people that I like to understand a subject well I love my game because it forces me to understand macroeconomics the world and to bet on it in relationship to other people. So it tests whether I have that knowledge. I love that. And I'm glad that we I've taken it to a certain point. And then there's the things that I've savour even more than that. Above all else it with 70 years old and is the relationships the quality of the relationships that sense of community. That's what I treasure more than anything. Thank you very much for an interesting conversation. And it's a terrific read and I highly recommend it. Thanks for writing it. Thank you for having me .

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The David Rubenstein Show: Ray Dalio

Bridgewater Associates Co-Chairman and Co-Chief Investment Officer Ray Dalio talks about what he looks for in an employee, how he's preparing for a possible recession and whether or not he'd ever take a job in government. He appears on "The David Rubenstein Show: Peer-to-Peer Conversations." The show was recorded on Sept. 5 in New York. (Source: Bloomberg)

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