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Ray Dalio’s ‘Hyper-Realism’ Defines ‘Sense on Cents’

Posted by Larry Doyle on October 22, 2010 9:12 AM |

In a world awash with lies, obfuscation, backstabbing, conflicts of interest, and those who prosper via these machinations, are there individuals and companies whose very core is defined by a perpetual pursuit of truth, transparency, and integrity? Of course there are many people who cherish these virtues and try to live and work by them. That said, within even the most well-intended organizational structure these principles will seemingly often be compromised for a variety of reasons. Is there an organization that not only promotes the pursuit of these virtues but has actually made them the foundation on which it operates and invests?

In fact there is. Let’s take a hard look at perhaps the single most successful fund in the markets today with a track record of success that would be the envy of all. I am talking of Bridgewater Associates based in Westport, CT.

Bridgewater is run by Ray Dalio. What does Ray have to say about his corporate philosophy? Let’s navigate as Ray writes,

“The purpose of this memo is to convey my personal philosophy as it relates to Bridgewater. By “philosophy”, I mean a combination of personal objectives and beliefs about how these objectives can be achieved.”

My overriding objective at Bridgewater is excellence, or more precisely, constant improvement.First and foremost, I want to have a culture of excellence that results in a superb and constantly improving company in all respects. To achieve excellence I believe that truth, or more precisely, one’s accuracy in understanding reality, is essential. I also believe that radical openness, though it can be uncomfortable, is essential in getting at truth. Truth serves as the foundation for excellence, and openness helps to assure truth.

How has Ray’s pursuit of truth and excellence worked out? Well, he and his colleagues now manage $86 billion and they continue to distinguish themselves this year. The Wall Street Journal highlights Bridgewater’s performance and philosophy today in writing, Big Win for a Big Bear,

One of the nation’s largest hedge funds is emerging as a big winner of 2010, earning its managers and clients billions in profits through a series of bearish bets on the U.S. economy.

Bridgewater Associates Inc. has scored a return of about 38% at its flagship fund, driven in part by a multifaceted wager that the U.S. economy would be in worse shape than many expected and the Federal Reserve would keep interest rates low, say people familiar with the matter.

Founded 35 years ago by Ray Dalio, a Harvard Business School graduate known for his philosophical musings, Bridgewater is at the forefront of a strategy called macro investing, which entails trading big buckets of stocks, currencies and commodities based on macroeconomic forces like politics, regulation and monetary policy.

“The economic reality of the world is playing exactly into Bridgewater’s view,” says Ken Miranda, the chief investment officer for the International Monetary Fund’s employee pension plan, which has invested with Bridgewater since the mid-1980s. “Other managers have seen this downturn as more cyclical, but they were right that this is more structural in nature.”

Where has Bridgewater placed its bets this year?

One of Bridgewater’s biggest gains came from its bullish investment in Treasurys, says Mr. Jensen. The fund believed demand for such government bonds would remain high as investors sought safe returns amid heightened economic uncertainty.

Also helping drive Bridgewater’s returns: a bullish investment in the Japanese yen, which has risen nearly 16% since May. The yen’s rise is being driven by a weaker dollar and China’s recent purchases of the Japanese currency.

Another big moneymaker has been gold, a commodity that has risen roughly 20% in value this year as investors flee major world currencies in decline.

What do Dalio and team see on our economic landscape?

Looking ahead, Mr. Jensen says deflationary pressure will continue to outweigh inflation concerns in the U.S., and he expects the Fed will have to do another round of quantitative easing—increasing the money supply to stimulate the economy—even after the $500 billion move that is expected in the near term.

Meanwhile, the economies of developing nations like China will keep getting stronger, while the U.S. stays relatively weak, he says. One outcome of that divergence was China’s decision this week to raise interest rates, while the U.S. keeps them low, he says: “China is developing its own monetary policy. They are becoming more independent.”

With returns such as these and assets under management of this magnitude, just how does Dalio maintain the perspective and culture to perpetuate this amazing track record? As the WSJ highlights, Dalio is driven by the pursuit of the truth,

Over the years, Mr. Dalio has devised a set of nearly 300 principles that he encourages his employees to work and live by. His basic philosophy is what he calls “hyper-realism,” a notion that brutal honesty yields the best results.

I can hear the naysayers now espousing that these principles become easily promoted when the money flows like water. Well on that note, Dalio again distinguishes himself in writing,

As mentioned, my overriding objective is excellence and constant improvement at Bridgewater. To be clear, it is not to make lots of money. If faced with the choice between pursuing excellence and making lots of money, I’d choose the excellence, though they are integrally tied (not only does this mode of operating often produce financial success, but financial success provides the resources to pursue excellence). Because they are so integrally related, they can easily get confused. I don’t think one can achieve real excellence in order to make money because making money would then be the goal, not excellence. They are two different goals. When faced with the choice, excellence will be cheated. Money doesn’t bring happiness; the pursuit of excellence does.

Those words, my friends, define the very essence of ‘sense on cents’,….I could not have said it better myself!!

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • phil trupp

    Mr. Dalio’s use of hyper-realism applied to economic function and macro investing is a completely new twist on what is essentially an artistic style first defined in 1937. As a school of art, hyper-realistic style is “photographic” in its form, with subjects placed at unexpected or unusual angles. The style attempts to penetrate the surface reality of a photographic rendition to reveal second, third and even fourth dimensions. In literature, Hemingway was a hyper-realistic narrator attempting (often successfully)to achieve a fourth dimension of reality. Applying this concept to economics is entirely new and provocative. The best analysts would do well to delve deeper into Mr. Dalio’s thinking. He is defining a dimension of knowable truth (this obviously is a relative term). In the financial world truth is perhaps the most difficult element to pin down, let alone capture on a macro level. I personally find this fascinating and intellectually adventurous. Mr. Dalio has added a new angle to the study of economics as it relates to human behavior and the movement of markets. He is trying to see what others don’t…or can’t.

  • LD

    Phil,

    Perhaps you and others might enjoy and appreciate,


    Principles by Ray Dalio

  • divvytrader

    Ray also believes gold as an asset class is VERY underowned .

  • kc

    It would be nice to know what triggers Ray uses for change to his AllWeather portfolio. He he still in his ‘Safe Portfolio’?






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