Ray Dalio’s Principles

Ray Dalio is the billionaire founder of the world’s biggest hedge fund, Bridgewater Associates, and was number 124 on the Forbes World’s Billionaires list last year. He has been higher. He worked his way up from golf caddie at the Long Island Country Club in New York in the 1960s, has a self-confessed inability to take instruction, and describes himself as incapable of rote learning. Despite that, he was inspired by ‘ideas’ and attended Harvard Business School, starting his Wall Street career trading commodities, which at the time were a backwater. His claim to fame is that he worked out how to hedge chicken feed prices (corn and soybeans), which allowed McDonald’s major chicken supplier to fix prices, enabling McDonald’s to launch the Chicken McNugget. Yep, it was his fault.

At the age of seventy-five, Ray is now at a stage in his life where he says “he wants to help others be successful rather than to be more successful himself,” and to achieve that, he has written a series of books explaining his concept of Principles. He believes that we would all benefit, as he has, and as his hedge fund clients have, from writing down our Life Principles, Work Principles, and, if you are an investor, your Investment Principles.

Too many people go through life shooting from the hip. But imagine, he says, if Steve Jobs, Albert Einstein, Leonardo da Vinci, Winston Churchill, Alexander the Great, Joan of Arc, Spartacus, Beethoven, Mother Teresa, Harriet Tubman, Rosalind Franklin and the many other visionaries, leaders, heroes, pioneers, and giants in their fields had, through history, taken the time to write down their experiences, reflections, and learnings for the benefit of all. But alas, outside of Marcus Aurelius, they are few and far between.

Ray Dalio didn’t build the world’s most successful hedge fund by shooting from the hip. He did it by developing, testing, and refining a set of clear, rational Principles, and sticking to them. For self-directed investors in Australia, his message is powerful: discover your own principles, write them down, understand yourself, understand others, and constantly reflect on what you have written down, and refine.

One of my bugbears in finance is the brainwashing of the civilian population of investors with investment principles that do not serve them, but serve the investing industry. Things like “buy and hold,” “time in the market not timing the market,” “the market is a voting machine in the short term, a weighing machine in the long term,” and “do not invest in anything for 10 minutes that you would not invest in for 10 years.” Ray Dalio addresses that by saying you need to think for yourself. Don’t adopt principles without your own thought. Many principles employed by others will be inconsistent with your own goals.

DIY investors, if they have one weakness, it is investing without structure. Ray Dalio’s central investment principle is to invest systematically. Build a system. If you shoot from the hip, you make all the classic mistakes. In Dalio’s terms, you will be flying blind, making decisions without a clear map of where you are going or how you’ll get there (if you know where “there” is, which you probably don’t).

Dalio’s Principles isn’t a how-to-invest book. It’s a framework for decision-making, providing a guide in complex situations, like investing. And while Dalio runs a global macro hedge fund, the underlying message is just as useful for an Australian retiree managing their SMSF or a 35-year-old doctor building a share portfolio in their CommSec account.

Here’s a quick outline of how you, an Australian self-directed investor, might begin to apply Dalio’s thinking to build your own investment principles.

1. First Principle – Know Thyself. What sort of investor are you? Decide. Dalio describes this as a basic truth, and you need to be clear with yourself. People are wired differently. Risk tolerance, emotional control, pattern recognition, they all vary. One person thrives in volatility, another panics. One trusts numbers, another stories. Understanding your own temperament is the starting point.

For example, if you need income, decide to do that, and don’t chase speculative small caps. Align your investment strategy with your personal psychological profile. Dalio says you need “radical self-awareness.” It means writing down your core beliefs, not just about markets, but about yourself.

Exercise: Write a one-page statement of your investing personality. Include how you handle risk, what you care about (growth, income, security?), and what mistakes you’ve made before.

2. Second Principle – Systematise Your Thinking. Good decisions are not made on gut feel. They’re made by developing rules, or principles, that guide decisions. That way, you don’t re-think everything from scratch each time. For investors, this means codifying how you approach decisions, what type of stocks you buy, why you buy them, and when you’ll sell. Dalio says some portfolios are a Frankenstein’s monster of thematics, tips, and emotional buys. A system turns ad-hoc trading into a repeatable process. Dalio turned these kinds of principles into algorithms that ran his hedge fund. You don’t need algorithms, but you do need discipline.

Exercise: Create a one-page investment checklist you follow before every buy or sell. Print it out and use it.

3. Third Principle – Embrace Reality, Especially When It Hurts. One of Dalio’s core ideas is “radical acceptance of reality.” Denial is the investor’s deadliest sin. Instead of blaming the market, admit you are wrong and build better rules.

Your version might be realising your strategy isn’t working, and fixing it. “Don’t protect your ego. Protect your capital,” he says. If you make a mistake, review it and revise your process. Don’t blame the market.

4. Fourth Principle – Track, Reflect, Improve. Dalio treats investing as an iterative process. Every trade, win or lose, teaches you something. He logs his decisions and uses them to refine his rules. Most of us do none of this. We remember the wins, forget the losses, and keep repeating the same mistakes. Our investing principles should evolve. But they will only evolve if we review our trades.

He suggests that every month you ask yourself: Did I follow my process? What worked, what didn’t? Do I need to adjust my principles? Over time, this turns investing into a craft, not a gamble. He suggests you keep an investing journal. Log your reasoning, not just your results.

“Investing without principles is like sailing without a compass”. When the wind changes, and it always does, you’re lost. You succeed by being disciplined, self-aware, and brutally honest with yourself.

To do that, the message is simple. Build your own principles. Yours. Write them down. Turn them into a process. Track your performance. And refine, refine, refine, for the rest of your life.