Book Review: Principles: Life and Work

Principles: Life and WorkPrinciples: Life and Work by Ray Dalio

My rating: 5 of 5 stars

Ray Dalio is the founder of Bridgwater Associates, one of the world’s most successful investment firms, with over $150B under management. Dalio himself has a net worth of some $17B. Principles is not, however, a book about investing; instead, it is the codification of Dalio’s beliefs about how best to live life and to structure an organization. Dalio’s mechanistic view is apparent even in the idea for the book; he apparently looks at life as more science than art, and at success as more the logical output of a well-designed machine than the product of brilliance.

The book is divided into three sections, each of which could stand alone. Dalio begins with his autobiography, focusing on his professional successes and failures, rather than his personal life. He is candid about the way in which his own arrogance lead to the near-complete failure of Bridgewater in its relatively early days. (That said, while Dalio espouses humility, he does manage to map his life onto “The Hero’s Journey” as described by Joseph Campbell in The Hero With a Thousand Faces.) Dalio looked for ways to mechanize both his investing decisions and his management practices from the earliest stages of his career. Whether he might say so or not, he is an engineer at heart; he views businesses as machines, seeks out “universal laws” of financial markets, and studies history due to the belief that most things that one encounters have happened before.

The middle section of the book are the “life principles” by which Dalio tries to live his own life, and suggests that others should consider in their own lives. Implicit in his thinking is that people do (and should) have goals which often seem out of reach, and that life is best lived by pursuing those goals. Many of these principles are nothing new; some are so common-sensical that they are easy to dismiss. “Pain + Reflection = Progress” is certainly not a novel thought! But, this section of the book is a pragmatic combination of many of the ideas set forth in Grit (by Angela Duckworth), Thinking, Fast and Slow (by Daniel Kahneman), The Power of Habit: Why We Do What We Do in Life and Business (by Charles Duhigg), and even The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses (by Eric Ries). While those books are more scientific in nature, describing studies that reveal certain aspects of human behavior, Dalio focuses more on providing concrete advice. As such, he provides a convenient, readable manual for those want to achieve difficult things.

There is a metaphysical digression into “evolution” as a moral imperative that I found unnecessary; his points about the pressures of one’s environment and the consequent need to adapt could be made just as well without presenting evolution as a near-spiritual force. Dalio also takes the view that personality is nearly immutable, putting considerable faith in personality testing. From a pragmatic management viewpoint, I agree that most employees who exhibit particular traits do not change those traits — but from a personal viewpoint, I have found that people are able to change their personalities in significant ways. Therefore, readers should be careful not to interpret the principle that “people are wired very differently” as a reason not to adapt themselves in order to reach their goals.

The third section of the book are the “work principles” that Dalio developed over 40 years at Bridgewater. People who have not made personnel decisions, planned budgets, sat on boards, and the like will find this portion of the book somewhere between tedious and incomprehensible. However, those who have (or aspire to) lead will find valuable information. I found it interesting while reading the work principles section that I could identify points in my own career where I had seen particular principles had been violated — almost always with poor results.

There is a certain brutality in Dalio’s principles, in keeping with his idealized view of evolution as a force for good. A lion killing a baby wildebeest is a force for evolution, driving ever-better wildebeest, I suppose, but the killing itself is brutal. Dalio demands that people have the courage to be brutal, in that he asks that people assess themselves honestly (even when they may not like what they see) and that they say what they really think (even when doing so may not be pleasant for others). When one’s objective is to achieve the extraordinary, that brutality is likely necessary — but there are no doubt many who are unwilling to pay the costs. Not all will agree with Dalio’s statement that “terrible is better than mediocre, because terrible at least gives life flavor.”

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Lemon Tree, Very Pretty

The Market for “Lemons” is a seminal economics paper by Nobel Prize winner George Akerlof  about used cars. Imagine that there are only two kinds of used cars: quality used cars and “lemons”, i.e., cars that, despite outward appearances, are in poor condition. Quality cars are worth $2000, but lemons are worth just $1000. Sellers know whether their cars are lemons or non-lemons — but buyers have no way of determining whether a car is a lemon or non-lemon. As a buyer, what would you offer for a given used car?512px-Lemon_with_white_background

You would probably be hesitant to offer significantly more than $1000, since you would regret spending more than $1000 only to find you had bought a lemon. On the other hand, as a seller, you would refuse to sell a non-lemon for a mere $1000, since you know that quality used cars are worth $2000. As a result, due to “information asymmetry”, the only transactions that take place are those involving lemons!

Sometimes, the market for start-ups is a bit like the market for used cars.

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Liquidation Preferences

As shareholders of startups, we all know how it’s supposed to work. We make an investment. The company grows. The company is acquired or goes public. Our initial investment yields a stupendous return.

Let’s do the math! Suppose we invest $25K at a $2.5M valuation. We own 1% of the company. A few years later, it is sold for $100M. We get 1% of $100M = $1M; a remarkable 40x our initial investment. Yay!

But, what if the company is sold for only $1M? Then, we get just 1% of $1M = $10K. Not so good, but it’s not like the math is any different. Right?

Well, that depends. Were there any liquidation preferences?

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