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Ray Dalio built a $150 billion empire on one realization: he was a "dumb shit." After a 1982 market bet left him so broke he couldn't pay his own phone bill, he stopped trying to be "smart" and started building a system to protect himself from his own ego. This is the story of how total failure became the blueprint for the most successful hedge fund in history.
What are the world's biggest investors actually saying right now? And what can we learn from the legends who came before them?
Every episode, we go source-by-source through interviews, reports, and predictions from investors like Cathie Wood, Ray Dalio, and Stanley Druckenmiller—plus deep dives into the timeless lessons from trading legends like Jesse Livermore and Paul Tudor Jones.
No speculation. Just verified quotes, specific predictions, and the strategies behind the world's greatest money minds.
This is Money Men.
Most people who write books about their success, they wanna tell you how smart they are. They wanna show you their trophies, their yachts, their perfect track records. They want you to believe that they have a crystal ball. Ray Dalio does the exact opposite. He opens his life's work, a book that took him decades to refine by calling himself literally a dumb shit.
Josh Stanton:I'm trying to think about the level of ego annihilation required to do just that. This is a man who built Bridgewater Associates from a two bedroom apartment into a firm managing over a 160,000,000,000. He's arguably one of the greatest capital allocators to ever live, but he tells you right out of the gate, before I begin telling you what I think, I want to establish that I'm a dumb shit who doesn't know much relative to what I need to know. And he goes even further where he says, whatever success I've had in life has had more to do with my knowing how to deal with my not knowing than anything I know. And so you can imagine you're a retail trader, you're sitting in front of your desk right now, you need to stop and let that sink in.
Josh Stanton:You probably think your edge is your strategy. You think it's that custom indicator that you bought or your secret source for reading the tape. Dalio is telling you that your edge isn't what you know. It's your approach to truth. It's how you handle the blizzard of situations that he calls it that the market throws at you every single day.
Josh Stanton:See most traders, they fail because they are trying to be right. They want the market to validate their ego essentially. Dalio's entire career is built on the realization that he is probably wrong and therefore he needs a system to survive his own stupidity. He says that without principles, we are forced to react to everything as if we're seeing it for the first time. And that is how you get wrecked.
Josh Stanton:That is how you blow up. He calls his approach a search for fundamental truths. He isn't looking for a vibe or a feeling. He's looking for the recipes for decision making. He says the most important thing he learned was an approach based on principles that helps him find out what is actually true and then determines what to do about it.
Josh Stanton:And this reminds me of Paul Tudor Jones. Jones has that famous quote where he says, don't be a hero. Don't have an ego. Always question yourself and your ability. And he says, the second you feel you are very good, you are dead.
Josh Stanton:Try to ask yourself, why are these titans of industry so obsessed with their own fallibility? It's because they understand the jungle. Dalio says that to have a terrific life, you have to cross a dangerous jungle. You can stay safe on the sidelines and have a mediocre life, or you can risk the crossing. But if you go into that jungle thinking you know everything, the jungle is going to kill you.
Josh Stanton:And Dalio's dumb shit comment isn't false modesty. It's a tactical advantage. By admitting he doesn't know, he opens himself up to radical open mindedness, which we're gonna talk about coming up soon. He starts seeking out the smartest people who disagree with him so he can understand their reasoning. I'm trying to think about that.
Josh Stanton:Instead of looking for people to tell him he's a genius, he actively looks for smart people to tell him why he's wrong. He says, I just want to be right. I don't care if the right answer comes from me. This episode is about that journey. It's about how an ordinary kid from Long Island with a worse than ordinary memory realized that the only way to beat the market was to build a machine that was smarter than his own ego.
Josh Stanton:And we're gonna look at his early luck, his public humiliation in 1982 where he lost everything, and how he eventually found the holy grail of investing. And so if you wanna be a successful trader or investor and generally a better decision maker when it comes to money, you have to stop trying to be the smartest person in the room and start learning how to deal with your not knowing. As Dalio says, the worst thing you can be is a phony. You can't lie to the p and l. The market is the ultimate truth machine.
Josh Stanton:If you wanna understand how a man goes from a two bedroom apartment to managing a $160,000,000,000, you have to look at the transition he made from being a knower to a learner. But before he was the philosopher king of Bridgewater, he was just a kid on Long Island who couldn't remember his own phone number, and that's where this story really begins. You see, Ray, he actually grew up in this middle class Long Island neighborhood, and by the sound of it, it couldn't have been more of an extraordinarily normal upbringing. See, he was the only son of a professional jazz musician and a stay at home mom. But inside that normal house, there was this kid who was fundamentally at odds with the way the world tries to teach us to think.
Josh Stanton:He says, I was an ordinary kid in an ordinary house and a worse than ordinary student. Our DNA gives us our innate strengths and weaknesses. My most obvious weakness was my bad rote memory. I couldn't and still can't remember facts that don't have reasons for being what they are, say phone numbers for example, and I don't like following instructions. At the same time, I was very curious and loved to figure out things for myself, though that was less obvious at the time.
Josh Stanton:And try to think about that for a second. So imagine like you're an investor and you're struggling to find your way. We're taught in school that intelligence is the ability to memorize and repeat, but Ray is telling you that his weakness, which is his inability to just follow instructions, was actually his greatest gift. This reminds me of Jesse Livermore who ran away from home at 14 because he couldn't stand the life laid out for him. But where Livermore's unstable upbringing led to an unstable life, Ray had a father who was a hard worker.
Josh Stanton:He was a guy that fought in World War two and the Korean War. He also had a mother who cared deeply for him. He had a stable baseline essentially, and and even if he was a rebel in the classroom. You see, he hated school because he wasn't interested in most of the things his teachers thought were important. He says, when I didn't want to do something, I would fight it.
Josh Stanton:And when I was excited about something, nothing could hold me back. For example, while I resisted doing chores at home, I eagerly did them outside the house to earn money. I don't remember my parents encouraging me to do these jobs, so I can't say how I came by them, but I do know that having those jobs and having some money to handle independently in those early years taught me many valuable lessons I wouldn't have learned in school or at play. And this is a massive point. You see, if you're looking to get better with your finances, you have to realize that the lessons don't come from a textbook or listen in this podcast even.
Josh Stanton:They come from having the skin in the game, actually investing versus saying you're going to. They come from the independence of handling your own capital. Ray gets his first real taste of the game at 12 years old. He's cadding a local golf course called the Lynx, and it's the nineteen sixties. And so The US economy is an absolute juggernaut at this point.
Josh Stanton:It's accounting for about 40% of the world's economy, and everyone on that golf course is talking about the stock market because everyone is making money. And so he takes his caddy money, and he buys Northeast Airlines. He didn't have a strategy. He says, I figured the more shares I bought, the more money I would make. So I think each share was like $5, so he could buy a lot.
Josh Stanton:He eventually just got lucky because the airline was going broke, but it got acquired, and so he ended up tripling his money. Now most people would take that win and think that we're a genius. But Ray, he realized something deeper. He realized that to truly win, you have to be comfortable making decisions independently. And he says, I've always been an independent thinker inclined to take risks in search of rewards, not just in the markets, but in most everything.
Josh Stanton:I also feared boredom and mediocrity much more than I feared failure. For me, great is better than terrible, and terrible is better than mediocre because terrible at least gives life flavor. And that is the mindset we all need to have. Right? Mediocrity is the enemy.
Josh Stanton:He realized that to make real money, you need to be an independent thinker who bets against the consensus and is right. Why? Because the consensus view is already baked into the price, and this reminds me of Paul Tudor Jones. He was a sportsman. He was this adrenaline junkie, and someone told him one day, he said, if you like the adrenaline you get from sports, then I'll show you a game that is the most exciting, the most challenging in the world.
Josh Stanton:And of course, that person was talking about becoming a trader and was the conversation that eventually sent him on his career path. See Ray, you can tell was also hooked on that stimulation, not just the money. He was cutting school to go surfing and trading stocks in his senior year of high school. He thought that he had the world figured out, but 1966 was the stock market's top and almost everything he thought he knew was about to be proven wrong. Okay.
Josh Stanton:So moving into 1967, Ray ends up graduating high school with just a C average, and he manages to get into a local college. And for the first time, he actually starts to excel because he's finally allowed to learn about things that actually interest him rather than than just following a curriculum essentially. So he majors in finance simply because of his love for the markets, but by this period where the world starts to change and Ray gets a front row seat to the fact that the present is rarely a reliable guide for the future. He says, in 1966, asset prices reflected investors' optimism about the future, but between 1967 and 1979, bad economic surprises led to big and unexpected price declines. Living through that taught me that while almost everyone expects the future to be a slightly modified version of the present, it is usually very different.
Josh Stanton:And so imagine you're a long term investor today, and you have to realize that most people, they are biased by their recent experiences. And we've seen markets fall in 2020 or in early twenty twenty four only to be followed by immediate swings to the upside. We become conditioned to believe that the dip will always be bought. But Ray, see, was learning a harder lesson. I gradually learned that prices reflect people's expectations, so they go up when actual results are better than expected, and they go down when they are worse than expected.
Josh Stanton:This leads us to 08/15/1979, and this is one of the most important dates in financial history. President Nixon goes on TV and announces that The US will move off the gold standard. Ray is a clerk on the floor of the New York Stock Exchange at the time, and he's listening to the news with amazement. See, he hears the government officials promising not to devalue the dollar, and then he watches Nixon do the exact opposite. And Ray says, instead of addressing the fundamental problems behind the pressure on the dollar, he continued to blame speculators crafting his words to make it sound like he was moving to support the dollar while his actions were doing just the opposite, floating it as Nixon was doing, and then letting it sink like a stone looked a lot like a lie to me.
Josh Stanton:Over the decades since I've repeatedly seen policymakers deliver such assurances immediately before currency devaluation. So I learned not to believe government policymakers when they assure you that they won't let a currency devaluation happen. For anyone looking to get better with their finances, for example, this is like a wake up moment when it comes to the government and central banks. You see, you shouldn't do as they say. You should do as they do.
Josh Stanton:And Ray expected the market to go into a tailspin on Monday morning because of this devaluation. He walked into the floor expecting pandemonium, and there was pandemonium, but not the kind he expected. Instead of falling, the stock market jumped 4%, and he was totally blindsided by it. He realized his failure to anticipate this was because he was being surprised by something that hadn't happened in his lifetime, even though it had happened many times before in history. He spent the rest of that summer studying past currency devaluations.
Josh Stanton:He realized that when a currency breaks its link to gold and devalues, the stock market often soars because money is being printed and the value of paper is dropping relative to the assets. And this led to one of his most important principles, which is you better make sense of what happened to other people in other times and other places, because if you don't, you won't know if these things can happen to you. And if they do, you won't know how to deal with them. And this kind of reminds me of Stanley Druckenmiller, who famously said that he doesn't just look at the current economy. He looks at the liquidity and the narrative history of how markets reacted to similar shifts in the past.
Josh Stanton:And Dalio was realizing that if you don't study the beautiful machine of cause and effect throughout history, you are just gambling on the present. So after seeing the truth behind the 1971 devaluation, Ray heads to Harvard Business School. And for most people, Harvard is about the prestige. But for Ray, it was actually about case studies and the actual practical application of how things work in the real world. He was never a man of theory.
Josh Stanton:He was always a man of the beautiful machine as he calls it. While everyone else at Harvard was looking at the nifty 50, the the 50 blue chip stocks that were supposedly short bets at the time, Ray went the other way. He took a summer job at Merrill Lynch in the commodities department. At the time, this was absolutely unheard of. He says, up until then, as far as I know, no Harvard Business School student had ever worked in commodity futures anywhere.
Josh Stanton:So why commodities? It's because he was looking for reality. He found that stocks could stay high or low forever because of the greater fools theory, but commodities eventually end up on a meat counter where the price has to reflect what people will actually pay. And this is a massive lesson for anyone managing their own finances. When everybody thinks the same thing such as, you know, what a sure bet was like with a nifty 50, it is almost certainly reflected in the price, and betting on it is probably going to be a mistake.
Josh Stanton:This period is where Ray experiences what he calls the electric shock of the market. So he gets into a trade in pork bellies that goes limit down every morning. So if you've never been in a limit down market, imagine watching your net worth just completely vanish and being physically unable to sell. He recalls it in Market Wizards, Jack Schwager's book, which I highly recommend you read, says each morning on the opening I would see and hear the market click down 200 points. The daily limit stay unchanged at that price and know that I had lost that much more with the with the amount of potential additional losses still undefined.
Josh Stanton:It was horrendous pain, but it pounded an indelible lesson into his head. In trading, you have to be defensive and aggressive at the same time. If you are not aggressive, you are not going to make money. And if you are not defensive, you are not going to keep money. This is the duality that we're thinking about here.
Josh Stanton:You need the audacity to play, but the humility to survive. And this reminds me actually of Paul Tudor Jones' story as well, who had a nearly identical experience in the wheat markets where he lost 60% of his equity in a single move. And Jones says that the second you feel you are very good, and we've said this before, you are dead. I try to keep that in mind as much as possible. Both men realize that the market is like electricity.
Josh Stanton:It can power your life, but if you don't respect it, it will kill you. Ray eventually gets fired for being too wild. This is really crazy story. Some reason he ends up hiring this stripper for this lecture that he was hosting for his company, and he punched his boss actually in the face as well. And you know at this time it sounds like it was the end of his career, but really it was just the start of Bridgewater Associates.
Josh Stanton:And he he started in 1975 out of his two bedroom apartment. He didn't have a master plan to build the world's largest hedge fund at the time, of course. He just wanted to trade with his friends. He says, as long as my basic living expenses were covered, I knew I'd be happy. While making money was good, having meaningful work and meaningful relationships, you should hear him say this over and over again, meaningful work, meaningful relationships was far better.
Josh Stanton:It's smarter to start with what you really want, which are your real goals, and then work back to what you need to attain them. So if you're a retail investor, for example, you just need to ask yourself, what is the actual goal? What is my actual goal? Money is just a tool. So for Ray, the tool was used to build models.
Josh Stanton:He became obsessive. He would figure out exactly how many chickens were being fed, how much grain they ate, and how fast they gained weight just to project the timing of meat production. He saw the whole world as a beautiful machine with logical cause effect relationships, but even with his handheld Hewlett Packard calculator at the time and his colored pencils, he still got whacked. He remembers a I can't lose bet that cost him a $100,000, most of his net worth at the time actually. It hammered home the point that there are always risks out there that can hurt you badly, even in the seemingly safest bets.
Josh Stanton:So it's always best to assume you're missing something. And this brings us to what Ray calls the abyss in his book. So it's 1982, and after a decade of studying the beautiful machine, Ray thinks he has finally cracked the code of global macroeconomics. He sees a massive debt crisis brewing. He looks at the world and sees only two outcomes.
Josh Stanton:Either The US sinks into a massive depression or it prints so much money that it triggers hyperinflation. Ray is totally confident in this view that he goes completely public with it. He's on TV, he's in the papers, and he's telling everyone who will listen that a soft landing is impossible. He said, I had been a wildly overconfident arrogant jerk who was totally confident in a totally incorrect view. And because he was dead wrong, instead of a depression, the Fed eased interest rates, the dollar drove up, and the economy fueled a massive boom after that.
Josh Stanton:And being so wrong and doing it so publicly as well, it cost him everything. He says, at one point, I'd lost so much money I couldn't afford to pay the people who worked with me. One by one, I had to let them go. Bridgewater was now down to just one employee, me. He was so broke that he had to borrow $4,000 from his father just to pay his family bills.
Josh Stanton:And this is a man with a Harvard MBA and years and years of experience as well standing at a fork in the road. He has a wife and two young children to support as well. He has to decide, does he put on a tie and take a real job on Wall Street, or does he keep trying to cross the jungle? And this reminds me of a quote from the legendary financier Bernard Baruch that Ray reflects on during this dark period. He says, if you are ready to give up everything else and study the whole history and background of the market, if you can do all that, and in addition you have the cool nerves of a gambler, the sixth sense of a clairvoyant, and the courage of a lion, you have a ghost of a chance.
Josh Stanton:And Ray realized that if he was going to keep going, he had to look at himself objectively and change his entire mindset. He says, I learned a great fear of being wrong that shifted my mindset from thinking I'm right to asking myself, how do I know I'm right? He realized that the best way to answer that was to find independent thinkers who disagreed with him so he could understand their reasoning. He didn't care if the right answer came from him. He just wanted to be right.
Josh Stanton:So what he ends up doing is he ends up developing this four step process to survive the jungle. The first step is to seek out the smartest people who disagree with you. The second step is to know when not to have an opinion. The third step is to develop test and systematize timeless principles. And the final step is to balance risk in ways that keeps the upside while reducing the downside.
Josh Stanton:And this medicine was awful tasting, of course, but Ray says it was exactly what he needed. It forced him to build Bridgewater as an idea meritocracy, which is it is today, where the best ideas win regardless of who they come from. It led him to his holy grail, which we'll talk about coming up soon, finding 15 to 20 uncorrelated return streams to reduce risk without reducing returns. So if you're an investor, and you have to realize that you will eventually hit your own abyss as well, and maybe you already have. Okay?
Josh Stanton:You will crash and it will hurt a lot, but the most important thing you can do is gather the lessons from that failure and gain the humility to start asking how do I know I'm right? Instead of assuming that you are. So after the 1982 crash Ray enters what he calls his road of trials. He is so broke at this point that he can't even afford an airline ticket to visit a prospective client in Texas. And think about the level of psychological grit required here.
Josh Stanton:You've just been publicly humiliated on national television. You're borrowing money from your father to pay the mortgage, and you have to walk into a room and convince institutional giants to trust you with their capital again, which is just crazy to think about. But Ray didn't just try to sell the same old product, he had a new weapon: computers. He realized that to survive the jungle, he needed a machine that could hold all the world's facts and mathematically express the relationships between them. He started a habit that every trader investor should actually copy.
Josh Stanton:He wrote down his decision making criteria every single time he took a position. So essentially he's journaling here. He says, then when I would close out a trade, I could reflect on how well those criteria had worked. It occurred to me that if I wrote those criteria into formulas, now more fashionably called algorithms, and then ran historical data through them, I could test how well my rules would have worked in the past. And this reminds me again of Paul Tudor Jones during the lead up to the nineteen eighty seven crash where Jones was famously looking at historical patterns.
Josh Stanton:He was overlaying the 1929 charts onto the nineteen eighties market to predict the collapse. Dalio was doing the same thing, but he was trying to systematize it into a repeatable process that took the human out of the equation, and that's really at the core Dalio's principle or main principle right there. Ray's ultimate goal was what he called the holy grail of investing, which was a way to get outside returns with almost zero risk. He hired a math genius named Brian Gold and asked him to create a chart showing what happens to a portfolio volatility as you add uncorrelated investments. And he describes this realization.
Josh Stanton:It's like a bolt of lightning is what he said. He says this. Ready? He says, that simple chart struck me with the same force I imagined Einstein must have felt when he discovered e equals m c squared. I saw that with 15 to 20 good uncorrelated return streams, I could dramatically reduce my risk without reducing my expected returns.
Josh Stanton:This is a total masterclass for the retail investor. See, most people think they are diversified because they own 10 different tech stocks. Right? But if those stocks are all 60% correlated, you aren't actually diversified. You're just concentrated in a different way, and Dalio realized that by finding 15 to 20 things that zig when others zag, he could improve his return to risk ratio by a factor of five, which is insane.
Josh Stanton:This philosophy then led to the creation of Pure Alpha, which is Bridgewater's flagship fund. And since 1991, it's had an average return rate of 11 to 13% annually with only four down years in over three decades. So for the average trader, 12% might not sound that sexy. Right? But you have to look at the drawdowns as well over those thirty years.
Josh Stanton:Years. So in 2008 when the S and P was down 37%, pure alpha was up 9.4%. Dalio had finally built a machine that could survive his own not knowing. He had turned his decision making criteria into recipes. He learned that making a handful of good uncorrelated bets that are balanced and leveraged well is the surest way of having a lot of upside without being exposed to unacceptable downside.
Josh Stanton:So as Bridgewater begins to scale, Ray hits a wall that isn't about markets, but it's actually about people. He realizes that his drive for radical truth is creating what he calls an intractable people problem. He receives a memo from his top lieutenants, Bob, Giselle, and Dan, that is really a a huge brutal wake up call. It tells him that he makes employees feel incompetent, unnecessary, humiliated, overwhelmed, belittled, oppressed, or otherwise bad is what the actual quote said. If you just think about this from the perspective of a trader or a leader, you think you're being efficient, but they think you're being a tyrant.
Josh Stanton:And Ray is faced with a choice. He can either stop being so honest to keep people happy, or he can keep being honest and watch his culture crumble. And this is true to form. Ray asked this question, how could it be possible to have both? He realizes the problem is that people don't understand the why behind his directness.
Josh Stanton:This leads to the creation of the work principles in his book and his theory of the two yous. He learns from neuroscientists and psychologists that there is a constant battle inside our heads. There is the upper level logical you that knows feedback is good, and the lower level emotional you that views feedback as a literal attack. And Ray says, while the logical part of people's brains could easily understand that knowing one's weaknesses is a good thing because it's the first step towards getting around them, the emotional part typically hates it. And to solve this, he creates what he calls the error log.
Josh Stanton:And one of his traders, Ross, forgets to put in a trade one day, and the money just sits in cash, which is a massive costly mistake. So instead of firing Ross, which Ray notes would only encourage people to hide their mistakes, or continue to hide their mistakes, they build a system to bring problems and disagreements to the surface. And the rule was simple: if something went badly, you had to put it in the log, characterize its severity, and make clear who was responsible for it. If a mistake happened and you logged it, you were okay. If you didn't log it, you would be in deep trouble.
Josh Stanton:This is the ultimate lesson for say the retail trader out there. Your trading journal shouldn't just be a list of wins and losses. It needs to also be this error log for your psychology as well. You have to be able to look at your own lower level emotional mistakes without your ego getting in the way. And Ray takes this even further and creates baseball cards for his employees.
Josh Stanton:And just like you wouldn't have a great fielder with a low batting average bat third, you wouldn't assign a big picture person a task requiring intense detail. He turned his entire staff into a system of believability weighted decision making. He says, I came to see that people's greatest weaknesses are the flip sides of their greatest strengths. Most are too much one way and not enough other. If you know you're a naturally fear based trader, you have to create a system that forces you to act against your instinct to cut profits too early.
Josh Stanton:You have to use your upper level you to design a machine that manages your lower level you. So by 1995 Ray has gone from being a one man show in an abyss to having 42 employees and over $4,000,000,000 under management. And he realizes that maturity is the ability to reject good alternatives in order to pursue even better ones. He wasn't just trading anymore. He was building an organization that could survive the jungle long after he was gone.
Josh Stanton:So as we move into the late nineties and the turn of the millennium, Ray enters a phase he calls the ultimate boon, and this is the period between 1995 and and 2010 where the machine he built starts to outthink even its creator. And at this point, Bridgewater is expanding rapidly, but Ray isn't just looking for growth. He's looking for immortality for his ideas. He realizes that to protect his family's wealth long after he's gone, he has to create a mix of assets that can survive any economic environment. He looks back at his decades of experience and identifies that no matter what asset you hold, there will come a time when it loses most of its value.
Josh Stanton:And this is the cold hard truth for any long term investor. There is no permanent safe haven in a single asset. Ray boiled the entire global economy down into two big forces at this point, which was growth and inflation. Those are the two things he looks at, growth and inflation. Each of those can either be rising or falling.
Josh Stanton:That gives you four distinct environments or seasons as he calls it, which is firstly, rising growth and rising inflation. Second season is rising growth with falling inflation, then it's falling growth with rising inflation, and then falling growth with falling inflation. He realized that by finding four different investment strategies, one for each of these quadrants, he could build a portfolio that was balanced to do well over time while being protected against unacceptable losses. He calls this the all weather portfolio, and he didn't build this to sell it to the public. He actually built it for his own family trust, but the logic was so sound that once other investors actually caught wind of it, it grew into a fund managing nearly $80,000,000,000.
Josh Stanton:And this is the transition from trader to engineer that he starts to take. He wasn't trying to predict which quadrant we were in. He was building a machine that didn't care which quadrant we were in, but systematizing the money was only half the battle. He also had to systematize the people because Bridgewater was run as this idea of meritocracy. Ray made a radical decision.
Josh Stanton:Every meeting had to be recorded. So he hired a team of video editors to take the most important moments of these meetings and turn them into virtual reality case studies. He wanted new employees to see the DNA of a decision, not just the result. He says these tapes allow people to better appreciate the logic of coworkers they once wanted to strangle. This was the thing that led him to create these baseball cards for his employees, and he started psychoanalyzing everyone and listing their stats, which essentially their strengths and their weaknesses.
Josh Stanton:He listed them on a card that was passed around the office so everyone could have get access to it. He says, just as you wouldn't have a great filter with a one sixty batting average bat third, you wouldn't assign a big picture person a task requiring attention to details. For the retail trader or the independent investor, this is actually a massive takeaway. You have to be honest about your own baseball card. If you are a big picture person, you might be great at spotting the macro trend, but you're probably terrible at the minute details of risk management or position sizing.
Josh Stanton:Ray's philosophy is that you shouldn't try to change your nature. You should build a system that compensates for it. He realized that most people are too much one way and not enough another, and it's because of how our brains are wired. He calls this the two yous, and there's this upper level logical you that the lower level emotional you doesn't understand, and so they're in constant fight for control. The logical you knows that knowing your weaknesses is the only way to get better, but the emotional you views this as a humiliation, as he calls it.
Josh Stanton:Ray's success in this period, which is navigating the .com bubble and the two thousand eight crisis, wasn't because he was smarter than everyone else. It was because he had built a meritocratic scoring algorithm that allowed the best ideas to win regardless of whose ego was attached to them. And so by 2010, Ray had reached the end of the road of trials, as he calls it. And he'd gone from being a dumb shit alone in an office to being the architect of a machine that could survive the jungle without him entirely. And so as he reflects on this entire journey, he leaves us with one of the most powerful insights for everyone pushing for success, which is this.
Josh Stanton:I saw that to do exceptionally well, you have to push your limits and that if you push your limits, you will crash and it will hurt a lot. Believe it or not, your pain will fade and you will have many other opportunities ahead of you. And so we really have to think about this and try to understand what is the lesson that Ray is talking about here. So the lesson is that the pain of the crash isn't the end. It's the tuition you pay to get to the next level.
Josh Stanton:So moving from the wreckage of the nineteen eighty two crash to the high stakes table of global policy, Ray didn't just rebuild his bank account. He built his entire understanding of how history repeats itself. He realized that the jungle isn't just a metaphor for the market. It's actually a cycle of debt and human behavior that is predictable as the seasons if you have the right map. So between 1982 and the mid two thousands, Ray becomes a scholar of catastrophe.
Josh Stanton:He researched and traded through the Latin American debt crisis, the Japanese blowout in the nineties, and the dot com bubble. But as he looked at the mid two thousands, he saw a monster looming that others were absolutely ignoring. He took history's books and old newspapers and went day by day through the Great Depression and the Weimar Republic. He was comparing the now to the then, and the results were absolutely terrifying. He says, the exercise only confirms my worst fears.
Josh Stanton:It seemed inevitable to me that large numbers of individuals, companies, and banks were about to have serious debt problems and that the Federal Reserve couldn't lower interest rates to cushion the blow as was the case in 1930 to 1932. This is where the independent thinker gets tested at this stage. Ray went to Washington, so he spoke to the treasury and the White House. Most of them politely dismissed him because the economy seemed to be booming at the time. And it reminds me of the famous Cassandra in Greek mythology, cursed to see the future but never to be believed.
Josh Stanton:But Ray had something Cassandra didn't, which was a system to protect himself whether he was right or wrong. So we met with Tim Geithner, the president of the New York Fed, and walked him through the numbers. And Ray notes that Geithner literally turned white. When Gartner asked where he got the data, Ray told him it was all public. Bridgewater had simply looked at the world in a different way, and so two days later, Bear Stearns absolutely collapsed.
Josh Stanton:And when the smoke cleared in 2008, the world's most prestigious models had completely failed. Alan Greenspan admitted the Fed model and the IMF model failed. Why? Because they didn't account for a financial sector meltdown, but Bridgewater's flagship fund made over 14% in 2008, while others lost 30% or more. And Ray's reflection on this is a masterclass in risk management.
Josh Stanton:He said, we would have done even better had we not feared being wrong, which led us to balance our bets instead of arrogantly and foolishly putting more chips at stake. While in this case, we would have made more money if we were less balanced, we certainly wouldn't have survived and succeeded long enough to be in such a position if we'd approached our investments in that way. And so the returns in 2,010 were even more staggering, nearly 4528% in his pure alpha funds. And Ray is honest about this cause. It wasn't his brain.
Josh Stanton:It was the systems. He says managing money without these algorithms would be like reading a map instead of following a GPS. But as the money poured in, which was so much that they had to return $15,000,000,000 to clients to avoid killing the goose that lay the golden eggs, as he called it, Ray hit the tall poppy syndrome. And so in Australia, they say the tall poppy gets its head whacked off, which is where I'm from, by the way. The media started calling him a superhero or a cult leader, and this is what drove him to go public.
Josh Stanton:He realized that by hiding, he was letting others defend him, and so in late two thousand ten, he published his principles online for free. It wasn't a marketing ploy. It was a defense of his culture, and so finally, he faced the ultimate transition, which was preparing Bridgewater to succeed without him. He had always hired adventurous types who would dive into challenges, but he recognized the massive emotional barriers people have to looking at their own weaknesses. And he notes that joining Bridgewater is like joining an intellectual Navy SEALs, as he calls it.
Josh Stanton:It takes eighteen to twenty four months for people to get comfortable with the truth. And so at 60 years old, and which is after thirty five years of running the firm, Ray decided to step back as CEO to suck the marrow out of life, as he says. He wanted to spend time on ocean exploration, philanthropy, and his family, and he knew that the proof of his life work wouldn't be in the 14% or the 45% returns. It would be in whether the machine he built could keep running when the dumb shit, as he calls himself, who built it finally stepped away. Ray Dalio spent thirty five years in the jungle, and by 2011, he's 60 years old.
Josh Stanton:He's at the absolute top of the food chain, but he realizes he's facing the one enemy you can't out trade and you can't out think, which is time. He looks at his life and he realizes there's a pattern. This is something essentially all the greats look at, which is the unifying code of how reality works. This is what I'm trying to understand here. Ray breaks life down into three distinct movements.
Josh Stanton:And if you're listening to this, you're probably in the middle of the second one if I had to guess. He says, in the first, we are dependent on others and we learn. In the second, others depend on us and we work. And in the third and last, when others no longer depend on us and we no longer have to work, we are free to savor life. Ray realized he was stuck in phase two, and he was the most successful worker in the world, but he was a slave to his own machine.
Josh Stanton:This is the part that really jumped out at me. Ray looked at Bridgewater, which is the greatest hedge fund on the planet at the time and still is, and he didn't see a legacy. He saw a key man risk. Think about the ego it takes to admit that, or at least the lack of ego. Most founders want to be the hero.
Josh Stanton:They want the firm to collapse the second they leave because it proves how great they were. Not Ray. He says the whole point of this final stage was to see the people I cared about be successful without me. He didn't want to be needed. He says, I didn't want to be needed in either role because of the key man risk that would create for the company.
Josh Stanton:He looks at Bill Gates leaving Microsoft in 2008, and he sees a mess. He sees that the founder led companies with unique cultures usually die when the founder walks out the door. So what does he do at this point? He goes back to the books. He studies Lee Kuan Yew, the man who built Singapore from a swamp into a first world superpower.
Josh Stanton:And he sees that Lee Kuan Yew didn't just quit. He became a mentor. Ray decides, that meant I would either not speak at all or speak last, but always be available to provide advice. But here's the most Ray Dalio thing in the whole book. He admits he doesn't know how to retire.
Josh Stanton:He says, I do things through trial and error, making mistakes, figuring out what I did wrong, coming up with new principles, and finally succeeding, and I didn't see why my transition should be any different. He's literally going to AB test his own retirement, and so he tells his clients, look. This is a ten year plan. He's 60 years old, and he's telling people he might not be fully out until he's 70. And why?
Josh Stanton:Why does he do that? It's because he knows that if he just declares victory and walks away, the machine may break. And he's betting everything on the idea that his principles essentially are more valuable than his personality. So Ray realizes that the biggest problem with his succession isn't the money or the markets, it's the human hardware. He's trying to find someone to replace him, but he realizes he he doesn't even know what he is in terms of a machine.
Josh Stanton:And so he looks at the successes and identifies what he calls the Ray gap. And this is such a great founder's move. He's treating his own personality like a missing part in the engine. To fill the gap, he starts studying a specific breed of human he calls the shaper, We're gonna be talking a lot about this, by the way. Listen to how he defines this.
Josh Stanton:He says, A shaper is someone who comes up with unique and valuable visions and builds them out beautifully, typically over the doubts and opposition of others. Ray starts looking at the great founders of the world. He's looking at Steve Jobs. He's looking at Elon Musk and Jeff Bezos and, of course, Lee Kuan Yew, who he mentioned before. He even looks at Einstein and Da Vinci, and he's looking for the archetype, essentially.
Josh Stanton:And so when Steve Jobs dies in 2011, Ray reads Walter Isaacman's biography, and it hits him like a lightning bolt. He sees the parallels. Both of them started in a tiny room. Both were rebellious independent thinkers. Both were meditators, and both were, let's be honest, notoriously tough on people.
Josh Stanton:But Ray notices a floor in Jobs. See, Jobs didn't leave the recipe, and Ray says, I wish Jobs had shared the principles he had used to achieve his goals. Ray realizes that if he wanted to be a great founder, he can't just leave great results. He has to leave the code as well. And so what does he do?
Josh Stanton:He gets on the phone, he calls Elon Musk, Bill Gates, Jack Dorsey, Reed Hastings even. He literally asked these titans to sit down for an hour and take a personality test, and he wants the statistically measurable evidence, which sounds so ray, by the way, of why they are the way they are, and he finds three things that you need to write down right now as you're listening to it. The first is the wide angle lens. And so these guys see the big picture and the granular detail as well at the exact same time. He talks about Elon Musk showing him Tesla for the very first time.
Josh Stanton:Musk is talking about the planetary survival of the human race and the design of the key fob in the same breath, literally. Most people can only do one or the other. Shapers do both. Second is audacity over expertise. So when Ray asked Musk how he started SpaceX, Musk told him he didn't know anything about rockers.
Josh Stanton:He just started reading books. He was willing to spend $90,000,000 of his own money just to inspire people to go to Mars. That is a shaper logic right there as well. And then finally is the concern of others paradox, and this is the part that will, I think, kinda blow your mind as it did with me. On these personality tests, every single one of these guys, including the big philanthropists like Bill Gates and Mohammed Yunus, scored low on concern for others, which is super weird.
Josh Stanton:Now does that mean they're bad people? The answer is no, and Ray explains it like this. When faced with a choice between achieving their goal or pleasing or essentially or just not disappointing other people, they would choose achieving their goal every single time. You see, the reason why is because they are mission obsessed. They view the gap between what is and what could be as a tragedy that they have to fix, and they won't let anyone's feelings get in the way of that.
Josh Stanton:And Ray realized that Bridgewater didn't need more managers, it needed shapers. And if he couldn't find them, he was going to have to build a machine that could essentially create them. So by 2012, Ray Dalio realized he was running a house divided. On 1 Floor of Bridgewater, he had the investment engine, which is a world class algorithmic machine that processed market data with zero emotional bias. But in the other floor, the management engine was sputtering, still run by people using gut feelings and avoiding tough conversations.
Josh Stanton:So for the retail investor or the entrepreneur, this is a massive lesson that we have to think about, which is this. Your financial life or your business will only be as good as the systems you put into place to manage it. And Ray wrote a memo to his team, was titled The Path Out Systematizing Good Management, where he laid out the problem with brutal clarity. He said, it is now clear to me that the main difference behind why the investment management part of Bridgewater is likely to continue to do well and most of the other parts of Bridgewater are unlikely to do well is that the decision making processes for investment management have been so systematized that it's hard for people to screw them up because they are largely followed by systems instructions essentially. While the other areas of Bridgewater are much more dependent on the quality of the people and their decision making.
Josh Stanton:And so he challenged his leadership to imagine a world where management was as precise as trading, and he asked them, imagine how Bridgewater's investment decision making would work if it operated the same as Bridgewater's management decision making, I e, dependent on the people we hired and how they collectively made decisions on their own. It would be an absolute mess is what he said. Ray's big insight for anyone looking to get better with money is that a principle is just a nice sentiment until you turn it into a decision rule. And I love that terminology, a decision rule. He decided that if a computer could identify a debt cycle, a computer could also identify a Ray gap or essentially a talent mismatch.
Josh Stanton:He believed that because computers don't have personal bias or emotional barriers, they could connect the dots on people's behavior more efficiently than any human could. And so here's what he did. He began building what he called the GPS for humans. The first major tool was the dot collector. So in every meeting, employees use the app to rate each other's thinking in real time.
Josh Stanton:This tool builds what Ray calls a pointless picture of a person aggregating thousands of data points to show them who they actually are, not who they think they are. Next, he created these baseball cards, which we already mentioned, for every employee to display their believability and specific traits. You see, Ray explained the logic behind these tools as a way to find fairness in a high stakes environment. He says this, when everyone can see the criteria the algorithms use and have a hand in developing them, they can all agree that the system is fair and trust the computer to look at the evidence and make the right assessments about people and assign them the right authorities. The algorithms are essentially principles in action on a continuous basis.
Josh Stanton:And so finally, he created, and this one actually I think is probably my favorite, he created this thing called the pain button to ensure that mistakes, whether in management or in a trade, weren't wasted. So Ray's core formula was pain plus reflection equals progress. Say this again, pain plus reflection equals progress. He described the goal of these tools as a way to build both the habits and the mindsets required for financial mastery. He said, all these tools reinforce good habits and good thinking.
Josh Stanton:The good habits come from thinking repeatedly in a principled way, like learning to speak a language. The good thinking comes from exploring the reasoning behind the principles. So by systematizing management, Ray was doing the one thing a founder must do to survive. He was making himself obsolete. He was building a machine that could think, judge, and act even when he wasn't in the room.
Josh Stanton:So now it's 2010, and while most retail investors were still reacting to the news, Ray Dalio and his team at Bridgewater were looking at a massive debt crisis emerging in Southern Europe. For Ray, this wasn't just a news headline. It was a mechanical failure in the economic machine. He approached the crisis as a doctor would a patient, focusing on what he calls economic physiology, which is very interesting term, by the way. He wrote, just as all human bodies work in essentially the same way, so do economic machines in different countries.
Josh Stanton:And just as a physical disease infects people without regard to nationality, so do economic diseases. So while the policymakers were at first skeptical, I approached my conversations with them by looking at the physiology of the case at hand. I would diagnose the economic disease they were suffering from and show them how its symptoms progress by referencing prior analogous cases. And while policymakers in the European Union were holding closed door meetings and trying to increase confidence essentially in their economies. Ray was looking at the cold hard math of the balance sheet.
Josh Stanton:He knew that if specific buyers didn't have enough money and credit to buy the debt they had to be sold, confidence was absolutely irrelevant. He saw that the leaders in charge had an oversimplified academic view of the markets. This is what he observed, ready? He said, their understandings of how markets and economies work were oversimplified like those of academics. For example, they looked at investors as a single thing they called the market, rather than an amalgam of different players who bought and sold for different reasons.
Josh Stanton:They didn't see that whether they were confident or not, specific buyers didn't have enough money and credit to buy all the debt that had to be sold. Then Ray goes on and he identifies that there's these two heroes from this period who were willing to look past the politics and deal with the reality of the machine. One was Luis de Guindos, Spain's minister of economy. Ray describes meeting him after a night of brutal negotiations. He says this, my meetings with minister de Guindos took place the morning after the first and most difficult of these negotiations.
Josh Stanton:With bloodshot eyes but a very alert mind, he patiently and forthrightly answered all my difficult questions. He never got the praise he deserved, but he didn't care because his satisfaction came from seeing the results he produced. To me, that is a hero. And the second was and please excuse me if I say this incorrectly. The second was Mario Draghi, president of the European Central Bank.
Josh Stanton:When the euro was on the brink of collapse, Draghi made the bold decision to buy bonds. Ray met with Draghi and the ECB board to argue that they needed to go further and print money to push it into the system via quantitative easing. Ray saw this not as a political choice, but as an obvious and necessary mechanical fix. And so for the retail investor, the lesson here is actually quite profound. The world is full of people who operate on ideology and hope, but the winners are those who understand the cause effect relationships on the machine.
Josh Stanton:And Ray realized that if he wanted to help more people, he couldn't just advise central bankers. He had to teach the world the basics. He wrote, it occurred to me that the world needed a simple explanation of how the economic machine works because if everyone understood the basics, then economic policymakers would be able to do the right things a lot faster and with less angst in the future. That led me to make a 30 video, which is how the economic machine works, which I released in 2013. By the way, I'm gonna put this in the show notes.
Josh Stanton:You can actually go check it out on YouTube. The video became a global phenomenon. It was watched by over 5,000,000 people, and Ray had moved from being a tall puppy hedge fund manager to a teacher finally, providing a template for how every person can assess their own economy and their own financial life as well. So as he starts to reach the final stages of his career, he realized his life was following a pattern documented for thousands of years. In 2014, his son Paul introduced him to Joseph Campbell's The Hero with a Thousand Faces.
Josh Stanton:Ray found that Campbell's description of the hero's journey perfectly mirrored the path of a shaper. He wrote, reading Campbell, I saw that heroes like shapers are real people. Typically, not all it's cracked up to be. They get beat up a lot and many are attacked, humiliated, or even killed after triumph. While the hero's journey captured the essence of my journey, hero is not a word that I would use to describe myself.
Josh Stanton:So freaking humble. Just listen to him say that right there. For anyone looking to improve their financial life, the most important part of this journey is what Campbell calls the return of the boon. And Ray explained that after the hero survives the abyss and achieves success, their final mission is to pass on the knowledge that they've learned. So he says this, later in life, winning battles becomes less exciting to heroes than passing along that knowledge.
Josh Stanton:Returning the boon as Campbell called it. Once the boon is returned, the hero is free to transition from the second phase in life to the third phase. This desire to find the unifying code of success led Ray to some of the most powerful people in the world, including China's Wang Qichan. Ray described Wang as a historian and a remarkably wise thinker who helped him see the rhyme of history. And Ray wrote about their discussions on the rise and fall of empires, and he said this, most of my conversations with Wang are at the principal level.
Josh Stanton:He sees the rhyme of history. He says unattainable goals appeal to heroes, he once told me. The unwise are those who worry about nothing. If conflicts got resolved before they became acute, there wouldn't be any heroes. Ray used Wong's historical perspective to help design the governance of Bridgewater, ensuring the system would be more powerful than any individual.
Josh Stanton:He even gave Wong a copy of Campbell's book because he saw Wong as a classic hero. For the listener, this boon is essentially the collection of principles Ray has documented. He realizes that the money he made was less important than the actual template he discovered for how reality works. And he concluded, I could see that my life would be over in a relatively short time and that what I'd leave behind could be more important. I needed to pass along the things that could essentially help others beyond me, most importantly, the principles in this book.
Josh Stanton:And so to wrap up Ray Dalio's journey, we're gonna look at how he applied this machine logic to his final act, was giving his wealth away and securing Bridgewater's future without him. For anyone looking to become a essentially better with money, Ray's transition into philanthropy offers a masterclass in systematic giving. He didn't just write checks, essentially. He approached the problem of global suffering with the same algorithmic rigor he used to trade gold or bonds, and he wrote, figuring out how to best give away money is as complex an undertaking as figuring out how to make it. I wanted to do our philanthropy together as a family activity, which has proven to be fabulous.
Josh Stanton:Ray's perspective on money changed as he transitioned into the third phase of his life, as you can imagine. He determined that his sons should have only enough for excellent health care, excellent education, and an initial boost to their careers. Beyond that, he believed the struggle to succeed was what made him strong, and he wanted the same for his family. He also applied his work principles to his foundation, creating formalized policies for decision making. He even explored building algorithms for philanthropy to ensure high social returns on every dollar.
Josh Stanton:This is what he ended up noting. He said, we view our donations as investments and want to make sure that we have high philanthropic returns on our money. It's much easier to measure efficiencies in a business. Because of this, we developed an attraction to sustainable social enterprises. So by June 2015, Bridgewater marked its fortieth anniversary, and Ray stood before his employees to deliver his final message on succession.
Josh Stanton:He wasn't just leaving them money or a brand, he was leaving them a living idea meritocracy. He summarized his vision for the firm's future, he said this, a community in which you always have the right and obligation to make sense of things and a process for working yourself through disagreements. I want you to think, not follow, while recognizing that you can be wrong and that you have weaknesses. And he concluded by admitting that while he thought the transition was wrapping up nicely in 2015, he had no idea how difficult the next year would be. Ray thought he was out, but in 2016, the transition hit a wall.
Josh Stanton:So while the investment side, which is the machine, was performing better than ever, the human side of the business was slipping. Ray realized that he had made a classic founder's mistake. He gave his protege, which was Greg Jensen at the time, too much to carry. And so Ray is brutally honest about this failure, and he says this. He says, I realized that I had handed Greg too heavy a load.
Josh Stanton:I regret that mistake more than any other I made in running Bridgewater because it hurt both of us and the company. And so thinking back to the average investor listening into this, here is the lesson. It was a mistake to assume that a person who is a genius in one role like picking stocks or analyzing charts will be successful in another role like managing a team or a business. This forced Ray to build a governance system, and he realized that a founder entrepreneur often runs things without formal rules to check and balance them. But for a legacy to survive, you need a system of checks and balances that is stronger than whoever is leading it.
Josh Stanton:If you're a retail trader and you're looking at your own key man risk, without a personal government system, rules that you cannot break essentially, you are one bad mood away from a blown account. As Ray looks back from the high level in chapter eight, he shares the ultimate mindset shift for financial mastery. He stopped seeing every market twist as a dramatic unique event. Instead, he began to see each encounter as another one of those. That's what he says.
Josh Stanton:He says another one of those. So with time and experience, I came to see each encounter like a biologist might approach an encounter with a threatening creature in the jungle. First, identifying its species and then drawing on its prior knowledge about its expected behaviors reacting appropriately. So he learned to love the struggle itself. He realized that the satisfaction of success doesn't come from reaching the goal, it comes from struggling well.
Josh Stanton:And if you're instantaneously to achieve all the financial goals today, you'd be happy for a moment, but maybe you'd soon find yourself needing something else to struggle for as well, and that's what he's trying to get at here. Ray's final brutal truth for anyone chasing wealth is about the marginal benefits of money, and he argues that having the basics, is essentially a good bed, good food, and good relationships, is most important, and those things don't actually get much better once you have a lot of money, which I think is a very important point to think about right there. It says the marginal benefits of having more fall off pretty quickly. In fact, having a lot more is worse than having a moderate amount more because it comes with heavy burdens. We have to think about that as investors.
Josh Stanton:Ray concludes his journey by passing along his boon, which essentially is principles to us. And he views this as the passing on DNA. He is very much like a scientist if you think about it. His purpose now is to help others evolve by showing them how to struggle well so they can get the most out of every unit of effort they put in. As he writes the final words of his story in 2017, he's ready to transition to the third phase of his life.
Josh Stanton:You're free to live and free to die, having returned his knowledge to the jungle for the next generation of traders to find. If you follow Ray at all on social media, you can tell that he has very much transitioned into the third stage of life. He's acting as a mentor and almost professor like, essentially. I wanna wrap up now by restating what I think is one of the most important quotes from the book, and that's in line with this very idea that we're talking about right here. And this is where he says, I realize that the satisfaction of success doesn't come from achieving your goals, but from struggling well.
Josh Stanton:To understand what I mean, imagine your greatest goal, whatever it is, making a ton of money, winning an Academy Award, running a great organization. Imagine instantaneously achieving it. You'd be happy at first, but not for long. You would soon find yourself needing something else to struggle for. And that very idea of struggling well, as he puts it, is something that I think is the most appropriate thing to end part one of this series on.
Josh Stanton:And so in the next episode, what I'm gonna be doing is dissecting all of Ray's life principles in an attempt to see what is relevant to the average retail trader investor or just anyone looking to improve their financial life. And so if you find this show interesting and helpful, you can subscribe to get notifications when new episodes are released. So I'll see you very soon.