Principles By Ray Dalio: Summary And Notes

Lessons from the most successful hedge fund manager ever

“If you work hard and think creatively, you can have just about anything you want, but not everything you want.”

Rating: 9/10

Related: The Changing World Order, Your Next Five Moves, Poor Charlie’s Almanack, Work The System, Thinking, Fast and Slow

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Principles By Ray Dalio: Short Summary

In Principles, Ray Dalio lays down the rules and frameworks he uses to navigate his life. The book explores truth-seeking, decision-making, and the implementation of systems to achieve success. Afterward, Ray goes over the management principles he used to build his multibillion-dollar hedge fund, Bridgewater.

Part 1: The Importance Of Principles

What Are Principles And Why Do They Matter?

All principles come from a set of values.

Your values are what you consider important and they define who you want to be. However, they are not practical to use when you are faced with tough decisions.

For example:

One of your values can be to “live a healthy lifestyle”. But what does “being healthy” mean in practice? What are the daily decisions you are going to make to be more health-conscious?

Instead of using your values to make decisions, you should defer to principles.

“Without principles, you would be forced to react to circumstances that come at you without considering what you value most and how to make choices to get what you want. This would prevent you from making the most of your life.”

The problem compounds in companies because there is no playbook on how to operate in a way that is consistent with the company’s values.

Principles are what allow you to live a life consistent with those values.

“Principles connect your values to your actions; they are beacons that guide your actions, and help you successfully deal with the laws of reality. It is to your principles that you turn when you face hard choices.”

For example:

From the value “live a healthy lifestyle”, you need to create a set of principles to guide your actions. Principles like “I do not eat fast food during the week” and “I exercise at least 3 times per week”.

Where Do Your Principles Come From?

Most people adopt pre-packaged principles from parents, religious institutions, or other influential figures without much thought.

This exposes you to the risk of inconsistency with your true values. Holding incompatible principles will lead to conflict between values and actions.

For example:

The hypocrite who has claims to be of a religion yet behaves counter to its teachings.

Your principles need to reflect values you really believe in or the cognitive dissonance will overwhelm you.

“Those principles that are most valuable come from our own experiences and our reflections on those experiences. Every time we face hard choices, we refine our principles by asking ourselves difficult questions.”

To make sure your principles and your values are aligned, you need to:

  1. Define what do you want
  2. Ask yourself “what is true?”
  3. Plan what should be done according to 1 and 2

To be successful, you must make correct, tough choices. You can only make good decisions if you have solid principles based on your values.

PART 2: Ray Dalio’s Most Fundamental Life Principles

The quality of your life depends on the quality of the decisions you make.

And to make better decisions, you need to adopt “hyperrealism”.

Ray describes “hyperrealism” as accepting the reality as it is rather than wishing it was different. Understanding the reality allows you to learn how to work with them rather than fight them, which leads to greater success.

Reality + Dreams + Determination = A Successful Life

“The people who really change the world are the ones who see what’s possible and figure out how to make that happen.”

Ray Dalio’s 5 guiding principles for work:

  1. Working for what he wanted, not for what others wanted him to do
  2. Coming up with the best independent opinions he could conceive
  3. Stress-testing his opinions by having the smartest people finding the flaws in his thinking
  4. Being wary about overconfidence, and good at not knowing
  5. Embracing reality, experiencing the results of his decisions, and reflecting on what he did to improve.

“While most others seem to believe that having answers is better than having questions, I believe that having questions is better than having answers because it leads to more learning.”

Your Most Important Choices

To reach your goals faster, you need to change how you deal with these 5 types of choices:

  1. Embracing pain that comes with pushing your limits. Building strength is all about enduring the painful learning process. Pain + Reflection = Progress
  2. Accepting reality. When you don’t face reality, you don’t find ways of deal with the root cause of problems
  3. Worrying about reaching your goals rather than looking good. You will not have all the answers. Being humble and recognizing when you don’t know something will supercharge your learning
  4. Embracing first-order consequences, even when they are undesirable. For example, the first-order consequences of exercise are “bad” (soreness and time-sink). But without them, the second-order consequences of better health and more attractive appearance are impossible
  5. Taking ownership of your outcomes. Building your ideal life is your responsibility. You are the one to blame when you fail to overcome a challenge

“In summary, I believe that you can probably get what you want out of life if you can suspend your ego and take a no-excuses approach to achieving your goals with open-mindedness, determination, and courage, especially if you rely on the help of people who are strong in areas that you are weak.”

Your Two Yous And Your Machine

“You do not rise to the level of your goals. You fall to the level of your systems.” — James Clear

Your capacity to achieve goals is all about the systems you implement in your “machine”.

“Those who are most successful are capable of “higher level thinking” — i.e., they are able to step back and design a “machine” consisting of the right people doing the right things to get what they want.”

To work on your machine, you need to separate your two personalities:

  • The “Designer”. The one who manages and plans the systems to achieve your goals
  • The “Doer”. The one who works according to the plan created by the “Designer”

Your job as a “Designer” is to look at your resources and yourself as a “Doer” objectively to create the most efficient machine possible.

If you are not the best person for a job, fire yourself and find a good replacement.

For example:

When I started my YouTube channel, I edited all my videos. Since editing was one of my weaknesses, I hired an editor to improve my content creation machine.

The more effort you put in as a “Designer” in your “machine”, the better your outcomes will become.

5-Step process to getting what you want out of life:

  1. Setting clear goals
  2. Identifying and not tolerating problems challenging your system to reach your goals
  3. Diagnosing the problem’s root cause
  4. Designing a detailed plan with solutions to fix the problem
  5. Doing the tasks set forward in the plan

How often you take the cycle will dictate how fast you and your machine improves.

Values → 1) Goals → 2) Problems → 3) Diagnoses → 4) Designs → 5) Tasks

Part 3: Ray Dalio’s Management Principles

1. Trust in Truth

  • Realize that you have nothing to fear from truth
  • Be extremely open
  • Have integrity and demand it from others
  • Be radically transparent

2. Create a Culture in Which It Is Okay to Make Mistakes and Unacceptable Not to Learn From Them

  • Observe the patterns of mistakes to see if they are a product of weaknesses
  • Get over “blame” and “credit” and get on with “accurate” and “inaccurate.”
  • Write down your weaknesses and the weaknesses of others to help remember and acknowledge them.
  • Be self-reflective and make sure your people are self-reflective
  • Teach and reinforce the merits of mistake-based learning

3. Constantly Get in Synch

  • Constantly get in synch about what is true and what to do about it
  • Be assertive and open-minded at the same time
  • Make sure responsible parties are open-minded about the questions and comments of others
  • Recognize that conflicts are essential for great relationships because they are the means by which people determine whether their principles are aligned and resolve their differences
  • Don’t treat all opinions as equally valuable
  • Make sure people don’t confuse their right to complain, give advice, and debate with the right to make decisions

4. Recognize the Most Important Decisions You Make Are Who You Choose to Be Your Responsible Party

  • Remember that almost everything good comes from having great people operating in a great culture
  • The most important responsible parties are those who are most responsible for the goals, outcomes, and machines
  • Choose those who understand the difference between goals and tasks to run things

5. Recognize that People Are Built Very Differently

  • Think about their very different values, abilities, and skills
  • Recognize that the type of person you fit in the job must match the requirements for that job
  • Understand that different ways of seeing and thinking make people suitable for different jobs
  • Remember that people who see things and think one way often have difficulty communicating and relating to people who see things and think another way

6. Hire Right, Because the Penalties of Hiring Wrong Are Huge

  • Think through what values, abilities, and skills you are looking for
  • Weigh values and abilities more heavily than skills in deciding whom to hire
  • Write the profile of the person you are looking for into the job description
  • Look for people who have lots of great questions
  • Don’t hire people just to fit the first job they will do at your company; hire people you want to share your life with
  • Pay for the person, not for the job
  • Recognize there is a high probability that the person you hire will not be the great person you need for the job

7. Manage as Someone Who Is Designing and Operating a Machine to Achieve the Goal

  • Understand the differences between managing, micromanaging, and not managing
  • Constantly compare your outcomes to your goals
  • Clearly assign responsibilities
  • Hold people accountable and appreciate them holding you accountable
  • Think like an owner, and expect the people you work with to do the same
  • Force yourself and the people who work for you to do difficult things
  • Communicate the plan clearly
  • Learn confidence in your people — don’t presume it
  • While logic drives our decisions, feelings are very relevant
  • Escalate when you can’t adequately handle your responsibilities, and make sure that the people who work for you do the same

8. Probe Deep and Hard to Learn What to Expect from Your “Machine”

  • Know what your people are like, and make sure they do their jobs excellently
  • Constantly probe the people who report to you, and encourage them to probe you
  • Probe to the level below the people who work for you
  • Don’t “pick your battles.” Fight them all
  • Don’t let people off the hook
  • Don’t assume that people’s answers are correct
  • Make the probing transparent rather than private

9. Evaluate People Accurately, Not “Kindly”

  • Evaluate employees with the same rigor as you evaluate job candidates
  • Know what makes your people tick, because people are your most important resource
  • Recognize that while most people prefer compliments over criticisms, there is nothing more valuable than accurate criticisms
  • Understand that you and the people you manage will go through a process of personal evolution
  • Help people through the pain that comes with exploring their weaknesses
  • Remember that you don’t need to get to the point of “beyond a shadow of a doubt” when judging people

10. Train and Test People Through Experiences

  • Provide constant feedback to put the learning in perspective
  • Remember that everything is a case study
  • Know what types of mistakes are acceptable and unacceptable, and don’t allow the people who work for you to make the unacceptable ones
  • When you find that someone is not a good “click” for a job, get them out of it ASAP
  • Know that it is much worse to keep someone in a job who is not suited for it than it is to fire someone
  • Do not lower the bar

11. Know How to Perceive Problems Effectively

  • Have as many eyes looking for problems as possible
  • Don’t use the anonymous “we” and “they,” because that masks personal responsibility — use specific names
  • Be very specific about problems; don’t start with generalizations
  • Use the following tools to catch problems: issues logs, metrics, surveys, checklists, outside consultants, and internal auditors
  • The most common reason problems aren’t perceived is what I call the “frog in the boiling water” problem

12. Diagnose to Understand What the Problems Are Symptomatic Of

  • Recognize that all problems are just manifestations of their root causes, so diagnose to understand what the problems are symptomatic of
  • Ask the following questions when diagnosing
  • To distinguish between a capacity issue and a capability issue, imagine how the person would perform at that particular function if they had ample capacity.
  • Keep in mind that diagnoses should produce outcomes

13. Design Your Machine to Achieve Your Goals

  • Don’t act before thinking. Take the time to come up with a game plan
  • Recognize that design is an iterative process; between a bad “now” and a good “then” is a “working through it” period
  • Most importantly, build the organization around goals rather than tasks
  • Everyone must be overseen by a believable person who has high standards
  • Do not build the organization to fit the people
  • Have the clearest possible delineation of responsibilities and reporting lines
  • Assign responsibilities based on workflow design and people’s abilities, not job titles
  • Think clearly how things should go, and when they aren’t going that way, acknowledge it and investigate

14. Recognize the Power of Knowing How to Deal with Not Knowing

  • Finding the path to success is at least as dependent on coming up with the right questions as coming up with answers.
  • Remember that your goal is to find the best answer, not to give the best one you have.

15. Remember the 80/20 Rule, and Know What the Key 20% Is

  • Don’t mistake small things for unimportant things, because some small things can be very important
  • Make sure all the “must do’s” are above the bar before you do anything else
  • The best choices are the ones with more pros than cons, not those that don’t have any cons

More articles on productivity at DanSilvestre.com.

Originally published at https://dansilvestre.com.

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