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Warren Buffett, AKA “the Oracle of Omaha” was born during the Great Depression in 1930. Benjamin Graham, known as the “father of value investing,” taught Warren how to invest. Warren spends 5-6 hours a day reading and focuses on thinking rather than working long hours. He believes in avoiding action bias by staying within his “circle of competence”. He looks for companies with sustainable competitive advantages or “moats”. He took over a struggling textile company named Berkshire Hathaway in 1962. Charlie Munger was Warren Buffett’s business partner for approximately 45 years. Munger joined Berkshire Hathaway as vice chairman in 1978. He remained in that role until his death in 2023. Together, they turned Berkshire Hathaway into a large conglomerate through investments and acquisitions. Today, Warren Buffett’s net worth is around $138 billion.

The following is Methods of Prosperity newsletter number 25. It was originally deployed December 7, 2023. As of August 15, 2024, original subscribers have received up to issue number 61: Brad Jacobs (conclusion).

Part 25

TL;DR

Ray Dalio, born on August 8, 1949, in New York City, is an American billionaire investor and hedge fund manager. He attended C.W. Post College of Long Island University. He graduated with a BS in Finance in 1971, and later earned an MBA from Harvard Business School in 1973. In 1975, he founded Bridgewater Associates. He led Bridgewater for most of its 47 years, building it into the largest hedge fund in the world. He’s known for his global macro investment strategies. Dalio has been a valued macroeconomic advisor to many policymakers around the world. He is also the author of the best-selling book, Principles: Life and Work. He shares his philosophy on corporate management and investment through his books. Ray Dalio is prolific on his unique principles for life and work.

Key lessons:

• Find meaningful work and meaningful relationships.

• Know what you and others are like.

• You can never be sure of anything.

• Pain + Reflection = Progress.

• Have principles. 

• Meditate.

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These were the most pivotal times in the last 100 years. From 1979 to 1981, the US economy was in bad shape; worse than 2007 to 2008. The Federal Reserve had two choices. Either print more money to relieve their debt burden, or tighten and risk damage to debtors. Debt was at its highest levels since the Great Depression.

In March 1981, Ray Dalio predicted a worse depression than that of the 1930’s. After all, he was a bright, well respected macroeconomics expert who studied debt all the way back to the 1800’s. By his calculations, he was certain of one thing. That this debt crisis of emerging countries was coming. His logic checked out. No one else found a flaw in his analysis, but no one else was willing to endorse his conclusion.

By the fall of 1981, his predictions started to appear to come true. In February of 1982, the Fed added liquidity to avoid a cash-crunch. In June, the Fed printed more money, increasing liquidity to high levels, but it wasn’t enough. Then, it happened as he predicted. Mexico defaulted on its debts in August 1982. US banks had already lent 250 percent of their capital to other countries. Other countries in the same risky position as Mexico.

Now he had the world’s attention. Ray Dalio was right about this big debt crisis. It was November 1982. He declared, testifying before Congress, that the economy was on the brink of failure. He appeared on the economic program called Wall Street Week.

“I can say with absolute certainty that if you look at the liquidity base of the corporations and the world as a whole, there’s such reduced levels of liquidity that you can’t return to an era of stagflation.” Dalio announced.

Ray Dalio bet on credit problems increasing. He was dead wrong. Inflation fell, while growth accelerated. That was the exact bottom of the market. The US economy blasted off on the greatest bull-run in history at that time. Being so wrong cost Dalio almost everything.

Ray Dalio was born on August 8, 1949, in New York City to a middle class family. His father was a jazz musician and his mother was a stay-at-home mom. He was an ordinary kid in an ordinary house and a worse than ordinary student. Starting at age 8, he did odd jobs around the neighborhood. This included a newspaper route, shoveling snow, bussing tables and washing dishes. He worked these jobs to earn money, but resisted doing chores around the house for no allowance. He learned invaluable lessons that school teachers couldn’t teach.

He started caddying at the local golf course at age 12, investing his pay into the stock market. The US economy was strong, and stocks kept going up. He began dollar-cost-averaging (DCA). That is, buying the same amount on schedule every month. In 1966, the stock market was still going up. He didn’t know it at the time, but that was the top. After that, everything he thought he knew about the markets proved to be wrong.

In 1967, Dalio kept buying stocks and lost money when the market fell, but he learned what to expect. In 1968, The Beatles went to India. They studied Transcendental meditation with the Maharishi Mahesh Yogi. Curious, Ray Dalio learned how to meditate and recommends it to this day.

“Meditation has benefitted me hugely throughout my life, because it produces a calm, open-mindedness that allows me to think more clearly and more creatively.” – Ray Dalio

He attended C.W. Post College of Long Island University. There he graduated with a BS in Finance in 1971, and later earned an MBA from Harvard Business School in 1973. He traded commodities including corn, cattle, soy beans, and hogs. He could use leverage to trade with very low margin requirements. That meant borrowing money to make more money.

At that time, in 1971, the United States dollar was on the gold standard but Americans weren’t allowed to own gold. Other world currencies pegged the dollar, and the dollar pegged to gold. Other central banks could convert their paper dollars into gold. That’s how they were sure that the US wouldn’t print too many dollars. The US government assured its citizens that the dollar was sound, and gold was old metal. The only problem was this pesky thing called stagflation (stagnation + inflation). The global monetary system was breaking down. There were reports that Europeans stopped accepting American tourist dollars.

On Sunday August 15th 1971, President Nixon went on television with an announcement. The United States would no longer allow dollars to redeem into gold. Government officials had already promised not to devalue the dollar. Now the leader of the free world framed a new narrative. Somehow by devaluing the dollar, the USA was actually going to “defend the dollar”?

A strange, unexpected turn of events happened as a result of the dollar depeg from gold. The stock market skyrocketed! Once USD became a fiat currency, the economy and the stock market started soaring. By 1972, stocks were doing great again. Ray went to work for a small commodities division that summer for Merrill Lynch. Oil prices went up in a few months, the US economy slowed and commodity prices soared. In 1973 the stock market crashed.

It turned out that when the US de-pegged from gold, the US defaulted on its debts. US debt spending of the 1960s carried over into the 1970s, which the Fed funded with easy credit policies. The United States now used fiat currency instead of gold-backed currency, to pay back its debt. By doing this, the US defaulted. With all this money printing, the buying power of USD declined. That led to more debt, which led to more spending. By 1973, to fight inflation, that forced the Fed to tighten monetary policy. That’s how central banks operate. This, in turn, caused the worst decline in stocks and the worst economy since the Great Depression.

Stocks were out of fashion by 1973 and, commodities were in. This was fortunate for Dalio. A brokerage firm hired him for the top starting salary of HBS graduates. The brokerage soon went under with the fragile economy. With the US economy in shambles, the Watergate scandal sent the markets on a downward spiral. Stocks hit bottom in December 1974 when the Fed eased up. Dalio now worked for another bigger more successful brokerage. He was in charge of futures hedging. This included commodities and financial futures. He helped clients using price risks in their business manage them by using futures. His expertise was in grain and livestock. Which placed him in West Texas and agricultural areas of California.

In 1975, he founded Bridgewater Associates out of his two bedroom apartment. He recruited two friends. Pursuing a mission with friends to help clients beat the markets was much more fun than having a real job. It was rewarding, putting himself in the shoes of his corporate clients. He showed them how he would handle market risks if he were them. Ray met his wife and in 1977 they started having kids.

Making money is a good goal. Meaningful work and meaningful relationships are better goals. Money has no intrinsic value. Its value comes from what it can buy, and it can’t buy everything. Ray Dalio believes it’s best to start with what you want, and then work backwards to get it. Making money is an incidental consequence of meaningful work and meaningful relationships.

Speaking of incidental consequences, did you know about this? R.D. helped McDonalds bring the chicken nugget to market. McDonalds was reluctant. Chicken prices might rise, and squeeze their profit margins. Chicken producers wouldn’t agree to sell at a fixed price. They feared that their costs would go up, and their profit margins would suffer. In economic terms, you can think of chicken products as a machine consisting of the chick plus its feed. The most volatile cost that the chicken producer needs to worry about are prices of their feed. R.D. applied his expertise in corn and soy meal futures. He helped the chicken producer lock in feed costs. That allowed the farmer to quote a fixed price to McDonalds. Having reduced its price risk, McDonalds introduced the McNugget in 1983.

Ray Dalio describes life as a series of “another one of those”. The same species of events happen over-and-over again in cycles. As they happen, we can write down our principles for how we deal with “another one of those” species. The people in our lives can then understand our principles. In that way, we can achieve our big, audacious goals together.

Going after our big, audacious goals allows us to fail. That’s our opportunity to create principles. We can improve, and go after more big, audacious goals. He describes this process as an “evolutionary loop”. This looping process he chunks-down into five things to be successful:

1. Be clear on what your goals are. You can have almost anything you want, but you can’t have everything. So, identify clear goals.

2. Don’t tolerate your problems. Recognize that we all have strengths and weaknesses. You may be the cause of your problems.

3. Only when you know and diagnose your problems accurately, the next step is...

4. Create a design to get around those problems.

5. Push through to completion. Remember that your weaknesses don’t matter if you find solutions. Notice where you often fail, and continue the loop upwards.

Everyone has at least one big thing that stands in the way of their success; find yours and deal with it. Understand how you can, in his words, “become radically open-minded”. The key is to work with other people who are strong where you’re weak. That requires being evidence-based, and encouraging others to be that way, too.

Discover what you, yourself and others are like. Know your personality archetypes. Doing so allows you to put into perspective your higher-level and your lower-level “you’s”. In other words, your conscious mind and your subconscious mind are in conflict. Aligning your two “you’s” requires pain plus reflection. Then you will make progress. Otherwise, we go through life with very wrong opinions.

In 2022, Dalio completed his transition from his formal leadership roles at Bridgewater. He continues to serve as a mentor and senior investor at the firm. As of 2024, his net worth is around $19 billion, making him one of the wealthiest individuals in the world.

I like you,

– Sean Allen Fenn

Methods of Prosperity newsletter is intended to share ideas and build relationships. To become a billionaire, one must first be conditioned to think like a billionaire. To that agenda, this newsletter studies remarkable people in history who demonstrated what to do (and what not to do). Your feedback is welcome. For more information about the author, please visit seanallenfenn.com/faq.