fbpx

Principles by Ray Dalio – Book Summary and Key Lessons

"Principles are fundamental truths that serve as the foundations for behavior that gets you what you want out of life. They can be applied again and again in similar situations to help you achieve your goals." - Ray Dalio

In his book Principles, Ray Dalio shares his life and work principles that he developed and refined throughout his life. His belief is that by documenting the principles that you use when making decisions, you can improve your decision making ability as an individual and as a team, and lead to greater success in both life and work.

Named one of Time’s 100 most influential people and one of Forbes’ 100-wealthiest people, Ray founded Bridgewater Associates in 1975. As one of the largest, most profitable and most well-respected investment management firms out there, Bridgewater Associates has continued collecting accolades, despite Ray beginning to step back from some of his duties in 2018.

What are the secrets that led to such large successes in both investing and in business?

We will cover the top five lessons from Principles that are applicable to early-stage investing and equity crowdfunding.

Whether you are looking to make better decisions in your personal life or your business, I would definitely recommend heading over to our book page and grabbing a copy of the book for yourself to dive into the deep wisdom that he shares.

Top Five Takeaways for Equity Crowdfunding Investors

In Principles, there are five key takeaways that we feel are especially relevant to the investor in equity crowdfunding deals. They are:

  1. Diversify by placing many smaller bets vs. fewer larger bets
  2. Avoid false dichotomies in risk-reward tradeoffs
  3. Systematize and codify your decision-making
  4. Keep an investment decision log
  5. Realize that nothing is a sure bet. Pain will be your teacher.

1 - Diversify by placing many smaller bets vs. fewer larger bets

"The success of [the Holy Grail approach] taught me a principle that I apply to all parts of my life: 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." -Ray Dalio

As we have discussed in past posts, it is important to make many smaller investments rather than fewer larger investments in order to reduce risk and increase odds of investing success.

Dalio touches upon this concept when describing his “Holy Grail of investing” approach. The "Holy Grail" is the portfolio that he and Bridgewater Associates pioneered, which successfully demonstrated how investing in many, uncorrelated income streams can provide similar returns to other investment options while lowering the overall risk. That is, it provides superior risk-adjusted returns compared to portfolio allocations that aren't diversified in non-correlated income streams.

Applying this lesson to equity crowdfunding

Adding early-stage companies to your existing investment portfolio can provide diversification. This is because startups are considered to be a part of the venture asset class, which has been shown to not be highly correlated with public equity markets. To make the best use of this method, an investor should diversify by investing small amounts of capital across many startups, and also by investing in different types of founders and startups within that asset class.

2 - Avoid False Dichotomies in Risk-Reward Tradeoffs

“...I learned to go slowly when faced with the choice between two things that you need that are seemingly at odds. That way you can figure out how to have as much of both as possible. There is almost always a good path that you just haven’t discovered yet, so look for it until you find it rather than settle for the choice that is then apparent to you.” - Ray Dalio

Ray Dalio points out that decisions don’t always have an either-or outcome, and there is often a solution just out of view that allows both objectives to be achieved.

While this approach can be applied to any decision in life, it is best to see how we can apply this to our investments and risk-reward tradeoffs. That is, you don’t have to have either lower risk or higher returns; sometimes, there may be a way to achieve both.

Applying this lesson to equity crowdfunding

Through intelligent portfolio allocation and diversification, there are often other ways to get superior risk-adjusted returns. That is, either comparable returns at a lower risk, or higher returns at a similar level of risk.

This brings us back to lesson #1 and diversification. For example, while it may seem counter-intuitive, having a 100% bond portfolio can actually be more risky than a portfolio that is a mix of both bonds and stocks. In a similar fashion, by adding startups as an asset class to your investment portfolio, you may be able to improve risk-adjusted returns for your overall portfolio.

3 - Systematize and Codify Your Decision Making

“Convert your principles into algorithms and have the computer make decisions alongside you.” - Ray Dalio

Each angel investor has different criteria that they use to make investment decisions. Some rely on detailed due diligence and objective checklists, some will make an investment decision after a 30-minute chat with the founder, while others will solely rely on references from other investors.

So what is the best decision method for a new investor looking to get started in equity crowdfunding?

In his investment strategy (and that of Bridgewater Associates), Dalio describes how he is a huge proponent of documenting all your decision-making criteria, such that another person (or even a computer) could make those decisions for you.

Studies seem to agree with Dalio, showing that coming up with objective criteria in advance of a decision or assessment can make novices perform better than experts.

In one study, experts and novices in basketball were asked to watch videos of basketball shots and assess the difficulty of those shots. The novices and experts were split into two groups. One group was asked to make assessments using their “gut feel” (i.e. intuition), while the second group was asked to first discuss and write down the criteria they would use to assess each shot.

For the intuition group, as expected, the experts proved to be much more accurate than the novices. So perhaps there is merit to the fact that some experienced investors can make decisions with limited information and intuition. However, the surprise was that in the second group who used objective criteria for evaluation, both the experts and novices performed better than the experts in the first group, who only used their intuition.

Personally, I believe that writing down your investment criteria in advance helps to remove emotion and helps you make more objective decisions. It also adds clarity to your thoughts by forcing you to put your decision criteria down in writing, versus having it all disorganized in your head.

Applying this lesson to equity crowdfunding

You don’t necessarily need to program a computer to make these investment decisions like Ray and his team did. But writing your investment rules and decision criteria down in advance has a number of benefits. Whether this is in the format of a checklist that you use when screening deals, or just the high-level principles and criteria that you have chosen for your investment strategy, it will go a long way towards helping you to improve your investment decision making.

4 - Keep an Investment Decision Log

“Experience taught me how invaluable it is to reflect on and write down my decision-making criteria whenever I made a decision, so I got in the habit of doing that.” -Ray Dalio

Another benefit of writing down your investment rules (lesson #3) is that you will slowly build your investment decision log. This is akin to Jason Calacanis' recommendation to write a "deal memo" for each of your investments, as discussed in his book Angel, which we reviewed last month.

Writing down your current rationale for decisions you make will allow you to get a less distorted view of your perspectives and thoughts later. This will improve your process of reflecting on past decisions and can help you to refine your future decision making.

If you’re like me, you probably have a hard enough time remembering birthdays and what you ate for lunch yesterday.

So I’d be lying to myself if I think that I’ll accurately remember my exact reasons for opening an investment 3, 5, even 7 years later. What were the biggest reasons I invested? What were my biggest concerns at the time? How does the actual outcome compare to my predictions?

Learning and reflecting on past decisions - both the good and the bad - will be key to your future investment success. And you will need accurate historical data to truly improve your future decisions.

Applying this lesson to equity crowdfunding

This doesn’t require an elaborate setup - even a simple spreadsheet or word document will suffice. The important thing is to take the time now when making any investment decision, vs. trying to remember and recreate those reasons later. List out some of your key reasons for investing in each deal, as well as your biggest concerns. I also record my reasons for not investing in startups that I screen; we can learn as much from what we didn't do as from what we did. Reflect on this decision log periodically and compare it with actual outcomes. Then adjust your criteria as required.

5 - Realize that nothing is a sure bet. Pain will be your teacher.

“There are always risks out there that can hurt you badly, even in the seemingly safest bets, so it’s always best to assume you’re missing something.” - Ray Dalio

“My painful mistakes shifted me from having a perspective of “I know I’m right” to having one of “How do I know I’m right?” - Ray Dalio

Both of these quotes show how Ray and his team have shifted from a know-it-all, confident perspective, to one that is more humble, open-minded, and always questioning assumptions.

There is another quote that I often remind myself of, which goes nicely with this theme:

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” -Attributed to Mark Twain (unconfirmed)

Applying this lesson to equity crowdfunding

Investing in equity crowdfunding is no different. Many companies that seem like “sure wins” will fail, and businesses that seem ludicrous and hopeless will go on to be huge successes. Always diversify, place many small bets (see takeaway #1), question your assumptions, and never assume that anything is a sure-thing, either as a winner or a failure.

General Lessons for Investors (and Founders)

As I mentioned, this book is a fantastic read, and really can be applied in all areas of life, not just in investing.

Some of the other key quotes that are relevant to both investors and founders of startups include:

  • Prioritize goals: “While you can have virtually anything you want, you can’t have everything you want.”
  • Choose your habits well. “Habit is probably the most powerful tool in your brain’s toolbox.”
  • Knowledge and courage: “In order to have the best possible life, you have to 1) know what the best decisions are and 2) have the courage to make them”
  • Always be eager to learn and remain open-minded: “It seems to me that if you look back on yourself a year ago and aren’t shocked by how stupid you were, you haven’t learned much.”

Summary of Principles: Life and Work

There are many other lessons in this book that we did not cover here.

Whether you are a founder or an investor, you will need to make many important decisions that will ultimately determine whether you succeed or fail. Wouldn’t it make sense to at least understand and acknowledge the principles behind your decision-making process, while also improving that process along the way?

It is insightful to see the types of principles that one of this century’s greatest investors and founders used in his life and in business. Even if you don’t adopt any of his principles for yourself, it should give you a great foundation for starting to reflect on the types of principles that you use in your own life and business.

For the official website, head over to principles.com.

To grab a copy of the book for yourself at no additional cost and support the free education we are providing on this blog, head over to our books page and pick up a copy of Principles by Ray Dalio.

If you're interested in getting investment book summaries like this delivered to your inbox, be sure to sign up for the CrowdWise book club using the form below:

>