Principles by Ray Dalio

Ray Dalio must be doing something right. After all, he is one of the wealthiest people in the world - he atests - guided by these Principles for investing.

Ray Dalio must be doing something right. After all, he is one of the wealthiest people in the world – he atests – guided by these Principles for Investing.

What you will learn from this book summary, building a successful business isn’t rocket science. According to the Dalio, anyone can run a successful business if they follow certain key principles that will keep them on the right path.

Understanding the most effective ways to run a company is, of course, a very subjective matter and that we need to figure out for ourselves. But there are certain core values that make a lot of sense from a business standpoint. For instance, being honest with the company staff is crucial if we want to create an environment of transparency and trust that will help us avoid a wide range of problems. So let’s dive in and find out more about Ray Dalio’s recipe for success!Throughout this summary, we’ll discuss:

  • how running a business is a lot like fixing cars;
  • why kindness might not be the best policy when it comes to business; and
  • how to build a successful business from the top down.

Principles Chapter #1: Look to Nature

In order to see the big picture, look to nature and evolution.

Life can sometimes be very overwhelming, especially when so many questions are thrown at us from every direction. When things get tough we even feel unable to see more than a foot in front of us as if we were trapped in a blizzard. In such dire conditions, choosing the right path and making the right decisions can be very difficult. 

As a result, it is crucial to have a concrete set of guiding principles to help us navigate through life. These guiding principles can act as a compass and enable us to always know where we are headed and what choices we should make to stay on the right path. 

In other words, by having principles we will be able to move towards our goals more effectively and we will have a set of fundamental truths that we can apply to any difficult situation. When we are trying to figure out what our guiding principles should be, it is important to be as realistic as possible. We should avoid fooling ourselves into thinking that we can avoid any messy and uncomfortable situation.

Dalio reminds us that reality is not always pretty and that we have to accept it and let our rational thinking guide us instead of our emotions. Sooner or later we all have to face the fact that life is not always ideal, so keeping Dalios words in mind might come in handy. 

So it is important to remember that it’s normal for things to go wrong sometimes and when they do, we have a chance to learn a valuable lesson, to adapt, and to evolve. Any business that’s been around for a long time has dealt with hard times, and as a result, had to adapt and learn how to bounce back. This will probably happen to you too. So take the hard times in stride and make the most out of them. Never stop learning and evolving.

Principles Chapter #2: Focus your Decision Making

Focus on choosing the right goals and work hard.

We don’t have to be professional athletes to use some of the methods and strategies that they use. In fact, we can become more focused on getting good results and work towards reaching our goals by thinking of life as a game. 

This perspective can help us get through any difficult situation. Even the most successful athletes in the world have dry spells. So it’s wise to keep in mind that life isn’t always one long winning streak. So whenever things aren’t going as planned, we need to keep calm, analyze the situation, and work towards finding a solution. 

But we cannot start playing without having a solid plan or an ultimate goal, and the secret to setting great goals is to know how to prioritize and narrow things down. In life, almost anything is possible, but we can’t have it all.

Setting too many goals is a very common mistake that many people make. But the truth is, whenever we are choosing a certain goal, we are eliminating numerous other potential goals in the process. So we need to be smart and choose very wisely by identifying the things that matter to us the most. 

Now, if there are certain things that we are passionate about, but we lack the skills to master them, that doesn’t mean we should completely push them aside. Continuing our education, learning new things and improving the skills that we already have is always a good plan. 

Once our goals have been established, the next step is to methodically analyze the situation and find out which obstacles or challenges are in your way. So, for this step, we need to be as realistic as we can. We shouldn’t ignore certain problems on account that they are too personal, and we shouldn’t be overly optimistic and underestimate a potential issue. 

We all have certain personality traits that we don’t like to acknowledge, such as a tendency to procrastinate, being lazy, etc. But owning up to our weaknesses is an important part of becoming more successful. The first step towards improving ourselves consists of admitting and learning how to control our shortcomings.

Principles Chapter #3: Radical truth and Radical transparency

Keys to building long-lasting and meaningful relationships at work!

Dalio, is the founder of the investment firm Bridgewater Associates. The firm embraces extreme truth and transparency, which are among Dalio’s core principles of doing business. Radical truth consists of ensuring that the main issues do not remain hidden. This created a work environment in which employees are encouraged to speak their mind.

Since coworkers will freely exchange criticisms, radical truth can be considered a safeguard against making bad decisions and constantly making improvements. At Bridgewater Associates, radical truth applies to everyone, including the executives. 

In general, when a company is considering selling or closing one of its branches or closing it, most executives will do everything they can to keep things as quiet as possible. They will probably wait and tell the employees at the last possible minute. But when something similar was happening at Bridgewater, instead of hiding the truth, the senior managers held an employee meeting and discussed the pending sale openly. 

Here’s the thing: when the executives are not upfront about important matters such as an upcoming sale, the employees will become hostile and agitated. More often than not, rumors have a tendency to spread no matter what and the employees might feel betrayed. So why not show them respect by being honest and telling the truth. 

Radical transparency is not very different from radical truth as it consists of being open about the behavior that is acceptable and expected from employees and from management. In other words, employees and managers should treat one another with respect, as they would a partner in a long-term relationship.

They need to look out for each other’s best interest, be open and crystal clear about each other’s responsibilities. When employees are more considerate and respectful with their colleagues, chances are the company will do better. And although this approach might not seem radical at all, it actually is. That is mainly owed to the fact that people are used to working in a cutthroat workplace where people fight for their best interests. But the quality of work and productivity will improve as soon as the employees stop being selfish and start building strong work relationships based on cooperation, transparency, and generosity.

Principles Chapter #4: Radical truth supports Performance

Radical Truth has a huge impact on performance evaluations as well.

Being dishonest isn’t always a malevolent act. In fact, most people choose to be dishonest in order to avoid hurting someone’s feelings. A while back, Ray Dalio was thinking of promoting one of his employees to Department Head and he knew that several people felt that he deserved the job. However, Dalio decided to check the company’s performance tracking system beforehand.

The system contained a lot of data on each employee of the company and, much to his surprise, Dalio came to the conclusion that the employee that he wanted to promote simply lacked the right qualities for the job. 

Considering the praise of the employee’s colleagues, we might think that giving him the promotion was the right thing to do. But radical kindness is not the secret to success, radical truth is. And in Dalio’s situation, the truth was that giving an employee a position that he wasn’t prepared for truth would have been a great disservice for everyone. 

People tend to overestimate the amount of work they do and their professional capabilities, so performing accurate evaluations is key to preventing serious problems. When Dalio polled the company’s employees and asked them to say what percentage of the company’s achievements they were responsible for, their combined percentages added up to a whopping 301 percent.

So, because employees can’t evaluate their achievements, it’s very important for managers to have an accurate understanding of how much work each employee is doing. But honesty and accuracy are not just good for the overall business, they are also beneficial for each employee. 

According to psychologists, the biggest motivator for personal improvement is the pain that people feel after making a mistake. When we do something wrong and we feel terrible about it, we are very likely to avoid feeling the same way in the future. This psychological phenomenon is called “hitting bottom” – and it’s the incentive that makes people change their ways. 

Another important aspect that managers need to remember is that sorting out their employees’ shortcomings can be a very time-consuming process, so it should be prioritized over celebrating success. Dealing with the strengths of the employees is much easier and managers only need to encourage them to keep up the good work. When it comes to weaknesses, the managers need to identify the cause and find solutions, which will most likely take a lot of time, effort, and resources.

Principles Chapter #5: Simple, Concise, visual.

Communicate Metrics and flowcharts are valuable tools to enhance performance.

When we establish goals for a business, we need to start to see our employees as parts of an engine. The engine is powering the business down the right path, increasing its chances of reaching the goals. For instance, the author’s goal was to provide the best possible return on investment for his clients. He admits that he often felt like a mechanic who had to open the hood numerous times in order to fix and improve the Bridgewater machine. 

By thinking of this analogy, of a company manager as a mechanic and his company as a machine we keep our mind focused on the things that we are responsible for and the things that need to be fixed. 

To function like a well-oiled machine, a company needs to have a process flowchart that shows how each task is performed. By seeing how the work is performed, the managers can have a clear picture and understand what works and what doesn’t. This tool allows them to spot the issues and to solve them in a timely manner. 

Firing and reprimanding employees is a very difficult task that no one likes to do. But as we mentioned above, being realistic is a fundamental principle for success. As a result, we all need to understand that there are certain unpleasant tasks that cannot be avoided. The performance measurements, or metrics, are another valuable tool that enables us to check if our machine needs maintenance. 

Having an effective system in place that allows us to measure performance is as important as having a dashboard on a vehicle. The flashing lights that alert us when something goes wrong can save our lives and so can the measurement system. Metrics can significantly boost the productivity of a company as they are accurate, unbiased, and reliable. Additionally, they are perfectly suited for work environments that practice transparency and radical truth.

Having an accurate image of what the employees are doing and how well they do it will prove to be lifesaving. Now that we’ve discussed the best techniques to keep our engine run smoothly, it’s time to learn how to build a solid machine.

Principles Chapter #6: Comany Structure…

Companies need to be built from the top down while keeping a close eye on manager-to-employee ratios.

As we move towards our goals, we need to come to terms with the fact that problems will arise sooner or later. But we shouldn’t panic, as most problems are simple bumps in the road. Finding solutions for a wide range of problems is a normal part of improving a company. In other words, most problems will be beneficial, in that they help us become better at what we do. But in order to turn our problems into advantages, we need to build a business that allows us to notice all the problems and to implement solutions as quickly as possible. 

According to the author, the best way to build such a business is from the top down. A good business structure should be built in the exact opposite way from a building. The foundation of the business is located at the top, instead of at the bottom and consists of hiring great managers. A great business manager should have high standards and should be trustworthy. If this isn’t the case, then these issues will affect the staff and spread uncontrollably.

On the other hand, managers who know how to show appreciation and who treat employees fairly, are very likely to succeed. Each department of the company should be self-sufficient and able to control the necessary resources.

If employees have everything they need, they are more likely to solve problems quickly. If departments cannot act fast due to bureaucracy, a lot of employees will be unable to do their jobs. Finally, keeping a balanced ratio of managers is extremely important and it is advisable not to exceed a ratio of ten to one. It an ideal world, each manager would be responsible for five employees, as this will allow managers to build meaningful relationships and to really get to know their employees.

But rather than focusing on implementing strict rules on team sizes, we can also get good results by assessing the strengths and weaknesses of each manager. So now that we know the basic principles that the author uses in order to become more successful, we can start working on our strategies. It is up to us to put these principles to good work and to turn our company into a constantly evolving enterprise.

Take Home Ideas

What is the key message of Ray Dalio’s 2017 book Principles? 

Dalio says, a collection of good and firm principles can help us make better decisions, especially during confusing and chaotic times.

These principles depend on us and on our goals and values, but building a radically transparent and truthful environment is always a good idea.

A company manager is like a mechanic and the company should work like a well-oiled machine. In order for everything to run smoothly, the manager needs to use metrics and flowcharts, to keep a relatively small manager-to-employee ratio, and to build the company from the top down. 

Valuable advice: Know your strengths and weaknesses. We can all be a little bit close-minded, especially when it comes to our weaknesses. It can be very difficult to accept our blind spots but we need to identify them and to avoid repeating our mistakes. To ensure that we are fully aware of our shortcomings, we can ask other people to be honest and to tell us what they think. The only way to move forward is by identifying and accepting our shortcomings.

Another great read is my Exec summary on Dan Coyle’s Culture Code

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