Ray Dalio is the founder, Chairman and Chief Investment Officer of the world’s largest hedge fund Bridgewater Associates. According to an industry study, Bridgewater’s hedge fund has made more money for its investors than any other hedge fund ever. Having started Bridgewaters out of a two-bedroom apartment in New York City, Ray Dalio has more than 45 years of investing experience. Thus, if you want to become good in investing, then you simply have to learn from the best.
According to Ray Dalio, there are close to 210 principles that he applies in his life, be it in work, life or investing. Some of the principles are relied on to make investment decisions throughout his life at Bridgewaters. Here are five important investing principles that Ray Dalio applies on a daily basis to make better investment decisions.
1. “How do I know I’m right” vs “I think I’m right”
10 out of 10 people in the market always think that they are right. Instead of constantly asking and validating that they are correct, they fall into the mistake of being overly confident. If you make the mistake of being overly confident, chances are that you will just invest in anything you “think is worth buying”. Unless you have lady luck shining on you, you will find yourself with a portfolio of bad stocks.
Rather than always thinking that you are right, Ray Dalio’s approach to investment is to first start with the reverse. Start by first thinking that you are wrong. Then, you find evidence and supporting data to prove that you are making the right decision to invest in a company or an asset.
2. Don’t let the idea of being proven wrong get to you
The truth is often hard to swallow, even for one of the best investors in the world like Ray Dalio. After all, it is human nature to ignore the harsh realities and stay in the illusion of being right. However, with years of investing experience under his belt, Ray Dalio has learnt that admitting to being wrong can greatly enhance your investment decisions.
This usually happens when you have invested in a stock that fall in value after you have invested in it. Abysmal investors often hold onto the stock and wait for the stock to rebound. They are seemingly afraid to face the truth that their investment decision was a wrong one. The reality is that only by accepting that your initial decision was wrong, you can then avoid holding on to losing stocks.
3. Constantly compare your outcomes to your goals
Do you diligently compare your investment outcomes to your investment goals? It is common to see investors boasting about their investment goals without having a real measure to evaluate how close they are. Without a clear measure in place, you are unable to receive feedback on whether your investment decisions are right or wrong. This deprives you of the opportunity to improve your investment decision. After all, if you don’t measure your outcome, you are just living in denial that every decision that you make is correct, isn’t it?
4. Learn to deal with what you don’t know
How many stocks in your portfolio can you classify as stocks that you have a great deal of knowledge about?
Unlike average investors, successful investors are adept at finding answers to what they don’t know. They do all their due diligence to clear their doubts about what they don’t know about the company before investing in them. Successful investors like Ray Dalio ensure that they know the main revenue drivers of the company and its growth prospects. They will also find out about its financial health through the balance sheet and cashflow statement. Some of them will even go to the extent of experiencing what it is like to be a customer of the company.
5. Pareto principle: Knowing where the 20% lies
Regardless of how successful you are as an investor, it is unlikely that every stock that you picked will be a winner. Successful investors have recognised that 80% of their portfolio’s return is attributable to 20% of the portfolio. Rather than diversifying their effort to find multiple stocks with mediocre returns, investors like Ray Dalio focus a great deal of time researching for great businesses to become that 20% in their portfolio.
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