The Steve Jobs of Investing

Ray Dalio and Bridgewater

Last week we looked at a recent book about Tiger Global and Chase Coleman III who wants to be the most successful hedge fund manager (he would use the term investor) and stay out of the public eye. He is not interested in being respected as a storyteller and philosopher king. He is not interested in going on Oprah. He is not interested in being known for re-inventing the workplace.

This got me thinking about who in the hedge fund industry has wanted all of this the most. All roads led to Ray Dalio, the founder of Bridgewater.

Some hedge fund managers are media shy - Izzy Englander, Jim Simons, Steve Cohen. Some like to go on CNBC and talk about their positions - David Tepper. Some talk about not just business but their political stance - Ken Griffin. Some do reverse broking, politics, and write tomes on social media - Bill Ackman.

But Ray Dalio is different. He wanted to pass on his knowledge and his “principles” of how to be successful. A money manager, self-help guru, and part-time Daniel Kahneman. There were famous books, media tours, and even joint videos with P Diddy. But what does a “deca-billionaire” want if they are not interested in running for President?

A biography about them by Walter Isaacson! Join an exclusive club including Benjamin Franklin, Henry Kissinger, Albert Einstein, Steve Jobs, and Elon Musk. Alas, Isaacson was not interested and was puzzled to find that when he was invited to speak to Bridgewater instead of listening to Isaacson’s stories about Jobs, Dalio was more interested in lecturing him on Dalio’s “principles”.

This is of course all alleged in Rob Copeland’s book “The Fund” about Dalio. Perhaps Dalio should have tried Michael Lewis as his rebound date. They could have even called the book “Going Infinite”!

When Copeland’s book came out a year ago it made a big media splash as the author “had the receipts” to illustrate how Dalio’s gospel of radical truth and transparency was at best ineffective and at worst created a culture of immoral behaviour at Bridgewater. The stories of Dalio being Julius Caesar in the Colosseum asking his employees to fight like gladiators are cringeworthy but you do wonder why anyone should care about ridiculously well-paid hedge fund employees being taken to task. If they didn’t like working for Bridgewater they could always leave.

In 2011 CIO magazine dubbed Ray Dalio the “Steve Jobs of Investing”, a reference Tim Ferriss later used. For a brief spell in 2016, Dalio even hired a former Apple executive Jon Rubinstein known as the “Podfather” to be CEO of Bridgewater. But here’s the thing. Even Jobs had a reputation for being very tough and abusive to many of his colleagues especially the ones that didn’t fulfil his expectations. The Steve Jobs of today Elon Musk is notoriously similar, if not worse.

This brings me back to what we can learn from the Dalio story.

Dalio was as much a marketing machine as an investing star from Day Zero. He was in the investment newsletter game well before the likes of Howard Marks and probably only preceded by Warren Buffett.

Dalio was early amongst hedge funds with institutional investors particularly ones outside of the US. He was investing in relationships with Chinese government officials and sovereign wealth funds across Asia well before these countries took off.

Bridgewater’s products don’t look that innovative today but were ahead of their time as the first systematic macro hedge fund with Pure Alpha and then creating the investment style of risk parity with the launch of the All-Weather fund. Like any investment style competition increases over time and erodes the competitive advantage and in this case, there were also other types of hedge funds like systematic trend-followers.  

Copeland alludes to this and how Dalio was the investor who cried wolf over and over again and eventually got it right in calling the dot com and 2008 crashes. But my biggest criticism of his book is that he dedicates hundreds of pages to office gossip and culture and only a dozen pages to why Bridgewater has been such an amazing investor. After all, it is or was the largest hedge fund in the world, and more than any other hedge fund its alpha generation is famous for being a black box.

Like technology companies and their patents, investment firms guard fiercely the secrets that may drive their investing edge hence you will never get the secret sauce. Nevertheless, Copeland is surgical with his detailed sources on office culture and parties but he seems to have hardly spoken to Bridgewater investing professionals, competitors, or Dalio about investing. The same criticism could be made of the book Private Equity about Chase Coleman III, and it is a common theme in the media – it is easier to write about who was drunk at what party than what is the company’s competitive advantage or what is eroding this.

There is a great story in the book about the economist Niall Ferguson speaking to Bridgewater employees in a fireside chat with Dalio: two big brains and egos clashing! Dalio talks about the mechanics of economic cycles and how he has studied these over hundreds of years of economic history while Ferguson disagrees that history can be modeled so crudely as this analysis ignores the impact of political leadership and institutional strength. This is just the sort of rabbit hole that you wish the author had jumped down further.

With Dalio gone Bridgewater is keen to emphasize the breadth of the investment team but the lack of Bridgewater cubs always stood out to me. In an industry famous for NDAs and noncompete clauses Bridgewater has been more aggressive than anyone and no one would expect an alumni like the Tiger Cubs, but many people have left Citadel and Millennium and set up new hedge funds successfully. Of course, systematic funds are different but even there the founders of AHL (the trend-following hedge fund set up in 1987) went on to set up major competitors.

Moreover, given Bridgewater’s deep institutional client base and systematic approach, it is amazing that Dalio was not able to off-load a much larger proportion of the equity in the firm to external investors. KKR acquired 40% of Marshall Wace and the FT reported the other day that Blackrock is looking to buy a stake in Millennium. Instead, Dalio is monetizing his majority shareholding in Bridgewater through annual payouts rumoured to be a billion dollars, with JP Morgan also providing loans to the senior management to increase their shareholdings.

Let’s get back to Dalio’s gospel of “Principles” and the Bridgewater workplace as a blueprint, which Copeland’s book is great at covering.

As a former bank employee, I hated 360-degree reviews. The brilliant Craig Coben wrote a great piece on them in the FT a few weeks ago. They were a generic popularity contest, rarely weighted towards people who were most relevant to your area of work and not specific enough. One of the things I liked working for the founder of ICAP is that we didn’t have excess bureaucracy. We once had a CFO who instead of stress testing budgets and learning about the business model of our company spent all day on 360 reviews, but he didn’t last long thankfully.

In “The Fund” Copeland gives great details of how Bridgewater used Orwellian tactics in assessing the effectiveness of their employees. Bridgewater had baseball cards for each employee to mark them on his 375 principles. New principles were added to fit Dalio’s mood and radical transparency meant a negative feedback loop of food fights. Dalio’s concept of the “idea meritocracy” became a system that was built to be gamed and a gallery all playing to impress their Emperor rather than speaking truth to power. Stories of Dalio asking employees or the managing committee whether they agree with him are great fun and most of you would have been in a room like that at some stage in your lives.

Then there is the story of how IBM Watson inventor David Ferruci was hired to codify the “principles” and dot collector in terms of algorithms but struggled with the huge number of often contradictory principles and the vagueness in the definition of principles. How do you codify creativity or lateral thinking? The fact that despite huge efforts by Dalio, these internal Bridgewater scoring systems could not be sold to other firms in a manner that Blackrock did with their Aladdin platform tells the story. Dalio even called his IT prototype iPrinciples and the Principles Operating System. Bridgewater’s reputation in systematic macro investing was one of rigorous back-testing but here this was absent.

Bridgewater’s pedestrian returns over the last decade (the original Pure Alpha fund is now down to a multi-decade annualized return of a high single-digit percentage) make me wonder how they have managed to retain such a large amount of assets under management. Unfortunately the book “The Fund”, tells us little to judge how broken (a more appropriate description may be “how eroded”) the Bridgewater alpha engine is. But it did provide lots of great details and evidence of the trouble of industrializing Dalio’s “principles”. Made me think the best person to have written that book about Dalio and his “principles” a decade ago would have not been Walter Isaacson but the late great behavioural scientist Daniel Kahneman: someone who would appreciate a lot of Dalio and Bridgewater’s strengths but test their confirmation biases. Alas, the time has passed for that.