The most common mistake of investing
Competing in the markets is more
difficult than competing in the olympics
The way that i feel it is life is like
an adventure
I mean if you knew everything it
wouldn't be nearly as good
So the ambiguity is part of it it's part
of the game
Each one of us would approach that
differently
for me have the greatest life I can have
well pain is a heck of a teacher when
you get the
pleasure then you just keep doing what
you're doing. But it doesn't teach you to
change.
You know pain when you put your hand on
a hot stove
or do anything that got you into a
position
teaches you maybe about how to approach
it differently and also
pain teaches you about how reality works.
Reality is reality we're given reality
a lot of people say they want to fight
what reality is
You know what was me and
Stop thinking about it being differently
Just understand
like why did that thing happen to me and
how do I put it in perspective
I remember a case that changed me
profoundly
so I started my business in 1975
investing you know it's easy to be wrong
in investing that's part of the game. But
in 1980
81 I calculated that american banks had
lent a lot more money to
countries than those countries weren't
going to be able to pay back. Therefore
have a big debt default and that would
cause an economic crisis.
And then in mexico defaulted in august
1982
So that prediction sort of wow came
right
and I thought we were going to go into
an economic spiral a depression a
big debt crisis and I couldn't have been
more wrong
That was the exact bottom in the stock
market and I lost money I lost money for
myself I lost money for my clients
I had to let everybody in my company go
I was so broke I had to borrow four
thousand dollars for my dad.
pay some of my family bills so I mean it
was a lot of pain.
It's like nature doesn't care about you
It cares about
the universe. And so when you have those
experiences just
understand how reality works and also
how to approach it better that's smart
I think. It made me
think about how I could maintain that
upside you know risk goes with return I
didn't want to
have an ordinary life so I still wanted
the big
upside return but how could I do that?
At the time I reflected it I felt it was
like the following.
I'm on one side of a jungle and i'm on
this one side of the jungle
in order to imagine you could have great
success
if you can cross the jungle alive to get
to the other side but in the jungle
are all sorts of terrible things that
could kill you and and so on.
And you have a choice you can have this
ordinary life
or you can try to cross the jungle now
each one of us would
approach that differently for me have
the greatest life I could have.
So how would you cross that jungle
And what I learned was that
the best way to cross that jungle would
be
with a team of people people who I cared
about they cared about with
me who could see things that I couldn't
see
and I could see things that they
couldn't see and that way
you could be effective together
so that's what I did that's how it
worked and what I also learned through
that thing
is like I don't want to get out of the
jungle I don't want to get to the other
side
Because the actual act of being in it
with them
and to do those things is itself
rewarding.
So I think pain is the best teacher
Because
it gave me the fear of being wrong
without me losing my
audacity. In other words it gave me an
open-mindedness.
It made me start to think how do I deal
with what I don't know.
it made me find the smartest people I
could find who disagreed with me
to start to understand their thinking. I
brought in the smartest people I could
find who were independent thinkers
who would disagree with me and I learned
this is an important thing to learn.
Whatever success
I had came more from my knowing how to
deal with my
not knowing than from anything I knew
in other words what you know in your
head
is only a small percentage of what the
important things and the right things to
know
is, And so to be able to go
outside of one's head and to take in the
best
of the best of the best wherever it
comes and then
use that to make decisions and all of
that
came from that painful very painful
mistake.
I wouldn't have known how to have great
upside
while having acceptable risks I'm
confident
that I wouldn't have learned that if I
didn't have that kind of experience
and that was the exact bottom
financially and so on in my life. From
that point
up to you know not long ago fortune
described Bridgewater as the fifth most
important private company in the country
in the u.s And so it was that pain
and reflecting well on that pain that
gave me
a greater ability to deal with what I
don't know.
The way that i feel it is life is like
an adventure
I mean if you knew everything it
wouldn't be nearly as good
so the ambiguity is part of it. it's part
of the game. It's just the way it is
and then experience that and to know how
to deal with ambiguity,
because the same rules apply you know
feel it.
feel it what's it like. How does it feel,
where are the pulls to how do you learn?
how do you learn how to approach it,
what's it like speak to others who have
been in there
in that spot before. Taste it and so on
our preferences change you know as
you're going through all those things so
you feel it out you learn about it.
You go to the things that you feel the
pull toward but in any case
to reconcile feelings with
thoughts to recognize feelings with
logic
and align them like each has to double
check for me.
Like if my feelings i'm yes i'm a big
feeling person
there is a subliminal mind that we have.
And so feelings and those things
are coming through that subliminal mind.
And it really has a big control.
Freud discovered that there's a
subliminal mind
and in that subliminal mind we just
don't
see it. Because it's not conscious it has
a big effect
meditation has had a big effect on me.
I've been meditating
since 1969 and then there's a conscious
logical mind
In your mind they're like everybody's
mind they're these kind of two minds
that are working I find that when I
align them
but at the same time to be able to get
their logic and be able to express
oneself
you know in algorithms or so is a good
thing. So when they're aligned
it's kind of a double check and it works
at both levels. So i think that's most
important.
Every time you put on a position in the
markets for example
I am never sure if it would be easy if I
knew
what I realized on those is doubting is
part of that process you can only be
sure a certain amount.
How do you get to the best triangulation
in other words take in from the smartest
people and your own thoughts, and so on.
So that you're making that understand
how reality works
and then try to make sure that none of
your
decisions are the ones that knock you
out of the game.
In other words like i've got an
expression for people who work for me
you can scratch the car but you can't
total the car.
So realize okay you don't win it all
you make your best bets but don't have
the one.
So you have to eliminate the killer ones
don't put yourself in a position that
you can have unacceptable.
Because you have enough killer ones odds
are one of them's gonna get you.
I approach it basically that way
you know try to make the diversification
try not to have any killer
eliminate all of those that are
unacceptable and then go for the
upside. I make the bet so that I won't
allow anyone that'll kill me
right and then I raise typically only
want to make bets that I feel good about
and I will have them stress tested my
bets by having other people stress test
it. Just imagine I don't know you're
playing a chess game
okay maybe you're a chess master but
okay what are you gonna do you have to
still make a move.
What's the best thing to do now imagine
you could ask the best chess masters in
the world
what you do and think about the pros and
cons and make your decision
maybe if everybody had a score card on
all their decisions
and then was being able to experience
essentially you try it one way you try
it the other way
and you start to see what's better and
you get punished one way
you get rewarded the other way naturally
you want to go in the direction you get
rewarded.
I just want to make the right the best
decision possible I don't care where it
comes from
like you might one thing another then
that's the beginning of trying to find
out what's correct
in the past. So a good partner is going
to disagree with you and you have to get
past it.
okay no I don't see it that way okay
let's figure it out
And then the score card i think probably
had the benefit
of that kind of notion I got a score
card okay I don't know like I'm not sure
okay bring it on please stress test me
oh that's great we have we're good
partners.
Like I say I think before that uh
1982-ish incident
I probably was a lot more okay
yeah you know I think it's right and
what I think is right and i'm a smart
guy and
so on so I was like you know that life
is a good teacher
two by four in the head you know and you
got a couple of those
and pain plus reflection equals progress.
I found that by writing down my
principles and the rules
and then testing how they would have
performed
over time and that's where the
algorithms came
so that I can basically just like a
machine
play it click click click click click
okay with execute the game plan
because I know what the experience is
like the experience is like you're
wrestling around with it you're losing
money the day you put on a trade
it doesn't go either straight up or
straight down and goes against you so
now I don't know you're losing money
okay how much should you lose what's
your game plan you've got to know your
game plan and stick to the game plan
and you can't be shaken out and yet the
emotions are going to cause you to doubt
yourself and plus
it brings you stress and all of that so
you have to execute a game plan that's
very well thought out then over time you
start to develop some better instincts.
Like if you're excited and you're going
along
be scared. If you're doing something
you're really worried about and nobody
else is doing it
maybe good. Don't be dissuaded see the
markets are very different than
consensus decision making.
It's counter consensus because the
consensus is built into the price
right so if everybody loves something
it's expensive.
And if everybody hates something it's
cheap. The most common mistake of
investing thinking that the investment
that did good is a good investment.
people rather more expensive the things
that quite often those markets that did
really really well became more expensive.
And everybody smart money is all the
time
comparing them and competing. So what
happens
is the naive money buys the thing that
was hot,
or is hot the thing that has been
terrible which might be the thing that's
beaten down.
So where most people say ah this is like
oh what a great company okay amazon is a
great company we got Amazon's a great
company
Who doesn't got that Amazon's a great
company and then okay
I'm gonna go on amazon okay
but if everybody's got this it's a great
company and it becomes
increment less great than they
anticipated bam
that baby goes down. So you have to
start to develop some of those instincts
or a game plan.
Here's another one that's really
important, diversify
because what I learned about this is
that
first of all all investments uh compete
and it's not easy to tell whether one
investment is better than the other
because if people could do that life
would be easy and everybody make a ton
of money
So and this is a competitive game that's
very difficult to compete in. So
it's very difficult to say which one's
better or worse
you could take experts and you could and
do all sorts of tests
and you'll find out that they can pick
that and you can't tell whether the
worst ones are going to be better.
So because of that you
understand that even picking the best
ones is difficult and particularly
if you're naive like we spend
hundreds of millions of dollars each
year on research
to try to give us an edge, okay now
you've got to compete with us.
Competing in the markets is more
difficult than competing in the olympics.
But there are more people who try harder
in order to do that. So it's a zero-sum
game. But
diversification that they're different
will reduce your risk without reducing
your return
