Principles: by Ray Dalio – A Book Review

Summary:  Why should you care? You can pick up Principles, by Ray Dalio and turn to any page and learn something. Ultimately its a wonderful collection of well thought out “How To’s.” It is filled with great examples, visuals, and sensible approaches. Perhaps its greatest strength, terrific approaches to life and business, becomes its weakness. For most of the 567 pages it lacks the human connection. And in that sense Ray Dalio is as real to me as Socrates.

*Day Dalio wrote a follow up book to Principles called Principles for Success. It is organized to be more easily consumed. My biggest criticism of his prior book, the length, is addressed. See this review for more: Billionaire Ray Dalio Adapts His Communication Strategy To Reach A Wider Audience

principles book cover

Detail Review: I start with aesthetics. The hardcover book is well constructed. It’s black with white “PRINCIPLES” and red “RAY DALIO.” The font is large. Pages go by with relative ease. There are visuals throughout as well. For a hearty book you need some pages which go by quickly. They help the sense of achievement. I’m also a fan of ribbon book marks. When the book is on its side I like to look and see how far down the page the marker is. Again, accomplishment.

rules of thumb book cover

Before we get into the subject of the book, I’d offer another: Rules of Thumb by Alan Webber. It has 52 rules which are each about three pages in description. It is easy to consume and with deliberation, easy to put into practice. For more see my review: Rules of Thumb – A Review

On to the subject of the book: Principles. How I think about principles is certainly as a sort of ethical code. That if you live by them then the results are something you can mentally reconcile. To get reflective for a moment. Life is short. One day you will want to look back and say “I lived a proper life.” Perhaps not virtuous, but fair.

This was never truer than with the death of Socrates. At the bottom of the review is a video highlighting the debate: be loyal to your principles and die. Betray them and live.

You’d want the same for your organization. You’d want it organized by Principles which reflect your values. Follow with policies, standards, and procedures. This creates a clear lineage between the type of company you want to be and the one you actually are.

Back to the book. It is divided into three sections: An introduction, life principles, and work principles.

The introduction is perhaps my favorite part. Dalio is very transparent especially as he describes his upbringing. He isn’t a good student in school; the subjects didn’t interest him. He buys some stocks with money he earns caddying. At first he thinks he’s smart, but realizes the market itself was doing well. He goes from college, which he loved, through the building of his company. Several stories of the ups, the downs. He has a few realizations through his journey. A major one is to learn from his mistakes and to codify them. This evolves to be his principles.

Next is the Life Principles. This is my next favorite section. These can be applied without an organization. They are like a new year resolution. Or perhaps a personal constitution. If the book ended after this section, it would be worth every penny.

Last is the Work Principles. It comprises much of the book. Each one is useful, but they are best served reading in chunks and not in long reads. This influences my overall view of the book. More than half of it is best read not as a story, but as guidance.

So what are the “Principles?” He has several. Perhaps the easiest ways to get them is through Twitter and Linkedin. Dalio posts them practically daily. But here are a few I pulled out.

The principles are chapters and are numbered. Then there are mid-level principles designated as a decimal e.g. 1.1. Finally, there are sub principles, which are letters such as 1.1a.

Life Principle 1 – Embrace Reality and Deal with It. I like this one because people, myself included, like to rationalize, tell themselves stories, and avoid tough decisions. Its better to face reality and act accordingly. Luck won’t save you and eventually no one else will. Creating the discipline to see your future and make it happen is such a valuable thing to live by.

Life Principle 1.8 – Weigh second- and third- order consequences. This is a nuanced principle. Most people solve the problem in front of them not realizing the solution may have created new or different problems. For example, suppose you excercise to lose weight. You have a good routine and get a sweat. Later when it’s time to eat you prepare a little more than normal. You’re really hungry because you’re expending more energy working out. But now you’re also eating more to compensate for the deficit in calories. So you can’t just excercise, you also have to diet. The first order consequence was addressed, but not the second and third.

Life Principle 2 – Use the 5-Step Process to Get What You Want Out of Life. This process is referenced several times throughout the book. Check out the visual:

raydalio-five-step-process-1

Life Principle 3 – Be Radically Open-Minded. Being open minded allows you to understand problems and the solutions for the possibilities that created them. No one and nothing is perfect. To get quality results being open to different perspectives, viewpoints, cultures, and ways of doing things is necessary.

Work Principles – An organization is a machine consisting of two major parts: culture and people. He presents this via this visual. As the Work Principles unfolds he goes further into each aspect.

dalio2

Another major tenet of the Work Principles is the Idea Meritocracy. He pushes his company, Bridgewater Associates, to have an Idea Meritocracy which is defined as Radical Truth + Radical Transparency + Believability-Weighted Decision Making. They realize this vision through consistent feedback and constant evaluation. While good in theory, I don’t think in practice this is for everyone. Dalio acknowledges this reality and says many individuals sort themselves out of the company as a consequence. I wonder if talented individuals are missed out because of this structure? I assume so, but Dalio believes the benefits outweighs it.

Work Principle 3 – Create a Culture in Which It Is Okay to Make Mistakes and Unacceptable Not to Learn from Them. This principle isn’t controversial. You want people who are eager to make a difference and take on an acceptable amount of risk. Learning from situations is by itself a benefit. Its likely you can apply those learnings elsewhere. Thomas Edison once said he didn’t fail in making the lightbulb. He found 2,000 ways to not make one. And only needed to find one way to make it work.

Work Principle 6.4 – Once a decision is made, everyone should get behind it even though individuals may still disagree. I’ve seen passive agressiveness first hand. People will agree to a decision in a formal setting, but then walk away and not truly commitment and at times undermine it. Organizations need to work to prevent this, whether through culture or through other mechanisms.

Work Principle 9 – Constantly Train, Test, Evaluate, and Sort People. This is one section I felt worked best in theory. As I read the book I got a sense this is what they do, but the human side of it must be taxing. If you’re constantly being sorted and evaulated, (perhaps a reality anyway), you never really relax. You are constantly looking over your shoulder. If people are compensated a certain way I could see this being less of a concern i.e. they make enough to cover expenses like a house. But if they don’t you’d get people who want to maintain the job. When this principle is tied to Work Principle number 3, the mistakes oriented one, you have to balance it. Take risks and learn versus being constantly evaluated.

Work Principle 16 – And for Heaven’s Sake, Don’t Overlook Governance. Having an infrastructure where accountability is built in is very important. It ensures hubris and proper risk taking is addressed on an ongoing basis.

Tidbit – I really like the example of how to tell good stories. He describes a process where the story has things that happen, but then shows for some parts of the story you want to provide more detail and context, but if you do that too much or don’t keep the story on track you’ll lose the audience.

Summary – The book is terrific, but its girth makes it a bit sterile. Telling stories, as discussed in the book, is a great way for people to connect. It needs more of them. Inspiring? Not really. Good read? Certainly. But only in chunks.

For inspiration, check out this thrilling, just kidding, 40 minute clip of Socrates.

5:45 mark – The majority opinion – they can’t be trusted

8:23 mark – Can’t expect me to change my ways now – being consistent, in good and bad times is part of the contract with the city or as the Principles book describes, the company.

9:06-13:45 mark – the essence of the argument and the part that reminded me of this book.

20:25 mark – A philosopher and death.

24:18 mark – The argument for the soul using opposites.

33:00 mark – An interesting metaphor of the soul and a musical instrument.

Reflecting on a Job Market – Employee and Employer

To gain significant wealth in the US you have to take significant risk. Usually that means starting your own business or being on the ground floor with someone who is. The individuals who put their neck on the line deserve the spoils of that risk. The last three years proves the fittest survives in business.

We can somewhat reflect now. The once in a generation economy is behind us, so it’s time to see what the new world looks like. It’s lean and flexible. But a chasm is growing between the employer and the employees. Here are some stats from a Mercer survey I read about by Ben Rooney on CNNMoney called  Half of Workers Unhappy in their Jobs:

  • 32% of US workers are seriously considering leaving their job. Up from 23% in 2005.
  • Of the age group 25-34, 40% are seriously considering leaving. Within that number is 44% of employees who are 24 and younger. The cheap labor is ready to bolt.
  • And more alarming, 56% of senior managers are considering leaving. This compares to 34% of managers and 30% of non-managers. The experienced are also looking to jump to other opportunities.
  • A slightly different take, but 21% have disengaged from their employer, meaning they are not looking for a new job, but they are apathetic toward their current one. This could be burn out and it could mean the productivity gains via personnel has reached it’s limit.

Workers are getting disenfranchised by the circumstances of their employment. In addition to that, there are business owners who have moved away from the proper perspective. They’ve had leverage for over three years. Chances are they laid off some people. Those that remain should have a debt of gratitude. It could be worse.

The business owner who has survived is entitled to some fun, but they need to realize no one does it alone. I was out to dinner with a friend in the industrial fabrication and installation field of work. He had an exchange with his boss similar to the one in the movie below. I embellished it for effect, but much of this exchange is true, particularly the part about the water skis
http://www.xtranormal.com/watch/12155321/a-resignation-story

When Ideas Come Together

I sit here and type. Sometimes I have inspiration and sometimes its a slog. I do it because I love when ideas come rushing in. It’s like the end of the Usual Suspects when everything comes together. Its powerful and rewarding.

Good mysteries are fulfilling because we have to hunt for clues. They are rarely obvious and they are as much a study of logic and circumstance as anything else. It’s in our DNA to problem solve this way.

For this reason I’m optimistic about the long term future. The connectedness of the world is bringing figurative detectives together, each with their own clues, to solve problems. Ideas have a better chance to grow. Incremental improvements are good, but we are after leaps forward.

Take this chart from CNNMoney.com about Cisco’s prediction on the expansion of the internet.

And check out these videos from Steven Johnson about where ideas come from. The first one is a short artistic explanation and the second is a TED Talk. I really enjoy the story at the end.

–>http://video.ted.com/assets/player/swf/EmbedPlayer.swf

Defining the Future for the Class of 2011

Congratulations to the class of 2011. You’ve earned the gratification of moving your tassel from one side of the cap to the other.

What does the future hold? What is out there? You’ll be told to find yourself, follow your passion, and chase your goals. And many of you will wonder what those are. There’s debt, perhaps an entry level job, and monthly bills. Before you can commit to your boundless dreams you already have these torments and everything that goes along with it. Chances are you’ll be figuring out credit cards, bad bosses, and hung over early morning meetings. Every day is a new day.

If you learned anything in school, I hope you’ve learned how to think. To ask why? Anyone can follow directions, good thinkers are people who understand why they exist. Great thinkers design the instructions. What is the path? What are the steps? “If this happens, then do this” and the decision tree associated with it. Working through these scenarios develops an ability to cope with complexity. Said another way – for greater enlightenment, do you want a happy meal toy or a jet engine?

And I beg you to create something. The world is a better place when people work to assemble rather than tear apart. If you’re a business person I’d start with thinking about value proposition. Think about a situation and how things work together. What is the context for which a transaction operates? Consider the decisions people are making and the information they are using. What drives them to act and is the desired behavior? Is there a status quo? Have people accepted things as they are?

The world you experience is very different than the world I know. And that is good. There are generally two types of knowledge explicit and tacit.

  • Explicit Knowledge – is knowledge that has been or can be articulated, codified, and stored in certain media. It can be readily transmitted to others. The information contained in encyclopedias (including Wikipedia) are good examples of explicit knowledge.
  • Tacit Knowledge – involves learning and skill but in a way that is difficult to transfer from one person by means of writing it down or verbalizing it. Tacit knowledge can consist of habits and culture that we do not recognize in ourselves. I can tell you how to ride a bicycle, but you won’t know how until you learn to balance.

Graduation means you’ve probably spent close to $1,000 on books over the last few years acquiring explicit knowledge. You’ve studied in your dorm room and memorized facts about amortization. You’ve read what the top of Kilimanjaro looks like.

Now is the time to look yourself. It doesn’t have to be the top of a mountain, a high point works just fine. Experience the edge and feel the risk. Trace the path you’ve taken to this simple point. Once you’ve climbed one high point, you’ll climb another and another.

Nothing worth doing is easy and life isn’t fair. Your experience is unique, always ask why, and focus on creating something, anything. And remember, every day is a new day.

Split Personalities – Tax Breadth and Tax Depth

We seem to have split personalities when it comes to the news and our politics. In the news we hear about natural disasters and the sour economy. In politics we hear about the failings of the President and the deficit. Why are these two voices talking about different subjects?

The truth is they are talking about the same problem, just different ends of it. The US is maturing. A large portion of the population is entering their retirement years. Every day, for the next 19 years, 10,000 baby boomers will turn 65. By 2030, 18% of the U.S. population will be over 65, compared with today’s 13%.

This is important for several reasons, but here are two:

  1. Federal tax collection is based on income. Those that are retired usually don’t make significant income, so the taxes they contribute are very low. A change or decrease of 5% is a huge impact to the revenue of the government. Or said another way, 10,000 people, who have a high average income, can drop out of the tax pool everyday.
  2. The baby boomers have been in leadership positions for two decades. The groups behind them, smaller in numbers, will need to fill the void.

The first reason is why you hear about Medicare and the budget. The second reason is why you hear about stimulus and silicon valley.

– When we talk about the deficit and paying down the debt we are talking about the inevitability of time. Our demographics show an aging population who will not be contributing to tax rolls. Less income means less spending. Tax Breadth.

– When we talk about innovation and stimulus spending we are pushing for investment and hopefully an improvement in future wealth and the standard of living. This would offset the loss of tax income from those no longer in the workforce. Tax Depth.

Both of these are concerns. I tend to be more transfixed with the latter. Many young professionals are either not entering the workforce or they are at compensation levels below the norm of 5 years ago. This lag in pay is not easily overcome and tends to persist for a career. Smaller income means smaller taxes paid. In addition to that, younger professionals are not moving into challenging roles as they would have in the past. Opportunities for learning experiences are reduced. Plus what they’ve been taught in school isn’t applicable e.g. China has changed dramatically since 2007, but the text books didn’t.

The 18% not in the workforce is unavoidable, but what should be asked is what’s to come of the under employed?

There will always be some number of the under employed, but we are currently looking at a devastating mix of long durations and loss of skills. The recession as it began in 2007 was a supply and demand recession, meaning nothing out of the ordinary occurred. But the last two years has led to a structural recession. This means that the skills and knowledge the US worker has isn’t quite matching up with what labor is needed. If this is more than a blip then high unemployment will continue for a few years as education and training requirements sort themselves out.

But I also feel like the 16-24 group, or more broadly the under 30 age group, is pioneering a new track. The way the view the world is much different than their older counterparts. As a consumer group they can influence the creation and offering of products and services. The next 24 months will be telling about the future of this country.

Using Particular Phrases to be More Compelling

I’ve recently been on vacation and I’m catching up on some reading. One of my favorite magazines and websites is the Harvard Business Review or HBR.org.

In the March 2011 issues is an Idea Watch section about the persuasiveness of experts. What the finding suggests is that when experts are less certain about their opinion, the more likely the opinion is going to be interesting and perhaps more intriguing to the audience.

What does this mean? It’s a little nugget for helping when people are scanning through information. If there are themes or patterns people tend to zone a out a bit. Important nuance can be lost. But when those themes are broken the reason for the deviation prompts curiosity.

This can be applied in the workplace. As the labor reports are coming out the economy is slowly picking up steam. There are many people looking for work. If you are writing a job recommendation for someone, its good to pepper in the phrase “high potential” in addition to “high achieving.”

  • High Achieving – Is a reference to the past. It shows capability and success but it isn’t necessarily relevant.
  • High Potential – Is a reference to the future. It latches onto a vision, onto hope, and shows adaptability and flexibility. Its more inspiring.

Here’s a blurb from the article Experts are More Persuasive When They’re Less Certain:

What makes a message compelling?

By “compelling,” I mean relevant to the core argument. In
another study, we had subjects read reviews that also gave four out of
five stars, but their content wasn’t really about the restaurant. They
said things like “My friend and I laughed the whole time. I liked the
way the menu looked and the colors they used.” That’s not compelling.
Even if it were interesting, it’s not what makes a restaurant good or
bad. Whether the reviews were confident or not, people didn’t find them
persuasive.

Where else do you want to take your certainty research?

One thing I’ve started looking into with some other
collaborators, Jayson Jia and Mike Norton, is how people view potential.
Our initial findings seem to show that people value high potential more
than high achievement.

That explains why a rookie quarterback like Sam Bradford makes more money than Super Bowl champ Drew Brees.

Sports are a great example. In one study,
participants read the scouting report on a basketball player. Some read
the actual stats for the player’s first five years in the league; others
read predictions for the first five years’ performance. The numbers
were identical. Then we asked, How much would you pay this player in
year six? On average, people gave the veteran who had performed $4.26
million and the rookie who was projected to perform $5.25 million, over
20% more.

Rookie talent in general, not just in sports, seems vastly overweighted.

Exactly. If you present people with letters of
recommendation for one job candidate described as “high potential” and
another described as “high achieving,” they’ll find the letter for the
high potential candidate more interesting and possibly more persuasive.

How can people be so thick?

Proven achievement is very certain. It’s less surprising
and less interesting to think about. Potential is uncertain and kind of
exciting. You can imagine many outcomes. Maybe they’ll do better than
you expect!

OK, I have to ask: How certain are you about the validity of your research?

I think our findings tell us something important. But you
never know what other variables could be in play here. The more we
research this, the better we’ll understand it.

I’ll buy that.

You see? It works.

Using Data as a Predictor of Sports Success

There’s a huge celebration going on this week – a celebration of decision making. You see the NFL Draft starts Thursday (4/28/11) and runs through Saturday (4/30/11) and fans tune in to see who their team selects. No games are played, just people’s names being called.

Why do we care? The simple answer is hope. We’ve entrusted the future of our favorite teams to a room full of guys with spreadsheets. We want to believe they have the magic formula for selecting the players who succeed in the NFL. They’ve studied film, measured height, weight, speed, interviewed the candidates, and surveyed other experts. They’ve quantified all these inputs and ranked the candidates. Most of the time they tier them for purposes of trading up or down. Teams win Super Bowls because of these three days.

It’s a lot of data and yet every year mistakes are made. As a General Manager, the person ultimately making the decision, you need the hits to be proportionally more successful than your misses. And you need to learn from your data year over year to see which inputs pan out and which ones do not. From there you can use heuristics to simplify the ranking order and reduce the risk of missing on a selection.

Below are two videos. One is from the Sloan Sports Conference and it features Peter Tingling. I’m a fan of Mr. Tingling and his company, Octothorpe Software (this is not a paid endorsement). Peter provides a presentation about how how successful NHL drafts are.

The second video is from the most famous sixth round pick ever – Tom Brady. He is your classic case of not using the data correctly.

http://www.kaltura.com/index.php/kwidget/wid/_203822/uiconf_id/1898102/entry_id/1_bukfpvkn/