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Pursuing Self-Interest in Harmony With the Laws of the Universe and Contributing to Evolution Is Universally Rewarded

With nothing scandalous to spread around, finance-world gossips have been left to focus on what a strange, strange place Bridgewater is. When the blog Dealbreaker posted leaked excerpts from Principles last May, the industry got a window into Dalio from his calls for his employees to “humiliate themselves” in pursuit of the truth and his comparison of the process of self-improvement to “when a pack of hyenas takes down a young wildebeest.” Dalio responded by posting the full Principles on the Bridgewater website, but if he thought his ideas would be judged more kindly in context, he was mistaken. “I’m sure our reputation on the Street is that we’re completely insane,” says a current Bridgewater employee. An executive recruiter who works with hedge funds confirms that suspicion, describing Bridgewater as a “bunch of fucking nutcases.”

At the same time, that $94 billion raises a question: What if the nutcases are on to something? “Bridgewater is a very quirky place, and you have to drink the Kool-Aid to fit in,” says another headhunter. “But clearly something is working for them.”

Dalio began his investing career at age 12, when he sunk $300 he’d earned as a golf caddie near his Long Island home into shares of the now-defunct Northeast Airlines. Soon after, the company went through a merger, and its $5 stock price tripled.

Dalio’s parents, a jazz musician and a stay-at-home mom, supported his passion for the markets. After college, he took a summer job on the floor of the New York Stock Exchange and eventually became fascinated by commodities futures—derivatives used by Wall Street firms to reduce their exposure to oil, metals, crops, and other resources vulnerable to price swings. It was at the time an unsexy specialty, but in the early seventies, when the Bretton Woods currency crisis sent the stock markets spinning, investors flocked to commodities, and Dalio’s budding expertise was suddenly in demand.

Don’t pick your battles. Fight them all.

Treat your life like a game.

Manage as someone designing and operating a machine rather than as someone doing tasks.

In 1974, after getting his M.B.A. from Harvard Business School, Dalio went to work trading futures for Wall Street legend-in-the-making Sandy Weill. Dalio stayed at Weill’s brokerage, then called Shearson Hayden Stone, for only a year. (Dalio declined to comment for this article, but several people familiar with the matter said he was fired after bringing a stripper to a client presentation.) He decided to strike out on his own, opening a small advisory boutique with a friend from his rugby team. Neither man had much experience managing money, but the market briefings Dalio sent out were impressive enough to land Bridgewater its first major investors, large pension funds that committed several million dollars apiece. (Today, the firm’s “Daily Observations,”multipage bulletins that include reflections on everything from bond yields to the potential market effects of swine flu, are required reading for pension managers and central bankers around the world.)

While his client base was expanding, Dalio began crafting the investing theory that would make him a multi­billionaire. The global economy was a giant machine, he observed, with certain cycles that repeated themselves during economic and political transitions. If you identified those patterns, as well as the smaller events that seemed to trigger them—a LIBOR blip here, a rising debt ratio there—you could build a computerized system that could predict booms and busts. The approach served Bridgewater well: The firm’s flagship fund has lost money in only three years since its founding and boasts an average annualized return of 18 percent since 1991.

In 2006, Bridgewater’s computers began to indicate that the American economy seemed to be heading for what Dalio calls a “D-process,” a sort of national bankruptcy proceeding in which debt-service payments rise relative to incomes until, under the threat of default, the government is forced to print tons of money and buy up long-term assets. The firm’s traders piled into investments that would be most affected, including, at various times, U.S. Treasury bonds, gold, and the yen. They also studied Japan’s “lost decade” and the Latin American debt crisis of the eighties and used what they learned to program red flags into Bridgewater’s trading system. In the spring of 2008, one of these flags, a risk metric for credit-­default spreads, prompted Bridgewater to pull its entire positions in several banks—including Lehman Brothers and Bear ­Stearns—the week before Bear ­Stearns imploded. In the years since, seeing the crisis coming has become the hedge-fund version of having been at Woodstock, but Dalio and his team actually did it.

Throughout 2010, the D-process continued to unfold. By the end of the year, 80 percent of Bridgewater’s bets were in the black, and even critics who’d mocked Dalio’s eccentricities had to acknowledge his brilliance as an investor.

The path to Principles began early in Bridgewater’s history, when Dalio began to think that employees, like economies, could be understood as following patterns. Transcendental Meditation informed his belief that a person’s main obstacle to improvement was his own fragile ego; at his firm, he would make constant, unvarnished criticism the norm, until critiques weren’t taken personally and no one held back a good idea for fear of being wrong. Dalio’s chosen investment system depended on such behavior. Unlike at a hedge fund such as Steven Cohen’s SAC Capital, where star traders are given chunks of the firm’s capital to run quasi-independent desks (and offset each other’s losses), everyone at Bridgewater essentially contributes to the same strategy as they work under Dalio and his longtime confidants and co-CIOs Bob Prince and Greg Jensen. Dalio thought radical transparency could optimize the hive mind. “The culture makes you have to listen to other people,” says Giselle Wagner, a former Bridgewater chief operating officer.