Creating vs Engineering

One of my favourite books of 2017 was Ray Dalio’s “Principles”.  If you’re not familiar with Ray Dalio, he’s the founder of Bridgewater Associates which is one of the most innovative financial management firms ever.

Dalio’s story is incredible to listen to – he started investing early and nearly lost everything several times before finally “figuring it out”.  His way of thinking and use of technology dating back to the 70’s has been revolutionary for the money management industry.

In the first half of the book, Dalio talks about his story and which sets the table for the second half of the book where he talks about his decision-making principles.  How the guy thinks about things is amazing and if you read or listen to that book and don’t come away from it with at least a dozen different ways of improving your own decision-making principles, you weren’t really paying attention.

But there’s one thing that gets lost in the mix.  Dalio has gained an incredible amount of positive press in recent years but his book has put him into the mainstream where he’s been praised as a champion of industry.

Except he’s not.

His success has come as a financial engineer.  When Bridgewater predominantly sold research data it was a small company, you wouldn’t even say they were “boutique”.  It wasn’t until they started managing money that they became successful.

In fact, every single economic calamity of the last 40 years has largely come at the hands of people like Ray Dalio.  The Wall Street financial industry doesn’t actually “create” anything – they manipulate money.

There’s one passage of the book where Dalio is talking about how they “created” Risk Parity funds and a particular class of indexed bonds that guarantee returns of inflation plus a certain percentage.  These are Bridgewater’s signature legacy.

Except most financial analysts agree that Risk Parity Funds were one of the main causes of the GFC because of the way they loaded up on effectively high yield junk debt and then dropped it into the market for retail investors to get caught with.

And those indexed bonds?  Those are called “loans” and when banks do them they have to carry working capital to offset them.  If you tried to just offer those to your friends, you’d be called a loan shark and be in violation of several illegal lending laws irrespective of whatever country you are reading this from.

The Hedge Funds like Bridgewater skirt these complications by consulting to governments who are drunk on cheap money and gorging themselves on debt, so companies like Bridgewater tell them what to do and then they “buy” those bonds up.

If you actually listen closely to what Dalio says in the book (I listen on Audible) he constantly refers to what he does as “placing bets”.  Which is legitimate because he’s just a data gambler and when they make bad decisions or give bad advice now to their clients, they’re all deemed too big to fail and we bail them out.  It’s a great gig for them, they get rich when they pick right and are “hedged” by the taxpayers when they pick incorrectly.

All that said, Dalio’s book is great and there’s a lot to learn from it.

Here’s the thing though… I’d rather be a creator.  I’d rather make stuff and sell it to people who see the value in what I offer and are willing to pay money for it.

People like Ray Dalio will almost always get wealthier faster than normal plebes like us, but he’s 100% reliant on externalities that ultimately he can’t control and we’re not.  If there were sweeping changes to the financial regulatory markets tomorrow that limited people to buying and selling stocks and government bonds, he’d be out of business.

You, on the other hand, can’t be shut down when you create things (as long as they’re legal things – LOL).  You’re almost entirely in control of your own destiny.

I like to be in control and I like to feel like I’m creating something, it’s empowering.

So grab Ray Dalio’s book, “Principles”, it’s a great read, but remember what you’re listening to and focus on thinking about how he goes about making decisions, that’s the real gold in the book.

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