Bridgewater Associates founder Ray Dalio retires, and his seven investment principles attract attention

Reporter: Wu Bin (21st Century Business Herald)

"Pain + Reflection = Progress." On August 1st, Beijing time, Ray Dalio, founder of Bridgewater Associates, shared his farewell letter on social media, reflecting on the pain and reflection that have shaped his tumultuous investing journey. With the 75-year-old Dalio having sold all of his remaining shares in Bridgewater Associates and resigned from the board, a legendary investor has retired.

 Ray Dalio, founder of Bridgewater Associates (file photo)

Last week, Bridgewater Associates said in a letter to clients that it had repurchased all of Dalio's remaining shares. The firm then issued new shares to Brunei's sovereign wealth fund, a multibillion-dollar deal that gave the fund a nearly 20% stake in Bridgewater.

In his more than 50 years of investment career, Dalio has successfully predicted major trends many times, including the 2008 financial crisis and the subsequent European debt crisis. He was once listed by Time magazine as one of the "100 Most Influential People in the World."

Looking ahead, Dalio reiterated his warning: Over the next five years, the probability of a global debt crisis is as high as 65%, potentially severely damaging the US dollar's hegemony. If businesses, countries, and individuals fail to identify their position in the cycle, they will be engulfed by this powerful "tidal force."

Will Dalio come true again this time?

Achievements

In 1975, at the age of 26, Dalio decided to establish his own investment firm. In his two-bedroom apartment, he founded Bridgewater Associates and began implementing his investment strategy. Since the founding of the flagship fund in 1991, under Dalio's leadership, Bridgewater Associates has achieved one brilliant success after another, becoming the world's largest hedge fund.

In 2008, Dalio successfully predicted the US financial crisis, leading to Bridgewater's flagship fund achieving a 14% growth in performance that year. He then foresaw the European debt crisis, with the highest return on Bridgewater's funds exceeding 40% in 2010.

Despite his impressive track record, Dalio's investment journey has not been without its challenges. In 1982, he suffered heavy losses after incorrectly predicting the US economy would fall into the Great Depression. He was even forced to borrow money from his father to keep his company afloat. This painful lesson became a turning point in his investment philosophy.

Before 1982, Dalio pursued scientific and rigorous "correct cognition"; after 1982, Dalio was obsessed with knowing "how to prove that his cognition was not wrong" and tried to establish a set of systematic principles for dealing with uncertainty.

In Dalio's view, the world machine is driven by five major forces: debt/monetary/economic cycles, cycles of internal order and chaos, cycles of external order and chaos, natural forces, and human creativity . When these five forces work together, they form the grand cycle of peace and prosperity alternating with conflict and depression in the evolution from the "old order" to the "new order."

He emphasized the importance of understanding the causal relationships that drive change, as causes precede effects. This understanding helps investors predict what will happen next. Clarifying decision-making criteria, backtesting them, systematizing them, and computerizing them ensures investors execute a well-thought-out and thoroughly tested plan. "In my more than 50 years of professional investing, I have made a lot of money betting on these causal relationships... While many key unknowns and uncertainties remain, I am convinced that these are the greatest and most important forces."

In recent years, Bridgewater's assets under management have shrunk significantly, from $168 billion at the end of 2019 to $92.1 billion by the end of 2024. In the five years ending December 2024, Bridgewater's flagship Pure Alpha fund achieved a cumulative return of only 5.9%, significantly underperforming the record-breaking US stock market during the same period. However, after restricting its size, Pure Alpha's performance improved, achieving an 11.3% return in 2024 and a 17% return in the first half of 2025.

dispute

In recent years, Dalio's widely circulated debt theory has encountered some doubts.

Dalio believes that if an economy, whether a company or a country, accumulates excessive debt, it will encounter a debt crisis. In order to reduce the risk of a debt crisis, it is necessary to reduce the size of the debt through "deleveraging" measures.

In the view of Xu Gao, chief economist of BOC Securities, Dalio made two mistakes in his methodology for analyzing macroeconomic issues. He mistakenly used micro thinking to analyze macro issues and mistakenly imagined the macroeconomy as a machine, thus failing to see the differences in operating logic under different macroeconomic conditions .

On the one hand, Dalio's core logic in analyzing national debt is that if a country accumulates too much debt, a debt crisis will erupt. His criterion for determining whether debt is excessive is whether the income generated by the debt covers the cost of the debt. This is a micro-level approach to debt analysis, applicable to microeconomic entities such as individuals and businesses. Xu Gao told reporters that while this logic aligns with people's intuition, it shouldn't be blindly applied to national debt analysis. Macroeconomic operations can sometimes be counterintuitive and counterintuitive.

As the issuer of the US dollar, currently the leading international reserve currency, the United States can borrow foreign debt in its own currency. The US debt constraint stems not even from its supply capacity, but rather from the "dollar hegemony." Xu Gao analyzes that as long as the dollar remains accepted as an international reserve currency and countries around the world are willing to hold it, the US debt will be sustainable. Accordingly, only threats to the "dollar hegemony" pose debt risks to the US. The hollowing out of US industries and the so-called "reciprocal tariffs" policy introduced this year pose threats to the "dollar hegemony" and are respectively long-term and short-term factors contributing to US debt risks.

On the other hand, Dalio interprets the macroeconomy as a machine, mistakenly assuming that specific actions will inevitably lead to specific consequences. Xu Gao cautions against imagining the macroeconomy as a machine—the various causal relationships and reactive behaviors within it are subject to change due to shifts in the macroeconomic environment. The macroeconomy is comprised of living individuals who have expectations about the future and whose behavior changes as those expectations change. Once expectations change, human behavior changes accordingly, leading to corresponding shifts in the macroeconomic structure.

Xu Gao believes that Dalio's mechanistic understanding of macroeconomics has led to some misconceptions. For example, in Chapter 18 of his book "Why Nations Go Bankrupt," Dalio proposes his "3% solution"—he believes the U.S. fiscal deficit should be reduced to 3% of GDP.

What are the appropriate fiscal deficit and debt levels for a country? Xu Gao explained that this depends on the country's macroeconomic conditions. The appropriate fiscal deficit and debt levels vary under different circumstances. Trying to find timeless, or even universally applicable, standards for deficit and debt levels is not only futile but also extremely harmful. Asking such questions assumes the existence of an answer, thus neglecting the truly important macroeconomic conditions and the need for specific analysis of specific issues.

bid farewell

Success and failure are all in vain. In 2011, Dalio first announced his succession plan. On October 4, 2022, Dalio transferred control to the company's board of directors, officially stepping back from the role and no longer having final decision-making power. Since then, Dalio has continued to work for Bridgewater Associates as Chief Investment Officer, Mentor, and a member of the Operating Board.

With Dalio selling all of his remaining shares in Bridgewater, he can now be considered truly "retired."

Many people asked him how it felt to hand over Bridgewater after founding and running it for 50 years. Dalio's memories came flooding back: "I'm incredibly excited! This has been an amazing journey, and I remember every moment vividly - from co-founding Bridgewater with a rugby teammate in a two-bedroom apartment, to working with an outstanding team to build it into the world's largest hedge fund (with approximately 1,500 employees at one point), to earning more for clients than any other hedge fund."

With the handover complete, Dalio looks forward to the next generation of talented individuals ensuring Bridgewater continues to thrive for the next 50 years. "I'm delighted to see Bridgewater thrive without me, perhaps even better than it was with me. I think this is the perfect lifespan. As a 76-year-old (actually, a few days shy of 76) who deeply loves Bridgewater and its employees, it's like seeing my own children thrive without me—far better than having to care for them at 76."

Looking back at Bridgewater's success over the past 50 years, Dalio believes there are four important "working principles": "The people and culture you choose determine everything; select those with excellent character and outstanding abilities, and establish a culture of 'ideological meritocracy' in which meaningful work and meaningful relationships are achieved through extreme truth-seeking and extreme transparency; create a culture that allows mistakes but does not allow people to fail to learn from them; pain + reflection = progress."

tidal

Throughout Dalio's decades of investment journey, seven investment principles have attracted much attention:

• Reality is like a machine, and investors need to understand how this machine works and master proven principles to deal with it properly;
• Understanding the cause-and-effect relationships that drive change, because causes precede effects, helps investors predict what will happen;
• Identify decision criteria, backtest them, systematize them, and computerize them so that investors are executing a well-thought-out and well-tested plan;
• Recognize that there is far more that we don’t know than that we do know;
• Know how to diversify your portfolio, because by doing this, investors can reduce risk by approximately 80% without reducing expected returns.
• Find the smartest people who disagree with you and have them pressure-test your ideas with insightful disagreements. This will increase your chances of being right and allow you to learn a lot.
• Ensure that the probability of unacceptable losses is zero.

Despite past successes and failures, Dalio's words are filled with reverence for investing. "A balanced portfolio is paramount. The correct approach is to build a reasonable portfolio with appropriate diversification. Ideally, a portfolio should always hold 10 to 15 low-correlated assets. By doing this, investors can reduce risk by approximately 80% without reducing expected returns."

He also warned investors not to blindly increase their holdings when market sentiment is overheated and to be wary of chasing rising prices. "The biggest problem most people have with investing is that they tend to assume that the investments that performed best in the past will be the best investments in the future. The truth is, the best companies aren't necessarily the best investments, just like the best horses in a horse race aren't necessarily the most worthwhile to bet on, as the odds already reflect everything. When an asset becomes too expensive, it's more likely to fall than to continue rising."

Starting from 2024, Dalio repeatedly emphasized that five major forces will reshape the world in the future. In the next three to five years, due to the influence of these forces , "we will experience changes similar to a time tunnel and enter a completely different world."

Nothing in the world is permanent except evolution. In Dalio's view, evolution is a cyclical process, like the tides—ebbs and flows that are difficult to resist or reverse.

The force of the tide is irresistible. You can either ride the waves or be swallowed up. Are investors ready?