Bridgewater founder Dalio retires, seven investment principles receive attention

Author: Wu Bin

"Pain + Reflection = Progress". On August 1st, Beijing time, Ray Dalio, the founder of Bridgewater Associates, shared his "farewell letter" on social media, reflecting on the pain and reflection that have shaped his tumultuous investment journey. As the 75-year-old Dalio sold his remaining shares in Bridgewater Associates and stepped down from the board, a legendary era in investing comes to a close.

Bridgewater Associates founder Ray Dalio (file photo)

Last week, Bridgewater Associates stated in a letter to its clients that it had repurchased all remaining shares of Dalio. Bridgewater subsequently issued new shares to the Brunei Sovereign Wealth Fund. In this multi-billion dollar transaction, the Brunei Sovereign Wealth Fund acquired nearly 20% of Bridgewater's equity.

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

Looking to the future, Dalio warns again: The probability of a global debt crisis erupting in the next 5 years is as high as 65%, and the dollar hegemony may suffer a heavy blow as a result. If businesses, nations, and individuals cannot identify their position in the cycle, they will be engulfed by this powerful "tide force."

Will Dalio once again hit the nail on the head this time?

Record

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

In 2008, Ray Dalio successfully predicted the US financial crisis, and that year, the performance of the Bridgewater flagship fund grew by over 14%. He then foresaw the European debt crisis again, and in 2010, the highest return of Bridgewater's funds exceeded 40%.

Behind the impressive achievements, Ray Dalio's investment journey has not been smooth sailing. In 1982, he suffered heavy losses due to his incorrect prediction that "the U.S. economy would fall into a great depression," and was even forced to borrow money from his father to keep the company running. This painful lesson became a watershed moment in his investment philosophy.

Before 1982, Dalio pursued a scientific and rigorous understanding of the "right cognition"; after 1982, Dalio was focused on knowing "how to prove that his cognition is not wrong," attempting to establish a set of systematic principles to cope with uncertainty.

According to Dalio, the operation of the world machine is driven by five major forces, including debt/money/economic cycles, internal order and chaos cycles, external order and chaos cycles, natural forces, and human creativity. When these five forces act together, they form a large cycle in the process of evolution from the "old order" to the "new order", where peace and prosperity alternate with conflict and depression.

He emphasized the importance of understanding the causal relationships driving change, as the cause precedes the effect, and this understanding will help investors predict what is about to happen. Clearly defining decision criteria, backtesting, systematizing, and computerizing them ensures that investors execute a well-thought-out and thoroughly tested plan. "In my over 50 years of professional investment career, I have made a lot of money by betting on this causal relationship... Although many key unknowns and uncertainties still exist, I am confident that these are the greatest and most important forces."

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

Dispute

In recent years, Dalio's debt theory, which has been widely circulated, has faced some challenges.

Ray Dalio believes that an economy, whether it is a business or a country, will encounter the troubles of a debt crisis if it accumulates excessive debt. To reduce the risk of a debt crisis erupting, it is necessary to compress the debt scale through "deleveraging" measures.

According to Xu Gao, the chief economist at BOC International Securities, Dalio made two errors in his methodology for analyzing macroeconomic issues: he incorrectly used micro thinking to analyze macro problems and mistakenly imagined the macroeconomy as a machine, thus failing to see the differences in the operational logic under different macroeconomic conditions.

On one hand, Dalio's core logic in analyzing national debt is that when a country accumulates too much debt, a debt crisis will erupt. His criterion for judging whether the debt is too much is whether the returns generated by the debt can cover the cost of the debt. This is a microeconomic perspective on debt analysis, applicable to individuals and enterprises as microeconomic entities. Xu Gao told reporters that while this logic aligns with people's intuition, it cannot be blindly applied to the analysis of national debt. The operation of macroeconomics is sometimes counterintuitive and contrary to common sense.

The United States is the issuer of the US dollar, which is currently the main international reserve currency, and therefore can borrow foreign debt in its own currency. The constraints of US debt are not even based on the supply capacity of the United States, but on "dollar hegemony." Xu Gao analyzed that as long as the dollar is still accepted by countries around the world as an international reserve currency, and countries are still willing to hold dollars, US debt can be sustainable. Correspondingly, only events that threaten "dollar hegemony" will bring debt risks to the United States. The hollowing out of American industries and the so-called "reciprocal tariff" policy introduced by the US this year pose threats to "dollar hegemony," which are long-term and short-term factors bringing debt risks to the United States.

On the other hand, Dalio understands macroeconomics as a machine, thus mistakenly believing that specific actions will inevitably produce specific consequences. Xu Gao reminds us not to imagine macroeconomics as a machine—various causal relationships and responsive behaviors in macroeconomics may change due to changes in the macroeconomic environment. Macroeconomics is composed of living beings who have expectations for the future and will change their behaviors based on those expectations. Once expectations change, people's behaviors will change accordingly, leading to changes in the macroeconomic structure.

In Xu Gao's view, Dalio's mechanical understanding of macroeconomics has led to some misconceptions. For example, in Chapter 18 of his book "Why Nations Fail", Dalio proposed his "3% solution"—he believes that the U.S. fiscal deficit as a percentage of GDP should be reduced to 3%.

What should be the appropriate level of a country's fiscal deficit and debt? Xu Gao stated that it depends on the macroeconomic conditions of that country. Under different circumstances, the reasonable level of fiscal deficit and debt varies. Trying to find a standard for deficit and debt levels that does not change over time, or that is universally applicable, is not only futile but also extremely harmful. By posing such a question, one assumes the existence of an answer to the problem, thereby overlooking the truly important state of macroeconomic operation and the necessity of specific analysis for specific issues.

Goodbye

Success and failure are all in vain. In 2011, Dalio first announced his succession plan. On October 4, 2022, Dalio handed over control to the company's board of directors, officially stepping back and no longer holding ultimate decision-making power. Since then, Dalio has continued to serve Bridgewater Associates as a chief investment officer mentor and a member of the operating board.

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

Many people ask him what it feels like to hand over Bridgewater after founding and running it for 50 years. Dalio's memories flood his mind: "I feel incredibly excited! It has been an extraordinary journey, and I remember every moment vividly—from founding Bridgewater with a football teammate in a two-bedroom apartment, to building it into the world's largest hedge fund (at one point, the staff reached about 1,500 people), and then earning returns for clients that surpassed any other hedge fund."

With Dalio's handover completed, he looks forward to the next generation of talent to help Bridgewater achieve new heights in the next 50 years. "I am pleased to see Bridgewater thriving even without me, and even better than when I was there. In my view, this is the perfect life cycle. As a 76-year-old who loves Bridgewater and its employees (actually just days away from 76), it is like seeing my children remain strong and healthy without me, which is far better than me at 76 having to take care of them."

Reflecting on Bridgewater's success over the past 50 years, Dalio believes there are four important "principles of work": "The people and culture you choose determine everything; choose those with strong character and outstanding ability, and establish a culture of 'intellectual elitism' where meaningful work and meaningful relationships are achieved through extreme truthfulness and extreme transparency; create a culture that allows for mistakes but does not permit failing to learn from them; pain + reflection = progress."

Tide

Throughout Ray Dalio's decades-long investment journey, seven investment principles have received significant attention:

• Reality is like a machine, and investors need to understand how this machine operates and master proven good principles that can effectively deal with it;
• Understand the causal relationship that drives change, as the cause precedes the effect; this understanding will help investors predict what is going to happen.
• Clearly define decision criteria, backtest, systematize, and computerize them, so that what investors execute is a well-thought-out and thoroughly tested plan;
• Realizing that what we don't know is far greater than what we do know;
• Understand how to achieve effective diversification, as doing so can reduce risk by about 80% without lowering expected returns for investors;
• Find the smartest people who disagree with you and have them pressure test your ideas through deep debate. This will increase the probability of being correct and also teach you a lot.
• Ensure that the probability of incurring unacceptable losses is zero.

In facing the ups and downs of the past, Dalio's words are filled with reverence for investing. "The most important thing is to balance the investment portfolio. The right approach is to build a reasonable investment portfolio, conduct appropriate diversification, and ideally, the portfolio should always hold 10 to 15 assets that are lowly correlated with each other. If done well, investors can reduce risk by about 80% without lowering expected returns."

He also reminded investors not to blindly increase their positions when market sentiment is too hot, and to be wary of chasing prices. "In investing, the biggest problem for most people is that they tend to believe that the investments that have performed best in the past will be the best investments in the future. The fact is that the best companies are not necessarily the best investments, just as in a horse race, the best horses are not always the ones worth betting on because the odds already reflect everything. When an asset becomes too expensive, it is more likely to fall rather than continue to rise."

Starting in 2024, Dalio has repeatedly emphasized that the five major forces will reshape the world, and in the next three to five years, due to the influence of these forces, "we will experience a change akin to traveling through a time tunnel, entering a completely different world."

Apart from "evolution", nothing in the world is eternal. According to Dalio, there are cyclical patterns in the process of evolution, akin to tides—rising and falling, which are difficult to resist or reverse.

The power of the tides is irresistible; one may ride the winds and break the waves or be swallowed. Are investors ready?