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By understanding these relationships, I could come up with decision rules or principles I could model. These early models were a far cry from the ones we use now; they were back-of-the-envelope sketches, analyzed and converted into computer programs with the technology I could afford at the time.

At the very beginning, I did regressions on my handheld Hewlett-Packard HP calculator, plotted charts by hand with colored pencils, and recorded every trade in composition notebooks. When the personal computer came along, I could input the numbers and watch them be converted into pictures of what would happen on spreadsheets. Knowing how cattle, hogs, and chickens progressed through their stages of production, how they competed for meat- eater dollars, what meat-eaters would spend and why, and how the profit margins of meatpackers and retailers would influence their behaviors for example, which cuts of meat they would push in advertisements , I could see how the machine produced cattle, hog, and chicken prices that I could bet on.

As basic as those early models were, I loved building and refining them— and they were good enough to make me money. The approach to price determination I was using was different from the one I had learned in my economics classes where supply and demand were both measured in terms of quantities sold. I found it much more practical to measure demand as the amount spent instead of as the quantity bought and to look at who the buyers and sellers were and why they bought and sold.

I will explain this approach in Economic and Investment Principles. This different approach was one of the key reasons I caught economic and market moves others missed. From that point on, whenever I looked at any market—commodities, stocks, bonds, currencies, whatever—I could see and understand imbalances that others who defined supply and demand in the traditional way as units that equaled each other missed.

My approach was far from perfect. That was most of my net worth at the time. More painful still, it hurt my clients too. This lesson changed my approach to decision making in ways that will reverberate throughout this book—and to which I attribute much of my success. But I would make many other mistakes before I fully changed my behavior. To me, meaningful work is being on a mission I become engrossed in, and meaningful relationships are those I have with people I care deeply about and who care deeply about me.

When thinking about the things you really want, it pays to think of their relative values so you weigh them properly. In my case, I wanted meaningful work and meaningful relationships equally, and I valued money less—as long as I had enough to take care of my basic needs. In thinking about the relative importance of great relationships and money, it was clear that relationships were more important because there is no amount of money I would take in exchange for a meaningful relationship, because there is nothing I could buy with that money that would be more valuable.

So, for me, meaningful work and meaningful relationships were and still are my primary goals and everything I did was for them. Making money was an incidental consequence of that.

In the late s, I began sending my observations about the markets to clients via telex. It was a good discipline since it forced me to research and reflect every day. It also became a key channel of communication for our business. Today, almost forty years and ten thousand publications later, our Daily Observations are read, reflected on, and argued about by clients and policymakers around the world.

In addition to providing clients with these observations and advice, I began to manage their exposures by buying and selling on their behalf. Sometimes I was paid a fixed fee each month and sometimes I received a percentage of the profits. I made them both a lot of money —especially Lane Processing, which did even better from its speculations in the grain and soy markets than it did from raising and selling chickens.

As I thought about the problem, it occurred to me that in economic terms a chicken can be seen as a simple machine consisting of a chick plus its feed. The most volatile cost that the chicken producer needed to worry about was feed prices. I felt great about helping make that happen. I identified similar types of price relationships in the cattle and meat markets. For example, I showed cattle feeders how they could lock in strong profit margins by hedging good price relationships between their cost items feeder cattle, corn, and soymeal and what they were going to sell fed cattle six months later.

I developed a way of selling different cuts of fresh meat for future delivery at fixed prices far below frozen meat prices but that still produced big profit margins. My ability to visualize these complex machines gave us a competitive edge against those who were shooting from the hip, and eventually changed the way these industries operated.

And, as always, it was a kick to be working with people I liked. On March 26, , my wife gave birth to our first son, Devon. It turned out to be my best decision. To give you an idea about how interwoven they were in my mind, Devon was named after one of the oldest breeds of cattle known to man, among the first breeds imported into the U. In the s, there were three such waves. The second, which came between and , took inflation to its highest level since World War II. The Fed tightened the money supply, driving interest rates to record highs, which caused the worst stock market and economic downturn since the s.

Interest rates and inflation soared and crashed; stocks, bonds, commodities, and currencies went through one of their most volatile periods ever; and unemployment hit its highest level since the Great Depression. It was a time of extreme turbulence for the global economy, for the markets, and for me personally.

In —80 as in —71 and in —75 different markets began to move in unison because they were more influenced by swings in money and credit growth than by changes in their individual supply-demand balances. These big moves were exacerbated by the oil shock that followed the fall of the Shah of Iran. That oil market volatility led to the creation of the first oil futures contract, which gave me trading opportunities by then, there were futures markets in interest rates and currencies as well, and I was making bets in all of them.

Because all markets were being driven by these factors, I immersed myself in macroeconomics and historical data especially interest rates and currency data to improve my understanding of the machine at play. A few months later, Volcker announced that the Fed would limit the growth of the money supply to 5.

According to my calculations at the time, 5. Bud Dillard, a Texan friend and client of mine who was big in the oil and cattle businesses, had introduced us a couple of years before, and we regularly talked about the economy and markets, especially inflation.

Just a few weeks before our meeting, Iranian militants had stormed the U. There were long lines to buy gas and extreme market volatility. There was clearly a sense of crisis: The nation was confused, frustrated, and angry.

Bunker saw the debt crisis and inflation risks pretty much as I saw them. He kept buying and buying as inflation and the price of silver went up, until he had essentially cornered the silver market. Every time that happened, inflation-hedged assets and the economy went down.

But Bunker was in the oil business, and the Middle East oil producers he talked to were still worried about the depreciation of the dollar. They had told him they were also going to buy silver as a hedge against inflation so he held on to it in the expectation that its price would continue to rise. I got out. On December 8, , Barbara and I had our second son, Paul. Everything was changing very fast, but I loved the intensity of it all. Because I had a strong tendency to be right but early, I was inclined to think that was the case.

It ruined Hunt, and he nearly brought down the whole U. All of this pounded an indelible lesson into my head: Timing is everything.

I was relieved that I was out of that market, but watching the richest man in the world—who was also someone I empathized with—go broke was jarring. Yet it was nothing compared to what was to come. We had become good friends from our dealings in the cattle and beef industry, and I respected his intellect and values, so I convinced him we should conquer that world together.

He brought his wonderful wife and kids up from Guymon, Oklahoma, and our families became inseparable. We ran the business in a scrappy, seat-of-the-pants way.

In , we decided we wanted to raise our families in more of a country setting, so we all moved up to Wilton, Connecticut, to run Bridgewater from there. We would debate about the markets and the forces behind them late into the night, plug data into the computer before we went to bed, and see what it spit out in the morning. In fact, some would say this was the most volatile period ever. The charts opposite going back to show the volatility of interest rates and gold.

As you can see, there had been nothing like it prior to — It was one of the most pivotal times in the last hundred years. The political pendulum throughout the world swung to the right, bringing Margaret Thatcher, Ronald Reagan, and Helmut Kohl to power. They either had to a print money to relieve debt problems and keep the economy going which had already pushed inflation to 10 percent in and was causing people to dump bonds and buy inflation-hedged assets , or b break the back of inflation by becoming bone-crushingly tight which would break the back of debtors because debt was at the highest levels since the Great Depression.

The worsening problem showed up in both progressively higher levels of inflation and progressively worse levels of economic activity. Both appeared to be coming to a head. Debts continued to rise much faster than the incomes borrowers needed to repay them, and American banks were lending huge amounts—much more than they had in capital—to emerging countries. But I had studied debt and depressions back to , done my calculations, and was confident that the debt crisis led by emerging countries was coming.

I had to share my thinking with my clients. Because my views were so controversial I asked others to track my reasoning and point out to me where it was bad. No one could find any flaws in my logic, though they were all reluctant to endorse my conclusion. Up until that point, gold and bonds had moved in opposite directions, depending on whether inflation expectations rose or fell. Holding those positions seemed much safer than holding alternatives like cash, which would lose value in an inflation environment, or stocks, which would crash in a depression.

At first, the markets went against me. But my experience with silver and other trades had taught me that I had a chronic problem with timing, so I believed I was just early and what I was expecting would happen soon.

By the fall of , the tight Fed policies were having a devastating effect, my bond bets were beginning to pay off, and my kooky views were starting to look right on.

In February , the Fed temporarily added liquidity to avoid a cash crunch. By then, it was clear to most everyone that a number of other countries were about to follow. This was a huge deal, because U.

Business loan activity in the U. Because I was one of the few people who had seen these things coming, I started to get a lot of attention. In both appearances, I confidently declared that we were headed for depression and explained why. This caused the stock market to jump by a record amount. After all, in a 15 percent rally was followed by the greatest crash of all time.

In October, I laid out my prognosis in a memo. To hedge against the worst possibilities, I bought gold and T-bill futures as a spread against eurodollars, which was a limited-risk way of betting on credit problems increasing.

I was dead wrong. In other words, inflation fell while growth accelerated. The stock market began a big bull run, and over the next eighteen years the U.

How was that possible? Eventually, I figured it out. As money poured out of these borrower countries and into the U. It drove the dollar up, which produced deflationary pressures in the U.

This fueled a boom. That way everyone could pretend everything was fine and write down those loans over many years.

My experience over this period was like a series of blows to the head with a baseball bat. Being so wrong—and especially so publicly wrong—was incredibly humbling and cost me just about everything I had built at Bridgewater. I saw that I had been an arrogant jerk who was totally confident in a totally incorrect view.

So there I was after eight years in business, with nothing to show for it. One by one, I had to let them go. We went down to two employees—Colman and me. Then Colman had to go. With tears from all, his family packed up and returned to Oklahoma. Bridgewater was now down to just one employee: me. Losing people I cared so much about and very nearly losing my dream of working for myself was devastating.

I had come to a fork in the road: Should I put on a tie and take a job on Wall Street? That was not the life I wanted. On the other hand, I had a wife and two young children to support. First, I had been wildly overconfident and had let my emotions get the better of me. I can say that with absolute certainty, because I know how markets work.

Second, I again saw the value of studying history. As in , I had failed to recognize the lessons of history. Realizing that led me to try to make sense of all movements in all major economies and markets going back a hundred years and to come up with carefully tested decision-making principles that are timeless and universal. Third, I was reminded of how difficult it is to time markets. Imagine that in order to have a great life you have to cross a dangerous jungle.

You can stay safe where you are and have an ordinary life, or you can risk crossing the jungle to have a terrific life. How would you approach that choice? Take a moment to think about it because it is the sort of choice that, in one form or another, we all have to make. In retrospect, my crash was one of the best things that ever happened to me because it gave me the humility I needed to balance my aggressiveness.

That way, we can all raise our probability of being right. So I learned to be radically open-minded to allow others to point out what I might be missing. I saw that the only way I could succeed would be to: 1. Seek out the smartest people who disagreed with me so I could try to understand their reasoning. Know when not to have an opinion. Develop, test, and systemize timeless and universal principles. Balance risks in ways that keep the big upside while reducing the downside.

Doing these things significantly improved my returns relative to my risks, and the same principles apply in other aspects of life. Bringing these opposing opinions into the open and exploring them taught me a lot about how people think. For example, some people are prone to take on too much risk while others are too risk averse; some are too focused on the details while others are too big-picture. Most are too much one way and not enough another.

Typically, by doing what comes naturally to us, we fail to account for our weaknesses, which leads us to crash. What happens after we crash is most important. Later in the book I will describe specific strategies for change, but the important thing to note here is that beneficial change begins when you can acknowledge and even embrace your weaknesses.

Sometimes life hits you in the head with a brick. Believe it or not, your pain will fade and you will have many other opportunities ahead of you, though you might not see them at the time. The most important thing you can do is to gather the lessons these failures provide and gain humility and radical open-mindedness in order to increase your chances of success. Then you press on. My final lesson was perhaps the most important one, because it has applied again and again throughout my life.

At first, it seemed to me that I faced an all-or-nothing choice: I could either take on a lot of risk in pursuit of high returns and occasionally find myself ruined or I could lower my risk and settle for lower returns. That way you can figure out how to have as much of both as possible.

As difficult as this was, I eventually found a way to have my cake and eat it too. Still, I gradually added clients, revenue, and a new team. With time, my upswings increased in magnitude and my downswings were both tolerable and educational. I never thought of what I was doing as building or rebuilding a company; I was just getting the things I needed to play my game.

Computers were among the most valuable things I acquired, because of how they helped me think. Without them, Bridgewater would not have been nearly as successful as it turned out to be.

The first microcomputers what would later be known as personal computers had come on the market during the late s, and I had been using them as econometricians did, applying statistics and computing power to economic data to analyze the workings of the economic machine.

Rarely, but still too often, the system would be dead wrong and I would lose a lot. In order to do that, I would have to have a vast store of economic and market data to draw on—and as it happened, I did. From very early on, whenever I took a position in the markets, I wrote down the criteria I used to make my decision.

Then, when I closed out a trade, I could reflect on how well these criteria had worked. It occurred to me that if I wrote those criteria into formulas now more fashionably called algorithms and then ran historical data through them, I could test how well my rules would have worked in the past.

Then I would run historical data through the systems to see how my decision would have performed in the past and, depending upon the results, modify the decision rules appropriately.

Doing this helped educate me and led me to refine my criteria so they were timeless and universal. Once I vetted those relationships, I could run data through the systems as it flowed at us in real time and the computer could work just as my brain worked in processing it and making decisions.

Most of the time, it was because I had overlooked something. In those cases, the computer taught me. We helped each other. This was great, because it was like having a chess grandmaster helping me plot my moves, except this player operated according to a set of criteria that I understood and believed were logical, so there was no reason for us to ever fundamentally disagree. And, because it had such a great memory, it could do a better job of compounding my knowledge and the knowledge of the people I worked with as Bridgewater grew.

Rather than argue about our conclusions, my partners and I would argue about our different decision-making criteria. Then we resolved our disagreements by testing the criteria objectively. The rapidly expanding power of computers during that era was like a constant stream of gifts from the gods to us. It was fun to put it up against each of my clients so they could see how hard it was to beat computerized decision making. They could also include timing rules.

We believe that market movements reflect economic movements. Economic movements are reflected in economic statistics.

Over the last three decades of building these systems we have incorporated many more types of rules that direct every aspect of our trading. Now, as real-time data is released, our computers parse information from over million datasets and give detailed instructions to other computers in ways that make logical sense to me. As you will see later, I am now developing similar systems to help us make management decisions. But clearly there was a growing demand for our research, and I realized we could sell it to supplement our consulting and trading income.

We worked with all sorts of corporate, financial, and government institutions that had market exposures—banks, diversified international businesses, commodities producers, food producers, public utilities, and more. For example, we would build a plan to help a multinational company deal with the currency exposure it faced from operating in different countries.

My approach was to immerse myself in a business until I got to a point where I felt that the strategies I was handing off were the ones I would use were I running the company myself. I would break each company down into distinct logical components and then come up with a plan for managing each part, using a variety of financial tools, especially derivative instruments. The most important components to separate were the profits coming from the core business and those that were speculative profits and losses coming from price changes.

I would advise them to deviate from this position only when they wanted to speculate, which they should only do in measured ways and with full knowledge of the effects it could have on their core business.

This approach was eye-opening for most of the firms we worked with. It gave them clarity and control, and yielded them better results. Sometimes they wanted us to speculate for them, which we would do for a share of the profits. The return of a market such as the stock market itself is called its beta. Alpha is the return that comes from betting against others. With alpha overlay, we were offering a way of making bets independent of underlying market performance.

Approaching the market in this way taught me that one of the keys to being a successful investor is to only take bets you are highly confident in and to diversify them well. One of our clients in the mids was Alan Bond, an audacious entrepreneur who was one of the richest people in Australia. Like Bunker Hunt, he eventually bet badly and was forced to declare bankruptcy. I advised him and his team on their way up and stayed on through his downfall, so I watched the tragedy unfold from up close.

His was a classic case of confusing business with speculation and only hedging when it was too late. Bond borrowed U. He did that because U. When the U. Before long, the Australian dollar plunged to new lows and they called me in for an emergency meeting.

Seeing one of the richest and most accomplished men on the planet lose everything made a huge impression on me. We also did one-off consulting projects related to the markets.

I also worked with the New York Futures Exchange to help design and market their CRB futures contract a tradable index that tracks the price of a basket of commodities. Unlike most people who work in the markets, I never had any desire to build investment products, especially conventional ones, just because they would sell well.

All I wanted was to trade the markets and build relationships, doing for our clients exactly what I would do if I were in their shoes. But I also loved building brand-new things, especially if they were great and revolutionary. By the mids, a couple of things were clear to me: First, we were making good calls in the interest-rate and currency markets, and the institutional investment managers who were buying our research were using it to make money.

With those two things going as well as they were, I figured we could become successful institutional investment managers ourselves. That was a huge turning point for us, as it was the start of Bridgewater as we know it today. The strategy we used for the World Bank shifted between holding cash and holding twenty-year U. Treasury bonds, because these positions would give us leveraged bets on the direction of interest rates.

When our systems indicated that the pressures on interest rates would cause them to fall, we would hold twenty-year Treasury bonds, and when the system pointed to rates rising, we would stay in cash. We did very well, and before long other large institutional investors gave us money to manage as well.

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