Billionaire Ray Dalio knows a thing or two about investing. He founded Bridgewater Associates, a leading hedge fund, in 1975, and he ran that fund up until earlier this year. Dalio also knows his way around managing people. Bridgewater’s success turned it into one of the largest hedge funds in the world, with $125 billion in assets under management and about 1,500 employees.
Dalio isn’t pulling the trigger on buys and sells at Bridgewater anymore, but he is still sharing his thoughts on successfully running companies. His management lessons can often be adapted to investing, including these three pieces of advice he recently shared on LinkedIn.
Focus On Goals, Not Tasks
Goals often require specific tasks, but tasks often displace people’s focus on the goal. That’s a problem because it can mean energy gets spent on tasks, even when they no longer move the ball up the field toward the goal.
As investors, we risk focusing on the tasks associated with investing our assets, rather than delivering on whatever personal financial goal we’ve set for ourselves.
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As a result, portfolios can wind up packed with stocks that don’t deliver on the goal, or we can become paralyzed by analysis, never acting because we’re too mired in the task of evaluating stocks.
To avoid that risk, remind yourself of your goal, and then, ask if what you’re doing is delivering on that goal. If it isn’t, you’ll be in a better position to take action to get back on track quickly.
For example, if your goal is beating a benchmark, such as the S&P 500, regularly ask if you’re over- or underperforming it. Then, ask yourself why? Starting with the goal and working backward can lead to important revelations regarding portfolio construction.
Accountability Is Important to Success
It can be tempting to overlook the shortcomings of others, stepping in to do their work for them for the sake of speed or quality. That’s a mistake for two reasons: It takes your eyes off the big picture, and it fails to empower the team members, so that they can improve.
Dalio writes:
“Holding people accountable means understanding them and their circumstances well enough to assess whether they can and should do some things differently, getting in sync with them about that, and, if they can't adequately do what is required, removing them from their jobs.”
The same can be said about individual holdings in portfolios. Often, investors incorrectly justify holding onto poor-performing positions. Instead of making excuses, hold those positions accountable. If an investment isn’t performing, it could be because your thesis for owning it is broken. Go back and stress test your rationale to understand better the business, and why the market isn't rewarding it. Doing so may make you realize that your money is best invested elsewhere.
Don’t Worry Too Much About Making Mistakes
Mistakes happen. If you don’t accept mistakes as learning opportunities, you’ll risk becoming so afraid of them that you’ll fail to make the best decisions or take any action at all.
“Just worry about making the best decisions possible, recognizing that no matter what you do, most everyone will think you're doing something--or many things—wrong,” writes Dalio.
The best investors are often wrong. Most successful money managers recognize that mistakes are par for the course. They accept them as a reality, rather than tie their ego to them. Remember, many of the leading hedge fund managers of our time have win rates between 50% to 60%. That means they’re wrong nearly as often as they’re right.
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