“I believe that understanding what is good is obtained by looking at the way the world works and figuring out how to operate in harmony with it to help it evolve” – Ray Dalio.
Simply put, economics is the study of satisfying our infinite number of wants with our finite resources. What do we produce? How do we produce? Where do we produce? These questions, although seemingly trivial, are the foundations of what goes on behind the doors of the world’s parliaments, banks and various other economic institutions every single day. What is “good” is quite subjective. Is it the result that produces the highest economic gain (GDP) for a country? Is it one that perhaps upholds economic sustainability? Or is it one that will ultimately lead to the greatest level of economic development? The answer is, we really don’t know. Sometimes decisions that are made may fit into all 3 of the above categories. Sometimes the policies we implement don’t fit into any at all. In this context, a “good” decision is one that generates revenue.
Undoubtedly the best way to examine this dilemma is to learn from one of the most successful hedge funds in the world, and is in fact the top of the line (as of 2022)— Bridgewater Associates. But first, what exactly is a hedge fund? Put simply, a hedge fund is an institution whereby private investors’ (generally) money is managed by fund managers to gain some positive returns. Or from the Oxford Dictionary, “an investment fund involving a group of people who take high risks with their investments in order to try and make a lot of money”. In spite of all the risks, these institutions still manage to earn large quantities of returns, and that’s a huge understatement. So what is it that makes it so successful? The crux of such success can be separated into 2 categories: principles of workplace culture, and principles of investment.
The principle of workplace culture is somewhat hard to define, but it can be simplified to the values and character that your institution or work environment truly embodies. It is evident that when examining Bridgewater, the root cause of these successful teams is the “truthful and transparent communication”, presumably fostering an inclusive culture so that all ideas are considered, as demonstrated on the front page of its website. While this may sound simple and a given, more than 50% of workers felt like there was a lack of transparency within their workplace, and this number goes up to 80% in some other studies. And it’s no surprise that when you put together these highly motivated men and women who have ample skills and expertise and foster them with principles like these, the results would speak for themselves.
A huge part of it should also be dedicated to Bridgewater’s “principled-based approach” to investment, in which the company applies “standard ways to deal with situations that occur over and over”. In other words, not purely observing history, but using history as a means to observe. This principle is perhaps best explained by something Ray Dalio has had to experience ever since he was a child: “I had to be an entrepreneur and an investor — and what goes along with that is making a lot of painful mistakes”, he said in his TED talk. Slowly, he began viewing the market as a “puzzle, [that] would give [him] gems”. This philosophy transferred from the mind of a curious child to the mind of an ambitious man; soon, many of these algorithms were written into computers, which took into account past failures and successes, making more informed future decisions. Evidently, such an approach has worked pretty well; over the past 26 years (from 2017), Bridgewater has been profitable in 23 of them.
Now, with that said, I’m not making the claim that these are the sole factors which have transformed Bridgewater Associates into the powerhouse that it is today; in fact, I can almost guarantee that there are a multitude of other factors, that are just as important, that have contributed to its success. Many of the other top hedge funds likely also possess many of these values as their core principles. Additionally, just because a company possesses these principles, it does not mean that it is guaranteed the same level of success. The path to success is seldom a straight line; it is one with curves, elevation, gaps and long, tedious pathways that will often lead to nothing but a dead end.
In summary, investment is not just about knowing economic theory and regurgitating what you find inside a book, or online, into the real world. It’s also not just about investment and economics; rather, interpersonal and workplace culture is of pivotal importance if one wants to achieve success.
Image: Credit to TED https://www.ted.com/talks/ray_dalio_how_to_build_a_company_where_the_best_ideas_win?language=en
Veni Vidi Veritatem 