Right and Wrong at the Same Time

Table of Contents

1. Destroy Best-Loved Ideas
2. Chernobyl and Theranos
3. Principles
4. Let’s Get Practical

1. Destroy Best-Loved Ideas

One of Ray Dalio’s principles is “Be open-minded and assertive at the same time.”

That’s hard to do.

It stuck together a few disparate experiences I’ve had lately that have each stayed in my mind.

Charlie Munger just said that he recently destroyed one of his own best-loved ideas, and doing so made him beyond happy.

I’ve mentioned him saying that a few times already in these issues, because the thought stuck with me so deeply.

How difficult to destroy one’s own best-loved ideas. Think of the process. First, you must simultaneously hold the confidence that you are correct and act on that conviction, while also knowing you may be wrong. Second, you must take responsibility for potentially being wrong and investigate your error in a serious way, while also staying confident that you are correct. Third, you must be open enough to discover that you are indeed wrong – and here’s the hardest part – without destroying your confidence.

So when I read Dalio’s principle to be open-minded and assertive at the same time, it jogged my memory and Charlie’s words came back to me. Dalio is saying the same thing as Charlie in different words; in effect, stay confident while staying open to being wrong.

2. Chernobyl and Theranos

I don’t actually know how to stay confident while staying open to being wrong, but it’s something I’m going to start noticing, paying attention to, and practicing. Maybe I can start to experience a glimmer of what Dalio and Munger seem to experience. Two more of those disparate experiences that stuck together for me highlighted how hard it is to acknowledge being wrong: a nuclear disaster and a startup fraud.

I watched the HBO miniseries Chernobyl, which is about the accident at and subsequent meltdown of the nuclear power plant in Chernobyl, USSR. Great show. It has some made-for-TV moments for sure, but what I took away from it was what it was like to live in a communist world where everyone gets ahead through being better than the other guy at politicking and never taking responsibility.

Incentives, man. They are dead serious. Deadly serious, in this case.

I won’t give anything away, but I’ll tell you how the show begins: a man records the story of what happened after the accident at the nuclear plant, and then kills himself at a precise time. The only way he could get attention was with his death, rather than his life.

In stark contrast, the workers at the Chernobyl nuclear plant were not open to being wrong. For many good reasons, including that they would get fired and since you couldn’t really get fired in the USSR and just go find another job (instead you’d get massively demoted and have a huge change in lifestyle for you and your family, including possibly being moved to the hinterlands) they refused to acknowledge a mistake and especially not responsibility. If you’re a shop worker, that’s probably not a big deal. However, if you’re a nuclear power plant worker, that’s not going to fly in the long-term. They were stuck between a rock and a hard place, and the real consequences of causing a nuclear meltdown ended up in court martial or a horrible death for most of the people involved, innocent and guilty.

Elizabeth Holmes, who started the blood testing company Theranos, ran into the same position between a rock and a hard place.

Background: The short version of what happened at Theranos is that it was started by 19-year-old Holmes who had invented a portable blood testing machine that could conveniently test our blood extremely inexpensively compared to what we pay now. The big audacious goal was that we would all be able to use the Theranos machines in our own homes at some point in the future, essentially to get real-time health testing that would prevent diseases. Here’s a helpful timeline Refinery29 put together. I read the book about how John Carreyrou, a Wall Street Journal reporter, exposed the company. It’s called Bad Blood, and was fantastic, and I watched the HBO documentary about the company on an airplane the other day, which was, after you’ve read the book, fine but nothing amazing. More with Carreyrou here and here.

Holmes behaved exactly like those nuclear plant workers: refused to acknowledge that her initial claims weren’t actually working out in the blood testing machine, told some initial small exaggerations, then bigger lies to cover, until finally she perpetrated a massive fraud. Common amongst software entrepreneurs, frankly. The difference was that, again, like the nuclear plant workers, her lies covered up a situation that actually hurt people. If software doesn’t work, ok, that’s probably a financial loss. If hardware that tests blood doesn’t work, that’s people’s lives at stake. If a nuclear plant test doesn’t work, that’s people’s lives and the environment at stake.

After watching Chernobyl, I realized I knew absolutely nothing about nuclear plants or even how nuclear power works, so I started reading about nuclear power and made my way eventually to this New Yorker article, which is at its core about how humans make stupid mistakes because we can’t remember that our lives are short. Turns out there’s a fault line in the Pacific that no one really thinks much about, but when it moves, it will cause two tsunamis. One will destroy the coastline of Japan, just like the tsunami that caused the Fukushima nuclear meltdown. One will destroy the coastline of the Pacific Northwest of the US. The article, written by Kathryn Schulz, won the Pulitzer Prize. It’s a fantastic read and well worth your time. I can’t stop thinking about the superintendent of schools on the coast of Oregon who can’t get the money to move one of his schools outside of the flood zone. What should he do? Should he quit in protest, hurting himself and his family, but hopefully bringing some attention to the importance of his cause? Or should he stay and keep trying, but possibly be the guy who, if the tsunami hits, oversees the deaths of hundreds of schoolkids?

What should we, as investors, do when we discover we’re wrong on a company we’re heavily invested in? How do I emotionally handle that discovery without hiding from it?

How can we encourage ourselves to take responsibility when there’s a possibility that we’re wrong?

3. Principles

I believe that Dalio wrote his principles down to encourage himself to take responsibility. He needed to regulate his emotions, and chose written principles as his methodology. He never intended to turn them into a book; he published them inside Bridgewater, where employees found them helpful, then he put them online, where they were downloaded millions of times, and finally he edited them and turned them into a book, Principles. They were never for US. They’ve always been for him and what he needed for his investing practice. And so should mine be for me and what I need for my investing practice. And yours be for you and what you need for your investing practice.

Each of us learn differently, remember?

I’m not going to recap the book or give a book report on it – Dalio does that himself very well in the interviews to which I linked in our last issue.

What I took from Principles was not particularly the principles themselves. They are interesting and relatively useful, and certainly thought-provoking so that’s all good. Ground-breaking? Nope. I skimmed a lot of that part of the book.

The book’s context is what makes it special. This book was written by the founder of a huge financial entity. The largest hedge fund in the entire WORLD. A billionaire. Dalio IS The Establishment. He IS the Financial-Industrial Complex. No one should be more Finance Bro than him, right?

Yet, his interviews and his book show that he’s nothing like that stereotype of the wolf of Wall Street, king of the world, Finance Bro. In context, the book is extraordinary. Dalio is someone who, instead of cheating people and cutting corners, created standards to hold the highest ethical standards. He meditates. He consciously grew his organization so it could exist and thrive without him. He’s

His principles aren’t particularly groundbreaking on their own. They’re interesting because they’re the ones HE needed to write down and learn. It’s an insight into a great investor’s learning process.

For example, one of his principles is that people learn differently from each other. “[__]” Um, duh. That’s not new. Yet, to me, that was one of the more revealing principles because it means Dalio had to learn that people learn differently from him. He was going around leading Bridgewater thinking that everyone working with him was learning the same way as he did, and when he discovered that they learned differently, that was enough of a shock that he wrote it down. It became a principle.

So, I read that and noticed that he took it beyond the first level, on which most people stop. Yeah, (Step One) an investor like Dalio has some major qualities of ego and possibly even narcissism that didn’t allow him to notice that people think differently than he does, AND (Step Two) a great investor like Dalio was open-minded enough to eventually notice that people think differently than he does, AND he didn’t notice it and forget it like a lesser thinker would do, he (Step Three) wrote it down, codified it, and lived by it going forward, and it made him one of the greatest investors in the entire world. Getting to and completing Step Three? THAT’s next level thinking and doing.

Behaving similarly is how I can also get to the next level.

Another example: one of his principles is to become aware of your own weaknesses and compensate for them through technology or hiring people with strengths in those areas. Again, not a groundbreaking idea. He’s not the first person to say “hey, if you’re not great at finishing projects on time, hire someone who will crack the whip on you.”

He certainly does have some rather unusual ideas about how to run a company. They’re the controversial topics to bring up in an interview, so if you listened to the podcasts I linked to last issue, you’ve heard them. His concept of radical transparency at work is controversial because the principle is to never say something about another person that you wouldn’t say to their face, and to that end, the company tapes every meeting and publishes the tapes and transcripts where any employee has access. They constantly evaluate each other in a way that, to an outsider, sounds very harsh. Dalio put an email in the book that he received after a meeting. The email informed him his grade for the meeting was a D-minus, he clearly had not prepared, and had wasted everyone’s time by rambling. It’s rough.

I feel like I shouldn’t comment much on the system without having ever experienced it. My gut says I’d either discover it’s a beautiful way for people to skip corporate politics and work together with fantastic honesty that creates truly meaningful relationships, or discover it’s a way for people to say terrible things to each other and then say “I’m just being honest!” like the Real Housewives do, with no consideration for people’s feelings or relationship consequences. I also suspect it’s probably both, with different experiences for different people. Dalio’s experience is probably pretty different from a low-level employee’s, though he takes pains to note that he thinks their evaluations are exactly as harsh. I don’t know how much I that that’s true in real life. In the book he gives an example of a lower-level employee being upbraided by a boss in a hallway, and someone with some power walked by and thought it was not appropriate, took it to an arbitration system, and [____]. But – what if that person with some power had NOT walked by? How many times had that situation occurred without anyone else noticing? I don’t know. I see a lot of ways it could go wrong, but I’m super intrigued by it, I’ll say that.

There’s a lot of negativity out there about Dalio and the unique way he runs Bridgewater. It has been an interesting experience for me to tell friends I have been reading this book and getting obsessed with Dalio over the last few weeks. A common reaction is “ugh, I couldn’t get through that book, it was so boring.” To which I reply, “Context is everything. It helps a lot to listen to his interviews first.” Another one is “I can’t believe they record their meetings, it sounds terrible.” To which I reply, “It does, and yet in that context and culture, it seems to work for the people who stay at that company – and the people who hate it leave.”

There are a bunch of negative reviews of the book on Amazon, mostly saying variations of these principles are just re-hashed statements of the obvious that are much better written in other books, and that Dalio doesn’t provide enough real-life examples to show how he actually uses this extremely long list of advice.

That’s true.

It’s a fair criticism and I don’t disagree.

However, I doubt those reviewers have a personal investing practice. I think they’ve missed the point. And I think that’s why I got so obsessed with listening to his interviews because hearing this man talk about what he’s done, why he’s done it that way, and the amount of thought he’s put into why he’s done it that way is special. It’s extremely unusual to hear this amount of introspective thought from a typical finance person. It’s also unusual to have a finance guy who does Transcendental Meditation and has for thirty years. It’s also unusual for anyone in finance to talk about mistakes he’s made. Great investors seem to be long-term oriented and tend to be philosophers. This is one who’s had the rare opportunity to implement his philosophy and watch how successful it is in real life, with many tweaks along the way. I think it’s worth learning from.