Principles offers a clear, straightforward approach to decision-making that anyone can apply to life, no matter what they’re seeking to achieve.
Animated Summary by Productivity Game and the Swedish Investor
Key Takeaways
"Anyone who is at the top of their game, who we would consider to be one of the most successful people in the world, aren't people who have never failed, they're just people who never let failure stop them."
Helpful to look at life as if it were a game, which each problem and failure is a solvable puzzle. By solving the puzzle you’ll get a gem in a form of a principle that will help you avoid the same sort of problem or failure in the future.
Pain + Reflection = Progress
The hundreds of problems and failures you encounter will simply allow you to build a better system of principles, making the path to success smoother and smoother.
Three Part Process for adopting a principle approach to life
Part 1: Be Radically Open-Minded
When you adopt a mindset of radical open-mindedness, you genuinely want to hear peoples honest opinion of you. You want to know how badly you’re failing. How flawed your thinking is. How weak your skills are. Because you can use that information to get better.
- When you’re radically open-minded you frequently ask questions like “What am I missing?” or “How can I get honest feedback?”
- You seek the truth regardless of how much it might hurt.
- With an open, egoless mindset, you’ll be able to use that information to grow and improve.
Part 2: Find the Root Cause
Finding root causes can often be painful because it usually leads to a personal weakness. However, just because you have a weakness doesn’t mean you have to simply live with it.
- Finding a weakness is like finding a leaky pipe in your house. There are a few things you can do to address that pipe.
- First you could find or come up with a principled system to work around it, like putting a bucket under the pipe and emptying the bucket once a day.
- Or you could find the principles to develop the skill of pipe repair by watching a few youtube videos and trying to fix the pipe yourself. In that way you turn the weakness into a strength.
- Or you could find the principles that could help you find the right people to mitigate your weakness. Like knowing who to call and how to negotiate a contract with a plumber.
- Problem is most of us take a 4th option: we sell the house with a leaky pipe and move to a new house. Essentially we run away from our weakness and focus on a different goal, but sure enough that weakness shows up again and we still don’t have a way to address it because we didn’t take the time to reflect and build principles to deal with it.
- In the long-run its much more beneficial to take the time and develop a principled approach to deal with your weakness.
Part 3: Write Your Principles Down
The easiest way to develop principles you can clearly explain is to write them down and refine them.
“To be principled means to consistently operate with principles that can be clearly explained.”
1. Create Principles - Systemize your Decision-Making
Principles are fundamental truths that serve as the foundations for behavior that gets you what you want out of life. They can be applied again and again in similar situations to help you achieve your goals.
- Imagine if you wanted to build muscles at the gym. Without any principles, you’d just go there and do stuff aimlessly. You’d probably have no regularity in your schedule whatsoever.
Having principles for basic level problems allows you to focus your energy and brain power on those of higher levels of difficulty, making you more efficient. Moreover, having principles allows you to diagnose problems that might occur along your way to greatness.
Identifying such problems becomes much easier if you have clearly stated principles, and it’s helpful if you write them down too. See principles as rules that govern a machine in a discipline where you want to become successful. See yourself as an engineer, whose primary task is to keep evaluating these principles against reality and updating them according to the empirical data that you gather.
Dalio suggests creating principles for everything in your life. He also suggests writing them down as an important step to make sure that you express them explicitly, and not in some vague way that neither you nor anyone else can understand.
He encourages to write down every important encounter that you had and compile them into a list. Develop principles for each category of encounters. Stress test them the next time you come across “another one of those”, and update the principle if necessary.
Here are a few famous investment principles:
- “Invest in your circle of competence”
- “Use a margin of safety”
- “Talk to people!”
- “If you like the store, chances are you’ll love the stock”
- And Ray Dalio himself: “15 to 20 uncorrelated streams of income can reduce your risk, without reducing your expected returns.” This is the holy grail of investing, according to Dalio.
2. The Five-Step Process to Ultimate Success
This is the five-step process to get what you want out of life.
1: Have Clear Goals Life is a smorgasbord of opportunities, and this causes many people to fail before they even get started. Setting and achieving goals always means that you must reject other interesting alternatives as well.
When setting your goals, don’t be afraid to shoot for the moon. If you limit your goals to what you know that you can achieve, you will always set the bar too low.
2: Identify and don’t tolerate the problems that stand in the way of you achieving those goals. Every problem that you face is an opportunity to improve. Remember – pain + reflection = progress. Every time you identify a problem you’re one step closer or becoming better.
However, finding out about a weakness and then doing nothing about it, is just as bad as not identifying it in the first place. Sure, thinking about problems that aren’t easily fixable will make you anxious but ignoring them should make you more anxious still.
3: Accurately diagnose the problems to get at their root causes. Before you concentrate on what to do about it, you must focus on what is. You must find the root cause to the issues. A root cause is typically described with an adjective, not a verb.
Here’s an example:
- “My stocks had a worse performance than the S&P 500 this year because I picked the wrong stocks.” That’s not really a root cause, let’s dig deeper.
- “Okay. I picked the wrong stocks because I don’t have a proper investing system.” That’s closer, but not good enough.
- “I don’t have a proper investing system because I’m not educated within the subject well enough, yet.” That’s good.
4: Design plans that will get you around them. When designing the plan, make sure to replay what you have done, which brought you to where you are today. Then visualize what must be done from you and others in the future so that your goals are reached.
- Write down your plan so that everyone can see. A word of caution here – many fail at this step because they are preoccupied with execution.
5: Do what is necessary to push these designs through to results. Designing precedes doing. There are many paths that will lead to you achieving your goals. You only need to find one that works.
For this step, you must grit your teeth and you must form awesome habits. Create to-do lists that are organized and tick off items in order from most important to least important. Establish metrics which allows you to see if you are on the right track.
3. Be Radically Open-Minded
Have you ever found yourself in a discussion where you stubbornly hold on to something and later realize that you were completely wrong? This highlights our third takeaway – the importance of letting your ego go, and listen to what other people have to say.
Sometimes, the reason why they disagree with you (believe it or not!) is because they are right. After all, with two opposing conclusions, at least one must be wrong.
Here are a few signs that you might be closed-minded, which is the opposite of what you want to be according to Dalio.
- You don’t want your ideas to be challenged.
- You make statements more often than you ask questions.
- You block others from speaking.
- You focus more on being understood then understanding others.
In Dalio’s own words:
“To be efficient, you must not let your need to be right be more important than you need to find out what’s true.”
“If you are too proud of what you know, or how good you are at something, you will learn less, make inferior decisions and fall short of your potential.”
Most people find this very difficult They aren’t interested in understanding what others are thinking, because too much of their energy is dedicated towards telling everyone what they themselves are thinking.
Stop worrying about if you’re looking good or not. Looking good won’t allow you to reach your goals. But finding the truth on the other hand, will.
A great tool for becoming radically open-minded that Dalio presents in the book is to always ask yourself if you are the master or the disciple.
- You shouldn’t block Warren Buffett out when you’re having a discussion on investing.
- Neither should you try to convince Arnold Schwarzenegger that your way of lifting weights is superior to what he did.
- And you probably shouldn’t block Synester Gates out when he tries to teach you an awesome lick on the guitar.
Realize when you are the disciple and must focus on asking questions. But also when the opposite is true, and you must be the one making statements.
Another way of becoming more open-minded is to see pain as a cue for being more reflective. When your ideas are being questioned, you will go into a defensive stance, which is painful. By being aware of it when it happens, you can remind yourself that this is a situation in which you must force yourself to be more open-minded.
4. How to Handle Your Weaknesses
We all have our weaknesses. When you encounter your weaknesses you have 4 choices:
1. Deny them. This is the most common approach, but it SUCKS. Especially if the skill in question is necessary for success within the field you’ve picked. You’ll bang your head bloody against the wall in frustration out of not getting anywhere.
2. Accept them and work at them to convert them into strengths. If this is a viable option, it is the best one to go for. But let’s face it. We were given a set of abilities at birth that we only can change to a certain degree. A dwarf will never become an elite NBA player, but he might make a h**l of an actor.
3. Accept them and find ways around them. This path is probably used the least and that’s a shame. A workaround could for instance, be outsourcing certain problems on the path towards your goal to other people that are naturally more gifted for that specific task.
4. Change what you’re going after. This is another solution that isn’t used widely, but which makes perfect sense. By changing the goal, your weaknesses might not be weaknesses anymore, and perhaps you can find even more joy in another discipline anyway. Remember that you can never dig yourself out of a hole.
5. Learn How to Synthesize Well
Synthesis is the process of converting a lot of data into an accurate picture of reality. This requires the usage of takeaway number 3 – being radically open-minded and it enhances the effectiveness of takeaway number 1 – building your principles to systemize decision-making.
Becoming great at synthesizing is a three-step process.
1. Synthesize the situation at hand. Well surprise, surprise! Everyday you are faced with thousands of pieces of information. We must learn to distinguish which data that is important and which isn’t. Who or what you’re listening to is an important part of this. Don’t believe in everything you hear, and value great higher than new.
2. Synthesize the situation through time. Categorize outcomes in different buckets. Note if they had a positive or negative impact and collect them over time. The development of outcomes within specific areas over time will reveal important information.
- For example, let’s say that you’ve recently changed your diet to consider if it improves your overall well-being.
- You could categorize into three buckets, perhaps, looks, mood and social. By taking notes on outcomes within these areas and rating them on a scale from good to bad, you can see how the decision to change diet has affected you.
- In this specific case, the diet seems to have improved looks but greatly reduced your mood.
- When synthesizing, you must ask yourself if it is worth it or not.
3. Navigate levels efficiently. Google Earth is a great example here. When judging if you want to travel to a specific hotel, you could zoom in on it and check out how it looks up closely. Then, you could zoom out a bit to see the surroundings. And perhaps zooming out even more to see what you could visit if you hire a car. All these pieces are essential to take a well-informed decision on if the hotel makes for a good vacation or not.
Make sure that you are navigating between the different levels of abstraction without changing the observed variable. Also, remember that some variables require you to go deeper. In our case, B and D. While others might only require a higher level view to gather the important information – in our case A and C.