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you've had an amazing success story with bridgewater you started the company in your kitchen I believe 40 years ago you built it into the most successful hedge fund in the world when you started how did you learn to invest and how did your investment strategy change over time well learn I learned from my mistakes huh so Dale you made Bridgewater in his kitchen most I've done in my kitchen is make egg but we're not here to talk about a case cooking skills we're gonna talk about how Ray Dalio created his winning investment strategy and how you can use the same principles to help create yours so like you said in that clip the first and most important thing to do is to learn from your mistakes well I learned I learned I learned from my mistakes in other words my instinct is you know you go there and you place a bet I'm who had winners and I've had losers and what I did well every time I made a mistake they became painful mistakes but with time I realized that reflecting on those mistakes would give me gems what I would do is I'd say why did I make that mistake and I would learn from that mistake and I'd write down a rule so what was helpful for me is I put that rule principles these principles I wrote these principles now it was just trial and error he would place a trade in the market and then analyze how it played out and while most traders focus on their winners Dalio was more focused on his losers because it was from the losers or his mistakes that he could pull out market principles and the more principles he could understand from analyzing those mistakes the closer he got to creating a profitable trading strategy and that's why I'm always talking about how important it is to have a trading journal because if you're gonna analyze your mistakes like Dalio then you need to have all your trading written down somewhere I'm talking making notes before you put the trade on as you put it on and then also post-mortem notes and I talked about all of this in the trade journal video which if you haven't seen a link to it above but yeah if you want to pull those same gems the Dalio did from analyzing his mistakes then you need to do the same your mistakes as well but Dalio also did stop it just listing his principles he took it a step further those principles that I wrote down I then put into algorithms in other words equations and what I learned by being able to do that is fine if I took my decision criteria those principles and then I tested them back through time I gained a perspective that was fantastic I could taste them in the back a hundred years I could test them in different countries and I would learn how those rules work see he didn't just have a fuzzy list of rules that he put together he spent a lot of time to actually define them because only if you really understand the principles can you make them into a defined set of rules that can actually be tested to be coded into a computer it has to be specific and the testing portion of this is really important because if you don't test those rules then really they're just assumptions because you have no idea how robust they are do they only work in some type of market environments do they work in every market environment is this a rule that's gonna withstand the test of time or is it just gonna fall apart in the next cycle and that's why you heard Dalio talking about testing his rules in multiple different countries going back a hundred years now that's a lot of testing but it showed him which principles he could use in which he should throw away and that's really how building a system works you get a hunch from observing the market and then you go and test that hunch if you're not gonna back test your assumption then you're not gonna know if it's real and usable or not now one argument that more inexperienced people have when it comes to systems is why even start with an assumption in the first place why not just back test the data and see what pops out well the problem with that is that you're gonna get data mined strategies that don't work off any real market principle like if you were testing data and for some reason you found a correlation between the full moon and Netflix's price going up would you actually use that to build a strategy there's no real market principle that defines that relationship it's just data mining and that's why starting with your own observations with what you think is a grounded market principle is the best way to go and then you go and back test that assumption to see if it's true or not but through this whole process of analyzing his mistakes pulling principles and loading them into a computer Dalia was able to create something either he or the computer could do by themselves and I put by putting all those rules together and then how having these algorithms the computer could replicate my thinking but it could actually think better than I could because it what it would do is it would take it can process more information it can process it faster and it could process it less emotionally so it was like having a G pS that was next to me while I was also making my decisions like you're driving in a car and you have both operating and to have that next to me was you know invaluable it would learn I would learn and together we built this see Dalia was well aware of the advantages that a computer has over him for example it processes data much faster and it executes saan rules with no emotion involved and he knew working together by combining his knowledge with that computer would give him overall better results and I completely agree with that which is why I've become a systems trader over time I started out discretionary but as I learned more about what I was doing I was able to codify it now creating a system or algorithm doesn't have to be super complicated I know we hear about genetic algorithms and all this complex quantum computing going on but what we're doing can be a lot simpler it's simply defining rules and plugging into a computer so for me when I'm using a system the market principle I'm trying to exploit is momentum so in basic terms all that is is having a computer run our aggression on a bunch of stocks to see which ones are trending the hardest and then you invest in those and take advantage of the market principle of momentum which has been around forever now momentum is not that complicated but Dalio who's much smarter than all of us was able to do the same type of thing for global macro now when I think of global mackerle I think discretion because how can you predict geopolitical events like Wars and dictators taking over and all the crazy stuff that's happened in history but Dalio using the process he just explained was somehow able to pull out the core principles of what makes the world turn and that's why he has billions of dollars and runs the most successful hedge fund of all time and Bridgewater claims of their system which is 99.9% systematic I think there's only a few cases where Dalia will actually go in and make a decision against what the computer is saying but they claim that their system can run untouched for the next a hundred years and it will make the same type of crazy returns that it does now now that's amazing now you don't gotta get that complicated but your goal should be to find your own market principles that you want to exploit in your strategy now right now I'm working with my partners to release you guys the momentum system that we use but it's funny because even once you have a system that does bring you returns you can still screw it up and that's because it takes a lot of psychological training to actually even follow the system that's the number one failure point I see with all traders including myself in the beginning it gets tough out there so the first thing we're doing is building psychology courses and guides to help investors eventually use that system and that's all coming soon so if you haven't already make sure you subscribe to this channel and hit that bell so you get notifications and new videos and of course I'll keep you guys up to date with how that progress is going on all that stuff so subscribe and I'll see you in the next video stay Falvo out there bye
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