Is there a $100 billion dollar bill lying on the ground that nobody wants to pick up?
Also this week, we revisit Dan Wang at Gavekal’s views on China and Technology. We identified Dan’s deep, diligent, and differentiated thesis in February for an expert call, and it’s fair to say he has come through in spades recently.
[8 minute read]
In our new world of infinite, noisy opinions, it’s a massive source of competitive advantage to see each situation as clearly as possible. The best investors, traders, and businessman can see all the permutations of a scenario and then weight them probabilistically. But how do you do it as a group?
First let’s ask a question- why do we have Zooms, discussions, and meetings in the first place? In the book On Dialogue physicist David Bohm argues:
“The object of a dialogue is not to analyze things, or to win an argument, or to exchange opinions. Rather, it is to suspend your opinions and to look at the opinions – to listen to everybody’s opinions, to suspend them, and to see what all that means.”
I don’t think most of us always see it that way. Especially not around a Thanksgiving table with your in-laws. It’s like the Indian parable of the blind men touching the elephant. If someone’s holding the ear and another person the trunk, we have no hope of finding the whole elephant without transparent communication of all the perspectives. This is what Bohm means by “suspending the opinions.” When you talk to someone you are also interfacing with their model of the world. Sometimes they can only feel the elephant’s ear and you can only feel the trunk. You’re both experiencing a different part of the same reality, and both perspectives might contain truth. It’s an approach that’s increasingly rare in our polarized world. Most people will just conclude the trunk guy is completely deluded; you can clearly feel it’s an ear!
Ray Dalio founded Bridgewater in his apartment in 1975. It has grown to become one of the largest hedge funds in the world, with an AUM of around $140 billion.
Bloomberg’s hilarious finance writer Matt Levine has a long-running joke that Bridgewater is run by a super-intelligent computer that does all the actual investing. The computer’s job is therefore to invent intense psychological exercises to keep the humans too busy to interfere with the running of the business. Finance is an odd industry where, the more successful you are, the more suspicious people generally are of your achievements. But one of my favourite clients used to say “be skeptical, not cynical.” So, taking Dalio at his word, there are a lot of really curious implications of Bridgewater’s historical approach. It’s deliberately weird, and weird is always interesting.
Closing the gap between map and territory is a universal principle of human flourishing. As an outsider, it seems that Bridgewater might have built a system that does it very effectively. Again, this is a story used as an illustration, not as evidence. I’m much less interested in trying to determine if this is the source of Bridgewater’s success (which the scoreboard suggests), but if this process can teach us all something practical. And it does: it illustrates a universal truth.
Just as Bohm argued, you need to find a way of producing a mosaic of all the opinions for everyone to see. Then you need to aggregate, suspend, and assess them to produce a decision. Compare that to this description of Bridgewater’s processes, via former Co-CEO Eileen Murray:
“Bridgewater’s ethos of “radical transparency” involves videotaping or tape-recording every conversation for review later, constant evaluations of peers across what elsewhere would be called a hierarchy in its “dot system” which aggregates into “baseball cards,” portraits of each employee which indicate that person’s strengths or weaknesses.”
Individual performance in a meeting is assessed by the group in real time, then weighted by a contributor’s historical track-record. Then they quite literally produce a visual map of the result.
Dot Collector. Source: Bridgewater.
In his famous 2017 TED Talk, Dalio talks about “believability-based” decision making:
“[It] eliminates what I believe to be one of the greatest tragedies of mankind, and that is people arrogantly, naively holding opinions in their minds that are wrong, and acting on them, and not putting them out there to stress test them. Collective decision-making is so much better than individual decision-making if it’s done well. It’s been the secret sauce behind our success. It’s why we’ve made more money for our clients than any other hedge fund in existence and made money 23 out of the last 26 years.”
This should create a culture where everyone’s ego is being constantly broken down and assessed. Dalio famously compared Bridgewater to a nudist camp. This is especially tricky in a hierarchical organization where juniors may not want to criticize their superiors. A great many of you are founders and CEOs, would you be comfortable with the intern savaging your performance in real time in front of the entire office? The obvious balance is therefore creating a culture that feels safe enough to mentally strip each other down. Clearly it’s not for a lot of people. I would absolutely last less than a week.
What kind of people should thrive in this environment? Philip Tetlock’s cohort of “superforecasters” that typically trounce expert predictions have startlingly similar characteristics to what Dalio is trying to produce. They “treat their beliefs more as testable hypotheses and less as sacred possessions.” Again - it’s probabilistic thinking and rapid belief updating at work. But doing it as a group is becoming increasingly commonplace and fruitful: today fewer than 10% of journal articles in science and technology are authored by just one person and 70% of patent applications name multiple inventors. A large body of evidence supports the conclusion that we think the best when we think socially. Knowing we’ll have to publicly explain and defend a perspective takes advantage of some strong cognitive motivations.
What’s super interesting is that Dalio’s book Principles, an explicit, itemized how-to guide, has sold well over a million copies and featured glowing endorsements from across the most famous business leaders in the world. And yet, a 2018 investigation from Angelo Calvello at Institutional Investor failed to find a single organization that had implemented his 210 principles in a Bridgewater-like way. If that’s true, it’s as if there’s a $100 billion dollar bill on the pavement and nobody is picking it up? Calvello’s conclusion is that:
“This result both confirmed for me Dalio’s strident claim that the principles in their authentic Bridgewater expression are the source of the magic that produced his and Bridgewater’s tremendous success and refuted Dalio’s claims that the principles are universally applicable.”
Dalio has explicitly said the entire world can benefit from his legacy and principles. There has been a not inconsiderable backlash to many of Bridgewater’s core ideas, culture and middling recent performance. But if I’d built a $100 billion hedge fund I’d probably feel the same.
Curiously, and yet totally predictably, there is now a Dot Collector app (just launched for free on Zoom). I’m calling it “Social-Awkwardness-As-A-Service,” or “SAAAS.” With the two whopping caveats that I haven’t tried it and it might cause horrible arguments, it could be worth experimenting with. One wonders why Bridgewater would license such a presumed source of competitive advantage. Matt Levine astutely noted that they might be giving away the management algorithms that made them famous, but hanging onto the investing algorithms that make them rich. Assuming that they can be separated.
The delightful implication from all of this is that the ability to generate and tolerate awkward conversations is a source of considerable competitive advantage. All athletes know the edge that comes with the ability to endure discomfort. Dalio himself claims pain is where the growth is.
“The most valuable habit I’ve acquired is using pain to trigger quality reflections. If you can acquire this habit yourself, you will learn what causes your pain and what you can do about it, and it will have an enormous impact on your effectiveness.”
The universal truth, and the point I’ve tried to use Bridgewater to illustrate, is that closing the gap between map and territory is typically painful. It involves tough conversations, cognitive dissonance, and conflict. As our egos are primarily concerned with keeping us safe, any threat to our identity reliably makes us angry, defensive, and uncomfortable. We think better in groups, but groups can also make us more sensitive and more tribal. The most interesting part of the Bridgewater model is that it seems designed to optimize for the identification and resolution of that pain.
- Read: How Dot Collector Works (short slideshow via Business Insider).
- Why Read: A visualization of the Bridgewater meeting process as described by Dalio in his TED Talk.
- Read: Ray Dalio’s Book Has Sold a Million Copies. But Who’s Actually Implementing His Ideas? By Angelo Calvello (11 Minute read).
- Why Read Calvello’s 2018 examination of if anyone was actually implementing Principles. Obviously it was only a short period of time after the publication of Principles, and now there’s an app.
Revisiting Gavekal’s Dan Wang on China and Tech:
When we first featured Dan’s work and conducted a KCP Expert Call in February, it was clear he’d done more work and thought more deeply than almost anyone else out there. I spent my pandemic watching Line of Duty on Hulu (amazing show BTW). He spent it reading reams of turgid Chinese Communist Party propaganda documents. A line from his remarkable 2020 letter really stood out at the time:
“I’ve never stopped lamenting the marketing trick that California pulled off to situate consumer internet as the highest form of technology….. The “tech” giants are highly-capable companies that print cash. But they’re barely engaged in the creation of intellectual property, excelling instead on business-model innovation and the exploitation of network effects. It’s become apparent in the last few months that the Chinese leadership has moved towards the view that hard tech is more valuable than products that take us more deeply into the digital world. Xi declared this year that while digitization is important, ‘we must recognize the fundamental importance of the real economy… and never deindustrialize.’”
Noah Smith’s recent article quotes Dan liberally and asks Why is China smashing its tech industry?
“And so when China’s leaders look at what kind of technologies they want the country’s engineers and entrepreneurs to be spending their effort on, they probably don’t want them spending that effort on stuff that’s just for fun and convenience. They probably took a look at their consumer internet sector and decided that the link between that sector and geopolitical power had simply become too tenuous to keep throwing capital and high-skilled labor at it.”
Where next? Dan elaborated in an article for Foreign Affairs last week that this is a fundamentally geopolitical move. He has consistently argued “this time is different” in terms of China’s will to produce their own hard technology sector.
“True, China has big technological hurdles to overcome, including weak basic research, ambiguous intellectual property protections, and excessive bureaucratic meddling. Yet the United States cannot assume that China’s leading firms will stay down forever: companies are rushing to fill the demand that U.S. firms can no longer supply. Chinese firms have to reinvent only certain wheels, with many simply working to recreate technologies that already exist. And no U.S. restriction can change the fact that China is an enormous market loaded with entrepreneurial talent and technical expertise.”
Deep work leading to a variant perception on a secular issue is the highest value content we can hope to bring to your attention.
Great call Dan!
Have a wonderful weekend all!