Transcript of Exclusive Interview by Ray Dalio, Founder, Bridgewater Associates Investment Company CNBC (Continued. Read the first part here.)
You started investing in China in 1984.when he only opened the borders to foreign capital. You have become the first major hedge fund to gain access to the Chinese market. You have always spoken out from pro-Chinese positions and call China the greatest economic miracle of all time. Looking at China and the pace of its reforms, can you formulate what, in your opinion, the rest of the world could learn from this country?
The results achieved by China speak for themselvesyourself. Since my first investment, income has grown 26 times. China's share of world GDP has grown from 2 to 22 percent. Then 88 percent of the population lived below the poverty line. Now the poverty level is 1 percent, and this with the current population of 1.4 billion people. This is a real miracle, without any exaggeration. I studied the history of China from the emergence of the Song Dynasty (960) to the present day, and I see evolution. I would say that they have their own, special approach to life, originating in Confucianism and in many respects determining a person’s attitude to society and social life itself. In general, this is a topic for a separate lengthy conversation, but in short, it is connected with the awareness of one’s role in society: one needs to get a good education, to know one’s role and one’s responsibilities, to fulfill them well, to be organized and the like. It starts with a family. If you are aware of your role in the family, your responsibility to it and you are a good member of it, then this attitude is also transferred to society as a whole. How does one family interact with another within the framework of the local community, how do all these relations connect into a single whole, and what should be the individual people? Confucius in 500 BC, we can say, described the ideas of meritocracy, where the way up is laid through hard work and hard work. Throughout almost its entire history until 1800, China was one of the two strongest economies in the world - in terms of living standards and so on. Then, around 1800, for various reasons, it collapsed and it would be interesting to discuss this topic, but it is too voluminous to answer the question you asked. So, China and Chinese culture, in my opinion, have many Confucian roots and, of course, this story is more about the hierarchical organization of society with the initiative moving from top to bottom. In the United States, initiatives are much more widespread from the bottom up. The United States is a country of immigrants arriving from a variety of places where a variety of approaches to managing society are practiced. Here the whole system is arranged from the bottom up. The unfolding confrontation is to some extent a cultural conflict between radically different systems of social structure. It is natural for the Chinese that the government cooperate with companies that are willing to cooperate - this hierarchy works this way. At the same time, you can now observe a large number of creative and entrepreneurial initiatives. We manage venture capital, and in China there are a lot of great business ideas.
So is China hungry for investment?
China wants to grow and increase its influence onall possible directions. Naturally, this implies competition. And then, because each side has its pros and cons, its strengths and weaknesses, right? So, the big data that China has in the era of artificial intelligence and free access to big data creates a competitive advantage. From the point of view of commerce, confidentiality problems also have their positive aspects. So this is a kind of competition of different approaches to life.
With your in-depth knowledge of China, can you give some advice to the Trump administration or future US lawmakers on how best to deal with Chinese leaders?
I would say tough negotiations accompanyingeconomic exchange is good and quite appropriate. Being a tough negotiator is a quality respected in China. But if you go beyond this framework and begin to show disrespect, threaten or cause harm, then, of course, you should expect responses in the same vein. What bothers us is that in the upcoming new world, everyone thinks first of all about how he can do the most harm to the other and try to inflict maximum economic damage on his opponents and competitors. And the Chinese know how to do it. So our leaders should think about how to achieve the necessary balance of power in a mutually beneficial way, from which both sides will benefit, and not in a way from which everyone will only lose.
That is, in your opinion, now both parties lack respect for each other?
Not really. I would say that there are significant stylistic differences between us, and this is not exactly described in the logic of respect or disrespect.
And how would it be more accurate to say?
Probably in terms of external decency, etiquette. There are great stylistic differences in the rules of public behavior between the two cultures. I think that both sides have respect for each other, but there is no properly structured diplomacy, and also, perhaps, not enough empathy and no emphasis on finding mutually beneficial solutions.
As an investor, you say that not investing in China is very risky. What exactly do you see opportunities opening up for investors in China?
The possibilities will come from two very differenttypes of economies coexisting in China. There is an old economy and there is a new one. On the one hand, all these state-owned enterprises and everything related to public administration are real estate, which, in my opinion, is very overvalued, areas that have been actively developing since the beginning of the rally in the Chinese economy and, as it were, still have gained more debts and overgrown; they need to be restructured. These can be said the worst areas of the Chinese economy, the old economy. But at the same time, they can represent excellent investment opportunities. Sometimes, restructuring creates opportunities for buying assets or investing in them at very attractive prices. And there is a new area of the economy - creative entrepreneurial endeavors, among which there are excellent ideas, especially in the areas of artificial intelligence and big data, but this also applies to biotechnology, fintech and all the most advanced areas. We find such initiatives everywhere, but this is especially true for Shenzhen. These are very interesting areas, and they attract large capitals, so caution must also be exercised here. I would say that the best thing that, generally speaking, most investors can do is to balance and diversify their portfolio in China, as well as in other parts of the world. Diversification and balance are the most important principles for creating an investment portfolio in any country, because we are talking about constant competition. In many ways, when you watch this race, you do not know who will be the winner in it, but by diversifying your investments, you can increase the chances of having your share in it. The world is largely underestimated.
You praised China for cutting nationaldebt and opening up your markets, but I know that during all these years of rapid development of China you were very focused on risks, and now you continue to talk about them regularly. In your opinion, what is the biggest risk for China? What could go wrong?
China restructures debteconomics, and this means that many parts of the economy must be recycled and rebuilt anew. It is necessary to process and restructure not only debts, but the entire economy. The ability of China to cope well with this task, in my opinion, represents the greatest risk for it, which arises simultaneously with the development of external conflicts. China’s external conflicts now occur in two areas: trade and technology, and China will also have to seriously rework them. In my life I have seen many economic cycles that the United States went through. During this time, the US has experienced a serious debt crisis four times. I saw how similar processes took place around the world - four major debt crises. China has the opportunity to coordinate monetary and fiscal policies, plus there is a level of interest rates and quantitative easing, if it comes to that. China can still use tools that the rest of the world has largely exhausted.
So you are not worried about China's debt crisis?
No, in the sense that you probablyYou mean - a lot of defaults on debt obligations that will pull along and bring down the entire economy - in this sense, China's debt crisis does not bother me. The reasons I have already mentioned: the inexhaustible possibilities of monetary and budgetary policies, as well as an accurate understanding of the situation by the country's leadership. The leaders of the economic bloc have already gone through the debt restructuring that took place in the 1990s, when Zhu Rongji had to carry out a large debt restructuring. Most of the people in senior positions today have already gone through this, which means they have the necessary understanding. Think of the 2008 US debt crisis or the latest financial crisis. They did certain things, and the crisis receded. If they had taken the same anti-crisis measures earlier, they could have completely prevented the recession. Now that they have managed to cope with the crisis, they can print money, restructure debts - there is a large margin for maneuver. I wrote a book about debt crises over the past 100 years. I have analyzed all of them, and a lesson can be learned from this. Governments control money, control balance. They control the budget and monetary policy. So they have the ability to deal with the crisis. On the other hand - you just asked me about the risks - there is an economy that cannot continue to grow and work in its current form. This applies to the old Chinese economy and even the real estate sector. This has implications in terms of slowing the economy and what it will mean for investors. Chinese investors have a lot of money in real estate and in foreign currency. If problems arise in these areas, this implies a significant risk for such investors. So it depends on those who will pursue economic policy - how well they can cope with these problems. I do not want to say that these are insignificant problems, but if we take into account the existing world experience, then China has even more opportunities to deal with them. And if in the light of this you look at the situation in Europe and the USA, then the challenges facing the United States look very serious. Europe is facing challenges. Japan is facing challenges. You can list and list. Therefore, when forming an investment portfolio, you need to think about diversifying it and finding the right balance.
Let's talk about the external situation becauseThe protests in Hong Kong made it difficult for businesses, transport, and even the airport. How big a threat to the future of China can Hong Kong pose?
Hong Kong situation goes beyond simpledemonstrations and, in essence, takes on the character of a revolution. I think we are in a difficult situation. Demonstrations are an expression of protest against something. We are dealing with a situation, possibly even practically revolutionary, when it comes to the overthrow of the government and the entire existing system. For Hong Kong, this is a very difficult situation.
But how much risk does it bear for China?
I would say moderate. On a scale of 1 to 10, I would rate it at 3 or 4 points. This is a rather difficult problem, as far as I can tell, although I am not an expert in geopolitics, of course. It seems to me that this presents China with a difficult choice: to allow this situation to develop or intervene in it. Both are pretty bad options. What will happen next, I do not know. But if you look at this problem in perspective, then Hong Kong is a very small part of what is happening in China. Therefore, despite the fact that I assess the risks at 3 or 4 points, I do not think that this will have a big impact on the Chinese economy. The situation in Hong Kong can have great geopolitical consequences, which I find difficult to judge, but it is unlikely to have any comparable effect on the huge and dynamically developing economy of China.
We are located in Singapore. Bridgewater has over 20 years of collaboration with the GIC (Singapore Sovereign Fund). You were well acquainted with the late Prime Minister of Singapore, Lee Kuan Yu. How do you see the future of Singapore, a city that is becoming increasingly vulnerable to the headwinds of the global economy?
This is a refuge.
I mean, this is a unique place in whichRespect for the law, culture and quality of education is respected. This is a place with a high-quality economy in the midst of a storm of conflicts, of which we have spoken about - trade, geopolitical. It is becoming more expensive, but it is a pearl of the region. If, looking at the problems of Hong Kong, you will think about where you would like to live, then Singapore is a great place, thanks to the rule of law, respect for the system, orderliness and, at the same time, the development and quality of education, as well as the quality of infrastructure and management. This is truly a unique place in terms of efficiency. The same applies to the economy, to the opportunity to develop a business and increase your income. A very efficient and well-managed capitalist and innovative environment has been created here, very orderly, in the middle of a region with great turbulence.
Singapore had to revise its growth forecast. Do you think he can avoid a recession?
I think that he is on the verge of a recession. A recession, by definition, refers to two consecutive quarters of negative economic growth. That is, you can, among other things, derive growth of + 0.1% and say: "We are not in a recession." Or, conversely, point to two consecutive quarters with -0.1% growth and call it a recession. It’s just me that there are recessions and recessions, some of them are bad, and some are at least not so bad.
What category will the approaching recession belong to?
It is important to say that growth is small andit is unlikely that in the near future we will see significant growth. Under existing conditions, the economy is likely to develop more or less horizontally.
Let's talk a little about something else now. Under your leadership, Bridgewater Associates, the company you founded back in 1975 in your own one-bedroom apartment, has grown to become the largest hedge fund in the world, managing assets worth about $ 160 billion. What drives you? What do you get motivation for yourself?
In meaningful, meaningful work and meaningfulrelations, in the realization of a certain mission - I think so. Be aware of your mission, be a master in your field and at the same time maintain independent thinking - because in order to be successful in the market you need to have independent thinking - and your team should consist of the same independent people who disagree with you. And in order to be able to overcome this disagreement, one must observe radical truthfulness and transparency and follow the principles of meritocracy. In the process, I find meaningful relationships. I am already 70, time to look back and reflect on the topic of the path traveled. This is my time to think.
Your time for reflection.
Yes. Therefore, I wrote a book in which I set out the principles that I formulated over the years of work. And now I came to Singapore with my family to see my old friends who live here, because when I look back at my years, it becomes clear that meaningful human relationships are the most important thing, relationships are most important. So I like this game. I like to do significant work, to be a master of my craft, to have this professional passion. And at the same time, it is very important to be able to maintain relationships - to be a good friend, to help each other, and then, looking back, hug, thank each other and say that it was great. Because the main question is, why is this all? What is this work for? You can only work for money - you need to have enough money to take care of your family, provide basic needs and so on. But money is an asset with diminishing returns, and for me it has not been a priority for a long time. Money is needed only to buy something on it, but what are you going to buy? You can, of course, buy a bigger house, but is it worth it to work for this? I think at some point it’s worth asking yourself: “What am I working for? Why do I live? ”After all, there is only one life, and you want to live it as interesting as possible. Therefore, meaningful and meaningful work and meaningful human relations are so important for me to develop myself and contribute to the general evolution.
Seven years after you foundedBridgewater, you have made a wrong bid in the market. You then lost almost everything. You had to dissolve all the employees, and yet you call it the best that has ever happened to you. Why? Did that moment change your life?
Yes. Firstly, if you do not push the boundaries of the possible - like in skiing or something like that - then you are not growing. And most importantly, what I learned from that episode is humility. I was too impudent.
They began to consider themselves invincible?
To be successful in the markets, you need to thinkwhatever. This means that you must be able to bet against consensus and be right. It's complicated. In 1980, I decided that American banks gave far more loans to developing countries than these countries could repay, and we should expect a debt crisis. In addition, we had defaults on debt securities, and I thought that this would lead to a fall in the economy. But I was wrong, and that was the bottom of the stock market. I had a small company - about eight or so, and I had to fire them all. I was left alone. The money was so bad that I had to borrow $ 4,000 from my father to pay my family expenses. And at the same time it was the best thing that ever happened to me, one of the best things - maybe after the wedding and the birth of children - because it made me think about how I can be sure that I'm right, to have such a firm opinion. It has changed my approach to life. Now I wanted to find the smartest people as possible who would disagree with me in order to understand their arguments and work through them. I learned to diversify. The key to my success was to a much greater extent the understanding of how to work with my own ignorance than any of my knowledge, because what we do not know far exceeds the field of our knowledge. That incident taught me a thoughtful disagreement, prompting me to look for the best answers, and diversify rates in such a way as to get the best risk / return ratio. This discovery was the key to the success of the Bridgewater.
As far as I know, you resort to meditation to comprehend your mistakes and clear your mind. Now correct me if I am wrong. Is it true that the Beatles prompted you to meditate?
Yes, the Beatles, 1968 At that time they were very popular, and then they went to India to meditate, it became widely known, and then I decided ... But I must say that I was still a teenager, at the very beginning of college, I guess. In general, I decided to learn to meditate too, and then it changed my life.
Could you tell us how meditation helps you make better decisions? How exactly does it work?
It helps to listen to the subconscious and feelbalance or, in other words, balance, calm self-confidence in the midst of a storm. The way it works is reminiscent of a mantra, that is, a word that, in general, means nothing - like “ohm,” for example. And mentally repeating this word over and over again, you leave your thoughts about some pressing problems, you seem to move deeper, and then, if you do this for a long enough time, this very word disappears and you find yourself face to face my subconscious. This state is as if between sleep and wakefulness - you are both sleeping and not sleeping at the same time. The subconscious has tremendous creative energy, and when you listen to it, it feels like new ideas come to you after a hot soul. And the inner balance, which is born from the fact that when you dive deep into yourself, distancing yourself from everyday problems and feeling an influx of creativity, you gain the ability to look deeper and try to create a more comprehensive picture of how this world works, how reality works. It helps to think deeper and increase perspectives, better understand the situation and find better solutions.
Did you meditate before this interview?
In the morning I was meditating, yes. I usually meditate in the morning and evening, before dinner, usually about twenty minutes.
You are the billionaire and founder of the largest hedge fund. What kind of leader are you? What principles do you follow in your life?
I live according to the principles described in my book.
Which of them would you name the main ones?
The idea of meritocracy. Anyone with whom I work always has the right to doubt anything, has the right to their opinion, and management should be based on meritocratic principles. The idea of meaningful work and meaningful relationships, which I have already talked about, is also of paramount importance to me. I think colleagues could characterize me as a tough but fair leader. I am convinced of the value of open and honest discussions that do not involve any special ceremonies. Everyone in my company can challenge me and challenge my opinion on any issue, and I will defend my position in front of the whole company.
So you easily accept criticism?
I love criticism!
Love the criticism.
What is the biggest criticism you received in your address?
It was that I do not understand people,someone else's point of view. I love criticism for two reasons. First of all, this is a stress test for your own ideas. I really feel interested in such a stress test, especially against smart people who challenge me. This is the best way to increase the likelihood of being right. In addition, I want to hear criticism because it is your opinion. If someone with whom I work will keep criticism and discontent in myself, it will not benefit any of us, because it creates a distance between the employee and the company, distancing him from working on a common mission. Therefore, I prefer that people openly express their opinion, whatever it may be. Let's resolve our differences in an open discussion! If you want the company to be truly successful, then you need to maintain a truly meritocratic environment in it, so that even those who hold completely different views with respect to your views, see that the system is fair and the strongest of ideas wins in an open discussion. This is an honest approach, and it helps to build better relationships, because when the cards are laid out on the table, it becomes possible to really assess the situation and eliminate misunderstanding. When people keep dissatisfaction in themselves, not putting them into discussion, it is very inefficient.
For clarity: did the employees who criticized you keep their place?
Yes, always. I have more questions when they don’t criticize me. Although emotionally, this is usually not easy for people. I, in turn, find it strange that the rest do not take the same approach. What is wrong with radical honesty? Or do you want people to accumulate discontent in themselves and hide it? It seems to me that this would be illogical.
You are 70 years old. In order for Bridgewater to outlive you, you introduced a partnership model, increasing the share of employees in the company's capital. How is this process going? How do you plan to ensure continuity?
Good question. Yes you are right. Starting your own business from a two-room apartment, bringing it to the status of the largest hedge fund in the world, and then also ensuring the succession of your business is a very long way. Fortune magazine named us the fifth most influential company in the United States - not only the largest hedge fund, but also the fifth most influential company in the United States. And all the more important is ensuring the continuity of your business. I absolutely did not know how to do this better. Nevertheless, I started this process, and by this moment I transferred to the status of an employee as an investment director and chairman of the board - this is what it looks like today.
But, as the founder of the company, can you completely let go of the situation?
Yes, this is quite natural. At least for me it is natural.
Is this not a problem for you?
Here as with children. Imagine that you have a child who is already 40, a daughter or a son. What will be your greatest joy? If your child is successful without your continued involvement. This is evolution. I am 70. And at 80 I will no longer be the same as now. Who knows how this will look and what will actually happen? Actually, the average life span is about 80 years. There are different stages in life, and at my age it is nice to see how others become successful without my participation.
Can you give other companies, their leaders or entrepreneurs some advice on how to build a sustainable and successful business?
It seems to me that culture has a determiningvalue. I would pay attention primarily to the culture of the company and the development of employees. Therefore, employees need to be given the opportunity to freely challenge you - because if you do not develop people, if they just follow your instructions, then they will not think independently and grow. In my opinion, this is an effective strategy. This intersects both the Confucian culture and the management culture here in Singapore. The Singaporean management culture — what Lee Kuan Yew did, and what is here today — is an example of such continuity. Here a certain way of being is formed, which is the basis of everything - the development of both personal talents and a certain approach to life that makes people productive, responsible and self-sufficient. Lee Kuan Yu can serve as a perfect example. With the beginning of the transition period in my company, I began to play the role of a “mentor”, a mentor, and I then thought a lot about the activities of Lee Kuan Yew as minister-mentor, which he already held in his son’s government.
And finally, have you ever thought about what legacy you want to leave the world after yourself?
First of all, these are the principles that helped me inof life. My book is also devoted to this - the principles of life and work, which I would like to convey to people. With this I ended, I told everything I know about it. Now I am working on the second book - a statement of economic and investment principles that I was guided by. Upon completion, it will be possible to say that I am finished with this. But the first book is especially dear to me, I wrote it with the thought primarily of my own grandchildren. In addition to this, I still need to transfer my condition. This implies that I want others to dispose of them correctly, because when you leave, you leave with nothing, right? When I think about my heritage, I try to determine what it is. Probably the most important thing is how a person uses principles. I wanted to not only share specific principles, but also help people think in the right way and formulate their own principles that help them personally. If I manage to help someone think independently and formulate their own principles that help these people to effectively interact with the world, then we can say that I gave them everything I could.
In one sentence, for what would you like to be remembered?
I'm not really bothered if they will remember meor not. I take care to make my small contribution to evolution. We are like ants carrying small crumbs of what we know about a huge and multidimensional existence. And it’s equally important for me to direct knowledge-seeking people to other wise people, such as Lee Kuan Yu. I don’t feel the need to be remembered, but if they do, then ideally I would like this memory to contribute at least a little to the general evolution.