Page 34 - Ray Dalio - Principles

margins, consumer preferences by cut of meat, and the
amounts to be slaughtered in each season.

This wasn’t academic learning: People with practice in the
business showed me how the agricultural processes worked,

and I organized what they told me into models I used to map
the interactions of those parts through time.

For example, by knowing how many cattle, chickens, and
hogs were being fed, how much grain they ate, and how fast
they gained weight, I could project both when and how much
meat would come to market and when and how much corn and
soymeal would be consumed. Likewise, by seeing how much

acreage was planted with corn and soybeans in all the growing
areas, doing regressions that showed how rainfall affected the
yields in each of these areas, and applying weather forecasts
and rainfall data, I could project the timing and quantity of
corn and soybean production. To me it all looked like a
beautiful machine with logical cause-effect relationships. By

understanding these relationships, I could come up with
decision rules (or principles) I could model.

These early models were a far cry from the ones we use
now; they were back-of-the-envelope sketches, analyzed and
converted into computer programs with the technology I could
afford at the time. At the very beginning, I did regressions on

my handheld Hewlett-Packard HP-67 calculator, plotted charts
by hand with colored pencils, and recorded every trade in
composition notebooks. When the personal computer came
along, I could input the numbers and watch them be converted
into pictures of what would happen on spreadsheets. Knowing
how cattle, hogs, and chickens progressed through their stages
of production, how they competed for meat-eater dollars, what
meat-eaters would spend and why, and how the profit margins

of meatpackers and retailers would influence their behaviors
(for example, which cuts of meat they would push in
advertisements), I could see how the machine produced cattle,
hog, and chicken prices that I could bet on.

As basic as those early models were, I loved building and
refining them—and they were good enough to make me

money. The approach to price determination I was using was