Page 37 - Ray Dalio - Principles

and expect to continue to write them until people don’t care to
read them or I die.

In addition to providing clients with these observations and
advice, I began to manage their exposures by buying and

selling on their behalf. Sometimes I was paid a fixed fee each
month and sometimes I received a percentage of the profits.
Among my consulting clients during this period was
McDonald’s, which was a huge beef buyer, and Lane
Processing, then the largest chicken producer in the country. I
made them both a lot of money—especially Lane Processing,

which did even better from its speculations in the grain and
soy markets than it did from raising and selling chickens.

Around this time, McDonald’s had conceived of a new
product, the Chicken McNugget, but they were reluctant to
bring it to market because of their concern that chicken prices
might rise and squeeze their profit margins. Chicken producers
like Lane wouldn’t agree to sell to them at a fixed price

because they were worried that their costs would go up and
they would be squeezed.

As I thought about the problem, it occurred to me that in
economic terms a chicken can be seen as a simple machine
consisting of a chick plus its feed. The most volatile cost that
the chicken producer needed to worry about was feed prices. I

showed Lane how to use a mix of corn and soymeal futures to
lock in costs so they could quote a fixed price to McDonald’s.
Having greatly reduced its price risk, McDonald’s introduced
the McNugget in 1983. I felt great about helping make that
happen.

I identified similar types of price relationships in the cattle
and meat markets. For example, I showed cattle feeders how

they could lock in strong profit margins by hedging good price
relationships between their cost items (feeder cattle, corn, and
soymeal) and what they were going to sell (fed cattle) six
months later. I developed a way of selling different cuts of
fresh meat for future delivery at fixed prices far below frozen
meat prices but that still produced big profit margins.
Combining my clients’ deep understanding of the way the

“machines” of their own businesses operated with my