Page 51 - Ray Dalio - Principles

predict that the price would drop to 50 cents before climbing
back to 75, and I wouldn’t know when to buy and sell. Rarely,
but still too often, the system would be dead wrong and I

would lose a lot.

“He who lives by the crystal ball is destined to eat ground
glass” is a saying I quoted a lot in those days. Between 1979
and 1982, I had eaten enough glass to realize that what was
most important wasn’t knowing the future—it was knowing
how to react appropriately to the information available at each
point in time. In order to do that, I would have to have a vast

store of economic and market data to draw on—and as it
happened, I did.

From very early on, whenever I took a position in the
markets, I wrote down the criteria I used to make my decision.
Then, when I closed out a trade, I could reflect on how well
these criteria had worked. It occurred to me that if I wrote
those criteria into formulas (now more fashionably called

algorithms) and then ran historical data through them, I could
test how well my rules would have worked in the past. Here’s
how it worked in practice: I would start out with my intuitions
as I always did, but I would express them logically, as
decision-making criteria, and capture them in a systematic
way, creating a mental map of what I would do in each
particular situation. Then I would run historical data through

the systems to see how my decision would have performed in
the past and, depending upon the results, modify the decision
rules appropriately.

We tested the systems going as far back as we could,
typically more than a century, in every country for which we
had data, which gave me great perspective on how the
economic/market machine worked through time and how to

bet on it. Doing this helped educate me and led me to refine
my criteria so they were timeless and universal. Once I vetted
those relationships, I could run data through the systems as it
flowed at us in real time and the computer could work just as
my brain worked in processing it and making decisions.

The result was Bridgewater’s original interest rate, stock,

currencies, and precious metals systems, which we then