Page 64 - Ray Dalio - Principles

investing. We were one of the few investment managers who
were short stocks ahead of “Black Monday,” October 19,
1987, then the largest single-day percentage decline in the

history of the stock market. We got a lot of attention because
we were up 22 percent when most others were down a lot. The
media dubbed us as among the “Heroes of October.”

Naturally, I was feeling pretty good going into 1988. I had
grown up in an era of high volatility and had learned that the
best way to play it was to get a hold of a big move and ride it.
We used our indicators to catch shifting fundamentals and our

technical trend-following filters to confirm that price
movements were consistent with what the indicators were
suggesting. When they both pointed in the same direction, we
had a strong signal; when they were at odds, we had little or
no signal. But as it turned out there was hardly any volatility in
1988, and so our technical filters whipsawed us and we ended
up giving back a bit more than half our 1987 gains. That stung,

but it also taught us some important lessons and prompted Bob
and me to replace our technical trend-following filter with
better value measures and risk controls.

Until then our systems had been completely discrete—we
would flip from a fully long position to a fully short one when
we crossed a predetermined threshold (much as we switched
from bonds to cash for the World Bank). But we weren’t

always equally confident in our views, and we’d also get killed
paying transaction costs when we crossed back and forth. That
drove Bob crazy. I can remember him running laps around the
office building to calm himself down. So at the end of the
year, we moved to a more variable system that allowed us to

size our bets in relation to how confident we were. These and
other improvements Bob made to our systems have paid off
many times since.

Not everyone at Bridgewater saw things as Bob and I did.
Some in the company doubted that systemization could work,
especially when the systems didn’t do well, which, like normal
decision making, happened every now and then. It took a lot of

reasoning to persuade some of the people I worked with to
press on. But even if I couldn’t convince them, they couldn’t
change my mind, because they couldn’t show me why our