Page 72 - Ray Dalio - Principles

Our Pure Alpha product was just the first of a number of
innovative designs we brought to our clients. In 1991, we had
become the first currency overlay managers for institutional

investors. At the time, institutional investors were placing
larger portions of their portfolios into global equity and bond
markets. While investing internationally added valuable
diversity, it also added unmanaged currency exposure. This
was a big problem because the currency exposures added risk
without adding any expected return. We had traded currencies
for years and had developed expertise in portfolio engineering,

so we were in a prime position to solve this problem.
Eventually we became the largest active currency manager in
the world.

We also produced several other new and effective ways of
managing money that flew exactly as they were designed.
With each one, we gave clients clearly stated performance
expectations expressed in a chart that showed an accumulated

profit line and the expected variations around that line. We
could do this because the systemization of our decision-
making process allowed us to stress-test the performance of
our decision making under a wide variety of conditions.

SYSTEMIZING OUR LEARNING

FROM MISTAKES

Of course we continued to make mistakes, though they were
all within our range of expectations. What was great is that we

made the most of our mistakes because we got in the habit of
viewing them as opportunities to learn and improve. One of
our most memorable mistakes happened in the early 1990s,
when Ross, who was in charge of trading at the time, forgot to
put in a trade for a client and the money just sat there in cash.
By the time the mistake was discovered, the damage was
several hundred thousand dollars.

It was a terrible and costly error, and I could’ve done
something dramatic like fire Ross to set a tone that mistakes
would not be tolerated. But since mistakes happen all the time,