These are my notes and favorite highlights from the book Principles For Dealing With The Changing World Order (2021) by Ray Dalio. In addition, I’ll share three excerpts, three suggestions from the author, and three personal reflections.
On the cyclical nature of history: As I studied history, I saw that it typically transpires via relatively well-defined life cycles, like those of organisms, that evolve as each generation transitions to the next. By seeing many interlinking cases evolve together, I could see patterns and cause/effect relationships that govern them and could imagine the future based on what I learned. These events happened many times throughout history and were parts of a cycle of rises and declines of empires and most aspects of empires.
On what causes the perpetual-motion machine to move: Everything that has happened and everything that will happen has had and will have determinants that make it happen. If we can understand those determinants, we can understand how the machine works and anticipate what will likely be coming at us next.
On the interlinked relationship between politics and economy: What most people and their countries want most is wealth and power, and money and credit are the biggest influences on how wealth and power rise and decline. If you don’t understand how money and credit work, you can’t understand how the system works, and if you don’t understand how the system works, you can’t understand what’s coming at you.
Three Suggestions From The Author
- Even with the author’s model, he does not say that he can predict the future, but we can prepare for it by 1) perceiving and adapting to what is happening, even if it can’t be anticipated; 2) coming up with probabilities for what might happen; and 3) knowing enough about what might happen to protect oneself against the unacceptable, even if one can’t do that perfectly.
- In his more than 50 years of investing experience, to be successful, both in the markets and in life, one should bet on the upside that comes from a) evolution that leads to productivity improvements, but not so aggressively that b) cycles and bumps along the way knock you out of the game.
- Dealing with what you know and what you don’t know: a) know all possibilities, think about the worst-case scenarios, and then find ways to eliminate the intolerable ones; b) diversify well; c) put deferred gratification ahead of immediate gratification; d) triangulate among the most intelligent people.
Three Personal Reflections
- The most recent books I read are about history, and I am a bit cautious about stepping into the realms of financial markets. Not that I don’t want to learn about finance, but I felt that it’s not for leisurely reading an hour before you go to sleep. While I armed myself with financial management basics in theory, and practice, revisiting financial jargon while in a supposedly relaxed reading session makes me jump out of bed to recollect my limited knowledge in finance. However, the author made a solid case that money, credit, debt, and economic activity form the backbone of history and why it creates cycles. I have heard repeatedly that the stock market has its highs and lows, but I never consciously correlated it with political and social crests and throughs. Even in the academe, we can observe how business and history are two different disciplines with distinct professional pathways. I learned that one can only learn so much and why you have to “triangulate with smart people.” In corporate parlance, we need to “collaborate,” and in sustainability parlance, we need to “create partnerships for development.”
- Planning is a staple personal and professional activity, and while we never end up with the same scenarios we put under our “planning assumptions,” we still do them periodically anyway. Indeed, plans are worthless, but planning is everything, as Eisenhower said. In my experience, most planning activities are based on the same template and tweaked according to “present determinants,” such as a pandemic. Designing a planning model is as hard as planning itself, but having a framework with good qualitative and quantitative determinants can spell the difference between winners and losers.
- Putting sustainable development in the cyclical nature of economy and history begs the question: why do we bother aiming for sustainable development if, in theory, markets and societies can inevitably collapse? Why do we bother envisioning an economic and social peak for all nations if we know that they will eventually decline anyway? The author proposed an “upward-pointing corkscrew” visual that illustrates evolution: “an upward movement toward improvement that occurs because of adaptation and learning.” We might have ups and downs, but we are far from where humanity started. Sustainable development doesn’t aim to stop the cycle and remodel it so it can look like a simple straight-line trajectory. Instead, it proposes to a) accelerate the rise, b) lengthen the duration of the peak, c) and mitigate the risks associated with the decline.
