For the last few days, I’ve been listing to the audiobook version of Principles. It has useful frameworks and tactics based on how Ray has made billions of dollars at his hedge fund.
One of the things I liked about the book is that I found it’s advice quite practical. In the sense that it applies to my own life, working at small companies and as an individual. I usually find that business books like this are either great tactically, or only useful for managing large companies. This book does a good job of tackling both.
- Life is a series of decisions you make as an individual and as a part of groups.
- Group decisions are always better than individual decisions.
- Group decisions are best when you have disagreement.
- Disagreement leads to bad decisions and bad teamwork if someone gets emotional.
- To solve this issue with emotional disagreement, have a system for making decisions.
- Always rank ideas by merit. This is based on people’s strengths and the outcome of structured disagreement.
Based on the above takeaways, I outlined the following as the framework that Ray uses to make money. This is his flywheel.
Key concepts in this framework:
- Models – forecasts about what will happen in the future based on historical data. Models generate ideas.
- Ideas – breakthroughs and new things based on data. Ideas lead to actions. These are then prioritized and acted upon using decisions.
- Decisions – how we determine actions to take based on ideas generated from data/models.
- Systems – structures for making decisions. With systems, we can prioritize and determine what ideas are important. From there we decide what actions to take, and in what order they should happen.
- Spend a lot of time researching, and building models to establish a baseline of data
- These models will generate ideas. This is the creative input that only humans can do and machines can never replicate.
- Once you have ideas based on models, input them into systems of decision making. This prioritizes which actions (based on ideas) to execute on.
- Record what you do, and your outcomes religiously. Then feed this information back into your models to improve your data. This, in turn, generates new ideas and improves your systems for decision making.
Some other takeaways:
Models are useful to predict the future. However, models are not perfect and can be wrong, which can be catastrophic. Ray lost a lot of money and almost went bankrupt because he made big bets on models that turned out to be wrong 1% of the time. Use models based on historical data and research to forecast into the future, but use human judgment to actually make decisions.
Always hedge your bets. If you put 100% of your funds on a single outcome, you will make more if you are right. BUT, on the chance you are wrong, you will lose everything. Hedging your bets is the smart way to limit your downside, even if you miss out on some of the upside when your bets pay off.
The time frame of your thinking influences your ideas. Ray created a multi-century “all weather” investment vehicle that launched a new asset class. But, he only conceptualized it because he was thinking about preserving generational wealth. Timeframe affects both problems you face and solutions you come up with.