Reporter | Wu Bin (21st Century Business Herald)

“Pain + Reflection = Progress.” On August 1, Beijing time, Ray Dalio, the founder of Bridgewater Associates, shared his "farewell letter" on social media, reflecting on the painful and reflective journey of investing. At 75, Dalio sold all his remaining shares in Bridgewater and left the board, marking the retirement of an investment legend.

Ray Dalio, founder of Bridgewater Associates (File Photo)

Last week, Bridgewater Associates informed clients that it had repurchased all of Dalio's remaining shares. Bridgewater then issued new shares to the Brunei Sovereign Wealth Fund. In this multi-billion dollar transaction, the Brunei Sovereign Wealth Fund acquired nearly 20% of Bridgewater.

Throughout his more than 50-year investment career, Dalio has successfully predicted major trends multiple times, including the 2008 financial crisis and the subsequent European debt crisis. He was named one of the "100 Most Influential People in the World" by Time magazine.

Looking to the future, Dalio has once again issued a warning: there is a 65% chance of a global debt crisis erupting in the next five years, which could severely impact the dominance of the dollar. If businesses, countries, and individuals cannot identify their position in the cycle, they will be overwhelmed by this powerful "tide force."

Will Dalio's words prove prophetic once again?

Track Record

In 1975, at just 26 years old, Dalio decided to establish his own investment firm. In his two-bedroom apartment, he founded Bridgewater Associates and began implementing his investment strategies. Since the launch of the flagship fund in 1991, under Dalio's leadership, Bridgewater has achieved one remarkable record after another, becoming the largest hedge fund in the world.

In 2008, Dalio successfully predicted the U.S. financial crisis, and that year, the flagship fund's performance grew by over 14%. He then foresaw the European debt crisis, and in 2010, the highest return of Bridgewater's funds exceeded 40%.

Behind these impressive achievements, Dalio's investment journey has not been smooth sailing. In 1982, he suffered significant losses due to an incorrect prediction that "the U.S. economy would fall into a Great Depression," and was even forced to borrow money from his father to keep the company afloat. This painful lesson became a turning point in his investment philosophy.

Before 1982, Dalio pursued a scientific and rigorous "right cognition"; after 1982, he focused on "how to prove that his cognition is not wrong," attempting to establish a set of systematic principles to cope with uncertainty.

In Dalio's view, the operation of the world machine is driven by five major forces, including debt/money/economic cycles, internal order and chaos cycles, external order and chaos cycles, natural forces, and human creativity. When these five forces interact, they create a large cycle in the process of transitioning from "old order" to "new order," alternating between peace and prosperity and conflict and recession.

He emphasizes the importance of understanding the causal relationships that drive change, as causes precede results. This understanding helps investors predict what is about to happen. Clear decision-making standards should be established, backtested, systematized, and computerized, so that investors execute a well-thought-out and thoroughly tested plan. "In my more than 50 years of professional investment career, I have made a lot of money by betting on these causal relationships… Although many key unknowns and uncertainties still exist, I am confident that these are the largest and most important forces."

In recent years, Bridgewater's assets under management have significantly shrunk, from $168 billion at the end of 2019 to $92.1 billion by the end of 2024. Over the five years ending December 2024, the cumulative return of Bridgewater's flagship fund, Pure Alpha, was only 5.9%, far below the record highs of the U.S. stock market during the same period. However, after limiting its size, Pure Alpha's performance improved, achieving an 11.3% return in 2024 and a 17% return in the first half of 2025.

Controversy

In recent years, Dalio's widely circulated debt theory has faced some criticism.

Dalio believes that any economic entity, whether a business or a country, that excessively accumulates debt will encounter debt crisis troubles. To reduce the risk of a debt crisis, "deleveraging" measures must be taken to shrink the debt size.

According to Xu Gao, chief economist at China Merchants Bank Securities, Dalio has made two methodological errors in analyzing macroeconomic issues. He incorrectly uses micro thinking to analyze macro problems and mistakenly imagines the macro economy as a machine, thus failing to see the differences in operational logic under different macroeconomic conditions.

On one hand, Dalio's core logic in analyzing national debt is that if a country accumulates too much debt, a debt crisis will erupt. His criterion for determining whether debt is too much is whether the returns generated by the debt can cover the cost of the debt. This is a microeconomic perspective on debt analysis, applicable to individuals and businesses. Xu told reporters that while this logic aligns with people's intuition, it cannot be blindly applied to national debt analysis. The operation of the macro economy can sometimes be counterintuitive and contrary to common sense.

The United States, as the issuer of the dollar, the current primary international reserve currency, can borrow foreign debt in its own currency. The constraints on U.S. debt are not even based on its supply capacity but on "dollar hegemony." Xu analyzed that as long as the dollar is still accepted by countries around the world as an international reserve currency and they are willing to hold dollars, U.S. debt can be sustainable. Correspondingly, only events that threaten "dollar hegemony" will pose debt risks to the U.S. The hollowing out of U.S. industries and the so-called "reciprocal tariff" policy introduced by the U.S. this year pose long-term and short-term factors that threaten "dollar hegemony."

On the other hand, Dalio's mechanical understanding of the macro economy leads him to mistakenly believe that specific actions will necessarily produce specific outcomes. Xu cautioned against imagining the macro economy as a machine—various causal relationships and reactions in the macro economy can change due to shifts in the macroeconomic environment. The macro economy is composed of living beings who have expectations for the future and whose behaviors change based on those expectations. Once expectations change, human behavior changes accordingly, leading to changes in the macroeconomic structure.

In Xu's view, Dalio's mechanical understanding of the macro economy has led to some misconceptions. For example, in Chapter 18 of his book "Why Nations Fail," Dalio proposed his "3% solution"—he believes that the U.S. fiscal deficit as a percentage of GDP should be reduced to 3%.

What is the appropriate level of fiscal deficit and debt for a country? Xu stated that it depends on the macroeconomic conditions of that country. Under different conditions, reasonable fiscal deficits and debt levels vary. Attempting to find a standard for deficits and debt levels that does not change over time, or that is universally applicable, is not only futile but also extremely harmful. Asking such questions assumes the existence of answers, which can lead to overlooking the truly important state of macroeconomic operations and the necessity of specific problem analysis.

Farewell

Success and failure are ultimately empty. In 2011, Dalio first announced his succession plan. On October 4, 2022, Dalio transferred control to the company's board, officially stepping back and no longer holding final decision-making power. Since then, Dalio has continued to serve Bridgewater as a chief investment officer mentor and a member of the operating board.

With Dalio selling his remaining shares in Bridgewater, he can now truly be considered "retired."

Many have asked him how it feels to hand over the company after founding and running Bridgewater for 50 years. Dalio's memories flooded back: "I feel incredibly excited! It has been an extraordinary journey, and I remember every moment vividly—from founding Bridgewater with a college football teammate in a two-bedroom apartment to building it into the largest hedge fund in the world (with a peak staff of about 1,500) and generating returns for clients that surpassed any other hedge fund."

As Dalio completes the handover, he looks forward to the next generation of talent to bring Bridgewater to new heights in the next 50 years. "I am pleased to see Bridgewater thriving without me, even outperforming when I was there. To me, this is the best possible lifecycle. As a 76-year-old man who loves Bridgewater and its employees (actually just a few days shy of 76), it feels like seeing my child remain strong and healthy without me, which is far better than me having to take care of them at 76."

Reflecting on Bridgewater's success over the past 50 years, Dalio identifies four important "work principles": "The people and culture you choose determine everything; choose those with excellent character and outstanding abilities, and establish a culture of 'thought elite system' where meaningful work and meaningful relationships are achieved through extreme truthfulness and extreme transparency; create a culture that allows for mistakes but does not allow for not learning from mistakes; Pain + Reflection = Progress."

Tide

Throughout Dalio's decades-long investment journey, seven investment principles have garnered attention:

• Reality is like a machine; investors need to understand how this machine operates and master proven principles that can effectively respond to it.
• Understand the causal relationships that drive change, as causes precede results; this understanding helps investors predict what is about to happen.
• Establish clear decision-making standards, backtest, systematize, and computerize them, so that investors execute a well-thought-out and thoroughly tested plan.
• Recognize that there is far more that is unknown than known.
• Understand how to achieve proper diversification; by doing so, investors can reduce risk by about 80% without lowering expected returns.
• Find the smartest people who disagree with you and let them pressure-test your ideas through deep dissent; this will increase the probability of being correct and allow you to learn a lot.
• Ensure that the probability of incurring unacceptable losses is zero.

In facing past successes and failures, Dalio's words are filled with reverence for investing. "Balancing the investment portfolio is the most important thing; the right approach is to build a reasonable investment portfolio, achieve appropriate diversification, and ideally, the portfolio should always hold 10 to 15 assets that are lowly correlated with each other. By doing this, investors can reduce risk by about 80% without lowering expected returns."

He also reminds investors not to blindly increase their positions when market sentiment is overheated and to be wary of chasing prices. "In investing, the biggest problem for most people is that they tend to believe that the investments that performed best in the past will be the best in the future. The fact is, the best companies are not necessarily the best investments, just as the best horses in a race are not necessarily the ones worth betting on, because the odds reflect everything. When an asset becomes too expensive, it is more likely to fall rather than continue to rise."

Starting in 2024, Dalio has repeatedly emphasized that the five major forces will reshape the world, and in the next three to five years, due to the influence of these forces, "we will experience changes akin to a time tunnel, entering a completely different world."

Aside from "evolution," nothing in the world is eternal. In Dalio's view, there are cyclical tides in the process of evolution—rising and falling, difficult to resist or reverse.

The tide force is irresistible; whether one rides the waves or is swallowed, are investors ready?

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