AK has been an analyst at long/short equity investment firms, global macro funds, and corporate economics departments. He co-founded Macro Ops and is the host of Fallible.
In this video we’re going to discuss how Ray Dalio created his investment strategy and how you can use the same principles to create your own!
As Dalio explains, the first and most important way to develop your strategy is to learn from your mistakes. He would basically just use trial and error. Dalio would place a bet in the market, see how it worked, and then analyze it. Did it work? Or did it fail? And instead of spending a bunch of time analyzing his winners like most investors, Ray Dalio would instead keep his focus on his losers — his mistakes. Analyzing those losers helped him pull key market principles out the market that he could use.
You can do the same. But to do so, you need to keep a trading journal. And I’ve talked about this before in previous videos, but I’ll say it again. A trade journal where you notate your thinking before the trade, the management as the trade is on, and the post-mortem after you exit. It’s important so that you can analyze your whole process.
But Dalio doesn’t just stop at listing out the principles he’s found. He takes it a step further. He goes on to define them thoroughly so that he can actually test them. And this isn’t necessarily easy to do, you really need to understand the principle to be able to simplify it enough to plug into a computer.
Testing is important because if you don’t test them, then those rules you made are really just assumptions. You have no idea if they’ll work across multiple market environments. There’s no way to prove they are REAL principles unless you test them. That’s why Dalio tested his principles over multiple different countries going back over 100 years.
To learn more about how Dalio created his strategy, make sure to watch the video above!