How Ray Dalio turned one of his biggest professional failures into a lesson for success

Business Insider Editor-in-Chief Henry Blodget spoke with investor Ray Dalio about turning failure into success. Following is a transcript of the video.

Henry Blodget: You had started Bridgewater. You'd had many years of being very successful. You had gotten very confident, and you've made this huge controversial bet that we were headed into the next Great Depression and then.

Ray Dalio: Right, the defaults came. Mexico defaulted in August of 1982. I thought, wow, we're gonna go in this crisis, and everything's gonna fall apart. That was the exact bottom of the stock market. I couldn't have been more wrong. And it was painfully wrong because I had built the company until that point. We were a tight group, small group of people. I had to let everybody go. I was so broke, I had to borrow 4,000 dollars from my dad. I had testified to Congress 'cause they asked me to explain this. I had been on Wall Street Week. All of those mistakes, and it was very painful experience. And it turned out to be probably the best experience of my life because it changed my attitude about thinking. In other words, rather than thinking I'm right, I went to thinking how do I know I'm right? And it created this open-mindedness, to be able to then go, fine. The smartest people who disagreed with me, and to see how they would think about things, to balance my bets better. It taught me a radical open-mindedness. It taught me what you're referring to in the beginning of the book that I'm trying to convey, that the power of radical open-mindedness and an idea meritocracy is such a powerful thing. And you talk a lot about how this process of pain, and I can imagine it was just, again, a gut-wrenching experience of having to fire all of your friends. You have to rebuild from zero. You start going forward. You have to look in the mirror and say, hey, I was way too arrogant and confident. I have to effectively relearn. That's not an easy thing to do. - Right, I have a saying. Pain plus reflection equals progress, right. And I began to develop this knee-jerk reaction. If pain is a signal that something is wrong, that you did something, if you make those mistakes, and then to take that pain and to calm oneself down and think what would I have done differently in the future? So my instincts changed. I view those experiences now like solving puzzles that'll give me gems. The puzzle is, what would I do differently in the future so I would get a better result? The gem is the principle that I would write down as I learned it, so literally by writing down the principle, when this one comes along, what do I do with it? Everything is another one of those. Like, we have a million those. - [Henry] Yes. - If you start to say, when one of those comes along, how should I bet steer with it, and you write down that recipe. Those are the principles. So I found that exercise to be great, and I also found that I could turn those principles into algorithms. So let's say our investment process, those criteria are built into literally algorithms and data can come in. So I found that process of encountering pain to produce reflection to produce better ways of doing it to produce principles and then carrying that forward to the decision-making has been invaluable and to do that with people who are gonna disagree with me and to know how to do that well. That's been the key to success

Blodget: And you talk a lot about how this process of pain, and I can imagine it was just, again, a gut-wrenching experience of having to fire all of your friends. You have to rebuild from zero. You start going forward. You have to look in the mirror and say, hey, I was way too arrogant and confident. I have to effectively relearn. That's not an easy thing to do. Right, I have a saying. Pain plus reflection equals progress, right. And I began to develop this knee-jerk reaction. If

Dalio: Right, I have a saying. Pain plus reflection equals progress, right. And I began to develop this knee-jerk reaction. If pain is a signal that something is wrong, that you did something, if you make those mistakes, and then to take that pain and to calm oneself down and think what would I have done differently in the future? So my instincts changed. I view those experiences now like solving puzzles that'll give me gems. The puzzle is, what would I do differently in the future so I would get a better result? The gem is the principle that I would write down as I learned it, so literally by writing down the principle, when this one comes along, what do I do with it? Everything is another one of those. Like, we have a million those. If you start to say, when one of those comes along, how should I bet steer with it, and you write down that recipe. Those are the principles. So I found that exercise to be great, and I also found that I could turn those principles into algorithms. So let's say our investment process, those criteria are built into literally algorithms and data can come in. So I found that process of encountering pain to produce reflection to produce better ways of doing it to produce principles and then carrying that forward to the decision-making has been invaluable and to do that with people who are gonna disagree with me and to know how to do that well. That's been the key to success.