Business Insider
Bridgewater Associates founder, chairman, and co-CIO Ray Dalio.
Ray Dalio, head of the world's largest hedge fund, lost a fortune back in 1982. It made him change his entire approach to business.
In an interview with Business Insider's global editor in chief Henry Blodget on "The Bottom Line," Business Insider's new weekly business show, Dalio said that event taught him "fear and humility"- which then allowed him to build Bridgewater into a giant overseeing $103 billion in hedge fund assets, with $150 in total assets under management.
It was 1982 and a year into his time at Bridgewater's first proper office in Westport, Connecticut.
Dalio, who had started Bridgewater out of his apartment seven years before, believed that American banks were lending too much money to emerging Latin American countries. Looking back on this analysis, he told Blodget it was "very controversial" among bullish investors but ended up being correct. At the start of 1982, American bankers were still hopeful their money would kickstart these economies and yield big returns, despite the fact that Latin American countries were $327 billion in debt to the nine biggest money-center banks in the United States.
In August of that year, Mexico's finance minister met with 100 international bankers at the New York Federal Reserve to tell them that Mexico was unable to pay its $80 billion in debt, and between $20-30 billion of that was owed to American banks. Oil prices had fallen unexpectedly, the peso was devalued, and interest rates went up. Mexico's economic dreams were crushed for the moment.
Mexico would go on to reschedule its debt, sparking a domino effect for 15 other Latin American countries that would do the same.
"I thought the economy and the stock market would go down a lot," Dalio told Blodget on "The Bottom Line." "The economy and stock market went up a lot!"
That same month of August, 1982, Fed discount rate cuts caused the market to make big gains, and Dalio lost his big bet.
He had focused so much on the Latin American debt crisis that he did not consider the information he either could not access or was not taking into account, which would have allowed him to prepare for a broad range of turnouts.
"I lost money for me. I lost money for my clients," Dalio told Blodget. "I was so broke that I had to borrow $4,000 from my dad. This was very, very painful."
But Dalio looks back at this moment as "the best thing that ever happened to me," he said. "Because it gave me a change of mindset."
He explained that he went from approaching investing - and later, as he would explain in his management manifesto "Principles," his entire approach to business - from "I know xyz" to "How do I know xyz?"
Basically, he went from starting with what he knew to starting with how he knew what he did, and then determining what he still did not know. This allowed him to hedge his bets more carefully through better diversification.
"It gave me an open-mindedness. It gave me a fear that balanced with my aggressiveness," he said.
"My success in life has come much more from my knowing how to deal with my not-knowing than what I know."
Watch Dalio explain how he learned to invest below, or click here to watch the first episode of "The Bottom Line."