The machine produced cattle, hog, and chicken prices that I could bet on.Ray Dalio
Ray Dalio, founder, co-chief investment officer and co-chair at hedge fund Bridgewater Associates, has the head of a longhorn steer (a variety of beef cattle) mounted on the wall behind his desk, according to a 2011 profile of him in the New Yorker magazine.
“He likes to go places and kill things,” the profile says. “He fishes in Canada, shoots grouse in Scotland, and hunts big game in Africa, with a bow – particularly Cape buffalo, which weigh up to two thousand pounds, are famously ornery, and sometimes gore hunters.”
This brawny hobby might surprise some. The legendary trader is usually associated these days with highly successful investments in the rather academic areas of government bonds and currencies. He is also known for his quasi-philosophical work Principles and for liking transcendental meditation.
But actually, flesh and blood are important as well as brains in making Dalio who he is today. This is because some of his formative trading successes involved meat.
“I was really getting my head into the livestock, meat, grain, and oilseed markets,” he says of himself as a young trader in Principles. ‘I loved them because they were concrete and less subject than stocks to distorted perceptions of value.”
In fact, his very precise understanding of these assets’ values was at the heart of how he made his money here. “By knowing how many cattle, chickens, and hogs were fed, how much grain they ate, and how fast they gained weight, I could project both when and how much meat would come to market and how much corn and soymeal would be consumed.”
“To me it all looked like a beautiful machine with logical cause-effect relationships,” he continues. “By understanding these relationships, I could come up with decision rules (or principles) I could model.”
These rules not only brought him financial success with meat and agricultural investments. They also became the basis for an investment system that he would go to apply to many other asset classes.
“Visualising complex systems as machines, figuring out the cause-effect relationships within them, writing down the principles for dealing with them, and feeding them into a computer so the computer could “make decisions” for me all became standard practices,” he says.
Dalio’s system not only brought him success with for his own investment firm. He can also claim it led to the existence of iconic fast food product the Chicken McNugget.
Dalio had begun sending his daily observations about the markets he took an interest in to selected clients. One of these was McDonalds.
The hamburger chain wanted to introduce a chicken nugget product to its range. But it was worried its profits would be squeezed if chicken costs went up. But using his in-depth knowledge of the market for chicken – and chicken food sources such as corn and soymeal – Dalio came up with a way for chicken producers to fix their own costs using futures contracts.
This meant they could in turn offer a fixed price for chicken to McDonalds, making the Chicken McNugget commercially viable.
Investments in meat did not just make an impression on Dalio’s professional life. Livestock were so important to him that they also touched his personal life – his hobbies as we’ve seen above, and beyond.
“On March 26, 1978, my wife gave birth to my first son Devon,” he writes in Principles. “I pursued [my family life] with the same sort of intensity with which I pursued my career, and I linked them.”
The source of his son’s name is perhaps one of the best examples of just how significant Dalio’s meat trades were to him. “Devon” is, says Dalio, the name of “one of the oldest breeds of cattle known to man, renowned for its high fertility.”
As basic as those early models were, I loved building and refining them – and they were good enough to make me money.Ray Dalio