well thank you for having me the so

when I think about our philosophy right and this is really about the philosophy that gets you to be excellent Excellence

is so core to us and as I go through the different words that define our our um our philosophy I think it's it's trying to really focus on what do you mean by a buzzword like excellence

and for us we measure Excellence by what we mean by it is continuous Improvement

everybody starts somewhere and the question is can you as an individual and you as an organization continuously improve

that's what we would Define as excellent

and so if I start with what are we trying to be excellent at

and Bridge has been been doing two things for its whole existence

50 years I've been a bridgew for 29 years and we focus on two things which is to deeply understand how the economic system works and apply that to build great portfolios

and there's three components that are critical to really understand our philosophy

one is what we mean by fundamental so fundamental means what actually drives markets

that we believe that you can that you can understand this that there are decisions that people make they make them for reasons those reasons add up to what we consider the fundamentals

that those ideas can be you can think of them qualitatively they're not like not everything that you're thinking matters is measurable in a traditional qualitative sense

but in any event that's what we mean by fundamental which is what are the true causes for the things that you see in the world

and then the second step that we take is to take whatever you believe and systemize it

what we mean by that is have the rigor to take the reason that's in your brain right it could be a qualitative idea but there is a reason the synapses in your brain are doing what they're doing and somehow there are inputs coming in there's logic being applied to those inputs and outputs coming out

you can take the energy to systemize that understanding and it's critical I'll talk about why that for us anyway that's so important

and the last thing is is have a strategy for being wrong

our strategy for being wrong is diversifying but there's different strategies

but you need to know that whatever you believe with whatever confidence you're going to be wrong a tremendous amount

so those are the three kind of core things I'll dig a little bit deeper on

so first off what could we mean by fundamental

what are truths that when we try to discover what's true about markets and economies they're things that are going to be true now that are true wherever you place yourself in the world that are true at any moment in history we expect to be true at any moment in the future

me the first one of those things we'd start with is that there's two ways two core ways to make money in markets

one is to take on risk that's a risk transfer to you that somebody's offering to pay you because you're in a position to take risk they don't want to take right

that's what that General category we call that beta not to be too like they semantic arguments about what beta means

but for us we just mean the the amount of money you get paid for taking on something else's risk

then there's a separate point which is Alpha which is the money you get you can make by making smart decisions in terms of timing in terms of valuation Etc that go beyond just taking on the risk

so that we think about trying to separate that and think of every um investment as the risk neutral position plus the beta so what the asset classes are that you hold and the risk that you're transferring plus the alpha

that's very different the way we look at it that sort of formula of how you get a total portfolio return is different than how most organizations structure their Investments

most organizations think of their total return as their their Holdings in each asset class Holdings in stocks Holdings in bonds Holdings in private Equity etc etc and those sum up right

and the difference is you don't have to combine your Alpha with your beta you can separate those two decisions and that's a big deal

so first of understanding those two return streams recognizing they're different and the way you can combine them together can actually significantly improve how you invest

so now when we come back to fundamentals and we think about what are fundamentals that are Timeless and Universal what can you say about markets that's going to be true 100 years from now is true in China it's true in the United States it's true here in Norway um

because you really want to base your beliefs on things that are fundamentally true and then build out the deep understanding about those things

so to give you two examples of what we mean by things that are Timeless and Universal that the first is that the price of anything is equal to the amount of currency spent on it divided by its quantity right

that seems simple but it's actually a world of understanding to say well how much money is going to be spent on something how much supply of it exists right

and you can fundamentally build that you can build that in any time in any country um and I'll get into how we check that that those things are true anywhere

similarly the price of something is equal to the discounted economic conditions that affect it

and so when you look at the changes in prices it's because something happens relative to the discounted economic conditions in that asset

those two things are true all the time and everywhere and those are big building blocks to then build a process around

so when we've been building processes to measure that to measure those cause effect linkages of things that we believe to be true um you know really starting in 1980

so the first thing I'd say now we talk about making decisions systematically why do you do this it's so such a pain right

why do I have to write down what I believe why do I have to stress test whether it's true

I mean most people want to skip that step because it's like okay it seems like this is going to happen or that's going to happen

and it's been such a huge uh building block in our organization to say no we're going to have the discipline to always write down our reasoning right

so when we talk about making decisions systematically this is not a quantitative thing this is about having the discipline to say this is why I'm doing what I'm doing

that opens up a world

so if you look at the yellow piece of paper that's up there that was our 1980 Bond system

so in 1980 you can picture Bridgewater it was yellow piece of paper rules that were written out this is we're going to buy bonds if this happens we're going to sell bonds if that happens

that were rules about what thought about money supply and other things at the time

um the idea itself is not that useful but the process that it kicked off was critical

which is we just scratched out one of those ideas put in another one learned another one but you start with this building block of what do you believe so that others in the organization can question that

it's forcing you to actually State what your logic is and um and that allows constant compound Improvement that's really such a critical element to our philosophy and and um

the benefit of that is you can check your yourself

so what I'm showing here is just an example if you if you said okay let me say what I think right right now you might think well the um capacity utilization in the United States like the economy is running hot and that running hot could lead to um higher wages and maybe higher inflation and therefore I want to take this position in markets right

and the great thing about forcing yourself to okay that seems reasonable like let's write it down let's see if that's true when is it true if you use that rule will it actually work in history right

force yourself through that put yourself at different points in time that'll force you to refine your thinking right

if you just take that idea that's like just something I've you know recently heard a fair amount so I just wrote it down so it could show

and then you could you know have technology to just test okay well let's say you follow that rule does it work or not

and what you find most of the time is actually a lot of time it doesn't work

so now you think well I must not know what I'm saying isn't that reliable right

and I show like a profit curve of the alpha of that rule and is actually okay for a long period of time and then flat for the last 35 years

why would that be why is that getting priced into markets what's going on right

and the benefit of writing down your rules is you can actually see whether they work um and that's a huge huge deal

beyond that you can also know what you're in for

for every idea that we ever use to invest we start with what do we expect from it right

and so this cone chart illustrates this but every idea that we use in investing we say okay what are the risk and the return that we expect from this idea in the future

and that gives us a uh an opportunity to then compare what happens relative to that right

so the cone chart is when we first started the idea so in 1991 as an example we started the idea of of pure Alpha which is all of the alpha ideas we had at the time put together

and then we've added to them and subtracted from them but um and we set out a cone chart and said this is what we expect the risk return to look like into the future

and every day we Mark what's happening relative to that expectation right

and we do that with every single idea which is automatic quality control

you could say okay if my idea doesn't work out consistent with how I expected it to then okay the world's different than what I thought

and on the other hand if there are draw Downs in that idea which there always will be you plan for it in advance you're not reacting to that draw down you're saying okay if I have a draw down of this nature I'm not perplexed by it because I knew it would happen I expected that to happen um

so knowing what's inside the bounds of what you expect and what's not is another critical element

Now the next point is probably the one that's most sort of Under Fire at this point in history because diversification hasn't been doing that great as a concept

but but um if we thought about the Holy Grail of investing right what do we actually want

if you want to achieve your goals in investing um it's to have something like 15 to 20 uncorrelated return streams

this is kind of what we're seeking you never actually get there because things are too correlated to quite get to that level

but if you you're seeking ways that you can make money in markets that are unrelated right and and the benefit of that is you can translate

if you basically look at this chart most things if you take most of the Investments that you're all invested in are reasonably highly correlated they're on the top left

that means you can buy a whole bunch of them you're not actually getting much diversification

if you see this curve if you're able to select strategies that are uncorrelated and you can move down that curve you can improve your reliability 3 five x with equally good ideas if you're getting uncorrelated ones um

so that is really that seeking that search for H what are our paths to get positively expected returns that are um uncorrelated to each other

so that's again a huge hugely important part of our philosophy and to do that

what you need is to to put them together in a way that actually works

so when you do balancing and diversifying in terms of risk instead of in Terms of capital is so critical

so it's usually people think in terms of okay I'm going to invest X in this asset why and this asset Etc in capital terms

restructuring your thinking to think in terms of I'm going to allocate risk to different things and then I'm going to try to balance that risk among things that are diversifying

so that means you have to take high risk strategies and lower the risk on them and take low risk strategies and raise the risk on them in order to get diversification across them right

and that's a another attribute of when we're thinking about diversifying

now to slow down a second um just to put that into practice right

so when you think about the concepts that are behind pure Alpha that is sort of the the best we could do in generating Alpha in the world

the concepts start with the deep understanding of the world having studied everything that exists in the world that we could think of for 50 years taking that yellow piece of paper Crossing out things we don't like adding things we learn building those into algorithms that reflect everything that we've ever thought of right

this kind of gives you a sense of how that literally works

so it starts with different ideas on the left here that a you'll have different approaches to trading the market this is Again part of diversifying right

you might think in terms of fundamental principle of value that eventually that that the cash flow of an asset is going to equal the the present value of all the future returns that you'll get

you could make build that deep understanding of what causes that what what an asset should be worth today right

that could be one perspective on that market that isn't going to help you that much in the next 6 to 18 months it helps to some degree it won't help you that much so you need other perspectives

well what are the other drivers Beyond value right

we think of the essentially the movement in the fundamental conditions that matter so how do you measure those how do you build that into a decision role

we also think about the effect that other markets have on that particular Market again how do you build that World out how why do other markets affect this Market how does that actually work

and then the fourth thing is who all the buyers and sellers are

one of the reasons things go far from fair value is because buyers and sellers do things for reasons other than the long-term cash flow effect

and understanding the balance sheets of those players where they get their money from how that works those pieces all combined together

and you could think of it as we have all of those ideas that we've been working on for years you can think of it as four people arguing with each other with different perspectives on markets that then put together to get to a view in a market

which is kind of then the thing that's on the second the the next diagram here on the chart which is okay you could translate those different people's views into a systematic process

those build that systematic process to combine that information into one view of a market right

so then we take that second step then we take those signals that we combined together and build that into a risk pie

so say okay well how much risk do we want to put on each one of those strategies how much risk would we put in each one of the markets

again trying to move ourselves as much as possible to the Holy Grail of 15 or 20 uncorrelated return streams

and um that's then the pie chart shows the risk budget we try to get over time which is a very balanced risk budget across many different markets across very many different strategies across those markets

but at a point in time which is then the furthest right chart you're not going to have views on everything

that's another big important philosophical thing is you don't have to have a view on everything

you have this world of opportunities to take advantage of you don't have to have a view on everything

so translating your views at a point in time that things that you have strong views on through a risk budget that's at a crosstime risk budget you can sort of multiply the signal by the risk budget to get the overall portfolio that you end up with um

so that's how we kind of put these pieces together in an approach that starts with qualitative thinking about from experts on like why would you buy a bond why would you buy a currency etc etc

Translating that quality qualitative thinking interrogating it until you could translate it into an algorithm

using those algorithms to look everywhere in the world so you could be massively Diversified because now you if you've actually taken the logic of why would you buy a bond why would you buy a currency you could apply that anywhere in the world if you've done done it well and deeply you can apply it everywhere

so you can apply those rules while you're not even realizing something's happening in a country or whatever and um you could build up your Port build out a portfolio that way measuring point and time conditions reflecting all that logic that you've built up over 50 years of compounding right

and that's kind of the last point that I'd say if you just talk about our philosophy it starts with constant Improvement

and if you actually do constant Improvement as an organization and you compound compound that understanding right you think about compound returns in the context of an investment

if you think of it in terms of an organization what you really want to do is compound understanding like what does the organization actually know and how do you keep building that out right

and so this diagram on the left it's going to be a little hard to to say but basically this is my view of the three pieces that we've been doing to build out our understanding that allows us to compound as an organization

the first is what's reflected by that Cube which is that everything we've ever learned at Bridgewater that we thought has value we have translated that into an algorithm

we that it's it it is that algorithm itself is data that's been stored

everything we've ever learned about currencies bonds economies growth inflation everything's been learned everything is stored in a way that's organized such that you can find it you can utilize it others can build upon it

we make everything that we've done we have the standard of it has to be computer readable which means we run it three times a day it's always updated it's always got the newest information and human readable

which means that a human expert can look at this and understand an investor can see this it's not buried in code but that it's available

everything that we've ever learned that's what the cube represents

now an organization of hundreds of people working on that Cube you need what the pyramid represents which is well how do you do it when you learn something where do you put it how do you reflect your qualitative understanding in ways that then others can access right

so the pyramid and what we have in there is essentially our rule book of how you go about from an idea to getting the data you need to fuel the idea to building the visualizations that other people need to understand your idea right

and so that is the second component of it

and then the third component of it is the circle around it which is reflects the learning process the constant learning process

you'll always be wrong about a ton

we have two inputs into our process one is the basic Circle which is we're constantly making predictions about the world we're constantly getting them wrong we're constantly learning by digesting why that happened looking back and building that out then um

there's also inputs in the world something you've never thought of before new things happening right

and the great thing about having a systematic process is you could spend all your time on what you might be missing in that systematic process

how do you deal with geopolitical tensions and tariffs and and changes in trade patterns Etc

you might not have that in your process but if you have a process that reflects everything you think about you can spend all your effort on the new problems right

and the chart on the right is kind of what I want to leave you with the um it's the compounding point

that if you start the is true of Investments obviously but true in an organization and understanding

if you start with a basic level of understanding in 1980 on a piece of paper and you keep Crossing things out and learning and learning and learning and that is that thing is not in your head so it doesn't leave when you leave but it's actually reflected in that process that others can build on

your understanding follows a compound return curve as an organization the same way that you're an investment can if you continue to compound

so that's our philosophy