Ray Dalio's Pure Alpha Fund returned 14.6% for 2018. That's an amazing feat considering the majority of hedge funds averaged a loss of 6.7%. How does he do it? Simple. He always asks, "how do I know I'm right?"
The Westport, Connecticut-based firm is the world’s biggest hedge fund with about $160 billion in assets. The gains for its Pure Alpha Strategy came as other fund managers were whipsawed by volatile markets, resulting in the industry posting one of its worst years ever.Via Bloomberg
How do I know I'm right?
I can't begin to guess how his Alpha Funds works internally, how complex it must be. If his book is any indication (a great summary here), then I can guess it's well thought out with one simple premise, "how do I know I'm right?"
Think about it, 1,000's of Hedge Funds are operating on similar strategies all the time. They're either macro, long/short, arbitrage, whatever... What does he do that's so different than all the rest? The nugget of truth is in his in Ray Dalio's questioning himself all the time with "how do I know I'm right?"
If you believe the market is going to crash when it's at an all-time high, how do check yourself? How, in your infinite wisdom, do you test and confirm that you are correct and the 1,000's of fund manager and quants have it wrong?
Another great aspect of Ray Dalio's strategy is that he looks in history where a current similar situation has occurred. According to him, he goes back about 500 years in economic/political/cultural history and looks if something similar (debt crisis, tulip mania, etc) has happened and what the outcome was. Then he adjusts his strategy accordingly.
One great example was when the US abandoned the gold standard in 1971. His initial thought was that the market was going to crash but was shocked to learn that the markets opened higher. Later he learned that history is littered with a few examples where this has happened before. The inflationary result of abandoning the gold standard lifted asset classes higher.
While history doesn't necessarily repeat itself, it tends to rhyme a lot. Perfect current example: Bitcoin. Bitcoin is a lot like the Tulip Mania (and other manias for that fact). While I'm bullish on Blockchain technology, I'm not sure if Bitcoin will survive to become a sorely needed digital currency.
No matter what industry you come from, you should always ask yourself if you're right and how can you confirm it. Once you've identified the known-knowns (the market already has), the known-unknowns (maybe the market has), and the unknown-unknowns (no one has, but history might provide a guide), then you can apply strategies and processes to win.
Now, ask yourself: How do I know I'm right?