The economy is built from simple transactions. You take assets or credit and exchange it for goods, services, or financial assets. That’s it. This process is repeated countless times in countless scenarios to build up the overall economy. You gain true clarity when you see a complex system as a combination of it’s simple parts. This type of understanding applies to many things in life. By reducing your problems to their simpler parts, you gain the ability to tackle even the most challenging task.
Ray Dalio turned his everyday decisions into systems. He started by compiling the reasons for each choice. Then he aligned the reasoning with the category it applies to. Because there are fever types of decisions than there are decisions to make, he could streamline decision making. Finally, he leveraged the power of computers. Algorithms don’t have biases, they don’t get emotionally attached, you can back test them, you can collaborated on them, and you can easily change them.
If you want to be successful, you need to leverage everything around you. Your intuition, technology, and the knowledge of others melded together. With more input you can make better decision. However, no matter how much input you get, remember to not get greedy. When you want ever more and get out of balance you run the risk of losing more than you can handle. Instead, make intelligent adjustment. You will still have a huge upside but with the assurance that you won’t lose it all.
Making many balanced and uncorrelated bets is the best way to minimize your risk while keeping the gains. If your bets become correlated, you lose the benefit of diversification because more of your portfolio can be effected by a single event. In order to understand correlations, you won’t only need to understand markets. You will need to understand people. Try to understand why opinions differ, even if they are at complete odds with you.
No matter how prepared you are, fate is unpredictable and you will face a loss. It’s unavoidable. The import thing is to make sure you can handle a loss. Minimizing your down sides by finding your neutral point. An equilibrium where you are not loosing anything and you can sustain indefinitely. Once you identify this point, you can take calculated risks outside of it. Knowing that you have a cushion at your neutral point.