In the book Hedge Fund Market Wizards: How Winning Traders Win, there’s an interview with Ray Dalio in which he describes how trading offers continual tactile learning experiences, particularly from painful surprises.
One vivid memory is his experience trading pork bellies in the 1970s when the market plummeted daily, causing him significant financial stress.
This taught him the importance of risk controls and balancing aggression with defense in trading. Dalio emphasizes that anyone who makes money in trading likely endures severe losses at some point, comparing it to receiving an electric shock.
These experiences fostered his approach of rigorously challenging his ideas and reinforced the need for prudent risk management in investing.
Here’s an excerpt from the book:
Dalio: Every day provides tactile learning experiences. You are asking me to describe moments. I don’t see it as moments, but rather as a string of tactile experiences. It is not so much a matter of cerebral memories as it is visceral feelings.
You can read about what happened in the market after Mexico defaulted, but that is not the same as being in the market and actually experiencing it. I particularly remember my surprises, especially the painful ones, because those are the experiences that provide learning lessons.
I vividly remember being long pork bellies in my personal account in the early 1970s at a time when pork bellies were limit down every day. I didn’t know when my losses would end, and I was worried that I would be financially ruined.
In those days, we had the big commodity boards, which clicked whenever prices changed. So each morning, on the opening, I would see and hear the market click down 200 points, the daily limit, stay unchanged at that price, and know that I had lost that much more, with the amount of potential additional losses still undefined. It was a very tactile experience.
What did you learn from that experience?
It taught me the importance of risk controls because I never wanted to experience that pain again. It enhanced my fear of being wrong and taught me to make sure that no single bet, or even multiple bets, could cause me to lose more than an acceptable amount.
In trading, you have to be defensive and aggressive at the same time. If you are not aggressive, you are not going to make money, and if you are not defensive, you are not going to keep money. I believe that anyone who has made money in trading has had to experience horrendous pain at some point.
Trading is like working with electricity; you can get an electric shock. With that pork belly trade and other trades, I felt the electric shock and the fear that comes with it. That led to my attitude: Let me show you what I think, and please knock the hell out of it. I learned about the math of investing.
You can find a copy of the book here:
Hedge Fund Market Wizards: How Winning Traders Win – Jack D. Schwager
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