Ray Dalio was 12 when he tripled his money on his first stock — and he says that lucky win almost taught him the wrong lesson

“Everyone was talking about the stock market, because it was doing great and people were making money. So I took the money I made caddying and bought stocks,” Dalio explained to Forbes. “The first stock I bought was in a company called Northeast Airlines; it was about to go broke but then another company bought it and it tripled.”

Dalio noted in another interview that the formative experience got him “hooked on the markets, like one might get hooked on a video game.”

That lucky stock stroke, however, almost set him up for failure down the line. Dalio wrote later that he figured that playing the stock market can’t be that hard after that first score.

“Of course, it didn’t take me long to lose money in the markets,” he added, “and learn about how difficult it is to be right and the costs of being wrong.”

A bad call nearly wiped Dalio out — but changed how he invested forever

Dalio’s observation about the cost of being wrong is key. The SEC, for example, devotes an entire page of its website to things investors do wrong when they think they’re being smart about stocks, including exercising familiarity bias, falling for market “manias and panics,” and actively buying and selling too often instead of using a more reliable ‘buy and hold’ strategy.

In fact, a 2002 study found that “overconfidence can explain high trading levels and the resulting poor performance of individual investors.”

Investor.gov, meanwhile, advises being an informed investor — a common sense approach but one that Dalio, at 12, hadn’t yet learned.

Still, Dalio has an expression he favors: “Pain plus reflection equals progress.” He believes in learning from mistakes and moving forward.

And perhaps that was never more evident in his own life than in 1982 when he made headlines, amidst an ongoing recession, for predicting that the U.S. was on the verge of another depression.

The national depression failed to materialize after the economy and stock market bounced back following a loosening of Federal Reserve policies. But Dalio’s depression after his disastrous prediction was just beginning.

“As a result of being wrong, I lost money for me, I lost money for my clients, I had to let everybody [at Bridgewater] go,” he said in a 2019 interview. “I was so broke I had to borrow $4,000 from my dad to help pay for family bills.”

Dalio added that the experience “changed my whole approach to decision-making” and “made me be much more open-minded, to diversify better, to deal with my not knowing.

“Whatever success I’ve had in my life,” he added, “has been due more to my knowing how to deal with what I don’t know than because of anything I know.”

Dalio’s investing playbook starts with one thing: knowing what you don’t know

Dalio’s principle of “How you deal with what you don’t know is much more important than what you know” is so important to him that it’s highlighted in his bio on Bridgewater’s website.

And once you realize what you don’t know about investing, it makes advice from someone like Dalio that much more valuable.

When asked by the Wall Street Journal how he’d invest $10,000 if he were starting out now, he said that when he was in that position in real life he asked himself “‘How many weeks, months or years could I live without our money coming in?’ If I should be dropped or I lose my job or something, how do I establish that security to basically immunize those types of things?”

And that mindset drove his approach to investing.

He also lauded “diversification — the Holy Grail of investing that, when I discovered it, it meant everything to me” and said that after immunizing yourself against things like job loss, start to “Think about your returns in real returns and, most importantly, how you diversify well.”