What is radical transparency?
Radical transparency is an organizational philosophy championed by Ray Dalio, the founder of Bridgewater Associates. Founder of the “superstar” hedge fund with almost $160 billion AUM. The hugely successful fund manager pioneered and nurtured radical transparency in his organization since 1993. Dalio expounded the thinking behind radical transparency in his book titled “Principles.” It encourages absolute honesty and rational criticism of any idea before it becomes a decision.
Any investor would do better by adopting radical transparency as part of their investment philosophy. So, can you upgrade your investment approach by incorporating Ray Dalio’s radical transparency principle?
For a long time, and perhaps for longer into the future, organizations have been run in a top-down fashion. Information runs from bottom-up, and instructions flow from top to bottom. The result is an environment where the top management always has an opinion about the reports. In contrast, the reports always mistrust the top management because the reports believe the management is their enemy.
The fundamental wisdom of radical transparency is that people tend to avoid talking about their mistakes and weaknesses and instead choose to dwell on the few instances of success. But transparency helps to uncover the problematic tendencies and biases human beings have. According to Harvard Business Review, research shows that businesses that exercise transparency when reporting their results are high achievers. Another one found that customers positively perceive the products of a transparent organization, and they are more satisfied of it. As such, they are willing to pay for such a product regardless of its quality.
Dissecting radical transparency and how it fits into investing
According to Ray Dalio, radical transparency is a pot that contains essential life principles. These principles helped Dalio to become the founder of the world’s most profitable hedge fund. He found each of the principles critical in constructing a portfolio that has returned more than $45 billion. Some of the life principles that encompass radical transparency include:
Embrace reality and deal with it
According to Dalio, every investor should be a hyperrealist. This principle’s premise is that an investor – or any other individual who wants success – must seek an accurate understanding of reality, be it the market in which one is trading or the assets in focus. Next, one needs to be radically transparent in light of reality to enable effective change through rapid learning. As an investor, you either evolve or die because the terrain is brutally dynamic.
Embrace the 5-step process to make investing decisions
You have probably heard this countless times, but Dalio believes that no endeavor is successful without a plan.
The plan has to start by setting clear goals by prioritizing the most important things. While at it, do not confuse objectives with individual desires. It means deciding what you want out of the current undertaking by reconciling personal desires and your goals. It could be a personal desire to generate a comfortable income from an investing career, but the goal could be to return at least 20% of your portfolio’s worth annually.
The second step entails identifying problems and designing mechanisms to avoid tolerating the problems. To this end, first, start by viewing painful problems as an opportunity for potential improvement. That means learning to confront problems since they reflect the harsh realities of your unpleasant side.
Step three entails diagnosing the problems to reach the deepest roots. Ray Dalio advises investors to first evaluate the “what is” of a problem before going after the “what to do about it.” Say you are an investor whose approach is constantly turning up losses. The first thing to do is to find out what is wrong about the strategy used. Only by identifying the ‘what is’ will you be sure what to do about the problem.
Fourth, design a plan for the way forward. Often, investors start from this point. They design investing plans when they know so little about themselves and the problems they are tackling. Because plans are a blueprint to tackle a certain problem – or set of problems – a great plan should seek to solve a problem. Having identified the problem, designing a plan shouldn’t take long.
Lastly, make sure you push every plan to completion. It makes for wasted energy if you develop a great plan but to bangle the execution. This means great investors need to develop great work habits that enable them to see through great plans. It helps to develop clear metrics to ascertain that you are closer to the plan.
Be radically open-minded
Open-mindedness means understanding and transcending your ego-barrier. Often, investing brings out two “yous.” One side of “you” wants to control the way you make decisions in a way that undermines the other side. The key is to understand the barriers inherent in your “yous,” especially the blind spot barrier to achieve success. Beyond recognizing the barriers to open-mindedness, you should practice radical open-mindedness. It entails appreciating your incapacities in terms of dealing with not knowing the more critical aspects of investing. The idea here is to understand that achieving your goal is what matters, not whether you are looking good in terms of portfolio performance or not.
Is radical transparency the way to go?
A lot of what investors know today is a conglomeration of experiences (both successes and failures) of experts who have been generous enough to share them. Many of the strategies and approaches that the investors depend on a shift in and out of relevance as time goes by. However, radical transparency as an investing approach remains resilient no matter the season.
Many successful investors have dabbled in radical transparency, even if the name was something unrelated. The baseline is that the approach requires an investor to be more direct in his/her expectations, develop measures to evaluate their performance effectively, and share ideas and problems with fellow investors to seek help to improve one’s approach.
Investors’ desire success, but few feel the need to be radically transparent with themselves in their investing career. Radical transparency means that one is willing to go above and beyond to seek out problems that hinder excellent performance. Identifying one’s shortcomings has the potential to turn a loss-making portfolio into the best performing in terms of returns.