Ray Dalio gets a lot of play in financial circles. His debt-theories, his leadership concepts, and the sheer fact that Bridgewater is and has been the world’s largest hedge fund for some time make him a person of supreme interest, even to non-finance types. With a high-water mark of around $168 billion in assets under management, the guy’s moved some weight.
And I appreciate the curiosity and fandom for anyone who has accomplished this.
But.
I’m a high-brow / low-brow kind of guy.
It’s why I love Rick Rubin yet, I love - even more so - to tell people who only see his high-brow philosophizing, about his low-brow antics. In Rubin’s case, I don’t think he’d mind, either. He loves that contrast as much as I do.
Give me pro-wrestling and fine art in the same afternoon. Give me Slayer and The Dixie Chicks for my before and after soundtrack. This is the richness of life I live for.
So when it comes to people being all excited about Ray Dalio, or sending me things he said, or points he made in books or YouTube videos, my go-to response is now and has been for sometime,
“Ray Dalio? The same Ray Dalio who invented the chicken nugget?!”
When I say it, I hear Jim Downey’s voice on Conan saying, “Jeff Epstein? The New York financier?!”
I know what I’m saying isn’t nearly as amusing as that bit, but I want to steer the modern success away from the things that made a person.
Why hide from it.
A recent exchange over a Dalio tidbit, where I delivered my line, made me realize I’d never written this story down anywhere. So today I’ll make that right.
In part because I think it’s a fun story. But, beyond the quirkiness of it, I think it tells you more about who Ray Dalio is than any grand theory on multi-century debt cycles. Not because he’s wrong about any of that, but because at the smallest scale he’s a smart guy who can put some variables together and make magic. At the grandest scale, life is as absurd as the fact that Chicken McNuggets are a trademarked term since 1980. Think about that.
Here’s the story. You can find it in Dalio’s very large but interesting enough book, Principles, or probably hear a version of me telling it poorly on various podcasts (whenever people bring him up). Now I can reference this post. Let’s get into it.
Ray Dalio was running Bridgewater Associates out of his New York apartment in the mid to late ‘70s. He’d been doing some risk consulting work for various corporate clients while trading commodities as well. Remember, it was the ‘70s, and all of this was sensible, despite work from home being a little different in those days.
On his client list he just so happened to have McDonald’s AND one of the largest chicken producers in the country. He heard about McDonald’s wanting to scale up the Chicken McNuggets after testing it in several markets but not being able to, mostly because of the inherent and volatile cost variability. An unprofitable Happy Meal is not a happy shareholder meal.
As it turns out, chickens are finicky little guys. For one, the corn and soymeal feed varies wildly in price, and that stresses the chicken farmers out. If they agree to sell chickens for too low a price relative to the soaring food costs they bear, they could be out of business. Historically, the farmers would demand a higher price to offset this risk. But for McDonald’s, that premium was too high to make the McNuggets’ price work
Dalio looked at the problem and realized that it had three legs. If he could get those three legs under one golden-arched stool, he could help the chicken producers and McDonalds out all at once. The chickens - yeah, let’s not talk about what happens to them. Happy Meals, remember? So the business potential was there, and Dalio saw the opportunity for exactly what it was.
So Ray, from his apartment, works out a derivative structure that would combine corn and soymeal futures in a single, synthetic future that would allow chicken producers to hedge their feed costs, and therefore quote McDonald’s a stable fixed price of nugget-ready chicken. Food + chicken + corporate profit margin = a no-brainer of a trade for all parties involved.
It is brilliant.
But all brilliant solutions have some small perspective. They get you from A to C by way of B.
I bring this up because Dalio is a smart and impressive person. He’s seen a lot of life. He’s seen a lot of markets.
But before somebody who hasn’t spent 50 years on finance reads too deeply into his grand theories of everything, remember - that’s kind of impossible to be right about unless you have several hundred years to zoom out and see what will happen.
On the much shorter scale, Dalio is brilliant at putting together smaller ideas, which remove risk and deliver an outcome. Spoiler: that’s what his funds do/did, that’s what lots of others have copied from them, and for the same reason you can get all sorts of nuggets in the world today, such is the truth about alpha.*
Ray Dalio is an impressive man. He’s quite the financier. And, he invented the Chicken McNugget.
That’s my story and that’s the way it is.
*shoutout to all the Excess Returns people, because this is an evergreen lesson.
