This article was updated on April 11, 2015.
Want to make money in the stock market? One man worth billions shares the simple answer to his success.
Warren Buffett has long extolled the value of patiently saving and investing in a low-cost index fund to prepare for retirement. But those who want to invest in stocks can learn from another man who is also happy to share his wisdom.
Ray Dalio manages Bridgewater Associates, with $165 billion at its disposal, and he himself has more than $14 billion to his name. It's estimated in 2010 alone he made more than $3 billion after his firm delivered a mind-boggling 45% return to investors.
Yet just one year later, after his publicity undoubtedly rose, he released a 123-page paper simply titled Principles [opens in PDF] outlining the things he believes have made him successful in investing and in life.
The way he learned to beat the market
Like Warren Buffett, Dalio began his investment journey before he was a teenager. He grew up in Long Island in a middle-class area, delivered newspapers, mowed lawns, and even caddied at golf courses. It was during this time on the courses when he'd hear about the stock market -- the booming 1960s led to much discussion -- and he himself thought he should put his money into stocks.
Dalio notes his first investment was Northeast Airlines -- which was acquired by Storer Broadcasting Company before it was ultimately sold to Delta -- which he invested in simply because it was the only company he'd heard of with its stock selling for less than $5 a share.
He ended up tripling his money as a result of the acquisition, but he notes he only made money out of sheer luck. However, in his early years, he, too, was met with failures: "It didn't take me long to lose money in the markets and learn about how difficult it is to be right and the costs of being wrong."
Yet he notes three simple things he learned at a young age when he sought to beat the market that catapulted him to success later in life.
Humility is key
It isn't easy for me to be confident that my opinions are right. In the markets, you can do a huge amount of work and still be wrong.
All too often investment ideas that are thought to be sure winners are regrettably big losers. Dalio notes he gets some of the smartest people he knows to stress-test his opinions to ensure that when he does come to an investment conclusion, it's the right one. He also notes that he's always "wary about being overconfident."
Mistakes are expensive
Bad opinions can be very costly. Most people come up with opinions and there's no cost to them. Not so in the market. This is why I have learned to be cautious. No matter how hard I work, I really can't be sure.
A mistake in choosing a place to eat lunch is temporarily unpleasant. One in the stock market can mean thousands -- or millions -- of lost dollars. Understanding this reality should cause investors to remember caution is critical.
Independence is essential
The consensus is often wrong, so I have to be an independent thinker. To make any money, you have to be right when they're wrong.
As the National Bureau of Economic Research notes on the Korean financial crisis, "The herd appears to have been running in the wrong direction. ... Investors would have made more money if they had bought stocks that had recently tanked and sold those that were on the up-tick."
In October of 2008 -- at the height of the financial crisis -- Warren Buffett said, "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful." Dalio undoubtedly would agree, and the research proves it.
There's a lot to learn from a man with billions who's happy to share the wealth of his knowledge, and these are three of the principles he lives by to beat the market.
Before investing in stocks, here is some advice to help beginners choose the right ones.
Patrick Morris has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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