Billionaire Ray Dalio: You will ‘inevitably succeed’ if you follow these 5 steps

David A. Grogan | CNBC

Ray Dalio

Billionaire Ray Dalio has built the largest hedge fund in the world. Bridgewater Associates has $160 billion in assets under management. And according to Dalio, there is a five-step formula to guarantee success.

Here are the five steps, with descriptions by Dalio, as told to Recode executive editor Kara Swisher on her podcast, Recode Decode.

1. Set goals. "You have to have your audacious goals."
2. Notice your mistakes. "As you go to those, you are going to encounter your failures, your mistakes. You have to identify those and not tolerate them."
3. Understand why you are making those mistakes. "You have to get the diagnosis to the root cause of them, which could be that you have a weakness or somebody has a weakness."
4. Fix your mistakes. "You have to design what you are going to do about it to get around it."
5. Persevere. "You have to push through to results"

"And if you keep doing that over and over again, you will inevitably succeed," says Dalio, 68. "You do it over and over again because you have determination — you will inevitably succeed."

Dalio discovered this formula for success in his professional life because he had to. He opened his hedge fund in 1975 and in the early 80s, he was convinced the economy was heading toward a recession and made moves with his company accordingly. Instead, the economy was just getting started on an 18-year-bull run, he says in his new book, "Principles: Life and Work."

"My experience over this period was like a series of blows to the head with a baseball bat. Being so wrong — and especially so publicly wrong — was incredibly humbling and cost me just about everything I had built at Bridgewater," he saysin the book.

"I'd lost so much money I couldn't afford to pay the people who worked with me. One by one, I had to let them go," he writes. "To make ends meet, I even had to borrow $4,000 from my dad until we could sell our second car."

The massive failure in judgement forced Dalio to examine his self-perceptions. He determined that, without candid feedback from smart people, his own opinions were leading him astray.

So Dalio built and implemented an "idea meritocracy" at Bridgewater, and his hedge fund has become both famous and infamous for it: famous because it has lead the company to legendary success; infamous because Dalio's style can be brutal to get used to.

"The biggest tragedy of most people is that they think that the right decisions are in their heads, they have opinions that they are attached to and that I learned through experiences, I learned humility," says Dalio to Swisher.

To truly get to the best possible solution requires soliciting opinions from smart people around you. Everyone has to articulate their honest thoughts. Then you need to have productive discourse, what Dalio calls "thoughtful disagreement." Work to understand the perspective of the people who disagree with you, says Dalio.

The other piece to developing this culture is to have what Dalio calls "radical transparency." For an idea meritocracy to work, everyone has to have access to the same information. Bridgewater Associates takes that to an extreme: for example, every employee at Bridgewater has access to a tape of almost every meeting that happens in the company, says Dalio.

For Dalio's protocol to be successful, participants have to opt in to the process. When the group decides on the best path forward, there's no room for emotions or egos. It's not easy, but works, says Dalio.

"Our culture, this idea-meritocratic culture has been mind-blowingly effective," says Dalio. "No human being has anywhere near the capacity to make the great decisions as great collective decision-making."

Whether you are implementing Dalio's strategy of an idea meritocracy in your company or following his five-step plan in your own personal life, the processes are parallel: set goals, admit and confront mistakes, educate yourself on how to improve, change your behavior and push forward.

It has worked for Dalio, who is now worth $17 billion, according to Forbes.

See also:

Billionaire Ray Dalio: There are 2 realities in this country—for the bottom 60 percent it's a 'miserable economy'

Why Elon Musk encourages his employees to tell him exactly what he's doing wrong

Bridgewater's Ray Dalio Dives Deeper Into the 'Principles' of Tough Love

Like this story? Like CNBC Make It on Facebook.