This powerful formula helped Ray Dalio build his $18 billion fortune

Ray Dalio, founder of investment firm Bridgewater Associates.
J. Countess | Getty Images

Billionaire financier Ray Dalio grew Bridgewater Associates from an operation run out of his two-bedroom New York apartment to one of the world's largest hedge funds. Today, Forbes pegs Dalio's net worth at slightly more than $18 billion.

He built this success, in part, thanks to a simple formula he uses to harness the power of challenging situations: Pain + Reflection = Progress.

Pain can shape us, and build our characters, Dalio explained in a LinkedIn post last week, but only if we let it. Key to this process, he says, is developing an important routine where one goes "to the pain" in difficult situations.

You must routinely analyze the reasons behind the emotions you're experiencing, Dalio has said. "With practice the pain won't be as painful," said Dalio, "and you will begin to see the pleasures of the successes so that going to the pain will make you feel good rather than bad."

It's common, says Dalio, to resist reflecting on your pain. It's ok to want to pay attention to other things, but know that you'll miss out on the growth and change that pain brings, Dalio wrote this past July. But whether you reflect in the moment or later, you'll find value.

Dalio himself has benefited from embracing his own personal pain. Nearly 40 years ago, Dalio had misjudged the market — a mistake that caused him to lose money and even let clients go. He was so broke he had to borrow $4,000 from his father to help pay for family bills.

"That was extremely painful — and it turned out to be terrific," Dalio said on a podcast. "I was absolutely miserable. But it gave me the humility that I needed to deal with my audacity. It made me want to find the smartest people I could find who disagreed with me so that I could understand their perspectives."

Ultimately, that painful bad bet shaped Dalio's policy of "radical transparency," or extreme honesty, at Bridgewater. Through this process, people are encouraged to point out key blindspots and what anyone — including Dalio — could be overlooking. This approach contributes to a culture at Bridgewater where the best idea wins, Dalio says.

Also painful for Dalio was receiving a memo in 1993 while chairman at Bridgewater providing some harsh feedback about his management style. After receiving it, Dalio was hurt and surprised. However, that painful experience led Dalio to re-think how he approached people, as well as Bridgewater's culture.

By reflecting on his feelings in these tough moments, Dalio learned to resist running away from difficult times and emotions. "If you can develop a reflexive reaction to physical pain that causes you to reflect on it rather than avoid it, it will lead to your rapid learning and evolving."

Embracing this pain, says Dalio, will "strengthen you which will give you the power you need to be more successful."

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