Episode 12: Bob Prince - Co-CIO of Bridgewater Associates

0:00Today, I am honored to have Bob Prince on the podcast. Bob is the co-chief investment officer of Bridgewater Associates, the largest hedge fund in the world. Bob started his career at First National Bank in Tulsa, where he headed the Treasury Department. He joined Bridgewater in 1986 and is responsible for managing the company's investment process. During his tenure at Bridgewater, he has been a critical part in developing all aspects of Bridgewater's investment process and client strategies. Bob has also served on Bridgewater's Management Committee since inception. I'm very excited to share this interview with you, and I hope you'll enjoy.

0:41Thank you. Thank you, Bob, for joining me. I really appreciate it. Thank you for taking the time. Sure. Good to be here. Congratulations on doing this. It's a great idea. Thank you. I want to start out in your childhood and your early career. So tell me a little bit about your childhood, and what should I know about it to understand the person you are today? okay well uh let's see i grew up in the in a small town in the midwest uh oswego illinois we moved there when i was i think four years old and uh still have family there um and um you know i it was it's an environment that wasn't really connected at all the financial markets.

1:29You know, my parents are both teachers. My dad was a coach, athletic director at a junior college. And so there were really no expectations about anything that I would do, you know, in finance, which actually I think has made it a lot easier because I just, whatever I've done is just because I wanted to do it and never really felt any pressure of anything related to that. And so So whereas I felt a lot more pressure in my golf game because my dad was a coach.

2:05So but so I think that that helps. Right. And I think it's it's sort of consistent with what I tell people is, you know, follow your passion, you know, like do something because you want to do it. You can't help doing it. You're drawn to it naturally. And if you do that, that compounds over time, you know, in terms of your knowledge and capabilities. And I remember Larry Bird said when he was, you know, signed on with the Boston Celtics and he signed this big contract, you know, for lots of money. And he said, hey, I would have played I would have I would have played for the Boston Celtics for a dollar, you know, like, you know, he and then that that was manifested in the nature of how he played the game during his whole career.

2:52right it was just all out so anyway I think growing up in a in a small town and and not having any sort of finance uh was kind of allowed me the freedom to choose to do it because I wanted to it thought it made sense I think also my you know my parents are great and um you know my heroes or my dad or my granddad. I think, you know, my, you know, I was reminded often to practice my trumpet and get my homework done, you know, and so I think that I developed, I had a lot of discipline, you know, you know, I practiced my trumpet every day for an hour, did my homework, I always did my homework the day before class.

3:43I always I never skipped a class. I was proud of this. I never skipped a class from kindergarten all the way through graduate school. So I just I slept through a class one time in college when I was a freshman. And I was like, wow, that was a really terrible trade off because, you know, that one hour versus like, I don't know what's going on now. you know so anyway so I think you know discipline you know uh discipline and hard work and and doing something that you uh want to do not not because the outside world you know thinks you should do it and I haven't skipped a class at least not yet and I although your dad was a golf coach I hear you're still a 2.5 handicap which I don't know a lot about golf but that's pretty good um and i also read that your grandfather went read the wall street journal and you were kind of inspired that was my reason for that no no i think i told that to somebody that um like when i was you know when i was a kid growing up my my granddad he was like a materials man he worked for panhandle eastern pipeline he was not like you know quite the finance guy, but, but he, he would, he, he had some stocks and he would look at the wall street journal.

5:01And I, when I was a kid, I was, you know, I remember him trying to show me, you know, what that was. And, and I just thought, wow, someday if I could learn how to read the wall street journal, that would be amazing. And other than that, what drew you to finance and how did you end up at First National Bank in Tulsa? Well, I went to Tulsa because, first of all, like, you know, in our school, the question was more like, are you going to college? It wasn't like, you know, a lot of pressure for which college. And so I ended up going to University of Tulsa. I was going to go to Murray State University in Kentucky because that's the only school that anybody from my golf, my high school ever played college golf at.

5:54And this guy, Kevin Arnold introduced me to the coach. And I was like, okay, great. I'll go to Murray state and play in the golf team there. Cause I want to play college golf, you know? And, and then I ended up, we were visiting my grandparents in Tulsa, Oklahoma. And you know, it was like a beautiful spring day after a cold winter in Chicago. And I sort of jokingly said, Hey grandma, you had a college here. And she goes, well, you're, why share Tulsa University, and I was like, oh, wow, I've never heard that one, and, but we then actually visited the school, and it's like, wow, this is actually, you know, Division IA, and it's big-time sports, and good academics, and it was a private school, small, and it was supported by the local community, and it's like, wow, this is really pretty awesome, So, you know, so I ended up, you know, going to school there and I wanted to do business of some sort.

6:50I figured it would be more entrepreneurial, you know, but I ended up studying finance because it seemed to me that finance was sort of a combination of. If you take accounting, it's super practical, but like not very strategic. And if you'd go to economics, it's very conceptual and not very practical. That's what I was thinking at the time. And marketing is like, I don't really need to get a degree to do marketing. So finance seemed like it would always be very practical because it was strategic and practical at the same time because any business you have, finance matters, right? And so it's going to matter to that business.

7:38And so it seemed like to me that that would keep my options open. I've learned something useful. And then when I went to First National Bank of Tulsa, I mean, once again, like I didn't have any big plans and this is the theme, but I was literally what was happening was it was my junior year and I was out playing golf with one of the guys in the golf team, Steve Layton. And he goes, hey, Prince, what are you going to do next summer? You know, you're graduating next year. And I was like, well, what do you mean? He goes, well, you know, are you going to do an internship or something? And I said, well, I don't know what's an internship.

8:12And I was thinking like that's medical, right? And an intern. And he goes, no, no, some banks, they have these jobs in the summer. It might be good for you to get some job experience before you graduate. So I was going to class with a guy named Mike Terrell. He was in a portfolio theory class at school. and I went up to him after class one day I said hey Mr. Terrell do you know anything about internships and he goes no I don't know anything about internships and I said okay and that was it and so then I went on about you know basically scheduling golf tournaments over the summer and I was going to umpire softball games that's what I did you know in the summer and you know I was all signed up for that so then about a month later Terrell you know pulls me up after class and he goes so hey prince do you um are you still interested in an internship and i was like uh i don't know i guess so uh i'm kind of now i have plans you know for the summer he goes well i might have one working for me and um so that ended up happening i i mean my question was what do you think would be better should i do the internship or should i do the golf tournaments and i'm part of the softball games and he goes well i think it'd be good for you to get some job experience.

9:33So anyway, I ended up working with him over the summer at the bank and, you know, compiling information for mergers that they might want to do. And I did a good job and they liked me, they gave me a job for the next year. And then I decided to take that job instead of, you know, the other jobs in, you know, in Tulsa are more like in the energy industry, right? And so mostly. And so I thought, well, you know, like what job should you take? And I thought the way I've thought about it was that it's, I have this, you know, like hub and spokes, right? There's hub and spokes, like a bicycle wheel, hub and spokes.

10:18And that finance or banks are at the center of the economy. And then all of the different industries are out in the spokes. And I thought, if I start at the center, I can always go out one of the spokes or I can stay at the center. Yeah. But if I start at one of the spokes, I can't go back to the center and I probably can't go across to another spoke. So I'm stuck there. So it just made sense to me to start at a bank and keep, cause, and, and that's what I did. And then when I was there, there was a guy named David, I was in a training program, credit training program, and there was a guy there named David Moffitt who ran the investments division, which was really like a security sales and trading, but also manages the bank's balance sheet, the investment portfolio and asset liability management, liquidity funding.

11:11And so I clicked very well with him when we kind of did our tour through that department. it all made sense to me um and so he pulled me up into the investments area and i was the first person i ever pulled from the credit training program into the investments area and uh he put me on the money desk because he said you need to learn about customers and so i was like filling out cd tickets every day and answering a million phone calls and then after about nine months he said okay he put me in an office and he said i called me it was called funds management analyst And he said, I want you to try to figure out how we can improve our net interest margin.

11:53And so I took a different approach to thinking about that. I looked at the bank balance sheet as like a set of portfolios, asset portfolios, liability portfolios with different speeds and so forth. It's just the way it made sense to me. The stuff they were doing didn't make any sense to me. and then uh i've been in the job for four months i was 24 years old and the guy that was running the funding area decided to be a bond salesman and moffitt came in he goes mcadams is gonna be a bond salesman and i said who's gonna run the funding area and he goes i don't know you're the only one that knows anything about it but you're too young and i said i don't want any part of that I kid but in the meantime then I started playing around with my new ideas for how you know we could manage these things and then a month later he comes in and he goes okay Prince um I want you to run the funding area uh on a six-month trial basis you can't make any decisions without talking to me and we'll see how it goes so I was like okay so uh I was running I was doing that and I kind of first year I did that for three of first year was just kind of figuring out how it should go you know and then the second year was sort of building the team and as it turned out I started getting all the best people because it was interesting it was exciting and then so I ended up sort of cherry picking all the best people out of the training program and then the third year was like sort of turn the key and run the car right and so it went really well we made lots of money we got lots of awards as the best department in the bank I got awards for that.

13:52And so that was going great. And then we ended up, this other bank ended up buying us, Liberty Bank bought us and everything changed. The culture totally changed and went from David Moffitt and me pretty much having free reign and doing new and cool, interesting things. Even though it was a regional bank, we were very connected with all the money center banks. and David was a charter member of the National Asset Library Management Association with like Chase and Citibank and all these guys so we were probably one of the most sophisticated banks in the country even though we were small and partly because we were small we could implement things fast right big banks take forever but we could move quickly so um so then um you know uh but then we got bought out and kind of everything changed and I came up with an idea right down so what happened so the connection to Bridgewater is that um um I signed up to to do this futures um uh basically a conference and um I ended up not going but the salesman called me and he sent me some Bridgewater research as part of their service and it was a piece that Ray wrote called understand the boom bust cycle and I gave it to David Moffitt and he read it he understood economics way better than me and he said this is the best thing I've ever read about how the economy works and I say oh great I'll check into these guys so I got all their historical reports to see if they were accurate and you know and I ended up saying okay I'll subscribe to your service for $295 a year.

15:40One thing led to another, I ended up getting to know Ray, you know, I ended up, I ended up actually then using them as my off campus research staff, pay them$17 ,000 a year for that. And they would, you know, I got to know them, they do charts for me. And so that's how I got to know them. But at that time, Bridgewater wasn't really managing any money, it was just a research firm and Ray was trading his own account. And, um, so that was really the beginning of the transition to Bridgewater because the, the culture that the bank was totally changing. I was 27 years old and, um, you know, I just didn't want to stick around there and go through that.

16:23And, uh, so I really, I really thought I really embraced some of the philosophies of Bridgewater and we ended up getting together. And I think a part also of why Tulsa was, their banking Tulsa was so successful was because you weren't only the young one. If I'm correct, David Moffitt was also pretty young too. He was in his early 30s. And for those who don't know, David Moffitt later became the CEO of Freddie Mac. So some pretty successful people emerged from that treasury department. Exactly. So David ended up building, he ended up, he went to SecPAC and then B of A, and then he and Jerry Grundhofer ended up running Star Bank in Cincinnati, which is a regional bank.

17:11And they ran it very well. And they kept buying other banks because they would just use their stock price to buy the other bank and the stock swap. So that is now U.S. Bank. so when you watch the basketball games on tv and you see the u.s bank halftime report that's david moffitt that built u.s bank and then like you said he took the job of ceo of freddie mack uh he was a highly capable guy there's another guy there that i worked with which is a friend is out walker he ended up he and i were on the golf team together and he ended up becoming the ceo of anadarko petroleum and sold it off to occidental uh so all three of us you know were at first house at the same time.

17:54Who was a thought? And when you joined Bridgewater and even before you joined, what stood out to you? And what stood out to you before you joined and what stood out during your early days? Before you joined Bridgewater and in your early days there, what stood out to you about it? Oh, well, I would say

18:21a very different and clear understanding of economies and markets as an integrated system. And like super, Ray used to describe it as the merger of an economist and a trader, right? And so the economists understand how the economy works, the trader understanding markets, flows, risk, reward, and then the integration of those two. And the way the integration happened is then systemizing the fundamental understanding. and so uh ray had built the first couple of uh he built an interest rate system a stock system and a gold system uh when i was there and i was a client and so he would he would there was a thing we called it he called it the wire but it's what we call daily observations today but in the wire every day would be the printout the readout of the systems you know and that was part of the service and so that idea i really just that that would that i really respected the integrity of like like laying it out the way you think it works to the point that you literally code it into the computer and now you're going to live with it you're going to do trades based on that like you're going to actually follow through and live with that right and the outcomes and then the other thing was this concept of a risk management plan which was this this this idea that businesses are really comprised of two things one is like an operating margin and the other is a bet on the markets and a lot of times they have a bet on the markets without really knowing they have a bet in the markets or they accept the bet in the markets because it improves their short-term profits, but it's a latent risk there.

20:28And so he used to use the example of a jeweler, like a jeweler thinks they're in the jewelry business, but they're along the gold market too, right? So how much of your profit is coming from being along the gold market and how much is coming from the operating business? And Ray used to do these kind of risk management plans with companies. And I thought that idea made total sense. And it was part of my experience that, you know, growing up in Illinois, near a Caterpillar factory, when the dollar was super strong, like, they were doing layoffs and they were getting hurt because the Japanese could undercut them because of the dollar.

21:10then I go to Tulsa and you know oil prices are high and Tulsa had was like one of the top places in the country money magazine rated as one of the top five three percent unemployment when Boston had an 18 percent unemployment rate and then all of a sudden oil prices go down and that everything flip-flops and it's like it doesn't you know I didn't even matter you know like like I could do a great job and it just says doesn't matter and the corner drugstore is going to go under because oil prices fell so this idea that like you are so much of it whipped around by the markets in your own life and as a business and so wouldn't you want to get a handle on that and the idea of Bridgewater was what that I liked was get off the planet, get above it.

22:10And you could take any market in the world and go longer short. Now it's totally up to you. You're not a sitting duck, you know, in Tulsa, you know, getting your head handed to you because oil prices fell when it has nothing to do with you or doing great because oil prices went up, right? That's totally stupid. So this, And then to work with companies, and that's what I was originally hired to do, was to do these risk management plans. I would work with banks and financial institutions and companies. One of the early ones was BC Hydro, which turned into a Harvard Business School case study. And I was 27 years old, and I'm going up there, didn't know anything about utilities, but I'm advising this utility on how to manage their debt structure against their business.

22:54And it was very successful. So that idea, those two things, really. And when you originally started working with Ray, as you said, Bridgewater was a pretty small to medium-sized research shop. It wasn't what it is today. What do you think were some of the main turning points that led it to become what it is today? They had just moved out of Ray's living room into the U.S. Plywood Building in Wilton across the street from the high school. And so it was only 10 people, right? And I was supposed to do these risk management plans, but I also was supposed to do the trading because they had this new fund and it had$350 ,000 in it.

23:42So I had an egg timer on my wall to remind me when to go check the markets to see if the signals have turned. And then I was raising business doing these risk management plans. And obviously, the first turning point was in 87 when the World Bank hired us to manage a$5 million bond account. You know, that was like, wow, the World Bank, you know, Hildo Choa. And so that's now you have your first account, right? That's the hardest one. I think another really important one was when Rusty Olson in 1991, Rusty Olson was at Kodak, and he's a legend in the pension industry, a pioneer and a legend. And, you know, we had talked to Rusty about managing money, and he did not want to use bonds at all.

24:41We did mostly bonds. But he sent us a fax on Friday afternoon, and he said, you know, in my portfolio, I feel good about my diversification. But if we have a deflationary depression, everything is going to go down together. So I'm thinking that if I put a lesser amount of money, let's call it$100 million in bonds with a 25-year duration, that I'll get the price action of$500 million for the capital outlay of$100 million. What do you guys think about that idea? And so when we got that request, Ray basically said, Monday morning, we are going to send him an answer where he stands up and applauds.

25:40And we started on Friday afternoon. We worked all day, all night, Friday night, Saturday, Saturday night, Sunday, Sunday night. We come in Monday morning. We literally went back and we studied, we pulled data from the Federal Reserve bulletins on railroad bond yields back to the 1860s. This is before you could pull data from all kinds of places. So we're punching in bond yields from the 1860s, you know, railroad bond yields, yield curves to show how, you know, these things relate to one another. And so we come in on Monday morning and we kind of look at what we had and we're like, you know, this really sucks.

26:18So I'm going to have to tell Rusty that It's not going to be Monday morning. But then we did work on it. And I would say maybe a couple of weeks later, we sent him a study that is still the gold standard of all studies. and in fact I hand it out to people when they start you know to say you know this is the gold standard and a lot of those concepts that we embedded in there are things that you know were became practically you know industries and different you know things that different became commonplace in a sense right but they were totally new at that time and so Russie hired us for this mandate which was a very very unique man it was 25 year duration implemented with futures two and a half times leverage in 10-year bond futures.

27:07We could shift the duration from 40 years all the way down to zero. So massive interest rate risk. We could move the currency plus or minus 100%. And we could do that at any point in the yield curve in any country. And so it was basically the first alpha overlay mandate, right? And it was effectively a combination of a liability hedge and an alpha overlay mandate. And that was really a big start for us because Kodak was a well-respected name. And this was a big deal. And it was alpha overlay. It took all the things that we were capable of and put it into a package. You know, and then there's just other things along the way.

27:58But mostly, I would say it's really grinding it out, you know. It's really grinding it out. And it's like every single day, just striving for excellence.

28:12Never tolerate mediocrity. Always do your best and just push it, push it. Try to think about the right answer, not what everybody else does, not the typical answer. Just think about what is the right answer. And think about that from first principles. You know, what are the basic physics of how the world works? And now if I take those physics and I apply them to this problem, what is the answer independent of what anybody else does? And so you're just trying to get the right answer to the problem. And then not everybody does that. And so what happens is convention settles in a lot of times. And then you're now you're doing something that's radically different than everybody else.

28:59and but if you know but if everybody else is over here and you're you're the only one over here but if you're actually right then in time the world comes to you and then that that was that doing that a number of times was really the basis of the growth of Bridgewater and you kind of mentioned that don't tolerate mediocrity how important has do you think the culture has been to the success of Bridgewater and what's the culture like today? Well, it's number one. It's where everything starts, right? Because it's people and people and culture is really where it starts because it's the people who do it and it's how they work together that really determines the, you know, your effectiveness.

29:48Yeah. And you said, you've mentioned a couple of times and And many people worked at Rayro have mentioned that one of the biggest powers of Bridgewater is knowing what you don't know. And a key part of doing is knowing of knowing what you don't know is humility. So how do you ensure your team has the best judgment when entering new markets and aware of what they don't know? I think stating it, first of all, is so important. you know like just expressing that as a as a sort of a given or a principle then and talking about why that is and otherwise you just doesn't occur to you right that's sort of it's sort of contrary to what you normally think normally you think your power is what you in what you know but actually the power is in what you don't know and and and your risk is in pursuing what you know as and not being aware of the how you're going to get maybe blindsided or what you're missing right and so recognizing that explicitly is um the first step and then just trying to live that out actually collectively because the the only way you can really get a window into the things that you're blind to is if somebody else tells you right and so um and so combining people with different capabilities is super crucial.

31:14And then transparency and honesty about strengths and weaknesses and what you're right and what you're probably wrong about and being open to what you're wrong about. That's the only way you can really get the right answers. And then at the end of the day, when you're managing money, there's an objective standard about whether you're right or not, and that's your returns. uh so and and the markets are a pure meritocracy because it's you know there nobody's name goes on a trade there's no brand value when you put a trade on you're either right or you're wrong and there's always somebody on the other side and it's a zero-sum game so it's the hardest game in the world with probably that with the highest payoff and you get the best people doing it so So if you don't have a meritocracy inside your organization, you won't compete well in the meritocracy that exists in the world, in the markets.

32:18And when you're hiring, how important is drive and kind of wanting to always improve? And what are some key things you look for other than that when hiring? I think that it's values, ability, skills in that order. Values is the most important thing. Abilities is second and skills is third and not that important because you can develop skills. And the values are essential because they're so unchangeable, right? They're sort of you develop your values growing up and your family and culture and everything. And so those become a given. And then the values actually end up shaping how you react to situations.

33:04And so we really do look for values first and values like openness and desire for truth. You know, what's true. I do think that people who value self-improvement and improvement work much better in our environment because they take feedback, failure and feedback as fuel to improve. So you view it as a positive. with whereas if you're much more concerned let's say what people think about you uh then you know you take feedback in a totally different way you know like how could you say that about me you know that kind of stuff so that's what you don't want and um so it starts there with values and then abilities is really you know especially like the ability to think logically and and you know imagination creativity uh you know uh analytical rigor you know that kind of stuff and i think i think the drive is probably actually easier to find um you know most of the people that are coming out of good schools have been worked really hard to do that so so that's a little bit But, you know, grit is different than drive, right?

34:21Because grit is like, can you, when things don't go well, when things don't go well, can you maintain your focus and use that to get better with a long-term goal in mind, right? Always pursuing that long-term goal and kind of not letting anything hold you back. That's a total, that's a different thing than drive. And so I think that's super important. It's hard to measure it, though. So I think, you know, we do our best, you know, to identify the values and abilities primarily, not much on skills. And to train people on skills. But then at the end of the day, you learn a lot more about what people are like by working with them than interviewing.

35:10And so you have to maintain that. Everybody has to maintain that objectivity all along the way, you know, when you're in the job. And that extends even to which kind of jobs you take and don't take. And are you failing in this one, but you have these abilities that will be better in this one? And do you have the flexibility to make those shifts? I want to shift a little to kind of your insights in your personal life um how has your faith played a role in your career and also your general life outside of Bridgewater well it's um it's fundamental it's it's number one fundamental to um kind of the starting point for everything really um and uh you know i just to you know there's a a heck of a lot of truth in the bible uh over centuries and centuries and you know and wisdom and so forth and like you know that's the starting point uh wisdom and um and i think uh um that accountability you know like a personal accountability to to a higher uh you know uh to god to christ i mean it's like it changes how you pursue everything um if it gives you a servant attitude you know there's a there's a scripture verse in all four gospels that said even the son of man did not come to be served but to serve and even to give his his life as a ransom for many it's an it's in all four of them right And so this idea of did not come to be served, but to serve, I actually think that that is how capitalism works, too.

37:06Because I think that, I think if your base frame of reference is yourself, you'll never, you won't be able to understand other people as well, right? If you have a truly giving spirit and serving others, you'll understand their situation, understand their needs, and you'll be much more likely to sort of give them a good gift, let's just say. There was a book written back in the 80s where capitalism was characterized as giving good gifts. I thought that was a great way to describe it, the ability to give good gifts. And I mean, like my wife, for example, like she just constantly is giving gifts and she really understands people.