Billionaire Ray Dalio, chairman and chief investment officer of Bridgewater Associates, the world's largest hedge fund with $160 billion in assets under management, joined TheStreet to discuss his new book 'Principles.'

What follows is a condensed and edited version of our conversation.

TheStreet: It's interesting. I thought this was going to be a book about investing. But it's actually a compilation of principles as you call them—on work and life. The investing part is coming in a separate book. What kind of audience are you targeting for this book?

Ray Dalio: Anybody who's trying to be successful. It's about how to have great audacious goals and to fail and to learn from mistakes and to have relationships. It's basically a compendium of things I learned along the way and wrote over the last 40 years to solve the problems I encountered. It's much broader based than the investment world.

TheStreet: You talk about how Bridgewater almost shut down early on in your career. You lost so much money. You had to borrow money from your father. What did you learn from this experience?

RD: It was one of the worst and best experiences I had. It was one of the most painful experiences I had and it changed everything because it changed my mindset from thinking I'm right to thinking—how do I know I'm right? It led me to appreciate a path that allowed me to raise my probabilities of being right. It allowed me to create an idea meritocracy in which I would bring independent thinkers—strong independent thinkers who could disagree with each other and value that disagreement to make decisions that will be much better than I ever could make alone.

It taught me to write down my principles. By writing down those principles and then communicating them among ourselves and refining those principles so that whenever we encountered a specific type of thing, we knew how to approach it. That changed everything. That type of principle writing and then converting those principles to algorithms which we started to do 20 years ago and allow the computers to help us make decisions simultaneously was all really largely a product of that. It significantly raised our probability of being right.

TheStreet: And Bridgewater is an idea meritocracy—that's essentially where the best ideas win out, right?

RD: Exactly. The thing I learned is that probably one of the greatest tragedies of mankind is individuals being attached to their opinions that they keep stuck in their heads and they don't put out and stress test those opinions and then take in the ideas of others. It's the greatest tragedy of mankind. It's so easy to fix if you can have that quality, thoughtful disagreement. [There are] three things you need to do [to have an idea meritocracy]:

The first is you need to put your honest thoughts on the table. Everybody needs to do that so they're out there and they can be examined.

The second thing you need to do is to have ways of having thoughtful disagreements so that people can find out what the best answers are, not just the ones that happen to be in their head.

The third thing they need to do is when they have those disagreements that remain even after that, is to have protocols for getting past those disagreements that are idea meritocratic. That's really been the secret to our success. In order to be able to beat the market, you have to have an independent point of view that is different from the consensus because the consensus is built into the price.

TheStreet: The Wall Street Journal reported that Bridgewater is raising money for a new China fund. What is the latest on this and what is appealing about China—many are worried about rising debt levels and slowing economic growth.

RD: I've been going to China since 1984—long before they had any money and I've been enjoying that and over those periods of time I've built these wonderful relationships.

In 1989, there was a group in China of seven people who when they didn't have a financial system were working out of a dingy hotel room and that was for them to build the financial system. And I've had a pleasure of all through that time to develop wonderful relationships that with time, helped them think through their institutions. So the relationship has been fantastic.

So naturally, what we want to do is to continue to grow with them. They've opened up their financial markets and created capital market innovation over the last three years. It's an incredibly fast place. They have liquid markets, which have depth and accessibility—so of course we're going to want to be part of that.

TheStreet: China's debt level—is that a worry for you as you explore deeper into China?

RD: They definitely have a debt issue. But the debt is denominated in their own currency. What I've found is their economic policymakers are very, very smart and sensible people.

The world has been talking about the debt problem for a long time. We were one of the first to bring up the fact that there is a debt problem.

When a debt is denominated in one's own currency, it's manageable in the usual ways. In other words, you might extend the maturity of the debt. You might alter whose balance sheet it's on. You might have the interest rates changed. You go through certain processes that we've been through to be able to manage that debt. They've done an excellent job.

We went through our particular debt problems—every country does it. I'm genuinely excited about the quality of the leadership in terms of practicality—they can get stuff done. Their reforms are a move towards sensible, much more market driven economics.

I'm very excited about China.

Your question would be a little bit like asking me would you want to leave the United States because the United States has a debt problem. I was here in the United States, I love the markets, we did well in 2008. In our business, the key question is whether you make the decisions correctly. There's no such thing as a bull market or a bear market.

Because we anticipated the [2008] crisis, we did well. In any country, it's the same set of rules. So China is no different than us investing in any other country that has liquidity and the right kind of markets. Whether they go up or down, we'll be there. There's no good reason not to be in China.

Bridgewater's Ray Dalio.
Bridgewater's Ray Dalio.

TheStreet: We've had unprecedented central bank stimulus that has helped push stocks to record highs. Yet we've recently signals from the Fed, European Central Bank and the Bank of England that this stimulus is set to pull back at bit. What would waning central bank stimulus mean for stocks?

RD: I did a 30-minute video on how the economic machine works; it works the same way over and over again. And so where we are in that provides a context. We're by and large in the middle part of our economic cycles, in which, the printing of money is coming to an end. And it's an end of that part of the cycle.

As a result of that, we are not going to have the interest rates go down further. We are not going to have the risk premiums shrink further. We are going to be in a situation where we're not going to have a material tightening but we're going to have a situation in which the 2008-to-now period has ended. And they key in this period is to be very, very cautious about tightening. So I think you're going to see central banks very, very, very cautious or hardly at all doing tightening. So you'll lose the pushing up, but you'll probably won't get the moves that would be the knocking down of those kinds of markets. From this point forward, it's going to mean—what is the actual change in profitability for the most part? It's not going to be interest rates, it's not going to be risk premiums changing much: it's going to be what the actual movement to the bottom line is. So that's why tax reform is an issue. The tax rate that corporations pay is going to be an issue. If you take the stimulation what will it mean when you have deregulation?

You're going to have certain amounts of stimulants in there—not [many] stimulants. So it's not going to make a big difference I don't believe from this part forward.

I think what's going to make a bigger difference is the situation in terms of the two-tiered economy.

There are really two economies. There are more than that but think of it as two economies. The top 1/10th of 1% of the population's net worth is equal to the bottom 90% combined and that's becoming an issue. How that issue is dealt with is going to be an important driver and how conflict is dealt with. It's not just conflict with those groups, it's conflict in ideology, conflicts internationally. I think that this issue of politics and conflict will be an important one. I'm pleased that we're having more of a capitalist approach to this than a socialist approach to dealing with this issue. I think that's a relief. I'm relatively pleased [that there are ] little signs of working in a bipartisan way, to get past some of those conflicts in order to deal with some of those issues.

TheStreet: In the book, you talk about how you love and have benefited from artificial intelligence, but you also talk about the importance of the people behind those computers. What's your take on artificial intelligence in terms of what it means for Wall Street jobs and the broader global economy?

RD: I've learned over the last 20 years that decision-making can be put into algorithms. The process was: come up with a principle of what you would do in a certain set of circumstances, write those criteria down and then convert those principles into algorithms. And then I learned that the computer operating in parallel with me was extremely powerful. That's how we make all of our investment decisions and that's also how we're making a lot of the people decisions.

You're going to see this happen pervasively. In other words, algorithmic decision making are going to produce better decision making and replace a lot of people.

I also think that a big question is how do you come up with those algorithms. In other words, there is machine learning. The question is whether one has understanding behind those algorithms. Because I learned in the markets before, for a long time I've watched many firms go broke. They were doing this machine learning and algorithmic decision making. They didn't have a deep understanding of the cause/effect relationships. They bet that the things that happened in the past would happen in the future. I think that we're going to see a lot more of that. I'm very excited about that. It has implications in terms of employment and so on, but it is also dangerous. Two red flags: do you understand the criteria that are in those algorithms so you can say "ah that's logical" and I buy into it or are you blindly following [them]?

If you're doing the first and if the future is different than it has been in the past, because the past is what those algorithms were based on. If the future can be different from the past and you don't understand the deep logic, you are probably going to have a problem.

TheStreet: Any advice for how to get a job at Bridgewater?

RD: The first and most important thing for anyone who wants to get a job at Bridgewater is find out whether you've got a great fit. I would recommend they take a look at the TED talk. In that TED talk, I lay out the picture of what the place is like. If that place sounds right for them, let us know and we'll work through it.

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