Before long, the Australian dollar plunged to new lows and they called me in for an emergency meeting. Seeing one of the richest and most accomplished men on the planet lose everything made a huge impression on me. We also did one-off consulting projects related to the markets. I also worked with the New York Futures Exchange to help design and market their CRB futures contract a tradable index that tracks the price of a basket of commodities.
Unlike most people who work in the markets, I never had any desire to build investment products, especially conventional ones, just because they would sell well. All I wanted was to trade the markets and build relationships, doing for our clients exactly what I would do if I were in their shoes. But I also loved building brand-new things, especially if they were great and revolutionary.
By the mids, a couple of things were clear to me: First, we were making good calls in the interest-rate and currency markets, and the institutional investment managers who were buying our research were using it to make money. With those two things going as well as they were, I figured we could become successful institutional investment managers ourselves.
That was a huge turning point for us, as it was the start of Bridgewater as we know it today. The strategy we used for the World Bank shifted between holding cash and holding twenty-year U. Treasury bonds, because these positions would give us leveraged bets on the direction of interest rates. When our systems indicated that the pressures on interest rates would cause them to fall, we would hold twenty-year Treasury bonds, and when the system pointed to rates rising, we would stay in cash.
We did very well, and before long other large institutional investors gave us money to manage as well. Mobil Oil and Singer were our next two accounts and others followed in rapid succession. We went on to become the top-performing U.
The more unusual a place, the more interesting I found it. This curiosity drew me to Beijing in Beijing was filled with wonderful and incredibly hospitable people who introduced us to the tradition of drinking shots of Moutai while shouting Ganbei! Bottoms up! This first trip, which I made with my wife and a few other people, began an incredibly rewarding thirty-plus-year journey that has had a profound impact on my family and me.
There were no financial markets in China at the time; eventually a small group put together by seven Chinese companies including CITIC known as the Securities Executive Education Council began to develop them. They started in , just before the Tiananmen Square incident, which set them back because such market developments were still seen as too capitalist. They operated out of a small hotel room and hardly had any financing. I can still picture the big garbage bin under the metal stairway going up to their office.
I really respected the risks these young people were taking by doing this at such an unsettled time, so I made a small donation to give them a hand and was excited to share my knowledge with them. In , I set up a company called Bridgewater China Partners. By then, I was convinced that China was poised to become the greatest economy in the world in the twenty-first century, but hardly anyone was investing in China yet; good deals could still be struck.
I could bring money to the table by introducing my institutional investment clients to opportunities, and I could provide know-how by introducing Chinese companies to American ones. In exchange, we would get a stake in these companies. Essentially, I was setting up the first U. When we got back, we agreed to move forward by setting up a jointly owned merchant bank in Beijing.
While I knew that entering a territory where few had been before would require a lot of experimentation and learning, I soon realized I had sorely underestimated the complexity of the task we had set for ourselves and the amount of time it would take. I learned that if you work hard and creatively, you can have just about anything you want, but not everything you want. Maturity is the ability to reject good alternatives in order to pursue even better ones.
We loved it, especially the people. In , my wife, Barbara, our eleven-year-old son, Matt, and I decided together that Matt would spend a year in Beijing, attending an all-Chinese school and living with our friend Madame Gu, who had stayed with us in America during the Tiananmen Square days and whom Matt had visited in China with us when he was three.
Standards of living in China were very different from what Matt was accustomed to in Connecticut. All of this was not just a huge adventure for Matt; it was completely unprecedented and required special permission from the Chinese government. I was excited for Matt because I knew he would see a different world and broaden his mind. Barbara needed a little convincing and a couple of visits to a child psychologist for reassurance, but she had lived all around the world herself and knew how it had benefited her, so she was ultimately receptive to the idea, even if she was less excited about being separated from her son.
Because he fell in love with China he says that he became part Chinese that year and because he learned the value of empathy relative to the value of material wealth, he started a charity called China Care to help Chinese special-needs orphans when he was just sixteen.
I in turn learned a lot from Matt, especially about the joys of philanthropy, and we both learned the deep pleasures of great personal relationships. Over the years, I and in turn Bridgewater have also built meaningful relationships with many wonderful people in China, and we have helped its financial institutions grow from fledgling organizations to sophisticated giants.
The experiences I have had, the perspectives I gained, and the help I was able to provide all added up to a package of rewards as large as any of the others that I got out of my career. There was and still is no leader I admire more than Lee Kuan Yew, who transformed Singapore from a mosquito-infested backwater to a model economy.
That says a lot, as I have gotten to know and admire several world leaders. One of my most thrilling moments was a dinner I had with him at my house in New York, shortly before his death in Lee requested the dinner to discuss the state of the world economy.
I invited former Fed chairman Paul Volcker another hero of mine , former Treasury secretary Bob Rubin whose breadth of experiences gave great perspective , and Charlie Rose one of the most curious and insightful people I know. Besides answering his questions, we probed Lee on world affairs and world leaders.
He rated Angela Merkel as the best leader in the West and considered Vladimir Putin one of the best leaders worldwide. He explained that leaders must be judged within the context of the circumstances they encounter and then went on to share his view of how difficult it is to lead Russia and why he thought Putin was doing it well.
He also reflected on his unique relationship with Deng Xiaoping, whom he regarded as the best leader of all. I love getting to know interesting people from interesting places and seeing the world through their eyes. This is true whether they are rich or poor. Encounters like these have taught me that human greatness and terribleness are not correlated with wealth or other conventional measures of success.
I urge you to be curious enough to want to understand how the people who see things differently from you came to see them that way. You will find that interesting and invaluable, and the richer perspective you gain will help you decide what you should do. Juggling work and family has been as much a challenge to me as to anyone else, especially since I wanted both to be great, so I combined them whenever I could.
For example, I took my kids on business trips. When at first I brought my son Devon and later Matt to my Chinese business meetings, our hosts were always very kind—they would give them cookies and milk. By the mids, Bridgewater had grown to about ten people, so I rented a big old farmhouse.
Bridgewater occupied part of it and my family occupied the rest. It was extremely informal and family-like: Everyone parked in the driveway, we met around the kitchen table, and my kids would leave the door open while they sat on the toilet. The people I worked with would wave as they walked by. Eventually, the farm was put up for sale so I bought a barn on the property and renovated it. My wife, our kids eventually there were four , and I lived in a small apartment inside the barn, and I made the unfinished hayloft usable as an office by putting in electric baseboard heat, which I chose because it was cheapest to install.
It was a great space for parties and there was enough land for us to play soccer and volleyball and have outdoor barbecues. The night always ended with a lot of dancing. You get the idea: Bridgewater was a small community of friends who worked hard and partied hard.
Bob Prince joined Bridgewater in when he was still in his twenties, and more than thirty years later we are still close partners as co-chief investment officers. We still love doing that and will until one of us dies. He is also a great teacher, both to clients and co- workers. Over time, he became like my brother as well as one of the most critical builders and pillars of Bridgewater. Soon, Bridgewater began to look like a real company. We outgrew the barn and moved into a small office in a strip mall; there were twenty of us by the end of the s.
But even as we grew, I never thought of anybody I worked with as an employee. I believe that all organizations basically have two types of people: those who work to be part of a mission, and those who work for a paycheck. I wanted to surround myself with people who needed what I needed, which was to make sense of things for myself. I spoke frankly, and I expected those around me to speak frankly.
I fought for what I thought was best, and I wanted them to do so as well. When I thought someone did something stupid, I said so and I expected them to tell me when I did something stupid. Each of us would be better for it. Operating any other way would be unproductive and unethical. We got a lot of attention because we were up 22 percent when most others were down a lot. I had grown up in an era of high volatility and had learned that the best way to play it was to get a hold of a big move and ride it.
We used our indicators to catch shifting fundamentals and our technical trend-following filters to confirm that price movements were consistent with what the indicators were suggesting.
When they both pointed in the same direction, we had a strong signal; when they were at odds, we had little or no signal. But as it turned out there was hardly any volatility in , and so our technical filters whipsawed us and we ended up giving back a bit more than half our gains. That stung, but it also taught us some important lessons and prompted Bob and me to replace our technical trend-following filter with better value measures and risk controls.
Until then our systems had been completely discrete—we would flip from a fully long position to a fully short one when we crossed a predetermined threshold much as we switched from bonds to cash for the World Bank. That drove Bob crazy. I can remember him running laps around the office building to calm himself down. So at the end of the year, we moved to a more variable system that allowed us to size our bets in relation to how confident we were.
These and other improvements Bob made to our systems have paid off many times since. Not everyone at Bridgewater saw things as Bob and I did. It took a lot of reasoning to persuade some of the people I worked with to press on. All great investors and investment approaches have bad patches; losing faith in them at such times is as common a mistake as getting too enamored of them when they do well.
Because most people are more emotional than logical, they tend to overreact to short-term results; they give up and sell low when times are bad and buy too high when times are good. Despite our relatively poor investment performance, was a great year for Bridgewater, because by reflecting on and learning from our poor performance, we made systematic improvements.
I have come to realize that bad times coupled with good reflections provide some of the best lessons, and not just about business but also about relationships. One has many more supposed friends when one is up than when one is down, because most people like to be with winners and shun losers.
True friends are the opposite. I got a lot out of my bad times, not just because they gave me mistakes to learn from but also because they helped me find out who my real friends were—the friends who would be with me through thick and thin. Bob introduced me to Giselle Wagner in She would be my partner in running the noninvestment side of the business for twenty years.
Dan Bernstein and Ross Waller joined in and , respectively, both fresh out of Dartmouth College. It seemed to me, young people were creating sensible innovation that was exciting. Older folks who did things in the old ways held no appeal. The Kodak portfolio was heavily invested in equities and Rusty was worried about what would happen in an environment in which the value of his assets fell badly.
He had been trying to come up with a way to hedge himself against this risk without reducing his expected return. Getting a client this prestigious and innovative would make a big difference to us.
We knew we could do a uniquely great job for Kodak, because we knew a lot about bonds and financial engineering, and we had a historical perspective unmatched in the industry. Bob Prince, Dan Bernstein, and I worked nonstop through the weekend, analyzing the Kodak portfolio and the strategy Rusty was considering. Then we wrote him a long memo laying out our thoughts. That was a game changer. Not only did it bring us a lot of credibility, it provided us with a reliable source of revenue at a time when we needed it.
If I could build a portfolio filled with high-quality return streams3 that were properly diversified they zigged and zagged in ways that balanced each other out , I could offer clients an overall portfolio return much more consistent and reliable than what they could get elsewhere. By then I was terribly fearful about what would happen if my assumptions were wrong, so I wanted to understand diversification in a very simple way.
It was so simple but it would be such a breakthrough if the theory worked as well in practice as it did on paper. This was another key moment in our education. Whether you own a hotel, run a technology company, or do anything else, your business produces a return stream.
Having a few good uncorrelated return streams is better than having just one, and knowing how to combine return streams is even more effective than being able to choose good ones though of course you have to do both. At the time and still today , most investment managers did not take advantage of this. They managed investments in a single asset class: equity managers managed equities, bond managers managed bonds, and so on.
Their clients gave them money with the expectation that they would receive the overall return of the asset class e. But individual assets within an asset class are generally about 60 percent correlated with each other, which means they go up or down together more than half the time. It would be easy to beat those guys by balancing our bets in the way the chart indicated. Thanks to my process of systematically recording my investment principles and the results they could be expected to produce, I had a large collection of uncorrelated return streams.
In fact, I had something like a thousand of them. I worked with Bob and Dan to pull our best decision rules from the pile. Once we had them, we back-tested them over long time frames, using the systems to simulate how the decision rules would have worked together in the past.
We were startled by the results. On paper, this new approach improved our returns by a factor of three to five times per unit of risk, and we could calibrate the amount of return we wanted based on the amount of risk we could tolerate.
The success of this approach taught me a principle that I apply to all parts of my life: Making a handful of good uncorrelated bets that are balanced and leveraged well is the surest way of having a lot of upside without being exposed to unacceptable downside. As excited as we were about this new approach, we proceeded cautiously. We gave the system a 10 percent weight initially and it made money in nineteen of the twenty months in our test period. I knew that asking these institutional investors to invest such relatively modest amounts would make it hard for them to turn us down.
Its returns depended only on how good we were in outperforming others. We also showed them how we expected the cumulative performance to unfold and what the expected range of performance around that would be. For our clients, it was a bit like being presented with the design of a plane that had never flown before but looked radically better than any other plane on paper.
Would anyone be courageous enough to get on board? Frankly, we were thrilled that any of them were willing to try. For over twenty-six years now, that new type of plane has flown exactly as we anticipated, making money in twenty-three of these years having only modest losses in the other three and making more money in total for our clients than any other hedge fund ever.
While the investment management concepts that underlie Pure Alpha eventually changed our industry, the journey from conception to general acceptance took many years of learning and grinding work by a group of dedicated partners. This included trading foreign government bonds, emerging market debt, inflation-linked bonds, corporate bonds, and the currency exposures that came with the foreign investments.
In our most unconstrained bond portfolios, we would make about fifty different types of bets, way more than traditional bond managers traded. Doing so gave us a big edge and landed us at the top of many investment performance tables year after year.
Our Pure Alpha product was just the first of a number of innovative designs we brought to our clients. In , we had become the first currency overlay managers for institutional investors. At the time, institutional investors were placing larger portions of their portfolios into global equity and bond markets.
While investing internationally added valuable diversity, it also added unmanaged currency exposure. This was a big problem because the currency exposures added risk without adding any expected return.
We had traded currencies for years and had developed expertise in portfolio engineering, so we were in a prime position to solve this problem. Eventually we became the largest active currency manager in the world. We also produced several other new and effective ways of managing money that flew exactly as they were designed. With each one, we gave clients clearly stated performance expectations expressed in a chart that showed an accumulated profit line and the expected variations around that line.
We could do this because the systemization of our decision-making process allowed us to stress-test the performance of our decision making under a wide variety of conditions. What was great is that we made the most of our mistakes because we got in the habit of viewing them as opportunities to learn and improve. By the time the mistake was discovered, the damage was several hundred thousand dollars.
But since mistakes happen all the time, that would have only encouraged other people to hide theirs, which would have led to even bigger and more costly errors.
I believed strongly that we should bring problems and disagreements to the surface to learn what should be done to make things better. As we consistently tracked and addressed those issues, our trade execution machine continually improved. Having a process that ensures problems are brought to the surface, and their root causes diagnosed, assures that continual improvements occur.
For that reason I insisted that an issue log be adopted throughout Bridgewater. My rule was simple: If something went badly, you had to put it in the log, characterize its severity, and make clear who was responsible for it. If a mistake happened and you logged it, you were okay. This way managers had problems brought to them, which was worlds better than having to seek them out.
The error log which we now call the issue log was our first management tool. I learned subsequently how important tools are in helping to reinforce desired behaviors, which led us to create a number of tools I will describe later.
Before long, things came to a boil. He is very bright and innovative. He understands markets and money management. He is intense and energetic. He has very high standards and passes these to others around him. He has good intentions about teamwork, building group ownership, providing flexible work conditions to employees, and compensating people well. The odds of this happening rise when Ray is under stress. At these times, his words and actions toward others create animosity toward him and leave a lasting impression.
The impact of this is that people are demotivated rather than motivated. This reduces productivity and the quality of the environment. The effect reaches far beyond the single employee. The smallness of the company and the openness of communication means that everyone is affected when one person is demotivated, treated badly, not given due respect.
That hurt and surprised me. I never imagined that I was having that sort of effect. These people were my extended family. What was I doing wrong? Were my standards too high? For Bridgewater to continue to be a one-in-ten-thousand—type company we had to have exceptional people and hold them to extremely high standards.
Was I demanding too much? This looked to me like another one of those fork-in-the-road cases in which I had to choose between one of two seemingly essential but mutually exclusive options: 1 being radically truthful with each other including probing to bring our problems and weaknesses to the surface so we could deal with them forthrightly and 2 having happy and satisfied employees.
And it reminded me that when faced with the choice between two things you need that are seemingly at odds, go slowly to figure out how you can have as much of both as possible. My first step was to make sure I knew exactly what the problems were and how to handle them. So I asked Bob, Giselle, and Dan what they thought was going on.
We agreed that being this way was essential, but since it was making some people feel bad, something had to change. While those people I had contact with understood me, liked me, and in some cases even loved me, those who had less contact with me were offended by my directness.
It was clear that I needed to be better understood and to understand others better. I realized then how essential it is that people in relationships must be crystal clear about their principles for dealing with each other. That began our decades-long process of putting our principles into writing, which evolved into the Work Principles.
Those principles were both agreements for how we would be with each other and my reflections on how we should handle every situation that came up.
Since most types of situations arose repeatedly with slight variations, these principles were continually refined.
As for our agreements with each other, the most important one was our need to do three things: 1. Put our honest thoughts out on the table, 2. Have thoughtful disagreements in which people are willing to shift their opinions as they learn, and 3. Have agreed-upon ways of deciding e.
I believe that for any organization or for any relationship to be great, these things are required. Having our work principles written out and getting in sync about them in the same way we had with our investment principles were essential for our understanding each other, especially since our unique way of operating—this radical truth and radical transparency—that led to our unique results is counterintuitive and emotionally challenging for some. Trying to understand how we could get our meaningful work and meaningful relationships through this straightforwardness led me to speak with neuroscientists, psychologists, and educators over the decades that followed.
I learned a lot, which I can summarize as follows. How that conflict is managed is the most important driver of our behaviors. That fighting was the biggest reason for the problems Bob, Giselle, and Dan raised.
Back then, we showed that a few bright guys with computers could beat the big, well-equipped establishment players. Now we were becoming the well-equipped establishment ourselves. As the number of decision rules and the amount of data in our systems grew more complex, we hired young programmers who were better than us in converting our instructions into code and smart new grads right out of college to help with our investment research. One of these new whiz kids, Greg Jensen, joined Bridgewater as a college intern in Because he shined, I grabbed him as my research assistant.
Over the decades that followed, he contributed a lot, grew into the co-chief investment officer role with Bob Prince and me, and became a co-CEO. He also became like a godson to me.
We also invested in more and more powerful computers. I answered that a portfolio of leveraged foreign inflation- indexed bonds with the currency hedged back to U. The bonds needed to be foreign because there were no U. Thinking about this later, I realized that we could create an entirely new and radically different asset class, so Dan Bernstein and I researched such a portfolio more closely.
In fact, it would be uniquely effective because we could engineer it to have the same expected return as equities but with less risk and with a negative correlation with bonds and equities over long time frames. We showed this research to our clients and they loved it.
Before long, we became the first global inflation-indexed bond manager in the world. In , U. Treasury deputy secretary Larry Summers began looking into whether the U. Dan and I traveled down to Washington to meet with Summers, his Treasury colleagues, and a number of representatives from well-known Wall Street firms.
It was a large room with a table in the middle and a press gallery off to the side. Larry Summers has since said that the advice he got from us was the most important in shaping this market. When the Treasury did create the bonds, they followed the structure we recommended. In my years as an investor, I had seen all sorts of economic and market environments and all kinds of ways that wealth could be created and destroyed.
I knew what drove asset returns, but I also knew that no matter what asset class one held, there would come a time when it would lose most of its value. This included cash, which is the worst investment over time because it loses value after adjusting for inflation and taxes. I also knew how difficult it was to anticipate the swings that cause those losses.
That meant I had to create a mix of assets that could be good in all economic environments. I knew which shifts in the economic environment caused asset classes to move around, and I knew that those relationships had remained essentially the same for hundreds of years.
There were only two big forces to worry about: growth and inflation. Each could either be rising or falling, so I saw that by finding four different investment strategies—each one of which would do well in a particular environment rising growth with rising inflation, rising growth with falling inflation, and so on —I could construct an asset-allocation mix that was balanced to do well over time while being protected against unacceptable losses.
Since that strategy would never change, practically anyone could implement it. It was another industry-shaping concept. Seeing its success, other investment managers followed with their own versions. With our people and culture producing these industry-shaping investment products, Bridgewater really took off. Our head count had doubled, so we moved out of our strip mall office into a larger space situated in a nature preserve on the banks of the Saugatuck River.
But while we continued to grow, it was never clear sailing. Building the business while managing investments required me to do two challenging jobs simultaneously and develop two distinct skill sets, while being a good father, husband, and friend. The demands of these roles changed over time, so the skills and abilities I needed changed as well. Most people assume that the challenges that go along with growing a large business are greater than those of growing a smaller one. That is not true.
Going from a five-person organization to a sixty-person organization was just as challenging as going from a sixty-person organization to a seven-hundred- person organization—and from a seven-hundred-person organization to a 1,person one. They were just different. For example, when I had no one to manage, I had the challenge of having to do almost everything myself.
When I learned and earned enough to pay others, I had the challenge of managing them. Similarly, the challenges of wrestling with market and economic swings were constantly changing. Very soon we faced another critical choice: What kind of company did we want to have? Should we continue to grow or stay about the same size? By , I had come to believe that we needed to grow Bridgewater into a real institution instead of remaining a typical boutique-sized investment manager.
Doing this would make us better in many ways—better technology, better security controls, a deeper talent pool—all of which would make us more stable and permanent. This meant hiring more people in technology, infrastructure, and other areas, as well as additional HR and IT staff to train and support them.
Giselle argued strongly that we should not grow. She believed that introducing a lot of new people would threaten our culture, and that the time and attention that hiring, training, and managing them required would dilute our focus. I felt about this fork-in-the- road choice the way I felt about most others—that whether or not we could have our cake and eat it too was merely a test of our creativity and character. For example, I could envision ways in which technology would help us get the most out of people.
After a fair amount of wrestling with these questions, we decided to go ahead. At first, this took the form of shared philosophy statements and emails to the entire company. Then, whenever something new came along that required me to make a decision, I would reflect on my criteria for making that decision and write it down as a principle so people could make the connections between the situation, my principle for handling these situations, and my actions.
By having them explicitly written out, I could foster the idea meritocracy by having us together reflect on and refine those principles—and then adhere to them. The number of principles started small and grew over time. By the mid- s, Bridgewater was beginning to grow rapidly, and we had a number of new managers trying to learn and adapt to our unique culture—and who were increasingly asking me for advice. I was also beginning to have people from outside Bridgewater ask me how they could create idea meritocracies of their own.
Over time, I encountered most everything there is to encounter in running a company, so I had a few hundred principles that covered most everything. That collection of principles, like our collection of investment principles, became a kind of decision-making library. As the company grew bigger, how that happened evolved. But as we grew, that became logistically impossible, which was a real problem. Without transparency, people would spin whatever happened to suit their own interests, sometimes behind closed doors.
Problems would be hidden instead of brought to the surface where they could be resolved. To have a real idea meritocracy, there must be transparency so that people can see things for themselves. To make sure this happened, I required that virtually all our meetings be recorded and made available to everyone, with extremely rare exceptions such as when we were discussing very private matters like personal health or proprietary information about a trade or decision rule.
All this openness led to some very frank discussions about who did what and why, and as a result we were able to deepen our understanding of our different ways of thinking. That insight led us to explore psychometric testing as a way of learning how people think differently. Her assessments proved spot-on and provided a great road map for how they would develop over the years. Because that testing process had been so successful, I worked with her and others to try to identify the best tests for determining what the people I worked with were like.
I began to look for other tests that could help us deepen our understanding of each other. This was slow going at first, largely because most of the psychologists I met were surprisingly squeamish about exploring differences. But eventually I found a few great people, especially a psychologist named Bob Eichinger, who pointed me to a number of other very useful tests. The results astounded me. Over and over again, the same people would walk into the same meetings, do things the same ways, and get the same results without seeking to understand why.
Recently I came across a study that revealed a cognitive bias in which people consistently overlook the evidence of one person being better than another at something and assume that both are equally good at a task.
This was exactly what we were seeing. At first, this idea met a lot of resistance. Most people found that having this information out in the open for everyone to see was more liberating than constraining because when it became the norm, people gained the sort of comfort that comes with just being themselves at work that family members have with each other at home.
Because this way of operating was so unusual, a number of behavioral psychologists came to Bridgewater to evaluate it. I urge you to read their assessments, which were overwhelmingly favorable. One day he went to the front desk of the hotel where he was staying while he looked for an apartment and smashed their computer.
He was arrested and thrown in jail, where he was beaten up by guards. So to understand the laws of nature, which we're all subject to, I'd recommend this book. Dalio has meditated almost every day since and says it's had a tremendous impact on him.
While there are tons of books on meditation, he recommends this recent one by psychiatrist Norman Rosenthal, which gives an overview of Transcendental Meditation and its many benefits. Like this story? Don't miss: Bill Gates: These 3 books 'opened a new world for me'. Ray Dalio Principles Pdf free download. Success Melinda Gates shares Buffett's advice and what she and Bill won't spend on. I will definitely recommend this book to business, non fiction lovers. Your Rating:. Your Comment:.
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