Edward Quince's Wisdom Bites: The Marks Series - The Market Pendulum: Mastering Cycles and Extremes

Edward Quince (EQ): Howard, welcome. My blog often laments the financial world's short memory. When you look across history, what principle about the markets seems most dependable, and yet most consistently ignored by investors?

Howard Marks (HM): It is simply the inevitability of cycles. The mood swings of the securities markets consistently resemble the movement of a pendulum. While the midpoint of the arc best describes the location of the pendulum "on average," it spends very little time there. Instead, it is almost always swinging toward or away from the extremes of its arc, moving between euphoria and depression, or between celebrating positives and obsessing over negatives.

EQ: That sounds intuitive, yet we constantly see people caught off guard. If cycles are so reliable, why do investors repeatedly fail to heed them?

HM: The error stems from an excessive proclivity to believe the positives—and disregard the negatives—prompted by the desire to make money. This leads to the most dangerous phrase in investing: “This time is different”. This phrase is a recurring bull-market cliché that always bears scrutiny. The greatest mistakes regarding the economic cycle result from a willingness to believe that it will not recur. Although history does not repeat itself exactly, it "does rhyme" because of the tendency of investors to forget lessons and repeat behavior.

EQ: So, the extremes of investor psychology are really the primary driver?

HM: Absolutely. Patterns in investor behavior rhyme from cycle to cycle, creating profound opportunities at the extremes. When attitudes of euphoria are widespread, prices assume the best and incorporate no fear, which is a formula for disaster. Conversely, when others are frightened and pull back, their behavior makes bargains plentiful, signaling an opportunity to be aggressive. Importantly, the movement toward the extreme itself supplies the energy for the swing back toward the midpoint.

EQ: Given that we cannot predict when the pendulum will reverse, how should a thoughtful investor approach market conditions informed by cyclical extremes?

HM: While we may never know where we’re going, we’d better have a good idea where we are. The circumstances must inform our behavior. Emotion must be resisted. I find myself using one quote more often than any other: "The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs". This means leaning away from the direction chosen by most others—selling when they’re euphoric, and buying when they’re afraid.

The Edward Quince Takeaway

Recognize that markets are rarely in the “happy medium,” but rather constantly oscillating between emotional extremes. Your goal is not to predict the next swing, but to be acutely aware of investor psychology—the more complacent and euphoric the crowd is, the more caution and prudence you must exhibit in your own actions.

Edward Quince's Wisdom Bites: Nomads and Motorcycles: The Hard Work of Attitude and the Value of Struggle

If the Nomad letters teach us anything, it’s that success is never a smooth or guaranteed ascent. The adventure continues, the trials never end, and unhappiness and misfortune are bound to occur as long as we live.

The Nomad founders were open and honest about their mistakes. They understood that knowing how to think (philosophy, psychology) was just as vital as any technical method. When reflecting on their approach, they concluded that the greatest challenge wasn’t identifying opportunities or calculating valuations—it was “having the right attitudes.”

Attitude is the ultimate margin of safety—because no model or forecast can protect you from yourself.

But this attitude isn't about naive blind optimism. It’s the quiet strength that endures uncertainty and learns from it. As Robert Pirsig reminds us, problems aren’t solved by abandoning rationality, but by expanding it. Growth occurs through contact with reality, by working, adjusting and learning "on the job" in the arena of life. The Nomad partners, like the protagonist on the motorcycle, learned to absorb the jolts and imperfections of the road rather than curse them.

We often view setbacks as external failures—a bad boss, a rogue market, unfair circumstances. But both Nomad and Pirsag suggest a harder truth: progress demands internal confrontation. The greatest damage often comes not from volatility itself,  but from our "inability to perform probability-based thinking", to hold composure when uncertainty reigns.

The Financial Takeaway:

The deepest form of growth is forged through struggle. True excellence emerges when talent is tempered by humility and discipline—when effort becomes craft.

Nomad’s story reminds us that enduring success is not about the absence of pain, but the persistence of purpose. The “game of life,” as Pirsig wrote, “is the game of everlasting learning.”

Stop viewing work as a mere transaction for money; see it instead as the pursuit of meaning. Maintain the right attitude. Accept that “everybody struggles.” And when the road jolts you—because it will—remember that mistakes don’t define you. They refine you. Choose growth, and keep going.

Edward Quince's Wisdom Bites: Nomads and Motorcycles: Imitation, Conformity, and the True Path

The pursuit of financial success is often sold as a hunt for a secret formula, leading many down the path of mimicry. Yet, this path leads straight to mediocrity.

The Nomad partners knew this inherently, operating under the principle that "Good investing is a minority sport." To earn superior returns, they had to do things differently from the crowd.. They had to consciously combat psychological traps like the wish to seem prudent in the eyes of others. Nomad's commitment to independent thought and long-term focus was often contrary to market sentiment.

Robert Pirsig saw the same danger in education.  He described "Imitation" as a profound evil that must be broken before genuine learning can begin. He observed students were conditioned to work solely for the grade rather than for true knowledge. In the financial world, the same pattern repeats: investors and analysts learn to "survive mainly by pleasing others"—by echoing what the bosses, the clients, or the consensus expects to hear, and saying it with skill.

But if you want enduring success, you must resist the universe's pull to be "typical". You must reject the notion that "Doing what everyone else thinks you should is a sure path to the same results as everyone else". The moment you publicly disclose your conclusions, you risk "pounding into your own head"—forming mental chains of consistency that prevent adaptation.

The Financial Takeaway:

Envy is ignorance, and imitation is suicide. Markets reward independent minds, not echo chambers. The goal is to cultivate genuine intellectual independence, not conformity. Ignore the applause and the panic.  The courage to think and act, alone.  As Nomad embraced concentration of bets and long holding periods despite peer pressure, you must have the courage to stand apart. Focus on what you believe, what you have studied, and act on that conviction.

True originality isn’t rebellion for its own sake; it is the byproduct of sincerity. Remember: "Your behavior matters more than your forecast".

Edward Quince's Wisdom Bites: Nomads and Motorcycles: The Noise Bottleneck and the Ascent to Wisdom

We live in an age of overwhelming information. Every day brings another data point, another Fed speech, another forecast of what comes next — a daily deluge of financial “news.”

We are drowning in Data, Information, and Knowledge (DIK), yet genuine Wisdom (W) feels scarcer than ever.

The Nomad Investment Partnership recognized this long before the age of infinite scrolls. They viewed frequent reporting — daily, weekly, even monthly — as “counterproductive.” Why? Because constant communication breeds what they called the say-something syndrome: the pressure to sound smart when there’s not much to say.

Robert Pirsig understood this too. In Zen and the Art of Motorcycle Maintenance, he warns that for every fact, there are “an infinity of hypotheses.” The more you look, the more you see — and soon, you see everything and understand nothing.

Nassim Taleb called this the Noise Bottleneck: “The more data you get, the less you know what’s going on,” because noise scales faster than signal.

The solution isn’t to consume more data — it’s to subtract. As Pirsig reminds us, truth emerges when we “look within ourselves.”

The Financial Takeaway

Wisdom sits at the apex of the DIKW pyramid. It’s not the accumulation of data but the discernment to act rightly with the data you have.
Clarity comes from subtraction, not addition. Remove noise, distractions, and unnecessary motion — what truly matters will reveal itself.

If it won’t matter in five years, don’t give it more than five minutes of attention.
Read less, re-read more. Don’t just process ideas — possess them.
Better one great book you fully understand than a thousand headlines you instantly forget.

Edward Quince's Wisdom Bites: Nomads and Motorcycles: The Equilibrium of the Long Haul

 If you spend any time on this blog, you know my mantra: Patience never trends on X. The market screams, "Don't just sit there, do something!". But the real wisdom, as we’ll see, is that sitting still is often the highest form of action.

The Nomad Investment Partnership attributed their success, in part, to the "aggregate patience of its Partners", achieving phenomenal results simply by making money "sitting on their assets". Their strategy centers on owning shares for "very long periods," consciously minimizing "more frequent or detailed reporting" which they viewed as unnecessary and even counterproductive. They recognized the profound power of compounding, noting that the only factor in the compound interest equation that is exponential is 'n' (time). In other words, patience isn’t just a virtue—it’s the variable.

Now, consider Pirsig's instruction for climbing a mountain:

"You climb the mountain in an equilibrium between restlessness and exhaustion. Then, when you're no longer thinking ahead, each footstep isn't just a means to an end but a unique event in itself."

This equilibrium mirrors the disciplined patience required for long-term investing. The restless desire to constantly buy and sell is often just noise. The true path requires finding a balance—not hyperactivity, nor total inertia—but a steady, measured pace. When you detach from the destination (the future price target) and focus on the process (the quality of the current decision, the soundness of the company), the journey transforms.

The great investor Charlie Munger summarized this perfectly, saying, "The big money is not in the buying and selling, but in the waiting". This aligns perfectly with the Nomad approach, where longevity and avoiding unnecessary interruptions to compounding are cardinal rules.

The Financial Takeaway:

Your primary competitive advantage isn't being brilliant—it's outlasting the rest. The Nomad founders, recognizing that they operated in a probabilistic field, focused intensely on process over outcome and understood the crucial role of time. Trying to maximize every move or react to every headline breaks that equilibrium. As Mr. Miyagi warned, 'Walk left side, safe. Walk right side, safe. Walk middle, sooner or later—get squish just like grape.' The same applies to investors.. Adopt the philosophy: "No hurry, no pause".

Edward Quince’s Wisdom Bites: Nomads and Motorcycles: The Perpetual Quality Machine

Welcome back to the digital saloon, where we trade fleeting forecasts for timeless wisdom. Today’s topic: how a discount retailer and a philosopher on a motorcycle ended up searching for the same thing — Quality.

Today, we delve into the heart of value, a concept often buried under balance sheets and noisy quarterly reports. The great investors at Nomad Investment Partnership eventually evolved from searching for "cigar butts" to prioritizing "near permanent holdings". They focused on businesses like Costco, which they described as a "Perpetual Growth Machine" built not on clever financial engineering, but on a virtuous cycle rooted in low costs and customer loyalty.

But how do you identify such a machine?

This is where the Nomad philosophy quietly aligns with Robert Pirsig’s profound inquiry into "Quality". Pirsig describes Quality as something you inherently know—some things are simply better than others—yet it remains undefinable. It is the force that generates everything we know; it is the soul, self-moving.

In the realm of business, this undefinable Quality is often expressed through superior attitudes and genuine care. Pirsig reminds us that true excellence emerges when the goal shifts from just trying to earn a grade to valuing the knowledge itself. Similarly, the Nomad framework looks beyond just the earnings, focusing intensely on business models. They sought organizations that fundamentally worked "very, very hard to be able to offer customers low margins" (the Amazon/Costco model), recognizing that this dedication to efficiency and value is difficult to replicate.

The question for us, as observers of the markets and architects of our own lives, is: Are we optimizing for the quantitative metric (the "grade" or the quarterly return), or are we investing in the qualitative force—the Quality—that makes the metric possible?

The Financial Takeaway:

The deepest insight often comes from asking why something works so well, even if you can't perfectly define the answer. True Quality businesses survive because they focus on enduring values—like treating the customer as king. Stop chasing transient data points and look for the inherent Quality in the business model, the leadership, and the customer experience. This dedication to excellence is often found not in complex analysis, but in "simple ideas, and taking them seriously".  

Maybe the lesson is that excellence compounds the same way capital does — quietly, patiently, through care. The spreadsheet records it only after the fact.

Edward Quince's Wisdom Bites: Friedman Conversations Pt. 5

Conversation 5: Prudence, Certainty, and Long-Term Value

Topic: The role of wisdom and intellectual humility in achieving enduring success.

Calculus of Value (CV):
Prudence is the rarest form of intelligence—the art of deciding well amid uncertainty. Long-term success begins by accepting the limits of our knowledge. Forecasting is elusive, models are fallible, and confidence is not the same as truth. The investor’s task is to estimate value from future cash flows and acquire it at a reasonable price. Because the future is unknowable, the discipline of a margin of safety becomes both mathematical and moral—a recognition of our own fallibility.

Friedman Doctrine (Milton Friedman):
Exactly. Intellectual humility in markets means acknowledging complexity while staying disciplined in purpose. The clear, achievable goal remains profit maximization. To wander into social or moral engineering risks substituting sentiment for rigor. Prudence, therefore, lies in adhering to economic clarity—allocating resources efficiently, minimizing irreversible mistakes, and avoiding the seductive noise of doing “good” at the expense of doing well.

Rerum Novarum (Pope Leo XIII):
You both mistake cleverness for wisdom. The cunning investor may preserve capital, but the wise man preserves conscience. The worth of a human being lies not in accumulation but in moral quality. Virtue—honesty, temperance, justice—is the only foundation on which durable prosperity can rest. “To focus on fundamental topics” means to build character as deliberately as one builds capital. Dignity and meaning are constructed in the soul long before they appear in the balance sheet.

Centesimus Annus (Pope John Paul II):
True prudence integrates reason with conscience. Wisdom is not the avoidance of error alone—it is the active pursuit of the good. The "game of everlasting learning" demands that we draw from timeless truths to interpret an ever-changing world. Courage is the testing point of all other virtues because it allows prudence to act. In the long run, what sustains markets, nations, and civilizations is not cleverness or calculation, but the moral order upon which trust depends.

Conclusion: From Profit to Purpose

Across these five conversations—Enterprise and Value, Labor and Justice, Virtue and Responsibility, State and Policy, and now Prudence and Wisdom—a single thread emerges: freedom without virtue decays, and virtue without reason stagnates.

The Friedman Doctrine insists on clarity and accountability—the discipline of efficiency and market order.
The Catholic social tradition insists on meaning—the moral architecture that gives those markets a soul.
And between them lies the Calculus of Value—the intellectual bridge that seeks to measure what cannot be fully measured: the worth of human judgment under uncertainty.

The paradox endures: markets run on confidence, but civilization runs on conscience. The challenge is not to choose between them, but to reconcile them—so that profit remains productive, power remains principled, and progress remains human.

Edward Quince's Wisdom Bites: Friedman Conversations Pt. 4

Conversation 4: The Role of the State and Fiscal Policy

Topic: The proper limits of government intervention and the moral implications of public finance.

Friedman Doctrine (Milton Friedman):
The State’s proper function is to preserve the rules of the game—enforcing property rights, contracts, and competition—nothing more. Beyond that, intervention corrupts incentives and dilutes accountability. Fiscal discipline is the foundation of liberty. When governments spend recklessly, the central bank becomes captive to fiscal dominance, keeping rates artificially low to accommodate political excess. The cycle is predictable: spend now, tax later, inflate always. In the end, high deficits force high rates, distorting capital markets and punishing those who played by the rules.

Calculus of Value (CV):
Public finance operates like gravity—it shapes every private decision. A rising tide of government debt lifts no boats if it distorts the cost of capital or misallocates savings. Today’s higher interest rates may be a necessary correction from the “distortionary” era of near-zero rates, which bred complacency and speculative excess. Fiscal policy, often treated as background noise, is in truth a dominant force influencing the equilibrium between saving and investment—the elusive neutral rate, r⁎. The real debate is not whether fiscal policy drives inflation, but whether it can ever again be neutral in an economy this large and leveraged.

Centesimus Annus (Pope John Paul II):
The State has a rightful and essential duty: to serve the common good, protect the weak, and ensure that markets remain ordered toward human flourishing. Yet prudence is the measure of justice. Persistent deficits represent not generosity, but negligence. Alexander Hamilton’s counsel still stands—“the creation of public debt should always be accompanied by the means of extinguishment.” To mortgage the future for present comfort is to betray both intergenerational solidarity and the moral law. Fiscal irresponsibility, like moral irresponsibility, erodes the trust upon which civilization depends.

Rerum Novarum (Pope Leo XIII):
Politics without virtue becomes manipulation, and economics without justice becomes exploitation. The State must not merely referee; it must safeguard the human person. This includes ensuring that policy—fiscal or otherwise—serves human dignity and social harmony, not the ambitions of factions. The pursuit of the common good requires international cooperation and moral clarity: where one nation’s debt becomes another’s burden, solidarity becomes both an ethical and economic necessity.

Reflection:
Friedman fears a State too large to fail; Leo and John Paul fear a State too small to care. Between them lies the enduring tension of liberty and responsibility. Debt, like sin, accumulates quietly until it reshapes what is possible. The moral question, then, is not how much government we can afford—but how much virtue our economy requires to govern itself.