(Expanded from April 9, 2025)
In April, volatility reminded us of Howard Marks’ most memorable metaphor: the six-foot man who drowned crossing a stream five feet deep on average.
The Danger of Averages
You don’t live on averages. You live through drawdowns.
Leverage narrows the range of survivable outcomes. You can be right long-term and still be ruined on a bad Tuesday.
The Financial Takeaway
Survival is the only road to riches.
Leverage doesn’t add value—it magnifies outcomes. Build a margin of safety large enough to withstand bad luck, not just bad analysis.
Assume the stream has deep holes. Invest like someone who wants to stay in the game.
Fortune favors the unlevered—or at least the perpetually cautious.
what does Edward Quince think of RPOs and circularity in the AI/highly levered data center sector?
ReplyDeleteRPO's were innovative in the NFL a few years ago, less so now, but still can work well with the right personnel grouping....sorry, you wanted Remaining Performance Obligations...and in the long-run isn't the entire economy a circular flow model (at least accounting wise)? Edward is smart enough (barely) not to venture outside his circle of competence, which does not include the intracies of data center deals...but he thinks the question behind the question boils down to a question of whether or not the AI/data center ecosystem is generating claims on future income faster than it's ability to generate that income...it's timing and whether the spend is "productive"...and who absorbs losses if it all fails to deliver?
ReplyDeleteEdward goes back to thinking about General Equilibrium models, which assumptions fail and why, opens up something by Keynes, who stabilizes the broken circle? Turns to Fisher for debt deflation, wonders what Minsky would think, does the circle just depend on asset prices and not income anymore? There's no precision in any of this, just uncertainty...where's the humility?