Edward Quince’s Wisdom Bites: Chekhov in the Boardroom

Chekhov's Principle (aka Chekhov's gun)

Playwright Anton Chekhov articulated a strict rule of narrative: If in the first act you have hung a pistol on the wall, then in the following one it should be fired. Otherwise don't put it there.

In finance, that loaded gun is leverage.

The Wisdom Bites:

"A lot of success in life and business comes from knowing what you want to avoid: early death, a bad marriage, etc." – Charlie Munger 

"The need for certainty is the greatest disease the mind faces." - Robert Greene

During the euphoric first act of an economic boom, investors and lenders happily nail loaded weapons to the wall. They structure highly leveraged CDOs, CLOs, and private credit loans because the immediate "optionality" and fee generation feel great. They assume the gun will never go off because "this time is different" and stability will last forever. But as Hyman Minsky taught us, stability breeds instability. Eventually, the economic cycle turns to Act III, the credit window slams shut, and the leverage fires—destroying the equity of anyone standing in its path.

The Financial Takeaway: You cannot introduce massive leverage into a portfolio and expect to permanently escape the consequences. Leverage doesn't add intrinsic value; it merely magnifies both good and bad outcomes, ensuring that a simple mistake becomes a fatal one. Win the long game by avoiding situations with loaded weapons