Daily Economic Update: May 20, 2025

Do You Even DuPont?

We see a million articles about the “fiscal disaster” of the U.S. government, the one entity that literally cannot default in the traditional sense of failing to repay as promised, but let’s be honest, do most investors have any idea how much debt is lurking in their portfolios?

Corporate debt and the amount of leverage in the corporate sector has taken a backseat to discussions around fiscal responsibility at the federal level. The most recent Federal Reserve Financial Stability report noted, “gross leverage of publicly traded corporations edged down but remained near the upper part of their respective historical ranges.”  And let’s face it that assumes the Fed can even measure all of the debt in the system appropriately.

You just don’t see a ton of articles talking about corporate debt and leverage, until you do (does anyone remember concerns over leveraged loans in 2019?), and that’s usually not until something is broken.  In the meantime corporate reports give you the data you need to help better understand how much leverage companies might be running.

We talked about leverage here. And if you want a deeper read, this Howard Marks memo is one of my favorites, summarizing leverage as: 

“Leverage is neither good nor bad in and of itself. In the right amount, applied to the right assets, it’s good. When used to excess given the underlying assets, it’s bad. It doesn’t add value; it merely magnifies both good and bad outcomes. So leverage shouldn’t be treated as a silver bullet or magic solution. It’s a tool that can be used wisely or unwisely.”

If you’ve ever nodded along while someone said “ROE looks strong,” but didn’t ask, “Yeah, but why?”, then allow me to reintroduce you to your friend DuPont.

DuPont, Not Just For Chemicals, But Decoding Returns

The starting point of DuPont analysis, or the decomposition of ROE, is that ROE is a function of how much a company earns from its assets and its use of financial leverage.  Companies can juice their ROE by earning more from their assets or taking on more debt. 

ROE = Net Profit Margin × Asset Turnover × Financial Leverage

Translation: how much you earn on each sale (margin), how many sales you wring from your assets (efficiency), and how much of it you turbocharge with debt (leverage).

But the key here is this: leverage is a multiplier. A beautiful one when things go up. A wrecking ball when they don’t.

While companies seem to be covering that interest cost currently, the potential refinancing of longer term debt can still be a source of risks to companies earnings and investors returns. And if you listened to Jamie Dimon yesterday, he sees risks to corporate earnings.

A company with 15% ROE might look like a gem until you realize it’s built on 7x leverage and burning through cash to keep the dividend alive.

Is Leverage A Risk You Don’t See?

Morgan Housel once said, “Risk is what you don’t see.” Leverage is often exactly that—hidden in leases, obscured in footnotes (remember “Repo 105” and Lehman), normalized through buybacks.  Generally unseen until it’s not. 

This isn’t just a stock-picking problem. If index returns are juiced by levered ROE across sectors, what happens when that leverage turns from friend to foe? Valuations start to compress—not just because growth expectations fall, but because debt starts to demand its due.

So yes, DuPont is dusty. But in a world where debt isn’t cheap anymore and ROE math isn’t magic, maybe it’s time to revisit the fundamentals.  

Because if you’re holding companies whose returns are just borrowed performance, you might want to check what’s backing them.

And A Day After Moody’s Downgrade…

Corporate credit spreads were little changed in the face of the Moody’s downgrade as investors don’t believe country risk extends to corporate risk.  Yields on U.S. treasuries rose some only to retreat and ended the day little changed. The S&P was able to extend its winning streak to 6 days.

Fed officials continued to stress “wait and see” and you’re likely to hear the same message today.

In the meantime, ponder how much financial leverage you own via the S&P 500…and that’s before we even get around to talking about operating leverage.

XTOD’s:

XTOD: CEO Jamie Dimon: "Forward P/E ratios are around 20 or 21 today.  And you know, tariffs do affect the E...Earnings forecasts will come down. We started the year expecting earnings to be up 12%. Now it’s more like 6–7%. My guess? In six months, that could be zero. So earnings estimates have dropped—and that probably means P/E ratios will drop too. If P/E multiples fall by just one turn, that’s another 5% down. So between earnings and valuation compression, you could be looking at a 10% market impact. I think that’s a likely outcome, in my personal opinion",

XTOD: Wild. "PE distributions have fallen from 29% of NAV from 2014 to 2017 to only 11% last year. Endowments are rushing to complete sales ahead of potential changes to taxes, which could rise from 1.4% to 21%... 'We recently looked at a portfolio at 80-85 cents on the dollar'."

XTOD: Shocking to literally no one, Buy Now Pay Later loans are a ticking time bomb

XTOD: Jeff Bezos on creating a culture for missionaries: https://pbs.twimg.com/media/GrVrWhnXEAETEg-?format=jpg&name=900x900

https://x.com/TheTranscript_/status/1924496760786874800

https://x.com/TidefallCapital/status/1924497898412118404

https://x.com/VladTheInflator/status/1924526771934032363

https://x.com/FoundersPodcast/status/1924562453624479921

Edward Quince's Wisdom Bites: The Marks Series - Leverage: The Accelerator to Ruin

Edward Quince (EQ): Howard, your memos have repeatedly sounded the alarm on the use of leverage, particularly in times of low-risk perception. Why do you characterize leverage as the ultimate two-edged sword?

Howard Marks (HM): Leverage doesn’t add value or make an investment better. It merely magnifies the gains and losses. Volatility combined with leverage equals dynamite. The temptation is clear: leverage is a way to let you bet more than your capital, and it can turn an inadequate 6% return into a handsome 10% on your capital.

EQ: But when it goes wrong, the consequences seem catastrophic, disproportionate even to the original mistake. You’ve used a very vivid analogy to illustrate this downside risk.

HM: That’s right. Levered portfolios face a downside risk to which there isn’t a corresponding upside: the risk of ruin. We must "never forget the six-foot-tall person who drowned crossing the stream that was five feet deep on average”. To survive, you have to get through the low points, and the more leverage you carry, the less likely you are to do so. The presence of debt is precisely what creates the possibility of default, foreclosure, and bankruptcy.

EQ: We see this pattern repeated across crises, from Long-Term Capital Management to recent credit crunches. Why does the market continue to use it excessively?

HM: Leverage pushes routine risks into something capable of producing ruin. When risk aversion is at cyclical lows, people will invest anyway, even if the reward for taking incremental risk is skimpy. Investors often use leverage to try to wring acceptable results from low-return investments. The fundamental risk is that highly leveraged positions are subject to margin calls or can’t bar the door against capital withdrawals, which can lead to a downward spiral of forced selling.

EQ: So, when is the right time to use leverage, if ever?

HM: Leverage should only be used on the basis of demonstrably cautious assumptions. We believe it can be wise to use leverage to take advantage of high offered returns and excessive risk premiums, but it’s unwise to use it to try to turn low offered returns into high ones. The riskier the underlying assets, the less leverage should be used to buy them. Conservative assumptions on leverage will keep you from maximizing gains but possibly save your financial life in bad times.

The Edward Quince Takeaway

Treat leverage as a tool for magnification, not a silver bullet for guaranteed returns. Understand that increased debt narrows the range of outcomes you can endure. Prioritize the security of your capital—and your survival—by maintaining sufficient prudence and adhering to a Margin of Safety, especially when combined with volatile assets.

Daily Economic Update: January 10, 2024

Howard Mark's writing a memo that uses Edward Chancellor's excellent book, The Price of Time, as the source of Mark's inspiration, sign me up!  I've written about Chancellor's book in this LinkedIn article and I've mentioned Marks a few times on this blog (you can search) and have always enjoyed his thinking on risk and leverage, including this quote: 

"Leverage doesn’t add value or make an investment better. Like everything else in

the investment world other than pure skill, leverage is a two-edged sword – in fact,

probably the ultimate two-edged sword. It helps when you’re right and hurts when

you’re wrong. "

As for Mark's latest memo "Easy Money" , I would summarize and comment on Mark's thoughts as follows:

• Mark's notes (again) that the extended period of low interest rates had a major impact on business and the associated appreciation of assets.
• Mark's list the stimulative effects of lower interest rates, including pushing investors out into riskier investments in a classic 'search for yield'.
• He goes onto discuss some of the problems that occur with abnormally low interest rates, something Chancellor provides examples of in his book and something I equally mentioned in my LinkedIn article (above).  In my article I wrote - "As Chancellor states: “Without interest, future income streams are impossible to value. Capital can’t be properly allocated and too little is saved. If this situation continues for long, then the state investment would have to replace private investment and central banks would have to replace commercial banks as the major providers of credit.” "
• Mark's cites a number of "malinvestment" examples from the recent cycle of low yields including Argentinian 100 year bonds, financing of LBO's, Theranos & FTX scams, and the proliferation of 'zombie companies'.
• As always Mark's never misses an opportunity to discuss leverage, writing: "In much the same way, leverage can make otherwise unattractive investments investible....it must be noted that cheap leverage doesn’t make investments better; it merely amplifies the results. In times of low interest rates, absolute prospective returns are low and leverage is cheap.  Why not use a lot of leverage to increase expected returns?  In the late 2010s, money flowed to both private equity, given its emphasis on leveraged returns from company ownership, and private credit, which primarily provides debt capital to private equity deals.  These trends complemented each other and led to a significant upswing in levered investing."  Further providing, "Heavy leverage can render companies fragile and make it hard for them to get through the proverbial low spots in the stream"
• Mark's also talks about the perils of borrowing short to invest long, reminiscent of the March 2023 bank failures, and mentions some of the challenges of a psychological belief in lower for longer rates.
• After discussing the impact of the low interest rate cycle, Mark's moves onto to discussing the power of understanding financial history and specifically that of credit cycles.  Interestingly Mark's uses the same John Mills quote in his article that I used in mine....should I go all Bill Ackman on him?
• Mark's notes how similar the post-GFC years characterized by 'easy money' have been to other periods of financial history that did not end well for investors, yet, the lessons of the past fall on deaf ears.
• While avoiding making any predictions, Mark's does not believe we're going back to unusually low interest rates and characterizes current interest rates as "normal", believing that only a true economic emergency should lead to rates lower than 2-4% range over the coming years.
• Mark's believe the market is currently pricing in "goldilocks thinking" as it relates to either what will be the likely strength of weaknesses in the economy which will reveal themselves in the future and that such thinking will lead to disappointment.

Yesterday, stocks were little changed and yields remain largely rangebound with the 10Y Treasury seemingly caught in a trading range from around 4-4.05%. Spot BTC ETF's were "approved" until it turned out the SEC's Twitter account was "compromised".  Got to love how much crypto can and does get manipulated.

Treasury Supply (10Y auction today), earnings season and CPI on the horizon. 

XTOD: What's the lesson I want you to understand?  Greed and status can make you successful to the point of self-destruction. Leverage + taking instant IRS credits (filing taxes w/ accelerated depreciation) to live large, acquire properties, be that person on X, IG or TikTok talking about financial freedom through owning real estate is fun, until it's not.

XTOD: So, what is the purpose behind those who tell tales of cheap Canadian drugs? They seek to imply that our system is broken, and delivers only expensive drugs, when the socialist Canadian system delivers the goods for its people. Thus, they implicitly argue that we need to have socialism here. It's not complicated.  So, repeat after me. We could go with the Canadian system and have super cheap drugs, if only we can find a much bigger, more medically advanced, freer country right next to us to make miracle drugs for themselves, and then we insist that we pay them only a bit above their variable cost for our share, and then they in turn agree to let us be their parasite. Mexico, would you mind helping us out?”

XTOD: Hoarding talent backfires. Managers who fail to promote people wind up with weaker teams. 

Study of 96k job applications: Bosses who advanced their employees attracted more & better internal candidates for open positions.  People gravitate to leaders who invest in their growth

XTOD: Makes me happy to see one of my old blog posts still being read, liked, and shared.

https://worthwhile.typepad.com/worthwhile_canadian_initi/2010/12/milton-friedmans-thermostat.html

XTOD: An analysis finds that nominal wage growth peaked in 2022. In 2023, wages were still increasing but at a slower rate, and growth has yet to fall to pre-pandemic levels https://ow.ly/EF4E50Qpc0s

Daily Economic Update: May 9, 2024

Yesterday the Swedish central bank cut their benchmark rate by 25bps to 3.75% in what some believe will be the first of many developed country central banks to cut rates this year.  On the day ahead we'll get the Bank of England rated decision, they are not expected to cut rates.  

Stateside, the large 10Y Treasury Auction tailed by a full basis point, the 13th of the last 15th auction to tail, perhaps showing that the market appetite for longer dated treasury paper has some fragility, but we'll see what the 30Y auction does today.  In Fedspeak, it's been more of the same kind of data dependent talk that everyone has become accustomed to of late.  Yields rose a couple of bps and stock grinded out another day of gains on the Dow and was nearly flat on S&P.

In other news Howard Marks dropped his latest memo titled The Impact of Debt.  It is his second "short" memo, following up on his last memo which I reviewed here. Readers will know I enjoy Marks' work and have covered some of his other recent memos here and here.  Perhaps my favorite Marks' quote is "Leverage doesn’t add value or make an investment better. Like everything else in the investment world other than pure skill, leverage is a two-edged sword – in fact, probably the ultimate two-edged sword. It helps when you’re right and hurts when you’re wrong."  

In this most recent memo Marks' reference the work of someone else I very much enjoy reading, Morgan Housel.  Here are some takeaways:

• "It's the presence of debt that creates the possibility of default, foreclosure, and bankruptcy."
  
  
  
• "Does that mean debt is a bad thing and should be avoided? Absolutely not. Rather, it’s a matter of whether the amount of debt is appropriate relative to (a) the size of the overall enterprise and (b) the potential for fluctuations in the enterprise’s profitability and asset value."
•  This reminds me and reminded Marks of one of my favorite Marks' memos https://www.oaktreecapital.com/docs/default-source/memos/2008-12-17-volatility-leverage-dynamite.pdf?sfvrsn=c7bc0f65_2
  
  
  
• "As Housel puts it, “ as debt increases, you narrow the range of outcomes you can endure in life.”
  
  
• The reason for taking on debt is simple, it's cheaper than equity, allows you to 'bet' more and when you're right you end up winning more.
• Of course when you're wrong you lose more...
  
  
• And this is where Marks' makes his mark in the memo: "But levered portfolios face a downside risk to which there isn’t a corresponding upside: the risk of ruin. The most important adage regarding leverage reminds us to “never forget the six-foot-tall person who drowned crossing the stream that was five feet deep on average.” To survive, you have to get through the low points, and the more leverage you carry (everything else being equal), the less likely you are to do so. "
  
  
• And in referencing Housel referencing Taleb, Marks' provides "It’s the isolated “tail events” that saddle levered investors with the greatest losses" and "One is thus capable of unwittingly playing Russian roulette – and calling it by some alternative “low risk” name. " and " as illustrated by recent events, we rarely consider outcomes that have happened only once a century . . . or never."
  
  
• So where does that leave things with regards to Marks' views on using leverage:
• "investors should usually use less than the maximum available. Successful investments, perhaps enhanced by the moderate use of leverage, should usually provide a good-enough return – something few people think about in good times."
• The risker the asset, the less leverage you should use and
• Adhere to Buffett's "Margin of Safety"

What's "Margin of Safety", there are many good definitions you can find that I've written on this blog, but I think this sums it up: think creatively and be open to things unfolding in ways different from what they expect....flexibility comes with a cost....retain the option to change course when our plans go awry and have the humility to follow through. 

On the day ahead it's BoE, jobless claims and 30Y Auction.

XTOD: There are many people here with serious gifts and talents—intelligent, witty, thoughtful—and those talents constitute a great power. Unfortunately, most choose to use that power in stupid and/or dangerous ways: the sharp-tongued pundit on here wreaking insecure havoc on everyone that disagrees with him in the slightest way; or the amount of time and energy thinking of funny memes for cheap engagement.

I often imagine what good is being lost to the world—what great good could be added to the world—if these same people used those gifts and talents, that power, to build others up and do something productive. 

What books will never be written?

What genuine words will never be said?

What time and attention is not given to a spouse that is given to a social media critic?

XTOD: If you do things you don’t enjoy for long enough without understanding why you’re doing them, you develop the bad habit of doing things you don’t enjoy without understanding why you’re doing them. And you end up with a lot of people who are miserable at work.

XTOD: Want to understand what's going on in the commercial real estate market right now, especially office properties?  Watch what's happening with 1440 Broadway.  The $400 million loan backing 1440 Broadway helped push up the serious delinquency rate for office loans to 7% in April, its highest level since early 2017,  https://bloomberg.com/news/articles/

XTOD: What I want 2 understand is where all the ratings agencies downgrades are. Crickets. Even CRE CLOS-- where the losses to the AAAs stand a real chance of repeating the 2008  meltdown that saw Our Heroes taking the "First." They LITERALLY claimed a 1st Amendment pass to avoid suits

XTOD: DavidBeckworth

𝘔𝘺 𝘱𝘳𝘰𝘮𝘱𝘵 𝘵𝘰 𝘊𝘭𝘢𝘶𝘥𝘦 𝘈𝘐: can you imagine a world where the combination of (1) big data and (2) AI enables the Federal Reserve to become more automated and less reliant on human beings? 

@pmarca

 𝘊𝘭𝘢𝘶𝘥𝘦 𝘈𝘐 𝘙𝘦𝘴𝘱𝘰𝘯𝘦:

Yes, I can envision a world where the combination of big data and advanced AI technologies enable the Federal Reserve's decision-making processes to become more automated and less reliant on human input. Here's how this scenario could potentially unfold:  

𝗕𝗶𝗴 𝗗𝗮𝘁𝗮 𝗜𝗻𝘁𝗲𝗴𝗿𝗮𝘁𝗶𝗼𝗻: The Federal Reserve could leverage big data analytics to integrate vast amounts of economic data from various sources, including financial markets, banking systems, employment statistics, consumer spending patterns, and global economic indicators. This comprehensive data integration would provide a real-time, holistic view of the economic landscape.

𝐀𝐈-𝐃𝐫𝐢𝐯𝐞𝐧 𝐌𝐨𝐝𝐞𝐥𝐢𝐧𝐠 𝐚𝐧𝐝 𝐅𝐨𝐫𝐞𝐜𝐚𝐬𝐭𝐢𝐧𝐠: Powerful AI algorithms and machine learning models could be trained on this extensive data to analyze economic trends, identify patterns, and make accurate forecasts about inflation, employment, economic growth, and other key indicators. These AI models could continuously learn and adapt, improving their predictive capabilities over time.

𝐀𝐮𝐭𝐨𝐦𝐚𝐭𝐞𝐝 𝐏𝐨𝐥𝐢𝐜𝐲 𝐃𝐞𝐜𝐢𝐬𝐢𝐨𝐧𝐬: Based on the insights derived from AI-driven modeling and forecasting, the Federal Reserve's decision-making processes related to monetary policy, interest rate adjustments, and other interventions could become increasingly automated. AI systems could recommend optimal policy decisions based on predefined objectives and constraints, minimizing the need for human deliberation and decision-making.

𝐂𝐨𝐧𝐭𝐢𝐧𝐮𝐨𝐮𝐬 𝐌𝐨𝐧𝐢𝐭𝐨𝐫𝐢𝐧𝐠 𝐚𝐧𝐝 𝐀𝐝𝐣𝐮𝐬𝐭𝐦𝐞𝐧𝐭: With real-time data feeds and AI-driven monitoring, the Federal Reserve's policies and interventions could be continuously evaluated and adjusted based on changing economic conditions. AI systems could dynamically adapt policies to maintain economic stability, without the delays associated with human decision-making processes.

𝐑𝐞𝐝𝐮𝐜𝐞𝐝 𝐇𝐮𝐦𝐚𝐧 𝐈𝐧𝐯𝐨𝐥𝐯𝐞𝐦𝐞𝐧𝐭: While human oversight and governance would likely still be necessary to some extent, the day-to-day operations and decision-making processes of the Federal Reserve could become significantly less reliant on human input. AI systems could handle the bulk of data analysis, modeling, forecasting, and policy recommendations, with human expertise focused on setting overarching objectives and ensuring the system's integrity.

However, it's important to note that such a scenario would also raise concerns about transparency, accountability, and the potential for unintended consequences or biases inherent in AI systems. Careful governance frameworks, ethical considerations, and robust monitoring mechanisms would need to be in place to ensure the responsible and trustworthy deployment of such AI-driven systems in critical economic domains like central banking.

Edward Quince's Wisdom Bites: The Peril of Debt – Navigating the Stream with Caution

Greetings, astute investors! In today's Wisdom Bites, we turn our attention to a powerful, yet often perilous, force in finance: leverage. While it promises amplified returns, it also holds the potential for ruin, a truth Howard Marks masterfully unpacked in his May 9, 2024 memo, "The Impact of Debt." This memo strongly aligns with our blog’s consistent emphasis on robust risk management and the timeless principle of "margin of safety."

Marks highlights that "Leverage doesn’t add value or make an investment better." Instead, it is "a two-edged sword – in fact, probably the ultimate two-edged sword. It helps when you’re right and hurts when you’re wrong". Drawing on the insights of Morgan Housel, Marks emphasizes that "as debt increases, you narrow the range of outcomes you can endure in life".

The core danger, Marks warns, is the "risk of ruin". He employs a powerful analogy: "never forget the six-foot-tall person who drowned crossing the stream that was five feet deep on average". This illustrates that to survive, "you have to get through the low points, and the more leverage you carry (everything else being equal), the less likely you are to do so". Leverage has the power to "push routine risks into something capable of producing ruin". Marks further notes that investors "rarely consider outcomes that have happened only once a century . . . or never" when making leveraged bets.

For Marks, the solution is clear: investors should "usually use less than the maximum available" leverage. Instead, focus on generating "good-enough return". This advice ties directly into Warren Buffett’s investing maxim: "Never risk permanent loss of capital". This principle underpins our blog’s belief in patience and compounding – because "The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference". As Munger famously stated, "Never interrupt compounding unnecessarily".

Ultimately, Marks advocates for adherence to "Margin of Safety", a concept deeply rooted in Ben Graham’s philosophy. This means cultivating flexibility, having a buffer, and maintaining the humility to "change course when our plans go awry". By carefully managing debt and prioritizing survival, you position yourself for long-term success rather than succumbing to the temptation of short-term, high-risk "bonanzas".

Edward Quince’s Wisdom Bites: The Six-Foot Man Who Drowned in a Five-Foot Stream

In investing, you don't get extra credit for complexity. In fact, it often just gets you drowned. But there's a simple, two-edged sword that can make or break your entire financial life: leverage.

Leverage is the ultimate double-edged sword in finance—it doesn't add value, but it magnifies both good and bad outcomes. Legendary investor Howard Marks captures this perfectly with a stark warning: "never forget the six-foot-tall person who drowned crossing the stream that was five feet deep on average". To survive, you must get through the low points, and the more leverage you carry, the less likely you are to do so.

This isn't just theory; it's a lesson written in the ruins of financial disasters. Take Long-Term Capital Management (LTCM), which spectacularly collapsed in 1998. Their enormous, leveraged positions in seemingly clever trades, like swap spreads, were so large they couldn't be quickly liquidated when markets turned against them. Similarly, AIG's financial products unit took on massive, concentrated bets by selling credit default swaps—effectively owning hundreds of billions in bonds with borrowed money—which led to staggering losses when the tide went out. As Marks notes, "It’s the presence of debt that creates the possibility of default, foreclosure, and bankruptcy".

The "Idiot Lender Chronicles" offer a modern, satirical take on this same folly: a debt fund CEO advising clients to "underwrit[e] a reduction in rates in two years" to make today's deals work. This is precisely the kind of thinking that ignores the fundamental risk of leverage. As your debt increases, you narrow the range of outcomes you can endure.

The Takeaway: Your goal as an investor isn't just to grow, but to survive. As Warren Buffett advises, "Never risk permanent loss of capital". This means understanding that the real cost of leverage isn't just interest—it's the risk of ruin. Whether you're a hedge fund titan or a personal investor, remember Marks' simple but profound calculus: risk no more than you can afford to lose, and risk enough so that a win is meaningful. If there is no such amount, don't play. 

Edward Quince's Wisdom Bites: The Discipline of Uncertainty

Welcome back to Edward Quince's Wisdom Bites, your daily reminder to cut through the noise and focus on what truly matters. Today, we're diving into a collection of a timeless mix of previous advice and XTODs (X/Twitter Thoughts of the Day) that illuminate the multifaceted world of risk management.

The Best of Edward Quince on Risk Management

In a world saturated with data and predictions, genuine insight often lies in understanding the unpredictable and managing our responses to it. Here are some profound observations on navigating risk, gleaned from the wisdom shared in our daily updates:

1. Embrace Uncertainty and Ditch Prediction

The future is inherently uncertain, and trying to predict it is often a fool's errand. As Myron Scholes wisely noted, "Everything in life is volatility times time. As volatility increases, time compresses. But what we care about is the validity of the fixed point. If we lose it, everything in the past becomes meaningless". Many "experts" confidently assert future outcomes, but remember that "Nobody knows anything, and that's okay". In fact, "It is very, very hard to keep in mind that we're not good at predicting & even harder to incorporate it into a general policy". The incentives in finance often encourage adding "noise, complexity and a constant pressure to do something", but "Time is the best filter. It is the only filter I trust". Your "behavior matters more than your forecast".

2. Start with Your Goals, Not the Market

Effective risk management begins with a clear understanding of what you want to achieve. As one XTOD puts it, "Risk offers the possibility of more, and risk management tools aim to empower us to go for more while taking less risk. Using them correctly involves staying focused on our goals and taking just enough risk to achieve them". Without a goal, "Taking a risk without a goal is just like getting in a car and driving around aimlessly expecting to wind up in a great place". Remember, "You don't need to worry about progressing slowly. You need to worry about climbing the wrong mountain".

3. Master Yourself: The Toughest Opponent

Risk management isn't just about financial models; it's deeply human. "The greatest battle of all is with yourself—your weaknesses, your emotions, your lack of resolution in seeing things through to the end. You must declare unceasing war on yourself". Overconfidence is a primary pitfall, as "Being 100% sure of yourself at all times betrays arrogance and breeds complacency. Questioning yourself reflects humility and propels growth". We often err by overestimating certainty or misjudging probabilities. Our aversion to loss can even lead us to take "bigger risks than we should or even realize". Cultivate humility, because "The need for certainty is the greatest disease the mind faces".

4. The Peril of Leverage: Don't Drown

One of the most dangerous aspects of risk is leverage. Howard Marks' powerful analogy warns, "never forget the six-foot-tall person who drowned crossing the stream that was five feet deep on average." He stresses that "To survive, you have to get through the low points, and the more leverage you carry (everything else being equal), the less likely you are to do so". Leverage "pushes routine risks into something capable of producing ruin", making investments inherently riskier.

5. Survival and Simplicity are Paramount

For long-term success, staying in the game is more important than chasing speculative gains. As Charlie Munger famously advised, "Never interrupt compounding unnecessarily". Warren Buffett echoed this with his fundamental rule: "Never risk permanent loss of capital". This commitment to survival means prioritizing prudence. "Margin of safety—you can also call it room for error or redundancy—is the only effective way to safely navigate a world that is governed by odds, not certainties". Simplicity is also key: "Block out all the noise and keep it simple".

6. Action and Prudence

While patience is a virtue, there are times to act. "Risk no more than you can afford to lose, and also risk enough so that a win is meaningful. If there is no such amount, don't play". "Intelligence without courage leads to anxiety because you will spend your time overthinking instead of acting, taking risks, improving your life". In making decisions under uncertainty, "the consequences must dominate the probabilities". A simple hedge is often to "simply take less risk".

Ultimately, understanding risk management means acknowledging that "The four most dangerous words in investing are: ‘this time is different’". By focusing on timeless principles, cultivating self-awareness, and maintaining a long-term perspective, you can navigate the inherent uncertainties of life and markets with greater resilience and wisdom.

Edward Quince's Wisdom Bites: The Inverse Degen Trader pt. 2

 “Double the Debt, Double the Dream!” — Words Engraved on Tombstones Since 1637

The Degen Cliché:
"Leverage isn't risk; it's maximizing gains. Double the debt, double the dream!"

Translation:
“I’ve never read a history book.”

To the Degen, leverage is a gift from the gods. They view debt like a relationship red flag: something to ignore because the dopamine feels good.

They forget (or never learned) that leverage doesn’t add intelligence. It just accelerates the consequences of your stupidity.

The Inverse Degen Trader’s Wisdom: Survival Is the Only Road to Riches
Ask yourself: What is the one thing every successful investor has in common?

They’re still alive.

Howard Marks said it best:
“Never forget the six-foot-tall man who drowned in a river that averaged five feet deep.”

Leverage erases your margin of safety. It turns small errors into fatal ones. It asks you to be right on schedule, which is hard because the market keeps refusing to follow your Google Calendar.

Lesson:
Fortune favors the unlevered. Or at least the moderately levered and constantly paranoid.