Edward Quince's Wisdom Bites: The Marks Series - The Futility of Macro Forecasting and the Value of "I Don't Know"

Edward Quince (EQ): Howard, one of the prevailing themes on this blog is the inherent uncertainty in financial markets, often summarized by the difficult answer, "I don't know". You've written extensively about the value—or lack thereof—in forecasting the future. Why is macro forecasting an area you advise investors to largely ignore?

Howard Marks (HM): Macro predictions are unlikely to give you an edge. There are two main problems. First, we don’t know what’s going to happen. The world is too complex, too erratic, and too full of surprises to make spot forecasts of anything of significance. Second, even if a forecast turns out to be correct, we don't know how the markets will react to what actually does happen. Forecasting is uncertain, so it's safer not to try to time markets based on predictions.

EQ: You mention that in efficient markets, correct forecasts are potentially very profitable, but also hard to make consistently. Is the consensus view of economists any better?

HM: The consensus view is usually an extrapolation of the current condition and is already embedded in the price of an asset. Most forecasts tend to cluster around historic norms and call for only small changes, underestimating the potential for radical change. If you are merely forecasting the most likely outcome, you are highly unlikely to hang your spreadsheet on predicting a discontinuity. Furthermore, most forecasters have average ability, and we rarely see their track records.

EQ: You advocate for the "I don't know" school of investing. What does this intellectual humility require of an investor in terms of action?

HM: The "I don't know" investor must face up to the uncertainty that surrounds the macro future. Instead of trying to divine the next economic move, we should devote ourselves to specialized research in market niches that others find uninteresting or overly complicated. We will continue to try to "know the knowable". This means focusing on micro factors relating to companies, assets, and securities where it is possible to obtain a knowledge advantage through the expenditure of time and effort. By concentrating on avoiding pitfalls and investing based on in-depth analysis, conservatively estimated tangible values, and modest purchase prices, we can proceed without relying on macro-forecasts.

EQ: So, the valuable forecasts are those that call for radical change, but those are rarely right. In lieu of perfect foresight, how do we protect ourselves?

HM: We must acknowledge the limits of our knowledge. This humility should drive us to employ the Margin of Safety. The margin of safety is, in essence, rendering unnecessary an accurate forecast of the future.

The Edward Quince Takeaway

Embrace intellectual humility: recognize that "Nobody knows" the macro future, and those who claim certainty should be met with skepticism. Focus your efforts on knowing the knowable—deep, bottom-up research in niche areas where superior insight is achievable—and rely on a robust Margin of Safety rather than unreliable predictions.

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: 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 Investor's Immutable Compass — Beyond Central Bank Tinkering

Welcome back to Edward Quince's Wisdom Bites, where we distill timeless investing principles that anchor you through the swirling tides of central bank announcements and market gyrations. While the Fed, FOMC, and other central banks command attention, your disciplined behavior and fundamental strategy ultimately matter more than their next move.

Warren Buffett's wisdom resonates deeply here: "Predicting rain doesn't count, building an ark does". This is the essence of preparation over prediction. Instead of trying to divine the Fed's precise next action, focus on building a resilient investment strategy. A cornerstone of this is Ben Graham's "Margin of Safety," which, in essence, makes an "accurate forecast of the future" unnecessary.

Charlie Munger, the wise old owl of investing, often reminded us: "The big money is not in the buying and selling, but in the waiting". He famously advised, "Never interrupt compounding unnecessarily". This patient approach allows the powerful force of compounding to work over the long term, a process easily derailed by constant reactions to market noise. Resist the seductive phrase, "this time is different," which Morgan Housel notes is one of the "most dangerous words in investing". Cycles and human nature tend to repeat, even if the specifics vary.

Howard Marks wisely reminds us that "survival is the only road to riches", emphasizing prudence and avoiding catastrophic errors, particularly those amplified by leverage. He warns against chasing speculative "bonanzas" that can lead to "catastrophe". Instead of complex, speculative ventures, consider simpler, diversified approaches. As Munger suggested, "Most people probably shouldn't do anything other than have index funds".

Ultimately, "Your behavior matters more than your forecast". Focus on what you can control: your discipline, your long-term perspective, and your risk management. As another wisdom bite advises, "Stop trying to be spectacular. Start being consistent". By adhering to these enduring principles, you build a robust financial future that thrives independently of central bank policy fluctuations.

Edward Quince's Wisdom Bites: The Folly of Certainty – Why "I Don't Know" is Your Best Ally

Welcome back, fellow travelers on the path to financial clarity! In a world that constantly demands definitive answers and precise predictions, it’s easy to get swept up in the illusion of certainty. But as this blog consistently reminds us, intellectual humility is not a weakness; it is the bedrock of sound decision-making. Today, we delve into the profound insights of Howard Marks’ July 18, 2024 memo, "The Folly of Certainty," a piece that perfectly encapsulates our core philosophy of embracing the unknowable.

Marks, ever the realist, frames his memo around a simple yet powerful premise: "how can anyone be without doubt". He argues that macro-forecasting—the attempt to predict broad economic trends—is fundamentally impossible. Why? Because, as he explains, (a) "we don't know what's going to happen and (b) we don't know how the markets will react to what actually does happen". He points out that the consensus among economists has frequently been wrong about the trajectory of interest rate cuts and the likelihood of a recession.

This idea deeply resonates with the Edward Quince blog's long-standing stance. We've often highlighted the "irony of maintaining a daily economic update blog while firmly believing it is best to ignore all of the noise and false stimuli". Marks’ insights reinforce our conviction that "economic forecasts are notoriously elusive, wrong, inaccurate and that unexpected events often overshadow carefully thought out plans". Our philosophy embraces an "I don't know" mentality because, quite frankly, "Nobody knows anything, and that's okay".

Marks’ memo is a potent reminder that trying to predict the future is a "fool's errand". The financial services industry, as Ben Graham shrewdly observed, "will always supply forecasts because 'Nearly everyone interested in common stocks wants to be told by someone else what he thinks the market is going to do'". But as we’ve learned, these predictions are often "less reliable than the flip of a coin".

Ultimately, Marks' "The Folly of Certainty" reinforces that "Clarity comes from subtraction, not addition. Remove the noise, the distractions, and the unnecessary. What truly matters will emerge". It's about cultivating a "philosophical attitude toward the inescapable variations" and recognizing that "your behavior matters more than your forecast". In a world of constant noise and false certainty, embracing humility and discerning what you truly don't know is often the wisest path forward.

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: Nobody Knows (Yet Again) – Embracing History's Rhyme

 Welcome back, clear-headed thinkers! In our ongoing quest to navigate the unpredictable currents of financial markets, today we revisit a timeless mantra from Howard Marks: "Nobody Knows." His April 9, 2025 memo, "Nobody Knows (Yet Again)," echoes a theme he first explored during the tumultuous Global Financial Crisis of 2008 and reprised during the COVID-19 pandemic. This enduring lesson powerfully aligns with our blog’s emphasis on embracing uncertainty and learning from human nature's consistent patterns.

Marks' original "Nobody Knows" memo, published shortly after Lehman Brothers' bankruptcy on September 15, 2008, affirmed his "ignorance of the future as usual, but to an even greater degree given that all prior expectations had been upended". Faced with a market that felt like a "downward spiral without end," he concluded that investors had to "assume it would [be arrested], and thus that we should plow money into financial assets at their highly discounted prices". He reapplied this logic during the "COVID-19 pandemic (which he titled 'Nobody Knows II')".

His 2025 memo re-emphasizes this point, particularly in light of current "economic shenanigans" and the way "global trade norms have been tossed out the window". Marks argues that trying to "analyze the future" in such times is "about as useful as trying to find a rational take on LinkedIn these days – it's an oxymoron". He cautions against relying on "experts" whose predictions are often speculative rather than fact-based.

 We constantly highlight that "history never repeats itself. Man always does". Marks’ recognition that "there are themes that rhyme throughout history" reinforces our belief that "human nature is predictable" even if specific events are not. His admission that "nobody really knows what's going to happen" aligns perfectly with our "I don’t know" mentality.

The wisdom here is not to become paralyzed by uncertainty, but to understand its pervasive nature and act accordingly. Marks’ approach—assuming the world will, in fact, not end and investing with that long-term perspective—mirrors our blog’s advocacy for patience and the understanding that "The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference". Even when "chaos is always loud", "patience never trends on X", and "discipline wins over drama". Marks’ insights serve as a powerful reminder that "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".