Edward Quince's Wisdom Bites: The one about the six foot man

(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.

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.

Edward Quince's Wisdom Bites: The Marks Series - Second-Level Thinking and Contrarianism

Edward Quince (EQ): Howard, given how easy it is to access data today, many investors believe they are intellectually superior. You argue that true superiority requires a concept you call "second-level thinking". What is the core distinction between first-level and second-level thinking?

Howard Marks (HM): Superior investing isn't easy. Anyone who thinks it is must be a first-level thinker. First-level thinking is simplistic and superficial, such as looking for the highest-quality company, the best product, or the fastest earnings growth, without considering the price or investor perception. Second-level thinking is deep, complex, and requires you to think differently and better than the consensus.

EQ: Can you give us an example of how this applies to fundamental analysis?

HM: Certainly. A first-level thinker says: "That's a great company; we should buy it". A second-level thinker asks: "It is a great company, but everyone agrees, so its valuation is sky-high. If anything goes wrong, the stock will plummet. I'll avoid it". For your performance to diverge from the norm, your expectations—and thus your portfolio—have to diverge from the norm, and you have to be more right than the consensus.

EQ: This seems tightly linked to contrarianism. How important is resisting the herd mentality to achieving long-term success?

HM: It is essential. Contrarianism means consciously looking for things others haven’t recognized. Since the consensus view of the future is already embedded in the price of an asset, to bring above average profits, a forecast generally must be different from the consensus and accurate. We believe strongly in contrarianism. That means leaning away from the direction chosen by most others: Sell when they’re euphoric, and buy when they’re afraid.

EQ: Acting against the crowd takes courage, especially since there is often a period where following the herd seems smart, and the abstainer looks foolish.

HM: That period of underperformance is inevitable, but the roles are inevitably reversed in the long run. You must be able to stand by your non-consensus view, even if the early going suggests it’s wrong. Ultimately, superior investing requires not just possessing data, but drawing superior inferences and applying second-level thinking. We must recognize that the market will only be permanently efficient when investors are permanently objective and unemotional—in other words, never. This imperfection provides the opportunity for skill to outperform.

The Edward Quince Takeaway

To achieve superior results, you must engage in second-level thinking: being different and being better than the consensus. Recognize that opportunities exist because other people have made mistakes. Dare to be a conscious contrarian, buying what others hate and selling what others love, because following the herd ensures average results at best.

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.

Edward Quince's Wisdom Bites: The Marks Series - Risk Control and the Road to Riches

Edward Quince (EQ): Howard, your emphasis on risk control is a cornerstone of your investment philosophy. We frequently highlight Morgan Housel’s insight that "survival is the only road to riches". How critical is it for investors to prioritize protection over maximizing returns?

Howard Marks (HM): Survival is indeed the only road to riches. You must strive to maximize return only if losses would not threaten your survival. We believe firmly that “if we avoid the losers, the winners will take care of themselves”. We aim for a high batting average, not home runs. Most of the investing careers that produce the best records are notable at least as much for the absence of losses and losing years as they are for spectacular gains.

EQ: That sounds like a defensive approach, focused on avoiding mistakes. How do we define that necessary defense?

HM: Investing defensively requires prioritizing the avoidance of losses. The key concept here is the Margin of Safety. Margin of safety means you shouldn’t pay prices so high that they presuppose things going right. Instead, prices should be so low that you can profit—or at least avoid loss—even if things go wrong. This buffer ensures you survive the low points.

EQ: But when markets are soaring, focusing on risk control can feel like a penalty. Investors worry about "opportunity cost"—missing out on gains.

HM: This is the core tension. We constantly deal with two main risks: the risk of losing money and the risk of missing opportunity. Investors should strive to balance both. However, if you opt for defense, you should get higher lows but also lower highs. We tell people that in good times, it’s good enough to be average, because we set up our portfolios to outperform in bad times. When others are euphoric, that puts us in danger. It is by being willing to cede much of the return distribution lying between “solid” and “maximum” that we prioritize survival. You can completely avoid one risk or the other, or you can compromise, but you can’t eliminate both.

EQ: In short, this philosophy requires tremendous fortitude and a willingness to look "dowdy" during bull markets.

HM: Indeed. You must cultivate humility, acknowledge uncertainty, and make prudent decisions. Investing scared will prevent hubris and increase the chances that your portfolio is prepared for things going wrong. If nothing goes wrong, the winners will take care of themselves. You never want to be caught "swimming without a bathing suit" when the tide goes out.

The Edward Quince Takeaway

Prioritize survival above all else, remembering that the absence of losses contributes more to long-term success than spectacular gains. Build your strategy around a sufficient Margin of Safety—the flexibility, prudence, and liquidity needed to navigate the inevitable low points without risking permanent loss of capital.

 

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.