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: When Leverage Turns Human

 Mitchell’s corpocracy is not built by villains; it is built by efficient people who forgot why efficiency exists.

Leverage—the financial kind—is merely a metaphor for the deeper risk: moral leverage.
The pressure to enhance:

• earnings
  
  

• throughput
  
  

• utilization
  
  

• shareholder return
  without enhancing humanity.
  
  

The true danger isn’t debt on the balance sheet; it’s debt on the social ledger.

A corporation can borrow against:

• worker well-being
  
  

• environmental resilience
  
  

• public trust
  for years before the margin call arrives.
  
  

But it arrives.

Just as markets misprice tail risk until the tail devours the system, societies misprice moral risk until collapse becomes inevitable rather than unthinkable.

Mitchell’s future isn’t dark because systems fail—it’s dark because they succeed at the wrong aim.

The Financial Takeaway:
Leverage is less about interest rates than existential rates.
If returns accelerate while dignity decelerates, the liquidation moment is scheduled—even if unknown.

Build capital systems that do not require sacrificing humans to function.

Edward Quince's Wisdom Bites: The Thanksgiving Series - Why You Must Pay for a Margin of Safety

Happy Thanksgiving!  

If the future is unknowable—and it is—then what is an investor to do?

Predict harder?
Model with more decimals?
Channel your inner clairvoyant?

No.
You buy a Margin of Safety.
You pay the price of uncertainty upfront, not at the crash site.

Ben Graham’s enduring genius is simple:
Margin of Safety exists to make precise forecasting unnecessary.
It is humility converted into portfolio construction.

Because the greatest danger in markets is not ignorance.
It’s the things we’re certain about that are dead wrong.

Mark Twain captured it beautifully:
“It’s what you know for sure that just ain’t so.”

Margin of Safety also means keeping flexibility—liquidity you didn’t deploy, leverage you didn’t take, options you preserved for when (not if) reality surprises you.

Financial Takeaway:
Survival requires humility.
Protection > Prediction.

Margin of Safety is not a constraint; it is the admission price for staying in the game long enough for your ideas to matter.

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 - 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: Hyman Minsky’s Ghost in the Machine—Why Calm Plants the Seeds of Crazy

Economist Hyman Minsky’s "financial instability hypothesis" can be summarized in a simple, powerful phrase: stability breeds instability. It’s a timeless lesson that explains why even the calmest markets can sow the seeds of their own destruction. Investor Paul Tudor Jones recently invoked this idea, fearing a "Minsky moment" where a sudden recognition of an "impossible" fiscal situation could trigger a crisis.

Minsky's theory outlines how credit cycles move through three distinct financing stages:

1. Hedge Financing: Borrowers can comfortably cover both principal and interest payments from their cash flows. This is the safest stage.

2. Speculative Financing: Cash flows cover interest payments, but not the principal. Borrowers rely on refinancing or selling the asset to repay the debt.

3. Ponzi Financing: Cash flows cover neither interest nor principal. The borrower depends entirely on rising asset prices to meet debt obligations. This is the most fragile stage.

Minsky argued that long periods of economic stability and prosperity (the "calm") encourage more speculative and eventually Ponzi-style financing. Lenders and borrowers become complacent, believing good times are permanent, and take on ever-increasing risk. Eventually, some event—a bank failure, a fraud, or just a shift in sentiment—triggers a "revulsion" against risk. Asset prices fall, credit contracts, and a self-reinforcing downward spiral begins.

This isn’t just an academic theory. Think of the dot-com bubble, the 2008 financial crisis, or even today’s concerns about private credit and commercial real estate. In each case, a period of apparent stability and easy returns led to excessive risk-taking that ultimately proved unsustainable.

The Takeaway: Minsky's wisdom is a crucial counter-narrative to the idea that markets are always self-correcting. It reminds us to be skeptical during periods of euphoria and to scrutinize the quality of debt and leverage in the system. The question to always ask is: Are we in a phase of prudent hedge financing, or have we drifted into the riskier waters of speculative or Ponzi finance? As Morgan Housel put it, “calm plants the seeds of crazy”. Understanding this cycle is key to navigating the inevitable booms and busts. 

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 Unseen Force of "Febezzle" and How We All Feel Richer

Have you ever felt wealthier than you actually are, caught in a wave of economic good times? You might be experiencing a phenomenon the late, great Charlie Munger called "febezzle"—the functional equivalent of the illusion of wealth created when someone embezzles funds, but before the crime is discovered.

Munger coined the term to describe the temporary, feel-good effect of embezzlement. Before the theft is known, the embezzler feels richer from their ill-gotten gains, and the victim, unaware of the loss, also feels just as wealthy. This creates an artificial boost in perceived wealth that fuels spending and economic activity—until the inevitable reckoning.

Munger, a master of multidisciplinary thinking, extended this concept far beyond simple crime. He argued that a similar, more subtle "febezzle" exists in finance and government. For instance, an investment manager collecting fees on rising asset prices feels virtuously richer, as does the investor whose statement shows gains, even if those gains are just part of a speculative bubble. Both parties are spending from a "wealth effect" that can dissipate when asset prices fall. This can lead to a misallocation of capital into unproductive projects that cannot be sustained once the "febezzle" unwinds.

This idea even applies to government policy. When the government runs large deficits financed by printing money, it can create a temporary economic boom. Consumers and businesses feel wealthier and spend more, driving up demand. But this "wealth" is not rooted in productive growth; it's an illusion that ultimately gets unwound through inflation, which acts as a hidden tax.

The Takeaway: Munger's concept of "febezzle" is a powerful reminder to question the source and sustainability of wealth and economic booms. Are the gains real, stemming from productive activity, or are they an illusion fueled by leverage, speculation, or fiscal stimulus? Munger’s advice was clear: "when the financial scene starts reminding you of Sodom and Gomorrah, you should fear practical consequences even if you like to participate in what is going on". Look beyond the surface-level gains and ask whether the underlying value is real or just a temporary, pleasant fiction.

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 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".