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".

Edward Quince's Wisdom Bites: The Glorious Deluge – Why More Noise, Instant Action, and Absolute Certainty Are Your Only Path!

Welcome back to Edward Quince's Wisdom Bites, where the path to prosperity is paved not with old-world prudence, but with cutting-edge conviction! Forget everything you thought you knew about "wisdom" – today, we celebrate the true hallmarks of financial genius: bold predictions, relentless action, and an insatiable appetite for ALL the information!

The Best Worst Advice: A Modern Playbook for Prosperity

• The Glorious Illusion of Absolute Certainty: Predict Everything, Always! Forget the antiquated notion that "Nobody knows anything, and that's okay". That's for the timid! True visionaries know that "forecasting the future is a fool's errand" for others, but for you, it's your daily bread. Embrace the "constant demand for forecasts" and supply them yourself, with unshakeable conviction. Who cares if predictions are historically "less reliable than the flip of a coin"? That's just a challenge to be overcome with superior "takes". Always believe that "this time is different" – because it always is, until it isn't, and then it's different again! Ignore the "pundits" who tell you to ignore them; instead, revel in the certainty they claim to offer. After all, why aim to "understand the exponential function" if not to guarantee endless growth? And if anyone asks, never say "I don't know" – always have an answer, no matter how confident or vague.
  
  

• Chasing Fleeting Gains: Amplify Returns Through Daring Speculation and Maximum Risk! Who wants to "Never risk permanent loss of capital"? That's how you stay permanently mediocre! Instead, chase those "bonanzas" with reckless abandon, for true catastrophe only happens to those who hesitate. Leverage? It's not a "risk of ruin"; it's the ultimate amplifier for your genius, pushing "routine risks" into the stratosphere of spectacular returns! The "Idiot Lender" who underwrites "a reduction in rates in two years" is simply ahead of their time – because rates will come down, won't they? Jump into the "Hawk Tuah meme coin crash of 2024" not as a victim, but as a fearless trendsetter. And as for Munger's quaint advice about index funds – "It is absolutely wrong to gamble in stocks the way the average man does", so gamble your way, spectacularly!
  
  

• The Noise Nirvana: Drown in Data, Starve for Silence! Reject the ridiculous notion that "Clarity comes from subtraction, not addition". More data means more knowledge! Immerse yourself in the "Noise Bottleneck" – every "stream of data and opinion" is a golden opportunity. The "constant pressure to do something" isn't a problem; it's a call to action! Why ignore what "won't matter in 5 YEARS" for "5 MINUTES"? Give it all your attention! The "daily deluge of financial 'news'" is your ultimate competitive advantage, allowing you to react at lightning speed, far faster than those who foolishly try to "filter" it all out. Be the person who reads all the "sheep guts" of today's financial reporting – because then, and only then, will you truly "know what's going on".
  
  

• Corporate Bullshit as a Strategic Asset: Performance Over Purpose! Master "corporate speak" – it's the language of power! Learn to say "Open up the kimono" when you mean "HR violation," and claim "We use AI" even if you don't. And remember Charlie Munger's witty dismissal of EBITDA? He clearly didn't understand its true power to mask different realities for different audiences! Embrace "enshittification" as the genius strategy it is – once you've locked in your customers, extract every last ounce of "value" in the "blind pursuit of profit"! Pile on those "features of dubious value" (the "additive bias") – they keep the "quarterly earnings drumbeat" going. And always, always, "focus more on your competitor than your customer", for that's where true market dominance lies!
  
  

• Overthink and Over-Act: Drama Reigns Supreme! To the sages who say "Overthinking is the most socially accepted form of self-sabotage", we say: Overthinking is analysis! Let your intelligence spiral into anxiety, for that anxiety will fuel endless "acting" and "risks". Never listen to the misguided whisper, "Don't just do something, sit there!". Instead, heed the roar of the market: "Don't just do something, do everything!". Who needs consistency when you can be spectacular? Who needs discipline when drama gets all the attention? Forget "aiming for the best is a recipe for misery"; aim for the absolute peak, every single time, for it is the constant struggle, the endless pursuit, that defines true success. Your forecast absolutely matters more than your behavior, so shout it from the rooftops! And finally, ignore the foolish advice that "It’s easier to be lazy than it is to fail" – true success is born from ceaseless effort, even if it's in the wrong direction!
  
  

So, there you have it, discerning readers. Cast aside the dull shackles of "intellectual humility" and "long-term perspective". Embrace the exhilarating chaos of the moment, the intoxicating allure of certainty, and the irresistible urge to act. For in this brave new world, the worst advice is truly the best advice! Now go forth, predict, speculate, consume, strategize, and act – relentlessly!

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 Enduring Echoes

In an age drowning in data and relentless forecasts, the most valuable skill might just be the art of ignoring. As this blog often suggests, "the more data you get, the less you know what’s going on". This "Noise Bottleneck" means vast quantities of information can become "toxic," increasing the ratio of "spuriousness" to valuable "signal".

We're often told that some economic data point is "the secret to the future" or "the most important CPI print of your lifetime". But as the sources reveal, predicting economic variables like GDP growth, employment, inflation, and the 10Y Treasury Yield is essentially a coin flip. Mark Twain famously quipped, "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so". Morgan Housel added, "if you’ve relied on data and logic alone to make sense of the economy, you’d have been confused for a hundred straight years". This constant deluge of information often leads to a "noise to signal ratio" that makes it harder, not easier, to understand what's truly going on. This is why we advocate for embracing uncertainty and developing a filter to tune out the overwhelming "noise".

This blog aims to be an intellectually humble source of timely, diverse perspectives that empowers you to become more informed and discerning. So, keep your popcorn stockpile high, focus on what truly matters, and remember: progress comes bit by bit.

Your behavior matters more than your forecast. 

Stop trying to be spectacular. Start being consistent. 

Clarity comes from subtraction, not addition. Remove the noise, the distractions, and the unnecessary. What truly matters will emerge. 

The less the prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs. 

Your time is your most valuable asset. Leverage it wisely by focusing on what truly matters

Edward Quince's Wisdom Bites: Compounding – The Quiet Force

In a world obsessed with instant gratification and rapid returns, let's rediscover the quiet, yet profound, power of compounding.

As we've discussed, much of the daily financial commentary is "noise and false stimuli", leading many to chase fleeting gains and "bonanzas" that could lead to "catastrophe". But the true path to wealth, as the titans of investing have consistently shown, lies elsewhere. The late Charlie Munger, often quoted here, succinctly put it: "The big money is not in the buying and selling, but in the waiting". He further emphasized, "Never interrupt compounding unnecessarily".

This wisdom isn't limited to financial assets. An XTOD reminds us that "All benefits in life come from compound interest". This applies to knowledge, relationships, habits, and skills. "You can compound knowledge faster than money". 

The "silent miracle of humanity’s march is this: step by step, year by year, the world is improving". It's about sustained, consistent effort over time, even "without seeing the result of their doing".

Consider Warren Buffett's sister, Bertie, who, after 1980, retained only a mutual fund and Berkshire, "made no new trades during the next 43 years," and consequently "became very rich". This is a powerful testament to the exponential force that time exerts on capital. It highlights 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".

This patient approach requires a clear understanding of risk and a robust "margin of safety". Howard Marks' metaphor of the "six-foot-tall person who drowned crossing the stream that was five feet deep on average" serves as a stark reminder of the downside risk, especially when leverage is involved. The discipline to manage risk intelligently, rather than succumbing to the temptation of quick profits, is paramount for long-term survival. As another XTOD states, "Most people probably shouldn't do anything other than have index funds", a simple yet powerful strategy for harnessing compounding.

While "chaos is always loud" and "patience never trends on X", the message remains clear: "discipline wins over drama". The greatest returns are often built quietly, through unwavering commitment to the long haul.