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: Nomads and Motorcycles: The Hard Work of Attitude and the Value of Struggle

If the Nomad letters teach us anything, it’s that success is never a smooth or guaranteed ascent. The adventure continues, the trials never end, and unhappiness and misfortune are bound to occur as long as we live.

The Nomad founders were open and honest about their mistakes. They understood that knowing how to think (philosophy, psychology) was just as vital as any technical method. When reflecting on their approach, they concluded that the greatest challenge wasn’t identifying opportunities or calculating valuations—it was “having the right attitudes.”

Attitude is the ultimate margin of safety—because no model or forecast can protect you from yourself.

But this attitude isn't about naive blind optimism. It’s the quiet strength that endures uncertainty and learns from it. As Robert Pirsig reminds us, problems aren’t solved by abandoning rationality, but by expanding it. Growth occurs through contact with reality, by working, adjusting and learning "on the job" in the arena of life. The Nomad partners, like the protagonist on the motorcycle, learned to absorb the jolts and imperfections of the road rather than curse them.

We often view setbacks as external failures—a bad boss, a rogue market, unfair circumstances. But both Nomad and Pirsag suggest a harder truth: progress demands internal confrontation. The greatest damage often comes not from volatility itself,  but from our "inability to perform probability-based thinking", to hold composure when uncertainty reigns.

The Financial Takeaway:

The deepest form of growth is forged through struggle. True excellence emerges when talent is tempered by humility and discipline—when effort becomes craft.

Nomad’s story reminds us that enduring success is not about the absence of pain, but the persistence of purpose. The “game of life,” as Pirsig wrote, “is the game of everlasting learning.”

Stop viewing work as a mere transaction for money; see it instead as the pursuit of meaning. Maintain the right attitude. Accept that “everybody struggles.” And when the road jolts you—because it will—remember that mistakes don’t define you. They refine you. Choose growth, and keep going.

Edward Quince's Wisdom Bites: Friedman Conversations Pt. 5

Conversation 5: Prudence, Certainty, and Long-Term Value

Topic: The role of wisdom and intellectual humility in achieving enduring success.

Calculus of Value (CV):
Prudence is the rarest form of intelligence—the art of deciding well amid uncertainty. Long-term success begins by accepting the limits of our knowledge. Forecasting is elusive, models are fallible, and confidence is not the same as truth. The investor’s task is to estimate value from future cash flows and acquire it at a reasonable price. Because the future is unknowable, the discipline of a margin of safety becomes both mathematical and moral—a recognition of our own fallibility.

Friedman Doctrine (Milton Friedman):
Exactly. Intellectual humility in markets means acknowledging complexity while staying disciplined in purpose. The clear, achievable goal remains profit maximization. To wander into social or moral engineering risks substituting sentiment for rigor. Prudence, therefore, lies in adhering to economic clarity—allocating resources efficiently, minimizing irreversible mistakes, and avoiding the seductive noise of doing “good” at the expense of doing well.

Rerum Novarum (Pope Leo XIII):
You both mistake cleverness for wisdom. The cunning investor may preserve capital, but the wise man preserves conscience. The worth of a human being lies not in accumulation but in moral quality. Virtue—honesty, temperance, justice—is the only foundation on which durable prosperity can rest. “To focus on fundamental topics” means to build character as deliberately as one builds capital. Dignity and meaning are constructed in the soul long before they appear in the balance sheet.

Centesimus Annus (Pope John Paul II):
True prudence integrates reason with conscience. Wisdom is not the avoidance of error alone—it is the active pursuit of the good. The "game of everlasting learning" demands that we draw from timeless truths to interpret an ever-changing world. Courage is the testing point of all other virtues because it allows prudence to act. In the long run, what sustains markets, nations, and civilizations is not cleverness or calculation, but the moral order upon which trust depends.

Conclusion: From Profit to Purpose

Across these five conversations—Enterprise and Value, Labor and Justice, Virtue and Responsibility, State and Policy, and now Prudence and Wisdom—a single thread emerges: freedom without virtue decays, and virtue without reason stagnates.

The Friedman Doctrine insists on clarity and accountability—the discipline of efficiency and market order.
The Catholic social tradition insists on meaning—the moral architecture that gives those markets a soul.
And between them lies the Calculus of Value—the intellectual bridge that seeks to measure what cannot be fully measured: the worth of human judgment under uncertainty.

The paradox endures: markets run on confidence, but civilization runs on conscience. The challenge is not to choose between them, but to reconcile them—so that profit remains productive, power remains principled, and progress remains human.

Edward Quince’s Wisdom Bites: The Coachman of Virtue in a Chaotic Market

In finance, we often confuse mere caution with genuine wisdom. However, prudence, often called “the coachman of the virtues,” is much deeper. It is the creative, thoughtful process required for sound decision-making, enabling us to act with intelligence and freedom.

The virtues necessary for navigating life and the markets—such as honesty, generosity, and resilience—cannot be consistently practiced without courage. Prudence requires cultivating humility, recognizing uncertainty, and seeking counsel. It means detaching from the emotional biases of fear and greed.

The Takeaway: Acknowledge the limits of your knowledge. “Walk humbly before markets you cannot control”. Prudence in the face of uncertainty demands maintaining a “Margin of Safety”. This flexibility is the buffer needed to survive the inevitable low points. Remember, sometimes the wisest response to market chaos is simply to “Don’t just do something, sit there!”

Edward Quince's Wisdom Bites: The Unfolding Drama of Market Cycles and Human Folly

The allure of "this time is different" is a powerful siren song, yet understanding the cyclical nature of markets and human behavior is paramount to navigating financial landscapes.

Markets are not a linear ascent; they are a perpetual drama of booms and busts, driven by the ebb and flow of collective psychology. Warren Buffett and Charlie Munger frequently alluded to these limits, with Munger stating, "People who expect perpetual growth in real wealth in a finite earth are either mad men or economists". This wisdom stands in stark contrast to periods of "speculation" when "blind capital... is particularly large and craving; it seeks for someone to devour it, and there is a 'plethora'; it finds someone, and there is 'speculation'; it is devoured, and there is 'panic'".

We often see these cycles play out in vivid, sometimes comical, fashion. Remember the "Bored Ape Yacht Club. WTF was that?" or the more recent "Hawk Tuah meme coin crash of 2024"?. These fads highlight Benjamin Graham's observation that "The speculative public is incorrigible. In financial terms it cannot count beyond 3. It will buy anything, at any price, if there seems to be some 'action' in progress". The "big money in booms is always made first by the public - on paper. And it remains on paper". Current market observations, such as "higher stock valuations despite higher rates," suggest an "odd combination" not seen in previous tightening cycles, raising questions about sustainability. Even the whimsical notion of "Nvidia purses" can be a "humorous, albeit concerning, observation on the signs of market exuberance and mania".

Navigating this cyclical drama requires a healthy skepticism toward claims of perpetual novelty. As Sir John Templeton noted, while "20 percent of the time things really are" different, the challenge lies in discerning those genuine shifts from fleeting narratives. The key is to avoid "loss of focus" and to "sit and think," rather than being swayed by the crowd. This prudent approach allows investors to apply a "margin of safety," acknowledging that "no matter how wonderful [a business] is, it's not worth an infinite price".

Edward Quince's Wisdom Bites: The Exponential Power of Patience and Survival [Buffett Birthday Celebration Edition]

Today, as we celebrate Warren Buffett's 95th [belated] birthday, we reflect on a cornerstone of his philosophy: the profound importance of patience and the unwavering commitment to simply staying in the game. Buffett reminds us that "in order to succeed, you must first survive". This isn't just a mantra for financial markets; it's a fundamental truth for life itself. His ultimate investment rule has always been to "Never risk permanent loss of capital". He further emphasizes this by endorsing Benjamin Graham's "Margin of Safety" as "the right three words" to distil the secret of sound investment, a principle whose neglect has caused investors "staggering losses".

Buffett, and his long-time partner Charlie Munger, famously advised, "Never interrupt compounding unnecessarily". This underscores the idea that truly significant wealth and success are built not through constant activity, but through disciplined non-action over extended periods. As Buffett colorfully puts it, "You can't make a baby in one month by getting nine women pregnant". The magic of compounding needs time, and any premature interruption can derail decades of potential growth. He highlights this by citing the example of his sister, Bertie, who became "very rich" by making no new trades for 43 years after 1980, simply by retaining a mutual fund and Berkshire. Her reasoning, drawn from common sense, proved far more effective than chasing short-term gains.

In a world filled with constant pressure to act, Buffett’s lesson stands as a powerful counter-narrative: true advantage often comes from doing less, but doing it with extreme prudence and a relentless focus on long-term survival.

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: Ownership vs. Debt – The Fundamental Choice

Welcome back, intellectually curious investors! Today, we explore a foundational concept in investing, one that Howard Marks distilled with his characteristic clarity in his October 23, 2024 memo, "Ruminating on Asset Allocation." This memo provides a powerful framework for thinking about risk management and aligning your investment decisions with your deeper financial goals, a core tenet of the Edward Quince blog.

Marks begins by simplifying the complex world of asset classes to their essence: "at bottom, there are only two asset classes: ownership and debt". He emphasizes the "enormous difference to own vs. to lend":

• Owners (equity holders) have "no promise of return". Their potential upside is uncapped, but so is their potential for loss.

• Lenders (bondholders, creditors) have a contractual "fixed outcome" – assuming, of course, the borrower fulfills their obligations. Their upside is capped, but their downside is theoretically limited to the amount lent.

The most basic decision for investors, Marks argues, is choosing between these two fundamental approaches. To anchor this decision, one must first identify a "risk posture". This involves determining how much emphasis you want to place on "preserving (defense) vs. growing capital (offense)". He calls this "preservation vs. growth" an "inescapable truth in investing," acknowledging that these two objectives are mutually exclusive.

This aligns perfectly with our blog's long-standing philosophy. We've often stressed the importance of identifying your goals as the first step towards good risk management, recognizing that "taking a risk without having a specific goal in mind is like driving around aimlessly and hoping to end to up somewhere good". Marks’ framework underscores that this crucial choice should be informed by your "investment horizon, financial condition, income, needs, aspirations, responsibilities, and, crucially, intestinal fortitude, or their ability to stomach ups and downs".

Marks also cautions against deviating from one’s "sweet spot" in terms of risk level, a reminder of the blog’s core belief in discipline and self-awareness. He concludes by pointing to the current opportunities in credit at current levels, which he sees as offering attractive returns.

Ultimately, Marks' "Ruminating on Asset Allocation" reinforces that "A prudent way to navigate the inherent uncertainty in the world and economy is by maintaining some flexibility, a buffer, a margin of safety and a level of creativity in planning". It's about making deliberate, informed choices about your risk posture, understanding the fundamental trade-offs, and focusing on what truly matters for your long-term objectives, rather than getting swayed by market noise or fleeting narratives. 

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.