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 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.5

 “I’m 100% Sure” — The Four Most Expensive Words in Finance

The Degen Cliché:
"I'm certain. My analysis is flawless. LTCM? Those guys were amateurs."

Translation:
“I have never met humility.”

This is the apex predator of arrogance—a trader who believes the universe takes orders. They confuse skill with luck, precision with wisdom, and backtests with divine revelation.

Every crash in history started with someone who was “sure.”

The Inverse Degen Trader’s Wisdom: Intellectual Humility and Process Over Outcome
Veteran investors know the truth:
Nobody knows anything. And that’s okay.

Forecasting is a probabilistic art form wearing a lab coat. The goal is not to predict the future but to behave sensibly in uncertainty.

Mark Twain’s line (which he may or may not have said, but we’ll use it anyway) nails it:
“It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.”

Lesson:
Your edge isn’t brilliance. It’s humility. Make “not stupid” your baseline operating system.

Final Analogy:

The degen trader treats markets like a casino—jumping from table to table, chasing the loudest crowd.
The inverse degen treats markets like an ocean.
He builds a sturdy ark (Margin of Safety), loads it with supplies (Patience), studies the currents (Valuation), and sails only when conditions are right.

One gets wet.
The other gets wealthy.

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: 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: 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.