Edward Quince's Wisdom Bites: Financial Gravity

 

The CAPE ratio is often misunderstood. Critics complain it doesn’t time markets. That’s true. And irrelevant.

CAPE is not a clock. It is a weather report.

Borrowing From the Future

High valuations do not cause crashes. They cause lower future returns. When you pay more today, you pull performance forward from tomorrow.

At elevated CAPE levels, optimism must be earned through exceptional growth—not assumed.

The Psychological Trap

Expensive markets feel safe. Momentum reassures. History fades. Investors extrapolate recent success and lower their required margin of safety.

That’s when gravity quietly builds.

The Lesson

Valuation doesn’t tell you when returns will disappoint. It tells you how much optimism is already priced in. Adjust expectations accordingly.

XTOD

“Price is what you pay. Value is what you get.” — Warren Buffett

Edward Quince's Wisdom Bites: The Optimists Paradox

At first glance, optimism and pessimism look like opposites. In investing, they are better understood as complements.

Joachim Klement captures the tension well: pessimism sounds intelligent. It catalogs risks, critiques assumptions, and anticipates failure. Optimism, by contrast, sounds naïve—until you look at the data. Over long horizons, optimism is what actually makes money.

Human progress is real. Productivity grows. Problems get solved. Capitalism, for all its flaws, adapts. Betting against that trend has been a historically losing proposition.

And yet—blind optimism is lethal.

The Asymmetry of Survival

The paradox is this: you must survive the short run to benefit from the long run. Markets do not move in straight lines. They lurch, crash, and occasionally panic. If your optimism leads you to excessive leverage or concentrated bets, the market will eventually remind you who is in charge.

This is why the correct posture is asymmetric:

• Save like a pessimist: assume bad things happen. Hold liquidity. Avoid ruin.
  
  

• Invest like an optimist: own productive assets. Stay exposed to growth.
  
  

This is the barbell, not as theory, but as temperament.

Why Optimism Without Defense Fails

Optimists fail not because they are wrong about the long term, but because they underestimate volatility. Drawdowns test psychology, not spreadsheets. When losses exceed tolerance, forced selling replaces rational decision-making.

Your optimism must be earned through prudence, not asserted through bravado.

The Lesson

Long-term success belongs to those who combine faith in progress with paranoia about survival. If your strategy cannot withstand temporary failure, your long-term thesis is irrelevant.

XTOD

“Real optimists don’t believe that everything will be great. That’s complacency. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way.” — Morgan Housel

 

Edward Quince's Wisdom Bites: Cruel Ironies

 

Investing contains a cruel irony: we commit capital today for a future that refuses to cooperate. We make decisions under uncertainty, but price assets as if tomorrow will behave politely.

Jason Zweig, channeling Benjamin Graham, describes two fundamentally different approaches to this problem: projection and protection.

Understanding the difference is the difference between surviving markets and being periodically surprised by them.

The Projection Temptation

Projection is the default setting of modern finance. Analysts extrapolate current trends—AI adoption, margin expansion, market share dominance—and project them far into the future. The story becomes the justification for the price.

Projection requires optimism, confidence, and precision. It also requires you to be right about variables you do not control: growth rates, competition, regulation, interest rates, and human behavior.

That’s a long list of things to get right simultaneously.

The Protection Alternative

Protection is quieter and less exciting. It focuses not on how good the future might be, but on how bad it could get—and whether you can survive it.

Protection is price discipline. It is buying assets cheap enough that disappointment does not equal disaster. It assumes your forecasts are flawed and builds defense accordingly.

This is the essence of Graham’s Margin of Safety—not brilliance, but resilience.

Why Protection Wins Over Time

Projection feels intelligent. Protection feels boring. But investing is not scored on excitement—it is scored on outcomes.

Projection asks: What if everything goes right?
Protection asks: What if I’m wrong?

Only one of those questions keeps you in the game.

The Lesson

Stop trying to calculate earnings in 2030. Start asking whether your portfolio can survive the ignorance of 2026.

You don’t need to be prescient. You need to be consistently not stupid.

XTOD

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” — Charlie Munger

Edward Quince's Wisdom Bites: The Oracle - The Magic of Compounding and the Power of Non-Action

Edward Quince (EQ): Warren, the growth of Berkshire Hathaway is frequently attributed to the magical effect of compounding. Many investors understand the concept mathematically, but few seem to master it psychologically. Why is time, the exponent in the compounding formula, so critical?

Warren Buffett (WB): The real action from compounding takes place in the final twenty years of a lifetime. For anyone familiar with the basics of compounding, the exponent (time) matters the most. While you can achieve large outcomes with a high growth rate, the crucial element is longevity, meaning you or your portfolio must stay around to enjoy compounding.

EQ: Charlie Munger famously advised, "Never interrupt compounding unnecessarily". How does an investor translate this principle into practical, daily behavior in a world that encourages constant activity and short-term trading?

WB: It requires tremendous patience. We must always remember that the big money is not in the buying and selling, but "in the waiting". I often say, "You can't make a baby in one month by getting nine women pregnant". Growth takes time, and you must resist the temptation to "fiddl[e]" with holdings. This is why I think people's investment would be more intelligent if stocks were quoted about once a year. If you spend all day running your life going from one economic data point to another, you lose sight of the long-term focus.

EQ: But doesn't this philosophy of patient non-action mean missing out on certain quick market gains?

WB: If we insist on a degree of defensiveness that turns out to be excessive, the consequence might be profits that are a little lower than they otherwise might have been. But our aim is to be around for the long run. My sister, Bertie, made no new trades during the 43 years after 1980, retaining only a mutual fund and Berkshire, and she became very rich. That demonstrates that the passage of time, inner calm, and minimizing transactions are required.

The Edward Quince Takeaway

Compounding is the quiet force behind immense wealth, but it requires patience and survival. Adopt a mindset where non-action is the default, and avoid the mistake of interrupting the exponential power of time unnecessarily. Your job is simply to survive the interim chaos so your long-term optimism can succeed.

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: The Hard Truth of Fiscal Discipline – Or, Why We Keep Kicking the Can

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 topic that feels perennially relevant, yet consistently misunderstood: fiscal discipline. While the market gyrates and pundits clamor, the wisdom of the past, and a dash of intellectual humility, might just offer the clearest path forward.

The Elephant in the Room: Mounting Debt and Deficits

It seems that every day brings fresh warnings about the U.S. fiscal situation. From Moody's putting U.S. sovereign debt on negative watch to calls about a "Minsky moment" from a fiscal situation deemed "impossible," the chatter is omnipresent. There's a persistent concern among investors about rising U.S. debt levels. Even Fed Chair Powell has acknowledged the national debt as unsustainable. We're talking trillions added to the debt, often with hundreds of billions more if expiring provisions are extended. It appears that policymakers sometimes act as if the answer to all problems is simply more government spending, as if there's no such thing as an uncovered deficit.

Historically, Alexander Hamilton warned Congress in 1790 that "the creation of public debt should always be accompanied with the means of extinguishment" as "the true secret for rendering public credit immortal". For the first 175 years of the nation, the U.S. largely adhered to this "Hamilton Norm," issuing large quantities of public debt only during emergencies. One can certainly wonder if we've violated that norm, and if it matters.

The Fiscal Theory of the Price Level (and Why it Matters)

While Modern Monetary Theory (MMT) might "diss" the idea of bond vigilantes and suggest governments can finance all spending without borrowing or taxes, other compelling theories offer a starkly different view. John Cochrane, a leading proponent of the Fiscal Theory of the Price Level (FTPL), suggests that if fiscal policy is undisciplined, the Fed's actions alone may not lower inflation. In fact, if the Fed raises interest rates, it raises interest costs on the debt, and if taxes don't rise or spending doesn't fall to pay those costs, there's "no reduction in inflation". He calls this "unpleasant interest rate arithmetic".

The FTPL posits that inflation occurs if debt exceeds faith in a country's long-run ability and will to repay it. This theory suggests that the Central Bank can only "move inflation around over time," and ultimately doesn't have full control if fiscal policy isn't consistent with price stability. It highlights the "real danger" that comes from "encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking".

The Fed's Dilemma: Independence vs. Politics

The Fed may believe a certain policy is correct but worry it will appear politically motivated. Peter Stella's definition of central bank independence is "the ability to raise interest rates when the Treasury doesn't want you to," which is almost always the case due to the cost of debt. Powell has stated the Fed "do not consider politics in our decisions. We never do. And we never will". However, the macroeconomic models themselves implicitly include some budget constraints and fiscal-monetary coordination. If fiscal policy is the major driver of inflation, how is the Fed supposed to fulfill its price stability mandate?

What's the Wise Play? Beyond the Headlines.

In a world loud with information, where everyone has a "take," the key is often to mute the unnecessary and discern what truly matters. As the wisdom from the blog frequently emphasizes, "Clarity comes from subtraction, not addition. Remove the noise, the distractions, and the unnecessary. What truly matters will emerge".

Here's some wisdom to help you navigate the fiscal noise:

• Embrace Intellectual Humility: Recognize that forecasting the future is a "fool's errand," and even "experts" are often wrong. As Morgan Housel wisely noted, "Real optimists don't believe that everything will be great...Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way".

• Focus on What You Can Control: Your behavior matters more than any forecast. Instead of reacting to every headline, cultivate discipline and a robust process. As Charlie Munger advised, "It's waiting that helps you as an investor, and a lot of people just can't stand to wait".

• Prioritize a Margin of Safety: Benjamin Graham's concept of a "margin of safety" is about "rendering unnecessary an accurate forecast of the future". This means building flexibility, avoiding excessive leverage, and having a buffer to withstand unexpected events. "Know your goals, mitigate unwanted risk, prepare and position the best you can for when the unknown or unexpected occurs, because life is uncertain, but remember without risk there is no return".

• Learn from History, But Don't Over-predict: "History doesn't repeat, but human nature does". Studying past financial disasters can impart "invaluable lessons on what to do and what not to do at far lower cost than making the mistakes oneself". However, be wary of thinking "this time is different".

• Question the "Why": Understand the motivations and incentives of those providing information. As Charlie Munger said, "I never allow myself to have an opinion on anything that I don't know the other side's argument better than they do".

Ultimately, fiscal discipline—or the lack thereof—has profound consequences. While you can't control government policy, you can control your own approach to navigating an uncertain world. Remember, "The greatest shortcoming of the human race is our inability to understand the exponential function". This applies not just to compounding wealth, but also to compounding problems.

Daily Economic Update: June 4, 2025

Yeah, we’ve got ‘em

Jobs that is, 7.4 million job openings. The internals were pretty steady.  Who has the upper hand? It’s a bit of “it depends”. If you work in healthcare, great, in other industries the story is more mixed.

But at least a few things are going nuclear.

Radioactive Facebook?

When I think of social media companies and the term “radioactive”, I tend to associate them in a pejorative way, one in which both can cause harm.  But nowadays when social media is going radioactive, it literally means they are buying nuclear power, specifically to power AI that sits inside data centers.  Yesterday, Meta announced they’ve entered into a 20-year agreement to buy nuclear power from Constellation Energy’s Clinton nuclear facility in Illinois. 

20 years seems like forever in the AI timeline, but things take time. Like growing the Federal debt level.

Like Radioactive Decay, There Are Exponents

Speaking of things that seem exponential, Ray Dalio promotion and his fears of the U.S. decline.  Yesterday, Ray promoted his new book, “How Countries Go Broke” with a LinkedIn post.

In the post, Dalio reminds us that no matter how you cut it, even when you can print and tax, credit cycle dynamics are the same as Hyman Minsky theorized and we discussed back in January.  

Dalio uses the human circulatory system as his analogy. Deficits are like plague, the deficits drive the supply of debt, the amount of which can overwhelm demand and act as plague breaking off, which ultimately causes a heart attack. Central banks’ can print to try to alleviate the blockage, but it distorts the normal flow of the system and doesn’t solve the problem. For Dalio the only solution is austerity and the accompanying lower rates.

Both Dalio and Treasury Secretary Scott Bessent both share a solution that is focused on 3% interest rates, reducing the budget deficit to 3% of GDP.

But What If You Created The Circulatory System In The First Place?

That’s likely what MMT proponents would retort to Ray’s analogy, after all, it’s your system, your currency, only you can cause the heart attack.  The debt Dalio’s worried about, that’s not plague, it’s actually the blood, if you don’t create the money, the system stops. And interest service on debt, that’s nothing more than a policy choice.  The real constraint isn’t the debt or the interest costs, it’s inflation.  Unless you have inflation, you have fiscal space and the MMT crowd would say you should use it.

And Speaking Of Inflation

Fed Governor Lisa Cook didn’t sound overly convinced that inflation won’t remain a problem in light of trade policies and other factors.

Bridging Common Ground

What if both Dalio and the MMT crowd are right?  What if you just need a way to connect them.  Perhaps there’s where the concept of Fiscal R-Star comes into play.  Remember, this concept is the equivalent of the neutral rate of interest for monetary policy, it’s the interest rate where fiscal policy is neutral.  In essence it’s the idea that deficits can be destabilizing, but only when they exceed the economy’s ability to absorb them without excessive inflation or crowding out.

Just Say What’s On Your Mind: “It’s A Disgusting Abomination”

One Big Beautiful turd?  Maybe, at least if you’re Elon. He’s certainly not ascribing to MMT - he tends to be a fiscal theory of the price level guy.  In a sense, good for Musk for calling out the pork in this bill, as someone who at least reportedly cares about government waste, he at least needs to be consistent.

But That’s A Problem For Another Day

Until the fiscal problem is our fiscal problem, it doesn’t seem to be a problem (for now). The S&P rose to 5,970 led by AI chip stocks and optimism that falls into the TACO trade narratives.

The 2Y treasury yield moved up to 3.96% and the 10Y was at 4.47%, both flirting with their somewhat key levels.

We’ll see what ISM Services and the Bank of Canada has in store today. 

Until then you can debate fiscal narratives.

XTOD’s:

XTOD: Bitcoin’s whole story is a staged illusion, scripted by insiders to convince you governments and institutions are “all in” — and that this market is booming on real demand.  

This is the LARGEST bubble in human history, set to go down as the largest financial scandal ever.  Ask yourself: If Bitcoin is so decentralized and powerful…Why do the same few entities control the narrative, the wallets, and the laws?  It's all smoke and mirrors. Here’s proof. 🧵

XTOD: "Diplomacy turns out to be quite different from reality TV and real estate. The best diplomacy is conducted secretly, not on live TV. And when a national security strategy goes awry, bankruptcy is not an option. There is no Chapter 11 for a failed foreign policy."

XTOD: hot ai summer lfg…lots of great releases coming!

XTOD: In November next year, we fire all politicians who betrayed the American people x.com/matt_vanswol/s…

XTOD: Learn to ask, “If this is the only thing I accomplish today, will I be satisfied with my day?” 

Don’t ever arrive at the office or in front of your computer without a clear list of priorities. You’ll just read unassociated e-mail and scramble your brain for the day.    Compile your to-do list for tomorrow no later than this evening. I don’t recommend using digital to-do lists, because it is possible to add an infinite number of items. I use a standard piece of paper folded in half three times, which fits perfectly in the pocket and limits you to noting only a few items.   There should never be more than two mission-critical items to complete each day. Never. It just isn’t necessary if they’re actually high-impact.   If you are stuck trying to decide between multiple items that all seem crucial, as happens to all of us, look at each in turn and ask yourself, If this is the only thing I accomplish today, will I be satisfied with my day?  To counter the seemingly urgent, ask yourself: What will happen if I don’t do this, and is it worth putting off the important to do it?

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