Edward Quince's Wisdom Bites: Sheep Guts

 

It’s prediction season again. Every major bank, asset manager, and independent thinker with a Substack has published their carefully calibrated year-ahead forecast. The S&P 500 will finish at precisely X. Rates will peak in QY. Inflation will behave—unless it doesn’t.

Ignore them all.

This ritual persists not because forecasting works, but because clients demand certainty and the industry is paid to supply it. As Fred Schwed observed decades ago in Where Are the Customers’ Yachts?,

“It is a habit of the financial community to ask questions to which there is no answer.”

Forecasts create the comforting illusion that someone is in control.

Why Forecasts Feel Smart (and Aren’t)

Forecasting is seductive because it masquerades as rigor. Charts, regression models, confidence intervals—all signal competence. The problem is that financial markets are not governed by tidy, stationary systems. They are shaped by politics, psychology, reflexivity, and randomness.

Statistically, many economic forecasts perform no better than a coin flip. Worse, the most confident forecasts often cluster at precisely the wrong moments—at cycle peaks and troughs—when uncertainty is highest and extrapolation feels safest.

The industry doesn’t reward humility. It rewards conviction. Saying “I don’t know” doesn’t sell well, even when it is the only honest answer.

From Prediction to Preparation

The moment you admit you cannot forecast interest rates, GDP growth, or recessions with any reliability, something liberating happens: you can stop predicting and start preparing.

Howard Marks captures this pivot perfectly:

“We may never know where we’re going, but we’d better have a good idea where we are.”

Preparation means building portfolios that can survive multiple futures—not just the one your base case prefers. It means diversification, margin of safety, liquidity, and humility. It means acknowledging that the biggest risks are usually the ones no one is modeling.

The Illusion of Precision

There is a special danger in forecasts with decimal points. Precision implies knowledge that does not exist. When someone tells you the S&P will end the year at 7,327, they are not informing you—they are performing.

The future does not care about your spreadsheet.

The Lesson

The most powerful words in finance are still: “I don’t know.”

They free you from fragile bets, heroic assumptions, and single-path thinking. They allow you to build robustness instead of castles in the air.

Admitting uncertainty is not weakness; it is the starting point of durability.

XTOD

“Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts.” — Charlie Munger

Edward Quince's Wisdom Bites: The Great Divide

 

Welcome back to the digital saloon. With the approval of spot Bitcoin ETFs, predicition markets, and the steady financialization of nearly everything that moves, the line between investing and gambling has blurred faster than a mirage in the desert. This feels like a good moment to return to first principles—specifically, the oldest and most misunderstood divide in finance: investing versus speculating.

These words are often used interchangeably, but they describe fundamentally different activities—different mindsets, different risk profiles, and ultimately, different outcomes.

Two Religions, Not Two Strategies

Robert Hagstrom once put it succinctly at a CFA Institute forum:

An investor thinks first about the asset and second about the price. A speculator thinks first about the price and only later—if at all—about the asset.

Benjamin Graham gave us the canonical definition that still hasn’t been improved upon:

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

Notice what Graham didn’t say. He didn’t say speculation is immoral. He didn’t say it should be illegal. He said it is different—and dangerous when mistaken for something else.

Speculation is not defined by volatility or novelty. It is defined by dependence on future buyers rather than present value.

The Greater Fool Problem

If you are buying something because you believe someone else will pay more for it tomorrow, you are speculating. Full stop.

This is the “Greater Fool Theory,” and it works—until it doesn’t. As long as a larger fool arrives on schedule, prices rise and confidence grows. But when the chain breaks, value evaporates because it was never anchored to anything real in the first place.

Investing, by contrast, does not require applause. It requires cash flows, balance sheets, and a price that allows for error. It assumes you might be wrong about growth, margins, or timing—and builds in protection accordingly.

Speculation assumes you will be right and on time.

The Margin of Safety Is the Entire Point

The defining feature of investing is not return; it is survivability.

A Margin of Safety allows you to endure disappointment, volatility, and human error. Speculation offers no such buffer. When sentiment turns, there is nothing underneath to stop the fall.

This is why speculative assets tend to require constant narrative reinforcement. They need a hype cycle, a community, a steady stream of validation. If your portfolio collapses without a continuous inflow of belief, you don’t own assets—you own expectations.

And expectations are notoriously fragile.

Modern Markets Make This Harder

One reason this distinction feels blurry today is that modern markets actively encourage speculation. Financial products are packaged, marketed, and distributed in ways that reward turnover, excitement, and narrative simplicity.

This doesn’t make speculation evil—but it does make self-awareness essential. Problems arise when people believe they are investing while behaving like speculators, or worse, when they lever speculative positions under the illusion of safety.

Both activities exist. Both attract capital. Only one is built to survive disappointment.

The Lesson

Be honest about what you are doing.

If you are underwriting cash flows, assessing downside risk, and buying with room for error, you are investing—even if prices fluctuate.

If you are relying on price momentum, social consensus, or future enthusiasm to justify today’s valuation, you are speculating—even if the asset feels “inevitable.”

Both paths can lose money. Only one offers a Margin of Safety.

If your portfolio requires a hype-man to maintain its value, you are not investing—you are holding a hot potato and hoping the music doesn’t stop on your turn.

XTOD

“The world is full of foolish gamblers, and they will not do as well as the patient investor.” — Charlie Munger

Edward Quince's Wisdom Bites: Keeping With Year End Traditions

 "What you do when you don't have to, determines what you will be when you can no longer help it."

            -Rudyard Kipling

Edward Quince's Wisdom Bites: Keeping With Year End Traditions

   "Poor is he who works with negligent hand, but the hand of the diligent makes rich. The soul of the sluggard craves and gets nothing, but the soul of the diligent is made fat. Wealth obtained by fraud dwindles, but the one who gathers by labor increases it. A man do nothing better than find satisfaction in his work."

                        - King Solomon, c. 1000 B.C. 

Edward Quince's Wisdom Bites: Keeping With Year End Traditions

"To have what we want is riches, but to be able to do without is power."

    - Joe Macdonald

Edward Quince's Wisdom Bites: Keeping With Year End Traditions

 "Goodness is the only investment that never fails."

                        - Henry David Thoreau 

Edward Quince's Wisdom Bites: Keeping With Year End Traditions

 "Keep a clear eye toward life's end. Do not forget your purpose and destiny as God's creature. What you are in His sight is what you are and nothing more.

Remember that when you leave this earth, you can take nothing that you have received....but only what you have given; a full heart enriched by honest service, love, sacrifice and courage."

                                 -Francis of Assisi

 

 

Edward Quince's Wisdom Bites: Keeping With Year End Traditions

 "The true test of civilization is not the census, not the size of the cities, nor the crops - no, but the kind of man the country turns out."

                            - Emerson