Edward Quince's Wisdom Bites: The Other PC

 

Private credit is having a moment. Depending on who you ask, it’s either the smartest corner of modern finance or the place where risk goes to put on makeup. In late January 2024, we flagged a piece by Laurence Siegel asking the uncomfortable but necessary question: is private credit a “golden moment,” or is it just the latest incarnation of volatility laundering?

The sales pitch is elegant. Private credit promises equity-like yields with bond-like stability. Returns arrive steadily. Drawdowns are rare. Correlations appear low. And best of all, prices don’t move around much. What’s not to like?

Well… reality.

The Volatility You Don’t See Still Exists

Private credit’s defining feature is not lower risk — it’s infrequent price discovery. These assets are not marked to market daily like public bonds or equities. Their valuations are typically model-based, manager-determined, and updated quarterly — sometimes with a healthy dose of discretion.

This creates a dangerous illusion:

If the price doesn’t move, the risk must be low.

But that logic confuses accounting smoothness with economic safety.

As we’ve said before: when you can’t sell an asset, its price is theoretical until proven otherwise. The absence of volatility does not mean the absence of risk — it often means the risk is simply unobserved.

History is not kind to assets that advertise stability during periods of abundant liquidity. We’ve seen this movie before:

• AAA-rated mortgage tranches in 2006
  
  

• Auction-rate securities in 2007
  
  

• “Low-volatility” credit strategies in 2019
  
  

They all worked — right up until they didn’t.

Too Much Capital, Not Enough Discipline

Another warning sign: flows.

Private credit has absorbed enormous amounts of capital as investors, starved for yield, move “off the run” in search of income. But capital is not neutral. When too much money chases too few deals, underwriting standards don’t tighten — they relax.

Covenants weaken. Structures stretch. Sponsor-friendly terms proliferate. Risk migrates quietly from borrower to lender while reported returns remain placid.

This is Minsky in slow motion. Stability begets confidence. Confidence begets leverage. Leverage begets fragility.

Private credit is not inherently bad. In fact, it can play a legitimate role in diversified portfolios. But when the primary marketing feature of an asset class is how calm it looks — rather than how resilient it is under stress — caution is warranted.

Portfolio Construction Reality Check

Private credit should be treated like what it is:

• Illiquid
  
  

• Cyclical
  
  

• Sensitive to credit quality
  
  

• Dependent on manager skill
  
  

If it’s being used as a bond replacement, investors should ask:

Would I still like this if prices were marked honestly every day?

If the answer is no, the stability may be doing more psychological work than financial work.

The Financial Takeaway

Be skeptical of asset classes whose appeal rests on opacity rather than robustness. Stability that comes from illiquidity is not protection — it’s deferred volatility.

Private credit is not fool’s gold by default. But in late-cycle conditions, with capital flooding in and discipline eroding, it is precisely the kind of asset that looks safest just before it isn’t.

XTOD:
"Private Credit is Having a “Golden Moment” – Buy or Sell?

Edward Quince's Wisdom Bites: Tools

 

Every technological revolution begins with scarcity and ends with abundance.

AI is no different.

The revelation that models could be trained more efficiently challenged the idea of an eternal “compute tax.” That’s not bearish innovation—it’s how innovation works.

The Model: Capital Cycles Eat Excess Returns

• High margins attract capital
  
  

• Capital creates supply
  
  

• Supply compresses margins
  
  

Hardware is particularly vulnerable because efficiency is deflationary.

Portfolio Orientation

Differentiate toolmakers from tool users. History favors those who apply technology, not those who sell picks at peak mania prices.

XTOD

“Those who invent rarely capture the economics.”

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: Sharing

Nick Sleep’s insight was deceptively simple: some businesses become stronger by charging less, not more.

This runs directly against conventional finance logic, which assumes firms maximize profits wherever possible.

Deferred Gratification at Scale

Companies like Costco and Amazon deliberately suppress margins to:

• Lower prices
  
  

• Increase volume
  
  

• Build loyalty
  
  

• Widen moats
  
  

This creates a flywheel competitors struggle to match.

Importantly, this only works when culture, incentives, and capital discipline align. Most companies cannot resist the urge to harvest short-term profits.

Why This Matters for Investors

Scale Economies Shared delay gratification at the corporate level, allowing compounding to work uninterrupted for decades. This is not growth at any price—it is growth with restraint.

The Lesson

Look for businesses that could extract more but choose not to. That restraint is rare—and often invisible in quarterly results—but it is the fingerprint of enduring quality.

XTOD

“The big money is not in the buying and selling, but in the waiting.” — Charlie Munger

 

Edward Quince's Wisdom Bites: Minsky

 

Hyman Minsky’s insight is unsettling because it doesn’t blame shocks. It blames comfort.

Periods of stability change behavior. Risk-taking increases not despite calm conditions, but because of them.

The Three Phases of Forgetting

Minsky outlined the progression:

1. Hedge finance: cash flows cover principal and interest
   
   

2. Speculative finance: cash flows cover interest only
   
   

3. Ponzi finance: cash flows don’t cover either; refinancing is required
   
   

Each step feels rational at the time. Nothing bad has happened yet.

Why the Calm Is the Shock

Credit quality deteriorates quietly. Covenants loosen. Underwriting relaxes. Yield-starved capital stretches.

Then something small breaks. Liquidity vanishes. Refinancing fails. And suddenly, what looked stable reveals itself as fragile.

This is not an accident. It is endogenous to capitalism.

The Lesson

Watch how returns are generated, not just how large they are. When you see borrowing used merely to sustain appearances—especially in opaque markets like private credit—you are closer to the cliff than the yield suggests.

XTOD

“The best way to think about the credit cycle is that it's the process of people forgetting, and then remembering, that bad things happen.”

Edward Quince's Wisdom Bites: Connections

Sharing a story told by author, journalist, podcaster, Cal Fussman regarding Dr. King's famous "I Have a Dream Speech":

Cal: [00:53:30] I have a story that really goes to show how there are these connections that are all around us. You don't even know that they're there if you're just seeing things from a distance. But I'll tell the story about the I Have a Dream speech. This is something that very few people know. I know it because I know the guy who actually has the paper that the speech was written on. And the words I have a dream are not on that paper. 

And so what happened was Dr. King was speaking at churches all over. And as he would speak, he would talk about this dream. It was part of his talks. And there was a gospel singer named Mahalia Jackson, who often went to the same churches and saying, while he was speaking, she knew, because of this continual connection, his whole repertoire. 

When this event was built in Washington, it was not really created for a church crowd. It was created for a huge American audience. And so Dr. King actually had somebody who he worked with write the first six paragraphs or so of the talk so that it was aimed at everybody. And then Dr. King wrote through the rest of the speech. And he got up to give the talk, and he's giving it, and it's going over okay. 

But if you're Mahalia Jackson, the gospel singer, who knows what's possible, you're looking out at the crowd and thinking, uh-oh, this is not going the way she had hoped. The crowd is responding nice and warmly and it's going well, but at about three quarters away through, and there's a ring of people behind Dr. King as he's giving the speech, he pauses for a second and Mahalia Jackson shouts out, tell them about the dream, Martin. Tell them about the dream. As soon as she says it, he pushes the speech aside and you hear I Have a Dream. 

Now you talk about connection, you talk about leadership. The whole movement was vitalized with those few words that would not have come out that day if it hadn't been somebody who was seated there, carefully listening to what he was saying, carefully watching the crowd. And remember, she's a gospel singer. She is a performer in a way. She knows what works. And she just stepped up and connected with him so that he could connect with everybody.

And it's just an example these connections are happening for us all the time if you pay attention to them. And obviously, Dr. King was because as soon as she said it, he understood exactly what she wanted to get across. And as soon as he went into I Have a Dream, everything changed. And not long after that, President Kennedy identified it as the I Have a Dream speech.

And the guy who got the speech, it is interesting. He was a student at Villanova visiting a friend's house. You just talk about connections here. His friend's father said, what are you guys doing over the next few days? And they said, oh, I don't know. And he said, why don't you go up to Washington and listen to Dr. King's speech?

So they went up. And this guy's name was George Raveling, and he was a basketball player at Villanova. So he's a big guy. One of the organizers walked over to him and said, you're pretty big. We need some extra security. Do you mind coming on stage when Dr. King is speaking and serving his security? And he said, sure. And so now he's on stage. King gives his speech. Afterward, he's been congratulated. He walks over to shake his hand and he said, do you mind if I have that speech? And Dr. King says sure and handed it to him. 

Now all this is just connection after connection after connection. But you have to recognize it the way Mahalia Jackson did or you have to ask for it the way George Raveling did. And now he is telling people like me the story.

Edward Quince's Wisdom Bites: Trees

 

Every market cycle begins with a compelling story. This one usually starts with the phrase “structural change.” New technology. New productivity. New rules. And sometimes, the story is even true.

But cycles do not disappear simply because the narrative improves.

Mean Reversion Never Retires

The old rule—trees don’t grow to the sky—is shorthand for a deeper truth: excess returns invite competition, and competition erodes margins. This is not ideology; it is arithmetic.

High profitability attracts capital. Capital attracts competitors. Competitors compress returns. Rinse. Repeat.

Yet every cycle produces its own “New Era” argument. Railroads. Electricity. The internet. Cloud computing. AI. Each genuinely changed the world. None abolished valuation gravity.

When the Exception Becomes the Rule

There are rare exceptions—companies that evade mean reversion by deliberately suppressing short-term profits to widen their moat. Nomad called this Scale Economies Shared. Amazon and Costco didn’t grow because they were expensive; they grew because they refused to extract maximum margin.

But here’s the catch: most companies claiming to be structural winners are not.

The Lesson

Mean reversion is the most powerful force in finance because it is rooted in human behavior and incentives. Betting against it requires overwhelming evidence—and paying a price that still allows for disappointment.

If you’re paying peak-cycle multiples for a cyclical business dressed up as a revolution, the cycle will eventually remind you who’s in charge.

XTOD

“There are two great sayings. One is, ‘If a thing can’t go on forever, it will eventually stop.’ The other… ‘People who expect perpetual growth in real wealth in a finite earth are either madmen or economists.’” — Charlie Munger

Edward Quince's Wisdom Bites: Razor

 

Is it a bubble, or just expensive?

David DeRosa suggests applying Occam’s Razor: start with the simplest explanation.

Expensive Is Not Irrational

Prices can rise for good reasons: technological change, supply shocks, increasing returns to scale. Labeling everything a bubble is lazy analysis.

But when prices detach entirely from plausible cash flows, the simplest explanation is often mass belief.

Timing Is the Trap

Bubbles can last longer than skeptics remain solvent. Being right too early is indistinguishable from being wrong.

The Lesson

Be skeptical without being cynical. Don’t short stories just because they sound ridiculous. But don’t abandon valuation because “this time is different.”

XTOD

“The most dangerous words in investing are: ‘this time is different’.”