Suppose there’s a five-letter password. You (Enderw24 or whoever wants to play along) know all the letters of the password except for the third one. Mario knows all the letters except the first one, Luigi knows all the letters except the second one, Toad knows all the letters except the fourth one, and Princess Peach knows all the letters except the fifth one.
Specifically, what you know is that the password looks like HO*SE
You think the password might be HORSE and it might be HOUSE. You don’t know which it is.
You think the password might be HOUSE, in which case Mario would see *OUSE.
You think the password might be HOUSE, in which case Mario would think the password might be HOUSE and might be MOUSE.
So you are unable to rule out the possibility that (Mario is unable to rule out the possibility that the password is MOUSE).
You know damn well that the password isn’t MOUSE. But you think it might be the case that Mario thinks it might be the case that the password is MOUSE.
Is that clear so far? Let’s keep going.
You think the password might be HOUSE, in which case Mario would see OUSE and think the password might be MOUSE. If the password were MOUSE, then Peach would see MOUS, and think the password might be MOUSY.
So you think Mario might think that Peach might think the password is MOUSY. This is even though you know damn well that no one thinks the password is MOUSY; you yourself know the password is of the form *OUSE, and you know everyone has the password correct to within 1 letter, which MOUSY would not be.
But that does not conflict with the fact that you think Mario might see OUSE, in which case Mario would think that Peach might see MOUS, in which case Peach would think the password might be MOUSY. You think Mario thinks that Peach thinks the password might be MOUSY, even though you know damn well that Peach does not think the password might be MOUSY.
Mario does not have as much information about what Peach sees as you do. You happen to know that Peach sees an ‘H’ at the beginning of the word. Mario does not know that. You know that Mario does not know that. So you know that Mario might consider possibilities for Peach’s guesses which include 'M’s at the beginning of the word, even though you know that Peach would never do that.