People have a very deep misunderstanding of logical decision making, and it’s been interesting watching this on full display over the last week or two.
There are a lot of very intelligent people talking about coronavirus and the market. The problem is many of them have very gaping holes in their ability to think/decision making.
So, due to the urging of my friend Corey, I’m making this post to protect those who may blindly follow the advice of their Facebook feed which even if their intentions are good, their ability to think logically does not match their intentions.
There are a lot of smart people saying dumb things.
It reminded me of a conversation I had recently with a friend about intelligence vs. wisdom. My friend is an almost 80 year old vietnamese/buddhist man named Chan. He was talking about how most people in the states are very intelligent, but there are very few that are wise. They read lots of books, know a lot of things and have an incredible amount of intelligence but very little wisdom.
It relates a lot to the current situation where people are reading lots of articles, regurgitating things that they think sound smart, and not doing much actual thinking. Once they decide which side they’re on, they look for more articles that confirm their bias to share, and people on the other side of the argument are doing the same for their side of the argument, so neither ends up doing much thinking or learning, just arguing over who’s smarter/right by sharing ideas of people that aren’t them, and many of those articles are ideas written by people that aren’t from that person.
It’s a professional regurgitation war, and no one’s winning.
“Don’t worry guys since we’re young we’re only going to die .2% of the time instead of 5%”.
As I’m reading things like this, I’m thinking:
‘It’s not just about you being infected, you mathless, selfish goofballs.’
Let’s pretend the death rate was only 1%
It’s not actually a 1% death rate in the way your mind frames it.
The math compounds even more ridiculously than usual in this case if it is true that symptoms sometimes do not show for days, or that some people are asymptomatic.
So, let’s say someone only has a 1% chance of dying, and they’re one of the many that aren’t showing symptoms yet or are asymptomatic. And then they interact and infect 10 people. So now 10 other people have now acquired a 1% chance of dying.
But it’s not just that. Those 10 people who go infect 10 other people with a 1% chance of dying.
So YOU being infected may or may not = 1% chance of dying.
But I think it would be helpful to realize in the above situation if we pretend that the number of people infected would be capped right there(which it obviously wouldn’t), that in the sample size of the infected group caused by you, the expected value of a death in just the group you infected would be 100%.(note: that is expected value, not result of one sample size group)
I think presenting the math in an alternative way like this may help those on one extreme of the argument to at least open up to new considerations, and is worth repeating:
The expected value of a death in just the group you infected would be 100%+.
Or, the expected value of you causing a death(including your own) in just the group you infected would be 100%+.
“So Billy are you saying you are on this side of the argument?”
“I don’t get it, so you’re on the other side?”
What I’m saying is a complete misunderstanding of math has people fully confident in whichever side they picked.
The same math that we applied above would change COMPLETELY if the variables changed.
And the variables have changed, and will change further.
So watching people ‘pick a side’ and then share articles that confirm their bias to the side they picked is so funny, but not funny in a ‘haha’ way because it’s affecting so many people not only health wise but financially.
There is no ‘side’, there is what is expected to happen when the possibilities of each side are considered and the probability of them happening.
People are seeking the ‘answer’ and the only answers they are considering is to one very extreme, or the other.
The ‘answer’ will almost always be in between.
And the ‘answer’ will get closer to what it actually is as more information is gathered.
As more information is gathered, variables will change accordingly, both up and down.
Anyone saying they know the death rate or any other rate has a massive misunderstanding of how math works.
It depends on variables.
And in this specific case there is a very high amount of variables.
And in a case where there is a high amount of variables, to determine what will happen is much more difficult.
Especially when many variables are hidden.
And by hidden I mean people just don’t consider them as part of the equation, but whether or not they understand the variables doesn’t mean they don’t exist.
Hidden variables still exist it is just difficult to know what number to plug in.
Just a small amount of the variables would be death rates, infection rates, ability to avoid infection rates, ability to create a vaccine, ability to create a higher quality of care for the infected, etc…
As hidden variables become less hidden, the actual numbers will come into play. And then those numbers will even further change as the variables continue to change.
Again, anyone saying they know the death rate or any other rate has a massive misunderstanding of how math works.
The most important thing to know is those saying they know, don’t know.
For example if we pretend one area has an older average age, their death rate would be higher. If their ability to care for those infected was low, their death rate would be higher. If the area was reactive instead of proactive to containing the spread, the death rate would be higher. If the area decision makers were emotional instead of logical, the death rates would likely be higher. If health care limited support amounts for those with limited financials, the death rates would be higher. etc…
It is important to note that as one of these variables change…
IT WILL AFFECT THE OTHER VARIABLES IN THE EQUATION.
Anyone claiming they know certain rates are only unintentionally claiming they have no idea how math works.
INCLUDING PEOPLE YOU CURRENTLY VIEW AS AUTHORITY.
That includes government and gurus.
Be very careful, there are a lot of people who speak eloquently who think very poorly.
Preparing doesn’t mean you think it’s going to happen.
It means you understand the downside of preparing is not equivalent to the downside of not preparing.
By a very insane margin.
So let’s say you are of the opinion that you think everything will be fine in x amount of weeks or months and that everything is overhyped.
It is still +EV to prepare, because the effort to prepare is minimal and the consequence to not prepare is maximal.
Again, I’m not saying anything will or will not happen.
I’m saying anyone who believes they do know, is only showing on full display that they have no idea what they’re talking about.
Besides the ‘coronavirus experts’ who are flooding social media, we now have the always expected ‘financial experts’ that come out every time the market goes up or down, pretending they have the answers to that as well.
Much of the above applies in a similar way, but I thought I would get slightly more specific as several people have messaged asking what to do with the market going wild.
“Should I buy the dip?”
“Is it going to keep going down?”
“Should I take all my money out?”
First of all, no one can accurately predict whether something will go up and down on a very short term basis.
And for everyone ‘buying the dip’, or wondering whether they should, I’d ask them to consider this:
What it is dipping in relation to?
People investing relative to what something was yesterday or what they predict it will be tomorrow are essentially attempting to predict what other people think about the market, and what other people think that other people think about the market.
They forget, or never even realized they’re betting on actual businesses with actual profits and losses.
I’d invite you to reconsider what you relate the dip to.
By that I mean, if you are going to ‘buy a dip’ because you thought it was priced perfectly yesterday, but now that it’s down today it is now underpriced, that would be a fine purchase.
The problem is that’s not what’s happening.
People are buying assets unrelated to what they think the actual asset is worth.
It’s not even a consideration for them.
They’re buying on ‘whether the market is up or down today’.
For the same reasons a market goes down in the short run, it goes up- psychology.
Long term it is based on the actual value and the expected rate of return.
So, many people are thinking they are an investor by playing a trader. And they are a -EV trader, but they don’t know it because of the quantity of variables they aren’t considering much like we talked about way above in relation to the virus, and that they won’t have the sample size to learn they are a -EV trader for quite a while.
They will focus on temporary results vs. the actual thought process that is going into the decisions, that would give them a shot to be +EV on their investments.
Many of the same people that are shorting today because “it’s going down!” are the same people who were buying yesterday because “it’s going up!”.
The decision making doesn’t have anything to do with companies you’re investing in.
A more optimal time to make a bet is before everyone in the world has the same information as you do.
SOMETHING IS NOT ON SALE OR OVERPRICED BASED ON THE PRICE IT WAS YESTERDAY, BUT BASED ON THE ACTUAL VALUE.
THE VALUE IS DETERMINED BY THE EXPECTED LONG TERM PROFITS OF AN ASSET.
THE OVER OR UNDER PRICING OF THAT ASSET CAN AND SHOULD BE APPLIED TO YOUR SPECIFIC DESIRED LONG TERM RETURN.
SO SOMETHING THAT IS UNDERPRICED FOR ONE PERSON, MAY NOT BE UNDERPRICED FOR YOU.
(under or over pricing is not based on ‘Ted’ from Facebook saying it’s low or high today)
Many finally wake up one morning and think, “wait a minute… I don’t actually know anything about the assets I own!”.
And so they ask other people who know nothing about assets they own what they should do.
And social media’s investing experts always have ‘answers!’.
The herd follows the smartest sounding dumb person.
It is worth repeating that value should not be relative to what a price was yesterday or tomorrow, as that’s just attempting to predict what someone else will think it’s worth and/or whether they think it will go up or down.
Over or under priced merely means relative to the rate of return you would like to earn and the rate of return you can be expected to earn based on the price you purchase at.
If you’ve ‘lost a lot of money’ in the last week or so, realize that you didn’t lose the money unless you need it right now. You hold an equity position in companies where the market changed the price in what they view the equity to be worth.
Our equity position didn’t change- we own the same % of the company as we did yesterday.
The market decided it’s worth less today, but if you’re not selling it doesn’t matter much.
You either believe it’s still a good bet or not.
It’s important to realize if your asset was overpriced yesterday, and the price is down today, it doesn’t mean it’s on sale today, it might mean it’s still overpriced.
If you’re wanting to make logical decisions about buying, selling, or holding assets it is not just about the value of the asset and your desired return vs. what you believe the asset will produce over the long term, but in the changes to the economy in the way that they affect the assets that you own.
In other words, if there is a supply change with an asset you own, that is one variable that is affected. So if we pretended that an asset was perfectly priced, and that a very temporary supply change is all that was going to happen, and the market reacted as if the world was crashing, your asset would likely be underpriced.
However, in situations like this where there are an incredibly high amount of variables, it is extremely difficult to determine how profits and losses will be affected for certain assets.
There are absolutely good and bad investments to be made in situations like this, but I would urge you to make these decisions in the right way, by relating it to the right things. And also fully understand that there are too many variables to ‘know’ what will happen. Not knowing what will happen is okay, but make sure you are considering whether or not something is mispriced in a logical way.
I would urge you to be very careful in blindly taking advice from people you think have the answers.
I can promise you that as in most things in life:
NO ONE KNOWS WHAT THEY ARE DOING
It’s easy for a well spoken illogical thinker to convince an answer seeking illogical thinker that ‘they have the answers.’
Everyone’s looking for ‘the answer’ instead of thinking for themselves.
Option #1: Become a logical thinker
Option #2: Learn who the VERY FEW logical thinkers are (a valiant attempt at #1 will help you with #2, if nothing else by at least eliminating those that are very obviously not. hint: almost everyone)
Option #NEVER: Listening to everyone else, no matter how intelligent they may sound or how many books or articles they can regurgitate, if they are unable to think logically avoid them at all costs.
For they know not what they do, and THEY DON’T KNOW THAT THEY DON’T KNOW – THAT IS WHERE THE DANGER LIES.