Always evaluate people's level of knowledge

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Steve Sokolowski
Posts: 4417
Joined: Wed Aug 27, 2014 3:27 pm
Location: State College, PA

Always evaluate people's level of knowledge

Post by Steve Sokolowski » Tue Mar 17, 2020 12:20 pm

I was surprised at the dramatic crash in coin and stock prices that occurred over the past week, particularly the 3000 point Dow loss that happened yesterday. As you may recall, in the previous post I mentioned that I believed that there was cause for optimism, and there is nothing that would lead me to believe otherwise right now - but the market reaction has been the opposite.

There are three critical issues that will determine how things go over the next decade.

First, there is now starting to be some evidence that a large number of survivors of the virus have fibrosis of the lungs, which permanently reduces their lung capacity by 20-30%. The research doesn't yet have enough patients to demonstrate what demographics are affected, which is important. For example, it may be that people who were already critically ill due to preexisting conditions may simply be having existing damage diagnosed, or it may be that otherwise healthy people will now no longer be able to engage in hard labor.

Second, if recovery from the virus only provides immunity for a month or two, then the crisis will continue until drugs are able to be produced en-masse.

Third, it is unknown how easy it is for terrorists to create and spread viruses like this. It is obviously known now that the ability to manufacture vaccines is poor, even if we can now decide on their chemistry in two months. Therefore, as I pointed out earlier, some probability needs to be considered that this is the first of many pandemics that could last a decade, until some sort of "universal vaccine" is developed.

Because we don't know the answers to these critical questions, particularly to the first two, it is not yet possible for governments to make policy decisions regarding the outbreak. The policy decisions resulting from immunity in survivors who make a full recovery require lesser sacrifices than an all-out war against a virus that permanently damages survivors' lungs and which can recur to damage them again. In the absence of positive information that suggests an end to the crisis is near, we have to assume that this new way of life is either long-term or permanent. This view is contrary to those on TV who have suggested that the crisis will be over in a few months. Note that it will almost certainly be possible to control the virus in a few months, and it will be safe to go to most jobs, but when, if ever, there will be large stadiums filled with people or international air travel again is unknown - especially since the case rate will have to be much lower to reopen them than it was when they were closed.

Due to this uncertainty, I believe that investing in any business that involves mobility and gatherings of people is a sure loser. Sports leagues, wireless phone providers, dating sites, movie theaters, and airlines, for example, may simply go bankrupt. Investing in anything that involves remote work, solitary entertainment like books and video games, and outdoor activities is a winner. This is not a short-term two-week situation; it is a restructuring of the economy where people who previously worked in restaurants will need to be retrained to lay Internet fiber for remote offices, or otherwise they will need a basic income.

Even if the virus disappears from the planet in the summer, that will still not prevent a restructuring of the economy. There are undoubtedly many people who loved going out to bars every night. Some of them probably never had played a video game before. Given no other options, they may spend the next four months playing games every night, realize they really enjoy gaming, and if the crisis ends they will simply not go back out to bars because they like gaming more than going to the bar now. Similarly, there are people who would always eat out, who are now forced to cook, and will enjoy cooking so much they won't return to eating out. There is no way that the businesses that are closed now will fully recover because an entire "pandemic" generation will be defined in its habits. In 2060, if the world still exists in its current form, people will recall the millennials that were defined by 9/11, the "pandemics" that are currently 5-24, and then a new generation younger than 5 now that will not recall the pandemic.

It's striking now when I walk around and see all the empty houses and buildings. It amazes me how much infrastructure was built that will be dark for years or which even may never be used again. Students who would have attended in-person classes moved out of house after vacant house, and I might see one car per hour drive by. Downtown, the $40 million law school building is locked and dark. Elsewhere in the world, cruise ships and airplanes sit idle, useless. Years from now, if it becomes completely safe for everyone to resume the life of the '10s, some of these things are going to be ghost assets that nobody is going to know what to do with. What do you do with a cruise ship that takes up a huge dock, when the company is bankrupt, there is no demand, and it costs hundreds of thousands of dollars just to move it out of the way? Who pays for that, exactly?

The bottom line is that this is a structural change in the economy, and things will never go back to exactly the way they were a few weeks ago. But as we have seen for the past few days, once people realize that hoarding supplies is unnecessary, it is possible for civilization to survive in this state as long as is necessary.

Now that we know the world hasn't ended, why does it seem to the markets that it has? After examining all the times that I've been wrong about something, it seems that most of the time the answer I come to is the same: I assumed that everyone was already aware of what I knew and had thought it all through. After all, most people have spent years having people tell them that there are "experienced traders" on Wall Street and in coins that follow this stuff every day, so trying to compete against them is foolish.

In this case, I assumed that, when prices reached $7700, most people had already accepted that the previous world was over, and the drop in bitcoin prices was a reflection that people understood (for example) that sports and entertainment would shut down. But then when Trump said that the crisis was going to last until August yesterday, the stock market lost 1000 points during the press conference alone. There were obviously some very smart people who hadn't yet understood the gravity of the crisis.

I also wrongly assumed that, when there was still plenty of toilet paper on the shelves at Wegmans on March 9, it was already past the point where people would have panic bought those items. I had ordered enough Huel and water buckets to survive the crisis back in January. By contrast, it seemed that last weekend was actually the peak of the panic buying and soap didn't sell out on Amazon until March 13.

The most common reason I've been wrong in the past, particularly with coins, is that I come to the conclusion that a dramatic scenario is going to occur (like when I said litecoins would be worth $20 in 2018) and then people who have put less thought into the issue convince me that the idea is ridiculous. In this case, I told a person in February that we might see a depression out of this situation, and he convinced me otherwise by saying I should only sell if I was a "trader" rather than a long-term investor. The advice cost a quarter million dollars.

In another case, I assumed that everyone knew that prices for coins fall before the halvings occur. In that case, my fear that I was right overrode what I erroneously thought might be logical and I did decide to sell at $10,200 and saved $60,000, despite everyone else seeming to suggest a huge bubble was imminent.

The lesson I learned, and which I hope will prevent future errors, is that one should always evaluate other people's level of knowledge about the situation. Compared to experts, I have a pitiful level of knowledge about the virus, which was gained by simply reading medical journals on the Internet for eight hours. But I learned from talking to people just this week that many people didn't even watch the news and had never thought through how exponential growth works. Is it possible that the bar for knowledge about anything is so ridiculously low that you can make a lot of money by simply reading about topics on the Internet? It's starting to seem to me like that is plausible. In the future, I'm going to carefully evaluate what the people talking to me know, rather than assuming that people who give trading advice are experts.

Applying this lesson, I still see large organizations cancelling events until some date in April, which indicates that most people still do not have a high level of knowledge about this subject. Therefore, I moved a huge sum of money to Bittrex and put buy orders below $3,000, awaiting the time when the reality that this crisis could stretch on for longer than a year dawns on those people. Whether it actually does last a year isn't important to trading; what is important is that there is zero possibility that things are going to resume as normal (whatever that means) in April, and too many people still have insufficient knowledge and believe that.
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