June 18, 2020 | The Rise of Robinhood Is About More than Reckless Kids—And Why This Matters

I’m not a day-trader. And I’m not a gambler. Despite my unabashed role in the market as an independent speculator, I’m mostly a value investor. But I use Robinhood.

At least for simple transactions, it works and it’s free. So why not?

Well, Robinhood has an aggressive growth agenda that has already run afoul regulators. And the whole platform has crashed more than once during trading hours.

I could see migrating to one of the mainstream firms that have been forced by competition from the likes of Robinhood to go to zero-commission trading. These include Charles Schwab, TD Ameritrade, E-Trade Financial and Fidelity. Nothing against the start-ups in this space, but I’d feel a little safer with known names. Still, free is free, and I intend to keep using free trading platforms for what they can handle well.

That said, a 20-year-old Robonhood user committed suicide when he suddenly discovered that he was more than $700,000 in debt on a bad trade a few days ago. I can see more regulatory scrutiny coming to free trading aps.

I feel for the guy and am sorry for his family’s tragic loss.

Frankly, this relates to why I priced my flagship service, The Independent Speculator, above most of my competitors. It’s meant for savvy speculators who can handle the risks and have money they can afford to lose. The relatively high entry bar helps ensure this. I can tell you that the correspondence I’m getting from readers now averages a much higher level of sophistication than it did in the past.

At any rate, this issue of inexperienced investors following hot trading fashins—pure momentum investing—brings to mind yesterday’s column on the dangers of chasing momentum.

When I posted this link on my social media accounts, I said I’m the opposite of David “Davey Day Trader” Portnoy. This is the “barstool” trader who’s made headlines saying he’s a better investor than Warren Buffet.

When I said that, I was reacting to a statement Portnoy made in an CNBC interview. Kudos to the interviewer for asking some hard questions, by the way. One of these was if Portnoy doesn’t feel responsible for the people who chase stocks on his tips and then lose money. His answer was no. He doesn’t feel responsible for what “idiots” do.

I’m the opposite. I feel it very keenly if I offer guidance that doesn’t turn out well. I take it personally if readers—many of whom have become friends over the years—lose money. If they do, one could argue that I’m the idiot, not them. That’s one reason I built my new business around the principle of having skin in the game with my clients. And it’s why I’m always looking for the maximum possible gains for the least amount of risk in my portfolio. I agree with Buffet’s rule: “Don’t lose money.”

But it gets worse…

Thanks to one of my sharp readers on Twitter, I saw a Portnoy clip that… to put it politely, offers the most breathtakingly irresponsible investment advice I’ve ever seen.

Davey Day Trader not only tells his audience that stock selection doesn’t matter, he says traders can use any combination of letters to pick stock symbols, and every day, they will go up a “bazil” (bazillion).

Being known for due diligence, I do indeed feel that I am Portnoy’s financial opposite.

But here’s the thing that got me the most. The interviewer asked Portnoy if he thought his track record would hold up over several decades, as Buffett’s has. Portnoy said he was going back to his day job after the COVID-19 lockdown was over.

Even he doesn’t think that what he’s doing is sustainable.

Or perhaps Portnoy’s a much more observant and thoughtful market analyst than his social media persona suggests. He could just be saying: “Don’t fight the Fed.” As long as the government is going to throw easy money at the stock market, he’s happy to stand there with a big net and scoop up as much as he can.

That’s his prerogative… but what about all the “idiots” he’s not sorry for?

As others have said, I don’t see this ending well. Not for most people following this latest “get rich quick” scheme (which includes speculating with COVID-19 “stimulus” checks, by the way). And perhaps not for Portnoy himself.

The point I really want to stress, however, is that the rise of Robinhood is about much more than inexperienced investors making headlines—and this is important.

I saw a financial talking head comment yesterday that there’s no good data on types of investors in today’s stock trading, but that options trading data shows that is now dominated by small, retail traders. (He was gone before I could get his name, sorry.)

This was attributed in part to Robinhood, which has grown from one million to 10 million users since 2016. But other free trading platforms are booming as well. And the addition of fractional share purchases makes it easier than ever for “the little guy” to invest.

I’ve seen articles arguing that algorithm traders and experience big players on Wall Street are going to eat these little guys for lunch. Maybe. Maybe not. If so, it could unleash an enormous backlash. That in turn could lead to higher regulatory burdens, financial transaction taxes, capital gains taxes, and all manner of other evils.

On the other paw, it seems to me that this Robinhood phenomenon is a market response to the 99% feeling that they don’t have the same opportunities as the 1%.

If so, this could become a very, very good thing. I hope a lot of these Robinhooders are realizing their profits since they started piling into the markets in March. I hope many learn to be great investors—and even independent speculators. I see much broader participation in and understanding of the markets as a positive development for society.

Why occupy Wall Street when everyone has access, and, if they invest intelligently, they have a good chance to come out ahead?

And just imagine if these young traders notice the extraordinary gains gold, silver, and other resource stocks periodically deliver?

It remains to be seen how this plays out.

I don’t think those who encourage reckless trading are being helpful.

But one thing does seem certain to me: large numbers of inexperienced investors flooding the market means sustained high volatility.

There are various ways to play that. My plan is to watch for huge swings in the markets to create buying opportunities in the gold and silver stocks already on The Independent Speculator Shopping List. In fact, the market has come to me on three of my shopping-list picks over the last month, due to exactly this sort of volatility.

As a speculator with cash to deploy, I’m happy to take advantage of lower prices when value hasn’t changed.

Bring on the wild swings, but…
Caveat emptor,

Lobo Tiggre June 18th, 2020

Posted In: Louis James

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