I blame Robinhood…
By which I mean the stock trading app, not the legendary English outlaw famed for meting out vigilante justice in the vicinity of Sherwood Forest.
No, today the target of my ire is Robinhood Markets, Inc., a financial services company offering commission-free online stock trading through its hugely popular app.
It has become the trading portal of choice for millions of Americans—typically younger investors—who’ve started playing the stock market during the pandemic. As such, it is a leading facilitator of the unhinged speculation that has pushed the markets to record, irrational highs and a fully-fledged bubble.
According to Goldman Sachs, for a decade before the pandemic, small investors accounted for about 10% of trading activity in the stock market. Last year, that figure was up to 25%.
There are two major causes of this flood of new investors: apps like Robinhood and COVID.
First the latter.
Over the past decade, the U.S. economy has produced lots of jobs, but most of them have been in low-skilled, low-paying sectors. Then COVID struck, locking workers out of these jobs in huge numbers. So, many turned to the markets to make some extra scratch.
Much of the funding for this investing has come from government stimulus checks—or “stimmies,” as younger retail investors have taken to calling them online.
A survey by Deutsche Bank found that 25- to 34-year-olds are planning to spend an average of 50% of their latest government check in the market. Overall, Deutsche reports that as much as $170 billion from the latest round of COVID payments to ordinary Americans could end up invested on Wall Street.
Look, the U.S. is a free country and people are free to spend their money however they wish. I certainly have no issue with people putting their money to work in the markets.
The problem is that many of these investors are complete newcomers who know bupkis about Wall Street or valuations or anything that is truly relevant about buying and owning shares of a company. Instead, their investing outlook is shaped by the colorful, fairytale view of trading offered by apps like Robinhood and the pie-in-the-sky “analysis” that courses through social media apps like TikTok.
Robinhood, along with competitors like Webull and eToro, has developed an overly simplistic interface designed to influence user behavior. The app features pleasing, vivid colors and big, shiny buttons for buying a stock. It shows related stocks that other users bought, as though it’s Netflix recommending another TV show you might like. And users are sometimes showered with digital confetti for making a purchase.
I’ve used Robinhood. Tried it out with a tiny sum of money. Wasn’t impressed. Left. I found the app neither allows nor encourages investors to spend their money wisely. This is investing your finances masquerading as Candy Crush.
I get the appeal of this kind of service. Stock trading can seem complex…maybe even bewildering (trust me, it’s not). So, it can be comforting to see it boiled down to pretty colors and easy purchases. But obscuring the complexities—really, the risks—of a shockingly overvalued stock market will not protect people from the consequences when things turn sour. Which they absolutely, 100% guaranteed will.
Right now, millennials and older generations who never invested in individual stocks before the pandemic, think making money is as easy as waking up and making a trade. I saw the exact same thought process in 2005, 2006, and 2007 when I was writing for The Wall Street Journal. At that moment, it was real estate, and no one could lose. Everyone was a real estate buyer. A flipper.
They were all convinced of their investment brilliance because, after all, real estate never goes down in value.
How’d that work out?
This time around it’s “same thing, different day.” It’s all going to end very badly for so many of these people. Which I find sad and frustrating because it’s going to turn people away from the stock market, historically a fantastic venue for creating wealth—just not when stocks are priced on the lunatic fringe of crazy.
That’s why I encourage anyone and everyone to avoid apps like Robinhood and stick to more traditional brokerages. I use Fidelity and E*Trade at the moment, but I have used Schwab in the past, too.
Fidelity et al. also offer commission-free trading and mobile apps, but their interfaces don’t look like they were designed for hyperactive toddlers. Plus, they give you access to way, way more opportunities.
Robinhood provides a bare bones trading experience. It only allows you to invest in four kinds of assets: U.S.-listed stocks and exchange-traded funds; options contracts for U.S.-listed stocks and ETFs; a very limited number of cryptos; and some American Depository Receipts.
That means you’re missing out on foreign stocks, preferred stocks, mutual funds, bonds, foreign currency exchanges, thousands of ADRs, and more. These are all opportunities you can access through Fidelity, E*Trade, and Schwab.
ADRs, in particular, can be great investments. These are securities issued by American banks or brokers that represent one or more shares of foreign-company stock.
Basically, they’re a way to buy an overseas-listed stock in the U.S., including big players like Sony and BioNTech. Many pay excellent dividends…a real way to build sustainable wealth through the markets. (You can read more about this in the upcoming April issue of the Global Intelligence Letter.)
We live in a globalized world, and this deep into the 21st century you want broad access to more than just the U.S. exchanges.
More importantly, you want a brokerage that understands that trading is not a game, it’s your financial future.