Robinhood: A Better Looking Casino
I keep hearing advertisements for Robinhood, a new discount online broker. Robinhood's big pitch is that they offer zero commission trades and a sleek interface.
That's great, but you don't go broke in the stock market because of high trading commissions or an ugly website.
Robinhood also offers "education" with great topics like "What is an IPO?" and "What are Treasury Bills?". Again, it's hard to believe that learning extremely basic information will prevent against the perils of the open market.
Stock catastrophes never play out like that. They’re way more like this:
“My barber’s brother works a pharmaceutical company that’s deep into trials and about to go crazy. The stock is trading at $1.33/share. It could easily be worth $10 in a year. I’m getting in.”
“Did you see the price of [famous company on a huge landslide]—it’s at $35/share? That thing was worth $200 three years ago. I’m getting in.”
We all know how these play out. Years of savings…gone. This is the reality of online trading accounts.
Luckily, Robinhood is here to solve that….really?
More of the same…
Robinhood is just a sleeker, cheaper, more efficient version of the same online platforms that have been available for years. These platforms entice inexperienced investors to open accounts, fund them, and begin trading stocks, options (yikes!), or crypto without any sort of investment plan, strategy, or goal.
This is not investing, it’s speculating, and Robinhood wants you to do more of it.
You may even get lucky a few times and make some money. Unfortunately, that’s sort of like winning during your first trip to Vegas. You may be even more confident on the second round of bets, you bet bigger, and lose more.
Robinhood is simply an online casino marketed to the masses.
Sure, there will be a some experienced investors, and a few other lucky investors, that benefit from Robinhood's offering.
But most people will open an account and begin buying and selling with emotion—a surefire way to lose money.
Why the hate?
First, it's absurd that services like this can be mass marketed to just about any adult with a pulse, a computer, and some money in the banking system. Considering the barriers in place for legitimate financial advice professionals to tout their own services, or the laws against investing in certain private offerings unless the investor already has $1,000,000 (accredited investor standard). Why is it ok for Robinhood to target young professionals to invest in things like crypto? You can't skydive without taking a safety course. Robinhood is pushing people out of planes without parachutes.
Second, the advertisements are offensive to anyone with critical thinking skills. The ability to buy and sell stocks does not make someone an investor or trader anymore than buying a race car makes them a race car driver. "Now you can play the market..."...all the way to insolvency.
Third, Robinhood encourages the very investment behavior that behavioral economists have named as the single most detrimental investment mistake—making decisions based on greed. It's destructive, expensive, and should have no place in the mind of smart, young professionals with legitimate ambition and goals. A bad experience in speculating with Robinhood could cost someone years of honest investment participation.
Speculating vs. Investing
Investing is about using massive amounts of data and research to leverage the highest probability of future events in your favor to have a better chance of meeting your goals.
Example: The S&P 500 has never lost value over thirty-years. If you invest in an S&P index fund today, it's virtually certain that your investment will appreciate over the next thirty years (when you actually NEED that money).
Speculating is a financial transaction with the likelihood of losing almost all the value, but with significant upside potential. It's basically gambling. Some people have amassed fortunes doing it, while many many millions of others have gone broke trying.
Example: Bet your entire net worth on one pharmaceutical stock ahead of an FDA ruling.
One is a game you set up to not lose, the other is a one that might win, but will probably lose. Which one do you want to play?
For someone that understands that they're speculating, and has underwritten the risk, then speculating is ok. So long as that person realized that their investment will PROBABLY go to zero, and they don't need the money for some other legitimate reason.
For example: Suppose you're on track to meet all your financial goals and decide to carve off 5% of your investable assets to invest in crypto, or some penny stock where you had a hunch. If that 5% goes to zero and you're still ok, then go for it.
Just know it's no different than putting that 5% on a football team to win the Super Bowl. In other words, be responsible and understand your risk tolerance and capacity.
Unfortunately, that message is not very clear in advertisements for Robinhood.