The brokerage firm Robinhood has been a pioneer, creating some of the biggest changes to the Financial Industry since Charles Schwab enabled the everyday investor to gain access to the stock market through low cost commissions in 1974. Robinhood makes it feasible for someone to start buying stocks with $10’s of dollars instead of $10’s of thousands of dollars. Zero commission trading, Robinhood was the first, and because of this, millions of millennial and Gen Z investors opened an account and started to buy stocks. This is great, Wall Street came to Main Street.
Financial pundits have long ridiculed Robinhood—and the investors who use the platform—for being, “dumb money.” If you tune into CNBC for more than five minutes, you’ll hear a “pro” mock what people on Robinhood are buying. However, Robinhood traders have been crushing the so-called, “Smart money” professionals over the past several months. Robinhooders are living by the notion that, “Stocks only go up”(Dave Portnoy). Financial advisors who mock them seem to forget that they tell clients, “If history is any guide, every dip and market crash has been a great buying opportunity.” Isn’t that saying that stocks “only go up”? I will not mock any new investor, whether they use Robinhood or any other brokerage firm. I am thrilled that they are getting to experience investing with their own money in real time. Undoubtedly, they will learn many important lessons.
My word of warning comes from my own experience during my first year buying stocks. When I started, I was 19, and my portfolio outperformed the S&P 500 index quite handily. Over the first 12 months, I made 36% on my money while the S&P managed ~25%. I was flying high, I had a knack for the stock market, or so I thought. I took that confidence and started to buy options. I bought options because the lure of earning 100%-1000% on my “investments” in a period of days and weeks was too appealing to turn down. Well, I found out the hard way that options suck. In the first twelve months trading options I lost at least $2,500. At the same time, my normal portfolio blew up. I was taking enormous amounts of risk. I sold Amazon at $1,100 per share because I didn’t think it would grow fast enough. I’ll let you look up the current share price yourself. I saw all of my gains evaporate and more as the stock market experienced a minor correction.
I learned so much through that experience. I learned to manage risk and to stay away from exotic products and I just about ditched options for good. Learning by experience did wonders for me, and because of it, my account wasn’t decimated during the COVID crash of 2020. The beauty is, I learned my lesson with relatively small amounts of money, and to all of you who are new to investing, you will learn through your successes and failures.
That being said, please stop using Robinhood altogether! Commission-free trading once made Robinhood unique. Today, Charles Schwab, Fidelity, E*TRADE and others offer the same thing. They also all kept the lights on during the 2008 financial crisis, so they can weather the storm. Robinhood experienced multiple black outs (The site went black, users weren’t able to see or access their accounts) in March, which was the most volatile month in the stock market’s history. So, in the mix of the craziest time in the stock market’s history, Robinhood investors may not have had access to their money. These other firms are not perfect, but they are a much, much better alternative if you want to make money, in my opinion.
Robinhood’s biggest appeal to me as a consumer was its ease of use. Too easy. Robinhood makes it incredibly easy to begin buying stocks on credit. Some of my friends talk about how simple it is to get extra “buying power.” What they don’t understand is that they are actually taking out a margin loan. Basically, buying stocks using a margin loan is like buying them with a credit card. I think we can all agree that this isn’t a good idea. The worst part of using margin is that it exposes you to more risk. One young trader, 20-year-old Alexander, saw his once ~$20,000 account show a negative balance of $730,000! Then the unthinkable happened. In his shock and desperation, he took his own life.
Alexander’s story makes me sick. Options are complex and not easy to understand. Maybe the most tragic part is that the negative cash balance was essentially a glitch. If you can’t explain it simply to a friend or a middle school math class, then you probably shouldn’t buy it.
Bottom line: Keep learning, keep trading, but leave options, margin, and exotic products at the door, because they are just a about a surefire way to guarantee that you lose money.
Sources:
https://www.aboutschwab.com/charles-schwab
https://dailyalts.com/fintech-robinhoods-outages-on-two-historic-trading-days-lawsuits-emerge/
Nate Tomkiewicz is a CRPC®, Financial Advisor at Berkshire Money Management. Nate’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Nate at email hidden; JavaScript is required.
Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience.Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. Diversification does not eliminate the risk of market loss an A long-term investment approach cannot guarantee a profit.This communication may include opinions and forward-looking statements. All statements other than statements of historical fact are opinions and/or forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the beliefs and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such beliefs and expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements. All expressions of opinion are subject to change. You are cautioned not to place undue reliance on these forward-looking statements. Any dated information is published as of its date only. Dated and forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any dated or forward-looking statements.Historical performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss of income and/or principal to the investor.This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in this communication is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational and illustrative purposes.Any references to outside data, opinions or content are listed for informational purposes only and have not been verified for accuracy by the Adviser. Third-party views, opinions or forecasts do not necessarily reflect those of the Adviser or its employees.Adviser does not endorse the statements, services or performance of any third-party author or vendor cited.