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.
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