For most average Americans (such as myself) the stock market is the only real shot for building massive wealth. Well, is Robinhood legit because I heard you can buy stocks there?
The likely ensuing meltdown in financial markets (induced by Dave Portnoy) will create an entire generation fundamentally scarred by bad advice. As Dave Portnoy famously said, “Investing is easy”!
Investing is Easy?
The following image is an actual headline from MarketWatch, which they conveniently changed at a later moment. Luckily, I was able to grab a screenshot before we lost the golden opportunity!
This “investor” is Dave Portnoy, also known as El Presidente, and the founder of Barstool Sports. Now, Portnoy is a genius when it comes to marketing and scaling a business, but he even admits he knows nothing about investing!
Claiming Warren Buffett is an idiot is an absurdly ridiculous statement; however, I think his entire shtick is to draw eyeballs with headline popping statements. I mean c’mon, that’s where the ad revenue comes from.
I won’t disagree that long-term, buy and hold investing is easy. In fact, I invest almost entirely in Vanguard S&P 500 index funds, and this requires literally zero work. I make one click and hold the investments forever.
Other investors elect the board of directors, who select the management teams that run the day-to-day operations. I merely collect my quarterly dividend payments as passive income. Seems easy enough.
Portnoy isn’t advocating this form of evidenced-based investing. He’s advocating flashy daytrades (the kind of investing where you can double your money in one day, or lose it all)!
How To Buy Stocks?
Upon Portnoy’s ludicrous claims, Google Trends noted searches for “how to buy stocks” hit an all-time high search volume. AND, it wasn’t even close!
This means that people who have never taken an accounting, finance, economics class, never read a 10-K or 10-Q, or learned how to invest believe RIGHT NOW is the absolute best time to begin investing!
There’s an old saying that the time to sell all your stocks is when your cab driver starts talking about their investment portfolio. The cab driver part may no longer be relevant, but I have experienced a similar epiphany.
I made a similar post on Linkedin on June 11. “I absolutely cannot make this stuff up. Within the past 36 hours I’ve had 4 different friends (who have never taken a business class in their life) ask me to help them start day trading because “it’s so easy to make money in the stock market”.
To say there isn’t euphoria or irrational exuberance right now in the stock market is a slap in the face to everyone’s intelligence!”
Now, I didn’t liquidate any of my investments, but on the following day, the Dow Jones fell 1,800 points. Safe to assume people only want to invest when things are going well. I haven’t received any texts since.
Guaranteed to Lose Money
“Day trading is defined as the purchase and sale of a security within a single trading day. The profit potential of day trading is perhaps one of the most debated and misunderstood topics on Wall Street.”
One of my favorite stories about day trading is from CNN Money, when they wrote an article called “The Day of The Day Trader” in 1999. Think of it as a modern “Day In The Life” series.
“Like most of the customers at Tradescape.com, Dan Ripoll is sick of reading stories criticizing his career of choice. “The people writing it don’t have any idea what we do,” he says. “This isn’t gambling.”
Ripoll quit Merrill Lynch’s market-maker training program a year and a half ago to day trade. The 25-year-old Los Angeles native recently allowed CNNfn.com to observe him on a typical work day.
He loves his job, he says, and is thinking about starting a course to teach others how to trade. With the right system and information, he says, trading is more of a science than a gamble. “Trading is all about being in the right stocks at the right time.”
See, we had Instagram Forex trading courses even back in 1999! In fact, thousands of white collar professionals quit their jobs to begin day trading during the Nasdaq Tech Bubble.
I urge you to have a conversation with any 22 year old college kid trading their summer internship money. You’ll quickly realize there is no strategy other than graphing support and resistance levels or candlestick charts.
Warren Buffett was spot-on when he said, “In the short-run, the market is a voting machine, but in the long-run it’s a weighing machine“.
Technical analysis and momentum matter in the short-term, but fundamentals are all that matter long-term. Things like earnings, corporate management, dividends, and profit margins will reign superior.
Please, just promise me one thing, okay? Stop using your stimulus check to speculate in the market! Sure, you might make a couple hundred one day, but you will most likely lose it all! If you’re that good at investing, why aren’t you already a billionaire?
Robinhood Sells Order Flow
Finally, the time for me to bash Robinhood! I personally believe Robinhood is extremely immoral, and it’s ironic they steal from the poor and give to the rich! Is Robinhood legit? NOPE!
Robinhood sells their order flow data to Citadel, which allows them to front-run retail investors. In fact, Robinhood has no legitimate way to make money because it’s a free service.
“Payment for order flow is the compensation and benefit a brokerage firm receives for directing orders to different parties for trade execution. The brokerage firm receives a small payment, usually a penny per share, as compensation for directing the order to different third parties.”
Robinhood can tell when millions of individual investors are looking to buy or sell with trading volume data. Then, they sell that data to high frequency traders, so they can profit off the price movements.
Zero Commission Trading
Any time I wanted something expensive as a child, my parents always made me front part of the cost. Why? Because they were correct that unless you have skin in the game, you won’t value any product appropriately.
Most people believe zero commissions are good for investors, but I hate it, believe it distorts markets, and has been a net negative for the overall market. Commissions keep people from speculating with constant trading.
For example, imagine you bought four shares of Coca Cola in 2005 for $120. Those shares would cost you $125 after including a $5 commission. Five years later the price of the shares increases to $130, so you sell!
Don’t forget another $5 commission, so you only have proceeds of $125. The end result is $10 in gains and $10 in commissions; thus, you made no money after expenses.
When investors are forced to pay commissions, they are subsequently forced to invest with a long-term mindset. Any idle speculation will be wildly unprofitable (and that’s before Uncle Scam takes his cut).
FWMD
Just like the atomic bombs dropped on Hiroshima and Nagosaki were nuclear weapons of mass destruction (WMD), ravaging towns and killing thousands. Derivatives are financial weapons of mass destruction (FWMD).
Financial derivatives have the potential to destroy financial markets, leaving billions to peril in the wreckage left behind. People forget the 2008 recession was only deep and systemic due to the widespread use of derivative instruments.
Warren Buffett beautifully stated, “Derivatives will force one party to do something painful.” The real question is can the counter-party actually follow through on the contract?
Here is a short list of the four most common derivative financial instruments. I would advise you to read more about them for background information.
- Call Options
- Put Options
- Forwards
- Futures
McDonald’s and The Farmer
“So, if derivative instruments are so systemically dangerous, why would anyone use them?” The classic case of McDonald’s and the local potato farmer should provide a sufficient explanation.
Potatoes are the key raw ingredient in making the famous McDonald’s french fries. Suppose 12 months from now, McDonalds is going to need 1,000 lbs of potatoes to fulfill their projected french fry demand.
For the sake of this example, assume the current market price of potatoes is $1 per pound. So, logically McDonald’s should set aside $1,000 for their potato purchase in 12 months right?
What if the price of potatoes rises to $2 per pound in 12 months, doubling the cost of McDonald’s french fry input cost? McDonald’s concern is “what if the price of potatoes rises?”. The farmer’s concern is “what if the price of potatoes fall?”
Both market participants have a vested interest in the price of potatoes, but one benefits if the price were to fall and the other would benefit by a rising potato market rate. The solution to this dilemma is a derivative contract.
McDonald’s and the potato farmer could agree that in 12 months, McDonald’s will pay $1.50 per pound of potatoes (regardless of the future price).
Who Wins?
Hypothetically 12 months from now, the current market price of potatoes rose to $2 per pound. The farmer grew 1,000 lbs of potatoes ($2,000 market value), but they must sell to McDonald’s for $1,500.
This derivative transaction results in the farmer being $500 worse off than had they not entered the contract; nevertheless, McDonald’s had a cost savings of $500.
On the contrary, suppose the current market price of potatoes stayed constant at $1 per pound. The farmer’s market value is only $1,000, but McDonald’s has to pay them $1,500.
Hopefully this scenario has showed you derivatives are strictly a zero-sum game. If one party makes $1, the counter-party has to subsequently lose $1. The sum of positive and negative returns must net to 0!
A derivative contract (by definition) must have a winner and a loser. If you’re smart and thinking ahead, one might ask, “What would happen if the potato farmer goes bankrupt?” That’s the $1M question!
Preventative Measures
The first time I ever visited Colorado, I starkly remember a billowing layer of black smoke, pilfering throughout the scenic Rocky Mountains. I asked my father why the mountains were on fire just like any young child would.
He told me this was a “controlled burn”? Controlled burn, what in the hell is that? Why would anyone start a fire on purpose (I mean other than an arsonist of course)?
He explained Rocky Mountain Forest Rangers start small fires to keep dry brush under control and prevent larger fires in the future. In effect, you are trading many manageable fires for a large out-of-control wildfire.
It’s the same reason Pacific Gas & Electric (PG&E) marvelously trims the brush from their power lines and ensures a safe power grid! Oh wait I forgot, that’s what they should’ve done. Their lack of prevention sparked two of the largest wildfires in human history.
Preventative measures are taken all across the natural world to keep potential disasters under control. Flood plains, avalanche control, and controlled burns are the best examples.
What’s the big deal? The big deal is our financial system is as dangerous as an avalanche or wildfire, and all the preventive systemic measures have been removed.
Problem With Prevention
There is an inherent problem with prevention. You can never see the counterfactual or how effective prevention tactics actually are.
Let’s take pandemic research for example. Imagine for the last 10 years, the CDC and WHO demanded $1 trillion to stop any pandemic from ever happening. For simplicity’s sake, let’s also assume they were successful.
Would anyone care? Hell no! Republicans would cry to cut their budget, so they could lower taxes. Democrats would divert the money to social welfare programs.
The problem is there is no true way to measure the success of prevention measures because the very success of the programs necessitates no counterfactual scenario to benchmark against!
Trading Options
Robinhood and Dave Portnoy are egging their users to up the leverage and take on options trading. Remember, options are a derivative, and a derivative forces one party to do something painful.
Options are a FWMD, and they should only be utilized by businesses with reasonable needs (like McDonald’s and the farmer) or sophisticated investors.
I personally am almost never an advocate of more regulation, but you can’t let everyone call themselves a doctor and provide surgery. Options should be reserved for those who know the risks, not a 10 year old on Reddit.
Robinhood allows users the ability to sell options with “level 2” access. Ooh, level 2, that sounds difficult to reach. Ehh, not really, just look at the image below. All you need is $50 and a beating heart.
The fact we have 10 year olds trading FWMD is outrageous and poses a massive systemic risk. This would be like putting tinder, dry leaves, and lighter fluid right next to a forest and smoldering cigarette.
It’s an absolute disaster waiting to happen.
Is Robinhood Legit?
Well, is Robinhood legit? If by legit you mean immoral and stealing data and order flow from retail investors, then no. You can trade stocks and options, but I would recommend a more legit platform (Vanguard or Charles Schwab).
The likely ensuing meltdown in financial markets will create an entire generation fundamentally scarred by bad advice. As Dave Portnoy famously said, “Investing is easy”! Yeah, right.
