Animal Spirits Podcast - Blog Post: Is Robinhood Good For Investors?

Episode Date: November 30, 2020

A few weeks ago on a Zoom conference call, Michael was asked "Is Robinhood good for investors?" In this episode, Michael shares how this question caused him to think more deeply about his answer.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Is Robin Hood good for investors? I was asked this question on a digital Zoom conference a few weeks ago. Below is a more refined version of my answer. Note that when I say Robin Hood, which I'll use from here on out, I mean any brokerage that gives you free trades and allows you to purchase fractional shares. New investors today are far more informed than younger investors of previous generations.

They have more information at their fingertips between YouTube, Twitter, and Substack than they could possibly hope to consume. Thanks to Robin Hood, they're able to put this knowledge to work. Robin Hood didn't lower the age at which you can open a brokerage account, but they did make it financially feasible. Five years ago, you needed to come up with $600 to buy one share of Amazon. And if you did have that $600, you had to pay $8 for that share, more than 1% of your purchase price. Thanks to fractional shares and zero commissions, now all you need is a couple of bucks to buy a piece of this company. If stock picking isn't your thing, you can all.

also buy ETFs with no minimums and no transaction fees. This is a huge win for new investors. Benjamin Franklin said, money makes money, and the money that makes money makes money. This is a perfect way to describe compound interest. Time is a fuel to compound interest fire. The early you start, the better off you'll be. To use a simple example, $100 growing at 6% a year from the time you're 18 to 65 would be worth 34% more than if you started five years later. Getting that snowball rolling early is a huge win for investors. Experiences can't be taught in the stock market. They have to be learned.

You cannot read what it feels like to lose 50% of your money. The only way to learn how to swim is to go in the water. And thanks to fractional shares and zero commissions, investors can go in with only a little money on the line. This is a huge win for investors. All right. So that's been my take on Robin Hood until now. And I still stand by the potential benefits of Robin Hood,

but I'm getting more and more concerned that there are plenty of downsides to free trading. Robin Hood feels like a casino. In a casino, you gamble. In a casino, the longer you gamble, the more likely you are to lose. The opposite is true in the stock market. The longer you play, the less likely you are to lose. But that depends, of course, on what game you're playing. And this is the issue.

I used to think that Robin Hood's casino-like nature was actually a good thing. If you lose for long enough, you will eventually get the gambling out of your system. I thought young investors would learn how hard the market is and that trying to beat it is a loser's game. I'm changing my opinion on this. Why? Your early experiences in the market mold what type of investor you're going to become. If your formative years teach you that the market is a giant casino, then it might be hard to shake that view later on.

Getting back to what I said earlier about younger investors being more informed, I have zero doubt that this is true, but I do doubt that this is actually helpful. Having a little bit of knowledge in the stock market is worse than not knowing anything at all. Terrible things happen to young, confident investors. We just haven't seen it yet because a bull market rewards risk-taking and disguises reckless behavior. Listen, I don't hope that young investors get crushed. I'm definitely not going to celebrate if or when they have their comeuppance. However, I worry that the longer the bull market goes on, the more ingrained this brazen behavior becomes.

This will be hard to unlearn as young people reach their peak earning years when real money is on the line. So, is Robin Hood good for investors? That's like asking our ETF good for investors. Which investors? Which ETFs? What does good mean? It's a question so broad that you can't possibly find the brush wide enough to paint it with. Robin Hood is neither good nor bad.

Some aspects of it are great. Others, not so much. Some people will take it too far. They'll learn the wrong lessons. They'll over trade. But is any of this unique to Robinhood? A small portion of investors has been blowing themselves up since the beginning of time. They did this before Robin Hood was here and they'll do

it long after it's gone. Few things are either good or bad.