The Canadian Investor - Revisiting the Gamestop Mania

Episode Date: October 10, 2022

Following the recent release of the Netflix docuseries on eat the rich, the Gamestop saga, we decided to give our thoughts and takeaways following what happened with GME in 2020 and 2021. The investing world saw retail investors team up together and inflict major losses to hedge funds. More than a year later, we look back at what happened and how r/wallstreetbets managed to pull off that epic short squeeze. We also take a look at Robinhood and how it has fared since its IPO. Tickers of stocks discussed: HOOD, GME Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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The reason we're doing this is because there was a new documentary that came out on Netflix kind of highlighting the events. And you and I were texting back and forth. Well, one, we love these kind of documentaries and two, let's revisit this because this is one of the most iconic events in the history of the stock market. And it's been almost two years since its events, which seems kind of nuts. So let's do it, man. Yeah. It feels like it happened yesterday, but yeah, it's been, it was what, early 2021 when it really kind of got out of hand and January 2021. Yeah. So it's been, no, it was crazy. It was kind of good to get a refresher on it. I had forgotten a little bit about like all the intricacies of what happened, but as I was watching it, I was like, oh yeah, that's right. All of that happened. Yeah. And the. I mean, we're not going to go into every detail here, but let's kind of recap before

you have your kind of takeaways, which I think are very good. I'll do a little bit of a recap of what happened from the mania from the start and how this story really starts before anyone knew about the mania and GameStop being the most searched up thing in the world for a brief period of time. There were a group of very smart, actual sophisticated value investors like CFAs. I even remember hearing a podcast about this exact thesis in early 2020, maybe even late 2019, because GameStop, ticker GME, was one of the most unloved deep value territory businesses available on the US market. Like hard stop blanket statement, one of the most unloved and objectively cheap on evaluation multiples businesses you could find in the world. And so, at the time, before this blew up, the stock had a total market cap

of around $275 million. So, this was a very small cap stock, yet a business that everyone knew. You ask someone, what did you say? This is fair to say. If you ask someone what GameStop is at the time, everyone knew what it is. Like, maybe the most outsized thing for a $275 million market cap. Yeah, yeah. Does that make sense? Yeah, it was well known. And I mean, the premise against GameStop was really easy.

And that's what I found funny about the documentary. It's like, they make these hedge funds sound like freaking geniuses. And it's like, well, I mean, yeah, it's kind of clear that it's going downhill. Yeah. Exactly. And $275 million in market cap in 2020, the year, so before this all happened, the company did $6.5 billion in sales and like $8 billion in sales the year before. Based on those numbers and just qualitatively, the business was in total, total structural decline. That's why it was such an easy short. Everyone was piling in. It had 100% short interest. A lot of these hedge funds are running, that's why they're called hedge funds. They're running long, short strategies.

So they're long some stocks and short some stocks as well. And they were short, just like the most obvious decline of businesses and GameStop fit into that category with just no catalyst for a real turnaround that was visible, right? So it was a very easy thesis. It was, it's blockbuster for video games. Their customers can now just start downloading them off the internet. The same way Netflix removed blockbuster's relevance by streaming it over the top on the internet and not having to go into these brick and mortar locations and rent the title, rent the DVD, rent the Blu-ray.

Well, I feel old just talking about this. Dude, side note here, I don't have a video game console anymore, although I kind of want one. Remember how you could just go to Blockbuster and rent the video games? Oh yeah, I remember that. That was the best. Yeah, I remember that. I would go with my parents and they'd rent a movie for the family. And then I'd rent a video game at the same time. Yeah. Same. Okay, so the reason that was awesome was because now video games are so expensive.

What's it cost for a game now? 80 bucks? 90 bucks? Yes. I mean, I feel like the prices have not gone up that much. Because I remember when I was a kid and we'd go to like Costco and I think it was back in the day. I remember like looking at one point for Command and Conquer Red Alert, like the first one. And I remember it being like $50 or $60 back then.

And I was probably 9 or 10 years old. So the prices actually haven't gone up all that much compared to what they used to be. actually haven't gone up all that much compared to what they used to be. But if you factor in the fact that they're not making physical boxes, a lot of digital downloads, then yes, definitely, you know, prices have gone up a bit. But yeah, it's never been cheap. It's just back in the day, you had different options, I guess, to rent it. Obviously not PC, but consoles. That's right. Yeah. So I'm looking here. It's $90, $89.99 for a new game. Okay. If you're playing a single-player game, I'm going to beat it in a couple of weeks. I just want to rent it and drop it back off at Blockbuster. We digress. This is what's happening. Falling sales for GameStop year over year, quarter over quarter,

and deteriorating profitability, store closures left, right, and center. Where does it fit in the video game ecosystem when people just no longer need to visit a physical store? They can just download it right onto their console. And so, there were very smart, sophisticated investors, CFA types, it was like deep effing value who is a very important character in this story, who recognized that the stock had what, 140% short interest, was it? Yeah, yeah, over 100%. Basically, it is when someone who shorts the stock, basically, those shares that are being borrowed, they are borrowed to someone else. Borrowed again.

Yeah. Exactly. You have that domino effect, which can really create a lot of pain when there's a short squeeze. Exactly. So it's a bit of house of cards. If there is any catalyst for the stock to have some positive momentum or some sort of turnaround, some sort of good news story, the stock, if it had that, would go parabolic because these hedge funds would have to cover their short position. But these smarts of actual sophisticated, smart CFA type investors who were early on this, they knew full well that a catalyst for this company to turn around or get some positive momentum was very unlikely. The likelihood of that happening, they were probably projecting to be quite low. What is the turnaround story? low, right? Like what is the turnaround story, right? And so, I think part of that was kind of like enter Ryan Cohen with the Chewy.com founder. And so, there was-

He's a Canadian, by the way. He is Canadian. Deep F-ing value is? No, Ryan Cohen. Oh, Ryan Cohen is? Is he really? Yeah, I Googled him and he's Canadian. Canadian entrepreneur. Yeah. He looks like a Vancouver guy, just the way he looks. Where is he from? It could be.

No, in Montreal. Oh. The other side of Canada. Yeah, he's not bad looking. He's a handsome lad, a couple of billions too, I think. Anyway, so there was enough of a catalyst to get some Momo the other way on just this like deteriorating business. As a short squeeze works, it starts to really work when there's over 100% short interest.

It's like every hedge fund is scrambling all hands on deck to cover their position. Then it's like they can't keep waiting it out because they can literally blow up and some of them did. Enter Wall Street Bets, which is a group of retail investors on Reddit. They're willing and ready to gamble on the good old stock market casino. They all decide, hey, let's pile into GameStop. Let's screw over these hedge funds who are in this heavily short stock and get annihilated. And while you're listening to this, a lot of you know the story here. A lot of people were very into this gripping investing story because we're all nerds and we care about this stuff. But this is entertaining to kind of rehash it. And I enjoyed watching the documentary because it was a bit of nostalgia, even though it's only

like what, a year and a half ago. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself,

I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started.

But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. So they all decided on Wall Street Bets, let's pile into GameStop, let's screw over these hedge funds. These hedge funds are going to get annihilated and we're going to love it. Let's stick it to the man, right? And they were right. Their thesis was correct. The stock went nuclear. It was up over 8,000%. There was an actual squeeze. The volume was nuts. Every time you refresh the price, it would be changing like $30, like a second. Do you remember just like

that, those few days where it was like, you'd wake up and you're like, what is going to happen with this stock? Yeah. And maybe a quick refresher. I don't think we really mentioned it. I know we have some new listeners pretty often. So when you short, you're basically taking a stock, you're like borrowing a stock. So you think it's going to go down. So let's say a share is $100. You borrow it from someone and then with the hopes that it'll go lower so you can buy it back. So say it goes down to 50, you buy it back, you give back that share to that someone else and you pocket the different in between. The problem with shorting is that in theory, your losses can be infinite, whereas your gains, you know, essentially are capped.

So, in this instance, we saw what can happen in terms of losses if there's an almost infinite kind of, you know, the stock goes up. That's right. Yeah. Thanks for that. And please jump in because I'm just kind of hashing out the story off memory. And it's somewhat fresh after watching the doc. Yeah. Yeah. Okay. So Wall Street Pets piles in the right, stock goes nuclear, hedge funds, like the most famous one in this story is Melvin Capital. They scramble, it was Gabe Plotkin, right? That's his name. Gabe Plotkin, he runs the fund. He's had dramatic success since it started and he's run this long-short strategy

under Melvin Capital with roaring success, well-respected in the industry, has a bunch of outside investment from Citadel. He's one of the top dogs in the game. The fund lost 50% of the fund like almost overnight, seemingly overnight. And they actually closed their doors for good this year. I didn't really realize that. I think I heard, but- Yeah, they unwinded the fund. I think last year they had losses of 50%, which is kind of mind-boggling when you could throw basically, you know, just money into any kind of stock if you weren't shorting it and make money. That's why, like, it did not look good for them.

In a year where people were having, like, 20%, 30%, 40%, 50% returns, minus 50%, you got to work hard at it. Yeah, didn't Google go up 70% in 2021? Yeah, everything was up last year, right? 70% for a trillion dollar company and you lost 50? Oh, yeah. Exactly. That's pretty – the SPY finished up over 20% last year. Easy. Easy. Okay. So, yeah, that's a good point because it was really hard to lose money last year.

Oh, yeah. You could invest in terrible companies and still make money, basically. Yeah. Yeah. Only bears lost money short and stuff. Okay. So, the Robinhood fiasco here is there's this free trading app that many of you know, all of retail, mostly in the US, was using it to pile into GameStonk. And they removed the buy button at the peak of its price. This is the most actively traded stock on the planet. And all of a sudden, they remove artificially demand for it by removing the buy button on the app. Like absolute scumbags. The stock plunges. And cue the witch hunt with Robinhood and their CEO scumbag Vlad Tenev, who by the way, started going on all these podcasts like thinking he's all cool after this, like he's some like celebrity.

And dude, most punchable face ever of all time, Vlad Tenev. Now, I'll leave it here. The details, the characters, the legal implications, the plot gaps, I'm not doing here. You can watch the three part series. But look, this is a David versus Goliath type story and it's coming up on two years, one of the most iconic stock market events in history. It's highly entertaining and it's a collection of wonderful reminders. And let's go through those. Yeah. Yeah. And I guess the last thing I'll add here is, you know, people may think,

okay, what's the big deal? People can still sell. But if you remove the buy button, basically it only creates, you know, selling pressure. That's what happens, right? You don't have any more buy pressure. And, you know, Robinhood, you know, I think you'll go over it, but they had 22 million users last year, a bit less than 23. So I would say it was always one of the most popular stocks, GME. So you can think that all those retail investors that can no longer bid up the price, obviously, it's going to make a big difference in the price of GameStop and the movie goes over that base, like essentially what happened once that buy button was no longer there. It's unbelievable that that happened. And then, you know, there's all the conspiracies come out, like, you know, there's payment for order flow. So, you know, was this a discussion with Citadel?

And then you basically realized that they had a liquidity problem at Robinhood. Yeah. And so, they went to save their a liquidity problem at Robinhood. Yeah. And so they went to save their own butts at the expense of their users. Yeah. Yeah, pretty much. Yeah. And I know a lot of people have switched and their user growth has pretty much stalled since then.

I'm going to go over Robinhood's fundamentals since the event after this. It's pretty drastic. Pretty bad. Yeah. So for me, there's a few takeaways here. It was pretty entertaining to watch. I actually rewatched this because the first time I was cooking while I was, you know, listening to it.

What were you making? It was one of those, you know, meal kits. Oh, you were using those? Yeah, we got a bunch. Those meal kits. Yeah, and we got a bunch. And with a newborn, you know, I've been cooking a lot. It was kind of nice to just have something where I didn't have to think too much. We need to get those meal kits sponsoring the

podcast again, like they were last year, because I miss getting those delivered to the house. Yeah. So people gave us some gift cards for them. So that's why we've been using them. So main takeaways here, obviously gamification of investing of the stock market by Robinhood. Obviously, gamification of investing of the stock market by Robinhood. We've seen that also in Canada with Wealthsimple, I think a little bit. Maybe not to the same extent, but people are getting free shares as they join. And you see one character who's actually in the movie. He's a, I guess, self-proclaimed professional gambler.

I'll just say that. That guy is hilarious. Oh, I would love to play poker againstler. I'll just say that. That guy is hilarious. Oh, I would love to play poker against him. I'll just say that. But basically he said when things locked down, he went to Robinhood to gamble because he could do it from home. Obviously, there's online gambling sites, but online gambling sites oftentimes will have limits. And for investing, usually there's not much of a limit. So you can pretty much invest how you want. And he was saying for him, it was just a way for him to gamble and not having the restrictions. Especially in a bull like that, where gambling on tickers becomes really easy when almost anything goes up. And spoiler alert, this guy pretty much lost

everything. That's what he was saying, right? Showing his app from like half a million dollars all the way down to $5. It's crazy. I'm like – I was actually shocked. I see people post those like kind of like crazy losses on WallStreetBets. But actually just seeing him kind of like navigate on the app all the way down to $5, like that – my heart – like my stomach dropped watching that. Yeah. Yeah, exactly. The second thing that comes to mind here is, you know, the excesses of investing, especially we saw that a lot with growth stocks last year, but it was just, you know, low interest rates, a lot of money in the economy, people just wanting to spend oftentimes they

couldn't spend on, you know, if they wanted to buy a car or something like that. They just, you know, couldn't because there was no availability. So being able to invest the money or gamble on stocks was an easy alternative. And if you look, I actually pulled some, went into the U.S. government website for the COVID-19 stimulus checks for individuals. And what's interesting here is that individuals making under $75,000 or families under $150,000 in the U.S., they got several what they were called economic impact payments. In Canada, you had to have lost your job, right?

So you weren't getting these necessarily. But then in the U.S., it was pretty much everyone that met that criteria. Exactly. So it may not sound like huge amounts, but then when you have millions of people using that to invest, it makes a big difference. And if you look at when the checks went out, there's a pretty close correlation with GME kind of picking up. I was having a fun look at that. So $1,200 in April 2020, $600 in December 2020 slash January 2021, and $1,400 in March 2021. So especially the last two here, you kind of see

that correlation with the price of GME. So people were definitely, you know, I think it's not a stretch to say that people were using that money to gamble on the stock market. The correlation is actually almost spot on to the movement. Yeah, it's very close. If you're ever wondering, do these checks provide a real stimulus? Stock market is not the economy, but it sure stimulated the stock market. It was a case study on does this work? It's now a case study on what are the impacts of it two years down the line

and we've seen that with such inflationary pressure. Yeah, and the other thing I've heard before and I saw again in this movie is a lot of millennials and Gen Z are feeling they just can't achieve the same goal as their parents, for example, home ownership without taking huge risks. And I listened to a podcast, I think it was a year ago, with someone who became a Dogecoin millionaire

after Elon tweeted about it. And that person said the same thing. How am I supposed to buy a house unless I'm able to take these big bets and get lucky? And you heard that more than once in that documentary. So is that a symptom of something bigger that needs to be fixed? Probably. But that was really interesting to see that generation kind of mentioning that. And the other thing is just be careful when everyone is talking about something, you know, the cab driver, like what you mentioned, or your parents, when it becomes really mainstream, you know, be careful, because there's a lot of cases, the cab driver, like what you mentioned, or your parents, when it becomes really mainstream, you know, be careful, because there's a lot of cases, every single one, I think in that documentary, who said they saw it on the news, or their parents were talking about it, or something

like that, they lost money. That's because at that point, the jig was up. I mean, they bought fairly high, and there was not much more money to be made. The other thing is, my God, does Elon have sway on people. That's crazy. Like just a tweet of Elon can move, you know, markets like, I don't know who else really. Maybe the only other person who's not tweeting that can move markets like that is Jerome. Good old Jerome Powell. Yeah. Yeah. Yeah. You'd hope Jerome would have a lot of impact. And then you have this billionaire who piled on, there was already so much forward momentum and everyone had already knew what GameStop was. It was surging to like 150 bucks. And then Elon tweets like- GameStomp. That's it.

GameStomp or something. Yeah, it was a GameStomp. I think it was just That's it. Game stonk or something. Was it game stonk? I think it was just game stonk. Yeah, that was the tweet. And it went to like 350 from 150 in like an hour of trading. Yeah. And let's say too, like it does kind of raise some questions because Elon had been very outspoken against short sellers. He has been a whole lot. He's been saying like

short sellers against Tesla. Because Tesla always has so much short interest. Exactly. And you have to kind of, I don't know, like, I think, you know, Elon is smart. So I think he knows what he's doing most of the time. He may say he's just tweeting or speaking his mind. But, you know, I feel like there could have been some Elon trying to stick it to some hedge funds over there. 100%. Remember Tesla was selling those short shorts? Yeah, I remember. And it was a dunk on short sellers because short sellers have lost an obscene amounts of money shorting Tesla over the years. People were heavily, heavily shorting the stock at like

$250 billion market cap thinking there's no way they're going to get smoked by competition. They're hardly delivering any cars, which was true at $250 billion market cap. I mean, they've had impressive execution and it's still 700. What is Tesla market cap today? It's still 700. Yeah, it's up there. The resilience of this stock is mind-blowing. I have to say. It's the aura of Elon. I think that's the only way to say it. And then the last two here is- Sorry to interrupt. Did GameStop do a stock split? Yeah, they did. Yeah.

Because I'm looking here and it's like the peak showing the price is 80 bucks, but that was like closer to 400 or something, right? Yeah. They did a stock split. Yeah. I remember it was a while back. Yeah. And then the last two things here, you know, edge funds and investment pros have some powerful trading tools. I never really looked into that, but that Bloomberg terminal, holy crap, it's something else. It's like real time, you know, data that's been validated. For traders, yeah. For traders. Like, I think there are some traders that make money. I think you can,

you know, pretty consistently. But those who do, they have these powerful tools. I mean, their licenses. And algos that are going to be able to act way faster than you. Exactly. And, you know, they're paying the blueprint terminal. It's 20,000 US plus per license. I had a look. I was just kind of interested.

You know, it looks amazing if you're a trader. But first of all, like who can afford that if they're not professional investors? No one. No retail investor. I mean, some, but yeah. And those tools are incredibly powerful for traders, of course. And so, the people up against them are traders. The people in this story doing GameStop are traders. They're not investors. And what we've always said is, like the company that I've built with Stratosphere.io, the fundamentals data has become really democratized.

I've built something that can give fundamentals data for long-term investors, basically have no issue. There's no advantage for professionals anymore with fundamentals data. But with trading data, I think that there's still a huge gap. These people in this story are traders, not long-term investors. So we always say it's such a good time to be a long-term investor because look how democratized fundamentals data has become. You don't need a Bloomberg. But we're not talking about that same game here, right?

This is completely different. Yeah. And I think the last thing here, and they mentioned that a few times, is their models had not factored in the probability, even though ever so slightly, of a wave of retail investors coming in and creating this unprecedented demand. Unprecedented. Man, thankfully we don't have to hear that word all the time. Remember in 2020, everyone thought they were so smart using the word unprecedented on every Zoom call. Yeah. And, you know, they had not factored that in.

And I think now what they really have to be careful on Wall Street, but first, you can guarantee the hedge funds are on there. That's the first thing. They are keeping an eye on that. And second, I mean, they're not going to get fooled against with this. Their models will incorporate that chance, ever so small it might be. They will incorporate it in terms of a potential risk. So maybe there's something else, another kind of miniscule chance that retail investors could use against hedge funds that they haven't factored in.

But this one, I'd be careful because I think they will. I mean, they're smart people. They'll have learned their lesson, I'm sure. It's a bit of a fool me once. How do we make sure this never happens again? Right. And so I think that they will hopefully learn that they can't have that kind of level of short interest because there is now an army of people who are ready to screen for companies with this level of short interest and blow you up and blow your fund up and make a bunch of money in the process. So I actually think that the main outcome out of this is a little bit more healthy market dynamics. You could make that claim, right? Yeah. Yeah. And I think probably another thing it made people realize is it's not all bad to pay a small fee for trades because it will probably make you less likely to trade, to do

some day trading on the one hand. And second, for the most part, if they're charging you for trades, then they're not using that order flow model. Payment for order flow. Yeah, exactly. So which can happen, like we saw with Robinhood where Citadel had some skin in the game with Melvin Capital. And who knows really what happened there behind the scene, whether it was a liquidity problem for sure, or a combination of liquidity and Citadel and saying like, well, we'll help you out if you kind of, you know, remove that buy button. As do it yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online

broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com.

Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Let's actually use that payment for order flow

discussion as a good transition to Robinhood and how their business has been affected by this. Robinhood and how their business has been affected by this. There's a bit of a mix of factors. It's the fact that those day traders have been washed out and realized you can't just buy anything and it goes up. Huge churn from users after getting stabbed in the back during this GameStop mania, them removing the buy button to save their own butts because of their liquidity problem and basically screwing the people who were piling into this stock. I mean, a lot of people are going to lose money regardless, but this was not right is the only way I can put it. Remember the argument that Vlad said about like, well, how is it bad?

We prevented people from buying at the peak. I'm like, oh my God, are you really saying this? He has no social awareness, this guy. I'm telling you, like most punchable face, worst guy ever, going on these podcasts thinking like, I'm going to have this campaign where people are going to like me again if I just go on all these shows, go on all these YouTube channels. And all he did was make it so much worse. Like, do you not realize like people know the basics of, you know, offer and demand? Like, you know, if you remove the demand, you know, and there's only self-pressure, like clearly it's going to go down. Clearly it's going to be the peak. Like it's just, yeah, it was the dumbest argument you could make and would probably – I'm sure angered people even more.

Yeah, he went on that like Chamath podcast and David Sachs was like just like calling him out. Like I love that because the guy – you know when the guest goes on like the podcast and everyone just gives them like a bunch of layups so that they sound like really smart? And they're like, you're the worst guy ever. They're like, of course, the stock was going to crater. You artificially removed demand on the largest trading platform for the most actively traded business. So yeah, most punchable face come back. All right. Let's talk about the business, right? I got to say, I mean, you can hear my sentiment now, but I've been actively rooting against them. I want to see their demise because what they did was highly unethical, highly questionable.

And it does make you wonder what they were telling the truth about, especially under oath with the US government. That was pretty wild to see. You can see the Citadel guy, what's Ken Griffin? Anyways, he's just reading off a script the whole time and you can tell. The camera, the Zoom call is here and he's looking way up at a teleprompter, eight feet above the screen. Robinhood stock is down 80% since its peak, which its peak was basically immediately after the IPO. The IPO right in the summer of 2021. After the mania had settled down and their customers had basically turned on them, rightfully so, they IPO-ed after that. Scumbag Vlad Tenev gets to go ring the bell, do the whole thing with an IPO.

Very exciting. I'm sure, you know, effort every entrepreneur's goal to ever do that. It's a big day for them. But they knew in the back of their minds, this ain't right, man. And as they say in Silicon Valley, if the product is free, you are the product. It is the most classic business model that was really pioneered around free usage in the early internet days where it's free to sign on to this platform and you become the product. Your eyeballs are monetizable via advertising and whatever else they want to do. and whatever else they want to do. Their users learn really quickly what payment for order flow is and how ironic the concept of Robinhood is. Robinhood was named Robinhood because the character Robinhood steals from the rich and gives to the poor. This was a giant rug pull because Robinhood was their actual customer. Their actual revenue was derived from payment for order flow. Now, you just mentioned this something, which I think is actually

important, which is having a commission for trading stock, even if it's a couple of bucks, will make you think twice about just going in and out of stuff. And so, payment for order flow is actually banned in Canada. And that's why you see commissions here regularly. Yeah. And the ones that do offer some free trades, they'll usually be fees on other things. So, options tradings, I know National Bank- Currency conversions, they make some money there. Currency conversion. And the other US brokers that are free for most trades, that's what they do. Like TD Ameritrade, as you were talking, I was kind of looking that up.

That's how they make their fees. So, you know, they'll take a spread if you convert foreign currency, options trading and stuff like that. So, I mean, I'm not a fan of Robinhood either. I will give them that. They definitely push the fees down for those, you know, self-directed investing platforms. So as they did it, the other platforms had to follow. I still don't like the way they did it and I don't like a bunch of other things, but I will give them that. That's a good thing for self-directed investors. Yeah. Yeah, exactly.

Across the industry, of course. I didn't like the way they did it. They created a race to zero, whether that's for better or for worse with commission price. Okay, so let's get into Robinhood business since it's IPO. Their users learned really quickly after. They may not have known what payment forwarder flow is when they signed on to Robinhood, but this iconic event drew the education towards how Robinhood actually makes money, and it is payment for order flow. Now, I pulled up a graph here. You can see here on the doxima, which is their quarterly, is the data visualization for their revenue on stratosphere.io

for quarterly revenue on their last 10 quarters. You can see it peaks basically at their IPO. They thought, if you black out the right half of this graph, you're like, this looks like a great time to IPO. Everything is looking good. Revenue is going up and up and up and up. Markets are hot right now. IPO is summer of 2021. Let's do it. Since that, since their second quarter in 2021, huge drop off into the third quarter, 35% down on revenue. It's been sequentially down. Each quarter over quarter, you've had sequential revenue decreases. Total so, total absolute dollar amount. And as you know, if you have some high flying new sexy tech IPO, and you have absolute dollar amount decreases in sales, what has happened to those stocks since, Simon? Just generally, what would you say? What would you

say to high flying tech stocks in 2021 that since have had absolute dollar amount negative revenue, like decreases in their total sales quarter over quarter? I mean, even though ones that are growing have been crushed because for the most part, they're not profitable. But the ones that are not growing or slowing growth or even obviously declining revenues, they've got crushed, completely crushed. I mean, I think an easy one is Peloton, right? Yeah. Yeah. That's a good one. Decimated. So, Robinhood stock is down 80% since their little peak after their hot IPO. Now, I pulled up here operating income. They were profitable from an operating income perspective right up until the quarter after this fiasco in their results.

And so, their free cash flow negative today. Their last few quarters were pretty rough, man. Here's their latest. So, I just pulled a screenshot here from the press release of their latest quarter, which I think was Q2 2022. Total net revenues. Here's, you know, we've been talking about this a lot. Here is when you know a company is trying to tell you something, is when they tell you what their revenue was on a sequential basis, if it's positive, because you know the comp. The comp is down 35%, but they're not going to write the first thing in their press release, total revenue down 35%.

They talked about their sequential revenue increase of 6% from last quarter. Yeah. Red flag. Yeah, I've been harping on that a lot recently, but you can really gauge how a company is doing just by an earnings release, the information that they put or forget to put in there. I think a better way would have been to, okay, you want to put sequential, sure, but also put the year over year. I think that's more transparent. Okay, you want to highlight the good? Sure, have at it, but also put

the year over year, which is not good. But we've seen that with the marijuana industry. It's like all over the place. They'll do this kind of stuff. Well said. It's like highlight the good, but don't try to fool me because I'm not going to be fooled by that. So, transaction-based revenues decrease 7% sequentially. Look at option volume get decimated, equity volume decimated. Now, here's the really concerning number. I'm going to pull it from down here in the bottom of the press release. To me, this is the scariest number. Monthly active users decreased by 1.9 million users sequentially. So in a three-month span to their base now to 14 million. So almost 2 million of the 14 million users churned last quarter.

That's brutal. That's terrible. I don't know. What else do you – what other adjective can you come up with than that is just garbage? Yeah. And the one underneath the assets under custody decreased 31% sequentially. Yeah. They're like primarily driven by lower market asset valuation. I guess that's true. I'm not sure when this came out and when this quarter ended for them. So I guess it depends on the timing, but I don't think, you know, the S&P decreased by that much.

But granted, some of their users may be in riskier assets. Yeah. But that's also not something that's, yeah, I mean, it's not good to see a 31% decrease there. Yeah. That's, oh, man. Yeah, I mean, you monetize the user base, right? With paying for the flow and the user base is just churning and you have the worst rep. No one's eager to sign up. So MAUs were down 35% since the second quarter of 2021 and they keep trending down.

So it's pretty bad. They turn their back on their customers and their customers left and they left quite easily. So I think that there's a takeaway here, which is for this business, for the brokerage business, there's a bunch of them. There's a lot of them in the US and some of them are actually pretty good businesses like Allied and Schwab. I think they're really good businesses, especially Allied. I think it's one of the better businesses there. Now, switching costs, I'll describe this. the better businesses there. Now, switching costs, I'll describe this. I'm curious what you think about this because you and I have both switched

brokerages in our investing career. I've done it once. Have you done it more than once? No, I've done it once. Yeah. Just once. Okay. Switching costs can be annoying. It was annoying, but it's not the end of the world. I wouldn't consider it a real pain point because they do their best to try to win business and make it as easy as you can to switch it. Now, there are still some supreme annoyances from doing this, but the switching cost is not enough for people to not switch if they want to. I don't believe that's very durable. I don't know what the mode is really here. And

pricing power obviously does not exist. So I'm curious to hear your thoughts on the durability of this business model. Oh, I've always been pretty kind of outspoken against it, whether it's them or even a Coinbase, because they are into crypto as well now. Robinhood, I don't know. I find exchanges, it's always a bit tricky because it's a bit of a race to the bottom in terms of fees that we've definitely seen with stocks here. And I'm going to disagree with you and say that they haven't lost their customers because technically their customers are not their users. They are- True, yeah. Yes, those payments for order flows. So I would say their users are probably more their product

than anything when you think about it. It's kind of weird, but it's true, right? Like a Facebook, you're almost – it's free, but at the end of the day, you're kind of the product and their customers are the advertisers. So that's just – I was kind of just teasing you, but it's kind of another way to look at it because it is true. They get their revenue not from the users. So, yeah. Well, they're getting payment for order flow from those users, right? Yeah.

Yeah, I guess. Well, wouldn't the hedge fund be the one paying? Chicken and the egg. Yeah. Yeah. You know, the hedge funds are the ones actually, you know, paying them. Yeah, that small fee. Yeah, exactly.

They're paying them for the value brought to them of payment of order flow from the users yeah no it's true it's true but yeah it's just so different from a traditional business model where the users actually pay that fee up front yeah that's right compared to like here in canada and the uk and wherever else it's banned where payment for order flow is banned. This is why you see commissions here, generally speaking, because of that, because the business model doesn't work the same way as it could for Robinhood with the regulations in the US. It just goes back to show here that the switching costs are not high, and you bring up Coinbase, which is a very similar comp,

but they're doing just crypto. They're an exchange. What is the durability and what is the real power that Coinbase may have? It might be reputation, it might be brand, it might be like, you know, the thought of being the biggest that you'll have a little bit more security and like, you know, you feel good about it, right? Yeah. Coinbase, I think what they have going for them is the institutional base that they have. So, they have some pretty strong institutional products that a Robinhood doesn't have. So, I think that's kind of a good base, but it's also not as profitable than their retail operations. Right. Because they can't charge the same spread. Is that? Oh, no. Yeah. They have to offer better fees. But I'm saying, is that why the margins are so

much worse? Is it the spread? I'm not sure. I think it's just the fees. I think at Coinbase, it's more fees that they do, but I haven't used Coinbase in years. So I'm just going. You're a ShakePay guy. Yeah, ShakePay guy. I'm just taking a guess here. Yeah. Now, if you look at that and then compare to how important the brand is and we would have ShakePay, let's go ShakePay. But if you look at Robinhood, for instance, they have completely tarnished their brand and there's no switching. I mean, there's no durability.

There's no moat. So, no brand, no reason to use it. This business is kind of doomed by some of their decision-making, I think. Yeah. Yeah. And I mean, there were rumors a few months back. I don't know if it'll happen at some point, but Sam Brickman's Freed or what's his name again from FTX? Bankman Freed. Yeah. Sorry, I'm butchering all the names

right now. But yeah, so there was rumors that they may be interested in buying Robinhood, probably because there's also a crypto aspect and they would be able to leverage their customer base. But that was a couple months ago. I don't think there's any more rumors on that. So I think that's probably going to be their ultimate destiny is that they're a larger player that will want that customer base. They will be struggling and they won't have a choice and they'll take the offer. Look at the doc. Look what I'm about to paste into the doc. Sam Bankman Freed. Look at this guy's hair. Oh yeah, it's always. Yeah, into the dock. Sam Bankman freed. Look at this guy's hair. Oh yeah, it's always – yeah, yeah.

That is some wild hair. This guy is so rich, doesn't have any Fs to give. Look at his hair. Incredible. My hair would come close to – I mean, you can tell my hair is curly, but like I keep it – Yeah, a little bit. Yeah. I keep it pretty short and like, you know, it's just mostly wavy because it's not long enough to be curly. My hair would come – if I didn't do anything to it at know, it's just mostly wavy because it's not long enough to be curly. My hair would come, if I didn't do anything to it at all, it would come pretty close to this guy's flow right here, Sam Bankman Freed. Should I grow it out? Do you think I would look good? I'm not sure, but- I just need a couple of billions to not give any Fs.

Yeah. Got to hand it to him though. He's buying companies on the cheap. So that's how you want to do it. If you want to grow, you know, get things at a discount. And he's not been shy about deploying cash recently. No, not at all. And it's private too, right? So he can kind of do whatever he wants. Yeah, yeah, exactly. So no, it'll be interesting.

Yeah, good for him. Good for him. Thanks so much for listening to the pod. If you're new here, we release episodes on Monday and Thursday. And there's a lot of new people. Thank you for coming in to listen to the show. This is the Canadian Investor Podcast. We talk about stuff like this, rehashing some fun events, our investment framework,

long-term investing mindset on the Monday release and then the Thursday release. We talk about news, keep you up to date on company fundamentals, quarterly reports. You're going to want to listen for the next six to eight weeks for sure. We're going to have finally some lots of talk about some earnings, earnings seasons on the horizon here. we'll have lots of exciting big names to talk about Canadian, US, global type companies keeping you up to date on their business performance, not the stock prices. We're doing something on stratosphere.io right now, which is actually, you can remove all prices. You go into business owner mode and you can remove all the prices and can't see any performance,

just so that you can't have your judgment clouded by market sentiment and really focus on the business. I think we were talking about that with Nike on yesterday's release, which is like, if you only looked at the fundamentals, it's like, how is this thing down 50%? How did the stock lose 15% in one day? And yeah, it has to do with guidance, of course. But if you're an investor, five plus years, how important is next quarter's guidance? It's really not that important, right? See what I'm like? No, it isn't. I mean, yeah, there's definitely a few factors at play right now for Nike, but I think you can make a pretty sound case that long-term, they should be okay. Yeah. Yeah, of course, I'm making an oversimplification here, but I think that it's really important to

look just at the fundamentals and you'll see volatility across securities, the ones you own, like unbelievable swings for businesses that are executing on all fronts. And so, there's a lot of short-term noise. Thanks for listening to the show. If you're thinking about giving us a review, give us a review, smash that review button, especially if you're an Apple podcast. If you're an Apple podcast listener, we need you. We need your help. Write us a nice little review there. Give us some five stars. Even if you don't want to write a review, you can hit the five star button in four seconds and it helps us immensely more than you could ever know. So if you could do that, we appreciate it. We'll see you in a few days.

Take care. Bye-bye. The Canadian Investor Podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.