Transcription: Segment 1
Paul Winkler: And welcome to the Investor Coaching Show. Paul Winkler talking about the world of money and investing. So what I want to talk about, guys, let’s get into something about Robin Hood. Now, a lot of younger people, Robin, I love Robin Hood. That’s a great thing. No, no. We’re talking about stock trading. Let’s get into, let’s get in this talk market. Let’s talk about the stock market. This is easy. Let’s get rich investing in individual stocks.
Now this article was from New York Times. It was entitled. Robinhood has lured young traders sometimes with devastating results. Now a Navy medic in San Diego, dabbled infrequently in stock trading, but his behavior changed in 2017 when he signed up for Robinhood. And I’ve had a young lot of younger people say, yeah, this is what I’m doing right now. I got a little Robinhood account. I can’t tell you how many times folks. I have heard this in the past month, just talking to people out there.
Robinhood
Robinhood trading app has made buying and selling stocks simple and seemingly free. Now I did a video about this, about free investing. So this is something that I’ve talked about a little bit, but these guys get into a little bit more detail in this article, which I thought was really, really good. Now this, Mr. Debates, now 32 has been charmed by Robinhood’s one-click trading, easy access to complex investment products and features like falling confetti and emoji field phone notifications that made it feel like a game.
And that’s it. They’re making this fun. They’re making it something that, and this is what happens with our brains. Our brains get addicted to the chemicals that get released by our brains, the endorphins and, and the serotonin and all the things that our brain kicks out that make us feel better. More about that in a second. But you may get this falling confetti and emoji filled. They make this feel like a game. And after funding his account with $15,000 in credit card advances, that’s how he does this.
He takes out credit card debt to start putting money in this account. Do you think Robinhood said, Hey, did you do this? Do you think they did any financial planning or said, you know, you may not want to do this. No way. I’m sure it crossed their mind to say that this guy shouldn’t be doing this. He began spending more time on the app, as recently as he repeated, excuse me, as he repeatedly lost money, Mr. Debates took out to $30,000, listen to this, $30,000 home equity loans.
So we could buy more speculative stocks and options hoping to pay off his debts. Of course, some of them incurred doing this crazy stuff here. His account value shot above a million dollars last year. Now that is really dangerous if you think about it, because what happened, he won. He gambled and he won and the account value one above a million, but not for long.
What happened was almost all of it recently disappeared. This week. His balance was $6,956. And remember he took out to $30,000. That’s $60,000 in home equity loans, plus $15,000. And his wife says this when he was doing his trading, he didn’t want to eat. And he says, he’s got three children, wife, three children. He would have nightmares.
And I’m thinking PTSD. You know, I don’t know. I don’t know enough about the guy to go and diagnose, but literally you got, you’re talking about a guy that went through all of this. This money was $75,000 in the loan borrowed money and then ends up losing almost all of it. And now he’s having nightmares over this and you can’t. I mean, it’s just, I can’t even imagine.
The “ease” of trading
Millions of young Americans have been investing in recent years through Robinhood, which was founded in 2013 with a sales pitch of no trading fees or account minimums.
The ease of trading has turned it into a cultural phenomenon and a Silicon Valley darling with the startup climbing to 8.3 billion with a B dollar valuation. Now my question to you guys, how do you become that big on something that’s free? It’s not free. I mean, it’s not free. Just possibly I think maybe it’s because they charge for counseling services after somebody has lost all that money.
Well, one time they were actually, they actually applied for a bank, to become a national bank. I heard an interview by the guy and they started the project that they canceled it. But I heard an interview recently that they were thinking about doing it again. And the reason why is because as a national bank, they avoid all the state regulators. Mm yeah. And then have a mortgage company too.
Yeah. Yeah. So, so how do they make this money? That’s the question you’ve gotta ask yourself. Well, at least some of their success check this out appears to have been built on a Silicon Valley playbook of behavioral nudges and push notifications, which has drawn inexperienced investors in the riskiest trading. According to analysis of industry data and legal filings, they had interviews with nine current and former Robinhood employees, and more than a dozen customers and the more customers engaged in such behavior, the better it was for the company.
The data shows now, how do they make money? Well, it actually points it out in here. It says that at the core of Robinhood’s business is an incentive to encourage more trading. It does not charge fees for trading, but it is still paid more if its customers trade more. So that’s basically what they’re trying to do is get you to make it into a game. So it seems like if you think about, if it’s free, there’s no cost. You don’t have anything that you pay for the trades.
It feels a little bit more like a game. And you’ve got the emojis and the falling you’re the confetti and all of that good stuff. But here’s what happens. It makes its money through a complex practice, known as payment for order flow. Each time a Robinhood customer trades, Wall Street firms actually buy or sell the shares and determine what price the customer gets. I have said this to so many people when they talk to me about individual stock trading. I’m blue in the face right now.
Know what you’re buying
Folks. How many times have I had this conversation? Somebody says, Oh, I’m buying this stock. I’m going to get, Oh, I know the airlines gotta become, Oh, I know the cruise ships gotta be coming back. Oh. They go on and on and on all the things that they have as brilliant strategies. And I just shake my head and go, “Look, look, look, listen to me. Listen to me, you are buying that stock off of somebody on the other side of the trade that is willing to sell it to you and guess what? They do nothing but trade that stock all day long. Do you think you really have knowledge?” I had a guy I was talking to recently and I asked him all kinds of questions about a company that he was talking about buying.
And I said, do you know how much debt they have? Well, no. Do you know what kind of repayments schedule they have? Do you know if they have any forgivable loans? Loans? No. No. Do you know who the CEO is? I mean, this is all knowable stuff. I can know this. And the CEO is I can know how much debt that they have. I can know what their business plan is. I can know what their profits are. I can know when they’re likely and this person didn’t know anything. All he just thought was, Hey, it went down a lot. It’s going to come back.
You know, if you think about that, cause it just hit me. These people know very, very little about the stock that they’re buying, but their mortgage broker knows every single detail about their lives. When they borrow money from a bank, good point. Yeah. They’re investing in something. They know nothing of, they’re not going to invest in you, but the bank’s not going to risk their money, giving them a mortgage. That’s right. They’re not going to invest in you without knowing everything about you, your payment history, your credit history, what your job is, what you make, what percentages of your debt payment compared to your income. They knew everything about you.
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How it works
And yet you invest in these companies and you know nothing about these companies. That to me is just absolute gambling. Now it says that they got this payment for order flow. Each time a Robinhood customer trades, Wall Street firms actually buy or sell the shares and determine what the customer pays, what price that they get. These firms pay Robinhood for the right to do this because they then engage in a form of arbitrage by trying to buy or sell the stock for a profit over what they gave to the Robinhood customer.
So it’d be, you know, basically sales going, Robinhood, Wall Street firm, and then they sell it for a higher price to someone else. And then they pay Robinhood. So they basically have hooked the Wall Street firm with somebody that doesn’t know anything about investing. Now, this practice is not new. This isn’t something that is brand new. Nobody does this. You got companies like Schwab do this, this type of thing. But Robinhood, who does this stuff for free, right? They’re basically, Oh, this is all free. You know, I’m really cheap.
We’re really inexpensive. They do it for significantly more than these other firms that I just named filing sale. Check this out: for each share of stock traded Robinhood made four to fifteen times more than Schwab in the most recent quarter. Well fifteen times as much money for the same service that you think is free. In the interview that I heard, Robinhood last year had more stock trades and it might get into this. In this article, they had more stock trades than Schwab and E-Trade combined. That’s not shocking. It is not in this article, but that doesn’t shock me. You know, that is because they make it like a game and it’s free. And they’re enticing younger people who are tech savvy who liked to play on their phone and really get into this stuff. So yeah, I can see how people get sucked into this Robinhood. And then here’s the thing. They don’t force people to trade. They don’t force you to go and trade your stocks in here, but you just try to get into an account and try to remain disciplined.
When the entire world is enticing you not to remain disciplined. They’re telling you what’s going to happen. If Biden gets in, what happens if Trump gets in, what if he gets reelected? What if the Senate changes hands? What if, what if COVID, what about, what if giant? What if there are all kinds of things that they can do? And they’re really good at dealing with your mind. They know how to get you to take action. We think we’re logical people. We think that we’re Spock for those of you that liked Star Trek, Spock was the dude that logical emotion never got him. Everybody else in their shifts, losing their mind on the Star Trek enterprise. They’re all losing their mind. But Spock was the guy who was always logical.
It’s not betting and gambling
Jim Wood: Well, the mentality is of just some people are just kind of wired to be taken advantage of whether it’s sports betting, whether it’s going to Vegas, whether it’s betting stocks on Robinhood. And in fact, Robinhood got a lot of bumping business from COVID when sports was shut down because a lot of sports betters went over and okay, well, I’m gonna, I can’t bet on sports or watch sports. I’m going to go to Robinhood, but they’re just some people, the way their brain chemistry works. They’re very susceptible to that.
And you hear stories of few people doing really, really well. And those things get viral, but so somebody else thinks, Oh, I can do that. I think it’s really interesting just to look at the name Robinhood, I’m going to go steal from the rich, you know, I’m doing something good. I’m an adventurer. Sure. Just the psychology. That’s just in that.
Paul Winkler: Yeah, absolutely. Robinhood doesn’t force people to trade. Here’s what this paragraph finishes on. Ironically, Jim, with what you just said. I don’t watch movies. I don’t watch TV. I’ll butcher this guy’s name. Ashton Kutcher. I guess that’s the guy, right? There you go. you. Who was it invested in Robinhood, attended one of the company’s weekly staff meetings on zoom and celebrated its success.
Day trading
By comparing it to gambling, websites said three people who were on the call. It’s exactly what they’re comparing it to. And you know, that is, and we’re going to head to a break here, but that is exactly what I said. What a couple of weeks ago, I was talking about stock trading. You know, the studies on stock trading and day traders. They had a couple studies and one of them was showing that day trading? No, no, not everybody makes money on it. Most people don’t make money on it. It was a Brazilian trader, only 3% of them made money.
And only 1.2 per 1.1%. I just remember the data. 1.1% of traders day traders actually made more than minimum wage. That was it. So you got 98.9%, 98.9% actually not even making minimum wage or losing money with day trading, but some people made money. Let’s follow the winners who did really well.
Well, they actually studied that. What if you found who the winners were and you followed their trades after you figured out who the winner is, who’s really good at this. Let’s just follow their trades and see how we do, what was the result? 79% loss. What that was one study, a second study that was done. Well, let’s just follow these winners. Maybe those first winners in that first study where they, they weren’t very good winners. How about let’s follow the winners in the second study, 92% loss. 92% loss is not indicative of future results, but let’s do this with the sharp ratio chasers.
Let’s do it where we have the high returns with low risk. I mean, that’s the issue. We were having a lot of people that win that took lots of risks to win. So let’s do it with the ones that made higher returns with less risk. Let’s do that. Oh, they studied that. The result, none, not one beat the benchmark, not one.
Listening to the Investor Coaching Show, Paul Winkler, along with Jim Wood.
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