Robinhood: The Modern Day Investment Thief
Robinhood investors are impacting the stock market
September 8, 2020. “Robinhood truly is take from the rich hedge funds and redistribute to the poor,” said CNBC’s Jim Cramer, commenting on how the no-cost investing app is shaking up the investment world.
The TV host and former hedge fund manager is among a growing tide of experts acknowledging that Robinhood is a much bigger deal than Wall Street wants to admit. “Let’s not deny that they have no clout, which is what I keep hearing from the grey beards. They’re just wrong,” Cramer noted on Market Alert.
Wall Street has a history of hating amateur investors. They’re an unweildy pack of uninformed speculators that jump into overheated markets and get burned when things turn south. The message has always been clear: Little guys cannot outperform the big money managers. And even if you did, the retail costs of trading and other restrictions would eat away the benefits of managing your own portfolio.
A lot has changed. Like nearly everything else in our lives, the Internet has transformed the investing landscape and encouraged millions of people to manage their own portfolios. Early websites like E*trade chipped away at the opacity that once surrounded Wall Street, and today’s new apps like Robinhood are opening the doors to investing even wider, offering instantaneous access to fee-free digital trading platforms in stocks, bonds, ETFs and options.
The result is something akin to a silent revolution, one that is now playing out amongst the hard-nosed traditionalists and new investors who are collectively impacting market movements, especially in the hottest sectors like electrical vehicles and cloud technology. Such market persuasion hasn’t been seen since the dot-com boom of the early 2000s, when newly-minted ‘day traders’ were driving up flashy Internet stocks that no one knew much about. Remember Boo.com? Vonage?
Today’s small traders aren’t the same as those from the dotcom days. Why? Three reasons: (1) There are more of them; (2) They include normal investors that don’t want to gamble away their savings; and (3) They have tons more information and resources at their fingertips. They’re trading options and foreign stocks, diversifying their holdings and rebalancing their portfolios using sophisticated software.
Most importantly, individual investors are learning to take profits and live off their earnings. They are making money in the markets in the same way as the largest portfolio managers, and they’re learning to stay ahead of market movements as quickly and efficiently as the professionals. Which isn’t to say they’re doing better or worse than the pros, but they are playing the same game. As their weight grows, their influence cannot be ignored.
Investing is going through the same do-it-yourself digital revolution as residential property. For decades real estate brokers were the guardians of how people bought and sold their homes. They succeeded in convincing buyers and sellers they offered services and unique access to the market they would otherwise not be able to find on their own to justify their eye-watering 6-7% commissions. The Internet swiftly threw a spanner into that myth and soon buyers and sellers could find one another at the touch of a button. Information about local prices and recent sales are also readily accessible, as are low-cost DIY legal and financial services that streamline the home buying process. Brokers are still part of the equation, but their role isn’t nearly as vital; it’s only a matter of time before a real estate app akin to Robinhood comes on the scene offering a market-changing interface to buyers and sellers at a fraction of the cost. As we’ve seen in the investment world, changing the rules takes time - and a paradigm shift - for people to fully recognize they are capable of brokering their own property trades without losing out.
As for investing, the playing field has already changed and market pundits like Jim Cramer are voicing what the investment world already knows. It is now up to investors to embrace the new landscape rather than defer to the myth that their money is better off in the hands of a professional advisor. Which isn’t to say advisors aren’t doing their jobs; but the vast majority are passively managing their clients’ money using software and investments that are now freely available to individuals. Just like real estate agents, financial advisors have a vested interest in protecting their turf and making their clients feel they’re providing a service and level of protection they could not otherwise provide themselves. As more individuals experience the markets through Robinhood and other personal finance apps, they’re learning there’s a whole world of resources to help them invest better and wiser, while letting them enjoy the thrill of being in control of their money.
Cramer is right: Robinhood has stolen the stock market from the elite Wall Street circle and opened it up to everyone. It’s now up to small investors to discern if they want to grab the opportunity and put their own money to work.
Want to know the best personal investing resources? Stay tuned for a list of my personal faves in my upcoming blog.