Is Robinhood Good For Investors?

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“Is Robinhood 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 “Robinhood,” 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 Robinhood, they’re able to put this knowledge to work.

Robinhood 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 the company. If stock picking isn’t your thing, you can also buy ETFs with no minimum and no transaction fees. This is a huge win for new investors.

Benjamin Franklin said, “Money makes money. And the money that money makes, makes money.” This is a perfect way to describe compound interest. Time is the fuel to compound interest’s fire. The earlier 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 5 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 can’t 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.

That has been my take on Robinhood until now. I still stand by the potential benefits of Robinhood, but I’m getting more concerned that there are plenty of downsides to free trading.

Robinhood 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 Robinhood’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.

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 no doubt that this is true, but I do doubt that this is 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.

I don’t hope young investors get crushed. I’m 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.

“Is Robinhood good for investors?” That’s like asking, “Are ETFs good for investors?” Which investors? Which ETFs? What does “good mean?” It’s a question so broad that you can’t possibly find a brush wide enough to paint it with.

Robinhood 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 Robinhood was here, and they’ll do it long after it’s gone. Few things are either good or bad.

 

 

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