Wanna Bet?

Covid-19 concerns are canceling most every sport, so betting on stocks is replacing betting on games. Robinhood is now making a game of the stock market, but is this a game you want to play?

Euphoric Frenzy

Legal online sports betting is a $150B/year enterprise, but there’s not much to bet on these days. While Covid-19 has all but shut down the nation folks are bored and stuck at home. With no sports to watch and government stimulus money in their pockets, many folks are looking for action. Obviously Wall St. is the biggest “casino” on the planet and it seems gambling degenerates are finding a willing partner.

I see it as no coincidence that as avenues for sports betting are currently non-existent, the Robinhood online trading platform has added 3,000,000 new users in 2020. Half of them self-identify as first time investors. Through May & June alone, weekly visits to the Robinhood trading platform are up 330% over last year.

With the online brokerage offering commission-free trades, there is virtually no barrier to entry and the cost of their “gambling” is essentially $0 – no “vig”! In perfect-storm fashion, a lot of these folks entered into the market as it dipped dramatically in March only to turn around and add 40% in the following 8 weeks. All of this now has some folks feeling very euphoric – very “I can’t lose”…

I’ve covered Robinhood before. I’ve warned of it’s game-like interface, lack of available research, offers of margin and options trading to the rookies & rubes, and it’s “the user is the product” business model. Let’s check in on Robinhood and see what’s going on today…

The Play

Below are the 10 most popular stocks on Robinhood as of June 8, 2020:
Ford (F)
General Electric (GE)
American Airlines (AAL)
Disney (DIS)
Delta Air Lines (DAL)
Carnival (CCL)
GoPro (GPRO)
Aurora Cannabis (ACB)
Microsoft (MSFT)
Apple (AAPL)

My gosh. With the glaring exceptions of Microsoft & Apple, this is a list of dogs – companies with abysmal 5-year charts and troubling prospects going forward. So the trend looks like it’s betting on stocks to rebound in hopes of making a quick buck – or some other strategy I can’t quite grasp.

Warren Buffett, for instance, famously exited his positions in airline companies as their values plummeted beginning in March. As travel restrictions decimated the airline industry, Robinhood users quickly scooped up his rejects. The U.S. Global Jets ETF $JETS held around $33 million in assets in March and has since seen a 2,390% increase. The fund saw net inflows for 62 consecutive trading days despite seeing its price drop sharply in that time. In roughly that same timeframe Robinhood accounts holding positions in the $JETS ETF jumped a whopping 8,000%. As the value of the airlines continues to drop it increases their appeal to Robinhood users – see chart below.

On the surface this does not look like long term investing. It looks more like a poker bluffs with bad hole cards, horse racing with long shots claimers, or roulette where you blindly throw the ball in the wheel and hope you land on a winner. Will these new investors stay in for the long haul?

can you spot the rube(s)?

Oh, You Want Leverage?

Of the 20 most popular ETFs held at Robinhood, almost half are 2X or 3X leveraged funds. What does that mean? Simply put, leveraged ETFs are not designed for retail investors, and few people know how they work. They are minefields waiting to chop your legs off. That’s not stopping the Robinhood’ers.

Additionally, for a mere 5-bucks/month Robinhood will let YOU in on the leveraged fun with 2x leverage against the cash in your account. If you have $2,000 in your account you can buy $4,000 worth of stock. That’s $2,000 with your money and $2,000 on borrowed money. I don’t have to explain the risks here…

Combine this leverage with stock options and the real fun begins. There are evidently a lot of folks wanting to turn their retirement savings into a game of Candy Crush – with their savings on the line – so here it is!

One user last month committed suicide when his leveraged options trades ended up with a negative balance of over $700,000. Thinking he’d blown up his account with the losses owed to Robinhood, he committed suicide. As it turns out he just needed various legs of his options trades to settle before the balance corrected itself, but he didn’t know what he was doing. He was a rookie poker player playing at the high stakes professional table.

DDTG

Leading a small army of day traders (and Robinhood’ers) is El Presidente, Dave Portnoy – or “DDTG”, which stands for “Davey Day Trader Global”. Running a “live” day trading account with an initial investment of $5M (against a net worth of of $100M, or 5% speculation which is reasonable) Dave lets users experience the thrill of stock picking victory and the agony of stock market defeat, complete with 6-figure swings and lots of cussing.

He also seeks to antagonize the world of finance (and garner free press) with tweets like; “I’m sure Warren Buffett is a great guy but when it comes to stocks he’s washed up. I’m the captain now.” (Dave was a big promoter of the $JETS ETF as reports of Buffett’s airline exits hit the wires)

I like Dave. He’s funny, I love the pizza reviews (“one bite, everybody knows the rules”), and enjoy his constant antagonizing of Roger Goodell. Keep in mind, however, these day-trading antics are a sideshow and NOT the main event. If you follow his picks, beware. He’s a mere gambler.

Re-Runs

I’ve seen this euphoria movie before, several times. I saw it in the dot-com bubble where people I knew were quitting their jobs to day-trade in the late ’90s, urging me to join the “can’t miss action”. By March of 2000 it was party over, and that’s if you didn’t ruin your account balance before then with stupid .com bets.

I also saw it in the real estate bubble of ’07 when folks I know were leveraging into real estate with colossal debt and urging me to come along for the ride. By 2009 it was party over and many lost everything, their families and livelihoods included. I knew several folks who had to leave the keys on the countertop and “walk away” – brutal.

The last time I saw this movie was late 2017. I knew people taking out second mortgages, 401k loans, and using their student loans to buy Bitcoin plus other crytpocurrencies. It seemed everywhere you went folks were bragging of their colossal gains. A year later those buying the run to the top saw their accounts cut in half with bills due on the difference. I saw some messy fallout there as well.

A Safer Way

I must admit I like a good poker game and I love a Sunday 5-team NFL parlay. On the investing side, however, I am a huge fan and proponent of broadly diversifying, holding long term, and investing on a regularly scheduled basis. For most investors, and especially first-time investors, this is the best way to become wealthy.

Don’t get caught up in the hype, the FOMO, or the tales of wonder. Stay the course, stick with Method Money Management, and dodge the bodies of the get rich schemes that pop up from time to time.

If You Must

If you like the “action” of the stock market, commit the equivalent of a nice meal and give it whirl. If you win, you win. But if you bust you can eat mac & cheese one night to offset the loss. If you’re good, you’ll turn the money into something sizable in short order. You’ll be bragging & tweeting in no time. Use this link for Robinhood and have fun. In the long run do not commit more than 3-5% of your investable capital on speculation. Period. That means no re-filling the account to “try again” after you go bust.

Cheers, and thanks for reading!

disclaimer – I am long CCL & MSFT. I work for Apple and own AAPL. The views expressed here are my own and do not represent my employer in any way. This is not a solicitation to buy or sell AAPL or any other stock listed. Consult a reputable fee-based advisor if you are unsure of your own ability to perform proper due-diligence.

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