Wednesday, August 4, 2021

Robinhood - The Plot Sickens

Stuff that used to be illegal is freely practiced today thanks to the Internet and Social Media.

Stand and Deliver!  Your lupines or your life!

Paypal, Uber, Bitcoin, Lime Scooter, Robinhood - what do they all have in common?  Well, for one thing, they are doing things that at one time might arguably be illegal, but since they "went big, fast" the government sort of looked the other way.  Paypal ran an unregulated bank, promising FDIC insured accounts and leasing out their merchant account to millions of people - in violation of the terms of service.  Uber basically created millions of unlicensed taxicabs - in violation of local laws all across the planet.  Bitcoin is offering "investments" without running them by the SEC first.  Lime Scooter is dumping scooters all over cities and telling other people to "deal with it!"  And Robinhood?  Well, the SEC has been hounding them already - but it illustrates how government regulations are hard to enforce, particularly when Republicans cut the enforcement budget (and for the IRS, too!).

The whole "Robinhood" thing stank from the get-go, and its links to Reddit "Wall Street Bets" while not official (supposedly) are present for everyone to see.  They are talked about a LOT on that social media site.  The 20-something kids on that site are using "free trades" to invest small amounts of money (in the hundreds or thousands) and since they are living with their parents, figure they can afford to lose it  - and hope to win big and show all the doubters what-for!

Of course, we know how this works out for the vast majority.  Like I said before, if you can take $1 from every person in the USA, you'd have $330 million.   Stealing a little money from a lot of people is a lot safer than stealing a lot from a few.  Rob the poor, not the rich.  The rich fight back.

I opined in a previous posting that one way to get people to buy "home lock" is to stage some events where someone tries to file a forged deed.  Make sure it gets a lot of press and bingo!  You've created a market. Why not? In the early days of alarm systems, alarm company salesmen would stage robberies in a neighborhood in order sell alarm systems.  And it worked. I am not sure this has actually happened or not with Home Lock - and I hate to give them ideas!  But the incidents that have happened - and they are few and far between - are hyped by the people selling "home lock" which doesn't lock anything, really, or protect you from any consequences.

A similar thing could be happening with Robinhood.  It is not hard, on the anonymous Internet to post some things on Reddit, hyping stocks and then make some big bucks when the plebes buy.  In the old days, it was called pump-and-dump, and a teenager in New Jersey made a million doing it.  Today, it is a little more nuanced.  You get the plebes to buy Gamestop and drive up the price and screw the short-sellers, who now have to scramble to buy shares.  You post bogus messages on WallStreetBets saying, "I'm hanging on to Gamestop forever!  It is a long-term investment!"  And you say this, not because you believe it, but because you want others to - and not sell their shares and take a quick profit, as it would depress prices and spoil the game.

In response to my previous posting on the subject, a reader writes:
I wanted to add some information about your latest post about the Robinhood IPO. I do agree that buying the IPO for Robinhood does not make sense for retail investors.

But there is another thing that I wanted to share with you and readers of LivingStingy. Robinhood may be offering free trades to people, but they are making a lot of money by selling the order flow for these trades to investment firms. These firms then are able to make money by taking the opposite side of many of these trades, almost all of which are done by amateur retail investors.

I came by this information, since I used to work for one of these investment firms that accept the order flow from Robinhood and would see many of these retail option orders pass through the firm's systems.

Reference links:

A fascinating concept and it illustrates how "pump-and-dump" has gotten all grown up. Rather than hype a worthless penny stock and get caught by the SEC, you let the retail plebes hype their own stocks (AMC?  Get real!) and then take an opposite position, knowing that these bubbles will eventually burst. Or you can see what the plebes are going to buy, and buy the stock before it goes up in price. The possibilities are endless - this "data" can tip you off to where certain stocks are moving to.  You can probably create an algorithm to determine the ideal counter-investment strategy.

What is troubling to me is this is the sort of nonsense I got sucked into at that age - on a smaller scale, perhaps.  I thought I would try to play this stock game and beat the market by looking for "the next big thing!" and "insider tips 'n tricks" and "stock tips" from people on television - tips that only 330 million other people knew about.  It did not work out well.  For every tip that worked, I probably lost money on two more. And like any good gambler, I remembered the wins and downplayed the losses. Worse yet, I would hang on to the loser stocks, because I could not bring myself to believe I wasn't a financial genius.

Over the years, I made money - the hard way.  Through work, either by salary or through my own business.  I made money in Real Estate the hard way - buying properties that needed work, doing the work myself and then renting them out for a positive cash-flow, and later, a nice capital gain. And stocks? Well over 30 years, Mr. See's portfolio in Fidelity mutual funds has done as well, if not better, than mine.  And mostly he pretty much left it alone and never even bothered to read the statements or prospectus or whatever. In my own portfolio, mutual funds often did better than my own stock picking - although in any rising market, you can pretty much pick any basket of stocks and they will go up.  Saying you made money in the market during the last ten years is saying nothing - everything went up.  Tell me again in ten months, it might be interesting.

But we made money in these funds and stocks buy continually putting money in over time.  About half the money we have in our portfolio is money we put in, not gains or dividends or interest.   The idea you can put in $2000 into a speculative stock and "strike it rich!" is just flawed. A fully-funded retirement isn't something you can buy for a few grand.  It is a huge mountain, you have to climb, one step at a time, over 40 years or so.   And every journey begins with a single step - right?  So why waste your time trying to find a shortcut that doesn't exist?  Because if it did, people would be using it, and not telling you about it on Reddit.

You can blame the manipulators for hyping stocks or gold or bitcoin on the Internet.  You can call for more regulation and better enforcement by the SEC.  But what it all comes down to is you.  If you buy into a "stock scheme" you are not investing, you are gambling.  And sure, some gamblers win - and their wins are touted on the Internet again and again. But most lose, and that most includes you and me.

What irks me about these schemes is that when they fail - and they always fail, eventually - they take down the larger market with it. In 2009, the market crashed, not because the fundamentals of the market were bad, but because one single type of investment - bundled mortgages - went South.  And when that happened, people lost their houses, jobs, and savings. They stopped buying cars, and the car companies went broke.  It is a Domino effect.

That is what worries me - that all of these shenanigans, from Bitcoin to Robinhood to Gamestop to Elio to inflated housing prices, to whatever - will all collapse at once, and this will have a snowball effect on the overall market, perhaps even worse than the last time around.

I met a nice man on the Mt. Washington tour ship the other day and he mentioned that the real estate bubble was "different this time around" as people were better qualified and vetted for these ultra-low-interest-rate mortgages.  Indeed, many are paying cash, on our little island, a half-mil or more!  But when interest rates go up (when, not if) the monthly mortgage payment for every house would go up, meaning the resale value could go down.  It doesn't take a rocket scientist to see that - and what will happen when the Fed raises rates from 0 to 1% as they seem prepared to do (finally realizing that inflation is real and what happens when you give money away!).

A perfect storm, it seems.  Trouble, it is a-brewing.  Then again, it always is, isn't it?