One of my favorite books is Tom Wolfe’s Bonfire of the Vanities. Sherman McCoy, the protagonist, is an investment banker who self identifies as a “Master of the Universe”. Residing in a Park Avenue apartment with 12-foot ceilings and wearing custom British suits, McCoy is the antithesis of Robinhood financial’s image.
Robinhood promotes its mission as “democratize finance for all”. The website is simple and easy to understand. It offers $0 commission trades, an educational section for new users, and a free share of stock. One section covers initial public offerings. The website states: “Now you can become one of the first public investors in IPOs”.
Lots of people don’t understand investing. The Robinhood premise is that investing is simple, and the ordinary person can do it. I brought up the topic with our 30-year-old daughter Melissa, who told me that she recently opened a Robinhood account, and speculates on stocks with a measured amount of money. Melissa spent a year at the London School of Economics, so she is better equipped than most to do this kind of investing/speculating.
If one is diligent, reads the information and has common sense, the Robinhood brokerage system could be a benefit. My sense is that it attracts more day traders rather than long term investors. Clients buy stock and speculate. When it goes up a bit, they want to click the sell button, and capture a profit. Robinhood is being sued because it limited sales of Game Stop and AMC Entertainment shares that were subject to massive speculation this spring.
Robinhood was also fined $65 million by the Securities and Exchange Commission for failure to disclose “true costs” to customers. My sense is that the newbies brought into stock markets by Robinhood will benefit people who know what they are doing; there has to be a buyer for every seller, and vice versa.
I used to tell my MBA students the Watermelon Story: Two guys drove a pickup truck to the Italian Market in Philadelphia and filled their truck with watermelons that they bought for $1 each. Then they drove to Delaware Avenue, and set up a sign next to the truck, “Watermelons for sale $1 each”. At the end of the day, they had sold all of the watermelons, and counted up the money. One fellow said to the other, “We didn’t make any money”. The other guy said, “I told you we needed a bigger truck.” Robinhood co-founders Vlad Tenet and Baidu Bhatt are Stanford math graduates, so I don’t think they are making that mistake.
The company started in 2013, just went public and has made them billionaires. I see them as the continuation of a line of successful brokerage firm marketers. Some marketing to people with lots of money such as Fisher Investments, and some such as Charles Schwab and TD Ameritrade, promising to make investing available to the average investor. The founders have found a market, and are promoting the heck out of it.
In Bonfire of the Vanities, Sherman McCoy falls hard when he hit-and-runs over a young black man in his Mercedes roadster after picking up his lover at the airport. Rather than dining on Fifth Avenue, he lands in jail squabbling with another inmate over a sugary drink and lunchmeat sandwich.
The founders of Robinhood will run into some regulatory and legal problems. It makes sense that a company starting in this industry will miss some steps. Robinhood has found a following and a purpose. As long as they don’t screw up in a big way, they will continue to gain clients.
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