Buffett and Munger have always been outspoken. Their followers love and expect it. Their annual investor conferences always sell out, and there are usually some choice quotes. They invest in a disciplined way and are extremely effective and ultimately successful in what they do.
But there’s more than one way to make money in the markets. And let’s not forget, Warren didn’t start with nothing. He had a healthy inheritance which helped kick off his investing career. He’s also had plenty of opportunities along the way. He was able to make a fortune during the financial crisis by being party to deals that ordinary mortals would never have access to. At the heart of the crisis, he ploughed $5 billion into Goldman Sachs, shoring up confidence in the bank at a crucial time. But he did it at incredible rates and ultimately made over $3 billion on the deal.
Do you agree with Robinhood?
Robinhood argues that it ‘democratizes investing’ by ‘tearing down the barriers to investing’ and letting people take control of their financial futures. The company says the old guard doesn’t want average Americans to have a seat at the Wall Street table and that Robinhood has technologies that ‘have the power to equalize’.
Sounds good. But is Robinhood really the wonderful altruistic organisation it claims? Let’s not forget that earlier this year, Robinhood restricted trading by its customers on GameStop and other heavily shorted stocks. They are yet to come up with a solid explanation for this and there’s a feeling that it was done to help certain ‘Wall Street players’ caught on the wrong side of the trade. And that being the case, then ‘caveat emptor’.
To what extent are Buffett and Munger right?
Buffett can be quite disingenuous with his homespun folksy words of investment wisdom. Charlie Munger can be downright insulting in his plain-speaking manner. Many professional investors find this all quite grating. But that’s not to say their criticism of Robinhood isn’t fair. After all, there is an online casino-like element to Robinhood. It’s one thing to make trading accessible, but you must know your customers, and clearly state the risks.
Robinhood boasts of ‘commission-free’ trading. Instead, it makes money by bundling up customer trades and selling these on to hedge funds/prime brokers. This is called ‘Payment for Order Flow’. As a customer, you may object to this, or you may not care. It’s just a business model. Just like Facebook and Google are apparently free services unless you want to put a proper price on your privacy and personal data. However, the gamification of trading is another matter. In the US there’s a feeling that trading, especially on an app, has become too attractive and too easy. And that it’s being sold to people who don’t know much about financial markets.
Munger was particularly outspoken: “I think it’s just God awful that something like that (Robinhood) brought investments from civilized men and decent citizens. It’s deeply wrong. We don’t want to make our money selling things that are bad for people.” I don’t believe that Berkshire Hathaway still owns tobacco stocks, but it certainly has holdings in Coca-Cola and Kraft, both of which make products that are bad for people.
A brokerage will want to save face from criticism, but what is it that retail traders are probably missing in all this?
Retail traders must understand the risks in what they are doing. They are trading, not investing, and that can be very dangerous if you haven’t done your homework. Trades must be planned. You need to understand what you’re buying or selling. You need to work out where to get in, and just as importantly, where to get out of the trade. You need to be disciplined and engage strict money and risk management. You must be prepared to take a loss if things don’t go your way, particularly if trading on margin.
As for options, these are complicated financial instruments, generally used for hedging rather than speculation. When buying options, you have limited risk, but most end up worthless. That’s why many experienced traders look to profit by selling options. But unless you’re running a complex options strategy, naked shorting of options has limitless risk so is very dangerous.
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