There’s a certain populist excitement about what has gone on in recent days with the stocks of GameStop, AMC, and others. Finally, the little guy is sticking it to Wall Street and the hedge funds!
More sober voices point out that there is no way GameStop as a company is worth the $23 billion its stock price implies. (For comparison, Best Buy’s market cap is $28 billion, and Best Buy has five times the annual revenue in an average year.) In short, a bunch of internet commenters are engaged in market manipulation that involves bidding up a stock. Some are even getting rich.
When Robinhood, a day-trading platform, shut down purchases of GameStop, the populists said this was the man cracking down on a populist uprising. Others said it was a trading platform stopping manipulation. They’re both right.
For starters, some level-headed writers wonder whether the “stock-market is rigged” talk is misplaced. The main lesson of GameStop is that the market is rigged against regular guys — if you’re talking about short-term trading. That lesson is an indictment of one central player in this episode: Robinhood itself.
Robinhood’s declared mission is to “democratize finance for all.” But that’s misleading. For a fairly small minimum investment, companies such as Charles Schwab and Vanguard long ago democratized finance and investment for all, but only the boring, long-term sort of finance. What wasn’t too democratized before Robinhood was fast-paced finance.
A generation ago, buying and selling stocks rapidly was nearly impossible for the ordinary person. The internet brought online trading platforms such as eTrade and ScottTrade that charged a few bucks per trade. Robinhood is different: It doesn’t charge anything per trade, and it encourages its investors to buy not only stocks but also complex financial products such as options, which involve predicting how a stock will move in the near term.
Here’s the thing about that: Regular people shouldn’t try to make money off the stock market in the near term. In the short-term, a stock’s price is dictated by randomness, stupidity, insider information, and market manipulation. Nobody can do anything about the randomness and the stupidity of others, and so unless you have insider information or the ability to manipulate the market, you are playing a losing game by day-trading or buying options.
Think market manipulation isn’t rampant? Watch this video
Here’s Jim Cramer, CNBC’s stock guru, explaining how as a hedge fund manager, he used to manipulate markets. If he was short on a stock (betting it would fall), he would spend a mere $5 million to boost stock futures for no reason, expecting that the stock would fall back down to normal levels, thus creating a negative atmosphere that might cause the stock drop he had been betting on. Watch the video to see other ways in which insiders can manipulate markets in order to make profits.
Unless you have savvy and experience and $5 million to $10 million in free capital lying around, you can’t play that game with the big boys. Yes, ordinary people can make money off the market in the long term by buying stock index funds (like an S&P 500 fund) and holding them for decades. Maybe ordinary people can make money by buying individual stocks and holding them for decades, but that’s too risky for me.
The stock market, over the long term, grows because humans tend to do productive things when you give them resources. That fact, and the tax benefits of 401(k)s and IRAs, makes it a great way to save for retirement. I have a little bit of excess cash in my working years, and so I let Vanguard invest it across 500 large companies, who try to do useful stuff with that money. On average, my money grows over the decades.
But tons of research has shown that nobody is really smart enough to “beat the market” consistently by picking stocks — and especially not by timing stocks.
If you lack insider information or the ability to manipulate markets, you are not likely to do well playing the market in the short term, which brings us back to Robinhood. The entire premise of Robinhood is that ordinary people should be able to play the same game as Cramer used to play. But that’s impossible. So the entire premise of Robinhood is a lie.
Robinhood is exploiting its customers to the benefit of more established players in the finance industry. This was true long before Robinhood turned off purchases of GameStop. Convincing ordinary people to day-trade is like talking your friend into joining a poker table full of expert poker players: You’re just putting easy money into the pot.
Robinhood’s profit model was that when a Robinhood user bought a stock at $1, an actual Wall Street trader would pocket the dollar, buy the stock at 98 cents, and split the profit with Robinhood.
Gamestop was about regular people manipulating the market in the way Cramer used to. When market manipulation was democratized, Robinhood cracked down. It turns out that if you’re trying to play the market in the short term, the game really is rigged.
