15 August 2022
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Are young Robin Hood investors stealing from fund managers?

Peter Switzer
23 June 2020

While others seek out daily news updates of their favourite political stories, updates on their footie teams or what the Kardashians are up to, a tragic human like me searches for the Dow to see how Wall Street is reacting to rising infection rates or better economic headlines and so on.

And despite rising COVID-19 infections worldwide, the US stock market, like ours yesterday, went higher. This oddity is explained by professional fund managers as the silly behaviour of millennials as they get too engrossed in the stock market.

In the US, the so-called millennial madness has been made worse because of the US-based Robinhood app that allows investors to trade stocks, options, ETFs, etc for free!

This has led market professionals (like the two I featured in my Switzer TV Investing programme debate last night) to express concerns that trading millennials have pushed the stock market to unrealistic levels.

The belief is that smart or courageous young traders are buying at 10am and flipping stocks by 3pm and having a ball! A crash is a perfect opportunity to buy good companies at post-spooked prices but the worry is that if it means crap companies get overrated by the inexperienced, they end up losing.

Of course, if you invest away from government-guaranteed term deposits to increase your potential returns, we say you’re going up the risk curve. And if you lose money, it’s because you took the risk for higher returns.

But you have to be concerned when you hear about the Hertz debacle in the US.

Recently, the Coronavirus-smashed, car rental company, Hertz, filed for bankruptcy but then announced it would raise $500 million in a new stock offering, to tap into the new pool of young speculative investors who were likely to give it a punt via Robinhood and other investing websites. Fortunately, the US regulator said “no way” and Hertz had to can the plan.

This is how techcrunch.com described the debacle: “Robinhood traders looked at Hertz and didn’t see the poor fundamentals; they saw opportunity. By March 18, more than 3,500 Robinhood users held Hertz stock, according to Robintrack. A month later, that number popped to more than 18,000, and then nearly doubled to surpass 43,000 users by May 21. It peaked June 14, when more than 170,000 Robinhood users held Hertz stock. The stock price rose 887.5% since that May 26 low, until it reached $5.53 on June 8. Shares of Hertz have since fallen 63.8% and closed Wednesday at $2.”

Clearly, the Robinhood app has encouraged craziness for novice stock players but I think it’s excessive to tar all young investors with the silly speculator tag. The online trading platforms and decades of money education via websites like Switzer.com.au, the financial newspapers like the AFR and money TV shows have created a more stock market savvy group of young people.

They also face high house prices, low term deposit interest rates and they lose 9.5% from their super. So the stock market is the logical place for them to invest and yes, speculate in.

This is the new normal for fund managers — they have more rivals for the stocks they have had to themselves for over a hundred years. And it’s not just young people because SMSF trustees are investing for themselves, once again because term deposits are offering nothing.

The question is: are these new age investors mindful of what can go wrong?

The professional managers have been holding cash expecting a second leg down but because it hasn’t come, despite bad Coronavirus infection news, they think it’s because the naïve optimism of young traders.

It’s a classic Robinhood story where the riches are ‘stolen’ from the pros to give the spoils to the inexperienced traders — themselves!

Of course, if these younger or even older opportunistic investors are long-term investors, who have bought companies to make money over three-to-five years and they’ve bought quality businesses, then they have an advantage over fund managers who have to show their results monthly, quarterly and annually.

So you can see why the pros are complaining. On the other hand, if the newcomers have borrowed or have used money they need, they could have been hoodwinked into a silly investment play that one day they might regret.

The online world has brought disruption everywhere and it now has hit investing big time. Regulators have to get on the front foot and do more warning about risky new products or services. I hope no local Robinhood comes to town.

Right now, the charts suggest stocks should go sideways or pullback a little and the virus would be the trigger.

Infections rising in our Victorian capital and around the world could easily spook stock markets soon, so investors need to be wary about buying. “The W.H.O. reported more than 183,000 new cases, the largest one-day increase so far, as the global tally inched toward nine million,” The New York Times revealed. “A Trump administration official said the White House was preparing for a potential wave of infections in the fall.”

There could be tricky times for stock players over the rest of 2020 but provided there’s not an out-of-control second-wave crisis, the success of treatments or the arrival of a vaccine could easily send stocks spiking higher.

This is the kind of anxiety you take on when you chase higher returns up the risk curve. I can’t blame millennials for having a go but I hope they’ve learnt to ‘gamble’ on quality businesses.

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