Robinhood might learn a thing or two from Warren Buffett


A series of skirmishes have pushed back the growing pains of Robinhood in public view once again this week, underscoring the growing political risks to society.

A week ago, online brokerage was criticized by America’s most respected investor, Warren Buffett, who feared the platform would respond to a gambling instinct and turn stocks into casino chips.

A day later, Robinhood castigated the “elites”, which he said block open market access.

“If the last year has taught us anything, it’s that people are tired of the Warren Buffetts and Charlie Mungers of the world acting like they’re the only oracles of investing,” Jacqueline Ortiz Ramsay wrote, public policy communications manager at Robinhood. a blog post.

Then on Tuesday, Robinhood’s fledgling crypto trading service temporarily crashed amid a dogecoin frenzy. (For the uninitiated, dogecoin is a cryptocurrency created as a joke It’s a tribute to a meme of a Shiba Inu.) Later, Robinhood was forced to defend itself against a charge that it was a “dogecoin whale” that holds around $ 25 billion in cryptocurrency.

Gary Gensler, chairman of the SEC, testified before the House financial services committee on Thursday about the risks posed by Robinhood.

Like Buffett, Gensler is concerned that platforms like Robinhood will turn stocks into a game, causing users to trade more. This increased activity is then paid for in order flow payment, a controversial practice of channeling transactions to market makers in exchange for cash.

Robinhood reportedly earned $ 331 million from Order Flow payment in the last quarter. Of this total, almost two-thirds would come from options trading.

Robinhood can deregister Buffett, but not the SEC. And it would be good to heed the advice of the Oracle of Omaha: “We just try to be afraid when others are greedy and to be greedy only when others are afraid.” There are many signs that we are living in a greedy age, and that should make Robinhood fearful.

The Federal Reserve this week warned that sparkling asset prices were “vulnerable to large declines if investor risk appetite plummeted.” It’s not just public stocks: venture capital valuations rose sharply in the first quarter to build on already high numbers from last year, especially for late major cycles, according to the latest. PitchBook-NVCA Venture Monitor. When it comes to cryptocurrencies, well, you know that story.

For better or for worse, Robinhood has become a hotbed for foodies. In a seemingly fearless market, its customer base has grown to over 13 million.

As Robinhood prepares for an IPO later this year, the company may consider what will happen – and who could be blamed – if and when that greed turns into fear. In a stock market rout, will hordes of memes stock traders follow Buffett’s oft-quoted advice, or will they panic and sell?

A market correction could be a bloodbath for novice day traders, especially those who trade options or on margin. If the GameStop saga is any indication, regulators and politicians have already chosen Robinhood as their favorite scapegoat.

Here’s a modest proposition: Instead of arguing with Buffett, the company could use its platform to encourage the kind of common sense behavior it has long practiced in proselytizing. Robinhood already knows how to do this. The company’s gamified interface can be put to good use by implementing behavioral tricks that push people toward longer holding periods, diverse portfolios, and other reasonable goals.

Critics aside, Robinhood has a lot to celebrate and deserves to be commended for introducing a new generation of investors to equities. Moreover, his plan that would allow users to participate in upcoming IPOs – including his own – could be groundbreaking.

It’s unclear how much Robinhood’s business model relies on active trading, or if it can wean itself off from the big checks that payment for order flow provides.

But the company’s upcoming S-1 filing should clear that up by showing just how important those order flow payments are. Long-term investors may not be particularly suitable for Robinhood’s business.

Even if this is the case, Robinhood would be wise to put the financial health of its users first, protecting both a generation of investors and its own best interests.

As Buffett said, “The most important thing to do if you find yourself in a hole is to stop digging.”


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