Why Day-Trading Doesn’t Work | The Motley Fool

In this episode of Motley Fool Answers, Alison Southwick chats with Motley Fool contributor Matt Frankel and Fool retirement expert Robert Brokamp about the perils of day-trading and swing trading. They show how Robinhood can be an excellent tool when used the right way and the importance of research and informed decision-making while investing in stocks. Learn about the many pitfalls of day-trading and how historically it hasn’t worked and much more.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

[embedded content]

This video was recorded on June 23, 2020.

Alison Southwick: This is Motley Fool Answers. I’m Alison Southwick, and I’m joined, as always, by Robert “go big or go” Brokamp. Hey, Robert, how are you doing?

Robert Brokamp: Swimmingly, Alison; how are you?

Southwick: In this week’s episode we’re joined by Motley Fool contributor, Matt Frankel, to talk about the rise of the Robinhood trader. All that and more, on this week’s episode.

So, Bro, what’s up?

Brokamp: Well, on this show, Alison, I have mentioned several times, probably, that my favorite investing book of all time is Stocks for the Long Run by professor Jeremy Siegel, a professor at the Wharton Business School. It’s a great book in terms of emphasizing the long-term benefit of stocks, how they outperform bonds and cash, but also has a lot of really interesting history, history of the Fed, history of the Great Depression, so all around a great book. So, I was excited to see professor Siegel as a guest on a podcast that I listen to regularly, it’s the Masters in Business podcast with host Barry Ritholtz.

It was interesting because I think Siegel explained something that is a key difference between the Great Recession of 2007-2009 and what’s going on now. You may remember, of course, the Fed did a lot back then in 2007-2009. We were all worried about inflation taking off with all the stimulus, but it didn’t happen. Siegel makes the point that all the stimulus that happened in 2007-2009 went to the banks, and then the banks held onto it. They didn’t lend it out, they kept it in reserve, because they were all worried about themselves going under, it didn’t actually make it into people’s pockets. This time it’s different. We talked about it in the last episode how the savings rate has jumped to 33% and how banks have noticed this 20%, 30%, 40% increase in the balances in bank accounts. The stimulus is making it into people’s pockets. And Siegel thinks that’s going to make this recovery look very different.

First of all, he thinks that’s why the stock market has recovered, because at some point, the stock market recognizes that things will go back to normal and people are going to have all this money to spend, it is going to be very stimulative. So, he predicts basically three things that are going to happen because of this. At least I boil it down to three things. No. 1, the bull market in bonds is over, according to Jeremy Siegel. So, back in the early ’80s, the 10-year Treasury hit almost 16% and has gradually gone down to where in March it was 0.5%. When interest rates go down, bond prices go up. To that point, if you look over the last 40 years, bonds have actually returned about the same as stocks. He says, it’s over. He says, that that point where we hit in March at 0.5% on the 10-year Treasury, not only is that the low for this cycle, that’s the low of our lifetimes. We’re not going to see 10-year Treasury hit that low again, they’re going to go up 2%, 3%, 4%, maybe, probably closer to 3%, he thinks, that means bond prices are going to go down. So, in other words, people who invest in bonds for safety, they wanted to secure that money, but actually it’s not going to be so secure. The takeaway for me is, for money you want to keep absolutely safe, at least in the short-term, cash is your better bet.

The second point that Siegel brought up is that inflation will return this time, we didn’t see inflation after the Great Recession, this time we will. Nothing crazy, like, 3%, 4%, 5%, but we haven’t seen that in decades, so people are probably going to freak out a little bit about it. And for the first time ever, he’s recommending that people have a little bit of gold in their portfolios as an inflation hedge. It’s not something that I personally recommend, but when I hear someone like him recommend it, as well as Ray Dalio of Bridgewater, one of the more successful hedge funds in history, it kind of makes me want to take another look at gold. So, it’s something that I probably will consider. And another reason why bonds are not going to be good, because if you have a bond that’s paying 1% or 2%, but inflation is 3%, 4%, 5%, you’re losing purchasing power.

And then the third point is basically, he still believes in stocks for the long run, and that’s not surprising, he’s kind of known as a permabull, that’s not necessarily true, he actually became somewhat bearish in March of 2000 right as technology stocks were peaking. So, he does have times pointing out where stocks are – at least certain types of stocks are overvalued. But especially, when you compare stocks to bonds and cash, it just doesn’t make sense to have an overweight in anything really than having most of your money in stock. In fact, he says, the classic balanced portfolio of 60% stocks and 40% bonds, that really nowadays should be 75% stocks, 25% bonds. He told CNBC earlier this year you should tilt them toward dividend-paying stocks. It’s interesting for me, because in the RYR model portfolios, Rule Your Retirement, the service that I run at The Motley Fool for retirees, we do recommend 60% stocks, 40% bonds. I think it is time we take a look at that, but it’s also important to point out that even Jeremy Siegel thinks you should have some money out of the stock market. In this bland model portfolio, he says 25%, I’m sure he would recommend even less for more younger, aggressive investors, but I think it’s notable that even someone like Jeremy Siegel thinks some people should have a little bit of money on the side.

And that, Alison, is what’s up.

Southwick: Alexander [Curran] is one of millions of people who recently found time on their hands amid the pandemic and decided to take up day trading. He discovered that a trade he made went sideways and he now owed $750,000. While it’s still not clear whether he actually owed $750,000, it is very clear that he didn’t understand what he was doing and was in over his head. He committed suicide as a result. And in his note to his parents he wrote, “How was a 20-year-old with no income able to get assigned almost $1 million worth of leverage?”

So, today, we’re joined by Motley Fool contributing analyst, Matt Frankel, to talk about the rise of the so-called Robinhood trader. Matt, thanks for joining us.

Matt Frankel: Good to be here. This is such an important topic for new investors, especially, to learn about, so I’m excited for this.

Southwick: Yeah. Well, before we get into it, how about we teach our listeners a little bit about who you are, where are you coming to us from?

Frankel: Sure. Well, I am in South Carolina physically. I’ve been writing for The Motley Fool for about 10 years now in one capacity or another, I specialize mainly in personal finance, I’m a Certified Financial Planner, but I also cover real estate and banking as my two areas of specialty. And I write across all The Fool properties, The Ascent, Millionacres – our new real estate site – and a lot of our premium services. So, I’m, kind of, [laughs] have many hats at The Motley Fool.

Southwick: Yeah. The Motley Fool has many hats, so thanks for helping us out on all those different fronts. Let’s start with the basics. So, can you explain day trading, because here at The Motley Fool we focus on long-term investing. And I definitely didn’t know much about day trading until I had been at The Fool for a while. So, what is it?

Frankel: Well, at its core, day trading means moving in-and-out of stock positions during an individual trading day, but we can kind of expand that term to include any type of short-term trading, which is really what’s going on today. I know a lot of the so-called Robinhood traders, and they’re not necessarily pure day traders in that they’re moving in-and-out of positions minute-by-minute, but you know, holding onto an airline stock for two days or something like that, which has historically been called swing trading, when you try to profit off small price movements. So, day trading at its core is moving in-and-out intraday, but we can kind of expand that to any type of short-term trading.

Southwick: Yeah. And at The Fool, we tend to invest in a company because we believe in it for the long-term, and so that’s why we use the term “invest,” whereas with day trading I feel like it’s more you don’t really care about the company that’s attached to the chart, in some sense you’re just looking for little blips on the screen. When I think of day trading, I think of someone looking at tons of charts and candlestick charts, and, oh, I saw this indicator, so I bought, and what does it matter what the ticker is.

Frankel: Right. And to me that’s like the modern-day version of getting your palm read, [laughs] is looking at the charts and things like that. But you’re right in the sense that day trading is more of a price centric form of buying stocks, meaning I’m buying, you know, American Airlines because I think it’s going to be worth more next week, not because I think it’s a good business, or I’m buying stock of XYZ bankrupt company because I think it’s appealing at pennies on the dollar, as opposed to looking anything into the merits of the business itself.

Southwick: Yeah. There’s a lot of comparison right now with so many people getting into trading, investing, day trading, that they’re saying it’s a lot like the 90s all over again. So, I was around in the ’90s but I was not necessarily investing or doing anything adulting. But now I’m going to make it sound like you guys are a lot older than me, but I mean, I don’t know, whatever, what was it like in the ’90s, grandpa?

Brokamp: Well, let me tell you. [laughs] Well, I will say this, right, I think the thing about the ’90s, and the ’90s when I first became interested in personal finance, it’s when I started first owning my own individual stocks and it’s when I joined The Motley Fool, it’s when The Motley Fool took off. So, the thing about the ’90s was, there was this new technology called the internet that allowed people to buy stocks on their own without calling a broker. Commission prices came down, so it made day trading more efficient and it made it cheaper. And you had a situation where stocks just kept going up, so anyone could day trade and look smart. And I think you have some of that going on now. One of the things that is fueling this is that Robinhood eliminated commissions and then plenty of other firms followed suit. So, you don’t have to pay $10 or $15 to get in and $10 to $15 to get out, it’s free. Plus, a lot of these people have just started since the market bottomed in March, and it has been easier to make money over the last two months or so.

Frankel: Right. So, Mark Cuban also had something to say about this recently where he compared it to the dot-com bubble, and he was definitely there for that. I personally wasn’t, I was in high school in the late 1990s. I think I bought my first stock in 2003, but there are a lot of, kind of, parallels between what’s going on now and then. The low commissions were the, kind of, gateway in the 90s toward being able to day trade, there were also fewer regulations restricting day trading. Right now, you have what’s called the Pattern Day Trader rule which really limits low balance accounts in their ability to day trade. If you have under $25,000, there’s a lot of restrictions on what you can and cannot do in short-term trading right now. So, that didn’t exist in the 90s, so it was kind of the wild west in terms of day trading, especially the online brokerages, low commissions, things like that. So, it looks like it might be the late-90s all over again in terms of trading and the new innovations that we’ve seen in the industry.

Southwick: Yeah. In general, how did it turn out for people in the ’90s, Bro? I think you did some research, generally, also into how successful people are with day trading.

Brokamp: Right. So, I mean when you look back at the ’90s, it actually didn’t work out so well for a lot of people because some of the stocks that were most frequently day traded were technology stocks, dot-com stocks. And many of those suffered significantly starting, generally around March of 2000 and many of those companies went out of business. But even as I was preparing for this episode, I thought, you know, we at The Motley Fool have been saying, you shouldn’t day trade since I’ve been at The Fool for more than 20 years. And I thought, like, what’s the evidence of that? Like, is there evidence that establishes why it doesn’t work?

So, I came up with actually five ways that, basically, day traders have the odds stacked against them. And very quickly, No. 1 is that, just the odds are not as much in your favor, the more you shrink down your timeframe. So, I’ve mentioned on the show before that if you look at U.S. large cap stocks, 5-year holding periods, you make money 88% of the time; 10-year periods, it’s 94% of the time; 20-year periods, you always make money, historically speaking. If you’re only holding a stock for a day, what’s the historical odds you’ll make money? Well, a company called Crestmont Research actually looked at this from 1950 to 2019. Stocks go up about 54% of the time from the day-to-day basis, so it’s just a little more than a coin flip, and it’s pretty consistent from decade to decade to decade. The worst decade was the 70s, you made money 51% of the time. Best decade was actually this last decade, you made money 54% of the time. So, you’re kind of just flipping a coin.

The second thing is that if you are doing what Matt said is the pure day trading, that is, you’re only holding it during the day, usually when the market is open, you’re missing out on the afterhours market. And Bespoke Investment Group actually looked at this since 1993, which is when the SPDR was launched, the SPY ETFs, and looked at what returns you had if you just held it while the market was open from 9:30 to 4:00, at least here on Eastern; as opposed to if you bought it right as the market closed and sold it right as the market opened. Since 1993, if you just held it overnight, you would have made 570% total return. If you only owned it while the market was open, you made 3%. 99% of the returns of the S&P 500 happened after the markets close, because that’s when companies release their press releases, they release their earnings, economic reports come out, things happen in Europe and Asia that affect the market. So, if all you’re doing is trading during the day, you might be missing out on some of the biggest returns.

There are several studies that have looked at day trading, every single one of them has demonstrated that it doesn’t work, some of these are a little older, some of them are from other countries, but the most recent one that got a lot of attention was from Brazil. And it looked at day trading over a couple of years from 2013 to 2015, found that 97% of all individuals who try to day trade for more than 300 days lost money, only 1.1% earned more than the Brazilian minimum wage. And every other study you look at finds the same result.

And then a couple of final things is, just higher taxes, right? One of the reasons why you would hold onto a stock for long-term is you get long-term capital gains. If you hold on to it, for stock, a day, most people listening to this, they’re going to pay a 15% tax rate on long-term capital gains, if instead you own it for short-term, you’re going to pay 22%, 24%, 32%, up to 37%, so you’re giving away a lot of your gains in taxes.

And then finally, a big part of the stock market’s return, anywhere from 20% to 40% of it over the long-term, is due to dividends. To get a dividend, you have to own a stock on one certain day, usually four times during the year, but if you’re day trading in-and-out, you’re not going to get those dividends.

Frankel: Those are actually the great [laughs] explanations of why day trading is bad, there’s specific reasons why platforms like Robinhood, kind of, encourage, you know, uneducated traders to really make bad moves like that, but that’s a great overview of why day trading is not in your favor.

Southwick: Yeah. I don’t want to make it sound like we’re attacking Robinhood. Robinhood is a tool. And I don’t know enough about it to say that they’re a horrible tool, but they seem like a tool that you can use to invest or it’s a tool you can use to day trade, which we would argue is not the smartest move, I guess. Should we? Should we be bashing Robinhood? I don’t know. Should we?

Brokamp: Well, just looking at the trading volume on most discount brokerages, since they’ve eliminated commissions, all of them have gone up. So, it isn’t just people on Robinhood who have increased their trading volume and are basically doing more trading rather than just buying a stock and holding onto it for three, five, 10 years.

Frankel: Right. When I published an article about the Mark Cuban comments about how this is like the dot-com bubble, I got a lot of pushback on how we’re always bashing Robinhood investors. And there’s a big distinction here, because we’re not bashing Robinhood investors, it’s traders that we have an issue with. If someone wants to go on Robinhood and buy, you know, a share of Apple and hold it for the next 50 years, there’s nothing wrong with that, it’s a great vehicle to do that. Robinhood allows fractional shares, so if you wanted to, say, invest $100 in Amazon.com, which wouldn’t be practical with most other brokers, that’s a great use of Robinhood.

The problem is, there’s a lot of features of Robinhood that kind of encourage short-term trading. I’ll give you just a couple of examples real quick. One, Robinhood’s platform is very, very lacking in educational resources when compared to, say, a TD Ameritrade and E*TRADE or a Schwab, they’re designed as a no-frills trading platform, whereas if you log in to, say, TD Ameritrade, you could spend entire days reading through their educational resources on the dangers of option investing, how to properly set up a covered call strategy or how margin works and things like that. And you could spend a whole day reading those, whereas on Robinhood it’s very, very minimal. Actually, they’re the only platform, that I know of anyway, that charges zero commissions on options trading, which is where a lot of traders find themselves getting into trouble. You know, using options, when they don’t really understand. They have some of the cheapest margin rates.

If you have a premium membership with Robinhood, which is I think $5/month, the first [laughs] $1,000 of margin is interest free, and above that, I think, it’s a 5% margin rate, which is about the cheapest you’re going to find. And finally, there’s a lack of customer support or customer support is pretty much an automated chatbot and a very slow email process from what I hear, there’s not even a published customer service phone number on Robinhood’s website, if you want to call and get some assistance from a person …

Southwick: … and it goes down pretty regularly. Like, you see on Twitter when Robinhood goes down and people are mad that they couldn’t close their options or whatever that they wanted to do.

Frankel: Right. And there’s not even anybody you can call in that situation. And not to mention there’s cryptocurrency trading available on the platform, which is you know —

Southwick: What could go wrong?

Frankel: Right. That’s clearly [laughs] intended toward the younger crowd that wants to make money quickly, if you ask me. But all those things kind of really, you know, I also don’t want to say encourage short-term trading, but it definitely facilitates it.

Brokamp: I think, I do also agree that to a certain degree Robinhood has facilitated some people getting into investing, which is a good thing. And I realized this recently when my millennial daughter texted me a screenshot of her Robinhood account, which I wasn’t even aware of. And she said, these stocks look good, I’m getting into Robinhood. And I love the idea that a lot of these people are trading for the first time. And even if they try day trading, they’re going to learn very quickly that it doesn’t work, and learning that now, when they don’t have a lot of money, is a good idea.

So, I think Robinhood deserves some credit for that, getting people into investing. But like Matt said, the tools are not there, and obviously, a lot of the information that the fellow you mentioned earlier in the show, the disclosures weren’t there, the education wasn’t there to learn, like, really in the end he actually probably didn’t owe that much money, but it wasn’t clear, and I could imagine, which is very, very shocking.

Southwick: Alright. So, we’ve talked about, sort of, Robinhood and the rise of zero fee trading platforms. I think another reason why we’re kind of seeing this 90s all over again is the pandemic and quarantine means that people have time on their hands. And in some cases, they oddly have more money. We talked about how the savings rate is up in America. I don’t know if we talked about it last week, I don’t know, again, time is without meaning, so at some point you talked about it. But also, people apparently are more likely – like, people are taking their stimulus money and investing it. So, CNBC cited research from Envest Yodlee (sic) [Envestnet Yodlee] that found that people earning between $35,000, and 75% annually, increased their stock trading by 90% more than the prior week after receiving their stimulus check.

So, yes, people have some extra time on their hands and some extra money. And so, it seems like that’s another factor that’s causing people to start investing more; and with the market dropping.

Frankel: Yeah, for sure. A lot of people definitely have time and money on their hands. You mentioned the savings rates. Banks reported over $860 billion of inflows in April alone. So, this is not just stimulus checks that people, you know, you have money to spare. I mean, all the stimulus checks issued don’t add up to $800 billion, so it’s the enhanced unemployment benefits. I read that in some industries people are making double what they would have from working from just unemployment benefits right now. Like, the hospitality industry, in particular, is a big one where they’re getting extra money. So, people do have a lot of money and a lot of time. And there’s really nothing to fulfill [laughs] the urge to gamble, I guess you would say.

Southwick: Yes. So, Bro, do you feel like your daughter opened up a Robinhood account because – why do you think she did it? Because I also hear that, like, “Stock prices were too high but now we have a market drop, so buy low,” and now is my opportunity to do it. But why do you think your daughter did it?

Brokamp: So, talking to her, her friends are doing it. So, she learned about it from her friends. Now, she’s heard me talk about money over and over again …

Southwick: … Boo! not cool.

Brokamp: [laughs] But this is a great thing. So, she was over for Father’s Day, so she’s going to be 29 in a couple of weeks. And she’s telling me how much she is loving reading The Millionaire Next Door, which I gave to her years ago and she finally picked up. So, I don’t know if the interest in money came first and then came Robinhood, or Robinhood came first and then she got interested in money, but it is now all, sort of, coming home for her. This interest in money and this idea of being financially independent and calculating where she is, like, relative to other people her age, it’s all wonderful. But it did start with other people talking about Robinhood and getting excited about it.

And I think part of it is that it’s on the phone. You can do it anywhere, if you’re sitting on the metro, she takes the metro all the time, and you have nothing to do, you can pull up your Robinhood account and see how your stocks are doing.

Southwick: Alright, Matt, you touched on something earlier that I want to dig deeper into, and that’s the idea that one of the other reasons why day trading is having such a resurgence is because people miss stuff to bet on. New York Times, for example, did a recent article, Trading Sportsbooks for Brokerages, Bored Bettors Wager on Stocks, and it’s all about these guys who used to gamble on sports and then they’re like, oh, I don’t have sports anymore, I guess I’ll gamble on stocks now.

Frankel: Well, it’s not just sports gambling, remember, casinos have been closed as well.

Southwick: Oh, yeah, that too.

Frankel: So, now that we’re seeing casinos open back up, we’re seeing sports are supposedly going to start next month in some cases. I think the baseball season they’re going to restart next month. Hopefully, [laughs] that’ll eliminate some of the trouble. And it’s not just the gamblers themselves, it’s the prolific gamblers who are really romanticizing day trading as kind of a substitute. We’ve mentioned Dave Portnoy. I’m sure you and Bro have heard of Dave Portnoy.

Southwick: He’s amazing.

Brokamp: Oh, yeah.

Frankel: [laughs] Have you followed his trading system yet?

Southwick: I have not followed his trading system, but I have – so, I did watch a video of him, because basically, if I understand this, he streams, like, the last hour before the market closes, right? And he’s basically at his computer and he’s gabbing, over half-a-million people watch him every day.

Frankel: That’s scary.

Southwick: I know, right? Well, I guess that’s the point. And so, what he did that day is he yelled a lot at Ron Insana, because I think maybe Ron Insana threw him some shade on CNBC. So, he was yelling a lot, and every other word is an f-bomb. But he basically decided that it was so easy to invest that he got a bag of Scrabble tiles, and he’s like, I’m just going to pull out Scrabble tiles and if it’s a ticker with enough trading volume, I’m just going to buy it. And so that’s what he did, he kept pulling – it’s harder than you’d think to actually form tickers out of just pulling tiles out of – like, that was the hard part. And then once he pulled out Macy’s, so I think he traded $150,000 on Macy’s because that’s what he pulled out of the bag. He also pulled out the ticker for Raytheon, and that’s what he did, and he ended the day down $142,000, because of a bad trade on Spirit Airlines, but it’s fascinating. I mean, Jason Moser always says, it’s entertainment, its entertainment. But at the same time, it’s also scary if there are people who are thinking they can take the same amount of risk that this millionaire is, because he’s a multimillionaire.

Frankel: Right. And what I was reading is that the entire amount of money that Dave Portnoy has put into the market is less than 1% of his net worth. So, it’s important to point out that speculating on stocks is not inherently bad if you do it with money you’re prepared to lose. If I was going to take $100 to the casino to play blackjack and instead want to make some speculative bets on stocks, it’s really the same thing, as long as I know what I’m doing with that money. It’s when people think that there’s no way to lose and with some things that Dave Portnoy says, I’ll read you a quote that I read you off the air earlier, “Why take profits when every airline goes up 20% every day, losers take profits, winners push the chips into the middle.” That’s where you kind of blur the lines between recreational gambling and dangerous thinking that you can’t lose. Nobody who walks into a casino thinks that they’re going to win every time they put money into the slot machine.

Southwick: Yeah. And I guess, actually we should say some background on him. Like, he was the Founder of Barstool Sports, which is big on sports and betting on sports. And when he didn’t have sports, he’s smart enough to be, like, well, I still need a way to keep my lights on, make money, keep busy, be entertaining, so I’ll do this now, because it’s, you know, now another business idea for him. Was it you who said on Industry Focus that if you talk to these different day traders, they make more money selling their system for day trading then they do actually day trading? [laughs]

Frankel: Yes. And I can’t say that in Portnoy’s case, just because he definitely does put a lot of money into the market. A lot of times when you see these, you know, people who’ve sold a million books on how to day trade stocks. They made more money selling those books than they did on actual day trading. I want to say 100% of the time, but most people who sell a trading system make more money from selling the trading system itself.

Southwick: Yeah. Well, it’s fascinating how – because again, I was watching his video, and again, you can view it as entertainment or you can view it as something dangerous for people who don’t understand the risk involved. But he says stuff that we’ve said at The Fool before, where it’s like, “Wall Street doesn’t want you to know that you can do this yourself,” and I’ll be like, well, yeah, that’s true, yeah, they want you to pay them to do it for them, that’s true. And I’m like, but, no, the answer is not day trading, [laughs] that’s not – I’m like, yes, I am there with you up until you start talking about dropping, you know, $150,000 on some Scrabble tiles. So, on the one hand, I’m like, yeah, that’s great. To your point, Bro, that’s great, new people are learning more about the stock market, but they’re going to learn the hard way, they’re going to get burned.

Frankel: Right. And, I mean, what he’s doing is inherently not bad. I mean, the points you were saying, like, you know, you don’t need to be a Wall Street insider to make money in stocks, that’s true. But I wish there was a Dave Portnoy of investing right now [laughs] who was, you know, kind of romanticizing the long-term investing, if that’s even possible to do.

The reason most people don’t invest the right way is because it’s not, you know, exciting and fun and thrilling. I mean, the stocks I’ve done best on, I’ve owned for years and years and I don’t even check them regularly anymore, to be honest with you, in a lot of cases, I couldn’t tell you the share price of Apple, which I’ve owned for about a decade. Because it’s not exciting, but it’s been the best contributor to my growing wealth over time, I guess you would say.

Southwick: Yeah. So, there was this talking point for a while that the reason why the market didn’t fall as much as it should have, because we’re in a global pandemic, was because Robinhood investors were piling money into the market and bolstering it up, is that true? I feel like Robinhood investors would still be the smallest percentage of the global investors in the world.

Frankel: They are. So, I don’t buy that in the context of the broad market. The typical Robinhood account has less than $5,000 in it, in many cases a lot less. Robinhood is about 13 million users right now. If all of them had $5,000 in their account, that would be a total of $65 billion. That is a small, small, small fraction of the trillions of dollars of volume that flows through the stock market every day, so.

However, I would buy that in the sense that it’s moving some of these cheap stocks. If you look at just some of the names on the top list of Robinhood stocks, like, GoPro is a major Robinhood stock. Carnival Cruise Lines, I would absolutely buy that Robinhood traders have had a big hand in moving those stocks. But as far as the entire stock market goes, no, I don’t think Robinhood traders had anything to do with the sharp rise we saw. I think that was just more, the market realized that we’re avoiding the worst-case scenario during the pandemic.

Southwick: Can you explain the Hertz story to me, because that’s kind of a fascinating story too, speaking of Robinhood investors coming together to do something.

Frankel: There are parts of the Hertz story I can’t explain to myself, but [laughs] having said that. If you’re not familiar, Hertz is the car rental company, declared bankruptcy, after they declared bankruptcy, they hit a low of about $0.40/share on May 26th. And because of the Robinhood community, primarily, the shares soared by over 1,000% at one point and hit a high of over $5.50 on June 9th. This is a bankrupt company, the company specifically – Hertz itself warned investors, if you buy our shares, you will likely lose your money. Over 170,000 Robinhood investors now have Hertz shares in their portfolio, which have since dropped to about $1.45. So, it’s a bankrupt company that has no intrinsic value at this point whatsoever other than the small prayer that they might get some money out of bankruptcy proceedings.

It just kind of goes to show you the herd mentality of Robinhood investors that would put that much into an essentially worthless security just because of – it’s essentially the “greater fool” theory that someone a few days from now is going to pay more than I did for this. There’s really no other reason to own those shares.

Southwick: Yeah. And is that a trend? Like, do they like to buy beaten down stocks, like Carnival; buying a cruise line is a gutsy move right now.

Frankel: Right. I mean, when I look at the top 10. Robinhood is very transparent about the stocks their investors own. That’s one thing I can say about them compared to other brokerages. And you see other names that are really – it’s the low share price stocks that their investors tend to focus on. Ford and GE are the No. 1 and No. 2, American Airlines is No. 3, beaten down airline stocks.

To be fair, some of the stocks that are widely owned by Robinhood investors are good long-term investments. Disney is No. 4. Apple is among the top 10 list. Microsoft is on the list. But the majority are these speculative names that trade in high volumes, they’re very volatile lately. And for the most part have very low share prices. So, it’s easier for investors and Robinhood to buy larger quantities of these shares in the hopes that they’re going to get – and it’s a very common myth among new investors in general, and not just the Robinhood crowd, that if I buy low share price stocks, they have the most potential to shoot upward, which is absolutely not the case. In many cases, these are stocks that are cheap for a reason and you’re more likely to lose money with them than if you buy a high-dollar stock, like an Apple or Microsoft.

Southwick: Well, I can keep talking about this for a lot longer, because I think it’s so fascinating, but how about for you guys, let’s provide a spoiler to our listeners, where does this all end. If the past is prologue, what have we learned about where a bunch of people getting into day trading is going to end up?

Frankel: Well, I guess I’ll go first with that. I think it’s going to end badly for a lot of Robinhood traders, but the silver lining is that these are mostly small accounts. You know, if you see a Robinhood trader that has $20,000 in their account, that’s the exception, most of these are small traders. So, if they can learn these lessons on small accounts, it’s not necessarily the end of the world. I mean, my first investment ever was I think a penny stock that lost all my money, but it was for about $200 and it was a good investment to learn, it made me want to learn how to invest correctly. So, my hope is that out of this comes some good. I’m an eternal optimist, so my hope is that the Robinhood crowd will take this opportunity to learn how to invest for the long-term.

Brokamp: Yeah, I agree with that, and I would also say, to the extent that this is due to the shut down and lack of sports and lack of other things to bet on, you know, that will change. At some point life will return to normal and people will have other things to focus on. And my hope is that those people with their accounts then just stop paying attention to them, they remember it two, three, four, five years later and are happy that it’s likely gone up at that point and they’ve learned that all you have to do is buy some good stocks and leave them alone and you’ll do fine.

Southwick: Yeah. I hope it just doesn’t burn a lot of people and turn them off from investing entirely.

Brokamp: Yeah. And I think that’s a risk; I think that is certainly a risk. And hopefully, they won’t feel that way. And the other issue too is that a lot of Robinhood accounts are taxable accounts, they’re not retirement accounts, and hopefully, people will be still be putting most of their money in their 401(k), get that employer match that tax advantage growth, and that will be left alone to grow through the years.

Southwick: Yeah. Well, Matt, thank you so much for joining us. This is, again, just been such a fascinating discussion, I really appreciate you coming on.

Frankel: Of course. I had a great time.

Southwick: Okay. As always, The Motley Fool may have recommendations for or against the stocks we talked about, don’t buy and sell stocks based solely on what you heard here or anywhere else for that matter, do your research, right, yes, OK. [laughs]

That’s the show, it’s edited day trade-ly by Rick Engdahl. Our email is [email protected]. For Robert Brokamp, I’m Alison Southwick, stay Foolish everybody.

Leave A Comment?

You must be logged in to post a comment.