In recent weeks it’s been impossible to miss the flurry of news regarding new investment trends by so called “Robinhood traders” which point out the way their unconventional methods are upending traditional investing approaches. From traditional investors’ perspective, stocks are an important asset class where their hard-earned money can be parked to counteract inflationary forces, create a passive income through diversified dividend-paying portfolios, increase net worth, or all of the above. Robinhood traders (largely comprised of millennials and generation z), on the other hand, are reckless renegades having fun on their cellphones in search of jackpots.
These youngsters often invest in worthless stocks or ETFs that aren’t even real companies. Some notable examples include USO (crude oil ETF) during the whole negative price debacle, JETS (Airlines ETF) after Warren Buffett announced he was dumping them because they weren’t attractive, Carnival Corp (the cruise lines) after the stock lost 75% of its value and HTZ (Hertz Car Rental) after they declared bankruptcy.
When Warren Buffet, whose favorite holding period is “forever,” made an exception by dumping airline stocks, he sent a strong warning signal Wall Street that things were bad. On Robinhood, however, this was taken as a trading signal. News outlets are having a field day with the absurdity of having droves of thumb traders flock to put their money into an insolvent Hertz worth negative $1.8 billion.
From a glance, it would appear there’s no rhyme or reason as to why these commission-free warriors are attracted to these stocks (or ETFs). But a deeper dive reveals a common denominator which gives a whole new meaning to the age-old principle of buying low and selling high: the stocks are “cheap.” In fact, this principle is so universal that it applies to gamblers and value investors alike.
“But they’re doing it wrong!”
Are they? True, the way this approach is supposed to work is by dedicating painstaking resources, instinct and a bit of luck to find companies whose market value is below their book value. Instead, these youngsters are quite literally looking for securities that have taken a recent nose-dive or have share price close to $0—in hopes the price goes up and have no consideration for what’s under the hood. For all we know, they scan headlines for distressing news or simply list the stocks on a spreadsheet and sort by price.
And boomers can’t stand it. They point out that this approach is senseless and will end badly. Billionaire investor Leon Cooperman was quoted saying “They are just doing stupid things” and the rise of these traders will “end in tears.” They’ve reversed the spirit of buying low by buying a company whose market value is well above its negative book value. They’re making a mockery of a craft that takes a lifetime to master.
What they fail to realize is that this new breed of stock aficionados isn’t interested in the long run. They hedge their bets in case the companies indeed go to $0 by holding for a few days or hours. They’re not waiting for dividends. Who cares if a company whose share price is $2 is dissolved, as long as it goes up to $5 before then. Just to be clear, I’m not implying that this is a successful strategy—it’s impossible to know.
What we do know is that there has been some success to this strategy. There was enough demand for low-priced Hertz that stock prices actually went up. So much so, that it decided to ride the craze by selling new and admittedly worthless shares in hopes of paying off its creditors. All because the stock was “cheap.”
The current top ten most popular stocks on Robinhood are Ford, General Electric, American Airlines, Disney, Delta Airlines, Carnival Corporation, GoPro Inc, Microsoft, Aurora Cannabis Inc and Apple. From this list, seven stocks either have taken a serious beating due to current events, have share prices under $10 or both.
And for this reason, I predict a new wave in stock splits. A maneuver made popular during the dot-com era whereby companies artificially lower their stock price without affecting market value by multiplying existing shares at a fraction of the price—all in hopes of turning into Robinhood’s next darling.