HOOD Sees Tentative Gain: Are We Having Fun Yet?

Admit it. You bought into Robinhood because of the name. The whole idea of taking from the rich—the greedy 1%—and giving to the poor—the rest of us stuck in monetary mediocrity—sounded just about perfect. And it was. For a while. Their stock price soared right along with their customer base.

Then Robinhood stock hit the brakes. Poor investment mechanics had finally caught up with good intentions and whiz-bang marketing. Something was rotten in Sherwood Forest, and it looked like a lot of the poor were going to stay poor after all.

It made sense at first: A simple stock trading platform easily accessible on your phone, relying on a stripped-down menu of stocks, ETFs, and crypto, and all of it without any commissions. Company execs told us that “Participation is Power,” and it sure felt like it.

That was in 2014, and the bull market was still stampeding through Wall Street. All we needed to participate in Robinhood investing was a little bit of money we were okay with losing (but honestly, didn’t think we would), be at least 18 years old, have a valid U.S. address, and we were off and running. No minimums, no middleman managers to pay, no complex terms like IPO, NAV, or P/E Ratios to learn. Just pick a stock and get rich.

We loved Robinhood, and they loved us back.

In August 2021, their IPO went live at $38 a share and hit its high of $85 just a couple of months later. All was well. Then, of course, came the pandemic, the Ukraine war, and inflation, and the bottom dropped out of the markets.

Last week, HOOD was trading at 85% of their book value, and Atlantic Equities predicted they would fall to $5 a share. Instead, last Friday, they took a slight bounce back from $6.84 to 7.19, as if they were thumbing their nose—again–and in the face of the Fed’s .75% interest rate hike besides.

Although gasping for breath, Robinhood may still make it, but the odds are against them.

It turns out that all those acronyms–the IPO, NAV and all the rest–have a purpose. It’s true that no one can always accurately predict the markets, but over time, the metrics—the relationships between profitability and sustainability–really do help us decide whether a stock is a good bet or not.

And, as for the middleman managers, they’re there because they know more than we do. By ignoring both them and the metrics, Robinhood proved that, at least to some extent, we need them both.

The voids left by Robinhood’s omission of traditional brokerage procedures showed up most glaringly in their exclusion of diversified mutual funds, opting only for single stocks or ETFs. Well-managed mutual funds provide buffers between the nuances of the markets and the gaps in our own knowledge, but they do something else, too. They gather a group of stocks in one place that gives us a degree of broad coverage small investors just can’t do on their own.

Every one of these fund characteristics—management, diversification, and market buffering– benefits the small, inexperienced investor, just the kind Robinhood attracted, but did not provide adequately for. It was like showing them the menu, but not letting them order.

Robin Hood doesn’t offer retirement accounts either. Yes, this fits with their no-frills image, but when a brokerage passes up on all the tax advantages the Fed has put at our disposal, like the 401K, Roth, and municipal bond options, its clients by default are going to pay more taxes than they would otherwise have to, making Robinhood ultimately more expensive, not less.

It turns out that Robinhood isn’t exactly free, either. Although they charge no commissions, they do charge for outgoing transfers and, in December 2020, the SEC charged Robinhood for misleading customers through inferior pricing that deprived clients of $34.1 million and the brokerage agreed to pay $65 million to settle.

Then, in June 2021, their outgoing transfer fees were deemed by Federal Industry Regulatory Authority (FINRA) to be excessive enough that Robin Hood was fined $57 million in addition to the $12.6 million they were ordered to refund to clients.

One of the biggest flaps, however, came when their options trading algorithms malfunctioned, allowing otherwise ineligible users to trade on the options market, in which an investor commits to buying a commodity without actually having to pony up the money right away, kind of like a stock market credit card. It’s one of the trickiest trading moves possible and never recommended for beginners. The $70 million fine against them was the largest financial penalty ever levied by FINRA.

Another criticism was that their customer service was poor, bordering on nonexistent. Last year, they unveiled a customer support scheme that guarantees a call back from their reps within 30 minutes of a request, but even that lags far behind traditional brokerages, most of which offer knowledgeable customer service representatives available nearly 24/7.

One of Robinhood’s attractions was that it approached the stock market like a game, making it seem more familiar than foreign. The hard truth, however, is that it’s not a game, and by stripping investing of some of the formulas and mechanics that make it even halfway predictable, Robinhood made it sound easy and fun, but in fact made it both costly and dangerous.

Robinhood was right, though, about at least one thing. The market needs to make room for a new generation of investors who have no patience for what looks to them like unnecessary smoke and mirrors. Shaking up the status quo needs doing from time to time. It makes us think about entrenched systems in a new way and paves the way to improvement.

It’s still possible that Robinhood will be able to pull out of its tailspin and maybe, if they do, they can adapt enough to actually do what they set out to do–make a safe, congenial investing space for Gen Z.