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'Robinhood isn't democratizing investing': 6 markets experts break down why Warren Buffett and Charlie Munger were right to trash the trading app

Business Insider logo Business Insider 2021-05-05 snagarajan@businessinsider.com (Shalini Nagarajan)
Warren Buffett, Charlie Munger are posing for a picture: Warren Buffett, CEO of Berkshire Hathaway, and vice chairman Charlie Munger. JOHANNES EISELE/AFP via Getty Images © JOHANNES EISELE/AFP via Getty Images Warren Buffett, CEO of Berkshire Hathaway, and vice chairman Charlie Munger. JOHANNES EISELE/AFP via Getty Images
  • Billionaire investor Warren Buffett and his right-hand man Charlie Munger have slammed Robinhood.
  • The online brokerage hit back, saying everyday investors deserve equal access to the markets.
  • Markets experts say investment success is more easily achieved by practicing buy-and-hold investing.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Robinhood this week struck back at Warren Buffett and Charlie Munger for comparing its treatment of the stock market to casino-like conduct.

Jacqueline Ortiz Ramsay, a Robinhood executive, said people are tired of the markets veterans acting like "the only oracles of investing."

Six experts told Insider why Buffett and Munger are right in their assessment:

More interest in speculation than investing

"Robinhood isn't democratizing investing. It is democratizing speculation and both Buffett and Munger recognize that. Calling most of the folks in the Reddit mob 'retail investors' is a misnomer. They are engaging in speculative activity, pure and simple. They may be learning about market mechanics - how to buy and sell securities - but that is the easy part. What they are not learning about is how to value securities. They are not learning anything about investing. And my fear is that many will lose money, conclude that the markets are a game rigged against them and simply exit financial markets." - Robert Johnson, PhD, a professor of finance at Heider College of Business, Creighton University

'Gamification' of trading

Buffett and Munger "are not the only investing experts, but they have proven to make the right investment decisions in the long run. [They] most likely refer to the 'gamification' of trading. Blinking lights, flashy animations, big buy and sell buttons, limited information about the company trades and limited analysis functionalities within the Robinhood trading app remind of a casino type of 'action.' TD Ameritrade still leads the list, but Robinhood's IPO this year could boost them to the top quickly." - Alexander Voigt, founder and CEO at trading-insights platform daytradingz.com

a hand holding a cell phone screen with text: Robinhood is hugely popular among day traders, which put it at the center of the GameStop frenzy. Justin Sullivan/Getty Images © Justin Sullivan/Getty Images Robinhood is hugely popular among day traders, which put it at the center of the GameStop frenzy. Justin Sullivan/Getty Images

Illusionary commission-free model

"I do not think Robinhood is correct that Buffett and Munger are bent on keeping the average American from reaping any of the rewards from equity ownership. Keep in mind that some of the criticism about Robinhood was their compensation for order flow. And from experience, the average investor is clueless that a broker-dealer could route orders to where they get the best fee and the client may not get the best execution. We also need to be aware that Robinhood will be issuing an IPO shortly and obviously wants activity to be high and negative comments few." - Morris Armstrong, founder and owner of tax advisory firm Morris Armstrong EA

"Robinhood boasts of 'commission-free' trading. Instead, it makes money by bundling up customer trades and selling these on to hedge funds/prime brokers. As a customer, you may object to this, or you may not care. It's just a business model. Just like Facebook and Google are apparently free services unless you want to put a proper price on your privacy and personal data. However, the gamification of trading is another matter. In the US, there's a feeling that trading, especially on an app, has become too attractive and too easy. And that it's being sold to people who don't know much about financial markets." - David Morrison, a senior market analyst at Trade Nation

a young boy sitting on a chair: Robinhood co-founder, Vlad Tenev. Robinhood © Robinhood Robinhood co-founder, Vlad Tenev. Robinhood

Losing sight of company fundamentals

"Buffett and Munger are correct. Robinhood fuels the irrational exuberance and gambling nature of investors by creating a casino-like environment. As the retail waves swell, the undercurrent of speculative behavior divorces a company's fundamentals from its stock price, creating a portfolio mis-pricing risk that most investors are unaware of. Retail investors that let this gambling sentiment, or herd mentality, continue to drive investment decisions are building portfolios that are subject to random outcomes. For a lucky few, this gambling behavior may provide short-term success. However, many will be left holding the bag." - Julian Koski, a chief investment officer at asset management firm New Age Alpha

Greater gambling risk

"Buffett and Munger are right in the sense that the average Robinhood investor will surely do worse than by investing in a low-cost total market index fund, though some will do better, and the risk is greater than from investing in the capitalization-weighted total market. This is because the more the transactions, the more they will lose to brokers and market makers. Their typical result will, in fact, be similar to the result of investing in an index fund plus a side investment with an expected negative return. However, many investors seem to want the gamble, finding it exhilarating, or, perhaps, educational, and would do it even realizing that it is likely to be a losing proposition. For those that want that, they probably can't do much better than to use Robinhood." - Michael Edesess, a former chief investment strategist, current adjunct associate professor at Hong Kong University of Science and Technology

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