Can An Army Of Day Traders, Led by Dave Portnoy and Robinhood, Compete Against Wall Street?

published in Blogs

Mar 10, 2021

Robinhood, a popular online trading platform, saw a historic 3 million new accounts during the first quarter of 2020 as sports betting came to a halt and many people turned to the stock market. However, even as the sports world starts back up, take note of the many new traders that are sticking around to test their skills.

Not only are there millions of new day traders entering the market, I believe they are doing so without the proper education. Acting as a leader for this wave of millennial traders is Barstool Sports CEO Dave Portnoy. As he livestreams his trading activity to an audience consisting mainly of college students and young professionals, it’s no wonder that he has been a catalyst for this surge of millennial investors.

Portnoy has added some value by attracting interest to the market, and Robinhood is a valuable platform, but neither are providing new traders with the information they need to be successful. Without support and guidance, novice investors have no hope of competing against Wall Street traders and are in danger of falling into financial trouble.

I found five experienced investors, versed in topics such as trading, artificial intelligence, and banking, and got their insight on Portnoy, Robinhood and how the new day-traders can make sure they are set up for success.

Lou Haverty, CFA, founder of Financial Analyst Insider
Shanka Jayasinha (LinkedIn), co-founder and CEO of EDGE AI Technologies
Daniel Caughill, financial journalist
Paul Claybrook, author of The Market Made Easy
Graeme Harris, founder and owner of Trader Caps

Here are our conversations and their valuable input on significant questions that myself, and many others, have been considering.

Can you provide an example of a possibly dangerous financial situation due to ignorant trades and a lack of knowledge about the market?

Daniel Caughill, financial journalist: By and large, these novice traders confuse the nature of a trade and that of an investment. You can make money off of any stock if you understand how to read the charts and time the volatility, or if you learn how to trade options. But too many of these newcomers buy a penny stock hoping it will spike in the next few hours. If it doesn’t, or if it goes down in value, they make a mental shift from “this is a day trade” to “this is a long-term investment.” The problem is, most penny stocks only lose value over long periods of time, and these “investors” will be left holding the bag.

Paul Claybrook, The Market Made Easy: It is a common practice among Wall Street novices that when the market gets “hot,” they get excited and make decisions based on that excitement rather than rational thought. This happened in 2000 and again in 2007. A common mistake is to take out debt (e.g. credit card, home equity, etc.) to invest in ‘a sure thing’ that ends up being not-so-sure and not only does the investor lose money but now they also owe interest on the loss!

Trader Caps: Many novice investors make the mistake of seeing a stock crash and think that it’s an amazing opportunity to buy that stock. The reality is that during the latest market correction, some stocks crashed much, much harder than others and may have looked like an excellent buying opportunity, when in reality what this showed us is that these stocks were relatively much, much weaker than others. Although we might see some recovery in those stocks, there is immensely higher risk in holding these than there is in holding the companies which barely dipped at all during the market correction. Robinhood shows the most purchased/popular stocks on its platform and so we can see an example of this with Delta Airlines or Royal Caribbean, although once a great company, with the pandemic and new regulations the future is incredibly murky for these companies.

What information is the most important for them to have in order to compete with Wall Street, and what advantages does artificial intelligence offer?

Lou Haverty, Financial Analyst Insider: One major advantage for professional traders is they often get better pricing execution. So short term traders really can’t compete with the professionals and shouldn’t try. However, long term buy and hold investors can get a really great deal by paying no commission and just holding for the long term. In those trades, not getting a perfect price execution doesn’t make much difference over the long term.

Shanka Jayasinha, EDGE AI Technologies: New day traders do not always know what they are doing and usually come in with crazy expectations only to lose money as this is the toughest time horizon to compete in when institutional investors use AI to make trades in milliseconds. On the flip side, this pay for order flow system enables Robinhood traders to trade for free. Robinhood may disclose this and every other disclaimer they legally need to but I do not think people are completely aware of how the markets work so it is always tough for new day traders to compete with Wall Street. Although novices can win due to the volatility of the markets, I think the best bet for newcomers are to study assets & sectors they are already familiar with and then invest in them over a longer time horizon to beat Wall Street with a systematic approach.

Daniel Caughill: No matter how large a pool of investors is, they have no hope of competing against Wall Street. Successful investments are sound investments, not those made en masse.

Paul Claybrook: Most day traders fail in the long run. That doesn’t mean there aren’t fantastically successful day traders, but it does mean that you really need to be knowledgeable to do it right. That means having tools that help you make good decisions, such as those that use AI to help identify “buy” and “sell” opportunities.

Trader Caps: The most important information for new investors to have, such that they can compete with Wall Street, is the simple fact that no one knows exactly what the market will do, not even Wall Street, and the only thing we can do is manage and limit our risk. People may be surprised to find out that hedge funds have actually underperformed the basic S&P500 market index over the last year, although they weathered less down turn in the latest stock market correction, they also had much less growth. The best thing any investor can do is look at things from a macro perspective, where will the market be in 5, 10, 20 years from now, and how can we grow with the market while at the same time limiting our downside risk.

Do platforms like Robinhood have a responsibility to provide novice investors with support and guidance when they do enter the market?

Lou Haverty: I think investors over the age of 18 have to be responsible for their own actions. This includes taking responsibility to learn about the markets and understand the risk they are taking. The one area that I believe should be more carefully monitored is when investors sign up for margin or to trade derivatives like options or futures. Those areas can result in very rapid gains or losses of money. Access to those trading products should be carefully monitored.

Shanka Jayasinha: There have been stories of people committing suicide after some accounts displayed negative balances due to leveraged trades coming to maturity when those numbers would reset the next day and the account holder would have not needed to pay. Maybe Robinhood could improve this to avoid those situations in the future.

Daniel Caughill: I don’t think platforms like Robinhood are liable to educate these young traders (not that they shouldn’t try!). The internet is already chock full of all the resources you need to become an expert. YouTube alone is a gold mine. If novice traders get themselves into hot water because they didn’t bother to do their own due diligence before investing, they have nobody to blame but themselves.

Paul Claybrook: Certainly not. No one is forcing them to sign up with Robinhood or any other firm. So, if someone wants to be with a company that offers no real “training,” that’s up to them. But the company must also face the possibility that failing to provide resources to customers may negatively affect the irretention rate.

Trader Caps: Many people have likely experienced someone at their bank calling them to say that they should get themselves invested in a mutual fund to save for the future and that they would be happy to help and advise them on this subject. What people don’t know is that the people at your local banking branch don’t have any fiscal responsibility to you, that means, they have no responsibility to you or to safely manage your money as if it were their own. They are actually, in effect, sales people, selling you the bank’s own mutual fund, which normally comes with high fees which the unsuspecting investor will pay unknowingly. Just like your local banking branch has no responsibility to you on this matter, Robinhood has no responsibly to support novice investors. Robinhood is plain and simple a tool, and a good one at that, for the novice investor but it does require one to do their own reading and research.

Do you think popular traders like Portnoy leading new investors into the market is a positive or negative?

Lou Haverty: I think anything that brings new investors into the market is a good thing. Many people learn by doing and most importantly they learn by making mistakes. The key is to make mistakes when you’re a younger investor, with hopefully less money, learn from those mistakes, and ultimately learn good long-term investing habits.

Shanka Jayasinha: I believe it is always great to see individuals exposed to their capital market and being put in a position where they can profit from it. Markets need liquidity in these tough times so their contribution, although small, is helpful. After all, retail investors represent a little less than 30% of invested capital.

Daniel Caughill: The answer probably depends on whether you’re poised to sell this influx of traders your holdings when a stock reaches new highs. Somebody always profits.

Paul Claybrook: It is a good thing, at least in the short term because more money is invested in the markets. It may be somewhat short-lived, however, because as traders continue to lose money, they may stop investing.

Trader Caps: I think it is actually immensely positive to spur young people and new investors into the stock market, but there are a number of basics many people are likely missing when it comes to managing a safe investment strategy for themselves. It’s incredibly important for everyone looking to the future to focus on building assets, whether stock equities, home ownership or otherwise; while this has always been true, it has become even more imperative recently due to incredibly low interest rates. Asset prices will be rising faster than they ever have with current monetary policy and as such it’s incredibly important that people learn how to position themselves in assets like stocks to benefit from this.

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