Why I Cancelled Robinhood

What's up, Graham? It's guys here. So, how would you like to double your money by, uh, this time tomorrow? Well, if that's the case, ignore Warren Buffett, throw all the conventional investing wisdom out the window, and instead look no further than Reddit. That's right! Within this small, tight-knit community of 10 million users, there appears to be a hidden formula to finding the next big 10 bagger, which includes the likes of Clover Health Investments up 76% in 24 hours, Wendy's, yes the fast food chain with square hamburgers, up 25%, Wish, the e-commerce platform, up 50%, all of which have garnered the front-page headline of every major business publication.

That's gotta leave you thinking what's going on. How do they find out about this early enough to invest? And most importantly, are there any chicken tendies left for the rest of us? So let's cover all of that and more on this episode of The SEC is cracking down on the gamification of stocks and why I'm canceling Robinhood, because I've had some issues with them that I have yet to talk about publicly until now.

But really quick, as usual, before we start, it would mean a lot to me if you crack down on that like button for the YouTube algorithm by regulating it until it turns blue. Plus, rumor has it that for every one like this video gets, a short seller loses a dollar. So thank you guys so much, and now let's begin.

So, before we go into all of these tantalizing money-printing details, we first gotta talk about meme stocks. See, in the olden days of investing, in the long, long ago last year, investing was based on a company's core fundamentals of expected growth, earnings, net profit, and cash flow. From there, you would make a calculated investment in terms of how undervalued you felt they were.

But today, it's almost as though the traditional investing advice no longer applies because the stocks that are doing the best, at least in the short term, have absolutely nothing to do with fundamentals at all. But instead, they're based on a combination of sudden investor enthusiasm, short seller interest, and the potential to make a lot of money very quickly, which you could then post on Reddit for internet points that, unfortunately, don't have any cash value.

Okay, but seriously, meme investing has sparked the entire growth of the community dedicated to finding beaten-down, overly shorted stocks that, with the right catalyst and enough momentum, could skyrocket in price, cause short sellers to lose billions of dollars, and make the people who bought in early really rich in the process. Lately, the attention has turned to a mixture of GameStop, which recently came back above $300 a share, AMC, which froze in price on the expectation of a hedge fund short squeeze, and now Clover Health, which is said to be experiencing a gamma short squeeze with over 43% of their shares being short, along with Wish going up in price from a 51% short position.

Or in other words, all you need to know is that Reddit users are looking for overly shorted stocks in precarious positions that hedge funds believe will be going down in price, and then they begin buying them up, causing retail momentum to drive the price even higher, causing hedge funds to have to cover their positions, which causes the price to rise even higher and higher. It's pretty much the stock market version of putting Mentos in a Coke bottle and then watching it explode, except with money.

But critics of this say that it's not investing; it's gambling. And they play the surge of meme investing on the apps that make it all possible to begin with, like Robinhood. In the last 30 days, despite stocks like AMC being up 465%, GameStop 109%, Blackberry 94%, and Build-A-Bear 132%, the SEC says that they want to crack down on the gamification of stocks with a new regulatory layer that would directly impact some of the most popular stock trading apps being used right now to process these trades.

Their thinking is that at some point these stocks are going to come crashing down, just like GameStop fell from $483 to $40 in three weeks or like how originally AMC dropped from its January high of $20 down to a low of $5. Because just as easily as you can make a lot of money, you could also lose a lot of money. And that's where all of this begins.

The SEC recently said that they're worried that these stocks are too easy to trade on Robinhood and elsewhere, and that investors could be setting themselves up for massive losses. He then went on to say that one of the ways to deal with the gamification of trading is to force brokers to act more like fiduciaries, as opposed to passive trading platforms that merely process trades for them. It would really be no different than putting a warning label on an alcoholic drink or a Parental Advisory sticker on a CD. Remember those?

In this way, a brokerage would be less likely to incentivize you to make such trades when they themselves benefit from the data that you give them. Instead, a brokerage would, as they say, look out for your best interest and make you aware that, hey, you might lose some money on the stock but as long as you check this box and agree, there you go, now you can give us your money. Some brokerages have even tried to get ahead of the curve in advance before it happens.

Like, for example, the free stock trading app public places a high-risk tag on certain stocks and a warning that comes up that you have to acknowledge before proceeding. From there, you can still trade whatever you want, but at least you better understand the risks. The issue that Robinhood previously faced was that the SEC said that they made investing a little bit too easy and a little bit too similar to gambling by giving their users free stocks held within a scratch-off ticket that rains confetti.

In this case, investing feels a little bit more like a game with the screen flashing red or green depending on whether or not you gained or lost money, which I will admit I liked. I thought it was a lot of fun, and that helped appeal to a brand new audience who ordinarily would have had no interest whatsoever in building their wealth. But, unfortunately, that also came with the dark side of some people taking it a bit too far.

For example, The New York Times ran an article about a 32-year-old investor who said he was lured into the app through features that included falling confetti and emoji-filled phone notifications. But, after repeatedly losing money, he took out $60,000 from home equity to put into even riskier options in hopes of making his money back. Surprisingly, after having some initial success, he grew that account to over a million dollars before proceeding to lose all of it, and his account is now down to $7,000.

Now, according to an analysis of industry data and legal filings, as well as interviews with past and current Robinhood employees, they say the app was built on what appears to be a Silicon Valley playbook of behavioral nudges and push notifications to draw investors towards risky trading, which happens to make Robinhood quite a lot of money in the process.

And the gamification of investing is working. In the first