Month: June 2019

Robinhood is dangerous

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robinhood-for-webFirst of all, I don’t mean Robinhood the vigilante, the hero. Sure, was a criminal, but at least he was fighting against the bad guys. In an unjust agrarian society, his actions could be seen as defensible, but I digress.
I mean Robinhood the investment app. A few notes on its danger:

  • The Robinhood app is gorgeous. It’s so pretty it’s hard not to look at it. The graphs and charts are perfect, the animations and gestures are seamless, the design is minimal, it’s about as well designed as apps come. The old mantra ‘beauty is only skin deep’ applies here. The beauty draws you in but also masks some sordid parts.
    The beauty of Robinhood masks the fact that it’s essentially a place to gamble. Sure, you could call it sophisticated gambling, at least you’re not sitting in the smoky haze with eyes glazed over at a shiny slot machine, but it’s still gambling. The little news tidbits aren’t going to help you beat the market, nor will the pretty charts. The truth is that even professionals don’t beat the market. The beauty and ease just make it more tempting.
    Robinhood will you trade options, which is an even riskier way to invest, and even more likely to lose you more money. An option is just a leveraged bet on the market, like putting your money on 13 at the roulette table. It’s a terrible idea.
  • Robinhood offers free trades, perhaps its most alluring selling point. Purchasing stocks always involves fees, brokerage fees, trade commissions, transaction fees, etc. Brokers who conduct trades charge fees, usually per transaction. Robinhood is one of the few places where consumers can purchase shares without transaction fees. So it’s beautiful and free? Who says no to that?
    It’s not entirely free. There are regulatory fees on every trade which Robinhood does pass on to customers. These fees are typically fractions of pennies, and Robinhood rounds them up to the nearest penny, pocketing the round-up of course.
    Robinhood also generates substantial income from a practice called ‘payment for order flow,’ a controversial industry practice interestingly invented by Bernie Madoff. It basically means Robinhood sells the right to execute customer trades to third-party market makers who pay a small fee. Those small fees add up, and Robinhood relies on their high-frequency traders to make it work. Regulators don’t love it, in fact, other brokers and market makers have faced lawsuits over the issue. Robinhood’s dependence on this income could spell its downfall in the coming years.
  • Robinhood only allows you to buy entire shares, which are often pricey. At the time of this writeup Apple is trading at around $200/share, SPY (a very popular ETF that tracks with the S&P 500 index) is trading at about $300/share, Tesla is at $220, you get the idea. Not all shares are that expensive, but it’s tough to deposit a small amount and get trading, you need more money to buy full shares.
    It’s not like Robinhood couldn’t offer partial shares, other platforms do it. Robinhood doesn’t because this is another one of the ways they make money. Offering full shares exclusively means that you will usually have some leftover change in your account, and Robinhood earns interest on those leftover funds. It also encourages you to invest larger chunks of money, which means you’re likely to lose more money.

I’m not saying you’ll die young or retire destitute if you invest some money in Robinhood. But just be aware of what you’re doing. You’re gambling. For the most part, it’s best to stay away.

Thoughts on capitalism (part 3)

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3: Capitalism in history.

 

  • Capitalism has been the most successful socioeconomic system in elevating people out of real poverty the world has ever seen.

 

  • John Addison Teevan, in his work Integrated Justice and Equality, states (p91):

    Per capita income, which had merely doubled over 2,500 years until the Industrial Revolution (roughly 1800), has increased by a factor of forty. Schoenfeld notes that real per capita income has nearly tripled since 1960, and the bottom quintile has risen so that it is now living at the economic level of the former middle class.

    Worldwide, income per person had merely doubled over 2,500 years prior to 1800. The result was the cause of an agrarian economy where wealth was fixed for the most part. Since 1800, worldwide income per person has increased forty times. The result is the cause of capital markets.

 

  • Steven Horwitz (Foundation for Economic Education), referring to an idea from Deirdre McCloskey, states:

    If you multiply the gains in consumption to the average human by the gain in life expectancy worldwide by 7 (for 7 billion as compared to 1 billion people), humanity as a whole is better off by a factor of around 120. That’s not 120 percent better off, but 120 times better off since 1800.

    Here too, the rapid enhancement of the human experience is drastic, and a direct result of capital markets.

 

  • Two revolutions were required for this transformation to occur: democratic and industrial. Democracy took the power from kings and dictators, often interested primarily in accruing wealth at the expense of others, and gave it to the people. The Industrial Revolution gave people power and opportunity to earn money and create new things, democracy insured that the ruling authorities wouldn’t take it away.

 

  • Until after WWII, there wasn’t enough food grown or produced per year to sustain the global population. Humanity lived in incessant food shortage, poverty meant literal starvation. Capitalism allowed for the creation of new systems and technologies to boost food production. Starvation is no longer a facet of absolute lack, but where it exists, it largely stems from corrupt governments and roadblocks.

Habit disruption

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Full disclosure, I’ve been reading Atomic Habits by James Clear, which is hard to over-sell (it’s really good), and this writeup includes ideas I’ve gleaned there.

Clear structures the book in a really helpful and practical way. He deals with both the creation of good habits which you’d expect, but also the opposite side: disrupting bad habits. Perhaps as important as establishing good habits is getting rid of, or at least minimizing bad habits. Most of us have gone through life accumulating all sorts of habits with hardly a thought to why. They’ve become so automatic we don’t even think about what they are, let alone why we do them. Some are certainly good (brushing your teeth before bed), but oftentimes many of them are bad (see a cookie eat a cookie), and the bad ones are the ones that are tough to deal with. Clear points out that we fall into habits because they’re easy. Many of them develop as a response to some sort of stress because they offer some sort of relief, like Netflix binging after a long day at work, but they begin because they’re easy. By now these bad habits are so ingrained it seems almost impossible to dig ourselves out. As easy as it was to fall into these bad habits, to break out of them seems incredibly difficult. Clear offers a remarkably simple idea here. If we fall into these bad habits because they’re easy, what if we just made the habit a little more difficult? An example from the Netflix binge example would be to unplug the TV every time you turn it off, which would require that you plug it back in next time you want to watch. That one little step does two things: 1) It simply makes it harder to follow through on the routine. Adding difficulty to anything makes us less likely to do that thing, humans follow the path of least resistance. 2) Perhaps more importantly, it disrupts the automatic habit loop that takes over when you step into your living room in the evening. Breaking the habit loop is critical. The simple act of plugging in the TV, which is not part of the normal routine, takes you off autopilot. It forces you to think about what you’re doing (do I really need to watch more TV right now?) and gives you the chance to choose to do something different (maybe I’ll grab a book instead!). Charles Duhigg, in his book The Power of Habit, points out that people who simply put some thought into their routines are much more likely to complete the desired task (I wrote a little bit about this here). Conversely, when people are forced to put some thought into the routine they want to break they become much more likely to find success in breaking that routine.

So the moral is, set up a few roadblocks for your bad habits. Clear helpfully fleshes out the idea that in order to change our habits we need to make good habits easy and bad habits hard. A little extra friction between you and your bad habits could make a lot of difference in your pursuit of good habits.

Thoughts on capitalism (part 2)

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2: Capitalism is a growing pie for everyone, not just the already rich.

The growing pie idea doesn’t only mean that rich people keep getting richer. They do, but instead of growing rich at the expense of everyone else (as in the agrarian economy we touched on in part 1), everyone else also gets richer. Capitalism is a rising tide that raises all the boats, even the little ones. A cool analogy for this rising tide idea (as noted in John Addison Teevan’s Integrated Justice and Equality) can be seen in the late great Chicago Bulls teams of the ’80s and ’90s. In 1986 the lowest salary on the Bulls was $135,000, the median salary was $300,000, the highest salary was $806,000. Jump to 1996, the Bulls highest paid player (you can guess) was Jordan, who made a screaming $33 million. At the same time, the lowest paid player’s income had also increased significantly to $500,000, and the median salary was all the way up to $2.3 million. Everyone wins! Over that 10 year period, the incomes of Bulls players grew by an average of 21% per year compared to an inflation rate of 3.65%, which is some serious wealth creation. Furthermore, while the income of the rich (Jordan) increased by a larger percentage than the lowest paid players (44% growth per year compared to 13%), it wasn’t at the expense of anyone. No one lost anything in this scenario. In fact, the opposite is true, everyone gained income. Sports salaries obviously aren’t perfectly correlated with the entire economy, but the point remains: capitalism creates wealth for everyone.

Thoughts on capitalism (part 1)

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It’s popular to dump on capitalism these days, but I’ve got a few positive thoughts to share here. Many of these ideas stem from reading John Addison Teevan’s Integrated Justice and Equality, which I highly recommended.

1: Capitalism is a growing pie.

One of the awesome things (maybe the most awesome thing) about capitalism is that it’s not a zero-sum game. It’s not like there’s a certain limited amount of wealth to go around where some lucky people get more and some victimized people get less, like the best apple pie at Thanksgiving. Instead, it’s a growing pie, which means capitalism literally creates more wealth through entrepreneurs and investing. This is in contrast to most of the history of the world which existed under the old agrarian economic model. Under the agrarian system wealth was a fixed pie, it couldn’t grow. Wealth couldn’t grow because wealth was land and there’s only a fixed amount of land to go around. Since there was very little freedom and essentially no industry, land was the only thing that was really worth something. So while the wealthy inherited land and hoarded more and more, the poor were left to work the land and forfeit whatever they had left. It was a flawed system. Not only was the amount of wealth fixed, but the status or wealth of people was also essentially fixed. There was no way for a poor person to gain wealth, you could call it fatalistic. In a fixed pie economic system, redistribution of wealth from the crony rich to the helpless poor, even if it involves stealing (think Robin Hood), makes some sense. In a capitalist system where wealth is created (not merely inherited or taken) and growing (not static) coerced redistribution doesn’t make any sense. Some people still have more and some people still have less relative to each other in a capitalist system, but overall everyone has more as the pie grows. You can argue about the virtues or vices of an income gap (here’s an interesting argument), but you can’t say that capitalism fails to create wealth for everyone.