Today, Paul and Evan discuss how Robinhood has grown to become one of the largest companies in the United States by gambling on stocks, crypto, and other speculative assets. When asked in an interview about whether investors are also turning to more traditional forms of investing for retirement, the company basically replied, “No, and we don’t care.” Listen along to hear these two advisors talk about why this kind of investing is so popular and how it’s making a fortune for the company at the expense of the investor.
Want to cut through the myths about retirement income and learn evidence-based strategies backed by over a century of data? Download our free Retirement Income Guide now at paulwinkler.com/relax and take the stress out of planning your retirement.
Paul Winkler: Welcome to “The Investor Coaching Show.” Hi, I’m Paul Winkler. He’s Evan Barnard, hanging out with me in the studio and going to take the second half and run with it today.
So I get all the topics the first half. It’s all me.
Evan Barnard: I back clean-up.
PW: You back clean up. That’s right. That’s what I need. Get the good stuff the second hour.
EB: That’s right. I get the slow students.
PW: Get the slow students. Oh, man.
PW: That portfolio you sent today, that was interesting. Yeah, that was interesting.
I didn’t realize that there were so many investment managers still using individual stocks. How backward.
Especially when you look out at the data on active management. A portfolio of all stocks. I hadn’t seen that in years.
EB: Yeah.
PW: I hadn’t seen that in a long, long time. But the idea, you go, “Well, what’s the problem with having a bunch of individual stocks, Paul?”
Or you’re assuming that they have the ability to figure out which companies are going to have higher returns in the future. And just look at the people throwing darts at the stock tables, and you know that’s not true. They don’t have that ability. There’s no magic there.
So these investment advisors will do that and say, “Hey, look, you’ll avoid the management fee.” They’ve got their management fee, of course, but you avoid the additional management fee of the mutual fund, is the idea.
But the reality of it is that the underperformance historically of those active managers is horrendous. It’s bad.
And you’re not really gaining anything except for you’re getting more risk. I mean, I suppose you gain that, and historically, you look at lower returns and more risk. What’s not to like about that? Right?
EB: Right.
PW: Speaking of more risk and return issues, there was an interview this week. Now, of course, the big news has been Robinhood moving into the S&P 500. The idea that they’re getting that big.
Now how do you get really, really, really big? Well, you make lots of profits, and you become very, very sizable, and you attract a lot of investors. Now, what has attracted investors? That’s the question that ought to be coming up on people’s minds.
What is it about what they’re doing at Robinhood that has attracted so many investors? And the technology, they’ve been taking people from Silicon Valley and moving them into this world. And we’ve talked about this before.
PW: There were some issues where they were actually using high-cost providers of investments. So you have market makers, have people that will make markets in different stocks.
At one point in time, the problem that they ran into is they were choosing the higher cost ones and they were saying, “Hey, you got free trading. You got free trading, but we’ll put you with the highest cost one, and you just won’t see the cost that you’re in price,” was really what was going on. And then it became this, there’s graffiti, there’s all kinds of stuff going on. You go and you trade a stock and you have —
EB: Confetti going across your screen.
PW: Yeah, confetti going across your screen, MacArthur’s back in town, or something like that. And you go, “Oh, they’re not trying to appeal, that’s not emotional appeal there at all.”
EB: Right.
PW: “That’s not what’s going on. This is all just genuine good investing. That’s all that’s going on right here.”
But I was actually watching a video this week, and there were these guys talking to and interviewing the CEO. And they’re talking about coin flipping.
And Evan, Michael has been actually talking about this, saying, “Paul, you ought to have some videos where you are just sitting there commenting on somebody else’s video.” And we talked to our compliance officer or attorney that does our compliance stuff.
She goes, “Yeah, yeah, heck yeah, you can definitely do that. You guys would definitely, that would be good for you.” And she was all for it. So I may do that with this particular video, but they were talking about coin flipping.
EB: It sounds like Polymarket or something.
PW: Oh, it is. I kid you not, they were talking about how they could make money doing that. And the only real objection that the guy had, it seemed to me as I was watching it, the only objection that he had was that after a while, people would get tired of it.
EB: Yeah, yeah.
PW: So we could make money. Yeah, sure. We can make money doing this. We can make money getting people to bet on coin flips. And I was thinking, How absurd. How absolutely absurd.
PW: So he was on CNBC this week, and this was the topic of conversation. Let me just play and we’ll comment on this.
Jim Cramer: I appreciate that. Let’s talk about gambling. Let’s talk about predictive.
PW: Yeah. Cramer says right off the bat, “Let’s talk about gambling. Let’s talk about predictive with an investment management company or an asset.” They allow people to do asset management. “Let’s talk about gambling.”
JC: Aside from my capital, and I really do, and I happen to like DraftKings very much, and I do daily fantasy with my kids’ stuff. But can I have everything on my Robinhood?
EB: Purely fantasy. Can you get into anything?
Vlad Tenev: You can have many things. Prediction markets, as you mentioned, is one of the new exciting things that Robinhood is leading in.
And you have a bunch of different events that you can trade if you’re a trader. You can also use the prediction markets as a source of information for what traders are doing and where we think the world is going to go.
PW: So, predictions about the future. Investainment comes to mind, as the old John Bogle line is, investainment. It’s just entertainment investing. Entertainment.
VT: For example, you’ve got CPI coming in later this week. We know we had producer price index coming in a little bit earlier, but there’s actually markets on how many Fed rate cuts are anticipated in September or through the end of the year. And we also have prediction markets on the consumer price index, which I think is a valuable source of macro information as well.
PW: Yeah, this is great stuff. This is what passes as investment management advice.
“What do we think is going to happen in this area? What are other traders doing? What are they doing?”
I mean, what’s the difference between that and coin flipping? I don’t know.
EB: Right.
PW: I don’t know that I know the difference, Evan.
EB: Well, I mean, at least you know the odds on a coin flip.
PW: That’s true.
EB: You have total information that it’s a 50/50 chance that it’s heads or tails.
PW: And the issue really is that the odds would probably be less than 50/50 simply because of the cost.
EB: Oh, yeah.
PW: You have a cost incurred. At least I don’t have a cost when I flip a coin. You don’t get a bill.
EB: Right.
PW: Well, I guess you would if they were actually having you bet on it. They would make money on it. So I guess the odds would go less than 50/50, wouldn’t they? I didn’t even think about that, but yeah.
EB: But I mean, when Cramer was describing that, it does sound like Robinhood has added some aspect of a Polymarket kind of a thing onto their platform.
PW: Right.
EB: Maybe not to political events, but economic data. And to me, it almost smells like throwing in the towel.
“Well, I can’t necessarily make money predicting the direction of the market if this happens. So now I’m just going to bet on whether the ‘if this happens,’ happens. I could make money on guessing the interest rate, even if my stocks go down.” It’s kind of crazy.
PW: Yeah. And I think something that was being alluded to is the idea that in most places, you still can’t get engaged in it. Well, I guess a lot of places those barriers are coming down.
Outright gambling, horse racing. I grew up in upstate New York, right? So in upstate New York, one of the things that I did when I was in college, I was working for a company that serviced the New York State lottery. And of course, you had a government-sanctioned gambling event going on there.
But the other thing that we serviced was off-track betting, which was horse racing. And I grew up not too far from Saratoga, New York. Thank you, Carly Simon. “Saratoga, and your horse naturally won.”
Right? But that was something that I grew up around, is a lot of that stuff. And I can count on one hand — actually, if I removed a few fingers, it would probably work better. I could count on one hand how many times I actually went to the track.
I just had absolutely no desire to do that whatsoever. But that’s what it sounds like to me, is just horse racing.
And it’s like, “Okay, well, I can’t do that. We don’t have a horse track here in Nashville. Let’s just jump online and trade stocks and do that, and let’s see if we can get lucky.”
You’re looking for: “How many other services can we have?” Well, some people, I’m sure, are probably engaged in other types of investing services over there.
We have these adrenaline rushes, and it drives us, dopamine gets kicked through the system, and we get addicted to this type of activity. And there’s more about that to come. But this is Cramer talking about crypto right there on the same show.
JC: Now, I did want to ask you about migration from crypto. I know that you and I have talked … we talked before you even had your app, which I think is so good.
But I always felt that I wanted people to go in for crypto, even go in for options, even go in for zero day, but then maybe gravitate and do more traditional investing along with that. Are you seeing that? Or are people that are … because you’re known, of course, being crypto, which by the way, I love and don’t think is a negative at all.
PW: What? What? “I don’t see it as a negative at all.” Well, I guess that shouldn’t surprise us.
EB: I didn’t even get that far, before you even play the rest of a quote.
PW: Oh, go ahead. What do you want to comment on, Evan?
EB: No, I’m picturing a parent talking to their kid, “And I was hoping that you would do enough crack that you would eventually decide broccoli is really good for you, and you want to have spinach salad.” “I want them to trade options and crypto, and hope that they start doing buy-and-hold investing.” That is counter to every physical law, human behavior.
PW: That’s hilarious. Yeah, no, that’s exactly right. That’s pretty good.
JC: I do want to see people also do a little bit more of a conservative side going with crypto. Are you seeing that yet?
PW: I guess your broccoli, right? Yeah. That’s your answer.
VT: Here’s the interesting thing. A lot of folks initially think that there’s a migration. Maybe someone comes in as a trader and then eventually goes into more passive retirement or index funds.
But what actually happens, what we’ve been seeing among our most engaged customers, is they come in through trading, and they end up opening a bunch of accounts. And one of the new features that has been very requested by customers is actually having multiple individual accounts.
So we released that yesterday. Now, you can have up to 10 individual brokerage accounts in addition to your retirement and, of course, the joint accounts.
So what we end up seeing is our most active customers are opening up a lot of accounts, and they not only do their active trading, but they also have their retirement, they also open up a joint account. But it’s not like they migrate. They just bring more and more of their wallet to us.
PW: That’s it. That’s what they want.
VT: I think that’s what we consider a healthy customer relationship.
PW: Yeah. Very healthy for them.
VT: We should really just be helping you with all of your financial needs. And banking is coming soon. I know a lot of people are excited about that.
PW: Yeah, that’s exciting stuff. So yeah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah, blah. Yeah.
So the thing that gets me there is this: Look at the statistics on people’s preparedness for retirement.
EB: Right.
PW: It’s not good. There’s nothing good about this, but it just does feed that desire to gamble.
And they have it alongside their retirement. And a lot of people don’t even realize that you might have retirement accounts.
PW: We were looking at the statistics on this this week in our office. Because I put out a newsletter, and the newsletter that we’re putting out is working through the typical investment management.
We looked at the typical mutual fund. We looked at just large blend funds in the newsletter. That’s all we were looking at, is funds that were investing in big U.S. companies that were neither necessarily value or growth.
They were in the middle. They were a blend, is what Morningstar calls them.
We were looking at the return of those funds, those professionally managed funds versus the S&P. And it was huge. It was something, I think, Evan, you saw it. I showed you guys the newsletter, but if something wasn’t on a $10,000 investment over 10 years ago, you would’ve lost $7,000 of accumulation due to the active management and the way they were managing it.
EB: At least.
PW: And that was the professionals. Those were the accounts that are used for quote, unquote retirement, that he’s referring to there.
EB: Yeah.
PW: So literally, we’re looking at, “Okay, let’s add on to dysfunctional management on the mutual fund level. Let’s add on that you do your own version of dysfunctional investing and see if that’s a good idea.”
And to me, I’m thinking, That is a horrible, awful, terrible idea. And yet this company would not be entering the S&P 500 if it weren’t for the popularity of this type of management style.
Nik, when we are in the office — because we’re not in the office today — when we’re over in the office and he is producing the show, he told me today, because he and I were working on something else together, he goes, “Oh yeah, you’d be proud of me.” I said, “What, man?”
He said, “I was talking to this young guy, and he was talking about investing in the S&P 500.” And he goes, “Man, you need to diversify more than that.” And he goes, “Well, what do you mean I need to diversify more than that?” And literally, Nik is quoting data that we have talked about here on the show.
EB: Hey.
PW: And I’m like, “That’s it. We have to get people to get this stuff.”
EB: Yeah.
PW: Go ahead.
EB: Well, to me, and we’re going to be talking about some of this in the second hour, actually, delve into this a teeny bit. But the only reason someone would have 10 accounts, let’s just say they’re all taxable, just non-qualified, since they were creating a distinction for retirement accounts.
“I’m following these three newsletters.”
PW: Excellent.
EB: And then, “I’m going to do this, dodge the whatever flavor of the month.”
PW: Excellent.
EB: And doing your own, creating a track record. And so, “I’ll close these three accounts because that strategy sucks. And then I’ll use …”
PW: That’s right.
EB: I mean, it’s almost like the mutual fund companies that seed these funds and then the ones that last, that guy will pour more money into it until it crashes, and they’re going to grind their net worth to a pulp.
PW: And who makes out?
EB: Robinhood.
PW: That’s right.
EB: Yeah. That’s scary.
PW: So let’s say that we look back at insurance and annuities. I mean, when you hear fiduciary, it’s my pet peeve.
I mean, last week I had that whole thing where this lady was talking about the regrets, and she was warning all of her friends to not do this. “Don’t do what I did.”
But the thing is, and I had, when I was on Channel Five last time, I was on Channel Five, and this guy calls up — maybe the time before that, but the last time too, it happened as well. But this guy was talking about this annuity that he bought, and the week before or the month before, he goes, “And this guy said he was a fiduciary!” And he was just really angry.
And I said, “Yes, sir, I feel your pain. I feel your pain. It is a problem in the investment industry where people call themselves fiduciaries and go out there and sell stuff that is just clearly not in the best interest of the investor.”
So anyway, Lloyd Blankfein, ex-Goldman Sachs guy. He was on CNBC this week, and it was an interesting conversation. They were talking about credit spreads, and they were talking about things that I think are really pretty arcane to most investors.
EB: Spicy topics for a Saturday afternoon.
PW: It was.
EB: Credit spreads.
PW: It was. But I want to cover this because I think it’s important to understand this concept when we are looking, and I’ll explain it more, but I want you to hear what he was talking about regarding insurance companies, because who are issuing annuities? Insurance companies.
What do insurance companies invest in? Bonds.
What do credit spreads apply to? Bonds. So that’s why I wanted to cover this.
Lloyd Blankfein: But I look at credit spreads being so narrow, so much money going to private credit.
PW: So let me just explain what he just said right there. He was talking about narrow credit spreads. What on earth is that?
So when a government, when they borrow money, when the federal government borrows money, what do we know about them? We know that they can print money and they can tax. We know that they have the ability to get our money back to us if we have lent them money.
Who do we not have that ability to necessarily hold their feet to the fire? Private companies. Or public companies, for that matter. They don’t have that ability.
So when credit spreads are narrowing, what that means is that the interest rate that the government charges is getting much, much closer to — or I should probably say it this way. The companies that are borrowing your money, that have one foot on a banana peel and the other in a bankruptcy court, are not having to pay that much more than the federal government has to pay to use your money.
EB: Right.
PW: There’s something wrong with that. There’s something wrong with that. Why?
Why would that be? It would be because there is demand out there that the investing public is so hungry for yield that they’re willing to throw their money and lend it to just about anybody.
They love it. They love the idea that you might have private equity in your 401(k). That’s awesome.
Because the more money they have access to, the lower the cost that they can use it will be. That’s really great for them.
LB: There are returns a little bit by leveraging up in odd ways at the portfolio level or other levels.
PW: So they’re goosing … Yes, go ahead, Evan.
EB: You heard it. Leveraging.
PW: Nailed it.
EB: “Let’s do some extra borrowing and gambling just in case the guess on the bond didn’t work out.”
PW: Yes. Leverage is literally why people lost everything in the Great Depression. It was leverage.
You’re betting on the direction of something, and you’re hoping that you can borrow money and invest and get a higher return on what you invest in, versus what your cost of borrowing is. Sounds really good until it doesn’t work.
LB: So leverage starts to think in. I think of the places where this is being done. A lot of these assets are being put into insurance companies, where people feel assured because of the investing premium for longer-term liabilities.
But if I were an insurance regulator, at some point I might say, “Are those assets really worth what you say they’re worth? And is it going to come to pass that you’ll have the money to pay your liabilities? And let’s look at that and let’s mark them and let’s take …” There are a lot of things.
PW: Yes, yes, yes.
EB: That’s pretty good.
PW: Isn’t that really great?
EB: Yeah.
PW: I mean, just nailed it. So if I were an insurance regulator …
I’ve had conversations, and a lot of times the answer is, “Well, we have freedom to do business in the United States, so we got to let them do what they’re going to do. And then, yeah, we got to protect the public, but we got to let people do what they they’re going to do.”
EB: You were talking earlier when we came back, talking about a fiduciary, and kind of our frustration on how the term gets misused.
PW: Yes.
EB: The insurance company is absolutely acting as a fiduciary in that capacity. And so that’s what that guy’s referring to, is that should actually have teeth. Like, “Hey, how can you justify putting client assets in this know tranche of bonds?”
You’re not throwing out the baby with the bathwater. But they should be able to justify that, and most people that throw that word around wouldn’t even know how to answer the question.
PW: No, Evan, you’re exactly right. And it was a couple of years ago that I actually threw out the warning sign that there was a lot of data on the amount of money that insurance companies were putting at high-risk bonds.
And it was super high. I want to tell you, it was 70%. It was super, super high.
And it’s actually working against them. But you don’t recognize the problem until it’s too late. And that is typically how these things play out.
And you don’t know when, but this is the type of stuff that I look at and just shake my head and go, “This is just not prudent. This doesn’t make any sense whatsoever.”
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
Today, Paul and Evan talk about the catastrophic drop in Bitcoin’s value and why Bitcoin traders keep digging their heels in, hoping
This week, Paul has been methodically taking you through the basic principles of building a portfolio that will help you reach your
When we discuss investing in the stock market, most people think of investing in individual stocks. Paul shares that the returns with
