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Robinhood and How to Lose Money

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Re: Robinhood and How to Lose Money

#51

Post by vmception »

raverbashing wrote: post #43
vmception wrote: post #36

> In the first three months of 2020 ... [Robinhood users] also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size > And let’s remember that options are far more illiquid and opaque than standard equities. Okay, first of all the growth of the options market is AMAZING, and their utility increases the more liquid the market is. So massive new groups of tra…

If only we had learned something from 2008... But apparently not (For those who aren't aware) The problem with options is that your liability with them can get bigger than your equity. You buy 10 shares of Newthing.js for $1000 ($100/share), the maximum you're losing is $1000 You shortsell NTJS because they use JS instead of Ruby, but guess what NTJS rose to $200 per share and at the time of selling you need to cover…

Learnings from 2008:

- banning short selling during a market sell off irreparably harms the options market, exacerbating market dysfunction.

- the tail wags the dog. although equities/asset prices should dictate options prices as an afterthought, options activity often can dictate equities/asset prices.

- options market should not be ignored in policy decisions and should be made more efficient to ensure better price discovery in both options and their underlying assets.

- options market hours should be extended

- big data challenges across broker dealer firms hamper the immediate rollout of all possibilities regarding improving options contracts, the solution being incremental rollout of series and smaller quotes

Re: Robinhood and How to Lose Money

#52

Post by kjksf »

pjc50 wrote: post #22
dmoy wrote: post #11

I do not get the appeal of largely gambling with your money on RH instead of just passively investing for the long term. Maybe with some of your money, but not to the extent a lot of people are doing. People want to get rich quick I guess? Even if you do want to do that, why not pick a brokerage which doesn't take as much from you, like IBKR? It's just a surreal situation to me.

Adrenaline? Same motivation as gambling. You can enjoy the hope of the possibility of wealth. Steady investment will never give you that. Of course, this involves a heavy dose of self-delusion, also popular these days.

Opening a restaurant is riskier than investing in stocks and way more work.

Investing in individual stocks (what you call "gambling") is more risky than investing in S&P 500 but that's the trade off. More risk leads to more reward (or more loss).

If you invest in AAPL (or AMZN or GOOG or FB or NFLX) at the right time, you will 10x your money in under 10 years.

Is investing in any of those companies "gambling"?

And sure, you can also loose money, but "data from the BLS shows that approximately 20% of new businesses fail during the first two years of being open" so you can also loose money opening a business and yet we're not name calling people who open restaurants "gamblers".

Re: Robinhood and How to Lose Money

#53

Post by jeffrallen »

Here's a rule of thumb that has served me well: If you're not paying someone to manage your portfolio, you're paying too much.

But: it has only served me well because the person I pay is trustworthy beyond reproach, and has earned that trust from my family over decades.

This is, unfortunately, not a scalable solution.

Re: Robinhood and How to Lose Money

#54

Post by JumpCrisscross »

raverbashing wrote: post #43
vmception wrote: post #36

> In the first three months of 2020 ... [Robinhood users] also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size > And let’s remember that options are far more illiquid and opaque than standard equities. Okay, first of all the growth of the options market is AMAZING, and their utility increases the more liquid the market is. So massive new groups of tra…

If only we had learned something from 2008... But apparently not (For those who aren't aware) The problem with options is that your liability with them can get bigger than your equity. You buy 10 shares of Newthing.js for $1000 ($100/share), the maximum you're losing is $1000 You shortsell NTJS because they use JS instead of Ruby, but guess what NTJS rose to $200 per share and at the time of selling you need to cover…

> The problem with options is that your liability with them can get bigger than your equity

Only if you sell them. A bought option’s maximum downside is the premium.

Does Robinhood let users sell options?

Re: Robinhood and How to Lose Money

#55

Post by BoorishBears »

system2 wrote: post #24

What's the reason of this article showing RH as an evil corp? People also gamble in Las Vegas, no one is stopping them. It is a good tool, thought me a lot about stocks and options. I am not investing heavily, but overhead of my investments would be far more higher with other competitors. The other trading companies literally asked my lifestory, bunch of scans and very long process of acceptance. Let alone their extr…

People keep saying this and all I can say is, have you used Robinhood AND a "real" brokrage platform?

Crashes during periods of high volatility at a much higher rate than competitors, puts detailed views of stock market behind a paywall, actively advertises options with asinine strike/expiries for people who don't get options, no full support for spreads are on their mobile app, their general poor handling of multi leg options strategies resulted in the suicide of person wrongly shown to owe millions in their account, terrible for tracking P/L, terrible fills on orders, the asinine fake chat bot system and lacking support in general

Robinhood as a trading platform is deeply flawed, you say your commissions would outweigh your investments, but a) now zero fee trades is not a differentiator, and b) you're paying commissions on every RH trade with subpar fills, both on time taken to fill and prices, those add up over time, and are why RH could even afford commission free trades in the first place

Re: Robinhood and How to Lose Money

#56

Post by aggie »

dmoy wrote: post #11

I do not get the appeal of largely gambling with your money on RH instead of just passively investing for the long term. Maybe with some of your money, but not to the extent a lot of people are doing. People want to get rich quick I guess? Even if you do want to do that, why not pick a brokerage which doesn't take as much from you, like IBKR? It's just a surreal situation to me.

From the people I've talked to it seems to be mostly a lack of understanding. They often self-describe as people who don't know anything about personal finance beyond earning a paycheck and paying bills. They see trading stocks as a step forward.

The concept of diversified risk is not something they are familiar with at all, so they don't see the issue. Many feel comfortable trading consumer company stocks because pop culture and consumer technology are things they have opinions on. And for many it seems like the key to success in trading is finding some insight to bet on, like "everyone loves Netflix, Comcast is doomed," or finding nascent categories like bitcoin or weed. The lack awareness of the complexity of market success makes it harder to grasp why indexes are a more reliable investment strategy.

Re: Robinhood and How to Lose Money

#57

Post by vmception »

raverbashing wrote: post #43
vmception wrote: post #36

> In the first three months of 2020 ... [Robinhood users] also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size > And let’s remember that options are far more illiquid and opaque than standard equities. Okay, first of all the growth of the options market is AMAZING, and their utility increases the more liquid the market is. So massive new groups of tra…

If only we had learned something from 2008... But apparently not (For those who aren't aware) The problem with options is that your liability with them can get bigger than your equity. You buy 10 shares of Newthing.js for $1000 ($100/share), the maximum you're losing is $1000 You shortsell NTJS because they use JS instead of Ruby, but guess what NTJS rose to $200 per share and at the time of selling you need to cover…

> For those who aren't aware) The problem with options is that your liability with them can get bigger than your equity. You buy 10 shares of Newthing.js for $1000 ($100/share), the maximum you're losing is $1000

> You shortsell NTJS because they use JS instead of Ruby with a strike price of $90 but guess what NTJS rose to $200 per share and now you're down $110 per option you put (minus the call option sell price).

Regarding your edit about the trading example, you are conflating so many things to make your point. People that know how to control risk don't have this problem, or use those terms.

Your risk issue is shortselling an options contract. Not shortselling a stock, which would be the actual opposite of your buying example. The options equivalent of both your buying example, and the corrected opposite, would lower your risk substantially more than purchashing/shortselling in the shares market, instead of increasing your liability.

Let me know if you wish to have that explained. It is distressing for me to see misinformation forming a mob against a benign market, which may result in even worse regulations for managing risk.

Re: Robinhood and How to Lose Money

#58

Post by aggie »

kjksf wrote: post #45
dmoy wrote: post #11

I do not get the appeal of largely gambling with your money on RH instead of just passively investing for the long term. Maybe with some of your money, but not to the extent a lot of people are doing. People want to get rich quick I guess? Even if you do want to do that, why not pick a brokerage which doesn't take as much from you, like IBKR? It's just a surreal situation to me.

Here's the appeal: I made 4x return in last 3 years "gambling" on stocks. That's far in excess of 8% return from "just passively investing for the long term". BTW: I gambled on IBKR, not RobinHood (I have RH account but don't use it). I just don't get why RobinHood is so vilified for the crime of making a fast, usable app. I use IBKR but their website is just bad. A security theater that makes logging in slow. Someti…

It's not inherently bad to make it easy to trade, but they specifically target (among others) people who don't understand the risks they're taking. If you're a hardline believer in individual responsibility, there's nothing wrong with that. But by the same logic you could put cigarette vending machines on every corner.

Re: Robinhood and How to Lose Money

#59

Post by kjksf »

jariel wrote: post #46
system2 wrote: post #24

What's the reason of this article showing RH as an evil corp? People also gamble in Las Vegas, no one is stopping them. It is a good tool, thought me a lot about stocks and options. I am not investing heavily, but overhead of my investments would be far more higher with other competitors. The other trading companies literally asked my lifestory, bunch of scans and very long process of acceptance. Let alone their extr…

"People also gamble in Las Vegas, no one is stopping them." If Robin Hood was positioned and sold as 'gambling' and regulated a such, nobody would have a problem with it. But if anyone doesn't see the maximal hypocrisy in their branding (literally: Robin Hood) and the materiality of their offer, then that's the issue right there. By 'gravy' the author means 'fish' in gambling terms. There's just no way kids on their…

In stock market you're not playing against other people, including the "pros".

You try to pick companies that will grow in the future.

If you pick well, then it doesn't really matter if other people (including "pros") pick the same company or not because there's enough future growth for everybody.

And I have much less reverence towards pros than you.

The pros were saying that Amazon's valuation is so crazy that even if they sold every book in the universe, it still would be too high. In which they were right except they couldn't see that Amazon is not a book store.

The pros were writing articles about how Nokia is, and will be, the king of the world a year after iPhone debuted and people were camping overnight and lining around the block to get it.

And today an average price target on Tesla is 1/3 of the current price. The pros at predicting future price of the stock are failing spectacularly to do so, despite being paid big bucks by the most prestige financial institutions and having more access to information than anyone else.

While I'm not playing against the pros, I sure am getting better returns than 90% of them.

Re: Robinhood and How to Lose Money

#60

Post by jesterson »

renewiltord wrote: post #30
jesterson wrote: post #10

Earlier quoted context omitted.

That's the problem of RH - in your cases stock is managed because of "frictionless UI" whilst it should be managed due to financial considerations but not because they have made it easy as getting a cup of coffee. You need to understand the model how low cost services like RH operate - they sell all your data to big hedge funds. Guess what happen at certain moment when smart money will decide it's time to cut pigs -…

This doesn't jibe with what Matt Levine describes as RH's operating model. Unless you're actually informed, this just sounds like Internet urban myth. You actually can get better results because as a retail trader participating with other retail traders you have uncorrelated order flow.

> You actually can get better results because as a retail trader participating with other retail traders you have uncorrelated order flow.

Hedge funds will get even better results knowing what's robinhooders are betting upon with much better precision.

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