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Sunday, February 28, 2021

Robinhood was wrong, so is reckless investing

Recent controversy surrounding the Robinhood app is justified, but has also revealed wrongdoings within its users

The Robin Hood App displayed on a desk.
The Robin Hood App displayed on a desk. Did the recent Robin Hood controversy only reveal wrongdoings by the company, or its user base as well? // Courtesy of Andrew Neel

By Finn Calvert

If someone told you 2021 would start with a bunch of Redditors beating hedge funds at their own game, would you believe them? Well, for a few short days, that’s exactly what happened.

GameStop’s value had consistently been depleting, and multiple hedge funds bet on this trend to continue, said Pamela LaBorde, an associate professor of finance at Western Washington University. 

Hedge funds are regulated investment firms that collect money from a vetted group of individuals. The funds are then collectively invested into various projects by a manager who takes a performance fee. 

Starting mid-January, members of the subreddit r/WallStreetBets hatched a plan to not only get rich quick, but also cause hedge funds to lose billions of dollars. Their plan was simple: collectively buy as many stocks of GameStop as possible and watch the fat cats burn. 

“People started noticing how shorted GameStop’s stocks were,” said Holden Lewis, a WallStreetBets subscriber and GameStop investor. “If enough of us invested in the company we could drive up the price, make some money and cause the hedge funds to lose a ton.”

Shorting is when an investor borrows a stock, sells it and buys the stock back to return it to the original owner. This tactic is employed when an investor believes a stock will drop in value. If the price does drop, the investor makes money when they buy it back at the lower price. 

The trend quickly went viral, and soon the stock of GameStop skyrocketed over 300%, Lewis said. 

In response to the manufactured rise in GameStop’s value, Robinhood, a brokerage app, blocked its users from buying the stock while still allowing them to sell, Lewis said. 

“I saw what was happening, but the app wouldn’t let me buy anything,” said Anthony Perez, a Whatcom County resident who was blocked from purchasing GameStop stock. 

“I think the fact that the hedge funds were allowed to recover, but people like me were screwed shows where their loyalties lie,” Perez said. 

Users of the app have every right to be upset. It’s not every day that small-scale investors have a chance to capitalize on the oversight of hedge funds and individuals should have been allowed to do so. 

Robinhood’s website states its, “mission is to democratize finance for all,” but their decision to halt the purchase of GameStop stocks was nothing short of authoritarian. 

That being said, the incident also showcases a disturbing trend one could label, “investing for the hell of it.”

Lewis summed this sentiment up well. 

“I’ve seen screenshots of people investing their whole bank accounts on opportunities like this,” Lewis said. “Some people on that subreddit are way overconfident. I swear some of them are just trying to outdo each other.”

According to the U.S. Bureau of Labor, 10.1 million Americans are currently unemployed. Many who are employed are in desperate need of economic relief, yet no stimulus package has been passed. Is it really appropriate to have thousands of people being so openly risky with their finances at this time?

This all too typical hyper-consumerism is not only condescending to those struggling in our nation, it’s just not that smart. 

Bryan Routledge, an associate professor of finance at Carnegie Mellon University, explained how those who think they can beat major financial institutions are doomed to fail. 

“Saying it’s rigged is a bit strong,” Routledge said. “But it’s like if you showed up at the Super Bowl last Sunday, hopped on the field and nine people ran over you. We should not be surprised by that.”

Routledge cites financial institutions’ many advantages from their large staffs, advanced technology and sheer amount of capital as reasons they’re so hard to beat. 

In this time of incredible financial strain, people with cash to spare should support their community before throwing it away for internet points. 

Many investors love witnessing the effects of their money. If that’s your thing, try mutual aid. It’s cheap, efficient and the results can be astounding

So, if you’re about to buy a piece of stock purely for the meme, maybe make sure your neighbors aren’t hungry first.

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