Historically, there are three forces that can send the stock and commodity markets to their knees. One is a war, the second is higher interest rates and the third is a recession.
Other than the age-old “war between the sexes,” the United States is not involved in a war. As for higher interest rates, that is certainly not a problem because rates are now at record low levels and likely to remain that way for some time to come. In fact, if anything, rates may decline further yet.
As for a recession, allow me to remind you of my weekly column from last week entitled “It’s official.”
I quoted CBS News by stating, “The unprecedented magnitude of the decline in employment and production and its broad reach across the entire economy warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions, according to the National Bureau of Economic Research, a trade group that determines when recessions start and end.”
Despite the United States now stuck in a recession, a host of young and bullish investors are making headlines and causing the “old-timers” to squirm. The new players in the marketplace are called “Robinhood investors.”
According to MarketWatch, billionaire Leon Cooperman said the emergence of individual investors eagerly scooping up stocks that have been rocked amid the coronavirus-induced downturn will ultimately not end well for those individual investors.
The Robinhood markets are going to end in tears, said Cooperman during CNBC’s show Halftime Report, referring to the popular online trading platform.
Cooperman was referring to an article from Barron’s a week ago that noted a free trading app called Robinhood has added more than 3 million stock trading accounts this year with the total exceeding 13 million.
The median age is pegged at 31. And these new investors and traders are far outperforming Cooperman and the average mutual fund, according to Goldman Sachs.
The attraction to the younger crowd is there are no commissions on trades and it is all done on a smartphone with an app or a computer. This new group of investors and day-traders are far outperforming the old-timers on Wall Street.
How long that continues remains to be seen. But thus far the Robinhood players are doing well.
Let me weigh in on this new phenomena. First, when investing or speculating in the Big Four — stocks, bonds, currencies or commodities — the least of your problems is commissions.
If you are making money, the commissions are nothing more than the cost of doing business. If you are losing money, commissions are simply salt in the wound. Choose more carefully in what you invest and the commissions will likely take care of themselves.
Cooperman also said: “The gambling casinos are closed and the Federal Reserve is promising you free money for the next two years, so let them speculate.”
He went on to argue: “Let them buy and trade. From my experience, this kind of stuff will end in tears. They are just doing stupid things.”
Cooperman is right — the casinos are closed and the Robinhood crowd may be sitting at home in self-isolation with an app on a smartphone, buying and selling stocks like mad. But if they use a stop to control the risk, that “kind of stuff” does not have to end in tears.
And they are only doing “stupid things” if it does not work. If what they are doing does indeed work and shows a profit such as lately, then who are the smart ones?
Here is how MarketWatch viewed Robinhood traders: “Some have made the case that an era of zero-commission discount brokerage trades, ushered in by Charles Schwab and platforms like Robinhood that cater to younger investors, combined with a dearth of diversions due to COVID-19 lockdowns and unemployment, have created a perfect environment for newly minted day traders.”
Yes, a perfect storm of coronavirus lockdowns, a free app with a trading platform and no commissions is a very tempting game. I say, welcome to the new world order.
From Walt Disney’s animated movie “Robin Hood” and from the lips of the hero while thinking of Maid Marian: “Ah, but remember faint hearts never won fair lady.”
And I say loudly with a slight, but imperfect, English accent from around the village of Nottingham: “When investing or trading in the Big Four, faint hearts seldom make money.”
Aside from the love story between Robin and Marian, never forget that the Sheriff of Nottingham was a dastardly and wicked knave.
Please call 406-682-5010 regarding the special offer for my twice-a-day newsletter. Heck of a deal!