Robinhood’s Crash-Course Lessons

New investors coming into the market is a good teaching moment.

While Barstool’s Dave Portnoy and his band of Robinhood traders agitate the old-guard investment establishment, I see another story unfolding. A much more interesting story.

An entire generation is being exposed to investing for the first time. Whatever the reason—Portnoy, working from home or out of work, government stimulus checks, no sports/sports betting, zero trading commissions, fractional shares, the list goes on—a growing number of younger investors are dabbling in stocks and ETFs.

For better or worse? I say better.

Following the 2008 global financial crisis, young investors were scared to death of dipping their toes into the markets. They witnessed parents’ retirement savings get chopped in half, saw homes lost and developed a deep mistrust of Wall Street.

Missing The Last Bull Run

Countless stories were penned on how millennials were hoarding cash under their mattresses instead of investing for the long term. The end result was some missing out on a historic bull run, while also falling behind on financial literacy.

How did they fall behind on financial literacy? Well, it’s kind of difficult to learn about stocks, ETFs and investing if you don’t, um … invest. You can spend hours reading the rules of basketball and watching Michael Jordan YouTube videos, but the only true teacher is stepping foot on the court. Baptism by fire. Learn by doing. It’s no different with investing.

A funny thing happened after stocks suffered a harrowing 35% drop from February into March. Instead of mimicking their 2008 counterparts, younger investors dove headfirst into the markets. Robinhood saw 3 million new accounts in the first quarter alone. Schwab and other brokerages experienced record signups. With Portnoy as their pied piper, the next generation of investors looked to get even with Wall Street instead of avoiding it.

Anyone who has attempted to interest younger people in stocks and investing knows it can be a heavy lift. Sure, everyone likes the idea of making money and the stock market seems glamorous. But going from idea to inception is a lot easier said than done in this arena.

Breaking Traditional Barriers

The financial services industry has (intentionally?) made investing intimidating and difficult to access. Add in the fact that our country does a horrendous job educating on the basics of personal finance and investing, and the problem compounds (I won’t rant about this now—you can read my diatribe on financial literacy here). And, if you think it’s difficult educating investors on the basics of stocks, ETFs are like teaching hieroglyphics.

Brokerages such as Robinhood and personalities like Portnoy are helping break down traditional barriers and delivering a crash course to new investors, whether intended or not. I believe this is especially true in the ETF space. ETF.com’s Lara Crigger recently published a story on the top 20 ETFs held at Robinhood. It was an eclectic mix of high-powered, dangerous investment tools and plain-vanilla index funds. I wouldn’t recommend some of these ETFs to even the most sophisticated retail traders.

Learning On The Run

However, new investors are quickly learning about everything from oil futures contango to the natural decay of leveraged ETFs to ETN acceleration events. They’re learning about ETF share creation, delistings and limit orders.

These aren’t necessarily the easiest concepts to teach. Believe me, I’ve been trying for years. But investors are now being forced to learn why the United States Oil Fund LP (USO)—owned by 170,000 Robinhood traders—doesn’t actually, you know, track the price of oil. Or why their triple leveraged Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN)—owned by 27,000 users and down 80% this year—is destined to go to zero.

If there’s a catalyst—any catalyst—that drives young people to the markets and gets them interested in vehicles like ETFs, I don’t see any way to view this other than as an enormous positive.

Are all Robinhood investors learning the nuances of ETFs? Of course not. Some traders are surely just gambling and have no idea or interest in how these products work. But anything that helps move the ball forward, even a little, is a win in my mind.

Now, are some younger investors being hurt? Absolutely, and I would be remiss if I didn’t mention the tragic story of a 20-year old who committed suicide after believing he lost $730,000 due to how Robinhood displayed their options trade.

It’s horrific, and Robinhood has responded that it’s making changes to their platform. No question Robinhood has gamified investing, making it feel more like playing Donkey Kong than risking hard-earned money. This absolutely poses some real concerns around the behavioral side of investing.

However, assuming the brokerage platforms are functioning properly, younger investors have the ability to rebound from a financial misstep. The average Robinhood balance is about $2,500. Every dollar is precious, but learning valuable lessons with a few thousand dollars is much different than making life changing mistakes with a retirement nest egg built over decades.

School Of Hard Knocks Your Friend

Young investors have an entire lifetime to recover—and that’s assuming things go wrong with their trades, which they may not! But it’s better to learn from the school of hard knocks when you have less at stake than when you have everything at stake.

The lessons being learned now will likely pay dividends down the road. Perhaps the question to ask is, what if these investors didn’t take an interest in stocks and ETFs now? If not now, when? And what impact would that have on their financial futures?

And, by the way, you know what Robinhood traders are not learning about? Mutual funds. Go ask any young investor whether they prefer an ETF or mutual fund. It’s not even close. But I digress.

A little over a year ago, I was attending the world’s largest ETF conference. I ran into a woman named Sarah Newton, an individual trader whom I first came across on Twitter. She was there checking out the event and trying to understand why we ETF geeks get so excited about the future of the industry.

I asked for her thoughts on the conference. Her response surprised me. She said we ETF geeks operate in an echo chamber, and that the industry must do a better job bringing our message to everyday investors.

I wrote at the time, “ETFs have democratized investing, but they haven’t democratized financial and ETF literacy”. In my wildest dreams, I never expected Robinhood and Dave Portnoy to help with the latter. But here we are—and I, for one, am grateful.

Follow Nate Geraci on Twitter @nategeraci