Beating the House: Robbing Robinhood’s ‘Gold’
Do you ever get the feeling Robinhood is out to get you? You aren’t alone.
I love Robinhood. It gives new investors unparalleled access to the market. Personally, the stock trading app works for me; its quick and easy to use, and I am able to leverage its benefits to fit my needs. I’m comfortable with the bare bones approach the platform has taken, and have developed a trading strategy that I think works for me and alongside this broker I have been using for years.
My account started trading in early 2016, shortly after its launch the year before. For a first time investor taking on the market all on my own, Robinhood was a godsend. At the time, the financial services landscape was a different world.
I deposited a meager $50 and bought into Bank of America, and Ford with a few shares each. at the time, BAC was listed at around $9, right around the fees charged per trade at bigger brokers — this was a cost that would have sunk my puny portfolio, if it had been allowed through the door, that it. Not only were brokers charging maddening rates for trades, they also barred traders like me from the game altogether with minimum opening thresholds of $500 or higher.
Everyone develops as an investor over time, and the first six months of trading produced a classroom environment that has guided my hand ever since. Early on, I chased dividends like my life depended on it — many have, and far more will continue in this fool’s errand in the future. I was obsessed with high value dividends and hadn’t built a foundation of trading fundamentals yet.
What I and many more like me didn’t understand, is that dividend payments are a direct siphoning of the quarterly earnings that drive stock movement at regular intervals across the year. While some companies perform a split to lower their buy-in price, others offer massive dividend payouts to their shareholders to drive the price back down. Microsoft has split nine times, while Berkshire Hathaway has never devalued its price (currently $263,094 per share).
By chasing the big payouts week after week alongside limited free cash meant that I was constantly selling at a loss or squeaking out a few cents on each trade in order to get in on the ‘next big payout’ just before its ex div date. This approach was slowly shrinking my portfolio and it wasn’t until I stumbled upon Vanguard ETFs (particularly VTI and VOO) that my savings were put back on track. In early 2017 my investments finally rose above the principal and have enjoyed great expansion ever since.
Robinhood got me into the market in a way that I never could have without them. But the company is woefully noncompetitive in a number of areas many investors find important. Surely, with a broader emphasis on user experience, I may have seen the error in my approach with far less failure under my belt.
The broker routinely takes flack for limited research availability, and in the past I have often found myself submitting an order only to find that it was executed at a slight markup. The platform has been quietly moving away from its founding principals of easy access and no nonsense to get the novice investor excited about the great potential of stock trading.
It turns out, From October 2016 to November 2017, Robinhood was exclusively using a process called ‘payment for order flow’ to compete with a growing field of other low or no cost trading options. In short, this increased margins while negatively impacting the positions of its investors.
Its worth considering the broker in all its flaws in order to tailor the investment experience to to best leverage its strong points for your benefit. This is especially important as Robinhood sits poised to enter the English market, adding untold millions of users to its already 10 million strong client base (CNBC, 2019).
Leverage: The Great Multiplier
Leverage is a fantastic vehicle for driving higher results from your portfolio. However, care must be taken with leveraged trading options because the opportunity to get shafted is ever present. The way Robinhood extends credit to its investors is through a program it calls ‘Robinhood Gold.’ Essentially they charge you 5% on the dollars borrowed, and take their cut monthly from your available cash. It appears that the company is willing to indefinitely increase your ‘gold’ at a roughly 50/50 rate alongside your portfolio value.
My investments haven’t come near cracking the $100,000 mark (yet!), but I haven’t seen any literature that suggests a cutoff point for all this free flowing leverage at any set level. I assume that Robinhood is just as happy to extend a million dollar line to a million dollar investor if she is interested in the risk of the 5% on top of sky high borrowing.
I recommend using this feature. But great care must be taken while borrowing, for any reason. You not only have to make smart decisions in order to grow your money, you also must crack the 5% mark year over year for it to remain profitable. Considering the target for average portfolio growth at 7%, this means you need to hit a 12% target without any extra knowledge, data, or assistance outside of the cash injection. All of a sudden the burden to flourish as an investor becomes far more important. Unfortunately this is where Robinhood fails in a most spectacular fashion.
The Research Void
Robinhood is spectacularly bad at offering research. In more recent versions they have begun offering a box that suggests expert’s recommendations in the form of percentages backing buy, sell, and hold positions. But there is typically no context or additional data the clarifies these recommendations.
The platform also publishes a list of its 100 most popular stocks among its users. This only proves the point of many detractors though. Yaron Yitzhak at The Next Web combed through publicly available data and found six million users owning a combined 12 million stocks (not shares). Whether you take the six or ten figure, the diversity of Robinhood users’ portfolios is bleak. The average portfolio contains two or fewer unique holdings; for contrast, mine includes 32 at present. As well, his research found that buyers skew hard toward technology and small and mid cap listings, far above the market’s capitalization for each segment.
The lack of usable research doesn’t affect my trading strategy today, though it certainly would have helped to have this guiding light built into the platform in my first months.
But many users seem to follow this crowd mentality by design. Their research stops at the inclusion of percentage recommendations sourced from the ether, Robinhood’s popular companies prominently displayed, and the option to buy into additional research alongside ‘gold’ that has yet to materialize. Its clear to me that Robinhood has built an atmosphere of mutual reliance among buyers rather than empowered stock market participants.
I am a believer in the power of speculation to lift or shrink a stock price, and often act against the grain. The potential for quick and rapid rebound weighed against the long-term growth of stocks across the board is enough to mitigate the risk surrounding a select group of companies and brands of negative perceptions in my mind. However, building a millions-strong base of users that must cut through the noise of the system in order to approach the market analytically has led to a slow development of fundamentals and instincts among up and coming investors.
Yitzhak claims that Robinhood’s free stocks for referrals is potentially the culprit of these data points, but I see the malignancy to be more potent than that.
The Heart of the Issue and How to Overcome
Brass tax, I see the system Robinhood has built to be a money making machine. It’s aim it to enrich the house without consideration of its players. But that doesn’t mean that we cannot build wealth as well! I use two strategies in tandem to improve my odds.
By charging 5% interest and allowing for constant increases to the credit line as your investment grows, the broker can continue to soak its clients of valuable free cash assets each month. And with a lack of resources to improve your investing game, Robinhood has stacked the deck against major growth in the short term, meaning that investors become reliant on the extra cash for that spark. They incorrectly assume that more capital means more gains — this only works with a coherent investing strategy. More capital only guarantees more movement, in either direction.
In present market conditions, I maximize my ‘gold,’ and have placed the majority of the extra capital in Teledyne (TDY: +39% last year), the Blackstone bank fund (BX: +31% last year), and Microsoft (MSFT: +48% last year). These vehicles have proven reliable earners for me over the years, and BX pays out something in the neighborhood of a 5% dividend each quarter, earning back a massive chunk of the interest I will ultimately lose all on its own. Teledyne (a telescopic and space communications firm) pays no dividend, so a careful eye on its price ensures the ability to move it when the time is right.
This is not to say that maximum leverage will always be the best position for me, in the event of a market correction, leverage can be a significant Achilles heel. I keep a close eye on the state of my portfolio and the market as a whole on a daily basis in order to constantly reevaluate my positions.
Secondly, I own stocks that pay dividends in each month of the year. Payouts typically occur in relation to quarters, so creating A, B, and C lists of stocks that pay out every four months in a steady rotation throughout the year ensures that my value never becomes negative due to Robinhood’s monthly ‘cut.’ This way, I always have capital available to buy something on the move.
Taking the time to find stocks you trust that fall within these staggered payout schedules is essential to building a consistent flow of free capital. There’s an added benefit as well, when your portfolio reaches retirement age, these monthly dividends can form a piece — possibly quite a large one with aggressive buying — of your monthly income.
I recommend Robinhood in the short term, and especially for new traders, in spite of these major factors that hold buyers back from their full potential. The truth is, if you want to become a successful investor, you’ve got to learn early, and never stop.
Robinhood works for me in the way I need it to, I buy and sell stocks and leverage their money to increase my own above and beyond the interest they charge and the ability of my own capital’s holdings alone. I don’t need or frankly want the platform’s advice when it comes to trading. I learned from experience and failure, and from hundreds of hours of reading and research.
Beating Robinhood’s house takes skill in the market: You have to make 12% rather than the standard seven. By aiming for earners poised to take off and building a reservoir of dividend payments you can maximize cash flow even as Robinhood’s system works to cut the legs out from under you.
