Warren Buffett is one of the most famously successful investors of all time and his firm, Berkshire Hathaway, trades today near its all-time high, closing Friday at $433,124/share. Mr. Buffett has stated that he does not intend to split these original A shares as they attract like-minded, long-term investors. However, Berkshire did issue B shares in 1996 at a more accessible 1/30th of an A share value, which split again in 2010 to now represent 1/1500th of an A share. Was the issuance of the B shares a reversal on his long-term buy-and-hold principles? No, he was merely responding the creation of unit investment trusts¹ marketed as Berkshire clones, which he believed would poorly imitate Berkshire performance with the addition of high fees.
If Warren Buffett likes his high share price for its tendency to recruit long-term investors, Robinhood takes the opposite stance. Robinhood is a stock trading and investing app that uses the tagline “Democratizing finance for all.” One of its chief innovations which you may have seen advertised lately is fractional shares. Robinhood makes a market and allows its users to trade by the dollar, such as $20 for 0.000046 shares of Berkshire Hathaway A earlier this week.
We see Robinhood as a young firm catering to a new generation of investors. Its predecessors, traditional brokerages, made money via transaction commissions. Robinhood charges no commissions and instead earns most of its revenue from payments for order flow³ from market makers. In both cases, more transactions means more revenue, and Robinhood’s strategy seems to be to bring new participants to the market via their app to produce these transactions.
What is different about this new generation of investors that Robinhood is hoping to bring into the market? It is impossible to characterize a whole population, but here are some themes we are seeing.
Gamification: Just as Facebook is designed to keep you looking at their app as much as possible, Robinhood is designed to make investing fun. These design tactics drew regulatory attention⁴ this year, with a complaint of “aggressive tactics to attract inexperienced investors.”
Cryptocurrency: Robinhood’s list of products⁵ reads “Cash Management, Stocks & Funds, Options, Gold, Crypto.” This is certainly not the list of asset classes we would provide for our clients, but it says a lot about the perceived demand by new investors & Robinhood’s ability to generate revenue. Cryptocurrency for the new generation is an asset class that warrants the same attention as blue-chip stocks.
Rosy Investor Experience: Most of our clients have experienced one or more very difficult market cycles and have seen prolonged periods of loss that can derail a financial plan. An investor with five years of experience has experienced the tail end of an historic bull market, and a v-shaped bear market. The rapid recovery may have taught less seasoned investors that markets only go up.
Decentralized Media: This new generation of investors is not stepping onto their porch to pick up their Wall Street Journal. They aren’t likely to subscribe and they aren’t likely to have a porch. They do seek investment advice on Twitter, Reddit, and Twitch, platforms that allow many more voices to spread many more ideas.
Outsize Voice: Following the previous theme, this generation of investors is much more savvy about using modern communication platforms. While they do not outnumber traditional investors in number, and especially in the proportion of market assets they own, they do have a greater ability to make their opinions heard.
Loose Money: On average younger investors have fewer financial obligations (mortgage, children) and therefore have a higher percentage of disposable income. Pair this with record cash balances produced by federal stimulus & limited outlets for spending, and we’re hearing many more anecdotes about new investors treating their investment accounts like “play money.”
All of these themes point in one direction- unprecedented risk taking. If investing is treated as a game where losses don’t matter and the riskiest investors receive the most attention, it is easy to see how the cardinal sin for this cohort is to be the last to the party. This won’t be a problem as long as new participants and loose money buttress risky investments. However, our belief is that fundamentals always win out in the long run. We can return to where we started with Warren Buffett, who says “in the short run, it’s a voting machine, in the long run, it’s a weighing machine.” If a new generation of investors wants to take some extra risk, there will simply be a little bit more volatility in between.
- Berkshire Class B Original Offering Statement: https://www.sec.gov/Archives/edgar/data/109694/0000898430-96-001695.txt
- Robinhood Customer Agreement, Fractional Shares pg.14: https://cdn.robinhood.com/assets/robinhood/legal/Robinhood%20Customer%20Agreement%20(June%2022)%20(1).pdf
- Robinhood IPO S-1: https://www.sec.gov/Archives/edgar/data/1783879/000162828021013318/robinhoods-1.htm
- CNBC “Robinhood gets rid of confetti feature amid scrutiny over gamification of investing”: https://www.cnbc.com/2021/03/31/robinhood-gets-rid-of-confetti-feature-amid-scrutiny-over-gamification.html
- Robinhood Products: https://robinhood.com/us/en/about/#our-products