Why The Ongoing War of Words Between Charlie Munger and Robinhood Underline The Lack of Inclusivity in Investing

With accusations of investing apps like Robinhood being labeled a “dirty way to make money” by Berkshire Hathaway vice-chairman, Charlie Munger in an attack that the app dismissed as “disappointing and elitist,” it’s clear that a war on inclusivity is only just beginning.

The battle lines were drawn following the Reddit group, r/WallStreetBets encouraging investors on the platform to buy GameStop shares en masse to pump its price up.

The plan was highly effective in the short term, as casual investors bought into GME shares, its stock peaked past $325 dollars – a significant rise for a company trading at lower than $5 per share in the summer of 2020.

In a short space of time, GameStop’s market capitalization flew from $300 million in August 2020 to $3 billion at the company’s January peak. However, the achievements of social investing on Reddit caused a form of friction across the market that hasn’t been seen before.

How Reddit Outpaced Wall Street’s Hedge Funds

The mass purchase of GMB stock came at a time when hedge fund Melvin Capital had looked to short GameStop shares in the anticipation of a drop in price. However, the mass social investments from Reddit led to not only Melvin Capital but multiple other hedge funds losing significant volumes of money.

In the chaotic timeline of events, we can see how heavily GameStop’s shares were influenced by the tug of war between hedge funds and Reddit. The unforeseen battle led to Melvin Capital losing 53% of its funds in January alone, but it was the actions of the retail investment platform, Robinhood that stole the headlines in the wake of the rally on GameStop.

Robinhood’s Moral Conflict

Robinhood is a commission-free stock trading app that promises to ‘democratize finance for all.’ However, as the price of GameStop began surging, the app took the step of freezing purchases of GMB stock, as well as that of AMC Entertainment (AMC), BlackBerry (BB), and Nokia (NOK) while claiming that the company ‘makes changes where necessary’ in light of market volatility. While the app continued to allow users to sell their shares, they weren’t permitted to buy more.

Robinhood was one of a group of trading platforms that curbed the purchases of its stocks. As an app that stood as a means of enabling people from all backgrounds to enter the stock market and invest their money, the notion of preventing them from buying into an asset in the minutes and hours after hedge funds were stung by retail investors provoked an outcry.

With at least 90 lawsuits filed against Robinhood in the wake of the fiasco, the app inadvertently exposed the significant lack of inclusivity when it comes to stock investing. The act of limiting the actions of its own users as the damage to hedge funds became clear has left more casual retail investors alienated by the market.

Dirty Way to Make Money or Elitism in Action?

When Berkshire Hathaway vice-chairman, Charlie Munger, gave his scathing assessment on Robinhood, and commission-free trading apps in general, he compared the investment platform to a gambling website.

“Robinhood trades are not free. When you pay for order flow, you’re probably charging your customers more and pretending to be free,” the 97-year old told the Daily Journal’s annual shareholder meeting. “It’s a very dishonorable, low-grade way to talk. And nobody should believe that Robinhood’s trades are free.”

Munger pointed the finger at brokerage apps for enabling the recent trading chaos by bringing together “a whole lot of people who are using liquid stock markets to gamble the way they would in betting on racehorses.”

“The frenzy is fed by people who are getting commissions and other revenues out of this new bunch of gamblers,” Munger claimed. “And of course, when things get extreme, you have things like that short squeeze.”

Robinhood responded to the criticism by claiming that Munger has actively dismissed the next generation of investors – labeling his words “disappointing and elitist.”

“In one fell swoop an entire new generation of investors has been criticized and this commentary overlooks the cultural shift that is taking place in our nation today,” explained a Robinhood spokesperson. “Robinhood was created to allow people who don’t have access to generational wealth or the resources that come with it to begin investing in the U.S. stock market.”

Sadly, the war of words between Charlie Munger and Robinhood signifies how much of a lack of inclusivity exists in trading, despite the development of technology that has the potential to bing new investment opportunities to scores of new users.

The Next Generation of Investor

In the past year, 10% of Americans bought a stock for the first time. On top of this, 7% began contributing to a retirement account.

There’s been a significant surge in retail investing since the beginning of the pandemic. In fact, over 10 million people in America have opened a new brokerage account in 2020. In a survey conducted by CNBC, 22% of Gen Z respondents claimed to have opened a stock market account in 2020.

Furthermore, the survey found that those without a college degree and in the income bracket of $50,000 or less were also more likely to buy a stock for the first time in the past year.

This data clearly shows that trading has taken strides towards new generations of investors that may have previously lacked the accessibility they needed to invest.

Platforms like Robinhood have opened the door to these traders, offering them access to investments that had seemed inaccessible before. However, in the wake of Robinhood’s kerfuffle, retail investors are now turning to other platforms offering similar features. For instance, NasDaq-listed Freedom Holding Corp. (NASDAQ: FRHC) has a platform called Freedom24, which not only enables retail investors to purchase stocks but also participate in selected IPOs. That said, not everybody is eligible as there’s an application process and a threshold of $2,000.

Alternatively, there are more traditional platforms like E*TRADE and TD Ameritrade that enable the general public to invest in stocks. TD Ameritrade, for instance, also allows its customers to take part in selected IPOs. However, the account value threshold is set at $250,000. Alternatively, the account must have completed 30 trades in the last 3 months.

The Covid-19 pandemic has offered individuals the chance to stop and reconsider how their money is best invested. With a brand new and broad generation of new investors entering the market, Charlie Munger’s comments may appear dismissive of the huge new collective drive towards trading. Likewise, Robinhood’s restrictive actions risk repelling new investors before they have a chance to see their first profits.

In a world that’s increasingly interconnected, fintech platforms and old hedge funds alike need to put in more effort to accommodate new entrants onto the market. After all, the free market will be a much more prosperous place when it’s accessible for all.