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How Robinhood Investors Beat Buffett at His Own Game

Summary:
If you’ve listened in to some of my interviews or online presentations since the start of the pandemic, you may have heard me discuss Robinhood, the no-commission trading app favored by millennials. According to the company, the median age of users is 31. Many are first-time investors. In the first quarter, the startup reported that some 2 million new accounts were opened, which was more than Schwab, TD Ameritrade and E*Trade combined. For some investing veterans, the narrative has been that Robinhooders are clueless kids living in their parents’ basements, whose haphazard day-trading has destabilized stock prices. They took their ,200 pandemic relief checks (which contributed to record disposable income growth in April) and loaded up on tech stocks, making markets frothy, some might

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If you’ve listened in to some of my interviews or online presentations since the start of the pandemic, you may have heard me discuss Robinhood, the no-commission trading app favored by millennials. According to the company, the median age of users is 31. Many are first-time investors.

In the first quarter, the startup reported that some 2 million new accounts were opened, which was more than Schwab, TD Ameritrade and E*Trade combined.

For some investing veterans, the narrative has been that Robinhooders are clueless kids living in their parents’ basements, whose haphazard day-trading has destabilized stock prices. They took their $1,200 pandemic relief checks (which contributed to record disposable income growth in April) and loaded up on tech stocks, making markets frothy, some might say.  

How Robinhood Investors Beat Buffett at His Own Game

I won’t make the case that there’s no truth to this characterization. Tech stocks are indeed among the biggest movers so far this year, with electric vehicle (EV) maker Tesla and teleconferencing app Zoom on top. Not only has the rally made Tesla CEO Elon Musk $41.2 billion richer this year, but market caps of the “Big 5” tech firms (Apple, Amazon, Microsoft, Google and Facebook) now account for more than 21 percent of the total market cap of the S&P Composite 1500.

How Robinhood Investors Beat Buffett at His Own Game

A recent Bank of America survey, in fact, found that three quarters of fund managers believe tech stocks are the “most crowded” trade in history. As if to underline this belief, as many as 40,000 Robinhood accounts added shares of Tesla during a single four-hour period on Monday, according to Bloomberg. (According to third-party Robintrack.net, which compiles trading activity data on Robinhood, Tesla was the second-most popular stock of the past week, following biotech firm Moderna, which released promising results of an experimental coronavirus vaccine this week.)

But I think it’s unfair to lump all Robinhood traders in the same basket.

Besides such criticisms sounding “elitist,” it just isn’t possible for Robinhooders’ trading activity to have such an enormous impart on the market. According to research firm Alphacution, the average Robinhood account is $4,800, making the combined value of all accounts trading on the app around $48 billion. Says Nir Kaissar, founder of asset management firm Unison Advisors, that sum is “a tiny fraction of the roughly $11 trillion in market value added to U.S. stocks since the market bottomed on March 23.”

Robinhood Traders Rebuff Buffett with Positions in Airlines

Another reason not to dismiss Robinhooders so quickly is that many of them made some masterful calls in this last downturn. Days and weeks before the S&P 500 bottomed, many began picking up coronavirus-impacted airline stocks. The buying spree continued even after Warren Buffett announced in early May that he had dumped all of his shares in the top four carriers, Delta, American, United and Southwest.

This was a case of retail Robinhooders beating Buffett, perhaps the most famous value investors of all time, at his own game.

I happen to agree with investor Bill Miller, who commented in May that if you don’t own the airlines, “then you’re making a bet against the vaccine.” Clearly many Robinhood investors agree as well. Since the start of the year, the number of accounts holding airline stocks has ballooned an unbelievable 1,200 times to just under 40,000 as of today.

Since its low on March 19, the NYSE Arca Airline Index has recovered 46 percent, a return that I believe would have been much higher at this point were it not for another huge spike in cases and hospitalizations. The number of commercial air passengers screened by the Transportation Security Administration (TSA) continues to bounce off the bottom, though at a slightly slower rate than in weeks past.

Buffett Missed Amazon and Google, Not to Mention Bitcoin and Gold

This isn’t the first time Buffett has been wrong about a stock or industry. The Oracle of Omaha famously missed Amazon and Google early on. “I was too dumb to realize,” he said in 2018. “I did not think [Amazon CEO Jeff Bezos] could succeed on the scale he has.”

How Robinhood Investors Beat Buffett at His Own Game

“We blew it,” Buffett said on a separate occasion, referring to the decision not to buy Google. His longtime business partner Charlie Munger added: “I feel like a horse’s ass not for identifying Google. I think Warren feels the same way. We screwed up.”

Below you can see exactly what Buffett missed out on. For the 15-year period, shares of Google parent company Alphabet were up 938 percent, compared to Berkshire Hathaway, up 222 percent.

How Robinhood Investors Beat Buffett at His Own Game

And then there’s bitcoin and gold, the latter of which has been one of the strongest assets of 2020 so far.

I say all this not to bash Buffett, whom I very much respect, but to contextualize Robinhood traders’ contrarian bet on airlines. They could have followed his lead and sold (or avoided) airline stocks altogether. I’m happy they had the forethought not to.

Claim Your Virtual Access TODAY…

I want to leave you this week with an invitation to join me at the virtual Oxford Club Private Wealth Seminar on July 27 and July 28. I’ll be presenting alongside other market mavens such as Alexander Green, Marc Lichtenfeld, David Fessler and more.

Register for this entirely VIRTUAL event by clicking here!

 

Gold Market

This week spot gold closed at $1,810.42, up $11.72 per ounce, or 0.65 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 1.81 percent. The S&P/TSX Venture Index came in off 1.43 percent. The U.S. Trade-Weighted Dollar fell 0.72 percent.

Date Event Survey Actual Prior
Jul-14 Germany CPI YoY 0.9% 0.9% 0.9%
Jul-14 Germany ZEW Survey Expectations 60.0 59.3 63.4
Jul-14 Germany ZEW Current Situation -65.0 -80.9 -83.1
Jul-14 CPI YoY 0.6% 0.6% 0.1%
Jul-15 China Retail Sales YoY 0.5% -1.8% -2.8%
Jul-16 ECB Main Refinancing Rate 0.000% 0.000% 0.000%
Jul-16 Initial Jobless Claims 1250k 1300k 1310k
Jul-17 Eurozone CPI Core YoY 0.8% 0.8% 0.8%
Jul-17 Housing Starts 1190k 1186k 1011k
Jul-23 Initial Jobless Claims 1280k 1300k
Jul-24 New Home Sales 700k 676k

Strengths

  • The best performing precious metal for the week was silver, up 3.24 percent and marking six weeks of consecutive gains. Silver was strong again this week as the metal neared $20 an ounce, a level last seen in September 2016. The metal is up 66 percent from its March lows due to stronger demand for use in solar. Silver is also riding the wave of higher gold prices.
  • Wheaton Precious Metals CEO Randy Smallwood said that mining companies could raise as much as $3 billion by selling shares of future output. “Any time there’s a bit of financial stress in the industry it always opens up financial opportunities for us,” said Smallwood. Royalty companies such as Wheaton provide upfront payments to miners in exchange for the right to buy metals at a discount in the future, reports Bloomberg. Wheaton says it has been “very active” on potential deals, including one valued at $1 billion.
  • Gold-backed ETFs had a 17th straight week of net inflows while silver-backed ETFs had a 12th straight week, according to Bloomberg data. However, investors in the gold futures market have been reducing positions. Eddie van der Walt writes that there has been a shift of balance in the gold market where the futures market is being crushed by “big boy” ETFs.

How Robinhood Investors Beat Buffett at His Own Game

Weaknesses

  • The worst performing precious metal for the week was gold, up 0.65 percent; likely investors are diversifying their investment across the other precious metals, particularly silver. Gold futures slipped on Thursday after strong economic data was released. China reported GDP expanding 3.2 percent in the second quarter after contracting 6.8 percent in the first quarter. U.S. retail sales exceeded forecasts in June for a second straight month.
  • Barrick Gold said its costs to produce gold and copper rose in the second quarter. The all-in-sustaining cost to produce one ounce of gold was 7 percent to 9 percent higher in the second quarter compared to the first quarter, according to a company statement. Bloomberg reports that Barrick’s production was down for the last three months largely due to COVID-19 disruptions in Argentina and planned maintenance shutdown in Dominican Republic.
  • The world’s two largest diamond producers said their combined sales were down 94 percent from a year earlier in the second quarter to just $130 million in rough stones. Bloomberg reports that De Beers and Alrosa PJSC both reported second quarter sales on Thursday.

Opportunities

  • Diego Parrilla, the hedge fund manager who runs the “doomsday” fund that has soared 47 percent so far this year, is betting that gold is only getting started. Parrilla believes that gold could rise to $3,000 to $5,000 an ounce in the next three to five years. “What you’re going to see in the next decade is this desperate effort, which is already very obvious, where banks and government just print money and borrow, and bail everyone out, whatever it takes, just to prevent the entire system from collapsing.”
  • India’s biggest gold jeweler, Titan Co., said that although it faces a substantial hit from the coronavirus, it does have faith that gold will remain an attractive asset class for protecting wealth. Managing Director C.K. Venkataraman said in a report that “following the outbreak of the pandemic, the perception of gold as an asset class has improved considerably.” The jeweler expects consumers to spend relatively more on gold compared to other discretionary goods.
  • EDL Capital, a Swiss hedge fund, plans to offer investments denominated in gold and silver to protect clients against the risk that record stimulus spending will hurt currency values, reports Bloomberg. “With the two new precious metal share classes, we want to offer investors a way to protect themselves against such scenarios” of potential hyperinflation and currency basement, said Jannik Wenger, head of investor relations at EDL Capital.

Threats

  • Edward Altman, the creator of the Z-score that predicts corporate bankruptcies, says that this year’s “mega” insolvencies are just getting started. More than 30 companies with liabilities exceeding $1 billion have already filed for Chapter 11 since January, reports Bloomberg. “There was a huge buildup in corporate debt by the end of 2019 and I thought the market would gain some much-needed de-leveraging with the Covid-19 crisis. Now, seems like companies are again exploiting what seems to be a crazy rebound,” said Altman.
  • U.S. consumer sentiment unexpectedly turned pessimistic in July with the University of Michigan sentiment index falling 4.9 points. The index had increased by 5.8 points in June. “The decline is a potentially troubling sign for the economy and underlines that confidence and consumer spending will be closely tied to whether the rapidly spreading coronavirus is brought under control,” says Bloomberg’s Scott Lanman.
  • The Labor Department reported that 1.3 million Americans filed for first-time jobless claims in the latest week. Although 10,000 lower than the previous week, it is higher than estimates of 1.25 million.

Index Summary

  • The major market indices finished mixed this week. The Dow Jones Industrial Average gained 3.76 percent. The S&P 500 Stock Index rose 2.31 percent, while the Nasdaq Composite fell 0.42 percent. The Russell 2000 small capitalization index gained 5.32 percent this week.
  • The Hang Seng Composite lost 4.28 percent this week; while Taiwan was down 0.09 and the KOSPI rose 1.54 percent.
  • The 10-year Treasury bond yield rose 1 basis point to 0.624 percent.

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You can read the remainder of the article at http://www.usfunds.com/investor-library/investor-alert/how-robinhood-investors-beat-buffett-at-his-own-game/

July 17, 2020

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

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