Shame on Cathie Woods for Not Knowing the Difference Between Disruptors and Fraudsters
After plunging more than 8% on its opening day July 29, the shares surged over 80% on August 4 – in an apparent response to Ark Invest’s Founder Cathie Wood buying RobinHood stock for her “actively managed exchange traded funds.”
I responded to her purchase by selling Ark exchange traded funds from all of our accounts that held them (ETFs account for no more than 10% of our holdings).
Her RobinHood purchase was the straw breaking the camel’s back: her ETFs have been having a bad 2021. In the interest of being fair and balanced, she’s hardly the only money manager whose returns have decelerated over the past six months as a result of the market wavering between growth and value instead of sticking with one or the other.
Woods’ excuse for the underperformance was that it was due to her embrace of ESG (environmental and socially responsible governance) criteria for investing. But nothing about that acronym can justify buying RobinHood.
Woods says she invested in RobinHood because she invests in innovators – and she used to excel at it. But it’s erroneous to compare her early move into Tesla with her recent RobinHood buy. The former innovates but the latter deceives.
Once the SEC caught up with RobinHood for this, a fine of $70 million was ordered on June 30. And within a matter of days, RobinHood filed for an IPO to cover the costs of that fine (although the total deal raised $2 billion).
And that means anyone who buys RobinHood shares – or at least who bought them in the first round of selling – is an enabler, making it possible for RobinHood to continue to deceive investors and get away with barely a slap on the hand.
According to the panelists on CNBC’s Half Time Report that aired August 4, only 2% of RobinHood’s 18 million accountholders actually make money – that’s far more like a casino than what any other investment brokerage reports on its books.
Something else that is unlike any other investment brokerage: RobinHood’s CEO and Founder, Vlad Tenet is not registered with the Financial Industry Regulatory Authority, which is a basic requirement for the chief officer of any investment institution. It boggles the mind that the company managed to register an IPO in spite of that fact, let alone the fact that no one noticed it until after the shares came out.
Although the laws that created the SEC technically indicate that the regulator should simply act as a gatekeeper for IPOs rather than approve or disapprove of them, not policing Tenet for lacking FINRA credentials seems like a dereliction of duty.
So is the fact that the SEC hasn’t been able to put an end to the practice of telling investors that a trade is being executed for free when in fact the investor is paying a spread on the back end that occurs because of the payment for order flow practice.
A back-of-the-napkin estimate of the opportunities lost to this practice comes out to about $15 billion annually just for individual investors alone – because since RobinHood pioneered the practice of payment for order flow, the competition followed suit and now just about every online investment company offers free trades that aren’t really free.
Once you see how much money is being lost to this problem, why would you want to further subsidize it by purchasing shares of the company that created the phenomenon? In doing so, you contribute to the “robbing from the poor to give to the rich” instead of the other way around.
Even if you buy RobinHood shares in the secondary market – meaning after the IPO – you are rewarding RobinHood employees by driving up the value of the stocks they receive as part of their compensation packages.
Now just because the stock went up 80% in one day doesn’t mean it will stay at that value. Don’t be surprised if the prices plunge again, since RobinHood has managed to upset plenty of investors, including many in the WallStreetBets camp. Since I’m not allowed to short the stock as a fiduciary, I’m simply staying away from it altogether.