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Is Robinhood Creating a Bubble? | Phil Town

Jan 02, 2022
Alright guys, I'm Phil Town from Real One Investment and today I want to talk to you about what's going on with these Robin Hood investors and whether or not they're

creating

a

bubble

for the rest of us to burst. Interesting problem, right, so this is an exciting time to be a stock market investor, certainly, especially this last month or so with all these Robin Hood investors stepping in and

creating

this massive momentum in a number of different stocks, so what is it really? going on here you are these

robinhood

investors bubbling things up that could result in some kind of systemic risk here that we should be concerned about so let's talk about what seems to be the goal of robin hood and more power for them has been to give power to little ones than just they came in with free trade early on and forced the big guys to lower their prices um and that brought prices down for everyone it's really been great So now almost anyone can go to any of the major online brokerage sites and they get free trade unless you're a pro like some of us and then you can't because they stick it to us so you know what they give you sometimes free shares of a company sometimes they give you free registrations blah blah blah so anyway Robin Hood was tailor made for sort of a younger new investor in an ever tech world older just going to what you know super cheap and then letting people figure out what they wanted to do within that realm so that's really cool the Robin Hood guys were very brave and very progressive and all of that is wonderful, except for a few things, one of the things we have to worry about.
is robinhood creating a bubble phil town
Is there a systemic risk as a result of what

robinhood

has created that could really affect the rest of us and are there some things going on that you guys don't know that are behind the scenes with regards to robin hood and all the other racers that are involved on kind of a wild and crazy momentum, as fun as it sounds and I'm a huge fan, there are things that can happen so let's talk about what the big picture is first. Here, in terms of a market

bubble

, the stock market bubble happens when there's a big spike in prices over a relatively short period of time and it's an extreme escalation, right? there is a very rapid decline in those prices or what is sometimes known as a crash now the point of this is that the stock market does this without the help of any Robin Hood investors or young young men jumping in there and really starting to playing by a different set of rules, the stock market is perfectly capable of crashing on its own and has done so regularly for 140 years, so let's not really get too depressed about someone's arrival. go in and find a new way to collapse it because it's going to collapse with just the old ways anyway that's how it works and I think you need to understand a little bit about why it's that when companies when when people are human when we start to see that our friends and neighbors make easy money we want to get involved in it we just can't help it it starts to spread virally through the neighborhood long before there were things like you I know about cell phones and the internet.
is robinhood creating a bubble phil town

More Interesting Facts About,

is robinhood creating a bubble phil town...

It would spread virally in the 1920s It would spread virally in the 1960s It would spread virally in the 1870s the stock market when it crashed in the 1929-1930 era and the result was a crash i.e. the market kept running down was to do 90 percent and that created a lot of fear, a lot of money wasted, then the banks went bust on top of that of that and then you were more afraid, so now we know that we haven't seen a bank failure bring down its depositors for a long time. many many decades and that's fantastic so that's federal government rules and regulations in a good way and market bubbles are much more under control now in 2009 when the stock market crashed there was government action extremes to bring it back and you saw how quickly it turned around in 2009 to start again, I mean literally bottomed out in March of 2009 and was already going up pretty solidly because of this because of this, you know, late spring in June so that was pretty good and then we saw this crash happen in March of last year and wow, did the government ever get caught up in that in a hurry?
is robinhood creating a bubble phil town
I mean all sides of the government came together and that stock market crash lasted like three weeks. I mean it went straight down. it's really amazing huh how different the timing is now in stock market crashes but there's nothing surprising about a stock market crash and basically no one knows what would cause it it's always kind of a camel on the camel on the straw back it's always that kind of never it's a straw it's always like a brick on the camel's back and the camel collapses and there it goes and we never know what that brick will be and if you want to read some good books on that my favorites are written by nicholas talib who is a super successful former options trader who made an unusual transition in life became a professor at nyu um you don't see that very often and by the way he said just in case some of you are thinking about becoming academics he said if you think it's hard in the pits of the chicago stock exchange where they trade commodities and it's very hard the pits are full of people who used to being football players said you should watch elbows get sharper in academia is really brutal so anyway Talib has written several books about this kind of brick on camel's back with what he would call a black swan and how those events happen far more frequently than you ever imagined. okay back to what we are what we're trying to figure out is if this current batch of volatility makers um and price manipulators um ever in robinhood are actually capable of creating a market crash so one of the things that happened, maybe, happened with gamestop and that this is a really cool example of investors not so much looking for a big return as punishing other investors and this is unprecedented among small ones.
is robinhood creating a bubble phil town
It has many precedents. Does that even work? precedent among guys who play in the institutional leagues so hedge fund managers have tried to punish other hedge fund managers forever and one of the most famous examples of hedge fund management uh punish to some really I think the big guys happened in 1997 or 1998 with a company called long term capital that built them I think two nobel prize winners in modern portfolio theory which has since come under a lot of criticism , not in the least, maybe because of me. and all the work that we've been doing to absolutely destroy the concept of efficient market theory, of course, I'm not going to get a nobel prize for it, there have been several nobel prizes awarded by people who prove that no, that the theory of the efficient market doesn't make sense and um you can watch any number of these videos and we'll talk about it but um in 1917 1997 98 the long term capital of this company had billions of dollars under management and they were attacked by equity funds hedging that they essentially found out they were long a certain position or short a certain position, whichever it was, they were wrong and they got hit by funds that went in there and hit them that's essentially what happened here with gamestop is that these gamestop buyers , this group of people on reddit jumped there en masse to punish the very large short positions they had discovered against the stop against the stock now part of that was just hey we like gamestop well you know a lot of us are gamers and we like gamestop uh and we think it's being unfairly punished by the short sellers who are trying to cut it some of the who are trying to bankrupt you so they can profit from the bankruptcy so there are some really bloody games going on here and this group of little guys got together and forced the price by buying aggressively with enough little ones that their total dollar amount was huge and the end result was at least one big hedge fund with 12 billion dollars in capital on January 1 of this year it ended at the end of January with less than 6 billion of its own capital it had 8 billion but 2.5 billion million of that was an infusion of some people who were very interested in you protecting your friends and also trying to find a way to protect robin hood now this f ue the unexpected side of this that you may not know is that robin hood well you may know that this robin hood came under a lot of fire and a lot of people abandoned robin hood and went to other runners because they saw that robin hood supported these greats hedge funds by manipulating the trading taking place in the games; what they did to manipulate that was make it impossible to keep buying it and what they wanted. essentially drive the price down or at least that seemed to drive the price down so these hedge funds could get a better exit out of their short positions now that's not what robin hood was trying to do these are not guys who are in support of the Big hedge fund managers, they're pretty much the people you think they are, but because they're the people you think they are, they're young, not necessarily super-sophisticated billionaires who got it done faster than they could. they think they didn't realize how much the regulators were going to be looking over their shoulders when their bonds started kicking in to cover the short positions if the short hedge fund managers couldn't cover, suddenly the Robin Hood guys they woke up one day and it's holy criminis we could be in trouble for two or three billion dollars here that we don't have that we don't have and I realized that if the game stopped pushing the strength of reddit it was driving up that price and these short positions couldn't be filled in order i mean they just didn't have the money all of a sudden robin hood could go after your houses and your cars and all that but that will take months if not years meanwhile the long guys everyone the little ones that want to get paid hey pay me pay me to do that somebody has to put up the money and if the hedge fund can't put up the money guess who has to put up the di Wildman. money you heard it right what robin hood does and all of a sudden these 20 somethings were sitting there thinking oh where did we get this?
So they had to stop things dead in their tracks and this is one of the systemic problems that happens when unexpected things happen, you have unexpected or unintended consequences. consequences that can be pretty dire, so Robinhood effectively closed the trade on that action for a while, and in the meantime, that unintended consequence of this pretty fun game of trying to squash some guys, squash some big guys that have moved on to other brokerages including the broker that I trade on which are interactive brokers that basically went out of business briefly on a number of these companies that have been identified on these reddit bulletin boards so wow the little it roared and spread all over the environment and boy were these guys out rushing money for cash in robin hood quickly raised two or three billion dollars kudos to them for being able to do it but it costs them a lot of capital so they one of the unintended consequences of this massive target of a specific action because it had been massively shortened by professionals who maybe they weren't trading the fairest way was to create almost destroy the very broker that was allowing this Go on this is really unbelievable can the market crash?
Oh hell yeah this is a brick and you don't know which brick will fall on the camel, that's the last brick, what you do know is that the bricks are starting to stack up. Now some of the bricks that are out there, guys, are the fact that for the first time since 1999, when the market dramatically crashed almost out of nowhere and for almost no apparent reason, the market is valuing all of these stocks at about a two percent return which is really amazing I mean it's essentially like you're going to play the stock market the way most people do they're playing they don't know what they're doing they have to do it. they get a higher return than for the risk they're taking compared to a Treasury, so right now a 10-year Treasury is considered the risk-free rate and typically the market is five or six percent above the 10-year t-bill, so the return on the stock market right now should be, I don't know, six percent, maybe five percent or six percent conservatively and it's two percent, so the market is more than double higher than it should bebe reasonably compared to the profits of all the companies participating right now, maybe some of that is covid, it is true that their profits are not that high, but I don't know lately, the profits are going back quite strongly and ‚Äčthe gains for many companies in the s p 500 have been phenomenal over the year as they have gotten deeper and deeper into e-commerce so yeah can you go back to the original question if a group of merchants operating together can do something for fun or profit without any intention of crashing the very market they are dealing with They want to profit or crash the very broker they are trying to profit off if that can happen and the answer is absolutely anything can happen whatever What is needed for a market crash or any bubble is just that enthusiasm and I would almost say the irrational exuberance that occurs in a bull market or bubble is so al that the next step is not more enthusiasm. the stage is less enthusiastic you just can't be more enthusiastic there are no more people to be enthusiastic there is no more money to chase it is as enthusiastic as it can be and when that happens then the enthusiasm starts to veer no need longing for people to start dating and when that happens, that cutting edge that's very sensitive to these shifts in emotions, those guys start dating, oftentimes, the big hedge fund managers are more attuned to this kind of thing than anyone in the world, that's right. as they make a living they start dating with a lot of money and when they start dating, the prices start to drop.
Now you have seen this in your life because it happened in real estate in 2006 and 2007 when people started working in particular. Most of the big guys that started realizing there was a problem with these subprime real estate based bonds started getting out of those bonds and then that started allowing more people who aren't as big or as informed to pay attention. and realize, oh people. They're Leaving Here is a lot like watching some people walk out of the theater first just one or two and you don't think anything about it, you just think they're going to go get some popcorn, right? what people do all the time they're just leaving you don't realize they're leaving because they smell smoke your nose is just not as tuned in so at what point do you start to realize there's an exodus?
It doesn't take that long after those first few people start going before a number of people leave and when a number of people leave you realize oh these aren't people going to the bathroom okay so which one It's the brick and we know which person it becomes which one a person wasn't there you think me It could still be a potty break but when that person is there it's not a potty break anymore, no one knows the answer to that it's just a feeling and that feeling starts to build the feeling of danger and then that feeling gets stronger and then you act on it and that's what crashes the market so yeah they can do it now , the beauty of rule one, invest just to put a little plug in because what we're teaching you is that we shouldn't be in the market. game stop or anything else like a game stop or actually even maybe in this market unless you're in very specific stocks that are still priced low because in every market there's always something low low low priced for sure but It's actually a rule that an investor is going to be out long before we get to this place, right?
We are not going to be at gamestop when it goes from 100 to 300. value becomes so absurd that pretty much all the rules of an investor who is not asleep are out and that is the same thing that happens with the market, so the event of the advantage it gives you in understanding the value in the specific companies you're looking at is gigantic, the biggest part of this is that you're not going to get caught up in major downturns in the market unless you've gone on vacation without your computer, so it won't even be a vacation it will be months before this all comes crashing down and you're still stuck so have confidence that you can do this and you can make calls in this market that the big pros can't do they are too big to move, it's all being judged month to month is that they can't play the same game the way we do or the way Buffett does, so I'll just give you a quick warning, albeit a very quick one.
Just in a financial advisor type disclaimer, I'm not your number one financial advisor and t or all of the robotic investors and all of these young investors in general who might be in over their head with margin call options by investing more money than they possibly uh can afford to hear from you but be real careful be careful and so you know love to hear from you what are you doing out there? what are your thoughts on these robinhood investors? play see ya if you enjoyed this video and think it was valuable and taught you more about whether robin and investors are creating a bubble for themselves or maybe helping hit the like button and share the video with your friends and for the yes you want more investing content please subscribe to my channel and don't forget to click the button on the screen to receive a gift, thanks again for watching.

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