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Brokerage apps luring amateurs with commission-free trading

Charlie Munger

Berkshire Hathaway’s Vice Chairman Charlie Munger blamed the brokerage apps for enabling the recent trading frenzy in stocks including GameStop

Berkshire Hathaway Vice Chairman Charlie Munger issued a warning Wednesday that nothing is ever really free – at least when it comes to Robinhood and other brokerage apps that are trying to lure amateur investors in with promises of commission-free trading on their platforms.

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 investor said during the Daily Journal’s annual shareholder meeting.  It’s a very dishonourable, low-grade way to talk. And nobody should believe that Robinhood’s trades are free.

Munger blamed the brokerage apps for enabling the recent trading frenzy in stocks including GameStop by gathering “a whole lot of people who are using liquid stock markets to gamble the way they would in betting on race horses.”

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

He also compared the trading activity to the historic South Sea bubble of 1720.

You will remember when the first bubble came which was the South Sea bubble in England back in the 1700s. It created such a big havoc when it blew up, Munger said. England didn’t allow hardly any public trading in securities and any companies for decades thereafter. It just created the most unholy mess.

So the human greed and the aggression of the brokerage community creates these bubbles from time to time. I think wise people just stay out of them, he added.

Critics have accused Robinhood of “gamifying” investing through its app after the platform began restricting securities including GameStop. The move was prompted by Reddit’s WallStreetBets, a speculative investing discussion forum that began buying up the struggling retailer’s call options, causing the company’s stock to surge and hurt market short-sellers.

Robinhood reversed its trading restrictions following backlash from both Main Street and Wall Street. However, it opened the company up to a hearing with the House Financial Services Committee and a probe from the Department of Justice which is now reportedly investigating potential market manipulation.

It’s really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors, Munger said. And of course it’s going to create trouble, as it did.

And I have a very simple idea on the subject. I think you should try and make your money in this world by selling other people things that are good for them, Munger continued. And if you’re selling them gambling services where you rake profits off the top like many of these new brokers who specialize in luring the gamblers in, I think it’s a dirty way to make money. And I think that we’re crazy to allow it.

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