The meme generation meets a potential bear market for the first time
No trading platform has so exemplified an era like Robinhood, the do-it-yourself app that enabled so many young first-timers to trade stocks cheaply and prolifically on their phones. The company married gaming with investing in a colorful package that became popular enough that in 2020 it supported a new insurgency that challenged a dusty, out-of-touch Wall Street. The resulting chaos was labeled “meme investing,” but was simply the championing of forgotten dogs like GameStop and AMC Entertainment. The ensuing rallies by these moribund companies had the white-shoe crowd clutching its pearls over what it characterized as the unruly rabble that the democratization of stock trading had spawned. Robinhood was new, it was cutting edge, it defied the establishment. Robinhood was hip.
Not so much today. The retail revolution against the Fidelitys and the BlackRocks of the investing world took place during the longest, most sustained bull market in history. Now Robinhood users and shareholders are acting as if those good times are over. The S&P 500 is down more than 10% from its all-time high, a punch that Robinhood has taken directly in the stomach. Shares are down 43% so far this year and 70% since it went public in 2021. The number of monthly active users fell 10% and the company says it’s slashing 9% of its employees. Adding insult to injury, company founders Vlad Tenev and Baiju Bhatt are no longer billionaires, according to Forbes estimates.
“We face a challenging macro environment, one most of our customers have never experienced in their lifetimes,” Tenev told investors an earnings-related call Thursday.
He’s right. In fact, Robinhood didn’t exist during the last bear market. Since the app launched in 2012, the S&P 500 is up in the neighborhood of 240%, despite this year’s pullback, and it’s risen more than five-fold since its nadir in March 2009. In other words, it’s been nearly impossible not to make money in equities over the last decade-plus. That’s thanks in part to the Federal Reserve’s ultra-accommodative monetary policy put in place to combat The Great Recession. The era of cheap money sent corporate profits and stocks soaring, and DIY investors grabbed hold and went along for the ride. Now many of them are realizing stock investing isn’t as exciting without the joy of winning.
“The reality is that self-directed investing often feels fun and easy when markets are just going up and up,” says Michael Kitces, head of planning strategy at Buckingham Wealth Partners. “It takes a bear market and the experience of losses for us to start to distinguish between our own luck and skill.”
That includes Allen Fok, a 31-year-old manager at a software company, who was a teenager when markets hit their lows. He’s been trading on Robinhood since June 2020 and says he’s seen fellow DIY traders’ accounts “blow up” since January. The native of Queens, New York, purchased his first stock, Marathon Digitial Holdings, on a recommendation from an anonymous user on the social media app Discord. The cryptocurrency-mining company surged 300% shortly after, but Fok’s portfolio is down 50% since he first started trading on the the app.
Fok, who married during the pandemic and took a new job, says he’s trading less these days because he has less time and is more risk-averse to market swings. Robinhood has lost over 1 million users from last year and revenue from equities trading was down 73%.
Brian Stone, a project manager with Bath and Body Works, joined Robinhood along with his coworkers during the Covid-19 lockdown of 2020. He traded stocks on the platform but kept a separate 401(k) account. Stone, 43, says he’s seen a “precipitous drop” in his Robinhood portfolio. At its peak, he was up 42%. Then came this year’s selloff. Now he’s up just 5% and says he trades less frequently than he once did.
Making money during a bull market doesn’t necessarily make a trader smart, says Hersh Shefrin, an economist who specializes in behavioral finance and teaches at Santa Clara University. But just about everyone feels smart when they make money.
Nowhere is that sentiment more true than at the now infamous Reddit message board, WallStreetBets, which was the incubator for the speculative calls on AMC, GameStop and other meme stocks. Where once there was unabashed optimism of “to the moon” and clarion calls to “HODL” (insider lingo for “hold”), there’s now a sharing of screenshots featuring deflated portfolios ravaged by the early snifflings of what could be a contagious bear market.
Let’s just say the do-it-yourself investors who are posting aren't taking the downturn well. One Reddit user displays a screenshot showing his 89% loss and claims to have said goodbye to $51,000 in two years, including a $30,000 loan at an unusually high 14% APR, which he says he lost in a single month. “I belong behind Wendy’s,” he laments. Another post shows four shapes — an octagon, a pentagon, a hexagon and a “portfoliogone” — with a picture of a stock chart showing a steep drop.
Before the era of do-it-yourself investing of which Robinhood was such a big part, investors would at least be able to blame a financial advisor, and not themselves, for any losses. Without the hand-holding, however, traders have free rein to panic. Given how shallow the stock downturn has been after 13 years of historic gains, Susan Kaplan, a Forbes Top Advisor and the president of Kaplan Financial Services, says that anxiety levels are out of whack. “In correction circles, this is chicken feed,” Kaplan says. “More than a measure of the strength of companies, this is a measure of the fragility of the mood of the investor.”
But for a new generation of investors who’ve only seen equities soar, even the first glimpse of what could be a sustained nightmare doesn’t seem to have them abandoning their rugged do-it-yourself ethos for the consoling arms of a professional financial advisor.
Advisors don't justify their return, “especially when the market is down,” Fok says. “You're paying them to lose money for you. Might as well lose it yourself.”
