Commentary: Easy Money

Long Term Investing
#1586c
Bill Onisick
Given 06-Mar-21; 15 minutes

Since coming on the scene in 2013, Robinhood, an easy to use phone app, has created a swarm, some 13 million and growing, new investors with its simple and free solution to trading stocks. Both young and old first-time investors have jumped in to make some easy money.

With this app, Robinhood has gamified investing; and if you do not know what gamified means it is just like it sounds. It is basically taking game-like attributes to drive activity. They have introduced push notifications, even surprise gift shares when you sign up, that magically are revealed in celebratory confetti in the form of an animated gif.

Robinhood uses push notifications that include news on individual stock positions and helpful trading hints. The app is always working to keep your undivided attention and drive more activity because that is how they make money.

But perhaps worst of all the app has lowered the bar on what it takes to become qualified to make more risky trade investments, like options. Simple, easy, free trading for everyone with an app that makes it super quick (*snap!). What could be wrong with that?

Well, the horror stories are starting to take center stage. The New York Times article, "Robinhood has lured young traders sometimes with devastating results" highlights just a few. Richard de Bost, a Navy medic from San Diego, was lured in with some quick early wins on the app. But that all went south very quickly as he took on larger and larger bets, investments, to try to recoup and offset the losses. He eventually lost everything. Over $800,000 through credit card advances and home equity loans.

Alex Kearns (you may have heard of this), a 20 year old college student from Nebraska, killed himself after logging in to his Robinhood app and seeing a negative $730,000 balance. He had lost a lot of money for sure. But a lot of that money he saw there was not real losing. It is just the account had not settled yet. But that shows all the more the danger of attracting very young and often uneducated investors who do not understand the level of risk in the investments that they are making.

Social media will glorify just about everything, right? It is very rare that somebody gets on social media and says, "Oh, I was duped. I made a mistake." Nope. But what do they do? They will certainly highlight their overnight fortunes, will they not? You will see countless stories of first-time investors who have made lots of money, doubled their money almost overnight. And what does that do? It drives a herd of now day trading sheeples following Reddit and Twitter, driving stocks like Game Stop and Hertz up overnight, double, triple, 100 percent, with literally no rationale, no underlying value there. It is like a shark feeding frenzy. Just as the shark is blindly biting, the investors hit the "trade now" button.

The app's following got so crazy that we literally have seen dozens of stocks that have gone up over 300% almost overnight. Why? Simply because their abbreviated trading name was somewhat similar to a different stock and they accidentally bought the wrong stock and lots of people followed suit. The game often ends poorly though, because that bubble will pop. It always does, and the stock drops like a rock in minutes and those investors are left on the sidelines. They just cannot get out quick enough. The app also has been down at some pretty opportunistic times, which has led to a lot of scrutiny and also some class action lawsuits.

So in our remaining time today, I thought, let us explore the difference between long-term passive investing and short-term active investing through an app like Robinhood. First off, a little bit of background.

I know not everybody here has dealt with stocks before, so bear with me if you have. When a company goes public it is pretty simple here. They are really just dividing the ownership of that company into shares, right? Those shares are traded on an exchange so that everybody can know how many shares are outstanding and what is the cost of each share. That is what the New York Stock Exchange does. It actually manages that set of stock. So shareholders earn money in really two ways.

First, if the price of the stock goes up, they can sell it and make a profit on the difference. If the company is profitable, it can also pay out a quarterly dividends for each share owned. So those are really the two ways that you can make money investing in stocks. And over the last 100 years, the average return in the stock market has been pretty good. It has been about 10 percent. That sounds really good, does it not?

But average past performance does not represent future performance. And you will hear that in just about every disclaimer out there when they related to the stock market. There have been many years when the return was negative. In fact, five of the worst years the return on investment was negative 30 plus percent, the worst year on record, 1931, the market lost over 50% of its value and that is the year after it already lost 34%. I believe it was well over 30% the year before. So do that math, not a whole lot left. So there is no sure thing when you invest in the stock market.

But typically—typically—if you are a passive long-term investor and you buy and hold a sustainable company, you will see a good 4% to 6% return on average.

Now, the Bible has quite a bit to say about investing for the future. We know the Parable of the Talents makes it clear. And we should note, it is interesting that Jesus actually uses money to illustrate the point of not burying our talents. In Genesis 41 we read of perhaps the best investor of all time, Joseph, who put aside a large percentage of earnings of grain for seven years, planning and storing up for the famine that was ahead. Proverbs 10:5 reinforces the wise son who diligently works to prepare the harvest for the future.

Yes, we should wisely invest for the future and there is nothing wrong with taking some of our earnings and investing in a company through the stock market. But we must generously give to those in need and make sure we are not just storing up for ourselves.

The difference between long-term passive investing and short-term active trading is the amount of time the individual holds the investment. That is pretty simple, is it not? The buy-and-hold passive investor looks for long-term investments in good companies and they look for a gradual increase over time, over years, many years. They often choose passively-managed index funds which are really just a group of stocks that you can buy all together because it is all managed for you. Right? And it diversifies your risk. Long-term investing is not exciting, is it? It is not exciting, but the research is irrefutable. The best return for the average investor is a long-term regular contribution to an index fund containing multiple stocks. You cannot and you will not ever time the market correctly.

Trading, often called Day Trading, is actively managing short-term investments. Actively managing, think about that. It is where the investor picks a single stock and they try to get in and get out quickly to make a couple of bucks, maybe a couple cents off of a large volume. This trading has nothing to do with the long-term viability and fundamentals of a company. They could care less about that. It is about the short-term momentum that could quickly increase or decrease the value of that stock. Negative news, metrics like unemployment or social media posts, as we have seen here recently.

Day traders feed off of market volatility and that is why they love Robinhood in this activity. It creates the ups and downs that they need to make the money, to make quick profits. The risk seekers, they often buy very large quantities of stock and they look for just a few cents increase over the course of maybe, minutes even. And then they get out. Many day traders do not even hold the actual stock. They use what is called a speculative call or put option (and we will not get into those details), but it is basically just a contract that gives them the right for a set period of time to buy or sell a stock at a set strike price. And so it allows them to speculate at a much greater quantity than they ever could with the amount of money that they hold on their own.

So actively trading stocks is very addictive, very addictive. The excitement when something jumps up 10%, 20% overnight. Whoo! Right? Free money! And it drives a desire to make more easy money. But like so many over hundreds of years have learned the hard way, there is no easy money. How arrogant does one have to be to think that somehow overnight *boom! they have become Warren Buffett and they can beat the odds of the market. They are better than the experts that are out there on when to buy, hold, or sell a stock. And even if they are among the very few success stories—and I do mean very few success stories, social media, you will read all the success stories—but you will not see the other people that have lost everything. Right? Because nobody goes and puts that out on social media, typically.

Real danger here; the real danger is, what is the cost of that success? They cannot take their eyes off their phone, they have got to watch the app, they have got to watch every single chart, and indices out there to try to understand and predict. Do I need to get out of the market now? Should I sell now? Should I buy? Do I sell? Do I buy? Do I sell? It becomes their obsession.

The real danger with day trading is it is impossible for day trading to not become the "seeking first" in your life. Paul tells us in I Timothy, the pursuit of riches is a stumbling block and the root of all evil. He reminds us in Philippians 2, we should do nothing out of selfish ambition but in humility, valuing others above ourselves, not looking out just for our own interests, looking out for the interests of others.

Well, think about this in terms of day trading. The day trader is doing things that are not in the best interests of other individuals. All they care about is their return, their immediate return. They do not care about the negative impact on that company they may have shorted; their bets on that company. They do not care about its employees. They do not care about the economy, they do not care about other shareholders. It is all about me, me, me.

Proverbs is chock full of warnings that we can apply here. Proverbs 21:5 (summarizing): The plans of the diligent lead to profit as surely as haste leads to poverty. Proverbs 13:11 is another good one: Wealth gained quickly will dwindle, but whoever gathers little by little will increase. As good physical stewards, we should make long-term wise investments and prepare for the future, just as that ant stores up for the winter.

We must remember, all investments have risk and the stock market has no guarantee on return, especially these days with the multiples driven so high, historic high right now. Above all we must trust God to provide for what we need because no matter how much we accumulate, no matter how much wealth we have, it can be taken away just like that if that is what is best for us in God's plan.

Recalling the many biblical warnings, we should be very cautious when it comes to engaging in any actively-managed trading. The desire to make money without working for it is an unrighteous desire. God uses hard work to build and shape our character. It is certainly more exciting for sure to earn 10%, 20% overnight than that meager 4% to 6% annual growth. But ironically, the studies are conclusive, the more active individual investors trade stocks—the more active they are—the worse their returns, almost always.

So for both financial and spiritual health, we should stay clear from trying to time the market and perform active trading. The Robinhood app is not inherently bad. If you happen to use that to make long-term trades, fine, so be it. But do not allow it to trap you into becoming an active day trader. It will not end well for you both physically and spiritually. Sound investments grow over time. There is no "get rich quick" scheme that works.

It is just like our spiritual walk when we really think about it. There is no get righteous quick plan, is there? We do not instantaneously become Godlike. Our walk is slow. It takes a daily steady investment to grow in the knowledge and character of Jesus Christ. It takes time. It takes hard work and wise investing of our spiritual talents to produce the fruit of God's Spirit.

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