This Investing ‘Video Game’ Is Burning Shareholders

One of Cathie Wood’s “innovative” holdings just got a letter from the feds…

The last time it got a letter like that, it ended up costing the company $65 million. So once again, it looks like Wood’s definition of innovation will mean big trouble for shareholders.

You see, I agree with Wood that the Nasdaq Composite Index just isn’t what it used to be.

In the 1990s, the tech-heavy index was jam-packed with innovative upstarts. But today, it’s filled with the “old guard” – companies like Cisco Systems (CSCO), Amazon (AMZN), and Intuit (INTU). These businesses simply won’t grow like they did in their early days.

So I get why Wood thinks the Nasdaq is yesterday’s news. And I understand why she argues that the index isn’t how folks should invest in innovation anymore.

Of course, Wood also thinks her ARK Innovation Fund (ARKK) is now the best way to do that. But it brings up another important question…

Is Wood’s new “tech index” really rewarding investors?

Today, we’ll take a closer look at the ARKK holding that just got a letter from the feds…

Critics say this company turned investing into a “video game” for millions of novices. And as you’ll see, the risk of following Wood’s view of innovation isn’t always worth the reward…

Folks, if you haven’t guessed by now, we’re looking at Robinhood Markets (HOOD).

Robinhood is this generation’s best-known discount broker. It’s a successor to companies like Charles Schwab (SCHW) and E-Trade, which is now owned by Morgan Stanley (MS).

Like the discounters of yesteryear, Robinhood became famous for slashing commissions. And in the end, it went even further than its predecessors did – all the way to zero.

This move attracted a lot of attention and customers. But it’s no longer a competitive advantage. That’s because most other online brokerages followed it to zero commissions.

Robinhood’s other claim to fame is its easy-to-use app…

Critics say that it’s too easy – like playing a video game. And because of that, they argue that it entices novice investors to take undue risk.

I’ve been around a long time. I saw how easily the financial media helped novices wipe out as the dot-com bubble burst. And of course, that was long before Robinhood emerged.

The thing is… recklessness will always find a voice. Every generation will produce a new set of novices. And Robinhood could do well by leading this ever-growing niche.

But that doesn’t mean the company is innovative. It’s just the latest way to skim money off of folks looking for a short-term gambling fix.

That’s not a long-term business model. Robinhood is really just a marketing company. And it’s trying to grab and keep as many customers as possible on the identity of its brand.

This type of endeavor is expensive. And the company is still burning cash. Right now, it’s surviving on existing cash balances and external funding.

It’s no wonder the Power Gauge assigns Robinhood a “neutral-” rating today. And now that the feds are knocking on its door, that rating could soon get even worse…

The company disclosed last week that it received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) back in December. Specifically, the SEC wants to dig into the company’s cryptocurrency-trading business.

History tells us that when the SEC looks into Robinhood, it ends poorly for investors…

A few years ago, the SEC charged the company with repeatedly making false statements and misleading customers between 2015 and 2018. Ultimately, Robinhood agreed to pay $65 million to settle the charges without admitting or denying the SEC’s allegations.

When it comes down to it, owning Robinhood shares isn’t a great bet for investors. The stock is down nearly 80% since the company went public in mid-2021.

But that hasn’t stopped it from tempting investors many times over the past 20 months. And it’s happening again right now. The volatile stock is up around 20% so far this year.

Don’t give into that temptation…

Wood might love Robinhood’s stock. But the long-term reward potential isn’t worth the risk.

Good investing,

Marc Gerstein

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