Stock trading apps that allow you to invest in the stock market with no minimum amount of money and charge you zero dollars per trade have become widespread. Perhaps the most famous of which is an app called Robinhood.
Here’s why I think you shouldn’t use these stock trading apps.
Robinhood is a very easy app to use, you just download the app, deposit money into your account, and later watch your hard-earned money disappear over time while you make irrational investment decisions based on spur of the moment impulses that were made actionable by the fact that you had a stock trading app on your phone.
The appeal of these apps, is that they’re really simple to use, they’re free, there are no minimum investment amounts, there are no explicit fees per trade so you can make as many trades as you want with as little money as you want and the instinct to try to win money in a short period of time with minimal effort is a very strong one.
Here’s what I want you to remember:
When you buy a stock, you are buying an ownership interest in a company. So if you want to make money in the stock market, you should have the mentality of someone who is purchasing businesses because after all, that’s exactly what you’re doing.
The true value of your ownership interest is a function of how much cash the business that you own is projected to generate for you.
As an investor in the stock market, your goal is to purchase businesses at a price that is equal to or less than their true value based on their projected cash flows. You will earn money in the stock market to the extent that you are able to do this.
This means that in order to make an intelligent purchase of a stock you have to have two vital pieces of information: price and value. Price is the easy one. Determining value is where skill and effort are involved.
While apps like Robinhood may provide the prices of stocks, they provide little information in the way of the value of stocks.
Moreover, the amount of money that a business generates, and therefore it’s value doesn’t change that much from day-to-day or week-to-week or even month-to-month. Accordingly, there is no practical reason why you should need to have the ability to trade stocks at an instant, from the convenience of your phone.
The only thing this convenience seems to facilitate is making impulse buying and selling decisions that are based on spur of the moment urges and emotions rather than price-value analysis.
Now one may ask, what if I don’t know how to value a business properly? Well, most people don’t. Valuing businesses properly takes years of education and practice. Accordingly, for most investors, the best course of action is to buy well-diversified low-cost mutual funds.
There is no good reason why you should feel a need to trade stocks frequently. If you’re doing things right, you aren’t buying and selling often, you’re buying good businesses (or well-diversified mutual funds) and you’re holding on to them for long periods of time.
If you think that you have a special skill at spotting short-term winners and losers in the stock market, I think it may be useful for me to mention here that according to one study of day traders it appeared that only a very small minority, in the neighborhood of 1% of traders, appeared to be able to make money after costs through their skill. The vast, vast majority of day traders were losing money.
There are so many other productive things that you can do with your time and effort, that have better odds of earning you money than frequently trading stocks.
You may be asking: Well, doesn’t Robinhood and other trading apps like it help the common person access financial markets? Sure they do. However, incessantly following small changes in stock prices and trading based on these random fluctuations in price is a recipe for losing your money and all the features in these apps seem to be directed at making it easy for people to do exactly this.
Consider the following analogy:
Say you were deciding on whether or not to buy a certain business in your town. In determining the price you would be willing to pay for this business, would you place more weight on your forecast for how much cash that business is going to generate in the future or would you place more weight on the price that a crowd standing outside the business is yelling at it. Further, let’s say you already bought the business and the next day the crowd standing outside decides to start yelling a much lower price at your business, do you think it is rational to sell your business now that a lower price is being yelled at it?
Focusing on price fluctuations to make value judgments in the stock market is a bit like focusing on what a crowd standing outside a business is going to yell at it next. The rational investor will ignore the yelling of the crowd and focus on the business.
Having an app on your phone for trading stocks is a bit like taking that crowd with you wherever you go. Even worse, it’s a bit like taking the crowd with you wherever you go along with the deeds for the businesses you own which you may sell to the crowd at any moment with zero transaction costs.
I know, being told to “buy and hold” and “focus on the long term” is easy to say, but much harder to do — especially when you’re down 20% and some “expert” is making a reasonable argument for why it could go down another 50%. This is exactly why you shouldn’t walk around with tools in your pocket that make having the discipline to focus on the long term even harder.
Like a dieter trying to lose weight, having the discipline to avoid fatty foods is tough, having the discipline to avoid fatty foods in a house full of fatty foods is even more challenging. Similarly, having the discipline to focus on the long term and not panic when everyone else is panicking is much easier when you aren’t walking around with an app on your phone that allows you to do the exact opposite.
This is why you should delete your Robinhood app and any other app like it.