The New Age Casino Operators

Amar Pandit , CFA , CFP

Two weeks ago, there was news that Sam Bankman-Fried, the Founder of FTX (a Crypto Trading Exchange) had bought a 7.6% stake in Robinhood, becoming the third largest shareholder in the company. This comes at a time that Robinhood announced a 18% decline in quarterly revenue and laid off 9% of their employees.

Exactly a week later, FTX announced that it will start offering free stock trading in the US. Here is the irony. So far, this company was touting Crypto and the Democratizing Finance bullshit. Now that crypto is down (and retail trading in Crypto is almost at its lowest point), this firm gets into the trading of the next best thing. Stocks. After all, you have to get people to trade. Otherwise, how else do you make money? The key is to get people addicted.

The real problem with money is that it is addictive. Making quick money is even more addictive. FREE is most addictive.

By the way, Robinhood had done the exact opposite of FTX- starting with free stock trading (but were making money through payment for order flow (PFOF) which FTX is now not and calls it a differentiator- (will write a Nano on PFOF) and then getting into Crypto trading (in the last several years).

Is this really democratizing finance? Is making people addicts or getting them to gamble with their hard-earned money democratizing finance? We might use fancy and respectable words – trade and democratize but truth be told it’s nothing but getting people to keep playing in the New Casinos of the 21st Century (some of which are open 24 * 7. Like the Vegas one, These Casinos never sleep too).

Adil Asher (name changed) is one such individual who I came across 2 weeks back. I had just landed at Philadelphia airport and was on my way out for the local airport cab. However, I was greeted by a well-dressed gentleman in his early thirties, who said he had a spacious clean cab, and he could drop me wherever I wanted to go. I was super tired after a bout of food poisoning so decided to quickly take this option.

During the ride, we started talking and I figured that he had moved to Philadelphia (from Dubai) with his parents 25 years back. He has been driving private cabs for quite some time but during COVID-19, this had come to a standstill. There was nothing much to do and stimulus checks were coming in. In early 2021, his brother and his friend told him about how they were making loads of money trading stocks and coins. Both of them had even decided to become full time traders quitting their jobs. Adil decided to take the plunge too and started his investing journey (he seriously thought he was investing).

At a traffic light, he suddenly took out his phone and showed me his portfolio on Robinhood. He said he had invested $12,000 and this had gone all the way to $24,000 in less than a year, which he said made him feel like a genius. Sadly, all of this crashed in the last 2 months and his portfolio is down to less than $6,000. He was distraught and said, “I believed Elon.” I told him that look it’s unfortunate what has happened but there are a few precious lessons for you here.

  1. Elon is not a Financial Professional.
  2. Elon does not know your financial situation and he does not care. He simply does not care. Period.
  3. This is not investing. This is speculating on price movements and hoping to get rich quick.
  4. The faster you make money, the faster you will lose it because it gives you a false sense of confidence to take even larger bets in the future.
  5. The real secret to building wealth is compounding and time. I told him how 99%+ of Warren Buffett’s wealth was made after age 65 but how he laid a solid foundation from a very young age.
  6. Finally, you need to have a process to make good decisions. What is the process for making decisions? You simply focused on the outcome – someone had made money. This is like saying crossing a red light is a great decision because nothing happened. This is not a process for making decisions. I then gave him a quick update on what a good process for making decisions looks like (The readers of this blog already know this. Don’t you?)

We had almost reached my destination. He then asked me “What should I do with this? Should I Sell or Hold?

I told him “Adil, I cannot answer this question as I don’t know much about your overall situation and it’s not a simple question to answer without a detailed discovery process. But you know your situation and so I will ask you a question and hope you find your answer in your response to this question.”

The question was “What would you do if you had $6,000 today? Would you buy these same stocks and coins?” Adil was quick to respond, “Never in my wildest dreams.” I said instantly, “In that response lies the answer to your question. On that note, I wish you all the very best for the future.

Well Adil’s story is one of the millions of stories that you are likely to hear around the world. Relating to a different area of finance, SFGate News published “Buy Now Pay Later is sending the TikTok generation spiralling into debt, popularized by San Francisco tech firms.

A Chinese proverb just sounds right here – Fish see the bait but not the hook; men see the profit, but not the peril.

The New Age Casino Operators understand this proverb very well. I hope you do too.