At times, the world can feel sort of bipolar to some of KCR’s research team. Financial markets have become a place rife with anger. Issues around fairness, soaring options trading volume, cryptocurrency trading and regulatory oversight seem to be meeting at the intersection of vitriol and mendacity.
We are not part of that. Longtime KCR subscribers understand that our research team has a fervent belief that the past is precedent. Avid readers ourselves, we also hew to the simple lessons of the greats. Over the last year one could be forgiven if they thought the only material we read was Berkshire Hathaway letters.
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We have and will continue to add more information about what we learned from other legendary investors like Seth Klarman and John Kenneth Galbraith. Yet we continue to reference Mr. Buffett due to the fact that his thoughts and process are readily available from the 1950s through today.
Leaning heavily on the historical record and his own experiences, Mr. Buffett is proof positive that great investing is simple to say but very difficult to do. For the sake of transparency, we do tend to agree with Mr. Buffett and we have put up a less than flattering Quick Take contrasting Seth Klarman’s Margin of Safety book and Robinhood. We have read a raft of pieces about the recent exchanges between Mr. Munger, Mr. Buffett and the folks at Robinhood.
Pitchbook, Newser, Forbes, Reuters, Business Insider and many others focused on the “altercation.” This type of exchange is exciting stuff. An article that caught our eye was one from Nasdaq which highlighted that many of Robinhood’s users largest holdings were also Buffett favorites.
This quick letter will attempt to avoid the anger and just focus on the facts. Next Wednesday we will publish a robust and damning study of trading volume and stock selection to bring more empirical clarity to this topic.
Being Part of the Casino, Fractional Shares & the Role of Recurring Investments
Both Warren Buffett and Charlie Munger criticized the Robinhood trading app for enabling and encouraging the “casino group, that has joined into the stock market.” Munger, known for his blunt approach, took things a step further and called the confetti-laden trading app a “…gambling parlor masquerading as a respectable business.”
Noting that Robinhood gets paid to encourage trading, both investors believe the trading platform has a serious alignment problem. The company’s S-1 filing confirmed that Robinhood does indeed benefit from high trading volumes. A significant part (75%) of their revenues came from payment for order flow from options, equity transactions and transaction rebates from crypto trading.
Robinhood responded with: