The risky nature of Robinhood style day trading revealed

Before the Reddit GameStop mania swept up retail investors, there was Robinhood. Two investment legends sound their warnings.

| More on:
asx share day trading represented by arrow through an apple

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Before the world had heard of the so-called Reddit army and WallStreetBets.

Before most any of us had a clue what GameStop Corp (NYSE: GME) did, let alone that the GameStop share price would be claiming global financial headlines for weeks running.

Before all of that, there was Robinhood.

That's the United States-based, commission-free investing app that soared in popularity during the long months of the pandemic lockdown. Millions of retail investors signed onto the service. Many invested in shares solely because they were moving higher.

Chasing the momentum higher, some day traders certainly made money. But many others will have lost money, buying into the big, new story too late, when share prices were due for a major retrace.

Two investment legends give Robinhood style day trading the thumbs down

Charlie Munger, Warren Buffett's long time business partner, cautioned investors about the nature of day trading. He compared it to gambling, specifically to punting on racehorses.

That critique was not well received. Robinhood itself tweeted, "To suggest that new investors have a 'mindset of racetrack bettors' is disappointing and elitist."

But Munger isn't the only investment guru concerned with the risks of short-term profit chasing. Richard Bernstein, founder of investment management firm Richard Bernstein Advisors, stepped into the debate himself.

As Bloomberg reports:

Munger's comments "were derided as those made by an old guy who does not understand today's more modern markets," Bernstein wrote, but stock market history backs up Munger's point about a short-term focus being harmful to one's wealth, particularly when chasing popular momentum stocks.

Day trading or coin flipping?

Bernstein backed up his warning with a chart showing that the probability of losing money on the S&P 500 Index (SP: .INX) – using rolling price returns from January 1930 to January 2021 – increases markedly the less time an investor holds onto their shares.

For those buying and selling in one day, there's a 46% chance of losing money. That drops down to 31% at 12 months and 10% for long-term investors holding on for 10 years.

Bernstein said:

The probability of success when day trading is only slightly better than when flipping a coin. There has historically been about a 54/46 chance of making money when holding stocks for a day versus 50/50 from coin flipping.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Share Market News

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Share Gainers

These were the best-performing ASX 200 shares in March

These shares made their shareholders smile in March thanks to some very big gains.

Read more »

Businessman using a digital tablet with a graphical chart, symbolising the stock market.
Opinions

2 ASX shares I have been buying in 2024!

I’m a believer in the long-term outlook of these stocks.

Read more »

Stock market chart in green with a rising arrow symbolising a rising share price.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a massive day for the ASX 200, with a new all-time high recorded.

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Technology Shares

This ASX tech stock rocketed 60% in March! Can it keep on delivering?

After soaring in March, the ASX tech stock is now up 169% since this time last year.

Read more »

Broker Notes

Brokers name 3 ASX shares to buy now

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A young man clasps his hand to his head with his eyes closed and a pained expression on his face as he clasps a laptop computer in front of him, seemingly learning of bad news or a poor investment.
Share Fallers

Why Burgundy Diamond Mines, Clarity Pharmaceuticals, EML, and Zip are sinking today

These ASX shares are ending the week in the red. But why?

Read more »

A young women pumps her fists in excitement after seeing some good news on her laptop.
Share Gainers

Why Mesoblast, Newmont, Pilbara Minerals, and Platinum shares are jumping

These ASX shares are ending the week strongly. But why?

Read more »

a young boy dressed up in a business suit and tie has a cute grin and holds two fingers up.
Opinions

2 of my top ASX 200 shares to consider buying before April

I would happily exchange dollars for these two shares right now.

Read more »