Berkshire Hathaway’s Charlie Munger isn’t impressed with the recent popularity of stock trading apps like Robinhood, saying that they are akin to “a gambling parlor.”
The billionaire investor appeared with fellow investing legend Warren Buffett on CNBC’s special “Buffett & Munger: A Wealth of Wisdom,” and the duo minced no words when revealing their attitudes toward the popular brokerage, saying that the promise of free trading is luring people away from more responsible forms of wealth generation.
“It’s telling people they aren’t paying commissions when the commissions are simply disguised in the trading,” Munger said, referring to Robinhood’s pledge that it is “commission-free, now and forever.” He called the app “a gambling parlor masquerading as a respectable business.”
Munger is far from the first to liken day trading and stock picking to gambling. Experts have warned that the ease of use of trading apps make it easier for users to lose large sums of money, fast. And the popularity of day trading through apps like Robinhood increased dramatically worldwide during the pandemic.
Stock picking — the practice of buying individual stocks in the hope that they outperform the market — can be dangerous and risky. Experts warn against trying to time the market and caution that stock picking is very difficult to pull off successfully.
Buffett added to his longtime friend’s complaint, saying he doesn’t think people are getting good advice or learning about responsible investing from their stock trading apps.
“It’s not encouraging people to buy a very, very, very low-cost index fund and hold it for 50 years,” Buffett said. New investors are learning how to trade riskier options rather than being taught to let their investments grow over time, he added.
A representative for Robinhood did not directly respond to Munger and Buffett’s critiques, and instead sent CNBC Make It a link to a May 2021 blog post that says Robinhood and “other online trading platforms have opened the doors of financial markets to everyday people, deeply unsettling the old guard who will fight to keep things the same.”
Buffett, whose net worth sits at more than $100 billion, has long sung the praises of index funds. He previously told CNBC that for people looking to build their retirement savings, they make “the most sense practically all of the time.”
That’s because index funds hold every stock in an index such as the S&P 500, including big-name companies like Apple, Microsoft and Google. Because this type of fund is highly diversified, it stays relatively constant and avoids the ups and downs that come with picking single stocks.
Indeed, passive investing in index funds has been shown to be more successful than professionally managed funds, outperforming 92% of large-cap funds over the past 15 years, according to a 2020 study.