Why Robinhood investors could suffer the most in the next stock market crash
When the markets collapsed in March, many investors were in panic mode, selling both the good and the bad investments. In the end, however, the sale offered only a brief glimpse of how serious the situation was, as many stocks started to recover a few weeks later. In a protracted market crash, which could happen if there is no quick end to the coronavirus pandemic, there will be no quick recovery.
And that could be bad news, especially for Robinhood investors. Here’s why they’re most at risk of losing if the markets head south.
Many don’t invest for the long term
If you’re a long-term investor, you’re usually looking to find out where the business you’re investing in will be not just months from now, but years to come. But many Robinhood investors don’t take this approach and instead look for quick wins, which is dangerous, especially during a recession and when a stock market crash may not be far away.
Many Robinhood investors are willing to take high risks for high short-term rewards. Hundreds of thousands of investors on the platform gamble and bet on insolvent companies in the hope that their stocks will rise in value.
And of course, in the short term anything can happen. The problem is, if you are caught holding an insolvent firm’s stock and there is a market crash, you might find yourself with no choice but to sell it for a large loss.
Speculative buying remains popular on Robinhood
Today, many of Robinhood’s top picks continue to be airline stocks, including American Airlines and Delta Airlinesand cruise ship stocks, where companies are crippled and at risk of going bankrupt. While they can make a difference, they are certainly high risk investments.
Cannabis producer Cannabis Aurora (NYSE: ACB) is another high-risk buy that consistently ranks among the 15 Most Popular Robinhood Stocks. In February, investment bank Ello Capital estimated that Aurora liquidity the levels were among the worst of the Canadian cannabis companies reviewed.
The stock was doing so badly this year that it needed a reverse split of 1:12 in May just to get back above the required minimum price of $ 1 per NYSE share. Since the start of the year, its shares are down 58%, which is much worse than the Horizons Marijuana Life Sciences ETF (OTC: HMLSF), which fell by a smaller 19%.
There are several other examples in the top 100 of Robinhood stocks that are either risky investments, overpriced or both, and where investors are betting on sharp reversals. But – again – these speculative buys look even worse when markets crash, as investors seek safer investments to hang on during a bear market. These already risky investments could plunge even lower in a crash.
Just because a stock has fallen sharply in value doesn’t mean it can’t continue to fall.
Value investors are in much better shape
For institutional investors and fund managers dealing with other people’s money, the types of risks Robinhood investors take are simply unacceptable. They cannot afford to gamble with their clients’ money and they have to be much more methodical in their investment process.
This normally involves assessing the value offered by a stock and examining its fundamentals. Aurora would be difficult to put in any wallet where value is important. The Alberta-based company cannabis companyhas incurred an operating loss in each of its last 10 reporting periods. And while its shares may seem like a transaction, trading well below their book value, investors should also remember that Aurora reduced its assets by C $ 1 billion ($ 750 million) upon release. of its second quarter results in February. Relying on the book value may not be very useful if the value of the assets is questionable.
Many of Robinhood’s top stocks would not pass the value investor test. By placing more emphasis on value and long-term investing, value-oriented investors are less likely to suffer large losses in a stock market crash, and their investments would also be more likely to recover.
What Should Robinhood Investors Do?
The good news is, it’s not too late for Robinhood investors to adjust their portfolios and hold safer stocks while getting rid of speculative stocks. It’s not just a matter of looking at valuation multiples, but of assessing which companies are safe for the foreseeable future. Determining a company’s cash flow position and evaluating its performance during the pandemic are ways that investors can assess the security and stability of a business during these difficult times.
Eventually the hype will die out. And if investors jump on the high-risk equity bandwagon, they can end up with bad investments in their portfolios, which can lead to utter disaster if the markets collapse.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.