INSIGHT: Warren Buffett vs. Robinhood, a generational clash the regulators will have to settle Published 06-May-2021 by Todd Ehret, Regulatory Intelligence Expert Analysis A generational conflict in U.S. investment culture broke into the open over the last week, fueled by remarks from market titan Warren Buffett and the upstart commission-free trading platform Robinhood Financial Inc. Ultimately, new rules, regulations, and enforcement actions from the regulators will shape the outcome of the conflict. The conflict pits an old-school, fundamentals-oriented mentality exemplified by Berkshire Hathaway Corp Chairman Buffett and his Executive Vice Chairman, Charlie Munger, against younger investors focused on technology and responsive to social media enthusiasms in ways that have shattered traditional trading patterns. The Berkshire Hathaway leaders, at the company's annual meeting, decried trends including environmental, social and governance (ESG) investing principles, virtual currencies, and special purpose acquisition companies (SPACs), while Robinhood cast itself as a vision of the future in financial marketplaces. "The future is diverse, more educated and propelled by engaging technologies that have the power to equalize," Robinhood communications executive Jacqueline Ortiz Ramsey said in a post on the company's website. The Berkshire Hathaway shareholder meeting is a high-profile event that provides the public with plenty of economic and stock market insight while also often touching on important political, societal, and regulatory issues. The folksy Buffett has been dubbed "The Oracle of Omaha," for his Midwestern roots and the perceived influence of his comments on investment. The 2021 Berkshire annual meeting held in Los Angeles on Saturday covered a wide range of regulatory-themed issues including ESG, cryptocurrencies, "gamification" in trading, the growing impact of younger retail investors, and special purpose acquisition companies (SPACs). In a virtual presentation and Q&A session, Buffett , 90, and Munger 97, did not mince words or pull punches. The legions of Buffett and Munger disciples likely were unsurprised by their comments and are in agreement. However, a host of others see things differently and are dismissive of their viewpoints. Taking Shots at Robinhood and Gamification Buffett has long maintained that individual investors are best suited by putting their money in a passive, S&P 500 index fund. "I do not think the average person can pick stocks," he said on Saturday. "Be aboard the ship," he advised. "You couldn't help but do well if you have a diversified group of U.S. equities." Buffett likened the millions of inexperienced day traders who entered the stock market in the past year to gamblers and said no-commission brokerages such as Robinhood promoted a casino-like atmosphere. Robinhood, he said, "maybe set out to attract," a large number of people who were just gambling on short-term price movements in stocks. Making "30 to 40 trades a day" is not a wise way to invest, he said. "There is nothing illegal to it, there's nothing immoral, but I don't think you build a society around people doing it," he said. Munger was even more harsh, saying, "It's just god-awful that something like that would draw investment from civilized man and decent citizens," he said. "It's deeply wrong. We don't want to make our money selling things that are bad for people." "The gambling impulse is very strong in people worldwide and occasionally it gets an enormous shove," Buffett said. "It creates its own reality for a while, and nobody tells you when the clock is going to strike 12 and it all turns to pumpkins and mice," he said. Robinhood shot back in Ramsey's blog post on Monday. "If the last year has taught us anything, it is that people are tired of the Warren Buffetts and Charlie Mungers of the world acting like they are the only oracles of investing," Ramsey said. "And at Robinhood, we’re not going to sit back while they disparage everyday people for taking control of their financial lives." In a statement published by CNBC, Robinhood said that there is an "old guard that doesn't want average Americans to have a seat at the Wall Street table so they will resort to insults. The future is diverse, more educated and propelled by engaging technologies that have the power to equalize." The "gamification" aspect of the platforms such as Robinhood has caught the attention of lawmakers and regulators. A pair of investor warnings from the U.S. Securities and Exchange Commission's Office of Investor Education and Advocacy and from the Financial Industry Regulatory Authority (FINRA) stress the dangers and risks of social-media inspired investing, where inexperienced investors often seek quick wins in the market while lacking an understanding of the risks associated with complex trading strategies and volatile markets. The Massachusetts Secretary of the Commonwealth, William Galvin, has also put Robinhood in his crosshairs seeking to revoke Robinhood's license in an administrative case. Galvin has accused it of what he called "gamification strategies to lure customers into consistent participation and engagement." The case will test a fiduciary standard of conduct his office adopted last year Buffett's ESG Snub ESG issues have been a top priority for President Joe Biden's administration, SEC Chair Gary Gensler, and some major asset managers. However, Buffett and his board of directors at Berkshire opposed two shareholder resolutions that called for annual reports on how its companies are responding to climate change, as well as reports on diversity and inclusion. As evidence of Buffett's persuasion and loyal following, the two proposals were each rejected, by a 75% to 25% margin, as recommended by Berkshire’s board of directors. Buffett said, "Most shareholders who voted for these proposals have not bought the shares with their own money." Buffett was referring to shareholders such as BlackRock Inc. the world's biggest asset manager, the California Public Employees' Retirement System, the largest U.S. public pension fund, and Federated Hermes Inc, who were among sponsors of the climate-change resolution. Although Blackrock and many other large asset managers have been vocal proponents of ESG, Buffett and Berkshire have a much different viewpoint. Berkshire Hathaway's board argued that the company's decentralized business model made it unreasonable to have one-size-fits-all standards for its operating units on climate change and diversity. Buffett told investors that requiring ESG reports from all the subsidiaries would be "asinine," because many of them are small and Berkshire Hathaway allows them to run independently. He also said he does not like making "moral judgments" on businesses, and it is "very tough" to decide which ones benefit society. In response to a question about fossil fuels, Buffett said he had no issue owning Chevron. "People who are on the extreme of both sides are a little nuts. I would hate to have all hydrocarbons banned in three years. It wouldn’t work. And on the other hand, what’s happening will be adapted to over time," he said. "There’s something about every business that, if you knew it, you wouldn’t like," he said. "If you expect perfection in your spouse or in your friends or in companies, you’re not going to find it." Bitcoin is "Disgusting" In response to a question on bitcoin, Buffett, who previously referred to it as a gambling instrument, said "I'm gonna dodge that question." "We’ve probably got hundreds of thousands of people watching this that own bitcoin, and we’ve probably got two people who are short," he said. "So we have a choice of making 400,000 people mad at us and unhappy, or making two people happy, and that’s just a dumb equation," he said. Munger, previously referring to bitcoin as "rat poison" said, "I don’t welcome a currency that is so useful to kidnappers and extortionists" and said it was a "financial product invented out of thin air." Bitcoin is the most-popular digital currency, and regulators for several years have expressed concern that it was being misused to facilitate illicit financial transactions. "I should say modestly that the whole damn development is disgusting and contrary to the interest of civilization, and I'll leave the criticism to others," Munger said. U.S. financial regulators have a difficult task ahead in their efforts to develop a regulatory framework surrounding the rapidly growing crypto industry. Gensler is believed to be knowledgeable and crypto-friendly. Fellow Commissioner Hester Peirce, a supporter of digital currency development, recently proposed a digital token safe harbor which would provide digital network developers with a three-year grace period to facilitate participation in and develop the platform with a registration exemption from federal securities laws. Criticism of SPACs Buffett and Munger weighed in on the SPAC market saying the mania "is a killer," there has always been "pressure from private equity funds," and that it "won't go on forever." As a major dealmaker always seeking acquisitions, Berkshire and Buffett are in some ways in direct competition with SPACs, which are publicly traded and launched with investor money to acquire a private company. Buffett said, "It's a different equation than you have if you're working with other people's money where you get the upside and you have to give it back to them if you don't do something. And frankly, we're not competitive with that." Munger called it "fee-driven buying. In other words, they're not buying because it's a good investment, they're buying because the advisor gets a fee." Buffett and Munger emphasized they're not criticizing the retail crowd for investing — or "gambling" — in these endeavors. "I don't regard it as shameful ... the people that gamble ... Gambling is a human instinct, and they've got money in their pocket, and they know somebody else [who's] made money [who] they don't think [is] smarter than them," said Buffett. Munger added, "I don't mind the poor fish that gamble. I don't like the professionals that take the suckers." In the last several months, the SEC has repeatedly warned of the risks associated with SPACs. Most noteworthy was guidance issued by two senior SEC officials related to accounting considerations for warrants which are an integral aspect of virtually all SPACs. The guidance issued by John Coates, acting director of the Division of Corporation Finance, and Acting Chief Accountant Paul Munter said, "warrants should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings." The changing of the accounting classification from an asset to a liability is significant and is credited for slowing the issuance of new SPACs coming to market. Collectively, the five warnings from the SEC have covered all regulatory aspects surrounding SPACs, and signal that the regulator is poised to crackdown on excesses or abuses in the sector. Buffett and Munger's opinions on such thorny regulatory issues matter as they are widely respected by their own long-term shareholders and institutional counterparts. However, an entirely new crop of younger and newer entrants to the financial services industry disagree. That is the dispute the regulators will have to settle.
What a stupid article. The comparison is moronic. The only worthy comparison is between smart and stupid people. Smart people always figured out a way to extract an edge. Dummies always lose money overall. There are some smart guys who made a fortune trading individual stocks and there are some idiots who still managed to lose money even with long term investments in ETFs or indexes.