Millionaire Investor Reveals Dark Side Of The Gamestop & Robinhood Situation
The massive controversy that erupted following Gamestop trading and the decision of Robinhood, an app that purports to allow all users to delve into the stock market, to halt its trading amid it's rally has been the talk of many financial circles. With some debating legalities, others debating the light it shines on some shady practices, there are still others looking into what allowed such a huge black eye for the stock market to happen in the first place. Charlie Munger is one of the latter.
Munger is vice chairman of Berkshire Hathaway and long-time business partner of Warren Buffett. The 97-year-old investor has seen his fair share of stock disputes through the decades. In light of this newest issue, he has unleashed a pointed condemnation to those he sees as enablers for the speculative frenzy done by retail investors.
His remarks came while peaking at a question-and-answer session for the Annual Meeting of Shareholders of the Daily Journal Corporation in Los Angeles. Responding to a question regarding the run-up in shares for stocks which had been heavily shorted, like GameStop, last month, Munger minced no words.
“That's the kind of thing that can happen when you get a whole lot of people who are using liquid stock markets to gamble the way they would in betting on race horses," Munger said. "And the frenzy is fed by people who are getting commissions and other revenues out of this new bunch of gamblers. And of course, when things get extreme, you have things like that short squeeze."
"It's not generally noticed by the public, but clearinghouses clear all these trades," he said. "And when things get as crazy as they were in the event you're talking about, there are threats of clearinghouse failure. So it gets very dangerous."
Charlie is never one to hold back his feelings and this statement went hand-in-hand with another he made at the meeting. He was asked about the frenzy that Bitcoin had caused and whether he found it "crazier" that the crypto currency had hit $50,000 or that Tesla could hit a $1 Trillion fully diluted enterprise value. His response:
“Well I have the same difficulty that Samuel Johnson once had when he got a similar question, he said, ‘I can’t decide the order of precedency between a flea and a louse,’ and I feel the same way about those choices. I don’t know which is worse.”
Perhaps, though, the system itself is to blame. Could it be that those placing bets are doing so for the thrill rather than the spirit of investing?
"It's really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors. And of course it's going to create trouble, as it did," Charlie explained. "And I have a very simple idea on the subject. I think you should try and make your money in this world by selling other people things that are good for them. And if you're selling them gambling services where you rake profits off the top like many of these new brokers who specialize in luring the gamblers in. I think it's a dirty way to make money. And I think that we're crazy to allow it."
Munger's previous comments about "wretched excess" in the financial system, a warning he had sounded in February 2020, were brought up. As they were, he was asked where he saw the excesses at their worst in the current state of the marketplace. He pointed his finger squarely at the company that most are pointing their fingers at lately.
"It's most egregious in the momentum trading by novice investors lured in by new types of brokerage operation like Robinhood," Munger said. "And I think all of this activity is regrettable. I think civilization would do better without it."
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