Alexander Kearns, a 20 year old sophomore management student at the University of Nebraska committed suicide after his account at Robinhood, an online financial app, showed him with a negative balance of over $700,000. The app, targeted at young people, has over 10 million users, and offers commission free trading. He died on June 12 in his parent’s home in Naperville, Illinois. In his suicide note, he wrote, “I have no clue in what I was doing in hindsight. I thought I was risking money I actually owned. The margin investing option isn’t even turned on for me.” One question, not answered, is how does a 20 year old with no income able to obtain a million dollars of leverage?
Part of the tragedy is that the “debt” this young man was seeing occurred because the app can display a positive portfolio value but negative buying power and negative cash. This can happen when the contract to purchase a stock is called, but the option to sell is not executed until the next day. Given the unsophisticated young people to which this app caters, having a potentially confusing, unclear display caused this young man to take his life. This is clearly a tragedy.
The greater tragedy lies in the greed of the financial institutions which offer an interface that makes trading supremely easy, without insisting on giving the necessary financial education regarding risk and rewards to its users, encouraging frequent trading rather than sound, long term investing. This is not only true of this app, but also is true of long established on-line brokerage houses, which turns investing into a Vegas like activity of gambling, with unsophisticated investors, just as in the casinos, the ultimate losers. Keep playing, and the house always wins. This type of investing mentality, combined with the trading algorithms of the big players, also contributes to the marked fluctuations in the price of stocks. It drives investing by emotion, rather than by reasoned analysis, and in the long run, hurts everyone. It makes its users speculators, rather than investors. Finally, it hurts companies by causing them to focus on short term results, which drive price momentum, rather than long term, strategic investments that need time to mature, and create true value in the future.