Lacy O’Toole | CNBC
Charlie Munger, vice chairman of Berkshire Hathaway and Warren Buffett’s longtime enterprise accomplice, issued a dire warning on the manic momentum-driven buying and selling exercise by newbie buyers and mentioned commission-free buying and selling apps like Robinhood have been partly accountable for the bubble.
“It is most egregious within the momentum buying and selling by novice buyers lured in by new kinds of brokerage operation like Robinhood and I believe all of this exercise is regrettable,” Munger mentioned Wednesday on the Los Angeles-based Every day Journal annual shareholders assembly, which was stay streamed by Yahoo Finance.
The 97-year-old investor mentioned retail merchants are being enticed by brokerage apps touting free buying and selling. Robinhood has been accused by critics of gamifying investing by way of its app. It and different on-line brokerage companies depend on a controversial follow referred to as fee for order move as their revenue engine in lieu of commissions. These brokers obtain funds from market makers like Virtu and Citadel Securities for routing trades to them.
“Nobody ought to consider Robinhood trades are free,” Munger mentioned. “The frenzy is fed by people who find themselves getting commissions and different revenues out of this new bunch of gamblers.”
‘Soiled method of earning profits’
The jaw-dropping GameStop mania became the poster child of the speculative bubble that Munger raised a red flag on. A wave of at-home traders encouraged each other on Reddit chat room to pile into shares of the brick-and-mortar video game retailer, creating a monstrous short squeeze that saw the stock soar 400% in one week.
“There are threats of clearing house failure, so it gets very dangerous,” added Munger. “And it’s really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack matters … It’s a dirty way of making money.”
A spokesperson at Robinhood did not immediately respond to CNBC’s request for comment.
Munger even compared the current trading frenzy to the historic South Sea bubble of 1720.
“You will remember when the first bubble came which was the South Sea bubble in England back in the 1700s. It created such a big havoc when it blew up,” Munger said. “England didn’t allow hardly any public trading in securities and any companies for decades thereafter. It just created the most unholy mess.”
“So the human greed and the aggression of the brokerage community creates these bubble from time to time. I think wise people just stay out of them,” he added.
Better off without SPACs
Munger also sounded the alarm on the red-hot SPAC market, saying it also speaks to the speculative mania on Wall Street.
Special purpose acquisition companies raises money from investors in an initial public offering, and then merges with a private company and takes it public, often within a two-year timeframe. Funds raised via such black-check deals have reached record levels.
“I don’t participate at all and I think the world would be better off without them,” Munger said. “I think this kind of crazy speculation and enterprises not even found or picked out yet is just a sign of an irritating bubble. It’s just the investment banking profession will sell s–t as long as s–t can be sold.”
Pre-merger SPACs are seeing an outsized pop on the first day of trading as yield-hungry investors take a leap of faith betting on empty corporate shells. Signs emerged that retail investors are behind some of the surge in SPAC trading.