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Op-ed: Gamestop's costly financial lesson for retail investors

Tim Ranzetta

The "democratizer of finance" certainly wasn't following the will of their people (small retail investors) when they shut the store down on Thursday and prevented them from buying shares of GameStop stock. Robinhood's actions lead to losses to GameStop investors of more than $10 billion Thursday.

An expensive lesson indeed. All of which could have been prevented with a little education, personal finance education, that is.

Some will say these speculators deserved what they had coming. After all, why should speculators -- let's distinguish them from investors -- see their stock price soar from $20 to $500 in less than a month?

Others see the irony of Robinhood protecting the rich, those hedge funds on Wall Street shorting GameStop, while hurting the poor, the small retail investor.

Still others wonder how the heck did we got here. So much to digest over the past week. A platform that gamifies investing, encourages frequent trading with no commissions which makes investing frictionless. Fractional shares that lower the cost of admission, social media that enables traders to act in unison on a trading idea, breathless media coverage of every GameStop winner -- $500,000 here, $13 million there -- and a juicy target to spur on the mob. And finally, Wall Street hedge funds who had bet against GameStop shares and had taken what in investing parlance is referred to as short positions.

SEC says it's monitoring extreme volatility in certain stocks amid GameStop frenzy
SEC says it's monitoring extreme volatility in certain stocks amid GameStop frenzy

So, what exactly did Robinhood do on Thursday to protect the rich Wall Street hedgies and crush their retail investors? They took the unprecedented step of preventing their customers from buying shares of GameStop. Basically, saying we got you into this game and now we are going to change the rules. The laws of supply and demand kicked in and without strong demand from new buyers of GameStop stock -- after all Robinhood wouldn't let investors buy the stock Thursday -- the stock dropped 44%. Sensing the class actions to come, Robinhood reversed their decision after hours and voila, GameStop is up 67% mid-day on Friday.

Wall Street vs. Main Street

The days ahead will be full of gyrations as the tug of war between Main Street and Wall Street plays out in GameStop stock. Wall Street won Thursday. It appears that Main Street may triumph today. With all the stock that GameStop has outstanding changing hands four times in just one trading session, the long-term for a GME investor is measured in minutes, not days or years or decades.

But what about the real long-term? For guidance we can turn to the father of value investing, Ben Graham, who described the stock market in the short run as like a voting machine, tallying up which firms are popular and unpopular. Robinhood's actions today put sand in the gears of that voting machine.

The true long view is that the market is like a weighing machine; assessing the substance of a company. As for the substance of GameStop, well that's probably a lot closer to where it was in early January ($20/share) than it is today ($317).

So, where does education fit in? In a press release, Robinhood has flexed its revamped and expanded learning platform. Meanwhile their gamified user interface and marketing encourage frequent and risky trading strategies (options, anyone?), which their business model and a future IPO rely upon.

Do we really want to receive our education from a firm so conflicted?

Our financial education non-profit has heard from educators across the country. Their students are captivated by the GameStop story. We applaud their efforts to use GameStop as a teaching moment to:

  • Highlight the difference between investing and speculation
  • Teach about the dangers of day trading, penny stocks and options trading: Did you know that 97% of day traders lose money eventually?
  • Describe the benefits of diversification that come from investing in index funds rather than individual stocks, using visualization of the S&P 500 like this one
  • Demonstrate the challenges of trying to time the market with this game we developed.
  • Explain those cognitive biases like overconfidence, which cloud investing judgment

We cannot rely on financial service firms like Robinhood to educate. As my 17-year-old, wise beyond their years, told me recently, "Why would they want us to get smarter when that would reduce the fees they collect?"

Good investing is boring but doesn't generate the growth and the fees that investment firms crave. Follow the money. Robinhood needs you to make those frequent trades so they can sell your order flow to firms like Citadel Securities.

We cannot rely on government agencies to regulate. The world simply moves too fast for the SEC to stay ahead of new apps and social media platforms that impact markets.

Individual knowledge is the key. With just 1 in 5 students taking a full-semester high school personal finance course, we need a lot more education in the U.S. Young people enthralled by GameStop are eager to learn more. We work with 42,000 teachers but we need education leaders to take up the personal finance flag so more school districts and states make it a priority.

We will never democratize finance without an educated populace who understand that investing is NOT a game but rather one that requires discipline, a well thought out process and a long-term horizon. Without this education, we leave our young people prey to firms like Robinhood, who showed their true colors on Thursday with their unprecedented actions.

Tim Ranzetta is co-founder of the non-profit, Next Gen Personal Finance, which partners with 42,000+ educators to increase the financial capability of the next generation through engaging personal finance curriculum. He is a member of the CNBC Financial Wellness Council.

Financial literacy isn't being taught to those most in need
Financial literacy isn't being taught to those most in need