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What Charlie Munger and Bill Gates overlook in the Robinhood retail stock trading boom

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Charlie Munger, Bill Gates, and Warren Buffett
Lacy O'Toole | CNBC 

The Robinhood stock investing boom is a polarizing issue, but getting too caught up in the trading app's market role can overlook a more fundamental investor shift over the past year with which its controversial success is linked.

Berkshire Hathaway's Charlie Munger this week pointed the finger at Robinhood, and said the stock market frenzy was "regrettable." Robinhood claims most of its investors are buy-and-hold, but that has to be weighed against the billions in a future public offering it has on the line, and the politicians on Capitol Hill looking out for the little guy, and looking to regulate its business, which relies on money-making relationships with hedge funds.

But what Robinhood said on Thursday about Munger being "elitist" does have some truth to it. The Robinhood critics are leaving out a big, more positive investing story linked to the retail stock trading phenomenon: for many Americans, especially younger ones and minorities, the past year was the first time they ever invested in the market.

America's new stock market investors

Ten percent of Americans bought a stock for the first time in the past 12 months, along with 7% who started contributing to a retirement account, according to a new CNBC + Acorns Invest in You Survey.

There has been a broad retail investing surge since the pandemic began: More than 10 million people in America opened a new brokerage account in 2020. The CNBC survey, conducted among over 6,100 adults in between February 1 and February 8 by SurveyMonkey, provides a window onto many of the market's new investors whom, if they do turn out to be buy-and-hold, will be making the right move and gaining a share of stock market wealth creation that historically has been concentrated in the nation's top income brackets.

Twenty-two percent of technology savvy Gen Z respondents opened a stock market account in the past 12 months, the highest percentage among any age group surveyed. The next age bracket (25-34) was second, with 17% buying stocks for the first time.

In addition, 13% of Blacks and Hispanics bought stocks for the first time; that figure was 14% among Asian-Americans. Hispanic males made up the largest percentage of new stock investors at 19%.

Those without a college degree and in the income bracket of $50,000 or less were also the most likely to buy stocks for the first time, according to the CNBC survey.

Data from Charles Schwab released Thursday also shows progress made by Black Americans, with 63% under the age of 40 now participating in the stock market, equal to white counterparts, though there remains a significant overall racial gap in stock market wealth. Its 2020 Ariel-Schwab Black Investor Survey found three times as many Black investors as white investors (15% vs. 5%) report having invested in the market for the first time in 2020.

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Less-experienced investors are more vulnerable to being duped, but long-time wisdom provided by the financial services industry to the public is to start investing early.

CNBC Advisor Council member and president Bone Fide Wealth of Douglas Boneparth has seen increased interest in his firm that caters to millennial investors. Boneparth says his advice for first-timer investors: know your why.

"Before investing know what you are investing for. It's different than just picking stocks. You need to have a why ... Making bank isn't a goal," he said.

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The past 12 months has been a wild ride for investors. It has been just over a year since one of the longest bull markets on record came crashing down as the first strains of the coronavirus appeared in America. The market has set 11 new records in 2021 already, but the past week has also shown how quickly things can turn, with the Dow Jones Industrial Average falling more than 500 points on Thursday and the Nasdaq having its worst day since last October.

The disconnect between the real economy and the stock market has benefited investors, who have seen record gains. And the survey reveals data on how some Americans may have been led to the market out of desperation. Black and Hispanic Americans are twice as likely as white Americans to say that they need a Covid stimulus check just to "get by," and yet, minorities responding to the survey indicated they were less likely to have received federal stimulus payments than white respondents.

Widespread memes like "diamond hands" and "Stonks" have been shared across social platforms as stock trading has boomed and everyone from Elon Musk, founder of Tesla and SpaceX, to Dave Portnoy, founder of sports site Barstool Sports, have weighed in on drama as millions of new investors watched ticker symbols rise and fall.

Bill Gates recently told CNBC that Gamestop trading had no "societal purpose," and the Gamestop trading frenzy is the kind of high-risk, high-speed stock market action that will result in casualties.

Record stock markets will attract schemers, so it is also understandable why legendary investor Charlie Munger weighed in on Wednesday at the Daily Journal annual shareholders meeting, saying, "It's most egregious in the momentum trading by novice investors lured in by new types of brokerage operation like Robinhood and I think all of this activity is regrettable." He said of business models like Robinhood, "It's a dirty way of making money."

If an investor has an issue with Robinhood — either for the hedge fund or speculative trading links, or the human tragedy associated with it — the fact is that there are now plenty of options in the brokerage world doing what it does, and which has been responsible for bringing so many new investors into the market: offering free trades, of stocks, ETFs or mutual funds. That list now includes Schwab, TD Ameritrade (now owned by Schwab), E-Trade Financial (now owned by Morgan Stanley), Fidelity Investments, and the investing firm synonymous with buy-and-hold investing, Vanguard.

Financial advisors say the first step to take with extra money is set up an emergency savings account — 39% of 18- to 24-year-olds responding to the survey said they could tap saving for an emergency $2,000 expense. Twenty percent said they would have to borrow from friends or family; 10% take out a personal loan; 7% sell something they own; 6% use a credit card.

If emergency savings is secured, starting an investment account is the first step to market wealth accumulation, which has societal purpose, and historically, investing in the markets is a safe bet. Investing in the S&P over the last 20 years produced an annualized return of 7.2%. Trying to time the market, though, less wise. If you had missed the top 10 days in those 20 years you return is cut in half, falling to 3.5%.

Once an individual starts investing, they should expect mistakes — the important thing is to learn from them. That's what Mark Cuban did long before he was a billionaire, when he first got into the market.

Boneparth advises anyone who may have gotten caught up in the hysteria of meme stocks to use that as a learning experience.

"There's a time and place to take risk, but that is after you have your other investments set up nice and neat. Assess your behaviors — how did you get there. Take it as a lesson. The biggest tragedy is not learning from the experience."

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