How Could One Trade Go So Wrong?

Alexander Kearns was a twenty-year-old uni student forced into locked down.

Soon after, boredom set-in so he started trading the stock market with only a few dollars, no income, and no experience.

He appeared to be doing well and very soon trading became his new sport.

But then one day his father walked past his bedroom where he saw an ominous note stuck to the door…

“Open my computer”

So, his father fired up the computer…

“If you’re reading this, then I’m dead”.

Alexander Kearns had thrown himself in front of a freight train in his hometown of Naperville, Illinois.

It turns out his trading account had a negative balance of $730,165 on the day he wrote the note.

So how could a young man without a job find himself in a position like this?

Good question, but you need to ask Robinhood.

Robinhood is the hottest trading app on the planet right now.

They offer commission-free trading and target millennials like Alexander to invest in thousands of dollar’s worth of stock with as little as $1. [1]

Specifically, they allow investors to trade, ‘fractional shares’, ‘options’ (derivatives) plus buy large holdings of stock using ‘margin loans’ with only a few dollars.

Meanwhile, you’re probably wondering what the hell are fractional shares, options and margin loans? Right?

If so, that’s exactly my point.

To quote the world’s most famous investor, Warren Buffett, “options are weapons of mass financial destruction”.

And right now, there are literally millions of first time traders in the US trading options who openly admit to having no idea of what they’re doing.

But that hasn’t stopped Robinhood.

During the first quarter of this year alone, they opened three million new accounts, mostly for first time traders with no experience.

Should trading apps be banned?

Not surprisingly, debate is raging in financial markets that apps like Robinhood should be banned. The belief is they’ve gamified trading while couching it as investing.

For example, Robinhood digitally spray your screen with confetti after your first trade and then send you endless push notifications encouraging you to make more trades.

And who could resist when the market is running hot, right?

And this is where I’m divided.

Is the problem trading apps offering zero commissions, or is it just human temptation in a red-hot market like this one?

Sadly, I saw similar behaviour during the dot.com boom twenty years ago.

Here’s one example.

A personal trainer opened a share trading account with me in late 1999. And in the space of a few months he went from placing $10,000 trades to $100,000 trades.

Then one day we caught up for lunch and I jokingly said he must have a nice ‘stash’ underneath his mattress at home.

He laughed and then told me how he took out a $200k loan against his eastern suburbs unit and then used it as ‘collateral’ to open a margin loan account with a second lender who gave him access to another $200k.

All up he’d borrowed $400k to trade shares without using any of his own money.

My antennae started to shake so I suggested he ‘ease-up’ to which he responded,

“No way man! I’m gonna get #@&*’n rich!”

Unfortunately, my muscled-up client didn’t like it when I disagreed with some of his ideas, so he took his business to a deep discount broker and went his hardest with them.

And then about two months later the dot.com boom busted and the market tanked (April 2000).

I bumped into him about three years later and to his credit, he didn’t run and hide. We shook hands and the first three words to leave his sheepish mouth were, “I lost everything”.

Not only did he lose his house, he lost all his clients because he was so depressed. One by one they started leaving him for another trainer.

I felt for the guy because behind the puffed up chest and empty wallet was a good bloke who fell hard.

Temptation is in all of us.

And that’s why I’m not convinced the answer to controlling trader behaviour is as simple as, ‘no more apps’.

In my opinion, apps are no different to motor cars. They’re only as dangerous as the person driving them.

Alexander Kearns had no income but he had access to nearly one million dollar’s worth of leverage through a trading platform. That should never have been possible.

He thought the most he could lose was whatever he invested from his own savings.

He also admitted in his final message that he had ‘no clue’ about what he was doing.

And sadly, that appeared to be the case.

You see, Alexander never lost $730,165.

He misread his account.

Take good care,

Adam

[1] robinhood.com