Don't Invest with Robinhood — Invest in Real Estate Instead

Trust by the American public is in short supply these days. Distrust in the government, Wall Street, and tech and media elites is at all-time highs—and it’s easy to see why the ordinary citizen feels like nobody has their back. The elites, it seems, only want to protect each other.

This distrust hit a fever pitch last week when popular online broker and Silicon Valley startup Robinhood limited trading of Gamestop (GME) stock. This was an unprecedented move.

What’s going on with Robinhood?

So why did Robinhood limit Gamestop trading? To understand all this, you have to go back to the beginning of this entire episode: WallStreetBets, a popular subreddit of with 2.1 million renegade day traders. Members of the subreddit are often young retail traders. They use Robinhood—a popular day-trading app—and typically ignore fundamental investment practices.

Tired of what they considered hedge fund manipulation of stock prices through short sale activity, the members of WallStreetBets decided to strike back. Their target: Hedge funds, who have long bet on companies they view “in decline” by shorting their stock.

What is shorting?

Shorting a stock is essentially selling borrowed stock at current prices with the anticipation of a price drop and then paying back the borrowed stock at the lower price. When the market sees massive shorting activity, it considers this a sign of decline. It drives down prices and, in a way, fulfills the hedge fund’s prophecy.

This practice runs into a major problem if the price goes up, not down. This causes a short squeeze: Legally, the hedge fund must return the borrowed stock but now at a higher price—resulting in losses.

So where does Gamestop come in?

Gamestop, a brick-and-mortar video game store, attracted hedge fund attention because of declining sales due to the pandemic. The stock steadily declined throughout 2020 with no expectations of reversal in 2021, so investors pounced—shorting the stock to the tune of billions. The members of WallStreetBets noticed this intense hedge fund activity. Tired of this type of market manipulation, they banded together in a concerted effort to drive up GME stock and put a short squeeze on the hedge funds. It worked—to the tune of $13 billion in losses.

Four months ago, GME was trading at $6 a share. During January 2021, its share rose from $17.25 to a record high of $469.42 on January 28.

That’s when Robinhood decided to step in and halt Gamestop trading on its platform. As of early February, GME has fallen to $100.

To understand why Robinhood intervened, you have to understand its business model. While its motto is “Investing for Everyone,” that’s a front for what the company really does behind the scenes. To encourage trading, Robinhood doesn’t charge commissions and offers liberal margin policies. It makes money by turning those trades over to high-volume traders—market makers—who execute the orders in bulk and make money from the price spreads. These market makers pay Robinhood more for options trading than for straight buy-and-sell orders.

Hedge funds are some of the company’s biggest traders. So, if hedge funds are losing billions of dollars due to the actions of Robinhood retail traders, where do you think the pressure came from for Robinhood to halt GME trading?

The hedge funds.

Why smart investors choose real estate

Truly wise investors flock to an investment class that can’t be manipulated—real estate. The high barrier to entry, illiquid nature, and private market prevent real estate from hedge fund-esque manipulation. Here’s a little more detail.

1. Real estate requires a capital commitment

Acquiring real estate, whether directly or passively, requires a capital commitment that prevents many investors with limited capital—like the ones flocking to Robinhood armed with stimulus money and unemployment checks—from participating.

Even direct investments acquired with a bank loan require minimum capital commitments. Typical passive investments also have typical minimum investments starting around $30,000. Investing in real estate isn’t necessarily prohibitive, but the high barrier to entry deters the casual, speculative investor who would prefer to trade on Robinhood for free.

2. Illiquidity insulates real estate from market volatility

The fact that day trading has replaced sports betting as America’s favorite pasttime should tell you all you need to know about the mindset of today’s stock market investor. This mentality is consistent with every other aspect of modern life—everything is expected in an instant. Buying and selling real estate doesn’t happen instantly, and that prevents investors from making snap decisions.

Passive investments are even more illiquid, with typical lockup periods of five years or more. The illiquid nature of real estate prevents the herd mentality that rules Wall Street. That insulates the real estate market from the volatility of the broader markets.

3. Private markets prevent collusion

Because real estate and passive real estate investments are not traded on public exchanges and online platforms, where buy and sell orders are executed in an instant, real estate prices are insulated from extreme volatility. Private markets prevent collusive behavior by hedge funds and subreddits, which—as we saw with Gamestop—can easily disrupt prices.

You can’t buy real estate for a dollar and you can’t buy it and sell it on the same day. Because real estate isn’t traded on Wall Street, it can’t be shorted—and that’s why it can’t be manipulated.

To avoid market manipulation, avoid Wall Street. Return to Main Street, where real assets still offer the surest and safest path to wealth.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.