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If you’re new here, I am a fan of the Coffee Can Portfolio, an “Active Passive” approach to investing. The idea of a Coffee Can is simple: Buy a basket of the best stocks you can and let them sit for years. You incur no costs with such a portfolio, and it is simple to manage.
Here are the results of my latest coffee can:
Thoughts on Bitcoin, KWEB, Tesla, and Nextdoor
Robinhood and the Sidedoor
In business, every industry does things a certain way. These “industry conventions” are determined by the leaders of that industry.
For new businesses to survive, and more importantly, to thrive and eventually lead, they must avoid following these pre-existing conventions, or be doomed to a future of mediocrity.
To prosper, innovative companies must change the game entirely and create new ways of doing things.
Companies who approach their industries in a completely new way are what I call Mavericks.
Mavericks are companies that have the potential to become the greatest companies of our time. If successful, they can gain massive scale, size and efficiencies, and in the process create enormous value for its customers, employees, shareholders, and the world at large.
The best Mavericks are the ones that gain sufficient scale, efficiency, and influence so as to change how their industry functions.
Does That Mean Robinhood Is A Maverick?
I am starting to lean that way.
You see, every industry has barriers to entry. Not only are these barriers conscious strategies deployed by old guard companies, they are also natural market forces that rise and change as competitors enter, grow, shrink, evolve, or exit. They can become the biggest obstacles new entrants face in a market. This is why if new businesses aren’t doing something completely novel or aren’t doing it in a completely new way, they should be thinking hard about how else to enter a market besides knocking on the front door and asking for permission to come in.
As Guy Raz of “How I Built This” says, figuring out how to sneak in through the “side door” may be a better way. The side door isn’t just less heavily guarded, oftentimes it can be bigger. Peter Thiel has said “Competition Is for Losers,” so “Don’t always go through the tiny little door that everyone’s trying to rush through. Go around the corner and go through the vast gate that no one’s taking.”
This is precisely what Robinhood co-founders Baiju and Vlad (B&V) were thinking from the onset. When B&V discovered that big Wall Street firms were paying little to trade stocks, while most Americans were charged hefty commissions for every single trade, they realized the world did in fact need another brokerage firm, one that would give everyone better access to financial markets.
So What Was Robinhood’s Side Door?
Sure they had the mobile app experience, the free stock new users received, and the gamified referral mechanics etc, but the main side door of course was Zero Commission Trading. That’s what made them different, unique and inviting.
Robinhood has innovated tremendously on the brokerage industry’s business model, and have found ways to come to market with lower margin, but hard to copy, products compared to competitors. As a result, this has continuously put competitors in a tough spot.
Take Charles Schwab for instance. They had over $1B in annual commissions revenue in 2021/2022. They couldn’t possibly walk away from those high margin fees. And if they offered free trading only to new customers, how do you think existing customers would react? They were stuck between a rock and a hard place.
So what did they do? They resisted. They tried to spin the narrative to things like:
“We don’t want Robinhood’s customers”
“Robinhood is acquiring customers who don’t have any money”
“Our customers appreciate our services, are not leaving us, and are willing to pay our $4.95 or $9.95 trading fees”
Incentives drive behavior, and brokers like Schwab ultimately capitulated and started to offer zero trading fees. But it was too little, too late. Robinhood became a legitimate player in the industry.
Remember what I wrote above: “The best Mavericks are the ones that gain sufficient scale, efficiency, and influence so as to change how their industry functions.”
Robinhood has changed how its industry functions.
The incumbents were reactive and started to play Robinhood’s game.
Just when they thought they’d successfully combated Robinhood by removing trading commissions, Robinhood walked through another side door.
Along with offering high interest on uninvested cash, they introduced a subscription membership, and started giving customers a 1-3% match on their account values. That is significant. This is yet another undertaking which is very hard for competitors to copy. Think about this for a moment. Schwab has ~$7 Trillion in Assets Under Custody. Can they really afford to pay 1-3% to customers?
Robinhood is locking in customers for an extended period of time (in order for customers to take advantage of their offers, and also charging them subscription fees). They believe people will stick around afterwards. Like bank accounts, people don’t change brokerages often.
Robinhood has a third side door: a more efficient, fixed-cost technology driven business with no brick and mortar branch operations. This is yet another structural industry advantage for the company longer term.
So, once again, is Robinhood a Maverick? It sure seems like it.
Robinhood’s Image
There are 2 primary challenges the brand faced/faces.
We all know about the GME/AMC memestock mania that happened a few years ago. During this time, Robinhood became the industry scapegoat for restricting trading, and was blamed for supposedly “colluding with large hedge funds against retails traders”. This was obviously not a good look. Of course they didn’t collude; retail traders are their lifeblood. Trust is a fickle thing…but perception is perception.
The good news is people have short memories, and customers have continued to adopt Robinhood.
Robinhood needs to change the perception that it isn’t simply a “gambling outlet” but rather a serious investment platform people can use to grow wealth and save for retirement.
As their customer base ages, gets more educated and sophisticated, and as the company launches a more well rounded suite of products for them, I believe Robinhood will get there.
Question:
What are some other companies who are approaching their markets in a completely new way?
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