As financial advisors and research analysts, our job is to monitor trends within the financial industry. Such is the case with Robinhood. No, he has not returned to steal taxes from the Sheriff of Nottingham and disperse it amongst the poor. Robinhood is the name of one program, among others, designed to help individual investors dabble in the world of stocks. Such apps do not charge commissions for stock, options, or cryptocurrency, and their base is largely comprised of young newcomers. It’s simple, easy to trade, with low trading costs, and increasingly popular. It’s also symbolic of the new era of trading apps that make trading in the stock market extremely cheap and extremely “easy”. So, what does this have to do with Hertz?
On May 22, Hertz filed for bankruptcy. According to Bloomberg, by June 8, their stock was trading like crazy as 533 million shares, worth almost $3 billion, had been traded. According to Thomas Lauria, “New platforms for day trades may be facilitating this”, with vague references to Robinhood-style apps (Bloomberg). What happened to make investors so interested in Hertz stock? Well, nothing actually. So why had it gone up?
The answer lies with those same easy-trading apps that Robinhood (among others) represent. As young investors continue to flood the market with these new easy-to-trade programs, their knowledge of investing is only as large as that of the companies they know. Investing is not like a buffet. You cannot approach the window and simply say, “I’ll take 10 shares of Apple, 2 shares of Microsoft, and 3 shares of IBM”. We have talked numerous times about the pitfalls of DIY investing, and what has happened with Hertz is a cautionary tale of why investors need guidance when entering the market. Hertz had declared bankruptcy yet somehow still saw its stock rise. It then attempted to offer $1 billion in new stock to which the judge approved. In its prospectus (a document designed to inform potential investors about the product and its potential dangers), Hertz readily admitted that stockholders who invested might not get their money back unless there was “a significant and rapid and currently unanticipated improvement in business conditions to pre-Covid-19 or close to pre-Covid-19 levels”. What it basically says is that the company was going broke before the pandemic, went broke during the pandemic, and if you bought more stock, there is a good chance the company will still go broke after the pandemic ends. In a more realistic world, no company would even go through with this because no one would ever buy their stock. Why would you? Their own prospectus is clearly detailing the great unlikelihood that their stock would ever actually recover. Furthermore, there is no detailed plan as to how the company would improve its financial situation even with the money. As Matt Levine stated, their message was simply, “If you give us $500 million, that’s your problem” (Bloomberg).
As seedy as this may seem, the fault does not lie with Hertz—it lies with the investors. Hertz declared bankruptcy then inexplicably saw their stock portfolio rise because inexperienced investors flooded the market and simply decided to invest in “Hertz, the car rental company” because it was a common name. There was no in-depth research or analysis from an experienced voice to determine whether investing in Hertz was worthwhile, even as a lottery ticket. Trying to catch a shark by going into the ocean and throwing a fishing line into the water is not going to work. Research is needed. Experience is needed. Advice is needed. This situation with Hertz is a warning to all inexperienced investors thinking that the investing world is easy to navigate. It is not. There is a reason why people hire financial advisors. They help steer inexperienced investors, both young and old, through the maze that is the investing world. There may be ways for people to invest on their own, and for some, they will have success. But just because you can, does not mean you should, and let what happened with Hertz be a cautionary tale for everyone. The need for financial advice is always present and being safe is always better than being sorry.