Anti-trust lawsuits should not scare investors, here is why

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Anti-trust lawsuits should not scare investors, here is why

Whitney Tilson’s email to investors dicussing the challenges facing big tech firms; Google dominates thanks to an unrivaled view of the web; Google’s ‘Year In Search 2020’; Massachusetts regulators to file complaint against Robinhood.

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Q3 2020 hedge fund letters, conferences and more

The Challenges Facing Big Tech Firms

1) Tech giants like Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN), and Facebook (FB) are facing so many investigations, fines, and lawsuits by so many different government entities that I can barely keep track of them.

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Here's a Wall Street Journal summary of just the ones in the U.S. by the Justice Department, the Federal Trade Commission, state attorneys general, Congress, and the Federal Communications Commission: These Are the U.S. Antitrust Cases Facing Google, Facebook and Others.

Here are some other recent articles with further details:

And now they're fighting among themselves, as Andrew Ross Sorkin writes in today's New York Times DealBook: Big Tech's circular firing squad. Excerpt:

When Big Tech's CEOs are hauled before Congress and accused of amassing excessive power, the leaders from Apple, Facebook, Google, and others have often tried to present a united front. But these companies are also competitors, and have recently taken to calling on regulators to go after each other.

Facebook and Apple are now feuding openly, after years of low-level tension. Facebook has launched a website and ad campaign that accuse Apple of threatening "the free Internet" through new policies on personal data tracking. Apple says it's just "standing up for our users."

Facebook says Apple will hurt small businesses. "Apple's latest update threatens the personalized ads that millions of small businesses rely on to find and reach customers," Facebook noted on a website it created to give "small business owners a place to speak their mind." Facebook's business model relies on its ability to deliver targeted ads around the Internet.

So, should investors be avoiding these stocks? I think not. The reason they're coming under such scrutiny is because they're such dominant businesses – the type I like to invest in!

Google Dominates Thanks To An Unrivaled View Of The Web

2) For example, this NYT article about Google's dominance in search makes me even more bullish on GOOGL shares: Google Dominates Thanks to an Unrivaled View of the Web.

I hadn't realized that many web sites block the "crawlers" from other search engines, thereby ensuring that Google's "index" of web pages is far more comprehensive than its competitors'. Excerpt:

Websites and search engines are symbiotic. Websites rely on search engines for traffic, while search engines need access to crawl the sites to provide relevant results for users. But each crawler puts a strain on a website's resources in server and bandwidth costs, and some aggressive crawlers resemble security risks that can take down a site.

Since having their pages crawled costs money, websites have an incentive to let it be done only by search engines that direct enough traffic to them. In the current world of search, that leaves Google and – in some cases – Microsoft's (MSFT) Bing.

Google's Year In Search 2020

3) Speaking of Google, it just released its "Year in Search 2020" top search terms, which you can review here (use the pull-down menu to select a country or see global results). The associated three-minute video is here. Someone converted the data into this cool chart:

Massachusetts Regulators to File Complaint Against Robinhood

4) Speaking of tech companies under scrutiny, Massachusetts securities regulators filed a complaint against the wildly popular stock trading platform Robinhood yesterday: Massachusetts Regulators to File Complaint Against Robinhood. Excerpt:

In a final draft of a more than 20-page administrative complaint reviewed by the Wall Street Journal, the enforcement arm of the Massachusetts Securities Division said Robinhood failed to protect its customers and their assets, violating state laws and regulations. Robinhood exposed Massachusetts investors to "unnecessary trading risks" by "falling far short of the fiduciary standard" adopted this year that requires broker-dealers to act in their clients' best interest, the state said...

The accusations from Massachusetts center on the tactics that the company uses to keep customers engaged, claiming that it "encourages customers to use the platform constantly" through what it calls "gamification." The complaint alleges that, through the promise of free stocks, push notifications and its signature digital confetti, Robinhood encourages "continuous and repeated engagement with its application." State regulators allege Robinhood allowed one customer with no investment experience to make more than 12,700 trades in just over six months...

It also alleges Robinhood violated its own rules regarding options trading by approving customers to engage in the practice without having the necessary qualifications.

This August 20 article in the WSJ highlights similar issues: Does Robinhood Make It Too Easy to Trade? From Free Stocks to Confetti.

In addition, here's breaking news this morning: Robinhood Financial to Pay $65 Million to Settle SEC Probe. Excerpt:

Robinhood Financial has agreed to pay $65 million to settle regulatory claims that it didn't sufficiently disclose its business deals with high-speed trading firms, the Securities and Exchange Commission said Thursday.

The deal resolves an SEC investigation that looked at Robinhood's failure until 2018 to reveal on its website how it makes money from its deals with speedy trading firms such as Citadel Securities and Virtu Financial. Robinhood and other retail brokerage firms generate revenue by routing customers' orders to high-speed traders, which pay for the right to execute many of the trades.

On December 4, WSJ columnist Jason Zweig wrote about his experience using the app (I Started Trading Hot Stocks on Robinhood. Then I Couldn't Stop)... so I decided to give it a try as well.

I set up an account earlier this week, funded it with a $1,000 transfer from my checking account, received one share of free stock – biotech firm Akebia Therapeutics (AKBA), worth $3.04 – as a bonus for signing up, and less than a day later was able to trade.

To test it out, yesterday I bought $10 worth of Bank of America (BAC), equal to 0.350324 of a share. Sure enough, I was rewarded with the "signature digital confetti":

https://assets.empirefinancialresearch.com/uploads/2020/12/121720-WTD-Robinhood.jpg

Soon thereafter, the app asked me if I wanted to trade options. When I said yes, it asked me a few questions about my experience with them (extensive, I answered truthfully), and within five minutes I was approved.

In summary, after only a day of using it, there's no doubt in my mind that, as the Massachusetts regulators charge, Robinhood "encourages customers to use the platform constantly" through what it calls "gamification." As a result, I can easily see how novice investors could quickly become addicted and lose a lot of money.

There are scary parallels with slot machines, which are also designed to be addictive – for more, see this article in The Atlantic: How Casinos Enable Gambling Addicts. Excerpt:

Modern slot machines develop an unbreakable hold on many players – some of whom wind up losing their jobs, their families, and even, as in the case of Scott Stevens, their lives.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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