There is no such thing as a free lunch

We have all heard the saying before, but what does it REALLY mean? This is the first economic lesson I ever remember, and I learned it in my 9th-grade history class with Mr. Quigley.

I find myself repeating the phrase to my children constantly these days, but never when it relates to economics. They are only 7 and 6 so rarely are they discussing the concept of trying to get something for nothing. They might not be discussing it, but understanding the concept has become more important now, than ever.

If it’s free, you are the product.

During the recent retail trading frenzy in Gamestop and various other stocks the general public learned something the hard way from online trading platform Robinhood. The app and trades might be free for you, but there is most definitely a fee to be paid.

Robinhood offers you a stock trading service and then sells your orders, and ALL order flow to a third party. YOU, ARE THE PRODUCT! The largest buyer of this order flow is Citadel Capital, and is the reason Robinhood makes any money. Check out the graphic below to see the Robinhood business model in more detail. The “fee” you pay is your order flow, and giving another organization the chance to take advantage of that information.

robinhood business model graph

The glass shattering

 

Maybe you don’t trade stocks so Robinhood selling your order flow doesn’t matter to you, but is that the only thing where we are the product? Take a look at the Facebook business model below.

facebook business model

We can do this for pretty much any social media platform, and everyone has noticed it before. We have all had conversations with our family and friends about the creepy nature in which Facebook shows you products that you simply mentioned to someone in a conversation.

Hundreds of millions of dollars are spent on breaking down how to use the data about our purchasing habits, interests, desires, likes and dislikes. The thing is, we are providing that data by using the free services. The “fee” you pay is your privacy, and your date.

Time to delete social media

This is how I feel sometimes as well, but once you understand that if it’s free, you are the product, you can begin to think about what you share and what “free” really means to you.

During the Gamestop trading craze, Robinhood eventually restricted your ability to purchase the stock shares or the options contracts on numerous stocks. There are a host of reasons for this, but at larger brokerages like Fidelity where you might have to pay a small commission for trades no such restrictions were put into place. I know of people who have been trying to transfer their Robinhood accounts out for nearly a month and still have been unsuccessful. Like the old saying goes, you get what you pay for.

The fee for wealth

Owning stocks is free. Yes, you pay for the shares, but you own an asset, and to keep owning it past the initial purchase, is free. You don’t have to keep paying the company to own their shares, in fact they might pay you in the form of a dividend. Based on what we just read we know there is a “fee” somewhere, so what is it?

The “fee” you pay for wealth comes in the form of anxiety, volatility, fear, doubt, and rapidly changing emotions, all of which drive you the extremes of happiness and despair. “Hold stocks for the long term” you have heard I am sure, but many don’t understand just how hard it is to stand by while stock prices collapse!

It is our inability to recognize that investing has a price that tempts many of us to try and get something for nothing. We all want incredible investment returns but without the “fees” I listed above, and that isn’t realistic.

So What?

So how does this impact all of you?

  • Understanding the “fee” we are paying for anything lets us see if there is any value.
  • If a service is free, you are the product.

 

Stock market calendar this week:

Wednesday February 17th:

FOMC Minutes @ 2:00PM

Thursday February 18th

Initial and continuing Jobless Claims @ 8:30AM

Most anticipated earnings for this week

most anticipated earnings feb 16

Latest Covid-19 Data

latest covid data graph feb 16

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