For Retail Investors, It’s Buyers Beware

Trevor Milton (right), founder and former-CEO of Nikola Corp., exits the Manhattan Federal Courthouse following an appearance in New York City, July 29, 2021. (Eduardo Munoz/Reuters)

Banding together to buy faddish stocks can be risky business.

Trevor Milton, the founder of electric-truck manufacturer Nikola, has been charged by the SEC with securities fraud after he allegedly made false and misleading claims about the company. Milton is charged with lying to investors about Nikola’s ability to build functional prototypes in order to boost his company’s value. Unfortunately, if these allegations are true, everyday retail investors on Robinhood and other apps will be significantly damaged financially. The charges against Milton and Nikola’s sinking market value show that retail investors should be wary about buying into stock fads.

The charges brought against the billionaire former CEO of Nikola are quite serious. The SEC alleges,

Milton sold a version of Nikola not as it was — an early stage company with a novel idea to commercialize yet-to-be proven products and technology — but rather as a trail-blazing company that had already achieved many groundbreaking and game-changing milestones. . . . Instead, much of what Milton represented as accomplishments were, at best, internal targets years away from completion and subject to significant execution risks or, worse, ideas conceived only on paper.

The evidence against Milton seems quite strong, given that Milton publicized his company across the Internet — for instance, with this video of the Nikola Two “driving” down a hill. It has come out that the Nikola One shown was not, in fact, driving but was towed up a hill and then rolled down to a stop.

Milton’s own words provide more damning evidence. In one video, Milton told reporters repeatedly that the Nikola One model he presented to the public was “not a pusher” but a fully functioning vehicle. Unfortunately, that was verifiably false. It is now known that the vehicle Milton wowed audiences with was hooked to electrical outlets during demonstrations.

Milton left the company he founded last year in September over fraud concerns, and it is important to note that the company itself has not been charged with any wrongdoing. But while Nikola has sought to distance itself from Milton, Milton’s legal problems have affected the company’s financials. The investigation into Milton started last year, and since then Nikola has lost billions of dollars, and an anticipated partnership with GM has fallen through.

Nikola’s stock price has dropped dramatically recently, and the fate of Nikola stock will affect more than hedge-fund investors. Milton was able to access lucrative markets by going public through a Special Purpose Acquisition Company (SPAC) deal that heavily targeted retail investment. Milton aggressively targeted retail investors, according to the SEC, looking to boost the profile of the company. Thousands of everyday people who invest on Robinhood or other trading apps, called retail investors, put their money into Nikola. The SEC alleges,

On June 8, 2020, Milton shared a tweet with a senior Nikola executive reflecting that over 36,000 new Robinhood users became Nikola stockholders that day. The senior executive responded, in part, by expressing his amazement at how many calls he received “from retail investors today that have no clue about Nikola, other than their friends told them to buy. A lot of hype out there with retail investors,” to which Milton replied: “That’s how you build a foundation. Love it.”

Undoubtedly, some were under the impression that Milton was a genius who was revolutionizing the market with his tech-truck company. The Justice Department found that many took money from their savings or retirement accounts to invest in Nikola. For those traders, their losses from the stock drop will be difficult to recoup unless Nikola can find a way to turn promises into products.

This points to two problems with en masse retail investing. For one, retail investors don’t research companies in the same way hedge-fund managers do, nor are they well versed in company-valuation techniques. Trading, definitionally, is not their job. Yet, knowing the stock market is important to make sound investments. So there is naturally going to be a misallocation of capital away from companies that may need financing.

More important, though, this misallocation of resources will hurt everyday Americans who buy stocks such as Nikola. The GameStop frenzy was a perfect example of this. Everyday investors were trying to hurt short sellers, but they ended up holding millions of dollars of depreciating stock. In the case of Nikola, short sellers were the first to be skeptical of the company’s valuation, and their analysis has turned out to be right.

If there is one positive we can take from the rise and fall of Trevor Milton, it should be that retail investors need a more conservative mindset. Investing in burgeoning and speculative markets is alluring. However, the promise of get-rich-quick stocks can be used by charismatic salesmen to boost profits. In a world of social-media editing, deep fakes, and snake-oil salesmen, intelligent investing is needed now more than ever.

Leave a comment