Interactive Brokers Stock Deep Dive | Best Quality Stock Idea Q4 2025 w/ Clay Finck (TIP768)

Summary

• Core Thesis: Bullish on Interactive Brokers (IBKR) due to automation-driven cost leadership, 75% pre-tax margins, and a clear path to multi-year account growth targeting 20M+ accounts globally.
• Competitive Dynamics: IBKR’s execution-first model contrasts with Robinhood’s (HOOD) payment-for-order-flow reliance, leading to better all-in costs for sophisticated traders and institutional clients.
• Peers and Positioning: Charles Schwab (SCHW) is cited for higher margin rates, limited global access, and duration risk in securities, while Goldman Sachs (GS) offers broader Asia access but at higher costs than IBKR’s tech-enabled platform.
• International Markets: With payment-for-order-flow banned in many countries and demand for global market access rising, IBKR is positioned to take share internationally and benefit from secular growth in stock market participation worldwide.
• Revenue Drivers: Commissions plus high-margin net interest income from client cash and margin balances drive results; interest-rate shifts create push-pull dynamics on cash balances and borrowing.
• Optionality: New offerings like crypto trading, white-label B2B platforms, and Forecast Trader expand TAM and provide long-term growth levers beyond core brokerage.
• Management and Governance: Founder-led culture prioritizing automation, transparency, and conservative balance sheet (no long-term debt); recent S&P 500 inclusion may increase visibility.
• Risks and Valuation: Cyclicality, rate sensitivity, high current margin balances, and founder key-person/ownership concentration risks; valuation (~31x trailing P/E) is elevated but supported by strong growth and differentiated moat.

Transcript

(00:00) Their culture of being highly  focused on reducing costs and increasing   the level of automation has created a  strong competitive advantage that is   just really difficult to replicate.  Now the question is how long will   interactive brokers be able to grow. Pedy  has shared that he sees strong potential   for growth both in the US and internationally. (00:20) Today around 3/4 of their revenue does   come from the US and Perfe sees the number  of accounts growing substantially well into   the future. So, right now they have their  sites set on reaching 20 million accounts,   up from 4 million today, but they certainly  don't intend to stop there. Before we dive   into the video, if you've been enjoying  the show, be sure to click the subscribe   button below so you never miss an episode. (00:50) It's a free and easy way to support us,   and we'd really appreciate it. Thank you  so much. Welcome to the Investors Podcast.   I'm your host Clayfink and today we'll be  presenting our quarterly best quality idea   series where each quarter we dive into a quality  stock and consider adding it to my own portfolio.   Today we're covering Interactive Brokers. (01:10) I wanted to get a couple of disclaimers   out of the way right out of the gate here. Tip  is not receiving any compensation to talk about   Interactive Brokers today. I am a very happy  customer of their brokerage product and as of   the time that this episode airs, they are not  a sponsor on this podcast. The second point   I'd like to make is as I was doing research for  this episode, I decided to purchase shares for   my own portfolio at around $71 per share. (01:36) With that in mind, I'd encourage   our listeners to do their own research and come to  their own conclusions about the company as nothing   we say on this show should be interpreted as a  buy or sell recommendation. So, with that out of   the way, let's get right to it. So, Peter Lynch  made famous the investment philosophy of buying   what you know and leveraging your own unique  insights in your daily life when choosing stocks   to research and invest in for your own portfolio. (02:01) So, if you notice that you're continually   using a company's product, that is a sign  that you see their offerings as highly   valuable. And this can be a good clue for us as  investors. So, back in early 2023, I converted   all of my brokerage and retirement accounts to  Interactive Brokers from my previous broker.  (02:20) The day I did that, I certainly should  have bought the stock as well as it's done very   well since then. But Lynch illustrated that  simply buying what you know isn't the formula,   but it's a good starting point in finding  stocks to research. Although we shouldn't   take my experience with Interactive Brokers and  assume that others will have the same experience.  (02:36) The reason I moved my accounts was  really simple. I wanted access to invest in   international markets at an affordable cost.  And Interactive Brokers not only gives you   access to a wide breath of different markets,  they also have industry low costs, which I'll   be getting into more detail a little bit later. (02:55) So whether you want to invest in Japan,   Europe, Canada, or really about any market  globally, I knew that I would be able to do just   that on Interactive Brokers, which honestly sort  of annoyed me with the previous brokers that I've   used. In that experience, I also saw how painful  it is to switch brokers. My previous broker, of   course, doesn't want to make it easy to switch and  they'll be charging me fees to move everything.  (03:19) But after a handful of  calls and emails and a few weeks,   I was finally able to get everything moved over  to Interactive Brokers. So that to me really   illustrated the switching costs for somebody  like me in going from one broker to another,   which would play to Interactive Brokers advantage  if they truly have a superior product that would   encourage investors like myself to switch. (03:42) Interactive Brokers, also known as IBKR,   has been on my radar ever since I switched  accounts. We actually discussed the stock on the   show almost two years ago with Jonathan Ber back  on episode 599. The stock is owned by a couple   of well-known investors. So according to the most  recent 13Fs, Brian Lawrence from Oakliff Capital,   he has a this is his top position in this fund  it looks like at over 25% without considering   the international stocks he owns of course  since he's not required to report those.  (04:11) So, it appears that he's held that  position for many years. And Lawrence has   actually been featured on the show a couple  of times in the past. And then we have Rob   Venol from RV Capital. He also has a sizable  position in IBKR as they bought a lot of what   they own in Q1 2023 and Q2 2023. If we  look at the business from a high level,   we have a market cap of just shy of $120 billion. (04:34) Over the past decade, the stock has   compounded at roughly 21% per year excluding  dividends. And related to the market cap,   just a quick note here. It's important to mention  here that the organizational structure complicates   things a bit when you look at this stock on  different investing tools. So I'm using Fiscal AI,   which is what I use to analyze stocks. (04:53) It shows a market cap of   $30 billion, and it's backing out the  75.2% ownership by IBG Holdings LLC,   and this is controlled by the founder, Thomas  Ptery. But the true market cap of the business   is actually around that 119 $120 billion mark. So  that's just something to keep in mind if you're   looking at the stock online on various tools. (05:16) So their total number of accounts has   grown by 20x since 2012 from 200,000 to over 4  million. And just for reference, Fidelity has   over 50 million accounts. Charles Schwab has 37  million accounts and Robin Hood has 25 million   accounts. So IBKR has just a small slice of  the pie and has been growing very rapidly.  (05:37) So year-over-year their total accounts  have grown by 32%. Which is honestly just amazing.   Similarly, the asset value of their accounts on  their platform has risen consistently. So it was   $32 billion in 2012. It's over $750 billion  today. Now, when I first started looking at   this business uh a couple years ago, I  sort of naturally assumed that they were   just in a fiercely competitive industry and  it would be really difficult to differentiate   themselves in a field of meto players. (06:07) So, if you're looking at a commodity-like   business, you tend to see lower margins and more  volatile earning streams. But when you look at the   financials of IBKR, it very much looks like the  very opposite of a commodity business. So, they're   consistently profitable. They're generating strong  and consistent earnings growth year after year.  (06:28) And even more impressively, the margins  are just off the charts phenomenal. Gross margins   are 82%. Pre-tax margins are 75%. And these margin  levels are better than Visa, better than Nvidia,   better than Meta. And these are some of the  most profitable businesses in the world.   So if you just look at the growth and the  margin profile, this very much looks more   like a SAS business or a technology business. (06:53) So clearly IBKR is doing something   right here. We'll be getting into what that  is during this episode. So the company was   founded by Thomas Pedy in 1978 and he actually  stepped down as CEO in 2019. So he's been very   involved in this business for a very long time.  Amazingly, he owns nearly 70% of the shares,   valuing his stake at around $80 billion. (07:16) This makes him the 24th wealthiest   person in the world according to Forbes at the  age of 81. There was a wonderful article that   was recently published by Colossus that profiled  Pedy that I'll be sure to get linked in the show   notes as well. Really fun and good read on  learning more about Pedy. And when tuning   into a recent interview with Pedfey, it's almost  comical how blunt and straightforward he can be.  (07:39) When asked about uh his business and  the success he's had, he instantly chimed in   and explained that, you know, business is  very simple. It's all about trying to give   your customers a better deal than they could  possibly get anywhere else. That's the secret   to business. And I think that simple idea explains  why IBKR has been so successful in continuing to   gain share in the discount brokerage industry. (08:04) and you know consistently grow their   number of customers. They've proven that they  are able to provide a very compelling offer to   their customers and obviously I myself am a  good example of that as I felt compelled to   switch platforms myself. So let's get more into  what exactly this business does. So Interactive   Brokers it's an online brokerage business. (08:25) It provides electronic market access to   a range of stocks, options, futures, currencies,  commodities, crypto and more. Pedro is all about   giving a comprehensive offering both in terms  of the types of financial instruments customers   have access to and then the geographical reach  in terms of the markets they're plugged into.  (08:44) And in addition to having the most  comprehensive offering, they also want to   offer the lowest trading commissions, the most  attractive interest rates for margin loans,   and the most competitive interest rates  on deposits. So, some of the audience   might be thinking IBKR having low fees  doesn't really mean anything because we   live in a world of zero commission trading. (09:04) But zero commission trading doesn't   necessarily mean that the all-in cost of trading  is truly free. The reality is that these zero   commission competitors actually have an all-in  cost that is higher than what's offered on IBKR.   So most of these brokers you can think  of like the Robin Hoods of the world.   They offer zero commission trading and rely  on something called payment for order flow.  (09:28) That's when they route your trade orders  to specific market makers in exchange for a small   payment. It's how they make money even on  these so-called commission-free trades. The   catch is that these trades might not always be  executed at the absolute best available price.   The difference might be fractions  of a cent per share, but over time,   these small inefficiencies add up, particularly  for active traders or these very large orders.  (09:53) So, if we walk through a quick example,  let's say you place a trade of 100 shares for   uh Google and you do that on Robin Hood. Instead  of Robin Hood sending that order to exchanges,   they will send it to a company like Citadel  or Virtue and they will execute the trade   either against their own inventory or they  will send it to the exchange themselves.  (10:16) And they're thinking about maximizing  their profit, not your profit. So executing   these trades is certainly very profitable  for these firms. And it's so profitable   that they're willing to pay Robin Hood for  that order flow. Although the amounts aren't   published by Robin Hood publicly, in 2024  it's estimated that they made well over $1.  (10:38) 5 billion in revenue from payment for  order flow. This comes out of somebody's pocket,   and of course, it's the end customer that ends  up paying for it. Interactive Brokers takes a   fundamentally different approach. They do not  depend on payment for orderflow for their IBKR   pro users, which means their priority is executing  trades at the best possible market price rather   than profiting from payment for orderflow. (11:03) Instead of routing orders to these   middlemen like Citadel and Virtue, Interactive  Brokers connects directly to dozens of exchanges   and dark pools around the world through its own  smart order router which automatically seeks out   the best available prices across all venues in  real time. However, for their IBKR light users,   which is a service they launched in 2021, they  actually do rely on payment forwarder flow.  (11:27) So, that's an important distinction to  keep in mind as well. And yes, IBKR does charge   commissions, but they're often tiny compared  to the total savings you get from the better   execution and the lower spreads. So, their  pricing model is also extremely transparent.   You can choose between a tiered structure that  passes along exchange rebates and fees or a fixed   structure that bundles everything together. (11:52) And either way, you see exactly what   you're paying for as a customer. Now, this  model plays to interactive broker's benefit,   especially if you're an active trader that's  making hundreds or thousands of trades per day or   maybe even have a very large AUM, maybe a hund00  million or more. But for a customer like myself,   there's little money to be made for IBKR. (12:12) And it's important to mention that   Interactive Brokers isn't really targeting the  individual investor that's looking to buy and   hold stocks and not do much trading. their  highest priority target customers would be   someone like a quant firm that highly  values the speed of execution and the   price they're getting for the trade. (12:31) Although us value investors   likely don't care for quant investing with  technology and AI continuing to, you know,   develop and rapidly increase in our world, the  amount of AUM at these quant firms continues to   increase as well, providing a natural tailwind  for clients on IBKR. So their core customer   base is really professional and institutional  traders, hedge funds, proprietary trading firms,   and high- netw worth individuals who value access  to global markets, low margin rates, and precision   trade execution. But one of the primary (13:03) drawbacks I would mention is that   they don't have this slick user face like you'll  find at many other brokers like Robin Hood, for   example. Thomas Pedy's philosophy with Interactive  Brokers has always been about building the most   complete and efficient trading platform in the  world, not just for US stocks, but for nearly   every major asset class in market globally. (13:24) And I think a good way to think about   the brokerage industry, is to sort  of put them in two categories. You   have your retail brokers. This includes  Robin Hood, Charles Schwab, Fidelity,   and then you have the institutional prime brokers  like Morgan Stanley, Goldman Sachs, and UBS.   Interactive Brokers is built for institutional  brokers, but they still allow these retail   investors like myself to use the platform as well. (13:47) And I think a good way to think about the   brokerage industry is to sort of put it into  two categories. So you have the retail brokers,   the Robin Hoods, Charles Schwabs and Fidelities  of the world, and then the institutional prime   brokers like Morgan Stanley, Goldman Sachs,  and UBS. Interactive Brokers is primarily   built for the institutional uh customers,  but they still allow uh retail investors   like myself to use the platform as well. (14:13) And while many of these brokers   are primarily focused on the US, Interactive  Brokers is available practically all over the   world. Although I do love the company  that Pedy has built over the years,   I'm a very happy customer. What I enjoyed learning  about even more was Pedy's background. He has   quite an inspirational story and I'd encourage  you to look up some of the interviews he's done   out there on the web to learn more about him. (14:40) Pedy was born in Hungary in 1944 towards   the end of World War II and he grew up in  a communist country. The Pedy family lost   their land during the first world war  and lost their remaining assets to the   communist state after the second world war.  Pedy's father fled the country when Pedy was   only 2 years old after divorcing his mother. (15:03) Pedy recalls that when he was a child,   he once asked his mother why she was crying and  she said that they were going to starve to death   as she was unable to find a stable job to put  food on the table. Although many books were hard   to come by in a communist country, Pedfey was  able to get his hands on a few of the classics.   And this is where he learned about capitalism. (15:24) As a socialist country, virtually all   industries were owned and controlled by the state.  So in Pediphy's words, since the people didn't own   the businesses, the people weren't rewarded  for working hard or coming up with new ideas.   So nobody worked hard and nobody came up with  new ideas. This led to the standard of living   in the country just to be incredibly low. (15:47) And ever since he saw the Statue   of Liberty on the little stamps that came from  the US, he knew that he wanted to move there.   He almost called it uh an excellent marketing  ploy from the United States. So after a rough   upbringing uh in a country that was devastated  by the war, Pedy managed uh to get a one-way   ticket to New York at the age of 21 in 1965. (16:09) Uh it seemed like he was pretty lucky   to be able to make his way to the US in the  manner he did. He didn't speak any English   at all. So he went out and he learned computer  programming before he even learned English. So he,   this is a classic rags to rich's story. He  started from nothing and by 1977 he had saved up   $200,000 and he bought a seat on the  American Stock Exchange for $36,000 to   start building an American dream of his own. (16:40) He was on the floor trading options   based on the values he came up with himself  and in one instance he ended up losing   $75,000 on just one trade due to what he described  as insider trading. That experience taught him to   hedge all of his trades in case things go against  him. He was very mathematical in his attempts to   rebuild his capital base and he eventually  hired others to execute these trades for him   and profit from the market's inefficiencies. (17:13) By 1982 his operation went by the name   Timber Hill. And at this time his firm was  just making a killing. You know he was very   mathematical and finding all these inefficiencies  in the market. He developed these handheld devices   that had the data the clerks needed to place  profitable trades. And when his team tried to   enter the Chicago Board Options Exchange,  they passed a rule that analytical devices   could not be used on the options floor. (17:41) So he was well ahead of his time   and had these tools that simply nobody else  had or you know knew how to make. Of course,   the exchanges made it difficult for his team  to place profitable trades in real time.   But they just could not stop Pedy from  continuing to dream up these new solutions   working around the rules they had in place. (18:02) So in 1987, he achieved what he first set   out to do in 1971, which was to create the first  fully automated trading system in Wall Street   history. The machines he ended up developing  could place trades without human intervention.   A NASDAQ employee was shocked to  find that a computer was placing   trades on its own with no human in sight. (18:28) And NASDAQ wasn't aware that Pedy had   actually hijacked the terminal's data line to feed  his automated system. You know, other traders,   they were manually typing these orders. They  weren't pulling prices from the feed and pushing   them through these algorithms like Pedy was. So  they told Pedy that he would have to be entering   his trades by keyboard just like everybody else. (18:51) Pedy thought that's no problem. So he   developed a machine that would automatically  type on the keyboard for a person. And this of   course did not make the NASDAQ employees any  happier. So as you can probably see it's in   Pedroy's DNA to automate as much as possible.  And this has carried through all the way to   the way Interactive Brokers operates today. (19:16) In addition to the options business,   he also started a marketmaking business in  1993. This extended from New York to Chicago to   San Francisco and then to Frankfurt, London, and  Hong Kong. Goldman Sachs made multiple offers to   purchase the market maker and Pedrofe declined all  of them. He set out to build a platform that would   give ordinary investors the same technological  advantages that he created for himself.  (19:42) This business would become known as  interactive brokers. Pedrofey was far ahead of   his time during the 1990s. You know, the financial  landscape then would remain overwhelmingly analog,   but eventually Wall Street would come around to  Pedro's innovative ways and he would become the   broker of choice for many professional traders. (20:02) In May of 2007, Interactive Brokers would   go public, but its options division, Timber  Hill, it still generated over 80% of the   company's revenue. So, this is very much a trading  business instead of a brokerage business. So,   this is important to keep in mind when  you're looking back at previous year's   financials and stock performance. (20:20) I think, you know, the stock   performance in its early years of being  public weren't that great. And that part   of the reason for that was because the option  division made up a substantial portion and it   was in decline while the brokerage business  was on the up and up. So Interactive Brokers,   they actually didn't need to go public in 2007. (20:39) Pedrofe still owned nearly all the   business and he took the company public to try  and um put the the company's name and brand in   the public domain uh since he just hated  spending on advertising. And I think this   is actually one of the things I like to look for  in stocks is like finding these companies that   um are almost like a family business. (21:01) They think very long term. They focus   on the customers and it's almost like they don't  need or don't really want to be publicly traded,   but they happen to be for all these idiosyncratic  reasons. And uh these points that I mentioned on,   you know, hating to spend on advertising,  trying to get the company's name out   there and be frugal and whatnot. (21:22) This hits on a couple of the   concepts I discussed last week on my episode on  intelligent fanatics. Intelligent fanatics tend   to be frugal and they just hate wasteful spending.  And of course, they're always looking to innovate   and find new ways of doing things. I would  definitely call Pedrofe an intelligent fanatic.  (21:40) Rather than paying investment  bankers hefty fees to go public, uh,   Pedy chose to do a Dutch auction to save $80  million in the process, and he would sell 10% of   his business. But this also meant no road show and  not much attention generated on Wall Street. So,   it didn't seem to do a lot from a marketing  standpoint, as Interactive Brokers is actually   still a fairly underfollowed business today. (22:04) Are you looking to connect with   highquality people in the value investing world?  Beyond hosting this podcast, I also help run our   tip mastermind community, a private group  designed for serious investors. Inside,   you'll meet vetted members who are entrepreneurs,  private investors, and asset managers. People who   understand your journey and can help you grow. (22:26) Each week, we host live calls where   members share insights, strategies, and  experiences. Our members are often surprised   to learn that our community is not just about  finding the next stockp, but also sharing lessons   on how to live a good life. We certainly do  not have all the answers, but many members   have likely face similar challenges to yours. (22:46) And our community does not just live   online. Each year, we gather in Omaha and New  York City, giving you the chance to build deeper,   more meaningful relationships in person. One  member told me that being a part of this group   has helped him not just as an investor,  but as a person looking for a thoughtful   approach to balancing wealth and happiness. (23:06) We're capping the group at 150 members,   and we're looking to fill just five spots this  month. So, if this sounds interesting to you,   you can learn more and sign up for the weight  list at thevesspodcast.com/mastermind. That's   thespodcast.com/mastermind. or feel free to email  me directly at clay@theinvestorspodcast.com. If   you enjoy excellent breakdowns on individual  stocks, then you need to check out the intrinsic   value podcast hosted by Shaun Ali and Daniel Mona. (23:41) Each week, Shawn and Daniel do in-depth   analysis on a company's business model and  competitive advantages. And in real time,   they build out the intrinsic value portfolio  for you to follow along as they search for   value in the market. So far, they've  done analysis on great businesses like   John Deere, Ulta Beauty, AutoZone, and Airbnb. (24:02) And I recommend starting with the episode   on Nintendo, the global powerhouse in gaming. It's  rare to find a show that consistently publishes   highquality, comprehensive deep dives that cover  all the aspects of a business from an investment   perspective. Go follow the Intrinsic Value podcast  on your favorite podcasting app and discover the   next stock to add to your portfolio or watch list. (24:26) Fast forward to 2017, Pedrofeed decided to   shut down the options maker Temper Hill as the  brokerage side of the business uh was growing   and growing uh and requiring more attention. The  advantages that Temper Hill had in the earlier   days uh just didn't exist anymore. So there were  little profits to be made in it and selling off   that portion of the business allowed them to put  all of their attention on the brokerage side.  (24:51) I think this is a good signal that  management does in fact think long term and is   forward-looking and they try not to be uh wasteful  in how they spend their time with different   business segments that especially the ones that  are becoming worse over time. It can be difficult   to accept that short-term pain and let go of some  of those profits, but it's clearly something they   strive for in building an enduring businesses. (25:16) Think ahead 5, 10, 20 years and where   things are heading. As I mentioned, Pedrofe  is as obsessed today about automation as he   was when he was just getting started in the  industry. And due to this intense focus on   automation and their industry low fees, they're  becoming the broker of choice for many hedge   funds and professional traders who understand the  importance of trading cost and fully appreciate   the service that Interactive Brokers offers. (25:42) So in that profile that Colossus put out,   Pedy was asked, "What's the secret?" And he he  responded, "It's all common sense. Hard work   and common sense. That's my story." And then I  wanted to share another quote I ran into from   Pedroy that was back in 2014. I quote, "When I  entered into this business some 40 years ago,   I was a computer programmer and ever since that  time I have remained a computer programmer and   surrounded myself with other computer programmers. (26:10) So unlike other businesses, we do not put   as much focus on sales which may be a problem  but we focus on building technology. Our forte   is to automate everything and everybody.  That gives us the opportunity to service   our customers at a much much lower cost than  our competitors do. And for that reason, we can   charge very low commissions. So, it's magic. (26:34) The magic is called automation. End   quote. So, in 2019, Interactive Brokers would  launch IBKR Light. This is designed for more of   a long-term buy and hold investor rather than  an active trader. IBKR Light offers unlimited   commission-free trading on US exchange listed  stocks and ETFs and it requires no account   minimums and it doesn't charge inactivity fees. (26:58) So, this positioned them to appeal to   more of a broader audience such as investors  like myself and not just institutions and more   uh sophisticated traders. Not unlike their  other offerings, IBKR Light does use payment   for orderflow. The reasoning is that IBKR  light users will have lower account balances,   fewer trades, and will have less of  an appetite to borrow on margins.  (27:21) So, as a result, it makes sense why  IBKR would utilize payment for orderflow. And   it would be more beneficial for the IBKR Pro  users to have sort of their own technology to   get the best trading prices available. IBKR  light is another example of the management   team thinking long term in their strategy.  You know, it took a lot of time, energy,   and resources to build out these capabilities and  to earn a measly initial return on investment.  (27:46) But as they attract more users to their  platform, give those users exposure to their   comprehensive offers, and further increase their  brand exposure over time, these early investments   will pay dividends for many years into the future.  As I mentioned at the top, Pedy stepped down as   CEO in 2019. and Milan Gollik, a long-term  executive who joined the company in 1990.  (28:07) He succeeded uh Pedy as CEO. Today,  Pedy is still highly involved in running the   sales and marketing department, and he always  enjoys the challenge of cracking a new problem,   finding new solutions. He's come to find out that  he was actually wrong about the potential benefits   of marketing and it being a total waste of money. (28:26) So, we'll see if they up their marketing   spend over time in the years ahead.  When we look at the business today,   they primarily make money in three different ways.  As you'd expect, IBKR earns commissions on trades.   This represents around 1/3 of their business  or revenue. They also earn net interest income,   which is over half of IBKR's revenue. (28:47) So, this segment includes a few   different categories. So they earn interest on  customer deposits uh you know cash deposits um   and then they keep a portion of that interest  for themselves and then pay out the remainder   to customers. So IBKR Pro users receive interest  that equates to the federal funds rate minus.5%   and they also require a cash balance of  $10,000 or more to start earning interest.  (29:14) So this segment also includes the interest  earned on margin loans extended to customers. This   is another important segment of their business  since many traders will utilize some level of   margin. And then the business also generates  revenue from market data fees, payment for   order flow, risk exposure fees, and other income.  These combined generate less than 10% of revenue.  (29:36) So primarily you're looking at commissions  on trades, the interest you're earning on the   cash, the margin loans, and then I'll get into  a couple of the other segments here shortly. So,   as far as the commissions go, IBKR seeks to  offer low commissions to deliver an attractive   value proposition to their customers. (29:53) On their website, they're   totally transparent with the commissions they  charge, which helps, you know, of course, build   trust with customers. They tend to refer to their  customers as traders, and of course, some of their   customers are going to behave more like a buy  and hold investor that isn't making trades daily.  (30:09) But for customers who are trading much  more often, the lower commissions obviously   serve as a good selling point for them. For the  interest earned on cash, this benefit tends to   favor the institutional investors as the interest  rate they earn increases based on the amount of   cash you have on the platform. other prime brokers  that IBKR competes with, you know, big banks like   Morgan Stanley, JP Morgan, Goldman Sachs. (30:32) I actually don't see interest rates   published online, which speaks to Interactive  Brokers culture of providing transparency   to customers. Alongside the growth in client  accounts, the company has also seen a significant   amount of growth in their total net interest  income. And you know, of course, this makes   up a good portion of the business today. (30:51) As I mentioned, this line of item   also includes the spread they earned on  margin loans. As of the time of recording,   margin balances sit at an all-time high, and  Pedy stated on the most recent earnings call   that if there's a sudden dislocation in  the market, he would expect risk-taking   and thus margin loan levels to decrease. (31:09) Their margin rates are also very   attractive relative to their  competitors. On the website,   they even showcase this chart that shows their  margin rates versus their peers. It depends,   of course, on how much you plan to put on  margin, but broadly speaking, you're looking   at around a 5% margin rate for Interactive  Brokers versus 10 to 11% for competitors   such as Erade, Fidelity, Schwab, and Vanguard. (31:34) And given that Interactive Brokers has   automated this segment, it's relatively low  risk on their end because they're able to   automatically execute margin calls if the client's  account balance isn't sufficient and it needs to   be liquidated since they haven't put up enough  collateral. The great thing about net interest   income is that it's incredibly high margin  and over the years it's making up a greater   and greater share of their overall business. (32:00) One concern that investors have related to   the business is the possibility of interest rates  going down, which might be a concern that's a bit   overstated since they actually pay an interest  rate roughly equal to the federal funds rate minus   50 basis points. So whether the federal funds  rate is 3% or 7%, the math is still the same in   terms of what they're paying out, but the math is  still the same in terms of what they get to keep.  (32:27) But, you know, there's of course second  order effects to what the federal funds rate   is. So, you know, as the federal funds rate  changes, it's going to change how much cash   clients desire holding in their accounts and how  much margin they're going to be taking on. So,   if you get a margin rate of 3% versus 7%,  you know, the math is much different on   how much interest you're paying on that margin. (32:50) So, if interest rates continue to decline,   that might lead to clients holding less cash  because it's less attractive in terms of the   interest they're earning. However, lower interest  rates also makes borrowing more attractive. So,   it's sort of this push and pull effect, but  generally, I think as interest rates decline,   uh, they tend to see sort of a  bit of downward pressure on the   net interest income they're generating. (33:17) So this is one concern I just want   to understand a little bit better is how much  could this net interest income figure decline.   This figure has increased substantially since  the start of 2023 and I would hate to invest   uh today to only see this favorable trend reverse  the other way. So one of the reasons this metric   has just done so well in recent years is  because they've increased their level of   assets on the platform so significantly. (33:44) this has been a very favorable   trend for them. So I would think about  how much is the federal funds rate going   to impact customers desire to hold cash  in the platform. So if the federal funds   rate goes to say 2% or lower, I think that  could put some serious downward pressure on   the net interest income they're earning. (34:05) You know, one reason is that the   opportunity cost of holding cash is much different  when the federal funds rate is so low and your   interest is is so low that you're earning. More  people would be want to of course go out and   buy assets with that cash. And then also there's  the potential of just a major economic downturn.  (34:25) So if we enter a downturn, some people  lose their jobs and whatnot. this could lead   to a decline in the amount of cash held on  their platform as uh customers have a need   to dip into that liquidity for one reason or  another. So I think investors and interactive   brokers sort of have to accept that there is some  cyclical element to this business in the sense of   being directly tied to the financial markets. (34:50) When markets are volatile and going up,   IBKR tends to do very well. When markets are  falling, they might have some headwinds in terms   of the revenues they're able to generate, but  over time, I would expect revenues to continue   to increase as a result of their growing number  of customers over time. Lastly, I'd also like to   touch on the securities lending segment as this  segment is also a contributor to their business.  (35:14) Securities lending is essentially  when investors allow their stocks to be   temporarily loaned out to other market  participants, oftent times uh to short   sellers and in exchange they get interest income.  Interactive Brokers manages this process of course   automatically through its securities lending  program where clients can earn an additional   yield on their long-term stock holdings. (35:36) The firm matches borrowers who   need to short a stock with investors  who hold those shares. And in return,   both the investor and interactive brokers share  in the income generated from the loan. What   makes this service valuable is that investors  continue to benefit from the price appreciation   of their shares as well as the dividends and  they're earning some extra income on top.  (35:59) So, it's a very simple way to generate  incremental returns on shares that you're of   course holding. Anyways, the drawback for many  shareholders though is that oftent times the   rate earned on lending out shares is pretty  low. So, it's really not worth taking the   time for many people to lend out their shares. (36:17) One easy segment to overlook in terms   of growth is their cryptocurrency segment as  well. I know a lot of our listeners aren't   into cryptocurrencies and neither is Pedfey,  but he listens to his customers. So if his   customers want something in this financial  space and interactive brokers is able to   provide that service and automate it then  they will add it as a part of their business.  (36:38) So they introduced crypto trading  in 2021. When we look at a competitor like   Coinbase they have over 100 million verified  accounts and they have higher fees than IBKR.   So many sophisticated traders are bound to  discover interactive brokers and switch over   to their platform and want those lower fees. (36:58) However, Coinbase compensates for this   by offering trading for over 250 coins while  IBKR is limited to the top 12 coins or so. In   their most recent earnings call, Interactive  Brokers shared that crypto trading volumes   are up 87% since the last quarter and up 5x  since the previous year. Interactive Brokers   also provides a white label solution allowing  banks, hedge funds, and financial advisors to   offer their own branded trading platforms built  on Interactive Brokers global infrastructure.  (37:31) This business-to business service powers  many financial institutions behind the scenes,   expanding Interactive Brokers reach beyond its  direct retail and institutional clients. Overall,   Interactive Brokers has a unique position  in the market by offering low trading costs,   low margin rates, and high interest on  cash through their automated platform and   direct market access and placing trades. (37:54) You know, it just makes it really   difficult for competitors like Schwab, Fidelity,  Morgan Stanley to compete. And to a large extent,   they tend to focus more on the wealth management  and client relations side and not so much trying   to be the most efficient player. Due to their  intense focus on being technology enabled,   in my mind, I sort of see them more as a tech  company than a financial services company.  (38:19) In addition to being the lowcost provider,  I also mentioned earlier that they post pre-tax   profit margins of 75%. This illustrates their  level of scale and just how efficient they are.   Better yet, they continue to improve their  offerings, invest in expanding their offerings,   and growing their scale, and they're able to  spread out all these fixed costs over a larger   and larger customer base, which allows  them to increase their modes over time.  (38:45) When it's all said and done, the primary  driver of growth for Interactive Brokers is going   to come from bringing in more customers, which  they've done an exceptional job at doing over   the years. Today, they have over 4.1 million  accounts. Unfortunately, they don't provide a   breakdown of the accounts by region and whatnot. (39:03) Over the five years leading up to 2024,   the number of accounts grew by 36% per  year. What I also really liked about their   level of growth is that they spend very little on  advertising. They have one of the lowest marketing   budgets of all of the online brokers, yet they've  consistently outgrown many of their competitors.   The SGNA line item, which includes their  advertising expense, is just 5% of revenue.  (39:29) This is a very good sign for investors  because they're able to generate growth simply   by having a superior offering in the market.  Most companies have to push their products   to their customers through marketing. But  few companies have the luxury of naturally   pulling in customers without having to put in the  time, money, and effort required to bring them in   and entice them to uh join their platform. (39:51) They also have a really attractive   referral program that incentivizes users who  like the product to share it with others.   Referring customers can earn a $200 payment  while the new customer can receive up to   $1,000 in IBKR stock. As a fan of the platform  myself, I've referred several of my friends   and family members to Interactive Brokers. (40:11) What's also interesting to consider are   some of the differences between a sophisticated  trader or sophisticated investor and your average   retail trader or retail investor. There's sort  of this joke that goes around that the Robin   Hoods of the world attract the retail crowd and  operate under the infamous 90990 principle which   states that 90% of retail traders lose 90%  of the value of their account in 90 days.  (40:41) While reality might not be quite this  bad, I believe that there's likely some truth   to it as investors on Robin Hood tend to  trade more often and haven't developed a   sound investment philosophy. And if investors  are losing in the market, it's not likely that   they'll be sticking around for a really long  time. And for investors that do make money   in the market and increase in their level of  sophistication over time, they're more likely   to eventually graduate to other brokers that have  more of a comprehensive offering and offer all-in  (41:13) lower trading costs. On the flip  side of Robin Hood, IBKR attracts, you know,   a more sophisticated investor that tends  to make money in the markets over time and   they understand the importance of trading  costs. So, you know, investors naturally   gravitate to the lowest cost provider. (41:31) You know, I kind of think of   people who shop for groceries. They just  naturally gravitate to Costco if they live   close to a Costco. And since these investors  are more successful with their investments,   they tend to have more money. So, more is at  stake with each individual trade, making the   transaction costs that much more important. (41:48) And as their account balances grow,   of course, that only plays into IBKR's  favor. Interactive Brokers platform is   by no means perfect, though. The company's  practically run by software developers,   so the user interface is not great. I wouldn't  be surprised if some retail investors set up   an account to test it out and just don't like  the interface, so they they leave, which you   could argue, you know, they aren't looking for  customers that want the best user interface.  (42:16) So, they're attracting a certain type  of investor on their own. I should also mention   on the previous point about interactive  brokers attracting more of a sophisticated   investor. They're of course attracting uh  the gambler type of investors as well and   some of these uh non-sophisticated types of  investors. So, as with many things in life,   it's not totally black or white. (42:36) These are just generalities   I'm sharing. Interactive Brokers also  doesn't have the best customer support. So,   if you run into issues on the platform, you might  have a hard time getting connected with support.   And it seems that the support team is much more  focused on helping onboard new customers rather   than, you know, assisting existing customers. (42:54) I recall hopping on the phone a couple   of times when getting my accounts moved over in  2023. I really didn't have any issues working   with them. Uh they did their best to help me. And  since I've been onboarded, there's really never   been a case where I needed to contact them as  the platforms always worked uh quite well for me.  (43:11) But I also uh don't have very  sophisticated needs relative to some   professional traders. I haven't used margin. I  haven't lent out my shares and I've just place   basic currency trades and um just basic buy and  sell orders on stocks. I also checked with uh a   couple of members of our mastermind community.  So one of our members is a member from Dubai.  (43:33) He manages assets for clients and he uses  Interactive Brokers. He's been on their platform   for more than a decade. He let me know he's really  liked it. Uh really appreciates the broad access   to markets all around the world. Seemed to  have no issues with it. And I was chatting   with one of our other members the other day. (43:49) Uh this is a member that's based in the   US but manages a fund that invests all across  Asia. And he informed me that he actually uses   Goldman Sachs as his broker because Interactive  Brokers apparently doesn't provide access to   every single market in Asia. Maybe that's  changed since he first launched his fund.  (44:09) I believe it's a fairly uh newer fund.  So, take that for what it's worth. It sort of   surprised me that uh Goldman Sachs was  had access to markets that Interactive   Brokers doesn't. But I know that Interactive  Brokers is certainly continuing to expand   their reach and continuing to, you know, just  be the best option for customers. You know,   they're not going to offer everything that  all their other customers provide, but I   think they hit on a lot of what customers need. (44:35) So to summarize the business's mo and   competitive advantages, I think it comprises  of several factors. So back on episode 727,   I covered Hamilton Helmer's book, Seven Powers.  And the book outlines the seven competitive   advantages a company can have. So I'm going to  go down the list here and mention a few that   apply to Interactive Brokers. So scale economies. (44:57) Interactive Brokers has the scale to earn   higher returns than many of their competitors  are able to do so. So competitors could try   and replicate the offering that IBKR has, but  they would either be disrupting themselves if   they already have the user base or if they don't  have the user base, they would need to scale up   significantly in order to capture the returns that  Interactive Brokers is able to at least initially.  (45:22) So second point here is  counterpositioning. I think this one is really   important. So with Interactive Brokers being the  lowcost provider, they're able to significantly   undercut many of the other prime brokers. So for  another prime broker to replicate Interactive   Brokers offering, they would be sacrificing  uh probably one of their cash cows, which many   companies, you know, just aren't willing to do. (45:47) So IBKR is just so good at automation and   providing the lowest cost. To a large  extent, their competitors aren't even   trying to compete with them in that domain. So to  help illustrate the counterpositioning at play,   let's compare and contrast the offerings of  Charles Schwab and Interactive Brokers and the   pros and cons of each for customers. (46:04) So as I mentioned earlier,   Charles Schwab has 37 million client accounts  relative to Interactive Brokers 4 million.   The primary value proposition for Charles Schwab  is that it's beginnerfriendly and it's easy to   use and they also offer wealth management and  advisory services as well as in-person branches   and they have z stock and ETF trading. (46:25) Their weaknesses lie in higher   all-in trading costs, higher margin rates,  limited access to international markets,   and it doesn't cater too well to  active or sophisticated traders.   After outlining these, you can clearly see  why Interactive Brokers would be positioned to   capture share from a player like Charles Schwab. (46:46) All of Charles Schwab's weaknesses play   right into IBKR's strengths. So, IBKR caters to a  more advanced, globally minded investor who values   low costs, comprehensive tools, and access to  nearly every market and asset class. In essence,   while Schwab dominates the mass market  with convenience, and accessibility,   IBKR wins by serving the sophisticated trader who  prioritizes precision, control, and global reach.  (47:10) So, it's pretty unlikely that Schwab  would attempt to stop the growth of Interactive   Brokers because it would practically mean  overhauling their entire offering. Incumbents   like Charles Schwab face the classic innovators  dilemma outlined by Clayton Christensen. Now,   that's not to say that all 37 million  accounts from Schwab are going to move over,   but I think that as Interactive Brokers  continues to improve their offering and   more investors see the potential of their  platform, they will continue to capture share   from some of these other players. Next, we have (47:40) switching costs. So, this one sort of   cuts both ways. Once Interactive Brokers is  able to gain new customers, the likelihood of   them switching to another platform is low, but  this also applies to their competition as well.   So luckily for IBKR in many cases their offering  is significantly better than the competition which   we can see in the numbers you know since they're  growing accounts so fast uh you can see that many   customers see value in their service even in the  light of the switching costs you know someone like  (48:09) myself overcame these switching costs  and made the jump. Next we have branding. I   think branding does play a bit of a factor but I  don't think it's significant. They're not doing a   lot of marketing. uh they have pretty subpar  customer service and that certainly doesn't   help with the brand, but I I think it's worth  mentioning here that it might play a smaller   role relative to some of these other ones. (48:31) And then finally, we have process   power. So process power can relate to the  company's culture or simply their way of   doing business. I think this one definitely  plays to IBKR's advantage. Their culture of   being highly focused on reducing costs  and increasing the level of automation   has created a strong competitive advantage  that is just really difficult to replicate.  (48:52) I'll talk more about this here  shortly when discussing the management   team. Now the question is how long will  interactive brokers be able to grow. Pedy   has shared that he sees strong potential for  growth both in the US and internationally.   Today around three4s of their revenue does come  from the US and Pedy sees the number of accounts   growing substantially well into the future. (49:15) So right now they have their sites   set on reaching 20 million accounts up from 4  million today. But they certainly don't intend   to stop there. And this is one of the things  I look for in the companies I buy. I like to   see a clear path to above average rates of growth  for at least the next five years. I think that's   certainly the case with interactive brokers here. (49:37) Earlier I talked a bit about payment for   order flow which enables brokers in the US  to offer commission-free trading but payment   for order flow is predominantly a US-based  phenomenon. It's actually banned in many other   markets and this makes IBKR uniquely positioned  to continue to capture share internationally   since they have less competition outside the US. (49:59) international customers also place a high   value on broader market access which also plays  in their favor and US investors you know a lot of   times they just want to stick with the US and  historically of course that's worked well for   them but investors outside the US I think they  tend to want access uh to a number of different   markets so let's take a look at the management  team incentives and capital allocation decisions   here so of course the company's led by Thomas Pedy  no longer the CEO but he's still very involved  (50:29) olved in the business and as chairman  of the board. I prefer companies run by owner   operators as they tend to run the business in a  way that generates the most value in the long term   without taking excess risk. Pedy understands, you  know, the brokerage business as well as anyone.  (50:44) Uh he's been through multiple market  cycles, navigated a number of different crises,   and as a side note, I sort of assume that  IBKR was not in the S&P 500 since Pedfey   owns so much of this business. And I I think  there's actually some rules around float and   whatnot and how many shares are trading. But  it turns out that uh the stock got added to   the S&P 500 in August of this year, 2025, which  may help the stock get more attention over time,   as historically it's been fairly underfollowed. (51:13) Perhaps that's part of the reason why   the stock's done so well as of late. Share  repurchases for the business are practically   non-existent and are likely difficult because  Pedy owns so much of the business. So there's   little flow to be purchased and they do pay  a very small dividend. So it's clear that   Pedy does see opportunities to redeploy capital  internally by enhancing their existing offerings,   adding new offerings, and entering new markets. (51:37) And like other founder businesses,   they also maintain a very strong balance sheet.  On the recent earnings call, the CFO stated,   "We have no long-term debt. Profit growth  drove our firm equity up 22% over the prior   year to 19.5 billion. We maintain a balance sheet  geared towards supporting growth in our existing   businesses and helping us win new business  by demonstrating our strength to prospective   clients and partners while also considering  overall capital allocation." End quote.  (52:06) So during the banking crisis in  early 2023, many firms got caught off guard   as interest rates swiftly rose and the value of  longdated treasury bonds fell. But Interactive   Brokers would was not in such a position since  they just don't take that sort of risk on the   balance sheet and they tend to favor very  shortdated bonds, you know, rolling these   bonds over at 30 days maturity or less. (52:30) So, as interest rates rose,   Interactive Brokers directly benefited from  this because they were continually rolling   over these bonds at higher and higher rates.  Whereas competitors like Charles Schwab, they   all of a sudden saw many of their long-term bonds  were underwater in light of the decrease in bond   prices. And if you look at the stock price between  IBKR and Charles Schwab since the start of 2020,   you can just see how much better Interactive  Brokers has navigated this economic cycle.  (52:57) So, since the start of 2020,  shares of Interactive Brokers are up   6x while shares of Charles Schwab are only up  2x. The company also has no long-term debt,   so they have an extremely conservative  balance sheet. As I mentioned, all too often,   financial institutions get too levered up and  believe that the good times will last forever.  (53:15) And this should play to interactive  broker favor should high return opportunities   present themselves in the future, such as making  an acquisition uh at good prices. Interactive   Brokers has a very tenured management team and the  company actually requires that all the executive   team have experience as a computer programmer. (53:36) The current CEO Milan Goic, he joined   IBKR in 1990 as a software developer after being  recruited by Pedy. The CFO Paul Brody, he joined   the company as treasurer all the way back in 1987.  And you just go down the line and they've pretty   much all been around for many years, definitely  more than a decade for most of them. And this is   a testament to Pedrofe and the culture he's built. (53:59) Not only does he understand how to provide   a superior value proposition to customers, but  he's also done the same for many of his employees   since they tend to stick around for essentially  their entire careers. All of the managers seem   to be fairly compensated. In 2024, Pedy earned  $750,000 and wasn't given any shares as a bonus.   In the footnotes of the proxy statement, it shares  that Pedy's salary is capped at2% of net income.  (54:26) The CEO earned a total compensation  of$ 177 million and the CFO earned around   6 million. When I compare these amounts to  competitors like Charles Schwab and Robin Hood,   it looks totally reasonable to me. While the  aggregate amounts are roughly in line with   the competition, IBKR in aggregate tends to  pay out less in stock to the management team.  (54:46) And the compensation committee determines  bonuses for the management team based on three   financial measures related to the company's  performance. So you have adjusted income   before income taxes, adjusted pre-tax profit  margin, and three-year adjusted net revenue   growth. This seems well aligned with common  shareholders as it focuses on a combination   of growth, profitability, and efficiency. (55:07) As a result of their compensation   arrangement, the management team, with the  exception of Pedy, has seen the number of   shares they own gradually increase over time.  One of the drawbacks with the management team   that one could argue is that they are  primarily led by software engineers. So,   they aren't client-f facing. This is good in the  sense that they're they highly value being a tech-   enabled platform and being highly efficient. (55:29) But since Pedro is really involved   with the sales and marketing side of things, it  seems that they could benefit from building out   a better sales team to capture greater market  share. But it's pretty hard for shareholders to   complain that, you know, this is a $120 billion  company that's reported growth of 32% in their   number of accounts in the most recent quarter. (55:51) So, you know, I think uh just something   worth considering. I think they are turning  more of their attention to uh opportunities   on the marketing front. Next, let's talk  about the valuation and risks. To be frank,   the valuation is probably my least  favorite thing about this business. Uh,   the market certainly likes this stock in 2025. (56:09) The market cap of the company as of the   time of recordings, 119 billion. Net income, or  the profit the business generates is around 3.7   billion. That gives us a trailing PE ratio of  31. That will be uh fairly high for many value   investors, let's be honest. But it's important to  keep in mind just the company's runway for growth,   how they've been able to consistently  increase their number of accounts year   after year and thus increase their earnings power. (56:34) And also considering how well-managed the   business is and how differentiated their offerings  are. In their most recent earnings report,   adjusted income before taxes grew by 45%.  So the earning side of the equation is   currently growing very rapidly. Now they may  be slightly over earning because of the recent   interest rate cuts by the Federal Reserve. (56:57) In September they cut rates by 25   basis points and in October they cut by another  25 basis points. So I would expect a bit of a   headwind to their net interest margins but  nothing too substantial in the near-term   all else equal. I expect any headwinds on  this front however to be easily overcome   by their rapidly increasing account growth. (57:19) So, the recent quarter they had account   growth of 32% year-over-year and customer equity  increased by 40%. When looking at the valuation,   it's also important to keep in mind the  strong balance sheet they have in place. So,   a company with additional capital  and their reserves like Interactive   Brokers is of course going to be valued  higher than a company that, you know,   doesn't have that war chest set aside. (57:40) So, think of a company like   Bergkshire Hathway for example with all this cash  they've built up. So, Interactive Brokers excess   capital not only protects them during a black  swan event such as the great financial crisis,   but it also helps enable their growth as large  institutions will trust that they are a partner   that's built to last and built for the long run. (58:02) But truth be told, the PE ratio today is   in the higher range based on historical  standards as the market is pricing in   higher levels of growth in the near term as a  result of their recent excellent performance.   Should the next few quarters disappoint,  then I wouldn't be surprised to see the   multiple rerate to where it has historically  been closer to 20 or maybe less than 25.  (58:25) Overall, the long-term thesis for  Interactive Brokers is very simple. They   have a superior and differentiated product. I  foresee them rapidly growing accounts over the   next decade, and as a result, I would expect the  net income to compound at at least 15% per year   on average. and thus shareholder returns  should coincide fairly closely with the   growth in earnings over the long term. (58:46) What also makes me bullish on   Interactive Brokers is that since this is a global  business, they benefit from the overall growth   of stock investing and investing in general  globally. There are studies that show that um   there's a correlation between broadband internet  access and higher stock market participation.  (59:06) So as more people emerge out  of poverty, enter the middle class,   and as more people in the middle class move up  into the upper middle class for their region, this   provides a natural tailwind of individuals who  are interested in investing in the stock market.   Interactive Brokers has customers in over 200  countries and territories, which for all intents   and purposes is practically the entire world. (59:28) Pedro has shared that he sees continued   growth in accounts of 30% per year without  really any advertising. And if they decide to,   you know, pull the lever on advertising  and really uh crank up their growth a bit,   we could see, you know, growth of 40% or more  in some years, which is pretty crazy to think   about. They certainly have the capital to  spend on advertising if they wanted to.  (59:50) And I would be very happy to do a  sponsorship read here on the show in case   anyone from Interactive Brokers advertising  department or marketing department or maybe   even Pedy himself is currently tuning into this  episode. And as with many wonderful companies,   there's always the potential for optionality. So  in 10 years, IBKR is very likely to have added   many offerings that they just don't have today. (1:00:17) One example of an offering they've   added recently is IBKR Forecast Trader. This  tool lets eligible clients trade binary yes or   no contracts on future events. For example, one  can bet on whether the Fed will lower interest   rates during the next meeting. This segment  is a small part of their business but could   be a major contributor of growth going forward. (1:00:36) And Pedro has also shared that they do   not anticipate getting into the sports betting  industry but perhaps that will be an area that   they uh eventually enter as well. and just shake  things up in that industry. Turning to risks,   I definitely think there are risks for  investors in this stock. The first risk   I would highlight is economic and cyclical risk. (1:00:58) IBKR is deeply tied to overall market   activity and investor sentiment. So, in a  prolonged economic downturn or bare market,   their revenue streams would almost certainly  contract and its stock price would likely move   in tandem with broader equity markets.  Trading volumes tend to decline when   investor risk appetite falls. And as  I mentioned earlier, margin loans on   the platform are at an all-time high today. (1:01:22) So the appetite for risk is higher   than usual. And there is some cyclicality  to this business. During the good times,   they tend to rise more and during the tough  times, they tend to fall more. It's also   important to remember that client equity on the  platform is going to be highly correlated to the   value of the stock market, at least in theory. (1:01:40) So, if we go through a bare market,   that's going to be a natural headwind for the  company that they're going to have to face. So,   if you aren't bullish on stocks over the  next 10 years, then this probably isn't   the right bet for you. And all you have to  do is look at the share price movement here   in early 2025 to see how painful it can be  to hold when the broader market's falling.  (1:01:58) So, in just a few months, the  stock dropped by nearly 40% during the   tariff tantrum before recovering and soaring  to make new highs. And IBKR has likely seen   a number of newer investors who are treating  the stock market more like a casino. You know,   this could lead to inflated account numbers. When  markets fall and accounts just get wiped out,   you know, people are using too much leverage. (1:02:21) You might see some customers leave   the platform and never come back, which is  just a natural part of the stock market,   especially with how volatile things have been  over the past 5 years and how much money a lot   of people are making in the market. The next risk  I would highlight is really related to Thomas   Pedy. He's still highly involved in the business. (1:02:39) That's a very good thing for investors,   but he won't be forever. He's 81 years old.  The company will need to prove that they're   able to continue executing on their strategy  once he's exited the business. By now, I think   he's put a really strong team in place, but we  shouldn't assume that, you know, they will be the   same business without him as he's the founder  and he's made this business his life's work.  (1:03:02) It also can't be ignored that  Peter owns over 70% of the shares. While   I don't believe it's public information what  happens with his shares when he passes away,   I would assume that it would remain in the family.  He has three children. One of them is a director   at the company. So this is of course a risk. (1:03:20) Perhaps his heirs decide to sell down   shares after his passing putting continuous sell  pressure on the stock or the market discounts the   value of the company once he's out of the  picture. This is uh one of those looming   risks that's really difficult to quantify.  In light of all this, I decided to weight   this stock at a 2% position in my own portfolio. (1:03:41) It's enough to keep me following the   company and capture the potential upside  from here and give me room to add to my   positions should the stock have a significant  pullback like it did earlier this year. I like   to invest in companies where I have high  conviction that the business is going to   be much larger 5 to 10 years into the future. (1:04:00) For a company like IBKR, there will   certainly be bumps along the way, but account  growth is just so robust that it's hard for   me to imagine that this won't be a much larger  business in 5 to 10 years. Currently, they're   growing accounts around 30%, that's a fairly  accelerated growth relative to much of their   history. And in the most recent earnings call,  Pedy mentions that he does expect this high level   of growth to continue for the foreseeable future. (1:04:25) And I see that as a pretty good sign   given how straightforward he tends to be  in his communications with not mincing   words. As an investor who's happy with  consistent earnings growth of 15% or more,   I'd like to see their account growth continue to  be in excess of 20% for the next 5 years or so.  (1:04:44) And I I also like to invest alongside  some of the greatest business people in the world.   So Pedy, he's certainly in that camp, at least  in my eyes. In my view, he's an unconventional   CEO who's willing to make these short-term  sacrifices for the benefit of long-term   shareholders. And I think that shareholders  are certainly in good hands with the team   he's built around him once he passes the torch. (1:05:07) I think there's a lot to like about this   business. I'm excited to follow along in their  journey as an investor and I'll continue to be a   very happy user of their platform for many years  into the future. I think that pretty much wraps   up the discussion on IBKR. Before I let you go, I  just wanted to mention some of the calls we have   coming up with our tip mastermind community. (1:05:27) For those not familiar, the   mastermind community is a place to connect with  highquality individuals who share a passion for   value investing. With the end of 2025 coming  up, many of our members will be presenting a   portfolio review to share what stocks they hold,  the lessons they've learned from the past year,   and just lessons from their overall investing  journey, and take questions from the group.  (1:05:48) We have several members in the  group with pretty impressive investment   track records. One member has a diversified  portfolio of stocks and generated a 19% annual   return since 2015 and is up 40% in the past  year. Another member has compounded at 30%   per year since 2016 and generating these  really high returns. He's actually been   utilizing LEAPS and longdated options. (1:06:10) So, a lot of our members are   interested in learning more about that strategy.  Both of these presentations will be uh with the   group on Zoom in about a month or so. Also on  November 25th, I'll be hosting a social hour   with the community to discuss current investment  opportunities in the market. And my co-hosts Stig   Broers and Kyle Grieve will also plan to uh  host a year-end portfolio review as well.  (1:06:34) To apply to join the community, you  can visit the investorspodcast.com/mastermind.   That's the investorspodcast.commastermind. That  wraps up today's episode on iBKR. Thanks so much   for tuning in. I hope you got some value out  of the discussion. If you have feedback on   this episode or just want to share some  of your notes on the company, feel free   to shoot me an email at clay@theinvestorspodcast. (1:06:59) com or shoot me a note on LinkedIn. I'd   be very happy to hear from you. With that, I hope  to see you again next week. So, I feel that only a   true master of their craft can make money shorting  a stock and then turn around not too long after   and go long before it becomes a multibagger. (1:07:18) So, that's exactly what you did   with Robin Hood. There were two, you know,  environmental reasons why they missed the   quarter and I just thought they were temporary and  it it traded down to the $8 where I bought it and   they still had that $8 a share in cash. Also  like technically it had built a big base like   it you know had covered in March of 22 and from  March of 22 to November of 23 the stock kind of   was flattish and it had built that long base. (1:07:44) So it, you know, I I got fortunate   that it took off soon after I bought it  and that was just good timing, good luck.