TD Podcast: Predictive Markets (#950)

0:01The Disciplined Investor is all about you, your money, and the markets. Sit back and get ready for this edition of The Disciplined Investor Podcast.

0:11Andrew Wilkinson:This episode of The Disciplined Investor is sponsored by Horowitz & Company. If you're looking for a portfolio manager, look no further. Horowitz & Company, from seed through harvest, cultivating financial success.

0:30We got a quick flip and a pivot. The Fed's in focus. Stagflation alert. Inflation remains sticky and unemployment. Wow. ADP shows massive losses in one particular category. And we're looking into the prediction markets with our guest, Andrew Wilkinson, Director of Trading and Education at Interactive Brokers. All this and much more on episode number 950 of the Disciplined Investor Podcast.

1:08Hey, hey, hey, ho, ho, it's the holiday season, and it's going to be a very short month. I got to tell you, there's some things happening. We'll go through it, and why I think that we really need to be ready and not lag, because while it is the beginning of December, the fact of the matter is we've got a few things coming up in the next few weeks. That is actually going to shorten it down pretty well. By way of introduction, I'm Andrew Horowitz, your host of this fine podcast, where we are all about the discipline. I'm also the co-host of DH Unplugged, where myself and John C. DeVore get together each and every week on Tuesday nights.

1:41Yeah, Tuesday nights, we're live, and we talk about all sorts of things, ranging from the news to what's happening in specific investments, where things are going, recipes. Crazy discussion, but really, I would say, informative. So make sure that you definitely subscribe to that, whether it's on Amazon Music, Apple Podcasts, Spotify, Our Heart Radio. The list goes on and on. Wherever you get your podcast, you can get The Disciplined Investor and DH Unplugged. So, discipline. We're talking about discipline. And the discipline that we're talking about and what we do here is all about learning. It's about acting.

2:23It's about doing. It's making sure that we are going to have a very secure future. This is what it's not. It's not about the fluff. It's not about getting rich quick. While we're all about getting rich, I'm all for that, right? It's a disciplined approach. It's all about getting there and keeping you there. Making sure that you grow and that money that you have, those investments that you've accumulated, that you've nurtured are going to be there for you for the future and that they're not going to necessarily have any big problems. And therein lies the differential with getting rich quick. It's also getting rich quickly.

3:10The reverse is true, I got to say, right? You got getting poor quick. Why? Because sometimes easy come, easy go. Now, listen, there are those great stocks, those options, those things that we could do and that we can set up for ourselves that make money very quickly and we have the opportunity to make some real scratch. No problem with that. Whether it's from the crypto markets to speculative trading of stocks, have at it. But in totality, what we're going to do is make sure that we are disciplined. I have no problem with doing things in a small account that's really aggressive to put a little bit extra alpha in your portfolio.

3:55No problem with that. All your eggs on one basket? No. Nope. We're going to say no to that. Diversification? Yep. We're going to say yes to that. So the discipline, the process is what it's all about. Now, as I mentioned, this month is going to be quick. It's going to go by quicker than you can imagine. Why? Well, in a couple of weeks coming, we have Christmas Eve. That's on a Wednesday. We're going to have partial day for the markets on that day, and then you're going to be closed the next day for Christmas. Friday, so you get the Wednesday, Thursday, Friday thing. Friday, who's working on Friday?

4:33You're off already for Wednesday or part of Wednesday into Christmas Eve. We all get the holiday bug, whether you're in the state of Washington, down to Houston, all the way up to Maine, or down where I am in Fort Lauderdale, Florida. The fact of the matter is it's holiday time, and we take off. We spend a little less time. The fact of the matter is the setup this year is going to cause a little bit more problem for some people because people are going to work a little bit less. Same thing is the week after that. The Wednesday is going to be New Year's Eve. Then Thursday is New Year's, and that's it.

5:10Done. Kaput. Who's working Friday? Nobody. So we come back and already we're into January. And there are some things that we need to start thinking about because I want to make sure that you get to these things earlier than later. Make sure that you have plenty of room to get things done because by the end of the year, if you don't, it's all over. You can't come back and say, oh, I forgot to sell that stock for a loss and, hey, can I have a second chance into 26 and make it count for 25? No, you can't do that. So I put together a very simple list, something you want to think about to get the juices flowing about some of the things that you could do for year end to make sure that you are on the right track and you do those things to optimize your taxes, to make sure that you are, in fact, doing the things that you can do from an investment standpoint, from a planning standpoint.

6:07before the year is out. So like what are these? What are we talking about? We got required minimum distributions from IRAs. If you're at the age we need to think about this, you need to start thinking about it now. Because if you don't take out enough, if you under-withdraw from your IRA and you're required to do so through RMDs, if you're age 73 or more, or potentially there are other ages that you may have had to start taking, but generally 73 or older, Or there's an inherited IRA also. You could be young and inherited an IRA. You're the beneficiary of an IRA. You have a 10-year plan that you have to start taking out that money.

6:46And if you don't do so, it's a huge penalty. So you need to think about this. You need to contact your CPA. You need to look at your brokerage account. You need to find out from your investment advisor if they're doing it. We do that for our clients for the most part. We do what we're holding. We'll make sure that things are discussed and taken care of. But if your investment advisor isn't doing that, tell them, hey, you know what? Get with the program. Let's get some planning going on here. And what else? What else do we have? Well, if you have a company, if you own your own company, and maybe you only have a few employees and you don't have a pension plan, maybe it's time to start thinking about setting something up like a SEP, a Simplified Employee Pension Plan.

7:33And you can put lots of money on a tax-deductible basis into that, but you need to make sure to set that plan up before year end. You can contribute to it and put money in in 2026 for 2025, but generally speaking, you need to make sure that you plan and get that account set up before the end of the year 2025. Before the calendar year ends, you have to set that up, and then you can fund it after the fact. Then there are tax matters, like reviewing when your portfolio needs to take some gains and losses, when it's appropriate. So what we do is we look at accounts, we do some tax logs harvesting for clients, where it's appropriate, looking for ways to pass through the losses and take gains to offset, reset the portfolio.

8:29Now, not everybody needs this. if you have only tax-sheltered accounts like IRAs and Roths and pensions and things of that nature, annuities, it doesn't matter. But if you have other accounts that maybe you have some extraneous gains and you're in a lower tax bracket, maybe taking some of those for short-term gains would make some sense to not put you into the next level. Or maybe the capital gains can be used against capital losses and vice versa. Something should be considered. And also maybe thinking about the idea of tax loss harvesting with a little bit of a twist. Like selling underperforming investments to offset gains, but also consider harvesting gains.

9:13If you're a lower tax bracket this year, locking gains at a low tax rate can be really just as powerful as offsetting losses. Something to really think about there because the whole game is not only making but keeping. Keeping as much of your profits and your investments as you can. And if in fact you can take some of the gains and keep the money at a lower tax bracket, that means that you have more for yourself. And that's what we're talking about. Keeping more. Then there's things like charitable giving. particularly appreciated assets, highly appreciated assets. So instead of cash, you could donate appreciated, highly appreciated stocks, ETFs, things like that, to charities or even donor advised funds.

10:07And by doing so, you could basically eliminate capital gains tax because you're giving it to the charity and still get a full deduction for the fair market value of the gift that you're giving to the charity. Now, if your charity are being inclined and you have these kind of situations, this is one of the best ways to gift. You can do it also with an IRA, for example. So that's something to think about. Then you have RESPs and FHSAs. This is for education, first home savings and buyers contributions must be made by December 31st to capture this year's particular government match on the tax benefits or tax benefits and or.

10:58Even opening up an FHSA now secures 8 ,000 of contributions room for next year. Then you can consider something like a backdoor Roth. So high earners who exceed the Roth IRA income limits can still contribute via what's called a backdoor conversion, which is you take your traditional IRA and take the money out. You move it into a Roth IRA. There's some pro rata rules that you need to look at. But there's a lot of things that you can do before the end of the year. This is not an exhaustive list, number one, and it is not, big disclaimer, this is not tax advice. You need to talk to your CPA. You need to talk to your financial professional.

11:41but I wanted to bring up a few ideas to get those creative juices flowing. Like, oh, I didn't know I could do that. Wow, wait a second. Maybe I should start doing something. You're listening. You're spending your time learning. It is time to act. It's always time to act. It's always a good time to act. Sell those losers. Offset some gains. Reset your portfolio. Rebalance your portfolio. there's a lot of things that happen towards the end of the year that get a little weird and into the beginning of the year. So there's something that I want to make sure that you are well aware of that you're working on.

12:19These are ideas. So do what you can, be disciplined, and get set. Let's get to our guest. It's Andrew Wilkinson. He's Director of Trading, Education, and Interactive Brokers. I have so many questions. He joined Interactive Brokers in 2007. Seven with a background in interest rate and derivative trading in the city of London during the 1990s. He joined IBKR to create monetary and market commentary about stocks and options, forex, bonds for the website before helping create the IBKR campus. If you haven't checked that out, that's something right there you need to go look at. which covers Traders Insights, Traders Academy, webinars, podcasts, and all sorts of things about financial training for investors and traders at all levels.

13:10So let's get right to this discussion because I want to really get into how they're doing, how the industry is doing with what's gone on this year. And also, I really want to talk about some of the hot topics right now that a lot of people have been talking about, like zero data options, options, option strategies, predictive markets. Addicted markets, that one right there is a biggie. So let's get into it. So, Andrew, how are you? Doing well, thank you, Andrew. It's nice to be back. Yeah, it's great. So I know we've talked about the various times and travels and things and all the things going on.

13:43But some of the things that are happening right here in the U.S., pretty amazing in terms of the activity. I mean, we looked at some of the reports from industries leading brokerage houses, and in particularly yours. I mean, 29 % higher daily average revenue trades, or as known as darts, from a year ago. That's pretty impressive. Yes, it is a function of what's actually happening in the market that month as well. So, you know, darts can fall as well as rise, but it does speak to the fact that we keep adding customers. This has been a huge trend since the beginning of COVID. And I think in November, we've added more clients to the ranks around the world.

14:36We now have 4.311 million client accounts, and that's up a third on a year ago. and they executed 4.273 million darts, daily average revenue trade, as you mentioned. So I'm guessing that maybe, I mean, we have more AUM, 770 billion, just about. Again, that's up by a third. That's a function of markets rising. It's also a function of volatility in the marketplace. And, you know, some of the selling we saw in November would have translated into active traders really participating, which accounts potentially for why the darts were a little higher. So what the point, though, is, you know, you mentioned something.

15:21You said, I thought that was interesting. When we look at the ending AUM, the assets under management, and about 35 % higher than a year ago, you said it was a function of the markets. But yet, nay, it's also a function of good investing. So it's the markets for people who are just passive. I'll go with that. Right. But let's give you some credit here and some props for the fact that you're, you know, director of education and of trading, understanding all that. Right. So must be something going right with what you're doing to educate your clients to make sure that they're staying out of harm's way.

16:01Because even in a good market, you can get wrecked sometimes. Yeah, we typically appeal to more professional type accounts, Andrew. So, yes, the AUM, it's a function of those two things, isn't it? It's like if passively, if the market goes up, the AUM is very likely going to increase as well. But as we bring in clients, we tend to notice the AUM go up. The education journey, we're very proud of it here. We have something called the IBKR Campus, and I think of it as an umbrella covering a series of pillars. We've got about nine different pillars, whether it's something like API user guides, our student trading lab.

16:47The main pillars involve podcasts, webinars, Traders Insight, which is market news, Traders Academy, which teaches people about asset classes, how to trade, and our user platforms. So we also partner with the outside world. We've got a lot of information there from the CME group in terms of video format. So we just try and cover as much content as we can to help keep investors on their toes. And if they don't understand outside the world of stocks, they've got no excuse because they can go and learn all about it with some of our lessons and courses. And something I should give a big shout out for, which has just been launched in the last month, is our very innovative, interactive learning tool, which allows people to better understand options.

17:37so you can, the journey is for somebody to address the asset class, learn what a call is, learn what a put is, drag answers into a chunk of text, and then interact with the screen so that you can see the impact of choosing a particular strike, a particular expiration date, and a particular price. And as you kind of get better at that, you're gravitated towards more complex options, combinations, and strategies. So this is kind of a first in the world as far as we know, and we've run it past a lot of our industry partners, and they're blown away by it as well. So we're very, very proud of the educational offering we have here.

18:22So let's just stick on that for a second. That options tool, the educational tool, is more than just a simple Black Shoals representation of what happens if you have this call, What is your possible max loss, max gain and scenarios? Is that what you're saying? Because we've seen those before. Yeah, totally. This allows you to use your mouse on the screen, drag the coordinates, the strike price or the break even to a particular point so that the understanding of options is reinforced. and you're allowed to pick a series of straddles, strangles, long calls, short puts, and test yourself until you actually understand what it is you're doing and how that P &L chart will change.

19:10So yeah, we kind of get into Black Shells and the pricing of it somewhat, but as you said, those calculators were already out there, but this allows the user to really understand, to dive down, interact, and become a more knowledgeable trader. I'll be honest, I haven't used this yet. Is that something where if you go through that process, you can say, OK, I pinpointed this and then you can turn that into a trade right from there? Yeah, because you can be logged into the campus and then go straight through the client portal. So, yeah, I guess you can. There you go. All right. Let's talk about something that I may want to come back.

19:47I'm reserving the right to come back to talk about options. But I want to talk about something that it seems has become very popular. And we're seeing this crop up in a number of different places in different ways. And there's a lot of companies that are starting to embrace this and really, I don't want to say push it, but really promote it. And that is the predictions market. So first, let's just start. I want to start from, I'm asking you as the teacher in you right now, okay, to educate me as if I and our listeners have no clue what that means, the words prediction markets. And tell me what that is at the base, at the core.

20:36Okay. So the prediction market enables you to take a view, express a view on the outcome of a question. And essentially, it's a binary question. Ultimately, the answer is either it's yes or it's no. And what this boils down to is looking at the probability of that event occurring. So very shortly, the Fed's going to meet again, and they're either going to reduce interest rates or leave them alone. So the question is, will the Fed fund's rate of interest, as of a specific date, as if this was a contract, will it be above a certain level? So the odds on that are then calculated by buyers and sellers.

21:27Some people will have one view that the Fed will cut interest rates and other people will have a view that they won't cut interest rates. So, you know, for a contract that might be some way off and there's a lack of information and a lack of certainty, the pricing might be 50-50. You know, the Fed may be done reducing rates and they may be entering a tightening cycle at some point. So I think the odds are 50-50 for June next year that this event will actually come true. So the premise is that the correct answer is paid out a dollar. So I can wage 50 cents in order to earn a dollar in the view that my view was correct.

22:08Or on the other hand, if I'd taken a 50 cent wager and the outcome turned out to be incorrect, I lose my 50 cents. So the whole point of what we're doing here in the prediction markets is to try and help investors understand better what's actually happening in the real economy as pertains to what the central bank's doing, what economic data is doing, and how that can help an investor understand whether their portfolio is in, you know, they're likely to do well with their portfolio, because some of these contracts, like, you know, will retail sales be above a certain level at a certain point of the year?

22:47If you're long of retail stocks, you could take the opposing view if you felt that retail sales was about to decline. So again, it's all about calculating the odds, which is done for you, and expressing that view. So your 90 cents can become a dollar, your 10 cents could become a dollar, if you get that right. A really good example of this is what's going on with the nomination. Oh, yeah, the Federal Reserve, right? I want to pull this up on my screen because this is over at, because everybody could, You can actually follow along without having an account. Yes. Go to IBKR. All the markets are available online for people to see the current odds.

23:31Right. So you go to, I think it's IBKR.com. Let me just read my screen because I have it up. Slash forecast. So what's interesting, let me go there. Let me go back.

23:49Okay. So you can go to like, for example, what are the popular ones? So the popular ones are Fed decision, whether it's going to be, you know, no change, lower by, higher than. There's things like futures contracts, things like that. Where is the one? I'm looking. There's a lot of these. So probably under government. Government. Yeah. So under government. Pestimism nomination for Fed share. I'm going to click that. Yeah. So I'm going to click that, and it says, will President Trump nominate Kevin Hassett as Fed chair? So what's interesting about this is that, just to repeat what you said, it's asking me a question, and I have to say yes or no.

24:30Right. And if I say yes, it's going to cost me$0.70 as of right now. And if it says, if I guess no, not guess, if I predict, or whatever you want to call it, if I predict, I guess is the right word, it costs me$0.28. So if I put money on no and I invest there and I predict that's the market and I put down round number, I'm just going to use round numbers here,$100 and the no comes to pass, essentially I'll get back three times my money, approximately three and a half times, right? Was that correct? Yes. So that's how it works. Basically, if I choose a yes contract, it's 70 % probability that that will come true according to this metric right now.

25:20Now, what about liquidity? What happens if I choose the no contract? It's at 28 cents now. And let's just say, let's just kind of go down the path a little bit. They have a little fight because President Trump has been known to have little fights with people. Right. And all of a sudden it's worth, I don't know, 80 cents. Can I sell it right then? Yeah. I mean, there's going to be hopefully another customer on the other side, and it might be a penny or two different to get out. But you can see that the combination of the two premiums there, the yes plus the no adds up to 98 cents right now. So there's two cents inside there that's been lost or paid away to the broker.

26:06that's how that works. But my point is these are liquid at any given time, right? Yeah. Yeah, six days a week. And I think what's interesting about this particular question, this market closes in 1143 days. What you missed on the question there, Andrew, was will President Trump nominate Kevin Hasse as Fed chair? And the as-of day is January the 20th, 2029. Good point. This is a weird one. Let's be honest, this is a little bit weirder than most, right? It is. So the logic here is that Jerome Powell's term comes to an end in May. Yep. So, you know, we're going through that process right now of, you know, President Trump making his nomination.

26:49And the word on the street is that Kevin Hassett is going to be it. Kevin Hassett then has to go through an approval process in the Senate, I think. and if he's not approved, then President Trump's got to go to the next person. Or whoever he nominates might say, well, thank you very much, but I don't want to do that. I'm really happy in my current job. So that's when we have a list of, you know, Walsh, Hassett, Waller, Besant, other people. So, you know, should anything happen to whoever becomes the next Fed chairman, you know, President Trump could still nominate somebody else before the end of his term on January the 20th, 2029.

27:30Yeah, so this one is a much longer situation, a little bit of a different thing than others. For example, the one we were talking about earlier that I was mentioning, which is much more timely, we'll call it timely, is Will, in fact, let me go find that again, because I just had it on my screen. It was under... Probably under financial markets.