TDI Podcast: Traders’ Campus (#940)

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 Wilkenson: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.

0:30Stocks taking a breather after a huge run. Economists talking out of both sides of their mouths again. Circular financing and vendor financing is all the rage. And our guest today is Andrew Wilkinson, Director of Trading Education at Interactive Brokers. All this and much more on episode number 940 of the Disciplined Investor Podcast.

1:07Hey, it's Andrew Horowitz, and welcome to the Disciplined Investor Podcast. It is the end of just about the end of September 2025, and we had a pretty good run in stocks, taking a little bit of a breather last week on a few days. Nothing major, but there was definitely some profit-taking being had, and this is one of those times of the year when we look at that seasonality where there's oftentimes more selling than buying. And I know that, of course, you have to have a seller, a buyer, it has to equal. I'm talking about the concept of that there is more selling activity. Downdrafts in the market, September and October are two of the, I would say two of the months that have some of the greatest historical volatility and probably some of the worst overall returns, if you take the totality of all that.

1:56So we're entering into October. Is everybody freaking out? No, not really. There's a lot of good headwinds, excuse me, tailwinds, not headwinds yet. We'll get to the headwinds in a second. There's a lot of good tailwinds that are still there. The opportunity for the continuation of earnings that are doing very well. Estimates are somewhere in the nine to 10 % next quarterly earnings. We're seeing that generally speaking, that the economy is doing okay. Last week's numbers of 218 ,000 on the employment for the initial claims was pretty good. And that was actually a surprise. They thought was that the near-term situation with employment was getting a lot worse, especially after we saw those big revisions.

2:44We saw some economists talking about how inflation is kicking up and the employment situation is starting to get a little bit softer. And that, of course, if you take that and really expand that to its fullest potential, that's what stagflation is all about. Are we at that yet? It takes a pretty special situation to create true stagflation. Are we there where we have inflation and a credibly significant situation brewing in the jobs market? I don't think so. But it's more there than it has been. That's, I think, what we could say. The tendency to have a potential stagflation is much more heightened right now than it has been in a very long, long, long, long time.

3:37So with that, we have to start thinking about markets and how they react and why it is that when we saw the interest rate reduction by the Fed, mortgage rates went up, long bonds rates went up. And overall, the total yield curve moved a bit higher. And that's something we're going to talk about a lot over the next few weeks, I think, with some of our guests, particularly with Barry Eichengreen, who's coming on next week, professor over at UC Berkeley. He has some very interesting commentary and writings and papers about what's going on with the dollar and what's happening with interest rates. And I think we'll really dig down and talk about it with him in a significant manner.

4:20Today, before we get to our guest, I want to talk about this phenomena that's going on. What have we seen over the last few weeks? we saw things like Oracle and OpenAI and Microsoft and even Tesla X to a degree. And we've seen NVIDIA and Intel. Now, what do all these companies have in common? All of them have been part of this vendor financing and circular financing that I've been seeing that is very concerning. And let's talk about what some of this is because both of these things can be structured in ways that essentially inflate the appearance of revenues, activity, and even the, I'll go so far as saying the financial health of a company.

5:15This can happen even when underlying fundamentals are weak. So let's start with some definitions and talk a little bit about what this is, because I think it's something we need to be aware of. because when we look at circular financing, and in some cases, what is this? Money moving in loops between related entities. For example, we have company A. You can stick whatever name you want on that. That lends money to company B. We have company A that buys into, uses equity or cash to buy into equity of another company, or maybe even just infuses money very simply to get back an ownership amount, and that is then questioned.

5:58Then company C pays company A for services or equity. So you see how the circularity of this is going on, right? We have A lends money to company B. B uses the funds to buy maybe company C. Company C then buys or pays company A for service or equity. And what just happened, right? It was just like, hi, Bob, here's$100. Thank you. Give it to Joe. Joe gets it. Thank you. Joe gives it back to me. I just made$100 somehow. I mean, that's as simplistic of a case you can get in this whole idea of circular financing. And it can create this illusion of revenue, of investment, of growth. And it's essentially just recycling capital without generating any real economic value.

6:45It can actually, I think, mislead a lot of investors. It's like eating your own arm and trying to believe that long-term sustainability of your diet is intact and you're not doing any damage. That that is actually something that is nutritious. This is what we're seeing with some of the announcements this week. Companies, again, like Intel and Tesla, XAI, Musk is talking about putting the companies together. And maybe there's going to be an infusion from Tesla into XAI. And maybe SpaceX will come together. All these different things we're seeing. Now, we have to add that to this next part because I think when we take both of these, both the circular financing and vendor financing, there's where our problem is.

7:28So it's something we need to really look at. And now we have to take a moment and say, well, what's vendor financing? This is when a company basically sells its products to a company but finances the product and purchases or whatever the service is by themselves. So the sale is booked as revenue, even though the cash hasn't been received potentially, or it is part of another deal with equity or debt. So, okay. Haven't we heard a lot about that this week too? Haven't we heard about things like, well, historically we heard that Microsoft was saying, okay, we're going to give money to this company, but that company is going to actually buy cloud services for us, and they're going to guarantee over the next five years X amount of money.

8:14So what happened there? We talked about this 100 times in the past, the idea of utilizing your balance sheet assets and somehow converting them into the income statement. That is what has gone on for a while now. How long is that sustainable? Only as long as the companies that you actually infuse the money to become profitable. If they don't, that's that. And you're going to see a significant tail off of earnings. Now, the problem he has, again, is if you're a customer that you utilize for this, right? So if I lend money to Bob and Bob then says, you know, I'm going to use that money to buy services from you.

8:54And the hope is that over time, the money that I give you is enough to help you build that business so that you continue utilizing my services. But what happens if that other company defaults? What if Bob defaults? If Bob defaults, the whole thing is off. What this does is has the ability to inflate the top line revenues. And that's what we've been seeing pretty substantially on top of the inflation numbers that we're seeing. And that makes the business look stronger than it really is. And if it's done aggressively, without proper risk controls, it could lead to balance sheet stress, regulatory scrutiny.

9:35But here we are in an environment where it's been going on for years, particularly in the tech space. Not something new. But the announcement by OpenAI this week, in the last couple of weeks, with hundreds of billions of dollars in promises over the next few years, with them having massive losses predicted over that time, it's like, what are you, what? How? What is that happening? Makes you kind of wonder. So why does this all matter? My concern is that a lot of investors are being misled by inflated revenues and growth figures. How do you know? How do you actually know? We don't know until a few years from now when some of the companies that were given money to generate back to the providing company are no longer able to sustain the buying patterns that they have.

10:27Therefore, the revenues will drop. Now, you also have the concern that some regulators, ha-ha, right? In the regulatory environment that we have now, really? Okay, but maybe some regulators may flag these practices if they, I guess, if they are really obscuring the true picture. I mean, you may see that with auditors too. So what is actually happening is that some companies are propping up others through some pretty fancy financial engineering. Again, nothing new here, except they're helping other companies help themselves back. And in my opinion, with the lax regulatory oversight that we have now, it's only going to get worse.

11:13Nobody gets in trouble for any of this. It's only the suckers that fall for all this nonsense. And I think the Oracle deal that we saw, well, the Oracle announcements that we saw over the last several weeks has a lot of people very concerned. They missed earnings. Their outlook, on the other hand, was spectacular because they utilized that infusion of open AI. OBDII, it was incredible, incredible promises over the next five years or so in the hundreds of billions of dollars. And that's how much space they would utilize. But is that really going to happen? What if OBDII says, you know what? We don't have that much need.

12:02Now, they could also say, let's go to the other side. You could be like, Andrew, but wait, wait, why not be more positive? Who knows? Maybe they have a much greater need. But the build-outs that they are doing on the hopes that build it and they will come, and that the idea that the advanced AI, not the AI that we have now, no, not the AI we have now, the advanced AI, the inference, the next level of real thinking, of real decision-making, that will help industry and create profitability for that industry. whereas they'll keep on pouring money into the various companies that are the players in this industry.

12:45And NVIDIA pushed money into Intel,$5 billion. We saw that in the hopes that there are going to be a partnership, they're going to build, they're going to do. NVIDIA is funding all these other places as well with some of the money that's being funded. So we have a domino effect. If any of these situations don't come to fruition and the funding company is finding out that they're not doing as well with this strategy and they pull back a little. Could you imagine because of the, I don't want to call it leverage, but the magnitude of the money that's being used and how it is being stacked upon by company after company after company and thought about, boy, could that be problematic?

13:36Now, am I blowing the alarm here? I'm not exactly sure yet. It's very difficult to discern whether or not this is something that we really need to be concerned about to a point that we're like, okay, short the industry, we're out, this AI thing is going to explode. There is and are a lot of similarities between this and what happened with the internet and the companies that we know of that didn't last. the companies that weren't supposed to last that somehow figured it out a la Amazon right? Amazon was one of those companies Amazon was like how is a bookseller going to make it in this world? or maybe even something like a Netflix very different but yet pivoted Amazon with their AWS that's where the real money came in for a very long period of time to help them build the rest of their infrastructure Netflix pivoted from a red-labeled disk mailing and returning service into a full studio, a streaming studio, and a real-life studio.

14:40So the pivots in what's gone on and the changes for those companies that weren't supposed to be around, right, that were supposed to fail to be the powerhouse they are today. But there are a lot of companies that we could probably go through as well that just aren't even around anymore. Lycos, remember them? Peapod.

15:02Webvan, AltaVista. We can go through a lot of names that you may or may not remember. The original social media MySpace, maybe still here, but not what it was. Didn't reach its potential, whatever that was. This is what happens during these kinds of major events in life where we see an industry bloom, grow, get established. There's winners and there's losers. But in this case, I find it to almost be to a degree, just bear with me, to a degree, similar to the multiple mortgages that we saw on housing back in 2008, where it just took a little problem, the tide to go out slightly for things to get messy.

15:52We're not going to see that as quickly here Because a lot of funds to mask all the problems And if interest rates come down It's better and it's good and will continue to do so Interest rates go up on the other hand Money becomes tight A slowdown in any of these factors happen That's That's what we have to be aware of Right now again I'm really not there yet But we're on alert We're watching We're being careful Something to think about So let's get to our guest. And our guest today is Andrew Wilkinson, and he's the Director of Trading Education at Interactive Brokers. He joined Interactive Brokers back in 2007, way back when.

16:32As a matter of fact, that's about the time this podcast started. His background, he had a background in interest rate and derivative trading in the city of London during the 90s. And he joined the brokers of Interactive Brokers to create market commentary about stocks, options, forex, and bonds for the website before helping create the IBKR campus, which covers Traders Insights, Traders Academy, webinars, podcasts, and a variety of other financial training for all investors at all levels. Now, what's interesting is that we've talked about this before, but I wanted to really get to the horse's mouth this time about who really is working this, creating it, and what things are available.

17:08So, Andrew, welcome aboard. First time on The Disciplined Investor. Thanks for coming. Love it. Thank you very much for having me, Andrew. It's a pleasure to be here. So let's talk a little bit about, well, I think, you know, can I start with something? Can I start with some of the highlights of things that are really cool happening at Interactive Brokers? So you've seen huge number of, well, I'm going to use the word darts. You know what that means. But for everybody else, you've seen a big number in transaction growth of last year, huh? yeah i think our darts are up uh in august about 29 percent oh uh year on year um darts daily average revenue trades at about 3.48 million um transactions you know these are big numbers but but it speaks testimony to the type of client that interactive brokers attracts you know people who trade professionally for a living and they are active they they embrace volatility they love the options market and of course those zero uh days to expiration options have become extremely popular so we've done very very well out of that i think um aum nowadays is over 700 billion 713.2 billion, which again is up by precisely a third over a year ago.

18:33Actually, it's 38 % higher. And then the number of customers. You mentioned earlier that I started here in 2007, just before the IPO, and we had, I think, 89 ,000 clients. Today, fast forward 18 years, we're up to 4 million client accounts. That's 32 % higher than a year ago. So just a lot of trading going on, a lot of in and out of volatile markets and different asset classes around the world. You know, I think that we started not too far after using interactive brokers for our clients, something about 2010. So we were, I guess, one of the first, not the first, but we were, you know, in the growth phase, in the beginnings of the growth phase, because, you know, back then, Even back then, you know, we're talking a lifetime of technology, right?

19:22Since now to back then. Back then you still had great technology. Yeah. Which is what were the drawing features of that. So that's pretty cool. You know, you recently joined the S &P 500 back in August, which congratulations to that, by the way. That's awesome. Um, what, what drew you personally to a career in the area of, uh, trading and specifically financial education? Well, it, it followed a career of trading, which I really embraced back in London. I think I started, um, trading in 1989 on the sterling desk at Fujibank back in London. and I just couldn't get enough of markets, particularly the futures markets.

20:11And then as I progressed, I came over to America to go to business school, and I was just heavily involved in writing and writing specifically about financial markets. And then out of the blue, Interactive Brokers approached me in 2006, had come up for an interview. I was down in Florida at the time, came up to Greenwich, and I just really enjoyed explaining how markets work. I'm kind of a mentor to any investor who wants to understand all about trading. And I think we've done a very, very good job. I built up a great team here to help create videos and podcasts and conduct webinars and so on.

20:49So it's all about, you know, providing something for nothing for people to help them understand. Because we want good traders. We want people to last so that our customer base not only expands but becomes more wealthier. It's a partnership. It's a bottom line. It's good for everybody, right? And the funny thing is I know a lot of, well, when I say a lot, you know stories, right? And they just want to get people in with$2 ,000 to trade. And most people that don't get training, what do they end up doing? They blow up. You know, the$2 ,000, the$5 ,000, they get sucked in. You know, they get some kind of two bit crazy theories on a few trades.

21:30They get hooked and then they kind of get in over their skis and then they blow up. And that's not good. That's not good for you. No, we've, you know, something I was taught when I joined this company is that is that people eventually hear about interactive brokers because of the low prices. They become good at trading stocks, and then they decide, well, we're paying too much in commission. This is going back when there were commissions. And that's exactly what we want, people who are going to become active traders to benefit from the strength in technology, the low prices, and that global access to markets.

22:10So you can trade pretty much anywhere around the world with the Interactive Brokers platform. So you're kind of at the – you're in the boot camp and in the training, but also post that where people have success and they come back to, let's call it initial training education to mentorship, right? That whole range is where you cover. Now, here's my question. What are some of the most common gaps, the things that investors have this area of knowledge that just they need filled, right? And what do they come at you with maybe in the early stages? Let's break this up into two parts. The early stages of when they come to you, this gap they have in terms of their understanding of investing.

22:56And then kind of later on, there's probably some gaps as well. So can you cover both of those and how you really address those as a financial trainer, educator? That's a really good question, Andrew. The real hole in anyone's education is options. I think. As I said earlier, people used to come to interactive brokers realizing that commissions were lower and that they were doing something more actively. And in terms of trading stocks, once they understand the stock market, how prices move not just up but also down, they start to learn about volatility. And when they learn about volatility, they realize that there's something very, very clinical that can be used to lever positions and to take advantage of market movements and to also hedge and speculate.

23:46And that is the world of options. And options are not easy unless you're actually trading them day in, day out to try and understand what will the price of an option be in the event that this stock price goes where I believe it's going to go. and if I'm long of a stock, you know, how am I going to protect myself in the event that there is some news event that drives the market down or the stock that I'm holding down? So we've gone to special efforts over the years. And I know the industry has done this too, but we've gone to great efforts to talk about options. That's kind of bread and butter for a lot of our traders here.

24:25And something that we've done more recently, you know, having made many, many videos and we've had webinar guests from the industry and from the exchanges come in and talk about options education. We recently built a new interactive options trading tool, which is free at the IBKR campus. And it allows people to interact with the screen and it's going to, it's going to take you through options fundamentals. It'll help you solve real problems. The interface allows you to drag words into sentences to help you understand the definition of a call, the definition of a put and other related things. It's going to teach you the basics about calls and puts, but it also walks you through at your own pace to advance strategies.

25:17So we started off with an introduction to options, an introduction to Greeks, and then we moved into basic call buying, where the break even and so on, and then moved on to vertical spreads. And there's even a challenge mode, which I think is really, really cool for somebody who's sitting, for example, the Series 7 exams, where you just, you know, if you're not in that market every day trading options, learning about them on paper is hard. So the ability to actually drag the tools across the screen to help you understand where a break even is, what the premium of an option is, why the straight price is important.

25:53This tool is really, really cool. We've even created this challenge mode, which allows you to say, I need to strengthen my understanding of, you know, specific spreads so that I can understand how break-evens work because I've got a test coming up soon for Series 7. So that's kind of the biggest area of – the biggest challenge, I'd say, in creating education. In terms of, I get that, you know, and options are challenging. And in the world of, this is what I know. Tell me what you think. In the world of investing, they say the smartest of all smart people trade bonds. Right? That's what they say.

26:28The bond market, generally speaking, I should say that. Right? But clearly, in my opinion, you know, it's one thing to buy a stock based on fundamentals or a chart, sell it, sell short. It's another thing entirely to not only look at the options market, because the options market, takes all of that, adds a ton of different other items, you know, Black Shoals calculations and, as you mentioned, volatility and the Greeks, but also then turns it upside down backwards where you can kind of sell, you can be on both sides, or utilize a combination of it to create some kind of, we'll call it spread trade of sorts.

27:10That gets complicated. it it does but as i say once you understand it you really understand it the the analogy i would make is learning a language you're only going to really understand that language like french if you go and spend time in paris or anywhere in france and speak it to people you've got to be in the thick of it same with options um you're looking at what options do in terms of allowing you to speculate on a market. You must understand what the Greeks are there for, how they all relate to the price of the underlying, and how to pick a strike price, how to pick the expiration date across time.

27:53But yeah, I think an options trader will probably outplace a bond trader, in my opinion. But if you can trade bond options too, that probably puts you king of the hill, doesn't it? And then options on futures. Let's get crazy now. I mean, talk about volatility. That's fun. The thing about the options is also one of the things I think people like about it today more than anything is they have a very – first of all, it can be short term. It can be exciting. It can be exhilarating. It can be exhilarating. I mean, I've had options. what we do for either personally for clients that, I mean, zoom on, the numbers are like, how much is it up today?

28:35You know, that kind of thing. And we know all the stories about like GameStop, for example, and how that guy, Roaring Kitty, played the GameStop market. Now, by the way, Reddit is all a flurry now with the idea of options and warrants once again on squeeze plays. It's starting to pop up again. Never really died off, but it's really starting to come up again. The thing about options, what's interesting is the training that you can get on various places, on IB Care campus and all that. You've actually decided that that's kind of an open door for anybody, haven't you? The options world, yeah. No, no, to get the training, to get the IB Care campus.