TIP768: Best Quality Stock Idea Q4 2025 w/ Clay Finck

25:29And of course, they're always looking to innovate and find new ways of doing things. I would definitely call Petterfi an intelligent fanatic. Rather than paying investment bankers hefty fees to go public, Petterfi 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 roadshow 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 under-followed business today. Fast forward to 2017, Petterfee decided to shut down the options maker, Timber Hill, as the brokerage side of the business was growing and growing and requiring more attention.

26:10The advantages that Timber Hill had in the earlier days 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. 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 wasteful in how they spend their time with different business segments, 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 business.

26:47Think ahead 5, 10, 20 years and where things are heading. As I mentioned, Pedrify 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 costs and fully appreciate the service that interactive brokers offers. So in that profile that Colossus put out, Petrfi was asked, what's the secret? He responded, it's all common sense, hard work and common sense. That's my story.

27:23And then I wanted to share another quote I ran into from Peterfi 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. 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.

28:03So it's magic. The magic is called automation." So in 2019, Interactive Brokers would launch IBKR Lite. This is designed for more of a long-term buy and hold investor rather than an active trader, IBKR Lite 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. So this positioned them to appeal to more of a broader audience, such as investors like myself, and not just institutions and more sophisticated traders. Not unlike their other offerings, IBKR Lite does use payment forwarder flow. The reasoning is that IBKR Lite users will have lower account balances, fewer trades, and will have less of an appetite to borrow on margins.

28:51So as a result, it makes sense why IBKR would utilize payment forwarder flow, 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 Lite is another example of a management team thinking long-term in their strategy. It took a lot of time, energy, and resources to build out these capabilities and to earn a measly initial return on investment. 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.

29:27As I mentioned at the top, Pedderfi stepped down as CEO in 2019. And Milan Gallic, a long-term executive who joined the company in 1990, he succeeded Pedderfi as CEO. Today, Pedrify 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, 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.

30:02As you'd expect, IBKR earns commissions on trades. This represents around one-third of their business or revenue. They also earn net interest income, which is over half of IBKR's revenue. So this segment includes a few different categories. So they earn interest on customer deposits, cash deposits, 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 0.5%. And they also require a cash balance of$10 ,000 or more to start earning interest. So this segment also includes the interest earned on margin loans extended to customers.

30:46This 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. 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.

31:20On their website, they're totally transparent with the commissions they charge, which helps, 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. 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.

31:51Other prime brokers that IBKR competes with, big banks like Morgan Stanley, J.P. Morgan, Goldman Sachs, 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 of course, this makes up a good portion of the business today. As I mentioned, this line 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 Pederfee 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.

32:36Their margin rates are also very attractive relative to their competitors. On their 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 5 % margin rate for interactive brokers versus 10 % to 11 % for competitors such as E-Trade, Fidelity, Schwab, and Vanguard. 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.

33:17The 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. 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 get to keep. But there's of course, second order effects to what the federal funds rate is.

33:53So 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 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, they tend to see sort of a bit of downward pressure on the net interest income they're generating. So this is one concern I just want to understand a little bit better is how much could this net interest income figure decline?

34:37This figure has increased substantially since the start of 2023. And I would hate to invest today to only see this favorable trend reverse the other way. So it's important to keep an eye on this metric as a KPI. 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. 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 on 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.

35:20And then also there's the potential of just a major economic downturn. 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 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. 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.

35:58But 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. Securities lending is essentially when investors allow their stocks to be temporarily loaned out to other market participants, oftentimes 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.

36:36The 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. The drawback for many shareholders though, is that oftentimes 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. One easy segment to overlook in terms of growth is their cryptocurrency segment as well.

37:15I know a lot of our listeners aren't into cryptocurrencies and neither is Petrfee, 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. 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.

37:51However, 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. This business-to-business service powers many financial institutions behind the scenes, expanding Interactive Brokers' reach beyond its direct retail and institutional clients.

38:35Overall, 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. 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.

39:11In addition to being the low cost 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 moats over time. 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.

39:46Today, they have over 4.1 million accounts. Unfortunately, they don't provide a breakdown of the accounts by region and whatnot. 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 SG &A line item, which includes their advertising expense, is just 5 % of revenue. This is a very good sign for investors because they're able to generate growth simply by having a superior offering in the market.

40:26Most 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 join their platform. 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.

41:02What'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 90-90-90 principle, which states that 90 % of retail traders lose 90 % of the value of their account in 90 days. While reality might not be quite this bad, I believe that there's likely some truth to it as investors on Robinhood tend to trade more often and haven't developed a sound investment philosophy.

41:42And 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 lower trading costs. On the flip side to Robinhood, IBKR attracts a more sophisticated investor that tends to make money in the markets over time, and they understand the importance of trading costs. So investors naturally gravitate to the lowest cost provider.

42:20I 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. 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 is 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 leave, which you could argue they aren't looking for customers that want the best user interface, so they're attracting a certain type of investor on their own.

43:07I should also mention on the previous point about interactive brokers attracting more of a sophisticated investor. They're, of course, attracting the gambler type of investors as well, and some of these non-sophisticated types of investors. So as with many things in life, it's not totally black or white. 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 assisting existing customers.

43:41I 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. 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 quite well for me. But I also 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 placed basic currency trades and just basic buy and sell orders on stocks. I also checked with a couple of members of our Mastermind community.

44:16So one of our members is a member from Dubai. 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, really appreciates the broad access to markets all around the world, seemed to have no issues with it. I was chatting with one of our other members the other day. 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.

44:50So take that for what it's worth. It sort of surprised me that Goldman Sachs 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 just be the best option for customers. 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. So when I look at the business's moat 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.

45:27So I'm going to go down the list here and mention a few that apply to interactive brokers. So scale economies. 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. Let's take a quick break and hear from today's sponsors. Spending my days digging through the financials of the world's best businesses, and one thing becomes obvious fast.

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50:04So 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 counter positioning at play, let's compare and contrast the offerings of Charles Schwab and Interactive Brokers and the pros and cons of each for customers. 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 beginner-friendly and it's easy to use. And they also offer wealth management and advisory services, as well as in-person branches, and they have$0 stock and ETF trading.

50:44Their 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. 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-cost, 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.

51:28So 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 innovator's 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 switching costs. So this one sort of cuts both ways.

52:03Once 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. since they're growing accounts so fast. You can see that many customers see value in their service, even in the light of the switching costs. Someone like 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.

52:36They're not doing a lot of marketing. They have pretty subpar customer service, and that certainly doesn't help with the brand. But I think it's worth mentioning here that it might play a smaller role relative to some of these other ones. 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.

53:09I'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? Peterfi has shared that he sees strong potential for growth both in the US and internationally. Today, around three-fourths of the revenue does come from the US and Peterfi sees the number of accounts growing substantially well into the future. So right now, they have their sights 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.

53:44I 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. 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. International customers also place a high value on broader market access, which also plays to their favor.

54:22And US investors, 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 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 is led by Thomas Pederfee, no longer the CEO, but he's still very involved in the business and is 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.

54:55Pederfee understands the brokerage business as well as anyone and has been through multiple cycles and navigated a number of different crises. And as a side note, I sort of assumed that IBKR was not in the S &P 500 since Peterfee owns so much of this business. I think there's actually some rules around float and whatnot and how many shares are trading. But it turns out that 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 under-followed. Perhaps that's part of the reason why the stock's done so well as of late.

55:28Share repurchases for the business are practically non-existent and are likely difficult because Pedrify 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 Pedrify does see opportunities to redeploy capital internally by enhancing their existing offerings, adding new offerings, and entering new markets. And like other founder-led 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.

56:03We 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." During the banking crisis in early 2023, many firms got caught off guard as interest rates swiftly rose in the value of long-dated treasury bonds fell. But Interactive Brokers 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 short-dated bonds, rolling these bonds over at 30 days maturity or less.

56:38So 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. So since the start of 2020, shares of Interactive Brokers are up 6x, while shares of Charles Schwab are only up 2x.

57:12The 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. And this should play to Interactive Brokers' favor should high return opportunities present themselves in the future, such as making an acquisition 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. The current CEO, Milan Gallick, he joined IBKR in 1990 as a software developer after being recruited by Pederfi.

57:50The 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 Pederfi and the culture he's built. 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, Pedderfy earned$750 ,000 and wasn't given any shares as a bonus.

58:27In the footnotes of the proxy statement, it shares that Pedderfy's salary is capped at 0.2 % of net income. The CEO earned a total compensation of$17 million, and the CFO earned around$6 million. When I compare these amounts to competitors like Charles Schwab and Robinhood, 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. 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.

59:07This seems well aligned with common shareholders as it focuses on a combination of growth, profitability, and efficiency. As a result of their compensation arrangement, the management team, with the exception of Pedrfee, 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 facing. This is good in the sense that they highly value being a tech-enabled platform and being highly efficient. But since Pedrify 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.

59:46But it's pretty hard for shareholders to complain that this is a$120 billion company that's reported growth of 32 % in their number of accounts in the most recent quarter. Next, let's talk about the valuation and risks. To be frank, the valuation is probably my least favorite thing about this business. The market certainly likes this stock in 2025. The market cap of the company as of the time of recordings around 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 fairly high for many value investors, let's be honest.

1:00:23But 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, 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 earnings 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. In September, they cut rates by 25 basis points, and in October, they cut by another 25 basis points.

1:01:01So 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. 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 doesn't have that war chest set aside.

1:01:38So think of a company like Berkshire Hathaway, 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. 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 re-rate to where it has historically been, closer to 20.

1:02:20Overall, 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 and earnings over the long term. 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 there's a correlation between broadband internet access and higher stock market participation.

1:02:59So 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. Peterfee has shared that he sees continued growth in accounts of 30 % per year without really any advertising. If they decide to pull the lever on advertising and really crank up their growth a bit, we could see growth of 40 % or more in some years, which is pretty crazy to think about.

1:03:40They certainly have the capital to spend on advertising if they wanted to. 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 Pedderfy 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. 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.

1:04:18For 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. And Pedrafi has also shared that they do not anticipate getting into the sports betting industry, but perhaps that will be an area that they 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. IBKR is deeply tied to overall market activity and investor sentiment.

1:04:53So in a prolonged economic downturn or bear 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, 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.

1:05:30If we go through a bear 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. So in just a few months, the stock dropped by nearly 40 % during the tariff tantrum before recovering and starting to make new highs. And IBKR has likely seen a number of newer investors who are treating the stock market more like a casino.

1:06:02This could lead to inflated account numbers. When markets fall and accounts just get wiped out, people are using too much leverage, 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 five 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 Pederfee. He's still highly involved in the business. 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.

1:06:39By now, I think he's put a really strong team in place, but we shouldn't assume that they will be the same business without him as he's the founder and he's made this business his life's work. It also can be ignored that Pedrafeet 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. 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.

1:07:17This is one of those looming risks that's really difficult to quantify. In light of all this, I decided to weight this stock a 2 % position in my own portfolio. 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 five to 10 years into the future. 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 five to 10 years.

1:07:58Currently, their growing account's around 30%. That's a fairly accelerated growth relative to much of their history. And in the most recent earnings call, Peterfi mentions that he does expect this high level of growth to continue for the foreseeable future. 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 five years or so. I also like to invest alongside some of the greatest business people in the world.

1:08:35So Peterfi, 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. 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 interactive brokers. Before I let you go, I just wanted to mention some of the calls we have coming up with our TIP Mastermind community.

1:09:12For those not familiar, the Mastermind community is a place to connect with high-quality 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. 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. Another member has compounded at over 30 % per year over the past decade.

1:09:48In generating these really high returns, he's actually been utilizing leaps and long-dated options. So a lot of our members are interested in learning more about that strategy. Both of these presentations will be 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 Brodersen and Kyle Greve will also plan to host a year-end portfolio review as well. To apply to join the community, you can visit theinvestorspodcast.com slash mastermind. That's theinvestorspodcast.com slash mastermind.

1:10:26That wraps up today's episode on IBKR. Thanks so much for tuning in. I hope you got some value out of this 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 clayattheinvestorspodcast.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. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com.

1:11:03This show is for entertainment purposes only, before making any decision, consult a professional. This show is copyrighted by The Investor's Podcast Network. Written permission must be granted before syndication or rebroadcasting.