Thomas Peterffy: Trump Is Smart & Rational, How I Built a $100bn Business, and Why the Bubble Is Still to Come

0:00I grew up in horrible conditions in socialist Hungary after the Second World War II But I basically consider that as a lucky break because that gave me a unique insight into the virtues of capitalism and the evils of socialism. It's very, very simple. You just try to give a much better deal to your target customers than they can get anywhere else. And that's the secret to business, right? Any business. It was very clear to me that people were misunderstanding Trump and his idea about instituting tariffs. Because I thought that his idea was completely rational. He's not a madman. He's a smart guy.

0:53We are not in a bubble yet, but we will be. Welcome to the Master Investor podcast with me, Wilfred Frost, where we celebrate and learn from the success of some of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge. We're recording this on Thursday, the 31st of July. My guest today is a titan of markets globally, particularly in the United States, a digital trading pioneer who founded Interactive Brokers in 1978 and has built it to sit at a market cap of above$110 billion today at an all-time high, still owning some 75 % of the company he founded decades ago.

1:47I am delighted to welcome the chairman of Interactive Brokers, Thomas Pettervie. Thomas, great to see you. Long time no speak. Great to see you too. That's true. We have been not speaking for some time, right? We have indeed. And obviously, I left CNBC three and a half years ago. And I have to admit that the growth your company has had since then slightly passed me by until I was preparing for this interview. Back when we used to talk, I had in my mind IBKR was a 20, 25 billion dollar market cap. It's up four or five times since then. What an amazing run. We're going to go deeper into the company in a moment.

2:33But just quickly, what has driven the last three or four years? So it is not that the company has done anything different. It is Wall Street that suddenly began to recognize interactive brokers for what it is. In other words, our growth has been very, very steady between 25 % and 35 % roughly. for many many years and it is just chugging along at the same rate and for a long time we were ignored and suddenly we are extremely popular I it's hard to understand why well congratulations and I want to go a bit further back because some of our listeners those in the US but but certainly those here in the UK don't know your your backstory you arrived in America for the first time from Hungary age 21 and I think I'm right in saying you didn't speak English at that point and obviously I did not I did not and I still don't speak it too well no that's not fair you speak it better than than than I do but then but but the key point being that I wanted to get to Obviously, you're worth$75 billion or so today.

3:51You built a$100 billion plus company. Could you have done that in any country other than America? I doubt it. No, no, that's not very, not possible, no. What I wanted to pick up on because of that is that you've spoken up about capitalism against socialism and communism that you experienced in your youth in Hungary many times. And my question on that is the fact as an American today, you need to speak up about the benefits of capitalism. But do you think that America needs to be reminded of the benefits of capitalism today or not? Absolutely. Absolutely. Yes. It's a very, very sad situation that we have now among many young people, and it is basically, I think it's the issue of the people who are going into teaching.

4:53they are not very ambitious they are not very practical and they are envious of the people who go into the productive businesses and do a lot better and there is not much of a transformation between academia and business I think there should be more movement there and that would be better. Do you think that things have gotten too unequal though in America? Well, yeah, I mean, but that is due to the technology. So technology as it evolves nowadays, it favors the concentration of businesses into a few hands. I think that probably will change at some time in the future. So we're all exposed to the technology that is prevailing at any one time in society.

6:03If I may go back, I grew up in horrible conditions in socialist Hungary after the Second World War. But I basically considered that as a lucky break because that gave me a unique insight into the virtues of capitalism and the evils of socialism. Because it gave me an opportunity to see the West and capitalism from the outside, behind the Iron Curtain. We were deprived of any information, current information, because there was censorship. So we couldn't read anything because the state was very worried about the people behind the Iron Curtain finding God that there is a better life on the other side of the Iron Curtain.

7:00So we were prohibited from reading anything other than we were allowed to read the classics. And I basically learned about capitalism from the classic English and French writers. So like Dickens and Balzac and Zola. And that gave me a very unique view of how capitalism worked. And so those books taught me that a successful business is basically based on fulfilling the needs of other people better and cheaper than other people do it. Success is always based on using the latest technology. I was very lucky to become a computer programmer when I came to America in the 60s, and that was the technology that I decided I will use to do whatever business I get into.

8:15And obviously you got into applying that computer science to stock trading and were one of the digital trading pioneers, as I said, it's more commonplace now. The growth in your accounts has been steady for decades, but over the last five years in particular, you've signed up about 35 % new accounts per year. You mentioned there the fact of delivering the best for your customers at the lowest cost. That is really your guiding principle, right? If you give them the best possible... It's very simple. It's very, very simple. You just try to give a much better deal to your target customers than they can get anywhere else.

9:07And that's the secret to business, right? Any business. I guess when you grow that quickly, as you have the last five years, People wonder how long it can last. But what I think is striking is that you have, I think I'm right in saying about 5 million customers, but someone like Charles Schwa. Four. We have only 4 million customers. Four million customers. Rob has 10 times as much as we do. Right. So there's a lot of growth for you still to come. And Robinhood has six times as many as we do. So there are a lot more customers, but our customers so as i said our customers are not really retail our customers are professional traders so our customers are the people who work at large banks and trading firms and even though we do take we do take anybody anybody who wants to come on to our platform can do so but the platform is tailored for sophisticated individuals who understand the market structure and understand the importance of excellent executions and low interest rates that we charge and high interest rates that we pay on deposits.

10:33because right now we are going through a very strong bull market. But on the long run, performance has to do with getting your costs down. So you said we're in a bull market. Let's talk about it. You correctly called for a bounce after Liberation Day back in April when the tariffs were initially announced. So kudos on that call. Why did you think we were due a bounce back then? So it was very clear to me that people were misunderstanding Trump and his idea about instituting tariffs, because I thought that his idea was completely rational. He's not a madman. He's a smart guy. Maybe his delivery has something that should be changed.

11:32But he's a good intentioned person and he's very, very smart. So the idea that he was out there to destroy the economy of the United States, that was just crazy. and and these people all the large institutional investors were in echo chamber complaining to each other oh my god what's going to happen here and so it was clear to me that that was i i it just so happens that i i was on television on the 6th of april and the market was really cratering and it was around 38, 48, 48, 50 was on the SMP. When I said that this is the greatest buying opportunity of my lifetime. And it just happened. That just happened to be the low point of the market that afternoon.

12:38Obviously, we've rallied very hard since then, Thomas. Do you now worry in the other direction or not? I'm not worried because I just see smooth sailing going forward for quite some time. What about AI? Do you think that we're in a bubble there or not? The big AI stocks? Not yet. We are not in a bubble yet, but we will be. So basically, if you look at what happens in a bubble, what happens is that there is a new technology and everybody believes that the fallout, the result of the new technology will be incredible and it's coming very, very soon. but then it inevitably turns out that it is not coming as soon as you expected and people get disappointed and they suddenly don't like anything having to do with the new technology and they just trash the whole thing but that's not true the new technology is always eventually going to become very very useful now as far as AI is concerned where the participants' behavior can be correctly predicted.

14:00AI is fantastic. And if you look at material sciences and biology and chemistry, where the participants are basically molecules and atoms, their behavior can be statistically extremely precisely predicted. So I think the useful fallout for AI in the near term will come in biology and material sciences and those areas. So general AI, general intelligence, I think that's far away. Do you get worried by the size of the debt and the deficit or not? Well, that depends, in my mind, that depends on the political situation. So if the country is politically peaceful, then all the deficit means is that the value of the dollar continues to deteriorate.

15:08and so you know what costs a dollar today will cost$10 three years from now that's okay that's what happened in the last 50 years since I came to America but as long as the country is politically stable and the United States appears to be more stable than any other country in the world, I think it doesn't matter. Now, if political instability begins, then that is a problem because then the deficits, of course, are unmaintainable. There's sometimes a debate in the marketplace about the smart money versus the dumb money, in inverted commas. obviously you've explained the base of your client base but you have a lot of retail clients too what do you what do you think about that debate when people try and suggest institutional is smarter than retail or not do you think that there's legitimacy in that or not i think that's there's too too much generalization so i'm talking about individual customers So some individuals are moms and pups who know nothing, and there are people, unfortunately, who go out and try to take advantage of them, and they lose money.

16:48On the other hand, there are institutional traders who also don't know too much. so it's basically the people in between the individuals who do hard work who inform themselves who analyze stocks and who who really try to predict the future it's all about predicting the future you know there are reasonable there are reasonable scenarios of what can and cannot what happened in the future, and which companies trying to figure out which companies will be the best, will be able to take advantage of what the future is going to look like. Just a couple more questions on the broad markets, if that's all right.

17:38What about ETFs and concentration risk? Is that something that is brewing a problem for down the line?

17:50it is possible that uh there'll be problems with etx because it's it's sort of an an investing on autopilot and uh but i i wouldn't really worry about that on the short term but on the longer term there it could be a problem, but not yet. In terms of crypto, is that something that you are moving into in a more meaningful way, that you're happy to be a follower? Well, we have to move into it because the world is moving into it, and it cannot be left behind. So even though I'm personally not a crypto enthusiast. I completely believe that whatever the world is doing, we have to service our customers.

18:51So that's what we do. Why aren't you a crypto enthusiast? Because I have trouble identifying the volume. And maybe Bitcoin is okay. But I mean, it's difficult to conduct business in because it's too consuming of power and technology and other coins. I mean, stable coins are fine. That's simple. But that's basically equal to the dollar. So it's not crypto. It's just blockchain. So one newer trend that I think you're quite bullish on is prediction markets. The likes of Polymarket, for example, have taken off. And this is a service you offer as well now. Absolutely. So for a long time, well, when I went into this business many, many years ago, I went into the options business.

20:02And options have all to do with probabilities, probabilities of future stock prices. And once you realize that, then you realize that our entire life basically depends on what is the future environment that we are going to live in. So, you know, probabilities and evaluating the likely outcome of any event, any future event, is the proper way to have a good life, right? You have to constantly build, try to predict the future and build for it. Build your life around that prediction. So it is very important. So therefore, our forecast trader is basically a very good platform for people to come on to and see what the consensus predictions are for whatever relevant questions are important.

21:17What is your prediction tools or you, more importantly, expect for the midterms in the US? Well, interestingly enough, I don't agree with this, but the prediction markets say that chances are 68 % that the House will become democratic after the midterms. and similarly chances are very high, equally high, that the Senate will remain Republican. And when you say you don't agree with that prediction, you think he'll hold both houses? I believe that chances, I'm not sure, but chances certainly cannot be 68 % that the Democrats will win. It's crazy. So it's a very good bet to buy an O for 32 cents, right?

22:1532 cents on the dollar, plus you get interest at 3.8 % on the value of the contract. So if the contract moves in your favor, you're doing very well. I'm interested there because it's an area that you could argue the UK in a different format was ahead of, but we'd call it betting. And there's a big industry here before it's obviously been legalized in the US. It's not as fluid as that. And I just wanted to talk about your take on some of the other countries that IBKR are pushing into and growing fast in. Is there any other nation that embraces trading broadly, all types of trading, as much as the United States or not?

23:05Well, maybe not quite as much, but certainly in Europe, England is one of the countries where trading is very popular. and of course trading is much more popular in Asia and in the Middle East. So in the Middle East is interesting because it's a recently evolving situation there because those folks have not been as commercial as people in America or Asia have been. But so, yes, the Chinese people are very, very interested in trading. And do you foresee most of your growth in the next five years being in the U.S. or overseas? I think it will be the U.S. probably more, but it will be all over the world.

24:06So because let's face it, I mean, you know, if we are right and capitalism is going to evolve everywhere and will make people richer, those people will have substantial savings and therefore they will invest. And so logic would tell you that investing will become more of a force because it's new, more of a force outside of the United States, where inside the United States, people have been investing for a long time now. So I want to kind of get to our final section, four or five questions left, Thomas, and sort of tips for our listeners almost. And I think it's fairly rare, not totally rare, but fairly rare that you have a great technologist, a great computer scientist, who is also a great leader.

25:08Do you think those require very different skill sets? And which are you better at? So I don't know if I'm a great leader. I always had a very simple view of, first of all, I think you have to plan for the future. And you have to have a plan that is rational. And as I said, my plan has always been to try to do what I already see other people doing, but try to do it better and using technology to achieve that. I just happened to land in the brokerage business, but I think that would work for anything. If you stick to your conviction and your conviction is correct, then you will eventually succeed as long as you can do it better than other people.

26:04And if your plans are long term and you are not disappointed or get thrown out of your track because, you know, next year maybe you are not performing as well as you expected to, so what? It's a long term that matters. I've seen one phrase you've used, which I wanted to dwell on with you. You said people should use fewer words when they can. That's very true. Yes. Yes. So many times I listen to people and I just don't understand what they are saying because there's so many words. There's music to my ears, Thomas, doing various political interviews every morning on my breakfast show on Sky News.

27:02If the politicians are watching, please take note of Thomas' advice on that. The final three questions, Thomas, we always ask everyone, what's the best investment you've ever made? So I'm much more of a trader than an investor. and the way I go about my personal investments is I try to value the future prospects of companies and then I look at the current share price and the P-E ratio and the potential growth and I try to identify companies that are overvalued versus companies that are undervalued. So say if I see a company that's undervalued, I accumulate a position and then I start. So Interactive Brokers has this algorithm where you can buy, accumulate a large position, especially as the stock goes down, you buy every, say, every two cents down, you buy a thousand shares.

28:17and then when it tries, starts going up, you sell it at a profit and you trade it back and forth. So if the stock is undervalued, you are fairly certain that you can keep on buying the stock as it keeps still going down and accumulate a large position and then when the stock starts going up, you start selling it. But as it fluctuates, you keep buying and selling. And so I prefer trading profits to position profits because I just like to trade. Well, that's probably why you built such a good trading product. Just the final question, Thomas, which can be when it comes to investing or being a business leader and building a business.

29:11What is your overriding piece of advice you have for our listeners? I think it's important to always have a plan and to have a long-term plan and to stick to it unless there is information that forces you to change it. But I think you have to have a plan. Thomas it's been a pleasure thank you so much for joining us it's been too long in between I hope we'll do it again thank you very much thank you Wilfred that was of course Thomas Petterby the founder of Interactive Brokers next week we'll be joined by Larry McDonald of the Bear Traps Report the author of How to Listen When Markets Speak please remember that nothing in the Master Investor podcast should be considered direct financial advice there's more information on that in our show notes if you want to refer to them.

30:08The Master Investor Podcast is produced by Paradine Productions and Master Investor Podcast Limited in association with Birdline Media. If you've enjoyed the episode, please do subscribe and give us a five-star review. Thanks so much for listening.

30:38Thank you.