Greenhaven Road Capital is bullish on Interactive Brokers Group, Inc. (NASDAQ:IBKR), a Connecticut-based electronic brokerage firm. In its Q4 investor letter, the hedge fund discussed IBKR along with other top positions; we’ve already covered Etsy Inc. In this article we’re going to take a look at the fund’s viewpoint on Interactive Brokers Group.
Here is what Greenhaven said about the electronic brokerage firm in the letter:
Interactive Brokers (IBKR) – As a customer and long-time shareholder, Interactive Brokers occupies a portion of the Greenhaven Road portfolio that I hope Greenhaven Road occupies in your portfolio – buy, hold, and forget about. Yes, I look at the monthly metrics and listen to the conference calls and buy shares on large declines, but the best thing we can do here is absolutely nothing.
The quality of management is well into the top 1% of teams we have seen, incentives are aligned with 75%+ insider ownership, there is a very long runway for growth with no additional capital, the value proposition to customers is excellent. Interactive Brokers came back into the top 5 of the portfolio through a combination of price appreciation and share purchases.
The company continues to add new accounts at a 20%+ per year clip. If and when volatility increases and trading volumes increase, Interactive Brokers will benefit. Until investors want to pay higher commissions and higher interest rates on margin portfolios, being the low-cost provider with scale presents Interactive Brokers with a tremendous ongoing opportunity.
Interactive Brokers Group, Inc. (NASDAQ:IBKR) is a $28-billion market cap automated global electronic broker and market maker. It brokers stocks, options, futures, EFPs, futures options, forex, bonds, funds and CFDs.
For the fourth quarter of 2017, IBKR reported a $0.02 loss per share, versus a $0.05 loss per share for the same period in 2016, due to the Tax Cuts and Jobs Act which decreased the company’s earnings by $0.45 per share. It had net revenues of $515 million and income before income taxes of 364 million for the quarter, versus net revenues of $193 million and income before income taxes of $28 million for the same period in 2016. For the year ended December 31, earnings per share were $1.22, versus $1.19 per share in 2016. Net revenues were $1.70 billion and income before income taxes was $1.04 billion for 2017, versus net revenues of $1.40 billion and income of $761 million in 2016.
On the share market, Interactive Brokers Group has been delivering a solid performance so far this year – and for the past 12 months. The stock has moved up more than 17% since the beginning of the year, while gaining 81.55% over the past 12 months.
Meanwhile, a number of hedge funds in Insider Monkey’s database also see value in Interactive Brokers Group, Inc. (NASDAQ:IBKR). As of the end of the third quarter of 2017, there were 25 funds in our database with positions in the company, including Ancient Art (Teton Capital), Bares Capital Management, and Guardian Point Capital.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
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