25 Million New Brokerage Accounts (EP.240)

Episode Summary

Executive Summary: The episode examines ARK Invest’s boom-and-bust, arguing that retail trading remains resilient even after 2020–21 mania. The hosts also discuss broader market lessons from Aswath Damodaran on data overload and mean reversion, then cover inflation, housing, Netflix/Prime pricing, crypto, and major earnings from BlackRock, JPMorgan, Robinhood, and Silicon Valley venture funding. Throughout, they stress context, behavior, and incentives over simplistic headlines.

Main Topics: ARK Invest’s rise, fall, and investor behavior (Priority: 5/5): The hosts analyze ARK’s performance since inception and the huge swing from peak outperformance to recent drawdowns. They argue the fund’s deterioration is less about a single manager mistake and more about money-weighted returns and crowd behavior. Retail trading persists beyond the pandemic (Priority: 5/5): They challenge the idea that retail participation would disappear after lockdowns, citing continued brokerage-account growth and sustained trading volumes. The discussion suggests retail investors are still active, though possibly in different names and strategies. Lessons from Aswath Damodaran: data, mean reversion, consensus (Priority: 4/5): They review Damodaran’s ideas that more data is not always better, data doesn’t always provide direction, mean reversion in valuations is not a reliable investment rule, and crowds can be wrong. The hosts use these points to critique overconfidence in market forecasting. Inflation, retail sales, and housing dynamics (Priority: 4/5): The conversation covers unusually strong retail spending, the difficulty of measuring inflation with broad averages, and why housing prices can keep rising even when mortgage rates rise. They emphasize that consumer behavior and life-cycle demand often overpower textbook rate effects. Streaming, subscriptions, and price sensitivity (Priority: 3/5): They discuss Netflix, Amazon Prime, and broader subscription pricing, focusing on the value of ease-of-use, the stickiness of services, and how much price increases consumers can tolerate before canceling. Crypto’s middlemen and adoption debate (Priority: 3/5): They debate whether crypto actually disintermediates finance, noting that large crypto fortunes and exchanges suggest middlemen still capture value. They acknowledge both hype and premature skepticism can be misleading. Earnings and market structure: BlackRock, JPMorgan, Robinhood, and Silicon Valley (Priority: 4/5): The hosts highlight BlackRock’s scale, JPMorgan’s deposits/technology spend, Robinhood’s losses and valuation questions, and a shift in tech hiring and venture capital beyond Silicon Valley while the Bay Area still dominates funding.

Key Arguments: ARK’s collapse in relative performance is dramatic, but its long-run return since inception remains positive, so ‘grave dancing’ misses context. The biggest driver of ARK’s investor pain is money-weighted returns: performance was great before the fund attracted massive inflows, which diluted future returns for entrants. Retail trading has not faded after reopening; the persistence of brokerage-account openings and trading volume shows trading is addictive and sticky. More data can create confusion rather than clarity; investors can drown in metrics and still make worse decisions. Mean reversion is not a dependable valuation framework because market valuations do not revert to a fixed long-run average in any precise way. Retail sales and housing activity stayed far above trend, helping explain inflation and supply pressure better than isolated monthly datapoints. Mortgage rates rising does not necessarily depress home prices because household formation, scarcity, and urgency can dominate financing costs. Crypto has not eliminated middlemen; instead, large exchanges and founders have become extremely wealthy, showing intermediation still exists. Netflix’s main advantage is not just content but user experience and frictionless streaming, which supports pricing power. BlackRock, JPMorgan, and other financial giants continue to scale by leveraging assets, deposits, and technology spend, while Robinhood’s business remains fragile in a rising-rate environment.

Data Points: ARK annualized return since inception: 23% per year - Calculated through February 2021 using YCharts ARK annualized return since inception at earlier peak: 40% per year - Referenced as the figure from about 11 months earlier ARK vs. QQQ outperformance: 500% in total to 30% in total - Relative outperformance swung sharply over 11 months Retail brokerage accounts opened in 2020: 10 million - Wall Street Journal discussion of retail takeover Retail brokerage accounts opened in 2021: 15 million - Continued growth in new retail participation Retail share of daily trading volume at peak: 40% - JPMorgan estimate on peak days Retail investors’ stock/ETF purchases in 2021: $300 billion - VandaTrack estimate Increase versus 2019 retail stock/ETF purchases: 7x more - Comparison of 2021 to 2019 flows ARKK assets in 2016: $12 million - Illustrates how small the fund was before the boom ARK assets by end of 2018: $1 billion - Early growth before mass inflows ARK assets tripled in 2020: to $6 billion - March to July 2020 growth phase ARK inflows Sep 2020 to Mar 2021: $13 billion - Morningstar estimate of investor inflows ARK investors’ aggregate outcome: Lost money since 2014 launch - Simon Lack estimate despite strong headline returns Global stock market value: U.S.: $52 trillion - Aswath Damodaran’s market-cap comparison for end of 2021 Global stock market value: China: $19–20 trillion - Damodaran’s comparison surprised the hosts Money in JP Morgan investment accounts: $3.1 trillion - Scale of assets managed by the bank BlackRock assets under management: $10 trillion - Noted in earnings discussion BlackRock full-year net inflows: $540 billion - 2021 earnings result BlackRock 2021 revenue growth: 19.5% - Year-over-year revenue increase BlackRock employee compensation and benefits growth: 19.8% - Roughly matched revenue growth BlackRock net income growth: 70% - 2021 earnings result JP Morgan average loans growth: 6% - Bank earnings discussion JP Morgan average deposits growth: 17% - Bank earnings discussion Median household checking account balance: 50% higher - Summer 2021 versus pre-pandemic JP Morgan tech spend: $15 billion - Annual spending with guidance for next year Robinhood losses over last nine months: More than $3 billion - Used to question sustainability of business model Silicon Valley venture funding in 2021: $105 billion - CB Insights State of Venture Report Netflix standard plan price increase: $14 to $15.50 per month - Current price hike under discussion Netflix stock performance since mid-2018: +43% - Compared with QQQ and S&P 500 over same period QQQ performance since mid-2018: +122% - Used as benchmark against Netflix S&P 500 performance since mid-2018: +80% - Used as benchmark against Netflix Amazon Prime members with two-year tenure: 98% renewal rate - Evidence of service stickiness Housing affordability survey result: 47% - House hunters saying higher mortgage rates would increase urgency to buy Mortgage rate example: 8.7% to 16% - 1977 to 1980 period cited in housing discussion Housing prices during that rate increase: +50% - Illustrates that prices can rise even as rates increase Retail sales change in December: -1.9% - Monthly miss mentioned in the macro discussion Retail sales year-over-year growth: 17% - Despite monthly decline, spending remained far above year-ago levels Toronto active listings: ~3,000 - Compared with realtor count to show market imbalance Toronto active realtors: 60,000 - Used to illustrate crowded housing-market participation

Pivotal Quotes: "No matter how desperately you chased past performance, you will never catch it." — Simon Lack (quoted by the hosts): Used to explain why ARK investors can lose money even when the fund’s headline returns were strong "More data is not always better than less data." — Aswath Damodaran (quoted/discussed by the hosts): Introduced as a core investing lesson about information overload "Mean erosion works until it doesn’t." — Aswath Damodaran (paraphrased by the hosts): Used in a critique of simplistic mean-reversion arguments for markets and valuations

Implications: Investors should focus on behavior, cash flows, and context rather than chasing performance or overfitting narratives. Retail trading, housing demand, and market leadership can persist longer than expected, while hype-heavy business models and simplistic valuation rules often disappoint.