Free Trading (EP.105)

Episode Summary

Executive Summary: This episode focused on market reversals and the growing pressure on fintech/private-market business models. The hosts discussed momentum vs. value rotation, discount brokerage fee compression, Robinhood’s competitive moat, private-market overvaluation, Goldman Marcus’s losses, narrow stock-market leadership, high health insurance costs, and broader lessons about incentives, IPOs, and investing behavior.

Main Topics: Momentum, growth, and value rotation (Priority: 5/5): The hosts examined whether recent stock performance signaled a reversal in momentum investing and clarified that growth and momentum are not the same. They used one-year return buckets to show that last year’s best performers became September’s laggards, while prior losers rebounded sharply. Brokerage commissions going to zero (Priority: 5/5): Schwab’s move to eliminate commissions was framed as inevitable due to competition from Robinhood and other zero-fee entrants. The discussion covered scale advantages, lost revenue, layoffs, and why major brokerages can absorb the shift better than smaller players. Robinhood, fintech, and private-market repricing (Priority: 5/5): They argued Robinhood and similar fintech firms may face valuation pressure as incumbents copy free-trading features. The conversation broadened into a critique of private-market valuations and the idea that public markets are challenging fintech narratives. Private equity and venture capital returns (Priority: 4/5): The hosts discussed how venture returns are highly concentrated in a small number of top funds, making broad VC access far less attractive than many assume. They noted endowments and foundations may not be getting the returns they expect despite access to elite managers. Goldman Marcus and consumer banking economics (Priority: 4/5): A Wall Street Journal story on Goldman’s consumer banking push highlighted heavy startup losses, credit losses, and expensive product launches like the Apple Card. The hosts were cautiously optimistic but skeptical about execution and profitability. Market concentration, healthcare costs, and personal inflation (Priority: 4/5): They highlighted how much of the bull market’s gains have come from a handful of tech giants and contrasted that with rising real-world costs like healthcare, which consumers experience as inflation even when official measures remain subdued. Media, movies, and podcast-side banter (Priority: 2/5): The episode also included lighter discussion of films, the Sopranos, reading habits, an electric fly swatter, and various personal anecdotes, which served as a recurring human-interest layer throughout the market commentary.

Key Arguments: Growth and momentum are not identical; recent declines in prior winners and rebounds in prior losers suggest a mean-reversion or momentum crash dynamic, not necessarily a durable regime change. Schwab’s fee cuts and Interactive Brokers’ zero-commission products show commission-free trading was inevitable because larger firms have the scale to cross-subsidize it. Robinhood’s valuation could be pressured if incumbents can offer the same core service for free; the public market is effectively forcing a repricing of private fintech assumptions. Private-market returns are heavily skewed toward top-tier funds; without access to elite managers, VC and PE performance can be poor, and endowments may not be as advantaged as assumed. Goldman’s Marcus losses show that consumer finance is expensive to build and that credit quality matters more than brand ambition. The bull market has been extremely narrow, with a disproportionate share of gains concentrated in a few mega-cap tech stocks. Official inflation measures can understate lived inflation because healthcare, education, and other household costs have risen sharply. A lot of IPO and venture upside is captured on day one, meaning much of the easy money goes to the private owners and early traders rather than public investors.

Data Points: Roku 12-month return vs. September return: Up 150% over the prior 12 months; down 30%+ in September - Used as an extreme example of momentum reversal in the one-year return buckets. Number of stocks up 50% over prior 12 months: 39 stocks - Count in the Russell 1000 breakdown that represented prior winners. Number of stocks down 50% over prior 12 months: 42 stocks - Count in the Russell 1000 breakdown that represented prior losers. Schwab active brokerage accounts: 12.1 million - Shown to illustrate Schwab’s scale and ability to absorb lower commissions. Schwab corporate retirement plan participants: 1.7 million - Part of the scale argument for why Schwab can compete on free trading. Schwab client assets: $3.7 trillion - Used to show the company’s size and cross-subsidy capacity. Estimated revenue hit from commission cuts: $90 million to $100 million per quarter - Schwab CFO estimate for the impact of pricing reduction. Estimated revenue hit as a share of net revenue: 3% to 4% - Context for the modest near-term financial impact of zero commissions. TD Ameritrade stock move: Down 21% - Market reaction to Schwab’s announcement and its implications for competitors. Brokerage stocks performance: Down roughly 35% to 40% over the past 12 months - Broad weakness across brokerage names including Schwab, TD, Interactive Brokers, and E-Trade. Goldman Marcus total losses since launch: $1.3 billion - Reported losses for Goldman Sachs’ consumer bank since 2016. Marcus credit write-ups in 2018: $156 million - Illustrates ongoing loan performance issues at Marcus. Marcus credit write-ups in first half of 2019: $155 million - Shows losses continued into 2019. Marcus losses as share of loan book: 5.5% - Compared with Discover Financial Services at 4%. Apple Card launch cost: $300 million - Amount Goldman reportedly spent building the Apple Card partnership. S&P 500 market cap growth since 2009: More than $18 trillion - Used in the anatomy-of-the-bull-market discussion. Share of market cap gains from tech: Three of every ten dollars - Shows tech’s outsized contribution to post-2009 equity gains. Combined value of Apple, Alphabet, Microsoft, and Facebook: From over $300 billion to more than $3 trillion - Illustrates concentration of market gains in four stocks. Annual health coverage cost: Over $20,000 - Employer survey figure cited from Bloomberg. Average worker family-plan contribution: $6,000 - Portion employees pay toward family coverage, even with employer subsidies. Private market fundraising/returns example: $21 billion invested, $85 billion returned by top VC funds; $160 billion invested, $85 billion returned by the rest - Kauffman Foundation data cited to show return concentration in top venture funds. Harvard endowment return: 6.5% - Referenced in a muted year for university endowments. Big school endowment average return: 5.8% - Average return for major university endowments for the year ended June 30. 60/40 portfolio return: 9.4% - Mentioned as a comparison point to endowment returns. Instagram share of Facebook ad revenue: 22% - Shows Instagram’s importance within Facebook’s business. Instagram share of new ad dollars: 54 cents of every new ad dollar - Highlights Instagram’s growth contribution to Facebook.

Pivotal Quotes: "In order for this to continue, here's what you're going to have to see." — Ben Carlson: Discussing how pundits try to explain momentum crashes after the fact. "We don't want to fall into the trap that a myriad of other firms in a variety of industries have fallen into and wait too long to respond to new entrants." — Schwab CFO (quoted by hosts): Explaining why Schwab cut trading commissions to zero. "Private valuation just got way out of control. And now the public markets are calling bullshit." — Michael Batnick: Summarizing the hosts’ view on private-market repricing and fintech valuations.

Implications: The episode argues that zero-fee trading, fintech, and private-market hype are being pressure-tested by scale, competition, and public-market discipline. Investors should focus on business economics, concentration risk, and real-world costs rather than narrative alone.