Over the past week, four major brokerages have decided to scrap their trading commissions. In this episode of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss what it means for investors and who the big winners could be. Then Frankel gives an overview of crowdfunded real estate investing and why it's such an exciting way to invest in properties. Plus, Frankel and Moser each give their latest stocks to watch and give an update on Facebook's (FB 2.55%) Libra cryptocurrency project.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Oct. 7, 2019.
Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, October 7th. I'm your host, Jason Moser, and joining me in the studio via Skype, Certified Financial Planner Matt Frankel. Matt, is it cooling down there in South Carolina at all yet?
Matt Frankel: Yeah, it's about 75 today. It's beautiful weather here. I feel like I haven't done a Skyped-in episode in a while.
Moser: Yeah. You were in town, and then you were off last week. We had Dan on the show. Now we've got you back. We had a little bit of a stretch where we didn't have to rely so much on technology. But it's always nice to be able to have that to rely on.
We have a big show today. We're going to talk about a lot of stuff here. On today's Financials show, we're talking about the latest news in real estate and crowdfunding. Matt, you're going to go into that for us. We'll talk about Facebook's Libra chalking up a loss. We'll have more of "What's the last stock you bought and why?" Of course, we'll have a couple of stocks for you to watch for the coming week.
But first, Matt, let's jump into the big news from last week. This was news that played out on a number of different companies out there. On Tuesday last week, Charles Schwab (SCHW 1.61%) announced that it was eliminating commissions on stock trading altogether. Man, did that set off a chain of events. And by a chain of events, I mean there was a lot of selling of a lot of these big-name brokerages that we know. Just looking at some of the numbers from some of the bigger players in the space, last week, TD Ameritrade shares were down 28%. Schwab shares were down 15%. E*Trade was down 17%. Interactive Brokers was down 11.5%, all on this news. Essentially, these brokerages have now gotten to the finish line of this race to zero. We're not going to be able to really go back to charging for commissions, I don't think. It affects some businesses a bit more than others. Talk a little bit about what you thought about this news and what companies you feel like this affects the most.
Frankel: For one thing, this is an obvious win for investors. Commissions aren't usually a big part of my investment strategy. Having said that, this makes it practical to buy, say, one or two shares of stock at a time. Before, if you had just a couple of hundred bucks of cash sitting in your account, it wasn't really practical to buy one share of Apple. Now, investors can do that. It helps you maximize your investment dollars.
I think the winners of this are, surprisingly, going to be the companies that were charging the most. Let me tell you why I think that. First of all, in full disclosure, I use TD Ameritrade as my broker.
Moser: As do I.
Frankel: The product's fantastic.
Moser: It is. I agree.
Frankel: Excellent access to research. Their educational tools are the best that I've seen. And I've used E*Trade and Merrill Edge in the past, so I have some basis for comparison. Their product is hands-down the best. But it seems counterintuitive that they were charging the most, and I think they're going to be the biggest winner. So let me tell you why.
Two big reasons. One, about 25% of their revenue previously came from commissions. That's pretty much going away. It's important to note that it's not going to zero. They're not eliminating all commissions. For example, an options trade would still have somewhat of a commission. It's not going to go to zero. Let's say, just for argument's sake, they lose 20% of their revenue. They've already dropped 28%. So that's more than priced into the stock at this point. The more important point is, just to name three competitors, you have Robinhood, which has been free; Schwab, which had been charging $4.95 previous to this move; and TD Ameritrade, which was charging $6.95 previous to this move. And it made sense. Robinhood was a no-frills platform, but it was free. It catered to that crowd. Schwab had a little bit more features. A nicer platform, more research available, stuff like that. And it was mid-priced. TD Ameritrade was a premium product that you paid for. Now, you can get a premium product from a TD Ameritrade or an E*Trade without having to pay that premium.
So I see a lot of people jumping ship from companies like Robinhood to bring their assets over to TD Ameritrade. They make money off interest income. They earn some interest on people's idle cash balances, they make some money off that. They get some interchange fees from the market makers when people place orders. They have a lot of other ways to make money off of customers' assets. So, I see this being a net win for TD Ameritrade and E*Trade. I think they're going to end up getting a nice trickle-down effect from the previously discounted brokerages, because now there's no such thing as a discount brokerage. They're all zero. All the big ones, anyway. You're going to see them get a nice little stream of assets from people who were just with companies like Robinhood because they were free. If you went to a Honda dealership and they were selling Hondas and Acuras for the same price, which one are you going to buy?
Moser: That's a good point. It makes sense to me. I remember the days when commissions were $50. I remember calling my Edward Jones broker on the phone when I was younger, placing a trade and paying a $50 commission. That'll make you think. The point is, the trend has always been going toward zero. This is not something where they're just ripping the band-aid off, so to speak, and going from $50 to zero. I mean, it's been a trend that's been established over a long period of time. I guess that's why I was a bit surprised to see such a reaction in the markets. With these particular names specifically, it felt like an overreaction. I feel like these are businesses that are very well rounded, have a lot of different ways to win, vs. something like a Robinhood, as you were talking about before.
Robinhood, that's a one-trick pony. That was their thing, was zero commissions. They don't have much of a business built around that. Just because the private valuation had them at somewhere around $8 billion, we know how private valuations work out. We've watched this WeWork drama play out, obviously. And it's not the only one. I would imagine the valuation on Robinhood behind closed doors has taken quite a haircut already. I tend to agree with you. It's just a matter of making sure that they figure out other ways to find that growth.
Frankel: Yeah. I was going to say, the market should be glad that Robinhood hasn't gone public yet. You think the IPO market's had a bad year so far already? If they'd gone public before this happened...
Moser: They would not be so forgiving, I don't think.
Frankel: Right. I put out a tweet about this shortly after the news came out about, what's the value case for Robinhood? And not one person responded with something like, "Oh, I'm going to stick with Robinhood because... " Most people were like, "Now I'm going to jump into E*Trade because I can afford to." They're getting these newer investors who have $50, $100 at a time, who, previously it was only practical to invest through a company like Robinhood. They're going to get this nice trickle effect from that. There are more ways these can grow. The lost commission revenue in all cases has been more than priced into these stocks. I think this is a big win for investors. And at the newer valuation, it's a big win for the companies as investments.
Moser: Big win for investors. Of course, we're not saying, "Hey, because it's free, get out there and trade more." We're not saying big win from that perspective. Don't up your trading volume. That's obviously not the way we invest here. But you are getting your trades for free now, which is nice. Just, obviously, don't let this encourage more short-term trading behavior. We've seen how that works out. It typically is not good. It's certainly not in line with the way we invest.
Like you, Matt, I don't make a lot of trades. I don't really consider commissions when it comes to the trades or the purchases or sales that I'm making because I make so few, and typically I try to be a net buyer of stocks anyway. When you look at it from that context, it's not going to kill either one of our bottom lines. It's not going to make either one of our bottom lines all that more robust. But I do feel like, when you look at these four businesses that I talked about earlier there -- TD Ameritrade, Schwab, E*Trade, and Interactive Brokers -- you can almost, dare I say, take a basket approach and take advantage of the market's short-term pessimism here. These are four very proven businesses with models that seem to work. It did strike me as a bit of an overreaction. I guess time will tell. But certainly, it's a new day for investors. I think that's a good thing.
Frankel: Definitely. Like I said, I think it's a big win for investors. In terms of being a stock investor and being an investor in these businesses, if you're looking for something to watch -- it's not my One to Watch this week, but I'll go ahead and add companies like TD Ameritrade and E*Trade to my watch list on the back of this news.
Moser: All right. Let's jump into real estate. Matt, as listeners remember, you are working on one of our newest initiatives here at The Motley Fool in Millionacres. You're helping bring the world of real estate investing to our members in new ways. Real estate investing is very much in line with the financial stuff that we're talking about every week. We're trying to incorporate more of this into our shows. It's a fascinating subject. It's one that I enjoy talking about. It's one that you know a lot about. This week, we wanted to talk a little bit more about crowdfunding's role in real estate, how it works, and how this plays out for everyday investors like our listeners.
Frankel: Sure. I'll give you a simplified explanation of how this works. Let's say that an experienced real estate developer finds this rundown hotel in an old part of town and can buy it and renovate it and seize the opportunity to make a big profit. Let's say that they can acquire the hotel for $10 million. A bank might be willing to fund, say, $7 million of that. If this developer, which is known as the sponsor in this, would not want $3 million of their own capital tied up, they can approach investors to raise the money from individuals. They usually put up a little bit themselves. They can use investors to raise the rest of that money in exchange for a share of the profits.
Similar to a REIT, except a few big differences. One, it's a single asset, usually, like a hotel that they will buy and renovate and try to sell it, say, five or seven years later. That's a usual time frame. That's the other big difference. There's usually a planned exit strategy.
There's a few reasons you would want to do something like this. No. 1, the return potential is off the charts compared to general stocks. A lot of these deals target rates of return in the 15% to 20% range. Although it's a pretty new industry, the early indicators are that it's pretty successful. On CrowdStreet, which is one of the most popular platforms, I think all but two or three of their deals that have been completed so far have beaten 14% internal rates of return. A handful have done over 20%. There's money to be made here. That 20% rate of return would double your money in roughly four years.
Moser: Not too shabby.
Frankel: No. There's a lot of money to be made here. It's a good way to add diversification to your portfolio. This is a type of real estate that, until recently, had been inaccessible to individual investors on a single-property basis. You could buy a hotel REIT, but --
Moser: That's a lot of different hotels, usually.
Frankel: Right. It's not buying one asset with some way to add immediate value and then flip it at a profit. That's been inaccessible to individual investors for most of history.
There are some drawbacks to this. Obviously, it's a riskier asset. Nothing that can produce a rate of return of 20% or so is without risk. This is certainly not an exception. Whenever you're trying to add value to an asset, there's a big element of execution risk. If you're planning to renovate a hotel and then sell it at a higher price, there's a lot of things that can go wrong in that strategy that wouldn't go wrong if it were just, say, buying hotels and renting them out, bringing in income. So, added risk is something investors want to keep in mind.
And, liquidity. Generally, when you give one of these your money, it's tied up until the deal is completely done -- until the hotel is bought, renovated, then eventually sold; or office building, or strip mall, or whatever you happen to be investing in. There's not really a secondary market for this. If you buy a REIT, you can sell it at a click of a button if you want to. If you buy, say, a rental property, you can list it whenever you want to. It might take you a couple of months to sell it, but you can sell it pretty much whenever you want to. With one of these, you really can't. You're pretty much tied up for the duration. There's no real secondary market for these. There's some interest in some of the platforms of creating some sort of market for these, but in general, if someone's targeting a seven-year holding period, be prepared to be locked in for seven years.
It has its ups and downs, but it's a really exciting new way to invest in real estate, and the early results have been very promising.
Moser: Real estate traditionally, for a long, long time, has been extremely prohibitive just because of the requirements needed to get in. You need a lot of capital. Whether you're trying to buy your own home, or whether you're trying to buy a hotel, or whether you're trying to invest in some sort of real estate consortium, it all comes down to that bottom line of you need capital, which makes it a lot more difficult. But it's really nice to see, in this crowdfunding age, options like this come online. Real estate, generally speaking, is an attractive investment. It's generally fairly reliable. Historically, more or less tracks the rate of inflation. There's some outliers there. Certainly, we can think of the early 2000s, where there was a little bit of a spike there. Real estate is a part of my investing philosophy, my strategy. My wife and I are homeowners. That equity that we build up in that home is something that we are looking at down the road as part of our strategy later on in life. But to get there, it took a little while to save up some money and actually get that home. It's nice to see that this is opening some doors for investors.
Of course, folks with more questions, you can go check out millionacres.com and all of the stuff Matt and the team are posting over there. Of course, you can always fire your questions our way. We'll be happy to take them here on the show as well.
Matt, let's jump into PayPal (PYPL 2.61%) here real quick. This happened a little bit later in the week last week. I can't say I'm surprised. I don't think you were surprised, either. Facebook is already dealing with a lot. Now PayPal has said, "See you later, Libra. We don't really feel like this is going to work out." Libra is still not off the ground and running. I don't think that's really a shock to anyone. They've got a lot of hurdles to clear before anything can really happen. But PayPal, this is a big loss. PayPal is one of the names that gave this concept the most credibility. When you see a name like PayPal involved with something like this, Libra, you think that maybe there's something there, if you've got some folks there in a mobile, technology-driven finance company. But PayPal just said, "Listen, the juice ain't worth the squeeze, see you later." What do you make of this news?
Frankel: I definitely agree with that. There are 28 companies that are part of the Libra gang, whatever you want to call it. [laughs] A lot of them are big names but are not financial names -- like eBay, Lyft, Uber, Spotify. Those are great names, but none of them lend the credibility to a financial product that PayPal did. So I think this is not great news for Facebook. I think that this is not going to be the last one that jumps ship. I honestly think MasterCard and Visa are going to follow quickly just because that's a very heavily regulated industry. With the regulatory scrutiny that's been placed on the Libra project so far, they just want nothing to do with it. Obviously, companies like Coinbase and other blockchain companies are going to stay in and see where this goes. But I think the big financial ones are going to get out. Stripe's another one, I think they're going to wind up backing out.
All the nonfinancial companies, I can see them hanging around just to see where it goes. They really don't have a whole lot to lose by saying, "OK, we're involved." But the big financial side... I think it's a good move by PayPal. Like we said, we don't really see the point that much in Libra at this point. It's just not worth the risk to these companies.
Moser: We talked about Libra before, and it seems like the problem they're trying to solve, there are other companies out there that are already solving that problem, and doing a way better job of it, it's more their core competency. It's interesting to look at that circle of names that had signed onto this initiative. To your point, it wasn't just financials. You had eBay, Spotify, Xapo, Calibra, Bison Trails, Coinbase, Farfetch was in there, Booking Holdings, even. So, yeah, to your point, there are a lot of companies in there that, it's really no harm for them to stay in that simply because there's virtually no downside. I could see they look at that and think, "This is an opportunity for us to expand our network, to expand our universe, to grow our business and participate in something that could be meaningful, given the size of Facebook's networks." It's certainly understandable. I tend to agree with you, though. I think we probably see the bigger financials go ahead and bow out because it is going to be a lot more work than it's probably worth to them. We talk about return on investment. You can look at that from any number of angles, but you have to feel like the time and money that these big financials could potentially sink into initiatives like this and still not realize anything from it, it's rather significant. So I wouldn't be surprised to see Visa and MasterCard go ahead and bow out next.
But who knows? It's anyone's guess at this point. It certainly doesn't sound like Facebook is giving up on the initiative. But it definitely did not make their job any easier. It is worth noting that for its part, Libra confirmed that an upcoming council meeting on Oct. 14 in Geneva, Switzerland, where Libra Association is headquartered, that meeting is still on. I guess we will just be keeping our eyes on that next to see what develops here.
OK, Matt, these past several weeks, we have jumped into this new segment of the show. We've been calling it "What's the last stock you bought and why?" It started out as just a little innocuous five minutes where you and I talked about a couple of stocks that we recently bought. We encouraged listeners to chime in. And man, you listeners are chiming in. We've got more than we can read this week. But I wanted to go through and read a few of them here.
Desmond Walker @DW78 tweeted in. He said, "I added in NWVCF to my basket of stocks. #smarterhappierricher." For those of you that missed that ticker, that looks like EnWave Corp. Thank you, Desmond! We hope that works out for you.
Hubert B @hubertb44682596 -- nice handle there, Hubert. He tweeted in, he said, "I think I'll continue to add Berkshire Hathaway's stock to my portfolio." Matt, I think I saw you respond to that. You said that one always works, right?
Frankel: Yeah, that's always a solid bet. I don't think you can go wrong with that no matter what the market's doing.
Moser: No, you can't go wrong with that one. Kevin @swizzlo2 tweeted in. He said, "I had to add to The Trade Desk. I love the business and this company. Oh, I love this segment, too. It's pretty cool." Kevin, thank you! We're going to keep the segment rolling because it seems like you're not the only one. I'm enjoying it. Matt's enjoying it. It sounds like the listeners are enjoying it too.
Lastly, I'm going to chime in and let everybody know that I too recently added a stock to my portfolio. The last stock I bought, a company called ANSYS, ticker ANSS. The value proposition in simulation software is crucial. I think in the world today, it's helping engineers and designers save more money and time. ANSYS is the gold standard in the simulation software industry. I bought shares of ANSYS earlier in the week last week. My time to be silent has expired, so I can now let everybody know that I did buy those shares, and I intend on holding them for a long time.
But like I said, we have more of these to read next week. Please email us at [email protected], or hit us up on Twitter at @MFIndustryFocus. Let us know the last stock you bought and why. I promise you we'll read them on air.
OK, Matt, we're going to wrap the week up as always here with One to Watch. What is your One to Watch for our listeners this week?
Frankel: Continuing our discussion about Libra, I'm keeping an eye on Facebook. I want to see how they react to PayPal jumping out, if any. I want to see if Visa and MasterCard do end up jumping out. And I think if you see a bunch more jumping out, they're going to toss the project out, or at least put the brakes on it. I think if they put the brakes on the project, Facebook's stock goes up. I think if you see all these partners jumping out and Facebook decides to push on with it, the stock might take a hit because of it.
Moser: Yeah, I could see that. You almost look at it and think, "Man, guys, take a hint. Don't waste any more time or money on it." I guess we'll see. I'm going to go in tandem with you here. I'm not looking at Facebook, but I'm looking at PayPal, ticker PYPL. This is a bit beyond the Libra news. Other than the Libra news, some of you may have seen last week, maybe the week before, news that PayPal, via a 70% interest, purchased Chinese payments company GoPay. Now gives PayPal license to provide online payment services in China. If you are wondering if that's a big deal, we're talking about a market opportunity that by 2023 is projected to be around $96.73 trillion. Listen, that's a big market opportunity. I don't know that necessarily all applies to PayPal. But ultimately, we're talking about money that flows through these networks. That's PayPal's opportunity. If you're talking about a country the size of China, you're talking about a lot of money flowing through a big network. PayPal getting entry into that market, that was the hardest part. Now it's going to be just about building out products and services for more people.
You may wonder, why PayPal? Perhaps they're just seen as the best option in a tech-driven-payments world. I'm not sure. We obviously like it for a lot of reasons. It's a company that was built on the technology as opposed to one that's pivoting toward technology. And then, you can't forget about the big cross-border opportunity. We've seen MasterCard and Visa both investing heavily in that opportunity. I think this is going to be a great long-term opportunity for PayPal. I was excited to see that news. How about you, Matt?
Frankel: Yeah, definitely. I am a big fan of PayPal, as you know. That's another one that I'm thinking about buying. When we were talking about recent stocks we bought, I haven't pulled the trigger yet, but that's one that I'm thinking about finally getting back into.
Moser: All right, we'll let you shut up about it so you can at least take advantage of it if the opportunity arises. Matt, thanks for joining us this week! As always, good talking to you!
Frankel: Always a pleasure!
Moser: Alrighty! As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Today's show was produced by Austin Morgan. Austin "the golf swing" Morgan. Check out his Twitter feed, guys. You'll know what I mean. For Matt Frankel, I'm Jason Moser. Thanks for listening! We'll see you next week!
