Interactive Brokers is the firm Greenhaven Road has used to custody all of our assets, serve as our prime broker, and execute our buy and sell orders.

Interactive Brokers has consistently grown its customer base between 1% and 2% per month for the last several years, growing profitably with minimal marketing spend. Interactive Brokers has both the lowest costs for customers and the highest margins of any of the brokers, including E-Trade and Ameritrade. This is accomplished through automation. Whatever piece of the investment and asset custodian businesses can effectively and responsibly be accomplished through software, Interactive Brokers has written the code. In many ways, this is a software company masked as a financial services company. With 75% insider ownership, I expect to own this as long as growth continues and management stays in place.

There are also strong secular tailwinds as larger banks continue to step away from prime brokerage for smaller funds. With just over 340,000 customers, there is a long runway for growth. This quarter witnessed more continued execution by the company with strong trading volumes and customer additions.

On any traditional valuation metric, the stock is expensive; however, they are consciously and materially under-earning. Interactive Brokers’ prices are so far below the competition. they could easily raise them 10% or more to see a material improvement in profits as it would all be incremental profit. Low prices allow them to add new accounts at a rate of 15%+ per year with minimal marketing spend. There are some concerns about Net Interest Margins, but if Interactive Brokers continues to add profitable customers at this rate, the company will compound revenue, earnings, and share price at attractive rates for a long time.

Scott Miller is an instructor at Wide-Moat Investing Summit 2016.

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This post has been excerpted from the Greenhaven Road Capital Q1 2016 Letter.

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