“We’ve Seen the End of Times”: Tom Michaud on Market Extremes, IPO Red Flags, and 9/11

**Tom Michaud** (0:00)
Once these companies go public, the index funds have to buy the shares. So that's built in after market demand. And it's just a dynamic that wasn't there 25 years ago.

**Wilfred Frost** (0:10)
But isn't that a red flag?

**Tom Michaud** (0:13)
Well, so here's what I would say. I think individual stock selection is very important, and I would be cautious. I mean, I'm a believer in diversification.
I think that investors should be cautious, and not every one of them will work. I'm not speaking about SpaceX in particular, but over the long run, there is risk in these offerings. The best investment strategy I've seen in 40 years is buying the trophies when they're on sale. I love buying best-in-class company stocks because what you're doing when you do that is you're buying their management teams to figure it out for you. And so I was moving back to the building, and I froze in my steps when the second plane hit the second building.

**Wilfred Frost** (1:00)
And I think I'm right in saying KBW lost 67

**Tom Michaud** (1:05)
We did, over a third of my colleagues who were in the office that day.

**Wilfred Frost** (1:09)
I'm so sorry. And that included the co-CEO of the business.

**Tom Michaud** (1:15)
And the other co-CEO lost his son who worked for us. There's no chapter in a textbook that tells you what to do when that happens.
And it's really all about what you have inside, what your values are and humanity at that moment.

**Wilfred Frost** (1:34)
Welcome to The Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge. The Master Investor Podcast is sponsored by ELSEG, Interactive Brokers, The World Gold Council and BNY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show notes.
My guest today, Tom Michaud, has led KBW since 2011 and worked there for 40 years, leading the firm to its IPO in 2006 and its acquisition by Stifel in 2013 KBW is the leading financial services investment bank. It's been number one advisor on banks M&A deals since 2020 If you want to know about the banking and financial sector in the US, but around the world as well, KBW is the firm to speak to and Tom as their CEO is the man to speak to. I'm delighted that he is here with us in London today. Tom, welcome to The Master Investor Podcast.

**Tom Michaud** (2:51)
Great to be with you, Wilf.

**Wilfred Frost** (2:52)
I've been thinking about, Tom, the best way to start this. And I actually kind of not to be negative on the outlook. I imagine you'll pivot us during the conversation and be positive. But I wanted to rewind the clock to 2008 Or perhaps more importantly, to 2007, to the lead up to the global financial crisis. What were the key, of course banks were the epicenter of that crisis?
What were the sort of warning signals that with hindsight, if we go back to a year or so before the crisis, we could have seen back then that people glossed over at the time? And what was really at the heart of that crisis that unfolded?

**Tom Michaud** (3:37)
Well, that I've spent the past 40 years studying the industry, as you mentioned earlier, and I do try to look for some absolute mile markers that I think are signals for further investigation. And as you know, we had a banking crisis in the United States in 2023, and I often think about what some of the factors were that may even have been similar with that 2008 period, to make sure we learn from them, so that way we see the mile markers before we get to trouble.
So in that period, it's really unbridled and exceptional growth. And when you look at the financial system, the financial system and the banks, they are built to help the economy grow. They can grow faster than the economy, but if they grow exceptionally faster than the economy, or if they grow exceptionally faster than other participants, there's something happening. And as you know, there's not a lot of patent protection in financial services. It's not like some company has such a unique model that it's exceptional relative to everybody else, that it can grow at such a quick pace. And if you go back to the period of the global financial crisis, what you will see is there is just so much growth in subprime mortgage, and then there were just new unique inventions with SPV vehicles and leverage. And I think leverage is the other piece to it, which is that many of the world's largest institutions were operating with tremendous leverage and growing very quickly.