A Deep Dive into Micro-Cap Investing | Ian Cassel

[00:00:00] There's 446 companies across the globe that went up a thousand percent or more during that 10-year time period. 87% of those started their journey as a micro-cap. My intention when we purchase something is to hold forever, but very few, if any, will earn that right. I want to find a Picasso. I want to find really an overqualified management team running an obscure small business that is running a unique business that can sustain double-digit growth.

[00:00:29] That is profitable. You might find 10 or 12 per year and you pick up the phone as quick as you can or get on a plane as soon as you can to meet them and you might pull the trigger on two. If I can just find something that is a $10 million revenue business earning $500,000 that I think can grow to $20 million business and earn $3 million, that's a five-bagger in my world.

[00:00:54] You know, it doesn't need to become the next Google, the next Meta, the next anything.

[00:00:58] Welcome to Excess Returns, where we focus on what works over the long-term in the markets. Join us as we talk about the strategies and tactics that can help you become a better long-term investor.

[00:01:08] Jack Forehand is a principal at Validia Capital Management. The opinions expressed in this podcast do not necessarily reflect the opinions of Validia Capital. No information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of clients of Validia Capital.

[00:01:21] In this episode of Excess Returns, Jack and I have a great conversation with Microcap investor Ian Castle of Microcap Club and the founder of Intelligent Fanatics Capital Management.

[00:01:30] We talk with Ian about all things Microcap investing, business building, and how he thinks about finding an edge in ultra-small companies with management teams who are building good, profitable businesses that offer investors solid long-term opportunities.

[00:01:43] Of course, it's not easy, but Ian helps us understand the opportunity in the corners of the market where most big investors aren't playing.

[00:01:49] As always, thank you for listening. Please enjoy this discussion with Ian Castle.

[00:01:54] Hi, Ian. Thank you very much for joining us today.

[00:01:57] Thanks for having me, Owen. It's a pleasure.

[00:01:59] I always enjoy conversations with guests when we have guests on the podcast where we haven't really had a chance to talk about the topics that we're going to talk about today.

[00:02:08] And with you specifically, that's Microcap investing and sort of your process that you go through when looking at Microcaps and building portfolios of smaller companies.

[00:02:20] But I thought where we should start, and it's important to start, is this concept or idea of intelligent fanatic and sort of where that comes from, what that means.

[00:02:33] And sort of because I think that's an important thing to sort of get up front as we sort of dive into this Microcap investing idea.

[00:02:40] Yeah, and I appreciate you starting off with that because not only do I think it's important with any small business investing in the right leader, but I know it's really the number one priority for my investing strategy in particular.

[00:02:53] And really the term intelligent fanatic was derived from one of the speeches that Charlie Munger gave, and he referred to an intelligent fanatic in one of those speeches as a sort of a great business builder.

[00:03:04] Someone that started a business from scratch, grew it into a business that dominated its niche, its geography, its industry, and not only dominated it for one or two years, but did it for decades.

[00:03:15] And he mentioned several individuals in that speech as well as others, you know, and some of them, quite honestly, they're probably well known now.

[00:03:23] But back when we co-authored the two books that we wrote on intelligent fanatics in 2016, 2017, you know, they were rather unknown.

[00:03:31] You know, people like Les Schwab of Schwab Tire Centers or somebody like a John Patterson who founded NCR, National Cash Register, or Ken Iverson from Nucor.

[00:03:44] You know, these types of folks which, you know, thanks to David Sinra, you know, the Founders Podcast and other ones like that, these people were kind of really well known.

[00:03:53] But back then, even in 2016, only being a few years ago, not very many people have heard of them because a lot of them ran private companies.

[00:04:00] And so what me and my co-author decided to do, who was also a member and microcap investor, we decided to kind of research these individuals that Charlie Munger mentioned and really kind of just write a quick 2025 page kind of overview of their personal life, their business life, how they grew their businesses and pull out some important lessons from their lives and from their experiences.

[00:04:27] And so I think the first book was eight intelligent fanatics we highlighted.

[00:04:31] And then we wrote a second book a year after that where these weren't businesses that Charlie Munger mentioned, but there are ones that kind of fit that framework.

[00:04:38] We pulled, I think, another 10 in the second book.

[00:04:40] And, you know, me and maybe 10 other people actually read the book because we didn't sell too many of them.

[00:04:46] But it was a fun project for me because I always wanted to sort of fine tune my lens for finding great leaders early because I think that's important when you're trying to invest in small businesses.

[00:04:58] You know, you can't grow a small business into a larger small business, you know, unless you have good leadership.

[00:05:05] And so I always wanted to fine tune my lens for kind of the qualitative element of finding great leaders early.

[00:05:12] And that was really why I spent the time kind of on two or three years writing those two books with my co-author.

[00:05:19] And, you know, it really helped.

[00:05:21] And ironically, probably the biggest takeaway for writing those two books and studying, you know, several hundred of these leaders was really not to focus on the leader themselves per se.

[00:05:31] But quite honestly, the types of folks they have around them in their organization.

[00:05:35] Because what you found was, you know, people that were able to scale a business from, you know, five, 10 million to 100 to 200 to a billion.

[00:05:43] You know, they can't rely on themselves.

[00:05:45] They need to, they put great people around them.

[00:05:47] And oddly enough, before writing those books, I probably put too much effort and attention into the founder, him or herself, instead of concentrating on the team that they were building around them to see if they were building something that was truly scalable.

[00:06:03] And probably the number one takeaway through that exercise for me.

[00:06:07] Yeah, that's great.

[00:06:07] And it's funny because if you think about Buffett, right?

[00:06:10] Like we all, obviously everyone knows who Warren Buffett is and he gets all the headluck.

[00:06:14] But, you know, Buffett's very quick or when he writes his shareholder letters and when he's talking about the people he's putting in charge of those divisions at Berkshire.

[00:06:21] I mean, it's, it's, you know, he knows how to allocate the capital and build a great team.

[00:06:26] And it sounds like it's a similar thing to what you've found in those founders.

[00:06:31] Yeah, that's exactly right.

[00:06:33] I mean, we're the number one thing that attracts us to a new idea in the portfolio is the people and the leader behind it.

[00:06:41] And I know we'll get into that in a little bit, but that's kind of where it overlaps with my investing style.

[00:06:47] So, in thinking about the microcap universe, can you just kind of tell us what that looks like in general, maybe?

[00:06:54] And it doesn't need to be exact, but how many, you know, stocks generally are on microcaps and sort of sector or is one sector maybe a little bit more dominant in microcaps or how does it look?

[00:07:05] Yeah, I mean, I think in general, let me just start sort of at the top.

[00:07:09] I think many people, at least in the Western hemisphere, define microcap as sub 500 million USD market cap.

[00:07:17] And that might change depending on the geography you're investing in.

[00:07:20] You know, for example, in India, a microcap might be sub 100 million USD market cap.

[00:07:26] So it really depends.

[00:07:27] But I think, you know, for mainly, you know, we're talking about North America, Europe, Australia, you're looking at 500 million market cap or less.

[00:07:33] And so when you kind of look at all public equities in the whole world and the globe, you know, 60,000 public stocks, roughly half of them are microcaps as that definition, more or less.

[00:07:46] And, you know, really when you go then to North America, so if you just look at United States and Canada, you have 23,000 total stocks that trade in the US and Canada.

[00:07:57] And I think it's around 13,000 that are under 500 million market cap.

[00:08:02] So it's about 56% of the investment universe public stocks in US and Canada would be considered microcap.

[00:08:10] Ironically enough, if you're just looking at Canada, I think Canada has around 3,600 listed stocks.

[00:08:17] And I think 83% of them would be considered microcap by the definition of sub 500 million.

[00:08:23] So I like to say Canadians, they don't know their microcap investors, but they are if they're investing in their own markets.

[00:08:27] And, you know, so it's so microcap is, you know, a big portion of the public stocks, you know, that are out there, you know, and to kind of give a.

[00:08:38] I think this research was done seven or eight years ago.

[00:08:41] But if you were actually to add up all of the microcaps in the United States together and aggregated their market cap, I think it's roughly 500 billion.

[00:08:51] You know, and it's funny to think about today because I think there's 15 or 16 individual stocks that are valued at 500 billion or more today.

[00:08:58] You know, that that kind of gives you a sense of how big and how small the amount of companies, how big and how small the total aggregate market cap value there is in US microcaps.

[00:09:08] You know, I think Berkshire has 280 billion in cash.

[00:09:11] When you think about that way, they can buy by the float of every micro.

[00:09:15] Right.

[00:09:16] I mean, which wouldn't be a good investment decision.

[00:09:19] Therefore, I'm not worried about that.

[00:09:21] But, you know, kind of break it down further.

[00:09:23] I mean, a lot of people might get confused with the amount of stocks that actually trade in the US.

[00:09:27] And a big part of that is mainly the fact that the OTC markets is where a lot of microcaps trade.

[00:09:36] And so I think there's like 14,000 equities that trade on OTC markets.

[00:09:42] You know, 7,500 of them are microcaps.

[00:09:45] You know, so a big portion of the microcaps that trade are on the OTC markets.

[00:09:50] And, you know, to put that into perspective, like the major indices here in the US, the New York Stock Exchange, the NASDAQ, there's roughly 5,600 stocks that trade on the NYSE and NASDAQ.

[00:10:02] About 2,300 are microcap.

[00:10:04] So there's actually more microcaps that trade on OTC markets than there are that trade on the entire NYSE or NASDAQ combined.

[00:10:12] I'm just curious, does the sector breakdown follow like something like the S&P 500?

[00:10:17] Could it map, does it map pretty closely in that or is there a lot of differences there?

[00:10:22] No, I mean, again, it kind of depends on geography.

[00:10:26] But I think if you're looking at the US, I think it's heavily weighted towards healthcare.

[00:10:31] You know, maybe 20%.

[00:10:35] Maybe another 20 or 25% actually in financials because there's a lot of small banks that are listed.

[00:10:40] I think there's like 1,000 or 2,000 microcaps banks, you know, in the US.

[00:10:45] And then I think it goes down from there.

[00:10:47] I think like roughly 10% is usually industrials, IT technology, another 10.

[00:10:51] And obviously there's industries like utilities where there's just not many small companies.

[00:10:59] And from your perspective, I mean, that's more companies than I thought I would have guessed.

[00:11:04] But it's probably good because there's a lot of fertile ground there to find ideas.

[00:11:08] But have you seen, I'm just thinking like, you know, in the last couple of years, there's been obviously a lot less IPOs.

[00:11:14] There's just in general, you've seen a trend in less publicly traded companies overall.

[00:11:19] So it's shrinking, even though, like you said, there's, you know, a couple of thousand microcaps.

[00:11:23] So it's not like there's.

[00:11:25] But is there, does any of that affect sort of the quality?

[00:11:29] Any of those trends affect the quality of microcaps that you're seeing sort of come online or not really?

[00:11:36] Yeah, I mean, I think, I think you hit the nail on the head.

[00:11:39] I think probably the number of microcaps has stayed relatively the same.

[00:11:43] I mean, even when you look at the number of IPOs, I think in 2023, there's around 150 IPOs, about 80% were microcap.

[00:11:51] Yeah, I think so far this year, when I actually looked at it, you know, preparing for this conversation, I think there's 180 IPOs.

[00:11:57] I think 73% are microcap.

[00:12:00] Yeah, there's, there's still, believe it or not, 100 SPACs done per year, you know, after 2021.

[00:12:05] And probably a vast majority of them are microcap.

[00:12:09] You still have 100 to 200 reverse mergers done per year, which that pre-2010 was the predominant way small companies went public were actually reverse mergers, not traditional IPOs.

[00:12:21] There's still 100 to 200 of them done per year.

[00:12:26] You know, those reverse mergers, it's actually an area that I haven't seen written about a lot.

[00:12:30] But pre-2010, here in the US, there would be 800 reverse mergers done per year.

[00:12:36] You know, that, and yes, many of them probably shouldn't have been public.

[00:12:40] And, you know, it's kind of the law of the 80-20 rule, you know, but I, I think a lot of the decline in the overall market,

[00:12:47] the listed, listed companies is a result of that 800 per year turning into 100 per year.

[00:12:53] You know, because there's just fewer companies that are going up and out of the microcap ecosystem and becoming listed, listed companies.

[00:13:00] And so, yeah, I mean, so there's, but like we said, like there's 9,000 microcaps, you know, really in the US that exists.

[00:13:09] And, you know, that's a pretty big sandbox.

[00:13:11] I mean, you compare that to, you have a large cap domestic US portfolio manager on here.

[00:13:17] Their sandbox is 850 companies, you know, so mine's 9,000, you know.

[00:13:22] And so there's, there's still plenty of microcaps that exist.

[00:13:26] The issue has been kind of the, what is the quality level of those new issuances coming onto the market?

[00:13:34] And I think that is where we've seen a degrade of that, you know.

[00:13:39] You know, and I love, as a microcap investor, a proponent of microcap investing,

[00:13:43] I love to point to Walmart being a microcap when it went public in 1970 on an inflation-adjusted basis.

[00:13:49] Or even Berkshire Hathaway when Buffett took it over, you know, when he did,

[00:13:53] that was actually a microcap inflation investment.

[00:13:56] I love to point to those things, but there's fewer and fewer real small companies going public when they are small.

[00:14:03] And when I say real in air quotes, I just mean profitable and growing real businesses.

[00:14:09] And you still have plenty of companies trying to raise $10 million to fund a phase one drug, you know, in a binary event.

[00:14:16] But you do see fewer real companies going public.

[00:14:20] And what's become more important as a microcap investor over time is because of that, not to be landlocked to the U.S.

[00:14:28] because you still have real small companies going public in places like Canada or Australia.

[00:14:34] And you just have to be open to going to these other jurisdictions, as you should, because in today's day and age,

[00:14:41] especially, you know, the English speaking, similar rules of law.

[00:14:45] I mean, there's no reason not to look at these other jurisdictions.

[00:14:48] Can you talk a little bit about the research supporting microcap investing?

[00:14:51] I mean, this has been a little bit of subject of the debate in our world, in the factor investing world,

[00:14:54] because everyone's debating whether the size premium still exists or not.

[00:14:57] But what research do you see on your side in terms of supporting microcap investing in general?

[00:15:02] You know, I think it's a good question because I think some of the data that I have is dated, quite honestly.

[00:15:08] I think actually a member of ours, Mark Vonderwell, went through and looked at all the CRSP data from 1927.

[00:15:16] I think his ended 2016.

[00:15:17] And, you know, obviously shows the smallest decile returns 17% versus the next decile, which is 12, you know, 500 basis points of outperformance.

[00:15:27] Obviously, that's probably close somewhat in the last seven years or eight years since that data.

[00:15:32] I haven't seen updated data on that.

[00:15:35] I found that probably the best research that I've seen recently was, I don't know if you guys probably have read it,

[00:15:42] but it's with Jenga Investment Partners out of the UK.

[00:15:45] They put out a study on global outperformers.

[00:15:49] They looked at all stocks that went up 1,000% or more between May 2012 and I think May 2022.

[00:15:57] So it's somewhat recent.

[00:15:59] And there's 446 companies across the globe that went up 1,000% or more during that 10-year time period.

[00:16:06] 87% of those started their journey as a microcats.

[00:16:12] And, you know, and that's over and above the fact that microcaps are probably 60% of the market anyway.

[00:16:20] So it's, you know, it's more so than normal, I should say.

[00:16:24] So that's probably the clearest evidence that's been more recent.

[00:16:28] And that ended in 2022.

[00:16:31] And, you know, I think the size offers some signal as a factor, but I think there are bigger factors such as illiquidity and quite honestly,

[00:16:41] just simple profitability that lead to outperformance.

[00:16:45] And I think when you combine small, illiquid, profitable, that is the secret sauce.

[00:16:51] That's the signal.

[00:16:53] And we even, quite honestly, we even developed a little index inside microcap club where, you know, of all the companies that have been profiled on there,

[00:17:04] screen them all for trailing 12-month profitability, equal weight them in an index, rebalance every quarter.

[00:17:09] And it's outperformed the NASDAQ this year.

[00:17:12] The drawdowns are less when the market draws down.

[00:17:15] It's been pretty, I haven't back-tested it, but it's pretty interesting just since January how that has performed versus the NASDAQ and S&P.

[00:17:24] When you have, like, days when the NASDAQ and S&P are down, like, you know, 1.5%,

[00:17:31] this 395 equally weighted profitable microcap index is down half that on the down days.

[00:17:36] And it's fascinating to see that.

[00:17:38] And I think that there's some signal there.

[00:17:41] But with what Jenga Investment Partners, what they showed was that, yes, 87% of all outperformers during that 10-year period were microcapped,

[00:17:49] and 82% of those were profitable, or I think 90% had a history of profitability.

[00:17:55] And so what that tells us is not only want to look at small, but you want to look at profitable.

[00:18:00] Yeah, and to your point, I would think this would be a bad area, and correct me if I'm wrong about this,

[00:18:03] but I would think this would be a bad area to index.

[00:18:05] Because just like the problems with the Russell 2000 in terms of lots of junky companies,

[00:18:09] like I remember AQR's paper, which I think has the best title of all time,

[00:18:12] which is Size Matters If You Control Your Junk, where they were effectively talking about this idea.

[00:18:16] So I would think you don't want to buy an index of microcap companies.

[00:18:19] This is something where you probably want to be looking for the best companies.

[00:18:22] Yeah, I mean, I've always said that the worst indices are the microcapped indices that iShares has,

[00:18:29] or even some of the larger microcap isn't meant to scale.

[00:18:34] And so when you see an investment vehicle built for scale in microcap,

[00:18:38] it's usually just meant for asset gathering.

[00:18:40] And that's just not where you're going to outperform.

[00:18:43] In fact, you can look at all those belong to performance of all those types of vehicles,

[00:18:47] and they underperform everything.

[00:18:50] Microcap is a place for stock bidding.

[00:18:53] You alluded to this before, but you had a great quote,

[00:18:55] liquidity trumps size as a return predictor in the microcap space.

[00:18:58] And I'm wondering if you just expound on that a little bit.

[00:19:00] Yeah, and I mentioned liquidity a little bit a couple of minutes ago,

[00:19:04] but I think it was Roger Ibbotson, who was a Yale professor.

[00:19:08] He used to do an annual update on a paper that he called liquidity as an investment style.

[00:19:14] And he looked at all equities from 1971 to the present,

[00:19:18] and he would publicly update it, I think, up until 2017.

[00:19:22] And since then, it's been kind of closed off.

[00:19:24] And unfortunately, it's not public.

[00:19:27] But he looked at all public stocks in the U.S. from 1971 to the present,

[00:19:32] and he categorized them by market cap classes of microcap, small cap, mid cap, large cap.

[00:19:37] And he looked at them by illiquidity.

[00:19:40] And what was interesting was illiquidity had some signal across all those market cap classes.

[00:19:47] It was less signal at the large cap area.

[00:19:49] I think illiquid large caps produced 11% return during that time period versus nine for liquid large caps.

[00:19:58] I think illiquid mid caps were something like 14% return versus 8% liquid mid caps.

[00:20:04] Now, microcaps is where you had the biggest variance there.

[00:20:07] You had illiquid microcaps performed 16% annual return versus what was, this is really interesting,

[00:20:14] versus zero on the liquid microcaps.

[00:20:17] So, you know, actually liquid microcaps for zero return during that time frame.

[00:20:22] And we can go down that rabbit trail if you want there and why I think the zero was there,

[00:20:26] because I find that the most interesting of all this.

[00:20:29] And my reason why I think it was zero is because the liquid microcaps are institutionalized.

[00:20:36] You know, anything 200, 300, 500 million market cap, by that point in time,

[00:20:40] you know, they're probably 10 to 40% institutionally owned.

[00:20:43] They're indexed through the iShares indices, the Russells and everything.

[00:20:49] And quite honestly, when you get to a bear market, a lot of times, you know, it's a risk off across the board

[00:20:56] and allocations go down and they're the first things that people bid whack

[00:21:00] and they perform really poorly in bad market environments.

[00:21:03] And so that's why I've always thought that the liquid microcaps perform so poorly,

[00:21:07] you know, over time is because of that.

[00:21:09] And it's also a function of why I, in my strategy,

[00:21:12] we look at the very small microcaps that have no institutional ownership.

[00:21:16] We're going to talk about your approach in a second,

[00:21:18] but I'm wondering if you've seen any change over time in terms of how the market reacts,

[00:21:22] like when you find a good company and they have good news.

[00:21:24] And the reason I ask this is, this is something we've talked about a lot in the podcast is

[00:21:27] this idea of indexing at the larger stock level.

[00:21:30] A lot of people who are small cap investors,

[00:21:32] and David Einhorn touched on this in a recent podcast,

[00:21:34] are saying so many people are indexing right now.

[00:21:37] Nobody's paying attention to the small cap space.

[00:21:39] I get good news on my companies.

[00:21:40] I get fundamental improvements.

[00:21:41] The stock doesn't go up because no one cares.

[00:21:43] Like, is that at all applicable in the microcap space?

[00:21:46] Or is this so far departed from that that it doesn't really matter?

[00:21:49] I think you see some of that, but I think it's mainly,

[00:21:52] I would say that his commentary was probably more towards his flavor of investing.

[00:21:58] You know, this idea of reversion to the mean based on fundamentals,

[00:22:02] you know, and multiples.

[00:22:03] I think that has somewhat departed,

[00:22:07] you know, from the way it used to be.

[00:22:10] But, I mean, quite honestly, you know,

[00:22:12] if I was getting a beer with both of you guys,

[00:22:14] I mean, I think blaming the markets and blaming anything or anyone,

[00:22:17] you know, kind of for this stuff is just an excuse for underperformance.

[00:22:20] You know, we're all dealing with the same circumstances,

[00:22:22] you know, and it,

[00:22:25] I mean, let's just take a factor like deep value or even value,

[00:22:29] which I think we would all agree that David Einhorn is in.

[00:22:32] You know, there's still people that are in that factor that are crushing it.

[00:22:35] You know, there's people like Michael Melby who runs Gate City Capital.

[00:22:40] He's a friend of mine.

[00:22:41] He's a member of Microcap Club.

[00:22:42] I mean, he's put up 21% net CAGR since 2011 in a deep value strategy.

[00:22:47] You know, I don't see him complaining about indexing.

[00:22:50] So I think you're always going to have people just complain

[00:22:53] because their performance is bad or complain

[00:22:55] because there's nothing else to complain about.

[00:22:57] But, you know, I think for me, I don't see it too much.

[00:23:01] For my investing style,

[00:23:04] I'm trying to find things that are undervalued that can get overvalued.

[00:23:08] You know, and I do think about who is going to buy my stocks from me,

[00:23:13] hopefully after they 5 or 10x.

[00:23:15] You know, who is that investor institution going to be?

[00:23:17] And I think historically what we've found and anyone's found

[00:23:21] is that institutions are always attracted to fast-growing,

[00:23:25] profitable businesses they don't own.

[00:23:27] And the one factor that everybody is attracted to,

[00:23:31] even if your deep value is growth.

[00:23:33] And so there has to be some component of the growth there

[00:23:36] that is kind of like the moth to the flame for institutions.

[00:23:40] And that's why growth is a decent part of kind of what we look for as well.

[00:23:45] Yeah, you just touched on a point that's been a big lesson for my career,

[00:23:48] which is like those of us that have value as part of our strategy

[00:23:50] have wanted to like shake our fists at the Fed and be like,

[00:23:53] oh, you know, the Fed is killing us,

[00:23:54] but you got to play the game that's in front of you.

[00:23:56] I mean, it is what it is.

[00:23:57] And like you can complain about it or you can do something about it.

[00:24:01] That's what I think I've learned in my career.

[00:24:02] I want to get into your process a little bit because you mentioned growth.

[00:24:04] And so I think that probably is a cornerstone of what you're looking for.

[00:24:07] But at a high level, when you're looking for a good micro cap company,

[00:24:10] how would you describe your strategy for finding?

[00:24:12] I think it's a good place to start because I think a lot of people,

[00:24:15] when they think of micro cap investing,

[00:24:17] they think of everyone being the same.

[00:24:19] But you have the same flavors of investing

[00:24:21] are found down in micro cap that you can find in large cap.

[00:24:25] And so, you know, I would characterize and then in micro cap too,

[00:24:30] there's certainly folks that focus just on that larger micro cap segment,

[00:24:35] you know, the 200 to 500 million market cap,

[00:24:37] because they are more liquid,

[00:24:38] they probably do have more robust businesses,

[00:24:40] you know, things like that.

[00:24:42] So for me, I really focus on that smallest decile of the market.

[00:24:47] So that's sub 100 million.

[00:24:48] And predominantly, I'm really looking to invest in these companies initially,

[00:24:53] you know, when it's sub 50 million, five zero.

[00:24:57] And these are very small.

[00:24:58] They're very illiquid.

[00:25:00] There's no institutional winner, hopefully of them, but me,

[00:25:04] if I'm going to, I hate calling myself an institution now,

[00:25:06] but, you know, I want to find them first, you know,

[00:25:09] and that way I have the full curve of discovery ahead of me,

[00:25:13] you know, if that business executes.

[00:25:16] And, you know, I think when I,

[00:25:20] when you're looking at these small businesses,

[00:25:22] you can still find these very unique ones.

[00:25:25] Then I, I kind of like refer to them as Picassos,

[00:25:27] you know, I want to find a Picasso.

[00:25:29] I want to find really an overqualified management team

[00:25:32] running an obscure small business

[00:25:36] that is running a unique business

[00:25:38] that can sustain double digit growth that is profitable.

[00:25:41] And that's a mouthful there,

[00:25:42] but those are what, you know,

[00:25:45] what does that do with Picasso?

[00:25:47] Well, these situations, they're just rare.

[00:25:49] They're scarce.

[00:25:50] There's not very many of them that exist.

[00:25:52] And these, like I said earlier,

[00:25:54] I mean, these are the types of situations

[00:25:56] that institutions will ultimately be attracted

[00:25:59] to their velocity, their scale, their profitability,

[00:26:02] and they reach an escape velocity

[00:26:05] where hopefully they can get out of microcap,

[00:26:07] you know, into small cap.

[00:26:08] And so that's traditionally what I'm trying to find.

[00:26:12] And it really starts with finding the great leader.

[00:26:16] And so a lot of, you know, our process is just,

[00:26:19] you know, focused on finding great management teams

[00:26:21] that are just overqualified.

[00:26:23] And what I mean by that is

[00:26:25] I like to see previous success.

[00:26:27] I like to see a management team

[00:26:28] that build up something from zero to a hundred million before.

[00:26:31] You know, you kind of see the glimmer

[00:26:33] of the bringing the gang back together again

[00:26:35] to do it again in something small and obscure.

[00:26:37] And by this time, they each made a hundred million dollars each

[00:26:39] and they're going to backstop

[00:26:40] the funding of the company themselves.

[00:26:42] They don't need Wall Street or anybody's money to do it.

[00:26:45] And there's a, like the, that's usually the trigger point

[00:26:48] that gets me interested in something new.

[00:26:51] And you don't find too many of them every year,

[00:26:55] but you might find 10 or 12 per year.

[00:26:59] And you pick up the phone as queasy can

[00:27:01] or get on a plane as soon as you can to meet them.

[00:27:03] And you might pull the trigger on two.

[00:27:06] And, you know, and that's,

[00:27:07] that's predominantly what gets me excited

[00:27:09] is actually the people first.

[00:27:11] Then it's usually the business second.

[00:27:15] And maybe another kind of part of our flavor of investing.

[00:27:18] It's more so in the portfolio level is just,

[00:27:20] I mean, we are, we are concentrated

[00:27:22] and concentrated is just a way of saying

[00:27:24] the portfolio is volatile.

[00:27:26] And we like to let our winners run,

[00:27:29] which makes the portfolio even more volatile.

[00:27:32] You know, our top three positions are 55% of the portfolio

[00:27:35] or top five or 75% of the portfolio.

[00:27:38] And so it's just, it's a very volatile.

[00:27:41] I like to say like, you know, we, we want to target,

[00:27:44] you know, a 20, 25% CAGR, but it looks like this,

[00:27:47] you know, and it's important for anybody involved

[00:27:50] in the way we invest to be in it for a duration,

[00:27:53] you know, a five to seven year period,

[00:27:55] because depending on when you come in,

[00:27:56] you can, you know, the next year,

[00:27:58] you can look like a hero or villain or an idiot,

[00:28:02] you know?

[00:28:02] And so you just need to be in it for a full duration of time.

[00:28:06] How does the company get on your watch list?

[00:28:07] Like, I assume you have a watch list of companies

[00:28:09] you're following that could potentially be included

[00:28:11] in your portfolio.

[00:28:12] Cause as you mentioned,

[00:28:12] you have like less than 10 stocks in your portfolio, right?

[00:28:15] Yeah.

[00:28:15] I would say it's around 12, you know,

[00:28:19] I would, I kind of, when I think about our portfolio,

[00:28:21] I think of it almost like a professional sports team

[00:28:25] where we have our veteran players,

[00:28:27] they're the largest positions in the portfolio.

[00:28:30] They earned the right to be there

[00:28:31] because we've owned it for a period of time

[00:28:33] and their equities have gone up quite honestly.

[00:28:35] They've earned that position size.

[00:28:37] And then we have, you know, another seven below that,

[00:28:41] that I would kind of call the rookies on the team

[00:28:43] that you bring on, they kind of fit your framework.

[00:28:45] You give them some playing time.

[00:28:46] If they succeed, you give them more money

[00:28:48] or you bump them up in position size.

[00:28:50] If they don't, you kick them back off the team

[00:28:51] and bring on somebody else.

[00:28:53] And that's naturally where some of the turnover occurs

[00:28:56] is kind of among the rookie team players

[00:28:58] when they're trying to find the next batch of talent.

[00:29:02] And so that's predominantly how the portfolio looks.

[00:29:07] So it's around, usually around,

[00:29:08] I would say eight to 14, depending on any given time.

[00:29:12] And what gets something on the watch list?

[00:29:13] Like, I'd assume you're about as far from us as possible

[00:29:15] in that you're probably not running a bunch of quant screens

[00:29:17] to say like, here are the stocks

[00:29:18] that should be on my watch list.

[00:29:19] I assume operating in the space,

[00:29:21] you're probably finding these more organically.

[00:29:23] Yeah.

[00:29:24] Yeah.

[00:29:24] I mean, I think,

[00:29:26] I think you usually find ideas

[00:29:28] in, you know, a few different areas.

[00:29:31] I think there's three ways

[00:29:32] you actually go out and find the ideas

[00:29:34] and then two ways they come and find you.

[00:29:36] Like the three ways you find ideas

[00:29:37] are just through brute force kind of research,

[00:29:40] A through Z,

[00:29:41] kind of Warren Buffett style,

[00:29:42] going through journals and manuals.

[00:29:44] Yeah.

[00:29:44] The second way is screens.

[00:29:46] Third way is researching,

[00:29:47] you know, you're researching something

[00:29:48] and you bump into something else.

[00:29:50] You know, that's how you find something new.

[00:29:52] And then the two ways they find you

[00:29:53] is just networking,

[00:29:54] which has become really important in relationships.

[00:29:57] And what I've found is

[00:29:59] we use brute force a lot.

[00:30:02] When we screen,

[00:30:03] we're not screening for quantitative criteria

[00:30:06] per se on fundamentals.

[00:30:07] What we're screening for

[00:30:08] is large insider purchases,

[00:30:11] rights, offerings,

[00:30:12] anything that triggers us

[00:30:13] to seeing skin in the game

[00:30:15] and a transformation that has taken place.

[00:30:19] And, you know,

[00:30:20] because that's,

[00:30:20] that's what we're trying to find.

[00:30:22] I mean, when you look at

[00:30:22] what multi-baggers are,

[00:30:24] I mean, it's,

[00:30:24] it's a combination of

[00:30:26] earnings going up,

[00:30:29] earnings going up in multiple expansion,

[00:30:31] you know?

[00:30:31] And so if you can find something

[00:30:32] at the point of transformation,

[00:30:34] it's probably trading a value price

[00:30:36] and hopefully it'll get a growth multiple

[00:30:37] once it starts executing.

[00:30:39] And so that,

[00:30:40] so on the screen side,

[00:30:41] it's mainly around insider purchases

[00:30:43] more than anything.

[00:30:44] And you're,

[00:30:44] you know,

[00:30:44] we,

[00:30:45] we have something set up

[00:30:46] across the globe

[00:30:46] that,

[00:30:47] you know,

[00:30:47] kind of flags anything

[00:30:48] over a hundred thousand USD

[00:30:49] kind of purchase.

[00:30:50] We take a look at

[00:30:51] and see if there's anything,

[00:30:52] any signal there

[00:30:53] to that,

[00:30:54] that type of thing.

[00:30:56] More and more

[00:30:57] since I've been doing this

[00:30:58] for 20 years,

[00:31:00] the ideas are coming to us

[00:31:02] through relationships.

[00:31:04] And,

[00:31:04] and I think that's ultimately

[00:31:06] any stock picker

[00:31:08] what the goal is,

[00:31:09] is that you're actually

[00:31:10] having ideas come to you

[00:31:12] in different ways

[00:31:12] because of relationships

[00:31:14] you've built with

[00:31:15] other investors,

[00:31:17] other CEOs,

[00:31:18] you know,

[00:31:19] other people that you're doing

[00:31:19] scuttlebutt research with

[00:31:21] where you showed value to them,

[00:31:23] they're reciprocating

[00:31:24] and you build up that trust

[00:31:25] over time of 10 or 20 years

[00:31:27] and all of a sudden

[00:31:28] when they find the next deal,

[00:31:29] they want you a part of it

[00:31:30] because they see the value

[00:31:31] of having you as a shareholder

[00:31:33] and have somebody on the team.

[00:31:34] And so,

[00:31:35] more and more

[00:31:36] we're seeing ideas come to us

[00:31:37] kind of through that

[00:31:38] relationship component.

[00:31:41] And,

[00:31:42] you know,

[00:31:42] it's one of the things

[00:31:42] that, you know,

[00:31:43] founded Microcap Club

[00:31:44] in 2011,

[00:31:45] you know,

[00:31:45] it was really just

[00:31:46] a pet project of mine

[00:31:47] where I just wanted to get

[00:31:48] as many smart people

[00:31:49] in my niche of investing

[00:31:51] on that site as possible

[00:31:52] so I could see

[00:31:53] what they liked and why.

[00:31:54] And that's still

[00:31:55] what it is today

[00:31:55] and it's been

[00:31:56] an incredible resource

[00:31:57] just for that networking

[00:31:59] and relationships component

[00:32:01] to finding ideas.

[00:32:03] And I would bet

[00:32:03] that that must be

[00:32:04] one of the coolest things

[00:32:04] about operating

[00:32:05] in the Microcap space.

[00:32:06] Like,

[00:32:06] if you take it

[00:32:07] to the other end

[00:32:07] of the spectrum,

[00:32:08] like,

[00:32:08] I can talk to all the people

[00:32:09] I want about NVIDIA

[00:32:10] and,

[00:32:11] you know,

[00:32:11] what's going on there

[00:32:11] but I'm probably

[00:32:12] not going to have

[00:32:12] much of an edge

[00:32:13] over anybody else.

[00:32:14] But I would assume

[00:32:15] like in the Microcap space

[00:32:16] you can develop an edge

[00:32:17] doing those kind of things.

[00:32:18] Yeah,

[00:32:19] yeah,

[00:32:19] you can.

[00:32:20] And I,

[00:32:21] the relationship side of it too

[00:32:22] not only with other investors

[00:32:24] but,

[00:32:24] I mean,

[00:32:24] we're very hands-on

[00:32:26] as investors

[00:32:26] with the companies

[00:32:27] we invest in.

[00:32:28] We have close relationships

[00:32:29] with the management teams,

[00:32:31] with the CEOs

[00:32:31] of everybody we invest in

[00:32:33] and something that

[00:32:33] I've always enjoyed doing

[00:32:35] and something that I

[00:32:36] kind of cut my teeth with

[00:32:37] when I was in my 20s.

[00:32:39] You know,

[00:32:39] just talking to management

[00:32:40] and stuff like that

[00:32:41] was important to me

[00:32:41] and so it's,

[00:32:42] it's definitely a,

[00:32:43] a cool thing

[00:32:44] about the Microcap space.

[00:32:45] And the other thing,

[00:32:46] cool thing about Microcap,

[00:32:47] I think,

[00:32:47] is that

[00:32:49] not every investor

[00:32:50] in Microcap

[00:32:50] has the same

[00:32:51] kind of background

[00:32:52] where they,

[00:32:53] you know,

[00:32:53] kind of went to the same

[00:32:54] business school,

[00:32:55] went to the MBA,

[00:32:56] you know,

[00:32:57] did their internship

[00:32:58] at Goldman Sachs

[00:32:59] or whatever it is.

[00:33:00] Like,

[00:33:01] everyone,

[00:33:01] every Microcap investor

[00:33:02] is so independent

[00:33:03] and so different.

[00:33:04] I mean,

[00:33:04] there's a lot of small business,

[00:33:05] some of the best

[00:33:06] Microcap investors I know

[00:33:07] are just simply

[00:33:08] small business owners

[00:33:09] because they understand

[00:33:10] small business.

[00:33:11] You know,

[00:33:11] they run one

[00:33:12] or they ran one.

[00:33:14] You know,

[00:33:15] you have lawyers,

[00:33:15] you have doctors,

[00:33:16] you have every background

[00:33:17] of person

[00:33:18] which also lends itself

[00:33:19] well

[00:33:20] for a community

[00:33:21] because you can usually

[00:33:22] get due diligence

[00:33:23] done very quickly

[00:33:24] because usually somebody

[00:33:25] on that community

[00:33:26] knows something

[00:33:27] about something.

[00:33:28] You know,

[00:33:28] some area

[00:33:29] that you want

[00:33:29] to look into.

[00:33:30] You know,

[00:33:30] so.

[00:33:32] You mentioned

[00:33:33] multibaggers before

[00:33:34] and some of the

[00:33:34] characteristics.

[00:33:35] Are there any others

[00:33:36] you can talk about

[00:33:37] in terms of,

[00:33:37] you've probably had

[00:33:38] a lot of multibaggers

[00:33:39] and you look back

[00:33:39] and say,

[00:33:40] what were the characteristics

[00:33:40] when I first bought them

[00:33:41] that I saw

[00:33:42] that led to this success?

[00:33:44] Like,

[00:33:44] when you analyze

[00:33:45] your multibaggers,

[00:33:46] are there certain

[00:33:46] common things you find?

[00:33:47] I think

[00:33:48] it's kind of getting

[00:33:49] back to that point

[00:33:49] I made earlier.

[00:33:50] It's like,

[00:33:51] when you can

[00:33:52] find an overqualified

[00:33:53] management team

[00:33:54] inside a small

[00:33:56] obscure company

[00:33:57] that is fundamentally

[00:33:58] undervalued,

[00:34:00] you know,

[00:34:00] where they haven't

[00:34:01] unlocked the growth

[00:34:02] engine yet,

[00:34:03] you know,

[00:34:04] and that's

[00:34:04] where you can

[00:34:05] almost see

[00:34:07] the next 50

[00:34:08] or 100% return

[00:34:10] already,

[00:34:10] just from

[00:34:11] three or four

[00:34:12] other people

[00:34:13] finding out

[00:34:13] about the stock,

[00:34:15] you know,

[00:34:16] and kind of

[00:34:16] getting a stock

[00:34:17] up just because

[00:34:17] it's undervalued,

[00:34:18] you know,

[00:34:19] and then their

[00:34:19] execution takes it

[00:34:20] up another level

[00:34:21] or two over time.

[00:34:22] But I think

[00:34:23] it's really

[00:34:24] just the combination

[00:34:25] of just

[00:34:26] Ernie's growth

[00:34:28] and just

[00:34:29] multiple expansion

[00:34:30] and the cool

[00:34:31] thing about

[00:34:31] Microcast 2

[00:34:32] is I'm not

[00:34:33] looking to

[00:34:33] find the next

[00:34:34] Google.

[00:34:35] You know,

[00:34:35] I'm simply

[00:34:36] trying to

[00:34:37] find a

[00:34:37] $10 million

[00:34:38] business.

[00:34:39] This sounds

[00:34:40] obscene to most

[00:34:41] people when they

[00:34:42] know that there's

[00:34:43] companies that do

[00:34:43] 10 million in

[00:34:44] revenue that are

[00:34:45] publicly traded.

[00:34:45] It's probably

[00:34:46] smaller than

[00:34:47] the largest

[00:34:47] company in

[00:34:48] your town.

[00:34:50] But they're

[00:34:51] probably trading

[00:34:51] buying your

[00:34:52] schlop account.

[00:34:53] If I can just

[00:34:54] find something

[00:34:55] that is a

[00:34:55] $10 million

[00:34:56] revenue business

[00:34:57] earning $500,000

[00:34:58] that I think

[00:34:59] can grow to

[00:35:00] $20 million

[00:35:02] business and

[00:35:03] earn $3 million,

[00:35:04] that's a five

[00:35:05] bagger in my

[00:35:05] world.

[00:35:06] You know,

[00:35:07] it doesn't need

[00:35:08] to become the

[00:35:08] next Google,

[00:35:09] the next Meta,

[00:35:10] the next anything.

[00:35:10] You know,

[00:35:11] and that's the

[00:35:11] beauty of kind

[00:35:12] of micro-cap

[00:35:13] and kind of

[00:35:14] smaller cap

[00:35:15] investing is

[00:35:16] all you got to

[00:35:16] do is find

[00:35:17] something that

[00:35:17] can just grow

[00:35:18] revenue,

[00:35:19] grow earnings,

[00:35:19] and not dilute

[00:35:20] you.

[00:35:21] And that last

[00:35:21] part is the

[00:35:22] hard part,

[00:35:23] you know,

[00:35:24] because a lot

[00:35:24] of companies

[00:35:24] are there to

[00:35:26] raise capital

[00:35:26] or raise money.

[00:35:28] And quite

[00:35:29] honestly,

[00:35:29] all I'm

[00:35:30] looking for

[00:35:30] is a simple

[00:35:31] boring business

[00:35:32] that can grow

[00:35:32] revenues,

[00:35:33] earnings,

[00:35:33] and not dilute

[00:35:34] me,

[00:35:34] and that is

[00:35:35] the next

[00:35:35] multi-bagger.

[00:35:36] And that's

[00:35:36] what that

[00:35:36] Jenga research

[00:35:37] report we were

[00:35:38] talking about

[00:35:38] earlier just

[00:35:39] showcased.

[00:35:40] You know,

[00:35:40] it's like 91%

[00:35:41] of the multi-baggers

[00:35:42] were profitable

[00:35:43] companies that

[00:35:44] were micro-caps.

[00:35:46] How do you think

[00:35:46] about position sizing?

[00:35:47] Because I think

[00:35:48] that would be a

[00:35:48] very interesting thing

[00:35:49] in terms of a lot

[00:35:50] of these companies,

[00:35:50] when you've got

[00:35:51] the great company,

[00:35:51] it probably just

[00:35:52] keeps going and

[00:35:53] going and going,

[00:35:54] but at a certain

[00:35:55] point,

[00:35:55] it becomes a huge

[00:35:55] portion of your

[00:35:56] portfolio.

[00:35:56] So you've got on

[00:35:57] one side conviction

[00:35:58] that this is a

[00:35:58] great company,

[00:35:59] on the other side

[00:36:00] you've got like

[00:36:00] it's maybe become

[00:36:01] something that gets

[00:36:01] too big.

[00:36:02] How do you think

[00:36:03] about that?

[00:36:04] Well, the way I think

[00:36:05] about it is going to

[00:36:06] be different than

[00:36:06] what somebody else

[00:36:07] has to think about

[00:36:08] it because,

[00:36:09] you know,

[00:36:09] I think position

[00:36:10] sizing,

[00:36:10] the number of

[00:36:11] positions you have

[00:36:12] is really a

[00:36:13] temperament type

[00:36:14] of thing that

[00:36:14] you realize over

[00:36:16] the course of

[00:36:16] investing for 10

[00:36:17] or 20 years,

[00:36:18] you kind of figure

[00:36:18] out where your

[00:36:19] sweet spot is,

[00:36:19] where you don't

[00:36:20] stay up all night

[00:36:20] thinking about

[00:36:21] something that's

[00:36:22] too big or,

[00:36:22] you know,

[00:36:23] the amount of

[00:36:23] positions you have

[00:36:24] and stuff like that.

[00:36:25] And then for me,

[00:36:26] I've always just been

[00:36:27] a concentrated

[00:36:28] investor.

[00:36:29] when I was a

[00:36:30] private investor

[00:36:32] and then a private

[00:36:32] full-time investor,

[00:36:33] I was mainly in

[00:36:34] five companies,

[00:36:35] you know,

[00:36:36] and it doesn't,

[00:36:36] I don't say that

[00:36:37] in a macho

[00:36:39] bravado type way.

[00:36:40] It's just,

[00:36:41] that's kind of

[00:36:42] just how I did it,

[00:36:43] you know,

[00:36:44] and for other people

[00:36:44] it's going to be

[00:36:45] 50 companies.

[00:36:46] I don't know.

[00:36:46] It doesn't matter.

[00:36:47] It's like whatever,

[00:36:47] however you succeed.

[00:36:49] But for me,

[00:36:49] I've always been

[00:36:50] concentrated.

[00:36:50] And so for me,

[00:36:53] what I normally do

[00:36:54] is I like to put

[00:36:55] on positions

[00:36:56] somewhere around

[00:36:57] a four to

[00:36:58] eight percent

[00:36:59] allocation

[00:37:01] and let them run,

[00:37:02] you know,

[00:37:03] and so I have

[00:37:04] no problems

[00:37:04] holding something

[00:37:05] as a 25 percent

[00:37:06] position if it earned

[00:37:07] its right to be there,

[00:37:08] which means it went up.

[00:37:10] You know,

[00:37:10] where you get,

[00:37:11] where you get yourself

[00:37:12] in trouble,

[00:37:12] where a lot of stock

[00:37:13] pickers get themselves

[00:37:14] in trouble is you buy

[00:37:15] something,

[00:37:15] it drops,

[00:37:16] so you buy more

[00:37:17] when really the

[00:37:19] business was degrading

[00:37:20] and you shouldn't

[00:37:20] have bought more

[00:37:21] and then you buy

[00:37:21] even more.

[00:37:22] It's that averaging

[00:37:23] down that kills

[00:37:24] stock pickers over time.

[00:37:27] And so what I try

[00:37:28] to do is you try

[00:37:29] to try to limit

[00:37:30] my initial position

[00:37:31] sizing to kind of

[00:37:32] that five to eight

[00:37:32] percent.

[00:37:33] And listen,

[00:37:34] I'm in microcap.

[00:37:34] The reason I'm in it

[00:37:35] is because I think

[00:37:35] there's multi-bagger

[00:37:36] potential.

[00:37:37] I'm not doing it

[00:37:37] because I think

[00:37:38] it's 12.5 percent

[00:37:40] IRR versus 12.1,

[00:37:42] you know,

[00:37:42] and so let the thing

[00:37:44] get big as they execute.

[00:37:45] And obviously,

[00:37:47] it does reach a limit

[00:37:49] at a certain point,

[00:37:49] but as long as

[00:37:50] the business is

[00:37:51] executing and I

[00:37:52] can look out

[00:37:53] from where that

[00:37:55] company is trading

[00:37:55] today and look

[00:37:56] out three years

[00:37:57] and still feel

[00:37:58] that there's

[00:37:59] still another

[00:38:00] double in it.

[00:38:02] And that's kind of

[00:38:02] what I try to

[00:38:03] underwrite the

[00:38:03] positions to is,

[00:38:04] you know,

[00:38:05] three years

[00:38:06] can that stock

[00:38:07] double?

[00:38:07] And that's a 25 percent

[00:38:08] Kager.

[00:38:09] You know,

[00:38:10] it doesn't mean

[00:38:10] I'm going to be

[00:38:10] right,

[00:38:10] but that's what

[00:38:12] I'm kind of

[00:38:12] underwriting

[00:38:12] fundamentally to the

[00:38:13] business.

[00:38:14] What do I think

[00:38:14] it can get to?

[00:38:16] And as long as

[00:38:16] I see that,

[00:38:17] I'm going to

[00:38:17] continue to hold it.

[00:38:19] And unless I

[00:38:21] find something

[00:38:22] or something

[00:38:23] that's in the

[00:38:23] portfolio that has

[00:38:24] a higher IRR

[00:38:25] or I find something

[00:38:26] new that's better

[00:38:27] than the worst idea.

[00:38:29] Yeah, it's funny.

[00:38:30] We talked to Jerry

[00:38:30] Parker about trend

[00:38:31] following and he

[00:38:32] operates in a

[00:38:33] completely different

[00:38:33] world than you,

[00:38:34] but the answer was

[00:38:34] exactly the same,

[00:38:35] which is, you know,

[00:38:36] a lot of trend

[00:38:36] followers, when the

[00:38:37] positions get too

[00:38:37] big, they just

[00:38:38] can't handle it.

[00:38:39] They'll sell, but

[00:38:39] he will just let

[00:38:40] it run.

[00:38:41] And it seems like

[00:38:42] that's very consistent

[00:38:42] with what you're

[00:38:43] doing as well.

[00:38:43] Yeah, I mean,

[00:38:44] it's so hard to

[00:38:45] find.

[00:38:46] It's so hard to

[00:38:47] find these things.

[00:38:48] And one thing I

[00:38:49] don't want people

[00:38:49] to think is that

[00:38:50] it's easy.

[00:38:51] If it was easy,

[00:38:51] I'd be on an

[00:38:52] island somewhere.

[00:38:53] You know, it's

[00:38:54] really difficult.

[00:38:57] And, you know,

[00:38:58] most microcap

[00:38:59] successes, you

[00:39:01] know, they last

[00:39:02] for a season,

[00:39:05] you know, call it

[00:39:05] two to four to

[00:39:06] eight quarters,

[00:39:07] you know, where

[00:39:07] they have one

[00:39:09] product that takes

[00:39:09] off for a period

[00:39:10] of time, you

[00:39:11] know, and then it

[00:39:12] ends, you know.

[00:39:13] And so you just

[00:39:15] have to be rational

[00:39:16] too with some of

[00:39:17] these companies,

[00:39:18] even the ones that

[00:39:19] I think have

[00:39:19] long-term promise

[00:39:20] miss.

[00:39:21] You know, my

[00:39:22] intention when we

[00:39:23] purchase something

[00:39:24] is to hold

[00:39:24] forever, but very

[00:39:26] few, if any, will

[00:39:26] earn that right to

[00:39:28] be held forever.

[00:39:29] You know, our

[00:39:30] normal holding

[00:39:31] period is probably

[00:39:32] 18 months on

[00:39:33] average.

[00:39:34] And that's just

[00:39:35] because these are

[00:39:36] small businesses

[00:39:36] and the shelf life

[00:39:38] of small businesses

[00:39:39] is shorter than

[00:39:40] larger and large

[00:39:40] cap companies.

[00:39:42] And you just have

[00:39:43] to live in that

[00:39:44] reality.

[00:39:45] You know, the

[00:39:45] quickest way to

[00:39:46] go broke is the

[00:39:47] coffee can, a bunch

[00:39:48] of these things in

[00:39:48] the portfolio and

[00:39:49] forget about them.

[00:39:51] Yeah.

[00:39:51] And it's

[00:39:52] interesting.

[00:39:52] Like, this is one

[00:39:52] of the things I've

[00:39:53] found in my

[00:39:53] career is for me,

[00:39:54] it's in many ways

[00:39:56] it's a lot harder to

[00:39:56] hold winners than

[00:39:57] it is to hold

[00:39:58] losers.

[00:39:59] You know, when you

[00:39:59] make a bunch of

[00:40:00] money on a stock,

[00:40:01] you're like, I

[00:40:01] got to take the

[00:40:02] profits.

[00:40:02] What if I lose

[00:40:03] this money?

[00:40:03] And like, as it

[00:40:04] keeps going up and

[00:40:04] you think about

[00:40:05] the types of

[00:40:06] returns you can

[00:40:06] see in micro

[00:40:06] cap or like the

[00:40:07] Amazons and the

[00:40:08] large cap space,

[00:40:09] like it's very,

[00:40:10] very hard for any

[00:40:10] kind of investor to

[00:40:11] keep holding on

[00:40:12] throughout that

[00:40:13] whole thing.

[00:40:13] The temptation to

[00:40:14] just say, I need

[00:40:14] to book some

[00:40:14] profits.

[00:40:15] I need to get

[00:40:15] rid of it.

[00:40:16] It's up so much

[00:40:16] is probably very,

[00:40:17] very strong.

[00:40:18] It is.

[00:40:19] And it's like

[00:40:20] losers are easier

[00:40:21] to hold because

[00:40:21] they always love

[00:40:22] cheap.

[00:40:23] Right.

[00:40:24] And so it's just

[00:40:24] easier just to hold

[00:40:26] them, you know,

[00:40:26] and the winners are

[00:40:27] always difficult

[00:40:28] because, you know,

[00:40:30] at any, whether it's

[00:40:31] Amazon or whatever

[00:40:32] it is, you're gonna

[00:40:33] have these massive

[00:40:33] drawdowns too on top

[00:40:34] of it.

[00:40:35] And at any point

[00:40:36] in time, I mean,

[00:40:37] when you look back

[00:40:38] at any five-year

[00:40:38] period on any

[00:40:39] major winner, you

[00:40:40] know, there's

[00:40:41] periods where it's

[00:40:41] cheap, expensive,

[00:40:42] loved, hated.

[00:40:44] You know, it just

[00:40:45] means that you must

[00:40:46] do the work

[00:40:47] yourself.

[00:40:47] You need to do

[00:40:48] independent research,

[00:40:49] form independent

[00:40:50] convictions so you

[00:40:51] can stand alone.

[00:40:53] Just one more

[00:40:54] for you before I

[00:40:54] hand it back to

[00:40:55] Justin.

[00:40:55] Do you think about

[00:40:56] things like sector

[00:40:56] concentration?

[00:40:57] Like in our quant

[00:40:58] world, it could be

[00:40:59] very important, but I

[00:40:59] would think in your

[00:41:00] world, maybe not so

[00:41:01] much.

[00:41:01] I mean, if you're

[00:41:02] able to hold the

[00:41:02] positions and you

[00:41:03] have the conviction,

[00:41:04] like, do you care

[00:41:05] if a lot of your

[00:41:06] positions are in the

[00:41:06] same sector?

[00:41:07] I mean, if it got

[00:41:09] really, you know,

[00:41:10] 50% of the

[00:41:10] portfolio, I would

[00:41:11] probably pay attention

[00:41:12] to it.

[00:41:12] But I mean, we're

[00:41:14] mainly trying to

[00:41:15] find kind of the,

[00:41:16] like I said, these

[00:41:16] overqualified

[00:41:17] management teams.

[00:41:18] And we're, I mean,

[00:41:20] at least with our

[00:41:20] strategy, we're

[00:41:21] industry agnostic.

[00:41:22] So we have, you

[00:41:22] know, we have a

[00:41:23] mining company

[00:41:24] alongside a

[00:41:24] healthcare company

[00:41:25] alongside a food

[00:41:26] company.

[00:41:26] So we're, we're

[00:41:28] pretty well

[00:41:28] diversified across

[00:41:30] industry.

[00:41:31] And I would

[00:41:32] probably answer that

[00:41:33] question the same

[00:41:33] way I would answer

[00:41:34] a macro question.

[00:41:35] Do you worry about

[00:41:35] the economy?

[00:41:36] I'm like, no, I

[00:41:37] just, because I

[00:41:37] have no control

[00:41:38] over the economy

[00:41:38] or where the

[00:41:39] markets are headed,

[00:41:40] you know, but all

[00:41:41] I have control over

[00:41:42] is, is in finding

[00:41:45] really good

[00:41:46] investments, you

[00:41:47] know, kind of

[00:41:48] like the, kind of

[00:41:49] the filters that I

[00:41:50] kind of look at

[00:41:50] are, can this

[00:41:51] business grow through

[00:41:51] a recession?

[00:41:53] You know, well,

[00:41:54] that strips out

[00:41:55] 98% of companies,

[00:41:56] you know, does

[00:41:57] this company, this

[00:41:58] small business

[00:41:59] actually have a

[00:41:59] balance sheet that

[00:42:01] can endure through

[00:42:01] a recession, hopefully

[00:42:02] be aggressive when

[00:42:03] their competitors

[00:42:03] aren't, you know,

[00:42:05] well, that's another

[00:42:05] filter, you know,

[00:42:07] do we think that

[00:42:07] there is intelligent

[00:42:08] fanatic leadership at

[00:42:09] this business?

[00:42:10] And I don't call

[00:42:10] anybody running a

[00:42:11] micro cap company

[00:42:12] an intelligent fanatic

[00:42:13] because that's a

[00:42:14] label that's earned

[00:42:15] after they build it

[00:42:16] into a mid cap or

[00:42:17] a large cap or

[00:42:17] something, not when

[00:42:18] they're a micro cap,

[00:42:19] but we look for

[00:42:20] those, those

[00:42:21] character traits.

[00:42:22] And then lastly is,

[00:42:22] you know, valuation.

[00:42:23] Do I think I can

[00:42:24] double my money in

[00:42:24] three years?

[00:42:26] But I think, I

[00:42:27] think that's

[00:42:29] predominantly how we,

[00:42:30] how we look at how

[00:42:31] to control the macro

[00:42:32] or industry

[00:42:33] concentration is

[00:42:34] really just to make

[00:42:35] sure that we're in

[00:42:36] the best investments

[00:42:37] at all times and

[00:42:38] being aware of what

[00:42:38] we own at all times,

[00:42:40] looking at our

[00:42:41] watch list, turning

[00:42:42] over all the rocks

[00:42:42] that we can.

[00:42:43] And we're looking

[00:42:44] for a reason to get

[00:42:45] rid of our worst

[00:42:46] idea in the

[00:42:46] portfolio.

[00:42:47] We're always looking

[00:42:48] to upgrade that

[00:42:50] portfolio.

[00:42:50] We're always looking,

[00:42:51] you know, in a

[00:42:52] lineup of 300

[00:42:53] hitters, you know,

[00:42:54] we're looking to

[00:42:55] add somebody that's

[00:42:56] can bat 320.

[00:42:58] Kick out the

[00:42:58] worst one.

[00:43:01] One of the things

[00:43:02] that's probably

[00:43:03] challenging for a

[00:43:04] lot of individual

[00:43:05] investors, if they

[00:43:06] go to a micro cap

[00:43:07] company's website and

[00:43:08] they look at the

[00:43:10] management presentation,

[00:43:11] you know, 99% of

[00:43:13] them are going to be

[00:43:15] positive about the

[00:43:16] company as they kind

[00:43:17] of should be.

[00:43:18] You know, you're

[00:43:18] picking up the phone

[00:43:19] and either calling or

[00:43:21] going to visit and

[00:43:22] obviously getting to

[00:43:23] know the team and

[00:43:24] the people and doing

[00:43:26] deep dives into these

[00:43:27] businesses.

[00:43:28] But is there anything

[00:43:32] where it's an

[00:43:33] immediate red flag to

[00:43:34] you that like an

[00:43:35] individual investor

[00:43:36] might be able to?

[00:43:38] I mean, you kind of

[00:43:39] said it's a lot of

[00:43:39] just independent,

[00:43:40] you know, research

[00:43:41] research that you're

[00:43:42] doing.

[00:43:43] But as in your

[00:43:45] experience, has there

[00:43:45] been things I'm

[00:43:46] thinking you could just

[00:43:47] do the opposite if

[00:43:48] they if the team owns

[00:43:49] none of the stock or

[00:43:51] if the company is

[00:43:51] losing money hand over

[00:43:52] fist and maybe it's

[00:43:53] just those types of

[00:43:54] things that, you

[00:43:55] know, for you, it's a

[00:43:56] nonstarter red flag.

[00:43:57] But is there anything

[00:43:57] else that you can think

[00:43:58] of that an individual

[00:43:59] investor might be able

[00:44:01] to latch on to to just

[00:44:03] say, no, this is not

[00:44:04] something I should be

[00:44:05] looking at?

[00:44:06] Yeah, I mean, if

[00:44:06] you're a beginning

[00:44:07] investor, my best

[00:44:08] advice is something you

[00:44:09] just hit on, which is

[00:44:10] obviously the

[00:44:10] profitability component.

[00:44:12] You know, it's like

[00:44:13] if I think roughly

[00:44:16] last time I checked, I

[00:44:17] think it was 17% of

[00:44:18] micro caps in the U.S.

[00:44:19] are profitable.

[00:44:21] So just focus on

[00:44:23] those 17% because

[00:44:25] that'll cut out probably

[00:44:26] 90% of the issues,

[00:44:28] whether it's just a

[00:44:29] bad business or no

[00:44:30] business or, you

[00:44:32] know, fraud or

[00:44:32] whatever.

[00:44:33] I think when you when

[00:44:34] you have actually a real

[00:44:35] business, it cuts out a

[00:44:36] lot of the issues.

[00:44:37] It doesn't mean it's

[00:44:37] going to be a success.

[00:44:39] But I think that's a

[00:44:39] good first place to

[00:44:40] start.

[00:44:41] And I'm not saying only

[00:44:43] profitable is the right

[00:44:44] way to go.

[00:44:45] I'm just saying if you're

[00:44:46] new, that's a good

[00:44:47] place to start.

[00:44:48] Unfortunately, as you

[00:44:49] guys are probably both

[00:44:49] aware, well aware, like

[00:44:51] how most people get an

[00:44:52] entree into the space is

[00:44:53] some glossy mailer they

[00:44:54] got in their inbox, you

[00:44:56] know, whether it's your

[00:44:56] email or your snail mail

[00:44:58] at your house or

[00:44:59] something like that,

[00:45:00] that's promoting some

[00:45:01] the next Amazon or

[00:45:02] whatever it is.

[00:45:03] And the thing goes

[00:45:04] down 99% in 12 months

[00:45:06] and you lose all your

[00:45:06] money and you never

[00:45:07] want to look at

[00:45:07] microcaps ever again,

[00:45:09] you know, and that's

[00:45:10] how most people get

[00:45:11] into the space and

[00:45:12] that's how most people

[00:45:13] get a bad taste in

[00:45:14] their mouth from it.

[00:45:15] And it's unfortunate

[00:45:15] because I think it's

[00:45:17] an incredible

[00:45:17] environment to invest.

[00:45:19] But you just have to

[00:45:20] kind of use kind of

[00:45:21] common sense, just

[00:45:22] like you said, Justin,

[00:45:23] just like look at some

[00:45:23] profitable companies

[00:45:24] where management owns

[00:45:25] a decent piece of the

[00:45:27] business and and

[00:45:28] it's probably a good

[00:45:28] place to start.

[00:45:29] And it doesn't mean

[00:45:30] that, you know, you're

[00:45:31] going to make money on

[00:45:32] it, but just go look

[00:45:33] at all the press

[00:45:34] releases, read all

[00:45:35] the earnings calls if

[00:45:36] they have them, you

[00:45:37] know, are they, you

[00:45:38] know, it's kind of

[00:45:39] like, do they do what

[00:45:40] they say and say what

[00:45:41] they do, you know, and

[00:45:43] dive into it from there.

[00:45:44] It's either the glossy

[00:45:45] mailer or the tip from

[00:45:46] your buddy or your

[00:45:47] uncle, you know, that

[00:45:48] has a small cap that's

[00:45:50] going to be the next

[00:45:50] whatever.

[00:45:51] And it's, you know, at

[00:45:52] 25 cents and the next

[00:45:53] thing you know, it's at

[00:45:54] like 10 cents.

[00:45:55] You know, I kept the

[00:45:57] new self spreadsheet for

[00:45:59] three years of every one

[00:46:01] of those things I received

[00:46:02] in my inbox.

[00:46:03] And then all of a sudden

[00:46:05] I stopped getting them

[00:46:05] probably because I was

[00:46:06] letting people know about

[00:46:07] it, but I think I

[00:46:08] collected 36 over like a

[00:46:10] three year period.

[00:46:11] And there was not one

[00:46:13] company that didn't go

[00:46:14] down 95%.

[00:46:15] Oh, wow.

[00:46:17] Yeah, it's pretty wild.

[00:46:19] But yeah, but, but it's

[00:46:21] still, but I would, but I

[00:46:23] will say it's an incredible

[00:46:24] universe to invest in mainly

[00:46:27] for that same reasons.

[00:46:28] You know, a lot of people

[00:46:29] just don't want to think

[00:46:30] about investing here in

[00:46:32] this, in this landscape,

[00:46:33] you know, and that's

[00:46:34] creates opportunity too.

[00:46:36] And there's 9,000

[00:46:36] companies and, you know, a

[00:46:38] lot of them aren't

[00:46:39] investable, but if you can

[00:46:40] find a handful that are, you

[00:46:42] know, you can, you can do

[00:46:43] really well.

[00:46:45] How do you think about

[00:46:46] debt?

[00:46:47] Do you, do you try to

[00:46:47] avoid companies that have

[00:46:48] high levels of debt?

[00:46:49] Yes.

[00:46:49] Do you dig into it more

[00:46:50] D in more detail or?

[00:46:51] Yeah, I, I, I generally

[00:46:53] hate debt.

[00:46:54] I try to stay away and stay

[00:46:55] clear of anybody, any

[00:46:56] company that has debt.

[00:47:01] And what is, you

[00:47:02] mentioned, I think you're

[00:47:03] holding the positions,

[00:47:04] you know, for roughly

[00:47:04] maybe 18 months or two

[00:47:05] years, your average

[00:47:06] holding period, but what

[00:47:07] would be, like, what

[00:47:09] would prompt you to sell

[00:47:11] one of the positions?

[00:47:13] There's just a better

[00:47:14] opportunity or maybe

[00:47:15] something else changes.

[00:47:16] What would be the

[00:47:17] self-discipline?

[00:47:18] Um, on the sell side, I

[00:47:21] would say that you

[00:47:23] normally sell for four

[00:47:24] reasons.

[00:47:25] Um, two of them is

[00:47:27] because something good

[00:47:28] happened and two of them

[00:47:29] were because something

[00:47:29] bad happened.

[00:47:30] You know, the, the two

[00:47:31] that are the two good

[00:47:32] reasons to sell is that

[00:47:33] somebody went up too far

[00:47:34] too fast.

[00:47:35] You kind of pulled

[00:47:36] forward, you know, five

[00:47:37] years worth of returns in

[00:47:39] the current year.

[00:47:39] Um, you feel like a hero

[00:47:41] and they get too expensive

[00:47:42] so you sell something.

[00:47:43] You know, the second good

[00:47:44] reason to sell is because

[00:47:45] you do find something

[00:47:47] better than your least

[00:47:48] convicted name in the

[00:47:50] portfolio.

[00:47:50] So you're upgrading the

[00:47:51] portfolio.

[00:47:51] So I view those things as

[00:47:53] two reasons, two good

[00:47:54] reasons, the two bad, bad

[00:47:56] reasons, not bad reasons,

[00:47:57] but two reasons that, um,

[00:47:59] because something bad

[00:48:00] happened, you know, the

[00:48:01] company stops performing

[00:48:02] the way you think it

[00:48:03] should.

[00:48:04] And, or which I guess they

[00:48:07] could, they're oftentimes

[00:48:08] mutually exclusive.

[00:48:09] You don't trust management

[00:48:10] anymore.

[00:48:13] And if I were to put those

[00:48:14] into buckets, I would say,

[00:48:17] you know, selling something

[00:48:19] because you found something

[00:48:20] better probably is higher

[00:48:22] percent selling something

[00:48:24] because the business stops

[00:48:25] performing is high percent.

[00:48:28] Um, you know, you wish that

[00:48:31] the whole portfolio went up

[00:48:31] too far, too fast.

[00:48:33] That's a good problem to

[00:48:33] have.

[00:48:34] And, uh, you know, just lack

[00:48:37] of trust in management because

[00:48:38] they did or said something

[00:48:39] that you didn't like.

[00:48:40] Um, you feel like they're

[00:48:41] untrustworthy.

[00:48:42] You know, that happens, you

[00:48:44] know, quite a few times too,

[00:48:45] but not as much as those

[00:48:46] other two.

[00:48:48] But I think, um, turnover is

[00:48:52] part of a successful micro

[00:48:54] cap strategy.

[00:48:55] You know, I think in today's

[00:48:56] day and age of buy and hold

[00:48:57] everything forever, you

[00:48:59] know, turnover is sort of

[00:49:00] perceived negatively by most

[00:49:03] investors, but it's really a

[00:49:04] necessity, you know, in

[00:49:06] micro cap, uh, just because

[00:49:08] these companies are small

[00:49:09] companies and they evolve in

[00:49:11] good ways and bad ways.

[00:49:13] And probably more than half

[00:49:14] the times it's going to be

[00:49:15] negatively surprising you.

[00:49:17] And so it's just part of the

[00:49:19] process is that turnover, you

[00:49:20] know, and even, even when you

[00:49:22] think about turnover, you know,

[00:49:23] even when you look at the

[00:49:24] greatest investors ever, like

[00:49:25] Buffett or Lynch or Greenblatt,

[00:49:26] their best years are when they

[00:49:27] had a hundred percent

[00:49:28] turnover per year in their

[00:49:29] book, you know, and not when

[00:49:31] they had 10% turnover.

[00:49:32] And, um, that's something I like

[00:49:35] to remind people to it.

[00:49:36] Even, even somebody like, uh,

[00:49:38] Buffett in his portfolio today.

[00:49:40] I mean, there's a guy that's

[00:49:41] been investing for 70 years.

[00:49:43] He invests his public book

[00:49:45] exclusively mainly in large

[00:49:46] caps because he's so big, he

[00:49:47] can't do anything smaller.

[00:49:49] So he's mainly in large caps,

[00:49:50] mega caps in his public book.

[00:49:52] He's owned hundreds of stocks

[00:49:54] over the last 70 years, and he

[00:49:56] owns 15 or so today that he's

[00:49:58] owned for 10 plus years.

[00:50:01] So that just means even the

[00:50:03] greatest investor ever, he's

[00:50:05] had to own hundreds of stocks

[00:50:06] to find a handful that are

[00:50:07] worthy of holding for more

[00:50:08] than 10 years.

[00:50:10] And so just layer that on top

[00:50:12] of small, evolving, emerging

[00:50:13] small micro cap companies.

[00:50:15] Of course, there's going to be

[00:50:16] a lot of turnover.

[00:50:18] One of the things when I was,

[00:50:20] uh, before we had you on, I

[00:50:21] was doing a little research and

[00:50:22] I went to your capital

[00:50:23] management site and it's very

[00:50:26] rare to see investment

[00:50:28] strategies that saying,

[00:50:29] you know, investment capacity

[00:50:31] of, in your case, $10 million

[00:50:33] in the fund and then $10

[00:50:35] million in the SMA.

[00:50:36] So obviously you've given a

[00:50:37] lot of thought to, you know,

[00:50:39] what the capacity is, the

[00:50:41] amount of money you can

[00:50:43] effectively deploy, deploy in

[00:50:44] these companies.

[00:50:45] But just talk to that a little

[00:50:47] bit because I think that

[00:50:48] that's sort of unique to you,

[00:50:49] but that's also important,

[00:50:50] right?

[00:50:51] In terms of being able to

[00:50:52] generate the returns that

[00:50:54] you're hoping to produce.

[00:50:56] Yeah.

[00:50:56] And especially if, if you want

[00:50:58] to remain kind of in that

[00:50:59] sub $50 million, at least

[00:51:01] initially, hopefully they grow

[00:51:03] up and out of that 50 million

[00:51:04] to a hundred and 500

[00:51:05] million.

[00:51:05] But yeah, I mean, we are a

[00:51:08] genuinely capacity constrained

[00:51:09] fund.

[00:51:10] And I was upfront about that

[00:51:12] from the very beginning.

[00:51:13] You know, as you guys know

[00:51:15] that, you know, people that

[00:51:16] manage capital usually don't

[00:51:17] put upper limits on how much

[00:51:18] they invest.

[00:51:20] We had that in our eyes every

[00:51:21] day.

[00:51:21] We had like a $100,000 minimum

[00:51:23] and a $200,000 maximum.

[00:51:26] And, you know, and it's, it

[00:51:27] worked out really well for us

[00:51:28] because I'm sure you guys are

[00:51:30] know plenty of them too.

[00:51:31] It's like you see so many

[00:51:33] managers take on a big lump sum

[00:51:34] from one investor too.

[00:51:36] And, you know, God forbid that

[00:51:37] investor leaves, they have to

[00:51:39] close up shop.

[00:51:39] And so I kind of viewed, I

[00:51:42] wanted to create a very

[00:51:43] anti-fragile kind of fund.

[00:51:45] And the way to do that is to

[00:51:47] not have a coffee table with

[00:51:48] three legs on it where you

[00:51:49] pull one out or even before

[00:51:51] you pull one out, it'll fall

[00:51:52] over.

[00:51:52] You know, I want to have one

[00:51:53] with 50 legs on it.

[00:51:55] So I'd rather have a bunch of

[00:51:57] smaller investors that

[00:51:59] understand the timeframe

[00:52:00] duration and volatility of the

[00:52:02] type of investing we're

[00:52:03] doing.

[00:52:03] And so I spent a lot of time

[00:52:05] just attracting the right

[00:52:07] type of investor into the

[00:52:09] fund.

[00:52:09] And so we are not an

[00:52:10] institutional fund.

[00:52:12] Most of our investors are

[00:52:13] small business owners, you

[00:52:15] know, they have a two to

[00:52:16] $10 million net worth.

[00:52:18] And, you know, they'd love

[00:52:19] to put $250,000 in something

[00:52:21] like this because it's not that

[00:52:23] much money to them.

[00:52:23] And they love kind of

[00:52:25] investing in types of the

[00:52:26] businesses that they probably

[00:52:27] ran or managed or sold.

[00:52:29] It's something they gravitate

[00:52:31] to.

[00:52:31] And so just been blessed with a

[00:52:32] good group of kind of small

[00:52:34] business owner investors at the

[00:52:36] fund level.

[00:52:38] And, you know, if we're

[00:52:39] going to remain investing in

[00:52:41] these smaller companies, you

[00:52:43] know, if they're all $50

[00:52:44] million markup, which they're

[00:52:45] not.

[00:52:46] But I mean, there's only so

[00:52:46] much money even shoveled down a

[00:52:48] basket of illiquid small

[00:52:50] things.

[00:52:51] And so we're cognizant of that.

[00:52:52] And so we close down the fund

[00:52:55] quite readily and we open up

[00:52:57] infrequently.

[00:52:58] And when we open up, it's

[00:53:00] usually because we drew down.

[00:53:01] And I think it's a good

[00:53:02] opportunity for new investors at

[00:53:04] the current price.

[00:53:05] And then we close back up and,

[00:53:08] you know, we hopefully that we

[00:53:10] won't open up quite honestly.

[00:53:11] Hopefully we don't open up

[00:53:12] again, you know, quite

[00:53:14] honestly, you know, because I

[00:53:15] just I think we'll get to a

[00:53:16] hundred million in assets.

[00:53:17] We're at twenty five million

[00:53:18] now.

[00:53:18] Just so you know, I have no

[00:53:20] doubt we'll get to a hundred

[00:53:21] million, but it's not going to

[00:53:21] be from bringing on seventy

[00:53:22] five million dollars.

[00:53:23] It's going to be from going up

[00:53:25] and portfolio as we as it

[00:53:28] matures.

[00:53:29] It's going to look larger, you

[00:53:31] know, because if we hold on to

[00:53:32] some of these winners that

[00:53:33] become small caps, the average

[00:53:34] market cap will look like a

[00:53:36] small cap, not a micro cap.

[00:53:38] But we're not going to sell

[00:53:39] them just because they grew

[00:53:40] out of our mandate or our

[00:53:41] name of micro cap.

[00:53:44] It's just going to be a

[00:53:45] successful outcome.

[00:53:46] And so I think we'll have to

[00:53:47] evolve with it just like

[00:53:47] everybody does.

[00:53:48] You know, I don't know where

[00:53:49] we're going to be in ten years.

[00:53:50] I just love what I'm doing.

[00:53:51] You know, I can kind of see

[00:53:52] where I think we're going to

[00:53:53] be in three.

[00:53:55] And just like in the port, just

[00:53:56] like in the companies that we

[00:53:58] own in the portfolio, I kind

[00:54:01] of view our fund the same

[00:54:03] way where, you know, I can

[00:54:04] only see as far as I can

[00:54:05] see when I get there, I'll be

[00:54:06] able to see further, which is

[00:54:07] a JP Morgan quote.

[00:54:08] I kind of believe that's a

[00:54:09] good way to kind of manage

[00:54:11] things, you know, for me as

[00:54:13] a overseeing the portfolio of

[00:54:16] companies that we own.

[00:54:18] I'm always looking at three

[00:54:19] year increments and also kind of

[00:54:21] at the funds fund level too.

[00:54:24] I think that's very important.

[00:54:25] You know, the types of

[00:54:26] clients you're getting to invest,

[00:54:29] you know, you're being up front

[00:54:31] with them, you know, you're

[00:54:35] you're conditioning them to be

[00:54:36] prepared, to think long term,

[00:54:38] to be ready for the volatility

[00:54:39] so they can get the most out of

[00:54:40] the strategy.

[00:54:41] You know, not a lot of people

[00:54:44] that run money sort of think

[00:54:45] that way, but to help them get

[00:54:47] the most out of what you're

[00:54:48] doing, it's super important for

[00:54:49] for all that to be on the table.

[00:54:51] So that's very cool.

[00:54:52] Most of most of my time is

[00:54:54] trying to on the fun side

[00:54:56] with new and partners.

[00:54:57] If they come in is, you know,

[00:54:58] trying to scare the heck out of

[00:55:01] them so they don't come in

[00:55:02] the way that, you know, I'm like,

[00:55:04] Hey, if the market's down 30,

[00:55:05] we're gonna be done 45, you know,

[00:55:07] is that what do you want?

[00:55:08] You know, if you handle that,

[00:55:09] you know, and so you just try

[00:55:11] to be upfront with them.

[00:55:13] Um, but it, it lets the right

[00:55:15] people kind of self-select in, uh,

[00:55:18] over time and it's created a really

[00:55:20] good, good core group of, of

[00:55:22] partners that we have with us at

[00:55:23] the fund that I'm proud to call

[00:55:25] partners and they're just normal

[00:55:27] people that you see on the

[00:55:28] street that own small businesses.

[00:55:29] And I love that more than, you

[00:55:31] know, a fund to fund trying to

[00:55:34] Nick pick me on every type of

[00:55:35] quantitative metric of what the

[00:55:37] portfolio did in the month of

[00:55:38] August, you know, for,

[00:55:40] I need a return attribution on all

[00:55:43] your holdings for the last 15

[00:55:45] days.

[00:55:45] Okay.

[00:55:47] Um, all right.

[00:55:49] So we have two standard closing

[00:55:50] questions.

[00:55:51] We actually like to ask all of our

[00:55:52] guests.

[00:55:53] Usually we only ask one, but since

[00:55:55] this is the first time on with us,

[00:55:56] you know, we've got to, we've got

[00:55:57] to get two in here.

[00:55:58] So the first one is, um, what is

[00:56:00] one thing you believe about

[00:56:02] investing that the majority of your

[00:56:03] peers would probably disagree with

[00:56:06] you all?

[00:56:08] When you say peers, would you say

[00:56:10] other micro cap investors or I

[00:56:12] guess just profession, it could be

[00:56:13] micro cap investors or professional

[00:56:15] investors in general.

[00:56:17] Well, let's this, well, what about

[00:56:18] the thin twit crowd?

[00:56:19] I don't like if it was pure peers for

[00:56:21] micro cap that are also micro cap

[00:56:23] investors.

[00:56:23] I don't think too many.

[00:56:24] I don't think there's anything that my

[00:56:25] peers who are also experienced micro

[00:56:28] capper cappers would generally disagree

[00:56:30] with me on agree with them on.

[00:56:32] I think that it would be just like a lot

[00:56:36] of things with investing.

[00:56:37] I think alpha is generated in a lot of

[00:56:39] small ways where we're, we, we agree,

[00:56:43] but it's just, um, executed slightly

[00:56:46] differently.

[00:56:47] And I think that's how it answered that

[00:56:49] question.

[00:56:50] If I was directed towards other experienced

[00:56:52] micro cap investors for peers that are

[00:56:56] investors in general, but not micro cap

[00:56:58] investors, I would say probably, and we hit on

[00:57:02] this already.

[00:57:02] I think just the belief that low turnover

[00:57:05] is good and high turnover is bad.

[00:57:08] You know, I think that's where I would

[00:57:09] disagree with a lot of folks, you know,

[00:57:13] in generally on financial and fin twit.

[00:57:17] All right, great.

[00:57:18] Um, and then this last one is based on your

[00:57:21] experience in the market, if you could teach

[00:57:23] one lesson to your average investor, what

[00:57:24] would that be?

[00:57:26] Uh, I would say the, the most important

[00:57:28] thing would be just to do your own work.

[00:57:32] You know, it doesn't mean that you can't

[00:57:33] use other people's work, but I think you

[00:57:35] need to verify that other person's work and

[00:57:37] kind of what we talked about before.

[00:57:39] I mean, the key to this, to stop picking is

[00:57:42] doing independent research to form that

[00:57:43] independent conviction.

[00:57:45] So you can just know what to do before other

[00:57:48] people, you know, and even when I was a

[00:57:50] private full-time investor, yeah, I had big,

[00:57:53] big wins, but just that independent research

[00:57:56] and conviction and just having a pulse on that

[00:57:59] business, you know, it was the large losses I

[00:58:03] never took that kept me in the game as much as

[00:58:05] the big wins.

[00:58:07] And so you're not able to do that unless you

[00:58:09] really dive in yourself.

[00:58:10] And I also think that's like the best resume for a

[00:58:14] younger stock picker or somebody who wants to get

[00:58:16] into it.

[00:58:16] Like, you know, go find, find a couple of

[00:58:18] businesses that you really like, talk to the

[00:58:19] management teams, do the work, form conviction,

[00:58:22] be the ax in that name.

[00:58:23] You know that business better than anybody else,

[00:58:25] you know, get loud about it on X.

[00:58:28] I don't care.

[00:58:28] I know I did back in the day.

[00:58:29] I don't anymore, but, uh, you know,

[00:58:32] staple your name to it, you know, make people

[00:58:34] know that you were the one that found that

[00:58:36] thing early after, and then it goes up a

[00:58:38] thousand percent.

[00:58:38] That's your resume.

[00:58:39] You know, you'll have employers, investors,

[00:58:43] whatever, knocking down your, your door.

[00:58:45] If you have a history of finding winners in the,

[00:58:48] in the stock market.

[00:58:50] Great Ian.

[00:58:51] Thank you very much.

[00:58:52] This has been awesome.

[00:58:52] Appreciate it.

[00:58:53] Thank you.

[00:58:54] Appreciate it.

[00:58:54] This is Justin again.

[00:58:55] Thanks so much for tuning into this episode of

[00:58:57] excess returns.

[00:58:58] You can follow Jack on Twitter at practical quant

[00:59:01] and follow me on Twitter at JJ Carboneau.

[00:59:05] If you found this discussion interesting and

[00:59:07] valuable, please subscribe in either iTunes or

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