Ian Cassel - Micro Machine
Ian Cassel is the CIO at Intelligent Fanatics Capital Management ("IFCM"). IFCM invests in the smallest public companies in the world. They focus on businesses that are run by management teams who are capable of growing those businesses while benefiting stakeholders. Ian also founded MicroCapClub.
In this episode Ian discusses how he became a microcap investor. One of his first successes was XM Satellite Radio. He discovered the company when it was a microcap trading for $2/sh and didn't have any contracts with car manufacturers yet. Ian saw they were presenting at a conference in NY, got in a car, and met with the CEO. After that meeting Ian became obsessed with turning into a full time private investor.
Ian stresses the importance of doing deep due diligence, remaining rational, and keeping personal expenses "variable." He invests in a concentrated manner (only a few stocks at a time), which is very Buffett like. Unlike Buffett, however, Ian discusses the importance of remaining open to selling winners. This is because Ian is "fishing in a pond" of smaller companies and execution risk must always be monitored.
Ian is a refreshing voice in the investment community and we are happy to have him join the show!
Album art photo taken by Mike Ando.
Thank you to Mathew Passy for the podcast production. You can find Mathew at @MathewPassy on Twitter or at thepodcastconsultant.com
+ Transcript
Ian Cassel is the CIO at Intelligent Fanatics Capital Management ("IFCM"). IFCM invests in the smallest public companies in the world. They focus on businesses that are run by management teams who are capable of growing those businesses while benefiting stakeholders. Ian also founded MicroCapClub. In this episode Ian discusses how he became a microcap investor. One of his first successes was XM Satellite Radio. He discovered the company when it was a microcap trading for $2/sh and didn't have any contracts with car manufacturers yet. Ian saw they were presenting at a conference in NY, got in a car, and met with the CEO. After that meeting Ian became obsessed with turning into a full time private investor. Ian stresses the importance of doing deep due diligence, remaining rational, and keeping personal expenses "variable." He invests in a concentrated manner (only a few stocks at a time), which is very Buffett like. Unlike Buffett, however, Ian discusses the importance of remaining open to selling winners. This is because Ian is "fishing in a pond" of smaller companies and execution risk must always be monitored. Ian is a refreshing voice in the investment community and we are happy to have him join the show! Note: We reference Connor Haley's presentation in this discussion. That presentation can be found here.
Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host Bill Brewster, I am super amped to be joined by Ian Cassel today. For those that know me from the Value: After Hours podcast with Tobias Carlisle and Jake Taylor, Ian is all 10 of our fans. We only have 10. They're all bots that Ian pays for and I appreciate all of his support. That's an inside joke, but it's also a little true. Anyway, we'll dive into that as we go. Ian is a very cool investor. He is an investor and entrepreneur. He is the man behind MicroCapClub. He wrote two books on the Intelligent Fanatics concept. He runs his own micro-cap strategy, I believe in a fund structure, right, Ian?
Ian: That's correct. Yeah.
Bill: We're going to dive into that. As always, none of this is investing advice. I'm not your fiduciary. Ian's not your fiduciary. Your money is your money, be responsible with it, do your own due diligence. With that out of the way, Ian, what's going on, man?
Ian: I'm just honored to be on here. I'm a big fan of you and what you guys were doing with Toby and Jake, and just seeing you doing your own thing is pretty wild. It's pretty great, too, because I think you're a special talent. I'm embarrassed to say that just for the listeners too, I mean, this is the first time we've talked.
Bill: I know this is the legit introduction right here.
Ian: Yeah. Which is ridiculous, because we've messaged quite a bit back and forth on Twitter and through email. But yeah, I'm literally looking forward to the conversation.
Bill: Dude, what's funny is, I feel like I know you. If you had told my 17-year-old self, “You're going to make friends or feel connections to people on the internet,” I'd be like, “No, you're a nerd.” But that's 100% what my life has become. It's wild.
Ian: The people you can connect with just the breadth of those folks in different areas, it's pretty spectacular.
Bill: Yeah, it really is. We were talking about it shortly before we came on, but Toby giving me a shot was, I remember when he put me on his first podcast, and it was like Jim O'Shaughnessy dropped, and I wrote him, and I was like, “Toby, you don't have to feature me. I'm no one. This is Jim O'Shaughnessy, what are you doing?” He really encouraged me to come on. He believed in me. It's been super fun. I've said it before, I'm glad that I could reciprocate to him in some way because it's been a very fun journey.
Ian: Toby's an amazing talent. I think a lot of people look at him and they just think, “Oh, here's just a deep value dude. Just all about how the market's always too high." He is so well versed across almost every aspect of investing, and I like how he does his interviews, too. I was on his podcast before. I think a lot of times, he knows more about the subject matter than the person he has on, like he's done that type of research beforehand. My hat's off to him on how he conducts himself, how he does his business, and just how he prepares, and it shows in the quality of what he produces, whether it's the podcast, books, or whatever he does. I'm a big fan of his.
Bill: I think not enough people realize that the reason that he's doing what he's doing is he tried to do a lot of the other stuff and determined this is the best solution for me. I think that some people that maybe are just starting to follow him or like, “Oh, this is just some deep value guy,” but it's like, “No, he's thought about a lot of the stuff that you're thinking about,” he just is probably further along in the process, and maybe he'll end up where he is eventually.
Ian: Yeah. He's trying different things. Just like you're trying this and you're successful at it, but you can't be afraid to do it, go out and try new things, especially when you're beginning. That's how you figure out who you are. You don't know what will work next time until you fail at something.
Bill: How'd you figure out who you were?
Ian: It's a good question.
Bill: For people that don't know your background, where'd you start? I mentioned that your micro-cap, for those that don't know, how would you define what you're looking at?
Ian: I define micro-cap as sub $300 billion market cap. I got started in investing when I was 16, 17 years old when I was in high school. My parents ran a small business. Actually, my grandfather started that small business-- when I say small, I'm talking-- it was my grandfather and my dad, like two- or three-man shop.
Bill: What kind of business?
Ian: It was basically graphic design, graphic arts, kind of truck lettering back. My grandfather started in 1945. Then my dad took it over in the early 80s. The expectation was for me to take that over. Growing up in that business, I was always there, because my dad was always working. It was always just a chore. It wasn't anything that I felt like I'd love to do. One of the hardest conversations I ever had was when I was 15 and I realized I do not want to be in this business anymore, but how do you tell your dad somebody-- we had a good relationship, somebody you admire that, “Hey, this isn't for you.” As a 15-year-old, it's a lot of stress built up.
Bill: Well, especially to a business been around since the 40s. It's like, “I don't want to carry on the family legacy.” That's not the easiest thing to say.
Ian: Yeah. that was the stress point. I got lucky because my sister married well, and my brother-in-law is now taking over the business. But back then, I didn't know that.
Bill: [laughs] You couldn’t foresee that at the time.
Ian: I really got lucky, I got bailed out. [laughter]
Ian: I remember, just sit down stressing out with my dad, I was like, “Hey, this isn't for me, I'm sorry.” I spent six months thinking about this conversation. He just said, “That's fine.” As soon as he said, “That was fine,” it just brought the stress level down to a point where I could then figure out what I really wanted to do. From that point forward, when I was 16, 17, he had saved for me around $20,000 ever since I was a baby, and they said, “Hey, this is what we saved for you. You can use this for your college education, you can decide where you want to go, this is all you're getting. If it's more than this, figure it out. We would let you know now, so you can have that choice, you can have that decision.” At that point, that was 1997, so kind of ramping up into the internet bubble.
Bill: Oh, my, what a dangerous time to be told that you have some money.
Ian: Oh, it was spectacular. [laughter]
Bill: It was great for a little while, right?
Ian: It was. Yeah. They ended up introducing me to their financial advisor. I threw that 20 grand into an account with him. He introduced me to some small-cap tech names.
Bill: Oh, wow.
Ian: I was like, “All right, let's grow this.” He introduced me to a couple of them. I was in control of the capital. I got lucky. That was a similar instance, it feels like right now, where you could throw a darts at some tech names and do well. That's how that market was. Turn $20,000 to $120,000 in a few years by the time I graduated. It was 150% luck. I mean, there was no skill involved.
Bill: It still works, man.
Ian: Yeah. You think it's skill, but it's not. Basically, at that point, I was like, “I don't want to blow all this money, go into a private school. I'll just go to a more of a public university. I'll commute and work part time, so I can just pay the tuition, so I can continue to invest.” I actually ended up working for a financial advisor when I was in college. I was more or less a glorified receptionist, answering phones, but it was right at that peak of the bubble, that bubble popped. That $120,000 turned into $8000. I wrote it back down, also learned that, at that point in time, I didn't really want to-- I thought I was going to be a financial advisor, but then just answering the calls of-- we had 1000 clients at that office, about 120 million under management. just answering those phone calls, I said, “I do not want to deal with other people's emotions when it comes to investing.” At that point, those small-cap tech names turned into micro-caps. [laughter]
Ian: Here we are. [laughter]
Bill: And then, I started a micro-cap strategy.
Ian: Yeah, exactly. [laughter]
Ian: Twenty years later, here we are. From that point, the first company I really dived into with certainty at that point in time when I had $8000 left was a company called XM Satellite Radio, which I told the story a couple of times before. That was a micro-cap back then. It was less than $2 a share. They launched a bunch of satellites up into space, had a couple billion in debt. 40% of the stock was held short, people were betting it was going to go bankrupt. They really had no OEM agreements with manufacturers at that point in time. But I liked it because a lot of people-- I'm old now, I'm 40, but people have to remember back with terrestrial radio, you drive 20 miles out of the area, you have to tune into a new one. The thought of just crystal-clear channels nationwide was, “Oh, wow. That's pretty cool.” I was attracted to that story. 4 Long story longer, I saw the CEO was presenting up in New York City. I called the conference organizer, made up a name that I worked for Cassel Capital. I had some business cards made and they let me come to this event, took a bus ride from Lancaster, Pennsylvania, which is where I'm from, where I'm still located up in New York City, it's about three hours, and weaseled my way into a one on one with Hugh Panero, the CEO of the company.
Bill: Oh nice.
Ian: I had 10 minutes to chat with him. My eyes were as wide as saucers. I was just infatuated with the fact that I just talked to a CEO of a public company.
Bill: No psychological bias there, huh? [laughs]
Ian: No, not at all. Again, took that eight grand, threw it into XM at $1.78. Almost immediately, they started executing, signing OEM agreements, refinancing their debt, big/short covering rally, took it from $1.78 to $34 in 14 months.
Bill: Whoa.
Ian: Made the money back. That was 150% luck as well. I always pointed that story in particular-- [crosstalk]
Bill: That's bullshit, man. That's not luck, because you put yourself in that room.
Ian: That’s true.
Bill: It might have been serendipitous, and maybe you were-- Warren is right on the thesis, but I think that a lot of life is taking the revs and putting yourself out there and seeing where it leads.
Ian: Yeah, 100%. Just not being afraid to step forward and just do what other people aren't doing. Really, that got me started in micro-cap, and it was really what infatuated me was that conversation I had with that CEO. I can sit across the table from a guy like this? I can't do that with Steve Jobs or whatever. Small cap up to large cap name. That's what got me down the path of micro-cap, and that was the early 2000s. From that point forward, all the activity on micro-caps-- because a lot of these smaller micro-caps are mainly retail owned, a lot of the due diligence and chatter is on public message boards, especially back then. I got on those message boards, created a following, a reputation on there, found a few mentors. I got really lucky on the mentor side. I had two individuals that were the opposite of each other. They really leaned into me and teaching me some of the hard skills of investing and the soft skills of qualitative approaches to investment. From there, I just learned the ropes by losing my money and then making it back and lose my money and making it back. At that point, I was still mainly centered on story stocks. I was not fundamentally driven, I was looking, where's the momentum going to occur? I'm going to be there before it occurs, type of thing. That was my approach for the first, call it five years of me getting into micro-cap, from that 2001 to 2006 time period. At the same time, I went from college to graduate school to get my MBA, mainly because it was a socially acceptable way to waste time and hone this craft. [laughter] I can at least put a diploma up on the wall.
Bill: Yeah, like me in law school.
Ian: [chuckles] Yeah, exactly. Really, the goal from the point in time where I was down to $8000, was I wanted to be a full-time private investor, and that's what I would wake up thinking about every single day, of how can I just become a full-time private investor managing my own capital, not dealing with clients, employees, bosses, anything? With some luck and some skill involved, I was able to do that, in '08, '09, actually during the crisis.
Bill: That's an interesting time to be able to do that. That's a heck of a runup to it. Then, did you sidestep a lot of the '08, '09 carnage?
Ian: Not necessarily. Around 2007, I felt I had enough capital. Listen, I'm not in Manhattan. I'm in Lancaster, Pennsylvania, in the heart of Amish country.
Bill: Dude, we're living similar lives. I told Jim O'Shaughnessy, I was like, “Jim, I'm not trying to manage a ton of money into-- I don't want to manage into a lifestyle. I would rather manage my lifestyle to what I have. Then, if I have to cut my lifestyle a little bit, that's where I want to go with this. I want to be independent and run my own capital.” If that means sort of not having the sexiest life, so be it.
Ian: That’s the key to longevity and survival, as a private investor. You keep your fixed costs low and your variable costs variable. Fine, you can rev it up, go take your family on a three-month vacation to Florida or wherever but you can rev that back down the next year.
Bill: Hopefully. [laughs]
Ian: Yeah, exactly. Until your wife says, “No, we're doing this again.”
Bill: That's exactly right. Until she's like, “I'm used to this. Go get a good idea.”
Ian: Yeah, in fact, now we're buying a place down there. [laughter]
Bill: That's right, and then you find yourself moving.
Ian: Really up until '07, I felt I had enough capital, I just felt I needed my strategy to be tested and I didn't know that a bear market was right around the corner. I was looking for a market to really test me and that's what '08, '09 did. Once I went through that, and I didn't go it unscathed, but I went through it. I got through it. That's what gave me the confidence to say, “Okay, I can do this.” If I can make it through that environment when peak to trough of the S&P or whatever was down 52%, and I'm still here, and I can still support myself, and I can still do this, and it doesn't change me mentally seeing that drawdown in your account, having to pay the electric bill, and doesn't change your strategy-- That's the toughest thing a lot of people don't realize in the private investing side is, people think 30% CAGRs are clipping off like coupons here lately, but there's going to be a 30% down year eventually, or God forbid, a couple of them. For me, when I cut the cord of income, the question was, “Can I sustain two down 30%, 40% years in a row, and it doesn't change who I am?”
Bill: Yeah. That's interesting. I love the way that you put that. A lot of people I see are not into dividend stocks. Why would you want a dividend stock? You’ve got to focus on how big the business is going to be. I agree with that. The reason for someone like me is, I need cash flow, because sustainable cash flow can get you through two 40% down years. Now, the business better be able to pay that out, so you’ve got to be right on that. I've tried to learn from Buffett in a way of he's got this float always coming in. So, I need some sort of an income stream to come in to create this, even if it's a suboptimal capital allocation decision, for my life, I needed as a, I don’t know, like a life raft or whatever.
Ian: Yeah. The way I would approach it, if I was deciding today whether I would do this as a full-time private investor, the decisions and the influences would be completely different than when I was single at the age of 28. I didn't have a wife, kids, mortgage. I kept things so lean. I could live off 1500 bucks a month. When you get married, you have kids, you have obligations, you also have their stress, not wanting to let them down, like, “Oh, sorry, kids, we can't go on a vacation this year,” or whatever it is. It layers on so it, it forces you to approach that decision differently.
Bill: Did you have anything? If your dad ran a business, was there some variability in growing up that you sort of wanted to avoid? Or, is that just something that you just don't want to deal with?
Ian: It's interesting that you mentioned, like that-- I was the first person in our family to go to college. I come from an interesting area. Maybe it's similar to where you grew up, but there's a lot of blue-collar entrepreneurs that are worth a lot of money in my area. They don't have a college education, but I wouldn't want to compete against them doing anything. Even like Amish people, people giving them-- think that they're dumb, working it out in the field. I'll tell you what, some of the smartest people I know are Amish people, because they have no vices. All they do is think about work and family, and that's it. They think through everything they do on a business side, probably more so than most realize. I don’t know why I'm necessarily going down that rabbit trail in this conversation, but I guess one of the points I wanted to make out was I didn't really have any financial influence early on outside-- my parent weren't that interested in the markets per se. They obviously had a financial advisor, but it's nothing that we sat at home talking about during dinners or anything like that. It was just through some luck and some work, just gravitated to investing and then gravitated down to this niche of investing where I felt that I had an edge.
Bill: How'd you find investing?
Ian: Probably the financial advisor. That $20,000 got thrown on me and like, “Here you go.” “What do I do with it?” That type of-- just really, from a very-- wish I could point to, "Oh, I was reading the Wall Street Journal when I was eight,” that was not happening.
Bill: Yeah. I wasn't barely even interested in it until I was maybe 25. In fact, college really turned me off to it because I had a big efficient markets guy as a teacher. It was all about how do you figure out the discount rate and weighted average cost of capital and tied to beta. It just didn't resonate with me. It took my grandma's friend sending me-- he sent me like two Bogle books and then one of the Intelligent Investor. I thought that was a kind of a sick joke to sandwich the Intelligent Investor and those two things. He could have just told me to index and never put my life down this path, but I'm glad he did.
Ian: You realize that too, a lot of times, we're just not at the right spot to even read those things. For me, and I started out in story stocks, I didn't read Buffett until after I was a private full-time investor. Te first time I read a letter, it wasn't because I was smart. In fact, I was right dumb. My strategy wasn't in line with his thoughts, so I just wasn't in a place to understand that. It's only really probably after I became a full-time private investor that I completely pivoted and how I learned. I learned the most by talking to people that invest differently than me. Nothing's better or more influential is when you can see a person that's doing it the opposite of you and doing it successfully. You're like, “Well, that's interesting. There's something you can learn from them.
Bill: Yeah, man. That's why I love David Gardner so much. He's my perception of the complete opposite of me. I look at his results and I'm like, “This cannot be argued with.” How, I guess, the fool markets themselves or whatever is debatable. I understand why people have some problems with that. I used to too, but where I messed up is, I sort of, one, don't even know why I have problems with it. I mean, if I'm perfectly honest, it's just like, standard newsletter marketing, what would I not like about that? Then, the second thing was, I was just too dumb to open my mind to why.
Ian: Yeah. I think the longer you invest, the more you realize that the way you do things, your strengths are in areas that you're different and you can find almost anybody that is successful, is considered a GOAT of their niche of investing, really different from somebody else. You have Sloss with 100 positions, Fisher with 12 you have-- it doesn't matter how you look at things, the VC side, down to deep value side. I had a conversation with an investor, and I've been trying to get him to come on one of these podcasts. I remember I met him at a conference, and he was the opposite of me. I'm concentrated in a few positions, growth oriented. He's thrown up 35% CAGRs being deep value in 200 names, not caring about management. It's like the opposite of me.
Bill: Wow.
Ian: It's just one man, I'm like, “How do you--?” “Oh, yeah, I have a fund and I have--" let's say it's 30 million under management, I have positions that are $500 worth. What? How do you?" I was like, “But wait, wait, wait,” and it just erupted into a three-hour conversation because I was immediately interested in that, because it was literally me looking at the opposite of me, and here's a guy that successful. Almost every case, you can learn something and apply that to your own investing. It doesn't mean you pivoting towards them, but it just maybe means be able to take a piece of something from that conversation and apply it to how you evaluate something.
Bill: Yeah. Do you remember what you took from that?
Ian: With him, it started changing my belief on position sizing a little bit. I used to believe that if it's not going to be-- and I'm concentrated, so let's call it a dozen positions. It used to be four or five when I was younger. But if it can't be a 5% position, why are you paying attention to it? That means you don't have any conviction in it, especially in a concentrated portfolio. Where just talking to him, and how he approached taking a half percent position, watching it being able to buy more of it later as he would follow it, that's probably one of the key takeaways I took to my strategy. That was like four or five years ago, where now I'm willing to take on a smaller position size because sometimes I have to, because of liquidity profile where you might only get 20% of the position you want just because the stock moves away from you. It doesn't mean that you shouldn't have it on because your best dollar is in that investment when you put it in, and it doesn't mean that stocks not going to come back down to where you can buy it again. It doesn't mean that that management might not execute and make it be a better buy at a higher price than it was at a lower price. So, it just changed my viewpoint on how I position size.
Bill: Yeah, I struggle with a similar thing. I run my fantasy football team. I have a lot of churn at the bottom. It's something that my mind, it helps me feel I'm doing something, but the core positions almost never change. I noticed something very similar in my portfolio, which part of me says, “Well, just stop that.” Part of me is like, "well, as a human, this is how I deal with something that I need to deal with." I acknowledge, that's a weakness, this is how I deal with it, whatever. I guess that I need to be mindful that I'm not making stupid decisions at the bottom of the portfolio with smaller position sizes and taking them willy-nilly, I guess that's the downside of that strategy. But I personally think that I benefited a fair amount from not having it must be 5% or bigger.
Ian: Your point on turnover is one that hit me too, because, and I would say my portfolio is similar to what you described with yours. There's a lot of turnover in the lower half, because I'm constantly trying to find and be in the ones that are executed, and I'm investing in small emerging companies. They evolve in different ways and I compare them to three-year-old kids where you don't leave them in your house alone, because they're going to burn the house down. It's same thing with these micro-caps, you’ve got to be watching them. A lot of times when they evolve, it's not in a good way. you can't be afraid to take the position off and redeploy into things that are working. My portfolio is similar to you in that regard. I think, in general, there's been such a buy and hold mantra right now where people are judged on their performance and their low turnover. It's a thing of pride, but when you evaluate some of the best “buy and hold investors,” a lot of their best performance came in their highest turnover years. Buffett had 80%, 90% turnover over 20 years during his best performance, and a lot of people don't want to talk about that. Same with Lynch, same with a lot of other people they had-- same with Greenblatt, 200% turnover when he was doing it. These portfolios were being turned over and people look at that with a negative eye. But when you actually analyze it, portfolio turnover a lot of times when done correctly, is the price of progress in the portfolio.
Bill: Yeah, that makes sense. I think that one of the things that people don't necessarily think about all the time, or at least I didn't, I'll just internalize it, with Buffett, it's really important to think about like, “Well, what's the vehicle that he's describing his strategy in?” That's a way, way different question than, "Okay, if you were young, and you were an independent investor, would you invest this way?" I suspect he'd have-- he has said as much that he would have more turnover. I don’t know how much, but I suspect it to be quite a bit more.
Ian: Yeah. I agree. I never really thought about my turnover until I started managing some outside investors' capital. Somebody asked me about it, and I pulled it up on Interactive Brokers, and I'm like, “Oh, wow. We had 130% turnover over the last 24 months,” and it got me thinking that down that route of-- and I analyzed some of my previous 15 years of investing and it was not quite that high, but it was similar. Then, I started asking myself the questions that investors would likely ask me, like, “Are we trading here? Are we trying to find great companies?” I dived down that rabbit hole of, at least for me, and what I do. I'm just constantly trying to be in the best companies I can find, and a lot of them, there's $20 million market cap rookies on that team that you might need to cut. Then, the ones that ultimately end up growing and be something more significant, they're the veterans on the squad, and you need to keep them. There's going to be some turnover there. The players you win with five years from now, are probably going to be different than ones you won with this year.
Bill: Yeah. I love that you're saying it this way, because I've thought of stock portfolio as like a baseball team a lot. I actually think that Buffett does too. If you listen to some of the ways that he speaks, I think sports-- Albert Pujols when he was in his prime is not the Albert Pujols that went to the Angels. The Angels paid him a lot. I think that there's sometimes, he's like, there are definitely companies that have hit sort of this part of their growth curve, where if you're looking at the last seven years or whatever, it's really easy to say, “Oh, this thing is going to grow and grow and grow,” but some of them turn into the older Albert Pujols, which is still a fine player, but it's not the guy that you think you're buying and vice versa. But I do think momentum breeds momentum. I think turning around bad momentum is probably quite a bit harder than continuing positive momentum.
Ian: Yeah, I realized early on that I'm more for-- it's obviously it's easy to say that in this environment, but I'm definitely more geared towards a growth mindset of trying to find winners that keep winning albeit down in the micro-cap realm, because if they're winning, they have obviously a much larger runway ahead of them, because they're small companies. I just have done poorly investing situations, betting that they can get less worse.
Bill: Yeah. Well, I'm going through with Wells Fargo, it's hard to watch the thesis that I sort of thought would play out, play out, and not participate. Part of the reason that I'm not participating is, I was sitting around and thinking like, is there just a-- Ally, for example, is a business that I think I have a reasonably high degree of confidence that it's going to be bigger in five years than it is today. With Wells, I have a fair degree of confidence. But there's a lot going on in that entity. Forget about how big it is. That's a problem in and of itself. I just have not gotten back involved because of exactly what you're articulating. I don't know that I really want to put capital in turnaround situations on a go-forward basis.
Ian: Yeah. I do have a couple turnarounds, I would-- it is part of what I look for, because especially in the smaller realm when you see a management change, it can often lead to a deep value situation where they're selling off some areas that they shouldn't have gotten into to focus on a growth area. You can make, obviously, multi baggers and deep value that turn into growth situations again, companies that trade on a ratio to the balance sheet that start trading on a multiple their earnings again. That’s how you get 10 baggers [crosstalk] doing that. I do have some filters out there, mainly alongside of like REITs offerings and large insider purchases, which triggers management changes, that's some of the things I look for. That's the only area of reason I look at the value or deep value bucket, is to spot those.
Bill: Like a skeptic or I would ask, why are there like good growth companies that are micro-caps? Why are those not private? It seems inefficient to have all the costs of being a public company and also have a business it's working. I don't understand why it's not taken private or owned by private equity or something like that?
Ian: Well, the answer to that changes depending on the geography you're in. If you're looking at the United States, we obviously have a very robust private equity and venture capital arena right now. It's much easier for private companies to get funded. Over the last 10 years, I would say in the US, albeit take the last six months out of it, there's been a reduction of small companies going public as micro-cap companies. Pre-2010, I don't hear a lot of conversation about this, but we always have read a lot of articles and white papers on how and the death of the public company, especially here in the United States, others half as many public companies as there were 20 years ago. What a lot of people don't realize is up until around 2010, there were 800 reverse mergers done a year in the United States. That's basically private company, reverse merging and RTOing into a public shell company, almost all of them are small micro-caps. Obviously, a large percentage of them either fail or flounder, whatever, but it's still a lot of large numbers where a certain percentage of them do grow up and get listed, that kind of thing. The Chinese frauds that occurred in 2010, which were also RTOs put a death to that means of going public, which was really a low cost, low amount of capital, meaning you could do that with a $1 to $5 million raise at the same time, go public. That 800 went down to about 100 to 150. We are seeing a resurgence of small companies going public now, albeit they're more small cap-ish, if you don't look at SPACs. But if you go up to Canada, they don't really have quite the private equity or venture capital influence up there, so you still have really unique small companies going public up in Canada. You still actually see it quite a bit in Australia, where you see actually real businesses, not just life science companies trying to raise $10 million for phase one trial, but actual real businesses going public on those markets. Even the UK, it's an interesting dynamic where I did some brute force research going A through Z through their London AIM Exchange, which is where most of their micro-caps are traded. The odd thing is, you saw quite a few $10 million, $20 million IPOs of some really unique businesses that ultimately went up 5X or 10X over the last four or five years. You saw that BlackRock participated in the IPO, these large bracket institutions, and you never see that over here. It's like, “Why is that happening there?”
I guess it's a long answer to your question, but it really depends on what geography you're focusing on. I think, obviously, some of the speculation that's coming back into the market right now, more small companies are going public here in the US now, and I think it's hopefully going to, and you're going to take some bad with the good with that, I'm hoping that leads to more of a resurgence of smaller companies going public again, because 20,000 public companies in North America, so the US and Canada, about half of them are micro-caps defined by sub $300 million. Half of all the publicly traded companies are still micro-cap companies in North America. It's a big number of companies, 8000, 9000 companies, and that's more than the amount of companies that trade in the NASDAQ and the New York Stock Exchange combined. It's a big sandbox, and obviously, not all of them are investable or investable grade. Like I tell most people that when they get started in this space that don't have your background, Bill, or my background is, unfortunately a lot of people just get brought into a story stock, something that doesn't have a balance sheet, it's just a story. Obviously, in this market in the last three months, it might work.
Bill: Yeah, that's worked out pretty nice.
Ian: Yeah, exactly. It's outperformed all of this, but usually the best advices, okay, out of those 9000 micro-caps in North America, 15% of them are profitable. So, just focus on that 15%. You can do really well just focusing on them. Most of them still file their Ks and their Qs and their 8K's with the SEC. They're still audited, and just focused on the profitable ones that actually have real businesses.
Bill: Yeah. I was looking through Connor Haley's presentation. For those that don't know, he's at Alta Fox Capital Management, he's got all his presentations on his site.
Ian: Connor’s a GOAT.
Bill: Yeah, he is a beast. We had to reschedule the interview but I'm happy that we did it. He wanted to do it in order to have a better conversation later. I was like, “Dude, I'm on your time, whatever." I thought that that presentation that he gave, what is it, the making of a multi bagger? I thought that the geographical distribution was interesting. It's skewed-- the US is underrepresented in that. That opened my eyes a little bit to maybe you should be fishing more globally. I know that that's sort of a silly thing to say, but I am starting with your encouragement to look smaller. I think that I'm going to have to be comfortable going outside. How do you get over the due diligence hurdle when it's an Australian company, LSE, or whatever? Are you flying to those geographies? Are you calling people that you know over there? How much is your network, is sort of a generic question that people always ask? What’s your process?
Ian: Maybe another way to answer that or be helpful is, I'm looking at a micro-cap in Australia or the UK. I'm mainly looking for obviously a good business that I think is differentiated, but also when it's global. I'm not necessarily interested in investing in an Australian micro-cap that just has all their operations and their business all in Australia. What's interesting to me, and you can find this whether it's Australia or the London AIM, you can find businesses that are real global businesses, they just happen to be headquartered in Australia. That really helps, not only show you the breadth and maturity of actually a business but it's helpful for due diligence too. Obviously, over the last 12 months, you can't travel anywhere.
Bill: No, it's been tough. You've got to Zoom.
Ian: Yeah, exactly. A lot of Zoom. The main focus is on due diligence are the normal stuff you would normally hear, just read everything that's public. I do a lot of qualitative due diligence, trying to talk to as many and it's probably the biggest takeaway from writing those two books on Intelligent Fanatics, which for people that don't know about them, Charlie Munger was the first person to use the term 'intelligent fanatic' and that's basically an entrepreneur that grew a company from zero into something that dominated a niche or geography or industry. They dominated it not just for a year or two, but for 30, 40, 50 years. How did somebody do that? What are the character traits or the systems or the cultures they put in place to allow them to sustain that dominance? I was interested in learning that just because what I've found over time, and we started that project in 2016, was the smaller the company you look at, the more important management becomes, and I wanted to fine-tune my lens, my qualitative lens for investing. I want to find great companies, I want to find great leaders. What were some of these characteristics that some of these folks had and some of the systems they put in place? That's the backdrop. Our first book was basically going over eight intelligent fanatics that Charlie Munger mentioned. Our second book, we found another 10 that we thought were interesting, that we wrote another book on them. One of the biggest takeaways from those two books was probably up to that point, I was focusing too much on the individual themselves that was leading the organization and not enough on the organization, or the people they had around them. Brent Beshore, I know you're good friends with as well, you probably have him on this podcast. I love the way he phrases that because he's doing what I'm trying to do in the public, small company universe, he's trying tried to do in the private, small company universe. We've always connected on just our own thought process, but he talks about it as a hustle, like, he runs into a lot of private businesses, and we all know of them, too. My family's one, for the most part, is a hustle, it's not a real business. It's a one- or two- or three-person operation. It's just like a hustle. How much work you're going to put in, how much effort and revenue you're going to get out of it? You see that a lot in micro-cap as well, where when you get down sub 100 million market cap, 80% of the companies you're looking at are still hustles. They don't have the infrastructure, the systems in place, the processes in place to scale, and that's the bet you're making as a micro-cap investor, that this isn't going to be a $10 million revenue company anymore, this can be 100. A lot of times, if you're still investing in a hustle, it's limited by that leader that's running that company. It's a tough transition to make, and it's a tough transition for any private or public company to make is, they're so used to bootstrapping, it's hard to then start spending in the ways that's going to allow them to 10X the business. They're so used to doing everything themselves and not trusting other people.
Bill: Yeah. I would think that when you said spending, I was thinking to outsourcing. Spending can also be thought of as letting go a little bit of control. I would think a lot of the guys that-- it's a different skillset to build a company from 0 to $5 million than 5 to $50 million and then 50 and up. Yeah, I could see how that would be tough. You almost have to ask different types of qualitative questions. How do you think about building systems? How would you succeed in this company if you were starting out? You ask to talk to other people in the company too?
Ian: Yes. I make that a point. I do a lot of expert interviews, too, and trying to talk to past employees and management as well. [crosstalk]
Bill: How do you source those, just reaching out on like LinkedIn or--? [crosstalk]
Ian: Yeah. You can do it through LinkedIn. If you have the means, you can use a platform like Tegus, there's one. There's other ones that you can use that do that front end work for you and find the people and then just set up the interview for you to have. You can also just utilize LinkedIn and reach out. I find that's really helpful when you talk to past employees or management. Obviously, there's usually going to be a negative slant, because they don't work there anymore, and you have to understand that. There's usually some really interesting tidbits you can pick up that you wouldn't be able to pick up elsewhere. That's a big part of the qualitative due diligence process I do, is just not only talking to the people that are currently around that leader but ones that used to be there and why they left.
Bill: Yeah. Then, trying to remove whatever bias that may or may not be there, right? Ian: Right, exactly.
Bill: When did you start MicroCapClub?
Ian: I became a full-time private investor would have been in early 2009, right in the depths of that crisis. Then I had my own blog for maybe three or four years leading up to that. I was always a concentrated investor, and I would just talk about what I liked and why. The slogan of the blog was, “Life is too short to diversify.”
Bill: There you go. [laughs]
Ian: That was the slogan. [laughter]
Ian: I'd be talking about the four or five names that I liked. I had a growth mindset. I'm interested in finding things that are undervalued that can get overvalued. When you're successful in that--
Bill: I like how you said that the other day. Not fairly valued but overvalued.
Ian: Exactly. You want to find some special things, there's a scarcity. I love scarcity and all its forms. Same thing with public markets. If you're successful in finding those types of companies, you're going to run into shorts quite a bit because if you're successful, you found something that goes way up probably too far, too fast, the shorts are going to start coming after those names too. I had quite a string of those instances where I would start writing about something and a few of them ended up being big winners, and then the shorts just started targeting everything that I was involved in. Bill: Oh, no.
Ian: It was obvious too, it was pretty funny. I was starting to be on Twitter then, and people would laugh at my handle back in the day, because I was the opposite of what I am today on Twitter. I was very aggressive. I'd be like, “I'm bidding for a million shares, come at me,” that type.
Bill: [laughs]
Ian: Which obviously is not how I'm on Twitter now. [laughs]
Bill: Yeah, no. It's much more toned down.
Ian: Yeah, exactly. I had that, and it just reached a point where it wasn't productive to be sharing my ideas publicly anymore. So, I shut down my blog and I was thinking for a few months--
Bill: That’s funny, dude, I couldn't imagine you being like that on Twitter.
Ian: Oh, yeah. No, I was completely that way. [laughter]
Ian: I was constantly, “Come at me, bro.”
Bill: Yeah, looking for a fight. “You want to short it? That's fine. I'm the buyer.”
Ian: Right, exactly. That's basically how I was communicating. At that point, I still liked to talk about stocks, but I don't want to do it publicly. I'm really interested in what other people that are good in this area, are interested in. Why don't we just create a private community where we could have these discussions privately about what we liked and why? Let's keep out the public. Let's keep out people from seeing these conversations as best we can, and just keep it a high-level-type conversation. 2011, launched MicroCapClub.com. I always thought worst case, this is just going to be me talking to myself and it'll be my own private journal. That was my worst case, which wasn't that bad of a worst case. Luckily, started attracting some good investors into it. It took three, four, or five years until I would say, it wasn't me posting 60% of the posts on there. It just took time. There was no monetization of the site. It was just that. It was just smart dudes talking privately about what they liked. Then, it just turned into something bigger. Now, 10 years later, it's about 250 members from across the world-- [crosstalk]
Bill: Oh, am I one of 250?
Ian: No. Then, we launched a subscriber-- [crosstalk]
Bill: Oh. I'm one of these-- I'm just a lurker. Not for long.
Ian: Even back then when I launched it, I just wanted it to look really professional and just cost money. It was costing me 30 grand a year running this site, I was just like, “Oh, this is getting--” but how do I monetize this site that doesn't make me look like a douchebag?
Bill: Are you talking about MicroCapClub or my podcast?
Ian: [laughs] Exactly.
Bill: Same shit, man.
Ian: Yeah, right. Exactly. I was probably overly cautious about the brand, but I was just like, “I don't want to monetize this,” and be like, “Alright, come look at this--” [crosstalk]
Bill: This is the exact same shit.
Ian: I know. I struggled with it for five years. Finally, I said, “You know what? Let's just launch a view-only portion of this where it cost 500 bucks if people want to get in and see where these conversations are.” That'll keep out 90% of the people that shouldn't be on here because the price point that's too high for the guy that's willing to spend 10 bucks to see what you want to say. Then, we launched subscribers in 2016, brought in a partner, Mike Shellenberger, who's @MikeDDKing on Twitter. He's also a full-time private investor, he came on board to help me roll that out. Now we have the subscriber portion that actually makes this a sustainable business now, which is nice. We have about 250 members. The cool thing is, and I always wanted it to be this way, I didn't want money to be a hurdle in getting smart people to join the site, so it doesn't cost anybody as a member to be somebody that produces the content. It's only if you don't have the time or ability to ever become a member, you pay to be a subscriber. What I found just earlier on, most of these ideas are found by small retail. It's the dude with $2,000 in his brokerage account, he's the one scouring the earth trying to find that small, obscure company, and I want him or her on the site more than the billionaire investor.
Bill: Yeah, for sure.
Ian: We want that young talent to be coming in.
Bill: Yeah, hungry and talented.
Ian: Exactly.
Bill: Yeah. I was going to write up this company, Intrepid Potash. People, if you're listening, this really is not investment advice. They were down at $150 million market cap, maybe 200, but it's a commodity company. I've made money on the name before, and I thought it was pretty cheap. Other than a commodity cycle, I couldn't really articulate why it would be a buy. Now, the commodity cycle has started to go up, we'll see how sustainable it is. I don’t know how much of this commodity boom is real versus just sort of short-term COVID-related stuff. I still would not write it up to submit it, but I am a little bit remiss that I didn't, because it would have worked and I would have gotten my membership by deserving it rather than paying, but over time, I will work to deserve the membership.
Ian: Well, you can apply at any time, so we'd love to have you--
Bill: I know.
Ian: What we find the subscriber side is a lot of people subscribe, especially if they don't have maybe the background on the investing side, to learn and then they end up ultimately applying to become a member. Probably 10% or 20% of our applications which we get, lately, it's been 20-25 people applying every month to get in [crosstalk] member.
Bill: Yeah, nice.
Ian: Yeah. Every month, our membership then votes on the quality of those theses. [crosstalk] Bill: Oh, how does that work?
Ian: If you want to become a member, you write a two or three-page investment thesis on your favorite microcap stock. I basically aggregate them. At the end of every month, the membership, not the subscribers, the membership votes on the quality level of each one of those theses and if you--[crosstalk]
Bill: Ooh, I like it.
Ian: -you get in.
Bill: Very democratic, sir.
Ian: Yeah. That's the way it should be. Out of 20, we might get maybe 4 or 5 that get in. It's not easy to get in. It's a great way to always be bringing in new-- and it's a great way to find ideas, like a lot of the new ideas are coming in from the applications. That's how I view MicroCapClub. It's an idea engine, it's not a guru service, it's not, “Come look at Ian, he made so much money, go buy his picks" service. It's, here's a bunch of smart people talking about what they like and why and you're going to get ample flow of new ideas every month.
Bill: Yeah, that has been the largest benefit from the whole podcast stuff that I've done. The part that I would push back on people that say that they don't want to be public on things because of confirmation bias and whatever, I agree that that is a potential cost of being public but the benefit that I've gotten from the idea flow is awesome. Then, I think my skillset in life is connecting with people. So, I've started to try to be very, very conscious of, “Okay, if an idea crosses my desk, I may not be able to opine, but how can I help this person get to somebody that can help them?" and matchmake. Then if you can create sort of an idea flywheel around you, for lack of a better term, I hate that term, because it's so overused, but it's very real. Somebody told me not to put myself down anymore. I'll say that the listeners are at least equally as smart, but sometimes I'm very intimidated by my listenership.
Ian: I think what you hit on is crucial, and it's something that I try to do too, is just obviously, give to those people of the network as much as you can, but it's just a huge asset when you're investing. I have a database of-- all right, here's a private equity investor that only focuses on life science and diagnostics, keep track of that and you just categorize these folks based on their interest level. Also, when you're finding something interesting, you're showing them something, you're getting their feedback on whatever it is, it's a win-win. Over time, you have 50, 100, 500 of these folks that you can turn to that you're showing value to, they're showing value to you. That’s how you create something big, and I think that's huge. [unintelligible [00:55:00] talks about that quite a bit on if you listen to a couple of his podcast.
Bill: Who does?
Ian: [unintelligible [00:55:01].
Bill: Oh, yeah?
Ian: He's great. He does the best job at networking what I just described with anybody. That's how he started his firm from scratch into a monster of a VC firm now.
Bill: Wow.
Ian: Just by networking, mainly.
Bill: Huh. I need to listen to more-- different types of podcasts. I don't listen to a lot of VC guys, but to your point on listening to people that think differently, I think that I would learn a lot if I got more plugged into that community, if nothing else, just how they look at life. The thing that has resonated with me about micro-caps is just the math of the-- there is only so big a $300 billion company can get. We have all sort of I think had our minds blown by how big these big companies can get.
Ian: Get bigger.
Bill: Yeah, well, in global scale is super important and once you're global, it's really hard to compete with and I get all that. By definition, I think the biggest winners have to come from the smallest companies, just seems to be how the math has to work.
Ian: Well, the thing that still boggles my mind today as we're talking about micro-caps is just the perception difference between small private equity, venture capital, and micro-cap investing. Those first two are widely accepted and loved ways to invest.
Bill: Yeah, micro-cap is totally crapped out.
Ian: Oh, yeah, it's still this slimy sleaze bin of, “Why is this even here?”
Bill: Yeah.
Ian: It's just ridiculous-- it's one of the things, it's one of the main reasons I'm even still on Twitter is because this light needs to be continued to be lit. The best investors ever started micro-cap, whether it's Greenblatt, Peter Lynch, Buffett, most of the best performing companies ever started were micro-cap companies, whether it was Berkshire Hathaway, which was still a micro-cap, inflation adjusted when he took it over. Or whether it was Walmart or Netflix, Intuitive Surgical, you rattle down a list of names, the best performing ones, many of them were micro-caps. When you look at Connor Haley study of the best performing stocks over the last five years, 70% of them originated out of the micro-cap ecosystem. This is a viable investment landscape and unlike private equity, unlike venture capital, where the only way you're going to get the best deals is, it's who you know, the right schools you went to? Who's your buddy? Did they go to Stanford? Everybody has access to these names down in micro-cap. There's 35,000 of them across the world. Unlike those other areas, you have the edge, you have the structural edge as a smaller investor. I'd say smaller if you're managing less than $20 million, or maybe in $50 million, where those large institutional players can't ever invest in these because they're too illiquid. It's easier for them to be in something that's completely not liquid than it is being something that's illiquid because it marks the market that.
Bill: Yeah.
Ian: [laughs] It's an incredible landscape where it's a walled-off city where here at micro-cap, retail, and smaller institutions are in the city gates and all the institutions are on the outside, and they can't get in because they can never buy these things, and that's the structural advantage. They can only buy it once their management teams execute, the stocks go up, liquidity profile increases, and they can then put larger capital to work. They have to wait till these stocks are higher. You have the advantage, because you can actually find them smaller before. You're the smart money, they're the dumb money.
Bill: Yeah. The interesting thing about that to your point on a name that can get overvalued is-- and I hate having this thought, because it's very not fundamental, by definition, what I'm about to say is not, but I also think that not recognizing it is not acknowledging reality. That is the amount of once the flows start, they can get so much-- you can get just as uplift. Then, the comp set that people have to use sort of changes, and as the company gets bigger, it's almost a self -fulfilling prophecy. It's like, “Well, the company is bigger, the multiple should be a little bit higher because it's a little bit more certain,” or something like that. Perception of a story may change a lot more than the real story changes, but you can make a lot of money writing that perception change, or just to your point
Ian: It's the institutionalizing.
Bill: -the fact that flows can come in.
Ian: What I call the institutionalizing of a company, and you're right you see these greater waves, you actually see it when a small company executes the liquidity profile increases, it goes up and you can see these greater and greater waves of liquidity come into something, when the Russell indices first buy, it's like choo, choo, choo, and then the institution's start buying, then all of a sudden, like you said. There's a company that I own small, a $3 stock, and it actually had an analyst that covered it with a $6 price target. Nothing has changed with that business, whatsoever. I know that business probably better than most. Now it's a $30 stock.
Bill: Wow.
Ian: [crosstalk] -like $35 price target on it. The numbers, the expectations are still the same. Now it's trading millions of dollars a day compared to tens of thousands before. And then to your point, that's the point you were making. It's like, nothing really changed here. The company is just bigger, more liquid, larger money's involved, and now they're just rationalizing a higher stock price. [crosstalk]
Bill: Yeah. How is somebody that anchors, or doesn't even anchor like you know the story from three bucks? How do you look at something at 30 bucks and mentally adjust where the multiple was versus where it is today? I would find myself being scared to hold something like that, I think, if I was anchored to the multiple back before it was institutionalized.
Ian: It's really hard. I don't own that one in particular, because it just got to a point where-- when I owned it, I thought it would be a $10 stock in a couple of years. Now, it's $30.
Bill: Yeah. [laughs]
Ian: Really, nothing's changed with the expectations. [laughter]
Bill: Believe me, I look back and I'm like, “Well, I'm an idiot.” [laughs]
Ian: Yeah. Well, man, it's an interesting time in the market. Everybody's biggest mistake right now is selling.
Bill: Yes.
Ian: We'll see how it all ends up, but that has my nerves racked a little bit.
Bill: Yeah. I don’t know if I've ever seen it like this. It reminds me, even on the micro-cap side, the momentum you're seeing just come into names and the liquidity of them-- there was a company that-- I don't want to mention it, but actually just happened this week where, again, nothing really changed with it. It was just the Robinhood crowd, the momentum crowd, just hit the thing. This was like a $2 stock that trades 20,000 shares a day and nothing changed with the business. They put out the same press release that they put out every year. It's just now all of a sudden it trades-- I think this week it traded 250 million shares at $20 one day.
Bill: What?
Ian: Six million shares are outstanding. It just doesn't make any sense.
Bill: Wow.
Ian: Yes, and I'm seeing that across the board in some things. There's another crazy one that's out there and I'll give the symbol because I don't mind it, but like NNDM is one. That's another crazy one. They started like 30, 40 cents, and the momentum train has just hit that thing. They've literally raised money, I think, every other week since July.
Bill: Good for them.
Ian: Yeah.
Bill: I’d argue that’s good management.
Ian: I know. That’s what I mean. It's actually. I'm so impressed. It's like it was a $30 million market cap last summer. They really haven't done too much. It's now a $2 billion market cap with probably a billion two in cash.
Bill: Wow.
Ian: They just raised $500 million last week again.
Bill: That's crazy.
Ian: It's just unreal what you're seeing out there. It is a little bit scary. When I say I don't pay too much attention to the macro side of things, I just pay attention to the micro of the things that I own and have control over because we could be having the same conversation in five years and nobody wants to sit on 80% cash when we're having this conversation in five years. [laughs]
Bill: Yeah. Well, that's what I say to Jake sometimes. I understand some of the fear and I don't even think necessarily it's wrong. But I also don't know why it stops and if it doesn't stop, and everybody else is making 10%, 20% a year, it's not even like a FOMO thing. It's a risk thing. If you're holding cash, you have opportunity cost risk. Even if the environment is kind of nuts, there are some reasonable things to do. If you're not doing the reasonable things, I think that you can fall really behind. I do think you would agree with that. I just think sometimes in the other podcast, it's easier to spar and troll each other a little bit. I think people enjoy it.
Ian: I know I do. [laughs]
Bill: Yeah. I don’t know, man, a lot of things have to go right in lot of these names. What you're talking about, a $30 million company going to 2 billion, I mean the fact that they raised one and a half billion, I would argue they should have been-- that's a really strong decision on management. But I'll be more interested in that one when it's a $750 million company with the cash on the balance sheet.
Ian: Exactly. The nice thing about micro-caps, even in an environment like this, you can still find undiscovered names. You can still find businesses that are good businesses that aren’t trading at 100 times earnings or sales, so you can still find those businesses. I'm finding a lot more of them, probably equally the same as what Connor Haley had in that report, in Australia, Europe. I branched out into those areas in the last three years, mainly because of the types of businesses that I was finding. But also, those are also markets that have similar accounting rules, regulations, as we have here in the United States. I'm not going to whatever, some far off exchange somewhere in Namibia or something. I'm going to these developed countries that I can still understand their filings, they have similar accounting laws, and I feel comfortable investing there.
Bill: Yeah. Do you need a prime over there to get you a block of stock? How do you get placed with some of the liquidity?
Ian: That can be the frustrating part. Interactive Brokers, which is who I use, gives you access to a lot of those exchanges worldwide. But even they are cumbersome in some regards to some of those exchanges. There's some exchanges they don't even give you access to. They're easy to use for Australia, they're easy to use for Canada. They're a little bit more cumbersome in the UK, because I don't think they have, believe it or not, direct access to the exchange in the UK, which is asinine to me.
Bill: Yeah, that doesn't make a whole lot of sense. [crosstalk]
Ian: They rely on this OTC auction process. Here's a funny story. I found this company, I did all the work into it, I was like, “Great, we're going to buy this company. We're going to put it on as a small position and follow it because it has all the things we look for, we did the work on it.” I go and put the order in, it's not executed. I put in an order above the market, just get me something, you're not executing. What is going on, this is happened for two days. I was like, it's showing there's 20,000 shares when they offered at 100 pence and I'm bidding 105. Just-- [crosstalk]
Bill: Yeah, why can't I get these damn things?
Ian: Yeah. Finally, I call up Interactive Brokers, and in the UK, at least, on their AIM exchange, you can only buy it through some secondary auction process. So, every three hours during their market trading, every three hours in the last 15 minutes of every three-hour period, they have an auction process where I guess, I don’t know, if it's a bunch of cattle herders come together and trade shares. It's like, backwoods, I don’t know.
Bill: That is some bizarre stuff.
Ian: Four 15-minute segments that you might get stock. I was bidding for stock over three weeks and got $1,000 worth.
Bill: That's crazy.
Ian: That sounds like, “Well, that's just great.” I called their European trading desk and they can't-- I don't believe they can actually put a market on the exchange. I could go to a market maker, but they bid me way too high. They go, “Oh, yeah, we can give you 100,000 shares 35% higher,” that type of thing. Anyway, you probably didn't need to hear that rabbit trail of the story.
Bill: No, I like it. I was talking to Andrew Kuhn about a position he was trying to build and he's dealing with off-market people that are trying to source private blocks. It's such a different world than what I'm used to. It's really interesting.
Ian: It is. You always do have to source, depending on how much capital you manage, you have to find other ways to get that stock, and sometimes it's through private transactions.
Bill: You know what he told me? That kid's only 25.
Ian: That's insane. I know.
Bill: I was like, “Dude, the world is going to be your oyster.” I wish I knew at 25 what he knows.
Ian: I'm a big fan of his. I can only imagine. When I was in my mid-20s and I go to a micro-cap event, I was the youngest person there by 50 years. The micro-cap scene was very old, 75-year-old brokers out of Colorado go into these things. Now, it's all 20 somethings, and you could say that's a result of the market environment we've had over the last 10 years, people only realizing a bull market, but I view that as a good thing. The amount of talent is insane. I have a full-time analyst with me now, Michael Liu, who I source from MicroCapClub. Not only the club's a good way to source ideas on the stock side, but it's a great way to source talent, because a lot of the best investors started in micro-cap and I think we have a lot of them on MicroCapClub and so you get to see who the up-and-coming talent is on there, and got to know Michael really well. He was the youngest person to ever get into MicroCapClub at the age of 15. [crosstalk]
Bill: Wow, good for him.
Ian: Now he's 21, and he's smarter than most other people that I talked to about investing. I tell him every day. I lean into him as much as I can, how much I can teach him, but you're going to take over the world in 40 years.
Bill: Yeah, when are you going to start teaching me, Mike?
Ian: Yeah. [laughter]
Ian: I think that's the key to all this stuff is just putting, I know, for me, too, like, all I've ever done is sit in the corner of my house and research stocks and manage my own portfolio. Now I do it for a few others and it's opened my eyes to-- now having Michael with me full time and he's really great at things that I'm not good at and understanding where you're deficient. I don't enjoy going through that file and trying to find the I that's not dotted. Yeah, but he does. Working with people that really are-- you're moving forward with the same kind of values, but they bring different talents to the table.
Bill: Yeah, man. One of the things that I said on Value: After Hours, and I wish I didn't get into this whole return thing, but I also felt like it was necessary because-- and it's not big, I don’t know what the hell I am. I do know that people are starting to listen to me a little bit more, like 18,000 followers feels a lot more important than when it was like 500 and I want to let people know who they're following. I said, like, I'm really not sure that or I've never been less confident that what I did was repeatable, and part of why is I've gotten to talk to a lot of people that I really, really respect, you being one of them. What I have had exposed-- you've got to look at yourself in the mirror and know who you are. I am similar to you in that really detailed part of the model or that part of the filing that maybe I should be picking out. I can get through, I have a CFA designation, I'm capable of understanding the things, but there are weaknesses that I have, and I need to either hire around that or figure out a way to close that sort of like-- I've got to figure out a way to mitigate some of those weaknesses, because I think I've proven to myself that I have some strengths and I'm proud of how I managed through March. But I also know that this is a really tough game, and you got to have the right pieces in place to survive over time.
Ian: I think that's something I didn't realize until two or three years ago, but I do think you just need to focus on your strengths. There's no reason that you should be focusing on things that you love to do, especially if you have the means to be able to put people around you or a person or two or service or whatever it is that can kind of fill those areas that you don't enjoy doing. That's what I've tried to do, too. I know what I'm good at and I know where I'm not good at. I was talking to, who was it, the other day, Yen Liow, who's on Twitter, he's amazing. I love his YouTube videos. He manages, I don’t know, he manages a billion dollars, maybe now, but I was having a conversation with him. He's one of the nicest guys you ever talked to, he'll do anything for you. He's amazing. Same thing with Dennis Hong, who's on Twitter. He's cut from the same-- [crosstalk]
Bill: Yeah, Dennis is a good guy.
Ian: They're just really, really good people. I've talked to them about it too. But they're also killers and are savages. They want to win, and they know they're not going to win if it's just them. They want to put great talent around them and they also want to help other people their friends and their network become better. They understand that. I think that's something that I need to elevate my game to, and not only filling those voids, but putting the right people around me, people that can encourage me that, “Hey, whenever I launch my fund with--” I was talking to Brent Beshore, and I was like, “Hey, I want to throw my capital into it and hopefully bring in a couple other people.” He's just like, “Oh, that's not nearly enough. You should go 10X more than that.”
Bill: [laughs]
Ian: That's what he wants. Toby and I had the same conversation with him. He's like, “What are you doing?” He's like, “You're 10X more than that.” Those are the types of people that we all need around us, pushing us to reach our fullest potential. I'm a big fan of that JP Morgan quote, “You go as far as you can see, and when you can get there, you'll be able to see further.” I don't know where I'm going to be in 20 years, but I do have a plan for the next five, and just surround yourself with great people and you'll get there.
Bill: Yeah, I think that's right. I like the Tony Robbins, he may have co-opted it, but he says, most people underestimate what they can accomplish in one year-- Wait, they overestimate what they can accomplish in one year and underestimate what they can accomplish in 5 and 10, right?
Ian: Yeah.
Bill: The compound growth that you see in the portfolio is also the compound growth that you see in your life, if you're on the right treadmill. That said, I pulled on some success journal or something that I did years ago, and I'm reading and I'm like, “Fuck, I'm the same person.” [laughter]
Bill: Did I just write this yesterday?
Ian: The other hole you get confined yourself in is, you look at other people and their life, their circumstances, and it's easy to sit back and be like, “Well, if I had their life and circumstances growing up, I could do that too.” We all like to make excuses for not pushing our own selves further, and so it's good to get out of that hole as well, just looking at other people and saying, “Well, they're that way because they started on second base," or whatever it is.
Bill: Yeah. I think that for a long time, I guess I was-- I don’t know what it was, man. I stunted myself in a lot of different ways. I do think a lot of it had to do with what I had to deal with personally. I've talked about it, but that's the card that I was dealt. Hopefully, I don't do that to my kids. I'm sure they'll end up on a couch talking about what I did to them though. It's inevitable. [laughter]
Bill: I just tell them that I didn't try to do it. [laughter]
Ian: We're all going to be a life of-- what's that show at HBO, Succession? I don’t know if you watch that one.
Bill: Yeah. I think they've got it pretty good though, so we'll see. I tried to take the best of my parents and apply it in my way. I did something with my wife the other night. I was so interested in what my kid had to say. I was legitimately trying to be there as a dad. We put him to bed, and she comes out, and she's like, “Why were you so hard on him? Don't you have any idea of how that must have felt to him?” I was like, “No, I have no idea. I thought I was being a great father.” She's like, “No, you're being a terrible dad.” Then, I went in and talked to him, then we had a good talk. It's weird, my brain didn't even connect the two things.
Ian: It's interesting as fathers, and I have a five-year-old girl and soon to be a three-year-old little boy, but it's just the differences even between how I communicate with my daughter versus my son, even though the sons two years older. My daughter's like, “Daddy, can you go get that cookie over there for me?” “Oh, sure, honey.”
Bill: Yeah.
Ian: My son who trips and falls and skins his knee, I'm like, “Boy, get up and figure it out.” Bill: Try to rub some dirt on it.
Ian: [laughs] You're right, exactly.
Bill: That's how we are. I've got a three-year-old and that kid just runs us. I've gotten to the point where I'm just like, he-- this is only because he's the baby. The other ones would have been in the room already. What are we doing? It is interesting how that birth order-- That stuff's real.
Ian: It is. Yeah, I feel it every day. My wife didn't say anything to me, too. “You're really hard on him.” I was like, “Okay,” it's good for somebody to tell you that, too because you don't really think about it sometimes.
Bill: Yeah. I certainly have different skill sets than my wife. I figured out how to marry different skill sets. Now I need to in work to figure out how to have different skill sets around me.
Ian: Yeah, I mean, it's funny how sometimes the investing experiences bleed into personal life too. One area that I'm cognizant with myself is, I generally lack empathy a lot of times and I think it's just from 20 years of being in this game of just the type of turnover I'm talking about and the type of diligence that I do, get to know the CEOs really well. Then, also on the other side, knowing that two years I'm probably not going to own you, and you build up those friendships, relationships, it's very cut and dry. It's the part of it I don't like quite honestly, and the ups and downs as well. It just turns you into a numb human being. It's an area that I can certainly look at myself and see the areas that I need to do better, and you can see it sometimes translate into family. It's good to know that that's there, so you can make sure to kick yourself back into reality. That's why we have wives do, that's what they do for us. [laughter]
Bill: That's true. That is true. Do you sometimes call a CEO and tell him like, “Look, I'm exiting. I love what you guys have done. It's just for me, the stock is sort of where I'm no longer comfortable, but I really appreciate what you did.” Is it that kind of relationship?
Ian: I used to not. I used to just let it-- and it's tough because you would go from talking to--
Bill: Oh, you just ghost them?
Ian: Yeah, well, exactly. It's obvious because you go from talking to a guy every other month to not reaching out anymore, it's obvious what occurred. Really in the last three or four years, I started doing exactly what you're saying.
Bill: Yeah, I would think that’s a good practice.
Ian: Like reaching out and be like, “Hey, I'm just letting you know, I sold out because of X and Y.” It's just a better way to do it, it's more respectful way and I have 50 CEOs I still talk to this day, I don't own their stock anymore, but I still talk to them, because we've built up a friendship over the years, and just because I don't own your stock, it doesn't mean I don't think you're they're a great individual.
Bill: Yeah. I would think, too, it helps you put your mosaic together of like, “Okay, well, these are sort of the people that I can bounce things off of.” Right?
Ian: Yeah. I could never be an activist, because I've dealt with too many CEOs and know what they go through to know that they're not always to blame when something doesn't go right. Investing is hard, running a business is hard, especially if you're a public company. This was probably 2007, I built up a big stake into a small company, and they were in the luxury experience area of the market, and going right into that 2008, 2009 time period, and I went to their Christmas party. There were probably 100 employees there, and then there was family and kids and stuff like that, and this was like 2007, and everybody's having a good time. I'm just sitting there, and they were giving out awards and you see their wives stand up and clap and cheer for their husbands or vice versa, get an award and their kids sitting there proud of their parents. Then, I went to that same one in 2008 and they really felt it because there was a luxury experience type company, and they felt the brute force of it early on. There was like, 30 people there, and they were cutting back staff and the business was down 70%. I remember walking to the airport, because he took me the airport then and I wasn't a shareholder then, the second time. H's like, “I just don't know if we're going to make it. It just sucks, because when you put forth your best effort and you still fail.” I've had probably like five or six of those types of experiences where I just have-- I don’t know if it's more a soft spot for the management teams and what they go through. It's not always when a company doesn't work out or a business doesn't perform the way you think that it's always the management to blame. This is a tough road we deal and it's always opportunity, execution, and luck coinciding. That's what we're betting on.
Bill: Yeah, for sure. I think that's been part of my hesitation within the micro-cap space is, I think-- if you look at a business like Disney, clearly, the management talent is very important and what Iger did to transform that company is extremely important. There's also an element of that company that is on a glide path. There's a momentum that Disney is big enough that it can carry itself through some problems. Obviously, not all and like I said, they were transformational acquisitions, so I don't want to belittle that. In the micro-cap side, luxury experience company that is a micro-cap, I think is almost by definition, somewhat more fragile at the state that you're buying it. So, that would be tough.
Ian: Yeah, absolutely. These are just smaller, more impressionable companies in general. I think the never sell attitude only works in mid cap or more, because you have maturity of a business that can continual and not regardless of the leader ,leadership is still obviously important for capital allocation. But for the most part, you're not talking about a zero, if things start--[laughs] where you don't have that luxury down in micro-cap, and people always ask about holding period, and it's a tough business. I consider myself more a buy and hold investor than most people in micro-cap but if you were to ask me, “How many companies have you owned in the last five years and how many of those do you still own today?” When I did the math on that, I probably owned 35 to 40 companies over the last three or four years and I probably-- well, I own six of them, so that means that's that churning in that lower half the portfolio and it's just a tough business. The easiest way to go broke in micro-cap is to coffee can them. Like I said, 80% of the time, if they evolve, it's going to be in a bad way, so you just need to be watching them.
Bill: I guess the issue is that you're betting on execution risk a lot more in that size. I guess maybe you just answered the question, but where do most people go wrong in micro-cap?
Ian: I think probably betting-- I know an area that I've gone wrong and where I'm kind sitting now is, it goes back to my roots of trying to find something first, is trying to bet on that inflection point beforehand and then just being too early or never happening. Trying to capture and it sounds insane what I'm about to say, but I was so-- it was like ego tied to capturing that first 100% move, but you might have been right 20% of the time and wrong the other 80%. Well, being too early is the same thing as being wrong.
Bill: Yeah. Well, especially when you're looking at zeros, right? Potential.
Ian: Exactly. Yeah, potential zeros. At that point, they're really gambles or speculations. These are still small companies, so why don't just wait for them to execute a little bit to show that they can execute and then make that bet? It's one of the areas to what in 2000-- in 2012, 2013, 2014, I started focusing on companies that dominate a niche area that are micro-cap, because that already proved to me that it's a quality management team that either took market share or they created the market. Either way, that shows management competence. Today, I have an area carved out for sort of those dominant good to great businesses that dominate a niche, and obviously, if they're micro-caps, a small niche, but I'm not worried about the market size, because as you and I both know, you have happy customers, they're going to pull you into other things, and your market is going to expand.
Bill: Huh. That is super interesting. I'm ruminating on that comment that you said, “The best way to get ruined is to just coffee can these things.” I don’t know how to process that, but that's a very interesting insight that you dropped.
Ian: Well, I had the same debate two weeks ago with Tom Gardner, the CEO of the Motley Fool. He had me on, and we were we were talking about that, because that's what their approach is. You take 30 names or 60 names and you coffee can them, it's kind of similar to David Gardner. Tom's a CEO and David runs the company with him. We're going back and forth on that. I'm not saying you can't do a coffee can approach, but it's very hard to stay that way. Let's put this way--
Bill: Well, what are they normally buying? They're normally buying closer to mid-cap, right?
Ian: Exactly. He was asking me about micro-cap, and if you could do kind of their approach in the micro-cap, and that's where the conversation got started. The way I answered that honestly was, let's look at MicroCapClub, we have 250 probably some of the smartest micro-cap investors in the world on there that have profiled 700 companies since 2011, 700. I think we're up to 22 companies that have 10 bagged, so 22 out of 700. It's not a huge hit rate. I think if you were to look down more to that, I think it's maybe 250 or 200 of them have doubled or more since they were profiled and probably half of them are losers, down 5% or down 100%, I don't know, but 50% of them are losers. It's a really tough game to say, “Okay, I'm going to buy these 30 and let power laws take over.” Well, because these are small companies, when they stop executing, it's sort of obvious. It's not a slow play. You're stupid for like, “Well, they're underperforming, I guess I'll still hold it.” It doesn't make sense. What I find in micro-cap is it's pretty obvious when they start to underperform, especially if you know the company really well and then just move that capital into things that are winning.
Bill: The thing that sucks though is you're selling into an illiquid market, so who's the bid?
Ian: Some cases, but again, the other side of this that we haven't even talked about, it's just knowing your positions better than most other investors. Continuing to do those types of interviews I was telling you about throughout-- A lot of people view due diligence as just an upfront process, that's 10% of it. 90% of the due diligence is maintenance due diligence as you own something. 75% of my effort every day when I tell Michael Liu, my analyst is to, “Pay attention to what we own because what we don't own can't hurt us. Stay on these things.” When we spot thesis starting to crack, 9 times out of 10 it is cracking, and we want to sell it before other people.
Bill: Is that monitoring news flow, how are you staying on day to day?
Ian: Yeah. Setting up Google Alerts, setting up if they have larger competitors that are public, making sure you're on their earnings calls, making sure you're seeing what products they're developing that could compete. It’s whole line items of things.
Bill: Yeah. You have that in a checklist, or is it closer to a mental?
Ian: We have it broken down it because it can change for each company because each company is different. We have a big checklist and then get more detailed with it for each company, what exactly those areas are. It helps us stay on top of these things and that's where 75% of the effort is.
Bill: Yeah, that's what I found of a checklist, too. Each situation is too different to hammer into checklist. But I also do like the idea of just having something that I can go through and say, “Okay, well, what have I missed in the past, and might it apply here?”
Ian: Yeah, you have to have some sort of journaling, so you can keep yourself honest with yourself because there's still 30%-- especially in these small companies, especially if you invest in some that might have different types of optionality on the upside, it's not just one product could work and take the stock up, maybe they're working on five different ones, or something you never thought of, it's just being honest with yourself, and why a company worked. Still 30% of the time something works for me, it's usually for something that I didn't even foresee happening. [crosstalk]
Bill: Putting yourself in the right pond and it works out?
Ian: Yeah, it doesn't necessarily mean that I didn't do the right research to know that that could have happened. It's the same thing to the downside. I don't dwell too much on the losers, either anymore, just because stuff comes out of left field all the time. I'm not going to act like, “Oh, yeah, well, there was an IP infringement suit, I guess I should have paid $50,000 for an IP attorney to really dive into that patent,” because then I would know it.
Bill: Yeah. Well, it's cost benefit, right?
Ian: Exactly.
Bill: Even if you pay that attorney, he's not going to tell you something's ironclad because attorneys don't answer anything.
Ian: Right. Yeah. Exactly.
Bill: I think it could be this, “Thanks, guy. Here's 50 grand.”
Ian: I think when you make that decision, the buy decision once it checkmarks all the things you're looking for, you know what the levers are on that business to watch and continuously watch, but also, because these are small companies. Also, knowing that you're not going to be right all the time. I'm still going to be wrong 40% of the time, which ones are they going to be? Being a stock picker isn't about picking winners, it's about picking out those losers from your portfolio. I'm not going to be right. Even when I talk to investors about the fund, or whatever, it's like, I tell them that, “We're going to be wrong.” I want to make sure they're small losses. That's why I was able to be a full-time private investor for 10 years before I launched kind of strategy that I have. It wasn't because of any huge winner, and I had a few of them, but it was mainly because of the losses I never took. Just keeping track of what those losers are. You'll see it in your portfolio too. You look back at your lifetime, probably you'll probably look back and see, “Wow, I had 10 huge winners out of the 200 companies that I owned.” Well, for the power of compounding to work, you need interest time and something that goes up and the detractors of that [crosstalk] things that go down.
Bill: Yeah, that's right.
Ian: So, pick out those losers. [laughs]
Bill: Yeah. The biggest lesson, or I guess, example of that for me, was the airlines and the banks in March. It wasn't the easiest thing to bail on those things, especially after being public. But the other side of is like, “Well your capital today is your capital today and you got to make the best decision today.” How I rotated the capital, if I had held on to those things I'd still be looking at, I don’t know, it's probably close to breakeven at this point, but using the capital elsewhere was a smart decision. Fundamentally, the thesis cracked. The world stopped, that was not in the underwriting.
Ian: The thing I like about how you communicate, not only in your podcasts or Toby’s, is I think it's important is that you're always evolving. I'm evolving. I'm not investing today the same way I invested five years ago, it's not the same way I invested 10 years ago. I started investing in story stocks that had no fundamentals. Then I went to precious metals and gold, [crosstalk] mining.
Bill: Oh, wow.
Ian: Then I went to life sciences, then I went to GARP. My strategy today is a combination of all those things. I still have some story stocks, ooh. I still have some of those in the portfolio. I have a gold miner in there, “Oh, my goodness. What's that?” I have obviously some small cap micro-cap SaaS names. So, it's an eclectic mix that makes up-- it's a lifetime or 20 years of just investing. I have little pieces of each one of those experiences that now is a portfolio, it's like a stew. The other people, when you look at the stew, you're like, “Oh, yuck.” The pieces you see put together, it tastes good. I think that's going to be different for each one of us. I fully expect to be evolved in the next five years, it doesn't mean it's some huge way like, “Well, I'm going to be a deep value investor.” A lot of times your alpha comes from these small changes you make on the fringes of your psychology when it comes to investing, so just making these little tweaks.
Bill: Yeah. Elliot Turner said that one of the things that he really liked about where he was at as an investor is he knows that his portfolio is one that if anyone else looked at, they would not build it the same way. It's like truly his portfolio. That's a cool place to get to when you're not looking to other people for any type of approval of something or whatever. It's like, “No, this is me.”
Ian: It's the benefit that I think most smaller investors have, if you're not managing other people's capital as well, like you too, Bill. Somebody asked me that, “What's your Sortino?” I'm like, “Go away.” [laughter]
Ian: “You're not getting it.” [laughs]
Bill: Yeah. It is very freeing. I wonder if somehow I use it, not having anybody to answer to as a crutch as opposed to not, but at least I think asking that question is probably getting me closer to the right answer than not.
Ian: Yeah. I kind of did it backwards in my career where I became a full-time investor first. Now, I'm managing some outside capital, but that’s just the way I had to do it, and I feel like my-- Not to say I lost my A game prior to this but I would say, now managing other people's capital in the structure that I have with the right investors, which is key, it's brought my A game back to another level, in a lot of ways, and that's been really fun. [crosstalk]
Bill: Yeah. Well, there's a certain amount of pressure that's got to be motivating, right? Ian: Exactly.
Bill: You see a lot of investors, what do you think are common traits among some of the better micro-cap investors that you've seen?
Ian: It's a good question. I'm just thinking, people are wondering why there's silence. Bill: No, we’ll edit the silence out, not a problem.
Ian: I think many of them look through situations through different lenses. They don't invest in a company and see the same things. When you have Connor Haley over here eventually, he's really impressive. I would say, he's one of the top in micro-cap. One of the beauties of micro-cap, Bill, is, you do this really well, you're not going to be a micro-cap investor anymore. [laughter]
Ian: He won't either. I sent him an email the other day saying, “Hey, I'm not really worried about you too much finding these ideas before me, because you're going to be a mid-cap investor soon.”
Bill: Yeah, that's right.
Ian: We joke about it. Just talking to somebody like him, you'll see that he's on a different level, in how he approaches the investment process, how he evaluates a company, and the people he's putting around him, what we talked about before. He doesn't feel he needs to do it all. He's putting the right people around him, and even as he approaches his fund as a business, it's at another level bigger than what other people that manage a small fund or strategy are thinking about, like he's thinking bigger all the time, not in a bad way.
Bill: No, I read one of his early, early letters, and he went through choosing the auditor that he chose and how he set up everything. It's clear that he's taking a professional organization really, really responsibly. I don’t know what I'm trying to say. It's very impressive how he's approached what he's trying to build.
Ian: Yeah, there's only a few people that I would probably put money with, and he'll be one of them. That's how much I think of how he approaches investing in the business. There's a couple other folks that are in MicroCapClub that I think are right there and that kind of same line of sight that just-- One of the hardest things as an investor to do is to pass on something and then buy it higher when you realize you were wrong, that you should have owned it before. Those little psychological cues that I like to read and letters, investor letters, like, “Oh, we started looking at this, I didn't like it then, but yeah, I bought it 100% higher." It was a story that I understood then, or it evolved into something that I could buy then, and just seeing that they're not-- don't have any mental blocks, biases towards previous ideas he looked at. I have a list of 700 companies that I did due diligence on and I have in little files and little blurbs, and I'm constantly looking over them, what's interesting. I'm not going to not invest in something just because I looked at it before and I missed on the first 500% because it could still go up another 500%. You're trying to look for those kinds of psychological cues as well.
Bill: Yeah, I need to get better at organizing the things that I've looked at in the past. Even Qurate, I pulled up-- I was going through my old files, and I was like, “Oh, I wrote this up two years ago. I totally--” I guess I didn't forget, because once I saw it, I was like, “Oh, yeah, I did this work.” But when I was looking at it at the time, it felt almost novel and then I realized, “Oh, no, I have done work on this in the past.”
Ian: Yeah. It's really helpful. Jim O'Shaughnessy, he preaches it all day long about journaling. I believe it's the same for your life and for your-- journal about your life, but also your investing obviously as well, like what you're thinking when you're making decision.
Bill: Yeah. Well, it's the only way like you said earlier to keep yourself honest. What's next for Ian Cassel, man? How big does MicroCapClub get? You've got a lot of things going on. It's very cool. It's very inspiring for me to see because here I'm building whatever the hell this is, and I think it's pretty cool, I don’t know where it's going to go, but I don't also know how I'm going to manage the investment side of the equation, because this takes up a lot of time.
Ian: Well, I think just like everything, you're always investing ahead. If you're looking at it from a bottom-line perspective, you're never going to reach your full potential, you've got to always be investing in the person or technology or whatever to get to that next level. It's that constant battle that you're having, entrepreneurial battle that everybody has. For me, yeah, I don’t know how big MicroCapClub can get. It's getting bigger now, because we're in the same momentum machine that the market's in right now. We're having record numbers of people sign up every month. It's also, I don’t know about the quality level of the people that are signing up, because they're looking for the next thing that can go up to 200% in a day, not necessarily about becoming a better investor.
Bill: You could SPAC it.
Ian: Yeah, exactly. That's true. [laughter]
Ian: But it's an incredible resource for my own investing still to this day, which is what makes it fun. I want to see what the smartest people are liking and why, and I'm going to look at all the ideas and the cool thing that's happened over the last three years where there's applications I was telling you about, with people writing ideas, and the ideas that are even posted in the club. They were 99% North American ideas two years ago, and today, it's probably 50-50.
Bill: Oh, wow.
Ian: We're getting a lot of Australian, lot of European micro-caps, you're getting that. That excites me. Bill: Yeah, that's cool.
Ian: Yeah. It helps me as an investor. I get the catbird seat of seeing what those new ideas are, and also seeing who the best investors are, and networking with them, forming relationships with them, to see idea flow. That's a huge asset, not only for me, but obviously the people that are part of it too.
Bill: Yeah, man. I’ve got to think that's cool. That's a cool contribution to leave to investing. Whatever you want to do with it, it's cool that you got it started and it's got momentum.
Ian: Yeah. I mean, from a business standpoint, I don’t know if it can double from here or not just because there's always-- the reason why it's such a unique and great club is because it's not a recommendation engine. It's not “Here's by these 10 stocks.” It takes work. Somebody pays money, they go in, they just want, “Just give me the names to buy, give me the names to sell.” It can be a little bit overwhelming. We have quite a bit of churn on the subscriber side. When you ask me like-- as a business, I don’t know how much bigger it will get. I imagine it will get bigger.
Bill: Well, I don’t mean [crosstalk] that. Quality, like, maybe it's somewhere that sort of like Vic. It is like Vic, but I didn't know what your vision of it was.
Ian: Yeah. I think it's continuing to do what it's doing. It's going in the right direction. There's other things that I'd like to do that I'd like to work on, like maybe doing some more educational-type content, because we have a lot of folks that are just new to micro-cap. They might have investing experience but new to micro-cap and just create some videos or tutorials on how to just research a stock, stuff like that, that could really help the new person in this space. That's probably an area that I'd want to get in more. So, that's MicroCapClub, they don’t like the investment management side, just continuing to do what I'm doing on that side. I think the way that scales in an unscalable strategy with micro-cap, is probably in five years just have a little bit of a deeper bench. If I'm succeeding as a micro-cap investor, if I'm in a dozen names and there's going to be some turnover there, but I would hope in five years that three or four of those micro-caps or small caps, I'm not going to sell them just because they grew out of the narrative that I have that I'm a micro-cap investor. It probably expands from 12 to 15, 16 names, and we probably have some billion, $2 billion market caps alongside some $50 million ones. It's a little bit of a deeper bench with some rookies and veterans, but generally investing the same way, because I always want to be able to look at something that's $50 million and be able to put that in the portfolio.
Bill: Yeah, that's cool. Well, I talked to one of your LPs, and he is a very good guy, and I think he understands it, so I think you pick your LPs well. I commend you on that.
Ian: That's probably the biggest part of the process, is scaring the wrong people away. 34
Bill: [laughs]
Ian: No, honestly, it is. Listen, everybody knows that I have a following on Twitter or whatever, and I have that luxury that there's people that do reach out, but I need to be able to make decisions, like a single human being making a decision, not getting pulled into people that don't understand our mission, and how we do things. The first thing I try to do when I talk to somebody that might not even understand micro-cap is just scaring them, and be like, “Hey, the market’s down 30 this year, we're going to be down 45. Are you okay with that? If you're not, this isn't for you.” Then also being real with them. This is a benefit to me, is like, I'm not after everybody's money. I'm looking for a small fraction of your investable portfolio. I want to be a small fraction, because it's the right allocation, quite honestly. Also, it's an allocation where you can do the right thing at the right time and not feel the volatility and so when that dip happens, you can invest more, because you have that extra capital to do so and you don't feel the volatility that's inherent in this portfolio. Because everybody's objective should be to outperform it, which means buying those February, March of 2020s.
Bill: Yeah. How do you deal with it? You’re fully allocated to it?
Ian: Yes. I don’t know, it's-- [crosstalk]
Bill: You're an emotional psychopath and it doesn’t bother you?
Ian: It's like I told you. Yeah. I can't cry with my kids now. [laughter]
Bill: I've actually been thinking about that comment since you said it, because that's just not what I think of you as. My mental association with you, and it's probably because of the Value: After Hours jokes, is that you're a really jovial, happy person, so to hear you say that you lack empathy at times is sort of shocking for me to hear.
Ian: I can always laugh. It's the other side that's me. [laughs]
Bill: Yeah. Okay. Well, that's fair. You repress that?
Ian: Right. Yeah, exactly. I repressed that pain through the years, just be on the psychologist’s couch, too, I guess. This is all I've ever done. When I started out, I was in three or four companies at a time. I have my entire net worth for the first 10 years, that's how I built the capital from whatever it was into an amount that I could just cut the cord. I've always been used to that volatility in that portfolio. I woke up one morning and all of a sudden, a stock I owned was halted, it was a 30% position, because the auditor couldn't find the cash on balance sheet.
Bill: Oh, no.
Ian: When it reopened a couple days later, it was down 40% on it. I sold out of the position on a day. Luckily, there was liquidity to do so, and that stock would ultimately go to zero in about three months. It sucked. Just going through kind of those reps good and bad, I've seen the extreme of the upside and the extreme of the downside, I don't have issues with volatility just now. I don't like to take losses, and I stay away from big losses. That's probably the biggest one I ever took. But just the amount of reps, I'm just used to it, to answer your question. I don't have a good answer for it.
Bill: No, that makes sense. Did you know the CEO of that one as well as you thought you did?
Ian: I did. The learning lesson from that one wasn't even about the financials. I just never really bought into the product. I bought into their fundamentals. “Oh, this is growing 20% with no debt, trading at 12 times earnings. I'll just buy it.” I talked to them, seemed good, the product looked okay. I didn't really understand why anybody would buy it, but maybe, because nobody was, I guess, but-- [laughs]
Bill: Yeah, that’s a really good lesson.
Ian: The learning lesson from there was really to this day, I really need to have complete buy-in to the management team, the product service, the mission, everything of that company. It's very qualitative and touchy feely what I just explained. It's also the only way that can hold something a for long time, unless-- [crosstalk]
Bill: Yeah. No, that makes sense, man.
Ian: [crosstalk] -complete buying into it. When you're investing on fundamentals, or purely on the fundamentals of a business, you're always just investing for the next set of numbers. God forbid, they come in 2% less of what you thought, then you're going to sell it. You're never going to be able to hold the winner that way either, because even Southwest Airlines or all these companies, they all stubbed their toe at some point. You need be able to live through that with them if you were going to hold these things over the long term.
Bill: Yeah, I think that a question that I try to ask a fair amount, and one that I ponder a lot is-- there's the thought from Bezos, “Would the customer be customer obsessed?” As an investor, I think I am beginning to become much more customer obsessed on who is the ultimate customer of this business and why are they fundamentally buying it, rather than-- in the past, I probably didn't do a good enough job getting inside that person's psyche. That's where I'm going to spend a lot more time. I think I've been reasonably good over the last 18 months or so. I came in through the value framework, and I focused way too much on statistical stuff, and whether or not something was cheap, and I just didn't do enough of the business analysis. My results have gotten good since I've cared much more about the business. Maybe that's a late cycle comment, and so is everybody's, and who cares anymore? But I think there's more reality to that statement than just the function of where we are in the market.
Ian: What's your goal as an investor?
Bill: I don’t know, man. I want to be able to look myself in the mirror and be proud of what I have done. Like the Qurate idea, I'm really proud of, because I think that was like, I was right for the right reasons. That means a lot to me. I guess that the thing that I want to be able to do is look at some of the guys on Twitter that I really look up to and admire and know that I belong in the same room as they do. My fear right now is I'm going to lean pretty heavy into this podcast stuff and I have been, so the portfolio is somewhat neglected. But I think that's probably the right decision for today and I think my portfolio is okay. I'm not looking at alt data and rapidly trading out of these positions. If it can't run itself for six months, then I probably have not built it correctly. It's not a great answer, but it's the answer I can give. I just want to provide for my family and know that when I look at my wife, and I say, “Hey, I know what I'm doing,” I'm actually living up to the responsibility that she is entrusted for me. I don't really want to run outside capital. That's not the goal. If I had to, then I would. But for now, I don't. Part of the reason, man, is what you said earlier about, not knowing that I've been tested yet. March was scary, but I don’t know that that was really a test. I still doubt whether or not that was the test that I needed to be able to look somebody that's worked their whole life to scrape by and save, to say, like, “I can invest your capital.” I don’t know that I'm there yet. I don't think that that's one of those things that given where my life is, I'm comfortable faking until I make. I mean, I want to know, when I tell somebody, that I mean it.
Ian: That's a good answer. I think the goal of investing is to hold on to your winners as long as you can. I think if you focus in your podcast, and things like Qurate, you know that what those business levers are, that you need to pay attention to, you don’t need to pay attention to them, and have your eye on them every single second of the day. But you know them well, and if your goal is to hold something like that, as long as they execute and perform, you just have to have that mentality. Sometimes, giving the positions a little slack is what it takes, you need to hold them. You can't just be focused on them so much where-- the butterfly effect. [chuckles]
Ian: You can't have that either. I think the podcasts for you and maybe some of the other things you're working on is a good distraction that could almost help your investing. I get asked all the time from people, “Am I ready to be a private full-time investor?” this or that. I'm like, “You don't need to be. Just find a job you like to do that gives you autonomy, and it might even pay you less. You don't have to do this every day, all day.” In fact, I would say, “In some ways, given whatever your strategy would be, it could hurt you.”
Bill: Yeah, I think that's right. I do think that sometimes that thought gets marketed as like, “Oh, well, just don't do anything and see what happens and everything will be okay.” That's not at all what I'm saying. I think that, for me, right now, I don’t know how long I'm going to have people's ears. It seems as though people really are enjoying what I'm doing and so am I. In the middle of some great content grab, when I have some ability to do this well, it would be really stupid not to lean into it. If it fizzles out, it fizzles out and whatever, but I'm hopeful that it won't. So far, the trends are good. Like you said, I don't think that I need to be in front of my portfolio-- I don't even think I can win that game. Guys on Twitter, crazy smart, and they're all-- It's not just on Twitter, in real life at the hedge funds, I can't beat them at that game. I know that.
Ian: Well, in the area that you invest to, if you're finding things that-- It's like what I said before, to hold these things, you're going to have to hold something that is cheap, expensive, loved, hated, your friends are going to be screaming at you to sell it, to buy it, and you've got to invest through that. that means you have to have an independent mindset towards what you're evaluating in that business. The other side of it is, you can't be gripping that tube of toothpaste too tight. I agree too, you reach these inflection points in life too where you just know you need to lean into it. Yours is the podcast, and people enjoy hearing you talk about investing or your life, we're hearing about some of the issues you dealt with your dad, and they don't want to hear somebody that's perfect.
Bill: Yeah. Well, I am not that. [laughs]
Ian: Well, no. You articulate things really, really well. We impress people with our accomplishments, but you really do just connect with people through their struggles, because everybody hearing you talk about your dad probably is going through something similar with their life and that's where you connected with people, not people’s thinking that you got a 45% return last year in one of your accounts. Yeah, that's great, but people are listening to you because of you being a real person.
Bill: Yeah, the 45% is not correct for people that are not familiar. It's okay. [crosstalk] [laughs] -my returns. [laughter]
Ian: We’ll edit that out of this podcast.
Bill: Yeah. The thing about talking about my dad, that was interesting, is one, he's one of the guys that I learned a lot-- I love my father big time. That was a really tough moment in my life. I was in law school, I had decided when I was 28, that was back or after when I did the work or whatever, I guess I was 25 when that happened. By the work, I mean therapy. It's hard to put your dad on blast a little bit in that way. But the other side of it is, I really want-- I don't want this podcast to be something that people feel they have to come on and emote, that's not the goal here. I also do want people to say like, “You know what? This is place that it's okay to acknowledge that stuff's not always great, that there are tough parts in life.” I want to show some of the life behind investors, if they're willing to share it, and if they aren't, then we'll just do an investing conversation. I don't really care. Then, eventually I'd like to take it outside of investing and just do interviews because I really enjoy this stuff. I think it's super fun.
Ian: I think you have the right temperament. You're a person that people want to talk more with, that's why we're bumping over two hours or around two-hour mark, I don't feel like, “Boy, I’ve got to go do something else.” It's an enjoyable conversation. I think you have a great temperament and cadence.
Bill: You're an enjoyable guy to talk to. [crosstalk]
Ian: Oh, thank you. [laughs]
Bill: I mean it. Even if you have no empathy. [laughter]
Ian: Thank you. That was a killer. [laughter]
Bill: That’s what I'm going to title the episode. Ian Cassel, Straight Killer. [laughs] Ian: Yeah. I’ll up into the right arrow, get on my way. [laughs]
Bill: That’s right. Rocket ships and diamond hands, Ian Cassel’s coming.
Ian: [laughs] We're all going through life and it's not all good stuff. I think you're right. It might have been back in 2012. I was sitting down with my wife was before we had kids, but I got a call and it was my dad, and my mom got hit by a car. It was a freak accident. Late at night, she walked across the road, and there was a bend in the road and a car struck her and dead instantly.
Bill: Oh, no.
Ian: That occurred almost one year to the day-- this is all around Christmastime, one year to the day after my mother-in-law died from cancer.
Bill: Ah.
Ian: Back to back Christmases, basically, it was like three days before. We lost my wife's mom, and then my mom and was just like, after that you're like, “All right, what's next Christmas is going--”
Bill: Yeah.
Ian: We all go through, and then that compared to what other people go through is nothing, but I'm just saying everybody's going through some type of struggle, and it's in those ways that we're human that you really connect, and see how people dealt with it.
Bill: Well, dude, people would look at my grandma's life and be like, she's had everything her whole life, what does she ever have to worry about? She lost both of her parents before she was 25 and she's buried two kids. One of them is a really unfortunate story of a wasted life. The other got his stuff together for the most part, and was working on a car. He used to build like old hot rods and stuff. Car started to roll down a hill, and there was a part of the chassis that sort of-- almost formed a hook, hooked his blue jeans, dragged him down a hill, pinned him against a tree and killed him. Could you imagine getting that phone call? It's your son. Like, fuck that. I wouldn't trade anything for that. Or, you couldn't give me enough to make that trade is what I'm trying to say. Sometimes, I guess one of the things that I felt like was a little bit of an avenue that I could explore, not being constrained by a firm behind me or fund or whatever, is whatever you can delve into in that realm because I think a lot of podcasts are, “Hey, isn't this great? This is my best idea. I'm crushing it.” I think some of the consumption almost feels like you're listening to a marketing machine. I'm trying to more have people listen to a conversation. I happen to think investors are crazy interesting, because if you're good at investing, I think you have to be curious, and a curious mind is an interesting mind.
Ian: Absolutely. I think that should be everybody's goals, put interesting people around them.
Bill: Yeah. It's been cool, man. How cool it is for somebody like me to be able to call you and be like, “Hey, do you want to hop on a podcast and be able to have a conversation?” It's awesome.
Ian: This is a blast. This is unlike any other interview I did, just because it feels like more of a conversation, that's less of me pitching whatever I'm here to pitch, whether that's micro-cap space, or whatever. I loved it. I think you're going to crush it. You have so many skills, and a lot of them, you're trying to figure it out, but you're highly talented and I'm excited about seeing where you're at in five years.
Bill: I'll tell you what, man, I’ve got to get my sound right. I've had sound issues and stuff. I need a hardware backup. It's time to make this thing a little bit more professionalized instead of just like, “Oh, here's a podcast, I hope you guys like it.” [laughter]
Bill: I at least know that.
Ian: Calling in on a conference line and record it.
Bill: That's right. I didn't have a website, like, John Mihaljevic, from Manual of Ideas, basically was like, “Okay, Bill, I will build your website, just give me the shit that I need.” The only reason that there's a functioning website is because John did it, but I'm the type of person that needs that nudge. Now I'm going to, like, hire somebody to do it the right way. To your point on surrounding yourself with the right people, I'm not going to be able to read what I need to satisfy myself as an investor, and do the podcast, and build out a website and have a marketing arm. I’ve got to have people around me to do this stuff. It's actually been a fun learning experience from that perspective, because I care so much about it, but in order to see it grow, I need to let go of some of it. That's interesting.
Ian: We all go through stages like that. You don't want to look back in five years and think, “Well, if I would have just focused on that, it would have been 10 times bigger, or it could have been something huge. You just don't want to do that. I think we all reach things, or areas like that, we have to make that happen inflection point. You want to keep on spreading yourself too thin where you're doing everything okay. Focus on something so you can crush it.
Bill: Yeah, I agree. You mentioned guys like Dennis Hong and like Fred Lou and my man, Dan McMurtrie, and Francisco like, these are guys that-- I think I am competent. Okay. I don't think that I can beat them at their game. It's not about me beating them at their game. Some of it is about acknowledging what makes people great and helping them be elevated. I love what you do, man. I like your marketing. I like how you built MicroCapClub. I like how you focused on micro-cap. Why not talk to you, elevate you who is someone that I respect, and build something for myself in the process? That's how I'm viewing this whole thing. It all goes back to wealth games or status games. I just don't care who gets a credit. I just want to put out dope stuff that people want to listen to and it's been fun.
Ian: Well, you're doing it. Continue to do it.
Bill: Thank you. Well, I appreciate you stopping by to help me do it. I am going to let you go take care of your kids because I know that your wife is saying they're about to run out of the basement. Are you just covered in snow right now?
Ian: Yeah, it's snowing outside right now. [crosstalk] -another six inches today.
Bill: Oh, that sucks. Ah, dude, I do not miss that. I was at the beach on Sunday. Ian: Don’t you miss Chicago? Come on.
Bill: My wife was really sick and I had the kids, and I took them to the beach. I looked at it and I was like I do not miss-- I love my neighbors. I love that city. I can't wait to visit in the summer. I'm going to rage there. But I don't need to be there in the winter, man. I'm done with that. [laughter]
Ian: I don't blame you. We went down to Florida for a couple weeks, too, and just be able to kick the kids outside and go to the beach is just killer. The older I get, the less I like the seasons, to be honest with you.
Bill: Yeah. Well, I can understand that. I'll tell you what, we got some space, so if you need somewhere to come back to, hit me up and we can host you.
Ian: Done. I'll do that.
Bill: All right, man. Well take care of yourself and tell your wife thank you for letting you stay for this long. I appreciate it.
Ian: [chuckles] Well, thank you. Thanks for having me.
Bill: Ian Cassel, ladies and gentlemen. How can people find you?
Ian: You can find me on Twitter. My handle is @IanCassel. I-A-N C-A-S-S-E-L, or you can go to microcapclub.com, check out MicroCapClub. You can go to if.capital, to see the capital management arm.
Bill: All right, or you can sign on to Value: After Hours live and see how he was commenting under a bunch of different aliases.
Ian: [laughs] Truth.
Bill: [chuckles] All right, man. Take care yourself. Thank you.
