We Study Billionaires - The Investor’s Podcast Network - TIP431: The Big World of Microcaps w/ Ian Cassel

Starting point is 00:00:00 You're listening to TIP. On today's show, we have microcap expert Ian Castle. Ian has been investing in microcaps for over 20 years, and he's the co-founder of the popular site MicroCap Club. He's the author of two amazing books on Intelligent Fanatics, a phrase coined by Charlie Munger, and he's now the CIO of Intelligent Fanatics Capital Management. In this episode, we discuss why microcaps get a bad rap, how a few of the greatest investors got their start in microcaps, how to identify.

Starting point is 00:00:30 microcaps that could grow up to be macrocaps, the pros and cons of a highly concentrated portfolio, psychology around cheaply priced stocks, including macrocaps that do stock splits, Ian's strategy for finding profitable and sustainable microcap companies with great management, and a whole lot more. I thoroughly enjoyed speaking with Ian, and I know you'll get a lot of great insights out of this one. So without further ado, please enjoy my conversation with the thoughtful Ian Castle. podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

Starting point is 00:01:21 Welcome to The Investors Podcast. I'm your host, Trey Lockerbie and Man O Man, I'm so excited to have on the show, Ian Castle. Welcome. Thanks for having me. I appreciate it. I'm eager to get into today's discussion on microcap stocks because it's something we really haven't explored on this show. and I'm not talking small caps. We're talking microcaps today. And you are an expert on the subject. Some

Starting point is 00:01:45 people would refer to microcap stocks as penny stocks, which has somewhat of a negative connotation to it. Could you please first define for the audience what exactly a microcap stock is and why they're also frowned upon from time to time? Sure. No, I'd be happy to. You know, microcap stocks, you're right. I mean, I think it's such an opportunity, but most people, like you said, frown upon them or broad brush the whole ecosystem as this uninvestable wasteland of small companies. But I define microcaps as public companies that have market capitalizations less than 300 million. And I've been defining it that way for probably 10 years. So just due to inflation, especially recently, I should probably increase that to sub 500 million. But I think most people would say in general, sub 500 million market cap.

Starting point is 00:02:32 And when you're sizing that up against the public equity universe, you're looking at around 24,000 stocks in North America, that's the U.S. and Canada combined. And roughly 48% of those 24,000 would be defined as microcap as having more caps, sub 300 million. So it's a vast amount of the public universe. In fact, you know, I would say there's more microcaps than there are companies that trade on the New York Stock Exchange than NASDAQ combined. So what's interesting about that, you know, as an entrepreneur, I look at that and I say, if you were an entrepreneur and you started a business and you started growing that business, and then all of a sudden someone said, hey, guess what, your business is worth $30 million.

Starting point is 00:03:14 You would be so stoked on that. You would be so excited. That would be a dream come true. You'd be like, this is the most incredible thing ever. And yet in the public markets, no one cares. That is like the smallest of small potatoes ever just even qualify as a microcap stock. So since no one cares about these stocks, the liquidity just isn't there, it would seem. And so that can create these really wide discrepancies in price and the bid-esque spreads,

Starting point is 00:03:39 etc. Is the fact that they're getting such a negative connotation around the idea of people trying to get out of these stocks and couldn't and saw this bigger loss? And so it's become this narrative that, hey, you'll experience more loss involved. Walk us through, I guess, what is creating the narrative there? You know, it's a very good question. I mean, when you think about microcap investing, we're investing in small emerging companies. And, you know, I kind of put small emerging companies, if you're an investor, you kind of have three ways to invest in them, whether it's venture capital on the technology side.

Starting point is 00:04:10 There's private companies, obviously, whether it's just kind of more smaller private equity, you know, also private companies. And then there's the public way to do that, which is microcap. You know, ironically enough, when you look at those two other ways to invest, whether it's venture capital or private equity, you know, The common public or retail investor doesn't really have access or at least good access to those marketplaces. There's some ways you can do so in the venture capital community today. But let's just be honest. I mean, even the venture capital side, it's those top five venture capital firms that

Starting point is 00:04:40 are getting the best deals that are negotiating the best prices that are doing the best deals, you know, quite honestly. You know, you have to know the right people. You have to be at those firms. You had to go to the right schools, you know, that type of thing. With public microcaps that are publicly traded, I mean, that opportunity set is open to everybody, whether you have $500 in your brokerage account, you know, or $5 billion or $5 billion, those opportunities persist. The interesting thing about microcaps being public and ill-liquid is it's probably the only area in the small public or small company arena that really keeps the institutions out because they're so ill-liquid. It's much easier for an institution, you know, investing, you know, $500 million, a billion

Starting point is 00:05:22 plus to invest in these venture capital companies or private equity companies because they can be in control of the deal, they can mark the price, and they can buy the entire company, you know, in most cases. They really don't have, want to, you know, buy one percent of a 35 million market cap company. It doesn't really serve a purpose. So there's this advantage to a small retail investor that's astute that knows how to read financial statements to find these really good companies that are unique, that are growing, that are profitable, that are small, because the institutions are kept out of them. The institutions can only buy them once their companies get larger, their stocks become more liquid, and then they can buy them. So it's one of the only areas

Starting point is 00:06:05 I think in investing where the small retail investor has a distinct advantage because the institutions are almost kept out of the city gates. You know, you have this playground to yourself. And that's what attracted me to it, you know, 20 years ago is somebody like me could get an advantage over other people. And I'm not the only one. I mean, Warren Buffett, Peter Lynch, Joel Greenblatt, all these great investors, most of the great investors got started investing in microcaps because this is an area in their early years when they were managing small sums where they could get an advantage over others. And that same kind of structural advantage still persisted today. And I think it might be, you know, why is this kind of space kind of broad-brushed kind of this

Starting point is 00:06:45 sleazy ecosystem. I think it maybe is because they are marked to market every day. They are public. You see the amount of failures. You know, you see the stocks decline on a daily basis. And I would be one to say if the venture capital community had the same mark to market every day, you would see a similar type of chart pattern, you know, where you have those power laws, you know, that persist even down here in small equities where, you know, 20% of the companies are probably going to be nice winners and the other 80% are not going to be. And so I think it's unfair just because, you know, those great investors started here, you know, companies like Walmart, Amgen, intuitive surgical, Monster Energy, Netflix, even Berkshire Hathaway when Warren Buffett took it over,

Starting point is 00:07:24 was a microcap company. You know, and I think historically those companies would also be the best performing public companies ever. They started or came out of the microcap ecosystem and even on an economic level. I think if you're, I think it's probably a little dated maybe five or six years ago. But when I had a CAP IQ subscription, I actually added together all the employees of the microcat universe. And it was like three or four million jobs, which is more people than Walmart employees. So it's a universe that also is impactful in the economy. And it's important that we support that. And so, you know, a big part of kind of my public outreach, whether it's on Twitter or through a microcat club, is really just to remind people how important this ecosystem is.

Starting point is 00:08:04 And it's legitimate. And it's been around for a long time. And there's sustainable advantages still exist today. Right, but you just use the term sleazy with that ecosystem as like, that is just such an interesting word that I have to dig in on a little bit more. Is it sleazy because it's prime for like pump and dump schemes? Do you find fraud more frequently in these stocks? Or is there some other sort of negative risk that goes along with it? Unfortunately, I think most folks get their first entree to microcats through some newsletter they get in their mailbox or inbox. that promotes, you know, a 10-page glossy newsletter on why company XYZ is the next Amazon. You know, and then if you looked at the disclaimer, you'll see that somebody paid $2 million

Starting point is 00:08:48 for distribution of this newsletter. And I actually, believe it, I actually tracked, I think I had a list of 42 that I received at my house. And 100% of the time within two years, they literally went down 99%, you know, those companies. And so unfortunately, I think the public gets their first entree and the microcap investing from the very worst part of it. Those types of newsletters that produce like these companies that really have no chance and that are going to go down.

Starting point is 00:09:17 And it's why when people talk about microcap investing with me or when I talk to them about it, I always say, listen, when you look at the public company universe that are microcaps, around 16% of these companies are profitable. Focus on that 16%. If you just focus on the profitable companies in microcap, it gets rid of 95% of your issues. Very interesting. And just more on that kind of idea of them being so small that the liquidity and the volume of trading could have such an impact. I'm kind of curious why we haven't seen, let's say the Reddit community entering into the microcap space, or if they have,

Starting point is 00:09:53 I'm not aware of it, but obviously even GameStop was slightly above that. Maybe they were in that 500 million range at the time. But do you see that happening at all in the microcap space where the retail raiders are coming in and making some sort of impact? Not yet, but I certainly kind of agree with you. It wouldn't be surprising to see them come downstream into microcap because more and more of these companies are actually uplisting in the New York Stock Exchange. A lot of them here in the United States, I would say probably over 50% of microcaps trade on the OTC markets. And so a lot of those Reddit crowd, they won't participate in anything that's OTC markets, but they would if it's trade on the NASDAQ or New York Stock Exchange. So I think, you know, it wouldn't be surprising to see that activity pick up. We certainly see a little bit of of it, but not to the extent that we saw in GameStop or AMC or things like that. All right. Well, I love the idea of Buffett and Lynch and Greenblatt, you know, all getting their start in this space.

Starting point is 00:10:46 And it makes total sense that as they accumulated more capital, they just needed to put that capital to work in bigger companies, right? Now, Buffett has that high class problem nowadays of hardly being able to find a company big enough. So that's where he's gone. But I'm curious, how did their performance in microcaps compare to the larger caps they've been investing it later on. When you look at the Buffett partnership, I believe he started that in 1957.

Starting point is 00:11:12 And when he started that partnership, I think it launched with around $100,000 in capital. And so $100,000 in $1957 is about a million dollars today. So, you know, Warren Buffett launching today would have launched his partnership with a million dollars. And that partnership ran until 1968. By the time the partnership ended in 1968, I believe he had around 100 million in capital in those dollars, which is around 800 million today. So, which is pretty incredible when you think about it. He went from basically a million dollars equivalent today to 800 million over the course

Starting point is 00:11:47 of 11 years in that fund. And in the middle of there, I believe it was 19, some Berkshire Zell that's going to yell at me. I think it was 1965 that he kind of bought control of Berkshire. So during that partnership, he actually brought control of Berkshire Hathaway. And Berkshire Hathaway, even on an inflation-adjusted basis, was a microcap, even in today's dollars. But he started purchasing kind of large chunks of public companies and even a few private companies, even in the mid-1960s.

Starting point is 00:12:15 And so his kind of entree in a microcap probably only lasted a few years because he was so successful, he quickly, you know, grew out of that ecosystem. When you look at his performance kind of over those first five or six years, years, I mean, they were actually probably fairly equivalent to what he did over the next 10 years, which makes sense. I mean, when you think about it, if I'm the best varsity QB in my high school football team, you know, hopefully I excel and become the best QB in the college team and things like that. And so your performance can sustain at different levels and different market cap classes. And that's what the greats do.

Starting point is 00:12:49 I mean, they're able to kind of continue on with their success compounding those great rates as they go upstream and up market cap. So I think most of his microcap experience was the first five or six years. And I believe he compounded at 31% gross during his partnership years, 25% net, which was probably on track with what he did over the next 10 years once he was kind of going upstream a little bit further. When you look at somebody like Peter Lynch, I think he launched his fund officially to the public in like the early 80s. And I think he had around a 22% average rate of return. And so probably somewhat similar, but a little bit better than what he did than when he was forced upstream. Because he went from managing $100 million in the early 80s to about $16 billion by the time he left. So he was obviously going upstream.

Starting point is 00:13:37 But he also increased the amount of positions that he was in. I mean, he was in 1,200, 1,300 companies at a time by the time he was done, which was pretty amazing. You think about that being in an active investor and being over 1,000 names. Incredible. Yeah. You know, back in 1999, Buffett said that he could still achieve 50% annual returns if he was working with like 10 million or so. What strategies do you imagine he'd be implementing in that case?

Starting point is 00:14:04 Would it simply be just concentrating heavily into these smaller companies, I think, like you are? Or are there like, you know, we're talking greenblatt spinoffs and other kind of strategies thrown in there? What do you think the playbook would look like? I think it would probably be, yes, concentrated. And again, he's one of the smartest people on the planet. So you have to watch when you talk about concentration because everybody glorifies it.

Starting point is 00:14:25 But there's also a dual-edged sword. But I think if Buffett was doing it today, it would be a combination of probably small micro, small cap companies and probably doing something similar to what Brent B. Shore does, you know, where it's like acquiring private small companies for two or three times cash flow. It would probably be some combination of that, but concentrating in that approach. As you mentioned earlier, some small companies eventually grow up to be bigger companies. Netflix comes to mind. They IPOed a little over 300 million. What are some of the biggest success stories that you followed from Micro that have transitioned into Macro?

Starting point is 00:15:00 A good question. I mean, there's some big bald bracket names like Walmart when it went public in 1971 as an IPO. It was MicroCap, you know, Intuitive Surgical. It was kind of like Netflix where it was kind of a larger, you know, microcap monster energy and one of those monster drawdowns that it had actually went down into microcab for a short period of time. Berkshire Hathaway, I said, I believe cell gene as well. And there's a few other kind of life science companies that made huge runs over time. There's also a bunch of companies that a lot of people probably haven't heard of that, I mean, listen, you can 10x, 100x, you know, and still be a relatively small company, too. You know, a company that like expel and the symbol is XPEL. You know,

Starting point is 00:15:41 that was a company that was profiled on microcalf club by one of our members at 25 cents a share back in 2012 or 2013, that hit $100 a share last year. And so that's the other thing kind of attracted me to kind of the smaller area of microcap is because, you know, you can find a $10 or $20 million market cap company. And if a 10x is, it's still only 100 or 200 million market cap company. But I think one of the other interesting that parallels this conversation is also illiquid microcaps. Roger Ibbotson, who's a Yale finance professor, also runs zebra capital. He actually has a few white papers on illiquidity as a factor. And he did some work looking at all market cap classes, all liquidity profiles going back to 1971. And in one of his reports, I think the most

Starting point is 00:16:28 public, or the most recent one that's public is year ended 2017 or 18, but he updates at annual like. But he has it there a matrix and it shows the best performing company since 1971. and every year, you know, over since 1971, it's ill-liquid microcaps. Not liquid microcaps, not mildly liquid microcaps, but ill-liquid microcaps, you know, versus, you know, liquid large caps, ill-liquid, large caps, mid-caps, small caps. Since 1971, the best performing, you know, kind of quartile is ill-liquid microcaps. Now, what do you attribute that to? Because when I hear that, I think of the real estate analogy where most people's wealth

Starting point is 00:17:07 is from their home, and that's almost purely correlated to the fact that it's so illiquid. They don't want to, they can't day trade in and out of it. So they just default to holding it for a long period of time. Is it something similar to that effect in this example? My theory, this is just my theory, because I kind of experienced it during the financial crisis of 2008, 2009 is the ill liquid microcap segment is normally the not institutionalized area. They're not in any ETF or anything like that. And so I think the main reason like that area of the market does the best is during drawdowns like the crisis or even what we went through with COVID, a lot of times those companies don't perform as bad because

Starting point is 00:17:51 they're not up against institutional outflows. People aren't saying risk off, you know, pulling capital out of funds that own them or the ETFs that own them. So that's my theory. What are your general thoughts on microcap ETFs? They're relatively new. And from what you just said, I'm coming up with this playbook of, okay, maybe we look at the holdings in those and then go elsewhere, right, to the more illiquid ones. But I'm curious, what are your general thoughts? You know, I think those microcap ETFs are meant to scale. And microcap is not an area that's really necessarily meant to scale. It's really the ultimate stock pickers universe. You know, I think the worst way to own microcap is to own all of them. You know, and when you look at the

Starting point is 00:18:33 companies that are in those ETFs, I mean, the I share is microcap. index, which I think the Sybil's IWC, I believe owns around 1,500 microcaps. 78 or 80% of them are unprofitable. And, you know, it's really just a vehicle built to scale that hopefully catches some inflows, you know, or outflows. And historically, outside of last year where it actually outperformed decently or did pretty well, it's been really miserable, you know, over the course of time, you know, the long-term performance of that index.

Starting point is 00:19:05 And I think that's something you'll see across the board in any micrachron. cap ETF that owns over a thousand names because microcap is really meant for stock picking. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists,

Starting point is 00:19:43 investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000. in extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to but end up having dinner with. Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech, and financial sovereignty, immersive

Starting point is 00:20:25 art installations and conversations that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person. Standard and patron passes are available at osloof freedomform.com with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference. It's a place where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately. How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today. NetSuite

Starting point is 00:21:11 is the number one AI cloud ERP, trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR, and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while making fast AI-powered decisions with confidence. And now with the Netsuite AI connector, you can use the AI of your choice to connect directly to your real business data. This isn't some add-on, it's AI built into the system that runs your business. And whether your company does millions or even hundreds of millions, Netsuite helps you stay

Starting point is 00:21:50 ahead. If your revenues are at least in the seven figures, get their free business guide, domesticifying AI at Netsuite.com slash study. The guide is free to you at netsuite.com slash study. NetSuite.com slash study. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also incredibly overwhelming and lonely.

Starting point is 00:22:20 That's why having the right tools matters. For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses of businesses around the world and 10% of all e-commerce in the U.S. from brands just getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics. So you're not juggling a bunch of different platforms. You can build a beautiful online store with hundreds of ready-to-use templates, and Shopify is packed with helpful AI tools that write product descriptions and even enhance your product photography. Plus, if you ever get stuck,

Starting point is 00:22:56 they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify, and start hearing sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. You know, the psychology around microcaps is super.

Starting point is 00:23:28 fascinating to me. For instance, the fact that a stock is a microcap doesn't automatically mean it's a value play, but for some reason there's this bias there. So case and point, when Tesla was ripping in 2020 to the point of being worth more than like the entire energy sector, they did a five to one split. They went from $2,200 to $446. The stock then doubled from there, right? And then Alphabet just announced a 20 for one stock split going from 2,700 down to 138. And I would bet that something similar is going to happen, right? Just because people just look at the share price and say, oh, if that looks more affordable to me, what a deal.

Starting point is 00:24:07 It went from 2,700 to 138, you know. And they don't pay much attention to the market cap, which I think is a huge issue. I'm curious if you have any examples of a microcap stock that you consider to become insanely overvalued? It's a good question. I mean, overvalued is in the eye of the beholder in some ways. I mean, I think what you do see as overvalued sometimes is just purely a story stock that has no revenues, has really nothing.

Starting point is 00:24:34 Maybe it's promoting some IP that it has or a technology that is yet to sell, you know, that sells for $100 million, 200 million market cap. But then again, you could say the same thing. That's what the venture capital world is in the business of doing, too. you know, having companies that have no revenues traded a billion dollar market cap. So it's hard to think of any single company that comes to mind as overvalued. I think what would you said earlier about people not understand the difference between market cap and stock price also occurs down here. You know, there's a lot of people that look at a 25 cent stock and think, well, that's cheaper

Starting point is 00:25:08 than this $5 stock and not realize the market cap's actually bigger on the $25 stock than the $5 stock. And that's why it's important to understand how to, you know, just look at simple things like the amount of shares outstanding and the fully diluted shares outstanding. So you can get a feel for what the business is actually worth. So I certainly see a lot of that down here in the microcat universe as well. But kind of the other thing to your point, I think we're in an incredible time period where the largest companies in the world are just, I mean, just the operating performance that they continue to put out is incredible. When you see the largest companies the world, it's still growing 30% a year with 30% of hours. operating margins. There's a reason why they're being valued where they are. It's just that operating performance is incredible. Yeah, you mentioned earlier that you would want to focus in

Starting point is 00:25:55 on profitable microcap stocks. I actually found that surprising because since they are more enterprising, then you think you would focus or wait profitability a little bit less, right? Because they're probably reinvesting a lot of capital, trying to grow and get bigger. Why are you saying that we should be more focused on profitability in the case of these younger stocks, we'll call them? I think the newer you are to microcap investing and understanding financial statements, the more important it becomes the focus on the profitable segment. You know, strictly talking about the new investor looking at microcap, you know, I think a lot of the bigger issues you face are when you invest in unprofitable businesses.

Starting point is 00:26:36 Because unlike the private equity and venture capital world where they're flush with capital and resources. It's actually pretty hard for a microcap company to raise capital effectively. And I've seen it time and time again, you know, a thousand different times and a thousand different ways, you know, a small microcap company be ineffective in raising capital and the way they raised it completely destroyed shareholder value. And so my biggest risk as a microcap investor is dilution, you know, and so I'm really trying to find that those companies, even today, you know, I've been doing this for 20 years. I do invest occasionally in some unprofitable companies, but it's really because I think they'll be inflecting on profitability within 24 months

Starting point is 00:27:12 and they have the balance sheet to get there. But for the most part, your biggest risk is dilution as a microcap investor. So I think focusing on profitable companies that don't need to raise capital is the best way to go. Now, how often are you finding that with these microcap companies, the actual founder is still attached to the business? And if you do find that, is it any sort of advantage in your mind? I'm personally attracted to founders for a lot of the same reasons other people are as well,

Starting point is 00:27:41 you know, because they build the business. And it is more prominent in small microcap companies. The founder is running those businesses, which is probably another reason why I like microcap investment. It's, you know, it's not unusual that most of these companies, you know, there's 10, 20, 30 percent ownership by that founder. And, you know, it's one of the reasons why in 2016 started working with Sean Hiddings and we wrote two books on intelligence finance. And, you know, basically what I believe is, you know, the smaller the company, the more important management becomes, the more important the CEO, the board, you know, the people that he, that is around he or she becomes. And so we, I wouldn't have drill down on that even more. So in 2016, me and my co-author,

Starting point is 00:28:21 Sean Eddings, we wrote two books. I have one here called Intelligent Fanatics Project. And intelligent fanatics is a term that Charlie Munger used to describe an entrepreneur that built something from scratch and built it into an organization that not only grew up to be a larger company, but became dominant in what they were doing in their geography and their industry, globally even. And not only became dominant, they sustained that domination over decades. And I was always interested in what type of caliber of person or what quality or traits did the individuals that founded those companies.

Starting point is 00:28:56 How do they create a business like that? Because a lot of these companies were in industries that were highly competitive, We were there in commodity businesses. They didn't necessarily have a product that was just better than everybody else. We took some of the intelligent fanatics that Charlie Munger mentions in his speeches, and we kind of dug into their past and kind of rewrote their stories, their personal and professional stories and tried to pull out some lessons from them. And it was a fun project for me because I really just wanted to fine-tune my qualitative

Starting point is 00:29:22 lens for investing. And we had so much fun writing the first, and we wrote another one. And we covered, I think, eight intelligent fanatics in the first book, another nine and the second book. And then we actually brought in some interns from India to write one for India, looking at entrepreneurs in India. So there was actually three books out by us. And so I think for me, I'm attracted to founders. A big part of my time is trying to find those great leaders that have these intelligence fanatic attributes in them. That's why I spent a lot of time talking to management as part as my best of process. I'd love to explore some of those attributes. What you just

Starting point is 00:29:57 said, kind of reminded me of a couple of things. My interview with Brent, Be Shure, he mentioned that, you know, you're looking for founders who are in it for the right reasons and also they don't need the money anymore, you know? So I think about Berkshire Hathaway as well, all the executives there could have retired many times over. They're all wealthy people, but yet they want to roll out of bed and go read 10 cues every day. So do you find something similar with the attributes you're exploring with these founders? Are they just passionate? What are, walk us through the attributes? Yeah, I mean, it's and it's no, you know, they need to have all eight of these.

Starting point is 00:30:31 You know, I wish it was that easy. You know, you can still fail when they have these attributes. It's still business still takes luck. You know, but I would say the number one thing that I picked up on that I really applied after doing the research was the part about, you know, constantly putting great people around them. You know, I run into, and Brent Beecher uses this term too because, and we connected to a lot of levels because he kind of does what I do, but in the private universe. But he uses the word hustle. He finds a lot of businesses that are a two or three person hustle. And you can scale a hustle up to a two or five or ten million dollar business.

Starting point is 00:31:06 But it'll always just be a hustle unless you put great people around you that will allow you to scale those, scale the business. And you run into that a lot with microcats as well. You can find quite a few companies that are good businesses even, you know, but they're actually limited. The ceiling is that founder because he will never let go enough to bring in great talent around him. or her. And I don't want to invest in hustles. I've done that before and you can even do that profitably. But, you know, I want to invest in something that could be a 10 million revenue company, go to 100, go to a billion. And for that, you need to have somebody that puts great people around them. And so probably the biggest thing from the book that I've applied today is really doing a lot

Starting point is 00:31:44 of analysis on the people that the CEO has around him or her in their operations and doing interviews with them. Are these people truly unique? Are they the best? And what I don't want to see is a bunch of yes, men or women, you know, that are around the person. That's probably the number one thing I took, you know, from the book was that because honestly, I probably put too much emphasis on studying the person themselves going into this research. And going out of it, it actually was probably spending less time looking at the person and more about the people around them. Yeah, interesting. The Jim Collins quote, a genius with the thousand followers kind of comes to mind. And when he did his research, he found that actually those leaders perform

Starting point is 00:32:23 worse off than the others who were more democratized. Very interesting. I want to explore your strategy a little bit further. As I understand it, you run a highly concentrated portfolio, or at least you used to, I love the quote that concentration creates wealth and diversification maintains wealth. Do you think there's truth in that? And as you've accumulated more capital and even launched a fund now, do you consider diversification more? Yeah, I've always been concentrated. traded. A little bit of my backstory in two minutes was, you know, I got introduced to microcaps when I invested in a few technology companies during the dot-com bubble in the late 90s. They quickly went up and then they quickly went down during when the bubble burst. And those

Starting point is 00:33:09 companies became microcaps. So that's how I kind of got introduced to them. And I think when you lose money like I did quickly, it either motivates you or demotivates you. And for me, it just kind of motivated me to dig into this ecosystem. And I found this wild world of microcaps. And I found this wild world of microcap investing. And back then, all the activity on small microcap companies was on public message boards like Raging Bull and Investors Hub and Yahoo Finance message boards. And the reason why all the activity is there is the investor base of most of these small companies is mainly retail. And so that's where people would go to connect and share research and that type of thing. And so for the better part of 10 years, I was on public message boards and I met a few mentors on

Starting point is 00:33:48 there and that type of thing. And through some luck and some skill, it's able to become a full-time private investor in 2008 during the depths of the of the crisis. And through all that, kind of investing through two ups and downs in the marketplace, it kind of zeroes you in on what strategy works well. And for me and my strategy, I would say it kind of characterizes I'm trying to find unique businesses that there's not another one like it out there that's public. And so what the formula I like to use is kind of this combination of tailwind, scarcity, story and undiscovered. It's kind of at the top level framework I use. And so for me, you know, tailwinds is important in a business because it's a lot easier to operate a business

Starting point is 00:34:34 win or a tailwind instead of a headwind. And I kind of compare it to the jet stream going from, you know, west to east in the United States, you know, where the jet liners utilize that jet stream, you know, it takes like an hour or two off the time that it takes to go, you know, from L.A. to New York. And it's kind of, that's how I wouldn't invest too. And so I'm trying to find these businesses that are in this tale when Josh Wolfe of Lux Capital kind of, I believe, refers to it as an inevitable arrow of progress, you know, kind of like how, you know, went from mainframe computers to personal computers to laptop computers to when you wear having your phone to one you have to rest, probably going to be implantable.

Starting point is 00:35:12 You know, it's kind of undeniable progress. And so I'm trying to find kind of things that fit that where it's a lot easier to invest when you're in a tailwind. The second thing is kind of scarcity. And scarcity is a, I think, one of the most unique parts of investing. It's one of the most powerful things that drives price. So scarcity is when demand, outstripped supply, you know, and prices are forced to go higher. You know, I think the most extreme examples of this is kind of when you see consumer

Starting point is 00:35:40 demand hitting a single product category, like, you know, tickle me, I'll know, or beady baby bubble, that type of thing. And I'm not interested in finding the next, you know, superficial bubble. But I think the same thing happens to unique businesses that are public when there's not another one out there that's like it. And institutions want to get exposure to that area and that type of business, that's where you get these undervalued situations that can trade at overvalued prices. And I want to find undervalued companies that can get overvalued. I'm not a deep value investor. I don't want to find something that's undervalued that can get less undervalued.

Starting point is 00:36:15 I want to get something that's undervalued that can get overvalued. and great businesses always become overvalue because there's a scarcity of them. And so I just want to find those types of situations, you know, when they're small. And, you know, when I first got started investing, I was mainly a story stock investor, believe it or not. You know, I wasn't really looking too much fundamentals. And I would just try to find these things that there was another company out there like it. There was in a tailwind and it had a great story, you know. And so actually one of the good example of this was a company called K Pasa, which was a Mexican social network.

Starting point is 00:36:48 like 10 years ago and it was the only public social network that existed 10 years ago is before Facebook went public. And that stock went from a dollar of 10 simply because institutions needed exposure to this new thing called social networks. And it just propelled that stock to ridiculous valuations because it was only one of one. And so that's kind of a dynamic I'm going to find just combining fundamentals with it, not just height. And I want to find, you know, like I said, one with a good story.

Starting point is 00:37:13 And, you know, one that 100% of people will gravitate to where it's easy to find the incremental buyer of the story because it's something you and I would believe in. And so you kind of combine that with undiscovered, you know, which is quite honestly, I mean, most of my hair caps are undiscovered. So that's the easy one. That's kind of the last piece of it. And so just trying to find things that institutions don't own because not necessarily for the upside, but during those time periods of 2008, 2009, institutions can't sell what they don't own. And so a lot of times you're safer in situations like that as well during the bad times. And so that's kind of like a top level framework. When I first started investing, I was in two or three companies, and that's how I

Starting point is 00:37:51 built my capital from, I would say, 2000 to 2007, 2008, literally in two or three companies. And, you know, today as my capital is grown, and now I imagine outside capital, it's still very concentrated. It's in, I would say, eight to ten, seven to nine, something like that, depending on the opportunity set. So I'm still very, very concentrated. And I look at the full ecosystem. It's not just the United States, Canada, but also the UK and also the UK. Australia. There's dynamics and those other geographical locations that make it very interesting, you know, as a microcap investor. You know, we're here in the U.S. quite honestly, there's less and less great opportunities going public small that have real businesses attached to them.

Starting point is 00:38:32 But in Canada, in Australia, those markets still have really interesting companies that are going public, you know, as a 25 million revenue company growing 30% a year that's profitable. You still see those. So it's important, unlike. 10 years ago that a microcab investor is not kind of landlocked to their geographic location, because that's what broker just allow you to do. You can buy stocks in any market now. And how do you sleep at night being that concentrated? It's all I've ever done. So I was more concentrated before, but it's also like a big part of my strategy is just knowing these companies better than most other investors because

Starting point is 00:39:09 that's what's going to save you from the losses. And that's what's going to keep you in these things to hold the gains because that's the key to investing. You want to sell your loses as quick as you can and hold your winners as long as you can. I have some curiosities around you becoming a full-time independent investor in the trough of 2008 because that's a very interesting time, obviously a very opportunistic time to get into it. Were you able to sidestep the decline there and you found yourself kind of flush with cash ready to put it to work in that instance? Or, you know, what kind of led you down that path? And then my second question would be, you know, how do you live off of that? How do you peel off cash from these positions just to cover overhead over time?

Starting point is 00:39:49 Good question. So probably by, so what happened a little bit of my chronological order here, was an undergrad from 99 to 2003, went right into grad school from 2003 to 2005. And I kind of fell in the microcaps kind of in the middle of undergrad. And I went right into grad school because I got into an assistantship that paid for my tuition. And I kind of viewed that as a socially acceptable way to kind of waste time and hone this craft by going to graduate school, to be honest with you. And so after that, you know, I still didn't have enough capital saved, but I was still learning. I had a few mentors. I was starting to visit companies pretty regularly by then. I actually had a system down to where I would go visit a company like on a Friday and I could

Starting point is 00:40:33 get back by classes on Monday morning. I'd all figured out. So, you know, it was quite a fun time. Then I did some consulting from 2005 to around 2007. And then around 2007, I felt I had enough capital that I could just quit doing consult and just live off my own balance sheet. But I really didn't feel comfortable doing so because I didn't feel like my strategy was tested through a bear market, not knowing that one was right around the corner. And when the bear market hit in 2008, I was not unscathed. I was in three companies, like I said, I was very concentrated. Two of them went down 55 to 65%, which is probably fairly normal from peak to trough. The other one went up 280%.

Starting point is 00:41:15 And the one that went up 280% wasn't some triple full levered gold, you know, ETF. You know, it was actually just a fast-growing technology company that was profitable that institutions didn't own. And what, you know, that kind of really drilled into my psyche that, you know, even in a market like 2008 when, you know, things are really bad. even during that time period, institutions are still attracted to great businesses they don't own. Because that company went up 280% even while the market got fleshed out. And all those companies that were down 55% to 65%, they were still high quality. And all of them made up those losses in about four months in 2009. And so I decided to cut that cord.

Starting point is 00:41:59 It wasn't like it was in the beginning of 2008. It was at the end of 2008 when I felt like, okay, a lot of those ones that were down 65%, already troughed by that point in time. And I just felt like, okay, now I feel like I can do this. So that's what I decided to kind of like cut the cord of the consulting I was doing at that point in time and then just make a go of it being a full-time private investor. But I also think it's important to point out I was single. I live in Lancaster, Pennsylvania, which is the heart of Amish country. The cost of living here is very low. I was not living in Manhattan in New York where I needed $25,000 a month to cover my expenses. Here at Manchester, I had it down to where I just needed like, you know, $1,300 a month

Starting point is 00:42:39 because I was single with no responsibilities, that type of thing. So it's a completely different situation than what other people might be going through it. Or if I was going through it now, honestly, now that I'm married with two kids. When it comes to paying bills, it's not easy. It's mentally draining more so than the money it takes to pay bills is selling stocks to pay bills. And it's one of the bogeys that I used for when I wanted to go full time, quite honestly, was what is the amount of capital where I could sustain two 30 percent down years in a row and I wouldn't feel like I'd have to change my entire strategy or approach? I wanted to be able to get punched in the face and still be able to move forward using the rocky term.

Starting point is 00:43:19 And so for me, that was kind of my bogey for when I wanted to pull the trigger and going full time was when I knew I could sustain a couple punches and still not have to change what I'm doing. No, in that example, though, do you put any emphasis on microcaps that are producing dividends? Do you put any kind of weight on dividends at all for that reason? Or do you even find any microcaps that are producing dividends? I mean, is that a factor at all? For me back then, no. No, there was no dividends. I was strictly looking for high growth.

Starting point is 00:43:49 great, profitable microcap companies. There are microcap companies to answer your second question. There are microcap companies that pay dividends. You have to watch out because some of them aren't sustainable because they're small, impressionable businesses. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business.

Starting point is 00:44:13 That's why VANTA is a game changer. VANTA automates your compliance process and brings complete. Compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Ryder spend 82% less time on audits with VANTA.

Starting point is 00:44:45 That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform I'd want in place. Get started at vanta.com slash billionaires. That's vanta.com slash billionaires. Ever wanted to explore the world of online trading, but haven't dared try? The futures market is more active now than ever before, and plus 500 futures is the perfect place to start.

Starting point is 00:45:15 Plus 500 gives you access to a wide range of instruments. The S&P 500, NASDAQ, Bitcoin, gas, and much more. Explore equity indices, energy, metals, 4x, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right from your phone. Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for. See a trading opportunity, you'll be able to trade it in just two clicks once your account is open.

Starting point is 00:45:46 Not sure if you're ready, not a problem. Plus 500 gives you an unlimited risk-free demo account with charts and analytic tools for you to practice on. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit plus500.com to learn more. Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high-yield savings account.

Starting point is 00:46:18 Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of all sizes, thanks to the Fundrise Income Fund, which has more than $600 million invested in a 7.97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years. Visit fundrise.com slash WSB to invest in the Fundrise Income Fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%.

Starting point is 00:47:02 Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's perspective. at Fundrise.com slash income. This is a paid advertisement. All right. Back to the show. A lot of this micro strategy conversation is just bringing up a lot of VC analogies in my mind.

Starting point is 00:47:31 And I'm kind of curious, I mean, so many companies, like you mentioned earlier, are choosing not to go public because they're getting eaten up by VC and even PE. And I think that has to do a lot with just the fact that those firms get a lot more control over the company. It's not even the capital. It's the terms that go along with it. Do you find that in the microcab world, there's more activism in a similar fashion where, you know, people are coming in trying to take more and more control over the company, just maybe because they can? The part about activism, I believe 65 or 70 percent of all public activism happens at the microcap level. You know, and so I think that is a big part of, I think you do see a lot of that in microcap,

Starting point is 00:48:13 but I know lots of activists, fund managers. That's what they did. That's not how I invest. I'm not an activist when I get involved. I try to look for good situations that can become great, not bad situations that I can make a little bit less worse. I believe the last time I checked, there was worldwide. There's 63,000 public equities. I think around 30,000 are microcaps as defined by U.S.

Starting point is 00:48:33 But a lot of times in those markets, too, microcaps is defined differently. Like for India, for example, a 600 million USD market cap company in India is actually like a midcap, you know, so you kind of have to watch how you define things. But yeah, I would say probably the rule of thumb is probably 40%, 45% of all public activities are microcaps. And there's 8,000 in the U.S. All right. So there's 8,000 microcap stocks just in the U.S.

Starting point is 00:49:01 How are you sifting through a universe that large? You did found microcap club where a lot of members are making recommendations, doing the analysis, creating conversations, dialogue. I imagine that's become a big resource for you. But even in the early days, I mean, how are you sifting through all of that and coming up with opportunities? You know, in the early days, I wish I could tell you, oh, well, you just subscribed to microcap club and, you know, it's all you ever need.

Starting point is 00:49:28 No. You know, it's one tool in the tool set to find ideas, you know, so my hair cap club would be one and just a quick thing on microcap club. You know, that's a site I started in 2011 to be a tool for my personal investing. And I just wanted to get other smart investors in this niche of investing in a private forum discuss what we liked and why. And so that's what that is today. It's a private forum. There's around 300 active members from around the world. Really just our mission is trying to find the next Walmart, Amgen, you know, name, you name it, those types of companies. And really proud of the

Starting point is 00:50:00 efforts of the club. It's not a guru service. It is not a, you know, sign up to this and we'll give you 10 stocks to go by today. That's not what we're about. It's all about idea generation. You know, there's probably 10 to 20 new ideas of, you know, a month that are posted on that forum. And so we have a pretty good record of picking winners. I think since 2011, so we hit our 10-year mark earlier this last year. I think we're up to 241 companies that were profiled by our members have doubled or more since they were profiled. And that's not some high watermark or high tick.

Starting point is 00:50:32 That's actually from where they were profiled to where they closed last month. And that's a pretty cool metric because there's been about 800 companies that members have profiled since over the last 10 years, 240 of them have doubled or more, which is pretty cool. But anyway, to answer your other questions, so that's one way. The other way is just simply, you know, networking with other investors, which I've been doing since, you know, the last 20 years. Another great way, but a lot of people don't do it, is just brute force A to Z, you know, going through all public companies. It sounds tedious, but that's what it takes. That's what I did And originally, you know, back in the early 2000s, that's what I did last year in the UK.

Starting point is 00:51:10 It literally went through 1,100 companies on the London A and Exchange, A to Z, because that way you're not missing anything. And a lot of times that's your edge as an investor is doing the work, going through a mountain of uninvestable ideas trying to find that great one. Like, that's your edge. It's because you're willingness to do that when other people are. It's like Buffett with his Moody's book, you know, scrolling through. So in that case, I mean, why not use a screener nowadays, you know, to filter through

Starting point is 00:51:34 There's just, I'm sure you have certain metrics that you like to find in stocks. Why not use a screener? I do use some screening, but not in the traditional sense. And what I mean by the traditional sense is I don't do a screen for, let's look at every company under 300 million market cap that has over 30 million revenues that's growing 30% per year, that has over 65% gross margins, that has insider ownership over 15%. You can go down through that list and you're going to be left with 100 companies. you know, and that's the same hundred companies everybody else is looking at.

Starting point is 00:52:05 I would rather do a screen that is a screen for insider buys or rights offerings, which is another, what's a fancy word for, you know, insiders putting more money into their company because that usually is alerting you towards a transformation in a business. And so those are the types of screens that I like to use. It's triggering me to something happening in that business. And so those are the types of screens that I do more readily than just as fundamental screens. Now, once you've done a screen like that, do you find that you then default to some circle of competence that you like to stay within?

Starting point is 00:52:40 Are there any industries that you say, nope, that one's not for me? I'm fairly a generalist. I would say I don't invest in utilities, but I don't think there is a utility. That's not true. I think there are a couple. But no, I mean, pretty much any industry is open to what I'm looking for. And really, the way I invest is different than other people. you know, it's just like in large cap, you'll find value investors, growth investors,

Starting point is 00:53:04 people that focus on life science companies, you'll focus on mining companies, you know, people that focus on momentum or whatever. You can find those same types of investors just focusing on the smaller segment. And so the way I invest is different from somebody else. So kind of my four hurdles for investment are, you know, number one, is this a business that can grow through a recession? It's more of a qualitative type of hurdle. And when you put just that type of framework around the ecosystem,

Starting point is 00:53:32 you know, that gets rid of 95 to 98% of the companies that are publicly traded. Number two, do they have a balance sheet that can weather a storm? Or they can also act with occasional boldness like during a COVID trough or a financial crisis when their competitors are going under. Can they take advantage of that situation? You know, number three is that management team showing signs of intelligent fanaticism. Are they showing those attributes that we're looking for? And number four, it's on valuation.

Starting point is 00:53:56 Is this a business that I think can fundamentally be worth double where it's at today in three years, kind of support you a 25% cater over the long term? So those are kind of those four filters, you know, that I kind of look at every business through. But those aren't going to be the same ones that other people will. And that's fine. There's a lot of ways to win in investing, as you know. Yeah, surviving through those downturns is super interesting. You mentioned that sometimes microcap stocks are less affected because the institutional money isn't in them to begin with. So therefore, they're not selling out. And this analog came to mind for me in real estate where when I was looking at homes during 2008, the average home price went down 50% unless you lived in Los Angeles,

Starting point is 00:54:38 where I live. And it was only 25%. I found that very interesting. That was for homes over a million, but you get the point. So is there something similar here or some metric where in downturns, microcaps historically have only gone down X percent versus Y percent in other size caps? What I would be interested to know is based on kind of those criteria I outlined, how would they perform through a downtrend? You know, and I haven't done that work as a whole. I don't have the resource to be able to pull that off. You can pull off what like the IWC, the ETF does through it.

Starting point is 00:55:10 You know, it's going to do worse than everything else, you know. So it's, you can kind of pull up the general data, but I haven't, but I'd be interested to know, you know, how kind of types of situations that I look for have done. I don't know. You know, unfortunately, you know, I had my instance through 2008, 2000. 2009, you know, but that's a, you know, sample size of one. I talk a lot about Buffett because he's my main reference. But going back to that visual of him scrolling through the Moody's book, I mean,

Starting point is 00:55:36 it's basically said that he was essentially doing the calculations in his head as he's going through that book. And even nowadays, he's got that too hard box on his desk, you know, for to discard things that are out of a circle of competence, if you will. I'm curious to know how much of your strategy is quantitative versus qualitative. So once you are going through even A to Z, like you mentioned on these stocks, are you modeling things out? You're visiting these management teams.

Starting point is 00:56:02 So I imagine there's a lot of qualitative that goes into it. What's the balance look like between quantitative and qualitative in your strategy? It's probably 50-50. You know, when it comes to modeling and pulling out Excel, you know, I'm probably a big fan of the Peter Lynch, you know, crayon of napkin type of thing. You know, that's what I'm doing, obviously a little bit more detailed than that. But I would say it's probably an equal mix of quantitative. and qualitative. I mean, one of the things I did early on, depending, we all go through this

Starting point is 00:56:30 maturation process as an investor. And when we start out as investors, we're probably overly focused on fundamentals and financials. That's why everybody starts out as a deep value investor, because it's all they know, you know, it's easy to just screening for that or look at, you know, financial statements. And then you kind of move from that to maybe looking at management teams. And then you get overemphasized that area, thinking that, oh, right, I found the next Henry single-ton, he knows how to allocate capital, and you kind of overly emphasize that area. And then you over-emphasize, you know, a certain industry. And so I find like the maturation process of investors just all about, you know, educating yourself in a new area. You end up

Starting point is 00:57:08 overemphasizing this area too much. You end up stepping back, realizing that it's all a piece of a massive puzzle and everything should be emphasized equally. You know, and I've done that so many times throughout my career where I over-emphasize the importance of, you know, these little nitty-gritty details on a leader or, you know, what he did. Well, you know, he's paid $10,000 a year too much or something like that. You know, he's not investable, stuff like that. You know, we have to step back and see it as a whole picture. And so today, I would say it's much more equal because of 20 years after doing this. And, you know, my investment strategy today is made up of all those past experiences. You know, I started as a story stock investor. And so story is still important to my

Starting point is 00:57:47 strategy today. I want to find these businesses that have a great story. You know, I want to find businesses that have a great leader. I would find businesses that are unique, where it's one of one, where it's not another, it's not the thousandth company marketing a product a little bit differently, hoping to gain share. And I'm going to find these businesses that are scarce, where there's not another one or two, hopefully there's only one or two other public ways to play in that business or trend or industry. That idea of scarcity is interesting to me because it kind of flies in the face of something we've discussed on the show before when it comes to smaller companies, which is optionality.

Starting point is 00:58:20 And maybe I'm misperceiving this, but the way you described it sounds like you're looking for things that almost have a monopolistic application or product instead of having a product or service that is highly optional and they might be able to branch off and do lots of different things, even in different industries, perhaps. Am I getting that right? Or is optionality part of the strategy in some other way? Absolutely part of it, you know, optionality. Scarcity, it's mainly just trying to find this very unique.

Starting point is 00:58:48 one-of-a-kind businesses or situations that's out there. That's mainly what I mean by scarce, and even scarcity down to the share structure. I found that the best leaders, you know, treat their shares like gold. They don't dilute a lot. And so I love, you know, scarcity even goes down to the ill-liquid stocks. Well, there's a scarcity of shares. So every incremental buyer, if they want to buy that stock, stocks going to go up because there's not enough shares at this price. You know, and so scarcity kind of falls under the full gamut of a quality business. even down to the share structure of the company, the leader, you know, and everything. But I certainly look for optionality.

Starting point is 00:59:24 I love it when there's, you know, two or three ways to win. You know, when Buffett and Lynch and these guys were running highly concentrated microcap type of portfolios, there was actually high turnover. A lot of people think of them as the buy and hold forever types, but there was actually some high turnover and the performance didn't seem to suffer from it. So is that something you find with your own portfolio as well where the turnover might be highly higher than normal. Maybe it's just less of a buy and hold strategy per se, but the performance isn't hindered in the same way. Yeah, I mean, I think in today's day and age, it's been sort of this

Starting point is 00:59:59 over-glorification of just buy and hold investing, you know, even by active managers. And, you know, I think it's, I think it's partly because of the rise of private equity and venture capital. You know, everyone's trying to invest in public markets with the same kind of permanent capital kind of mantra. But, and I think also, I think when it comes to an active investing in stock picking, you know, I think it sounds more cerebral and thoughtful when you appear to do all the work up front and then you're just going to park it and sit it and forget it. It makes it look like you did just the mountain of work and you're so convicted in this name.

Starting point is 01:00:34 You know, when you look at somebody like Peter Lynch, you know, he had, I think, two or three hundred percent turnover per year. Warren Buffett had 50 to 100 percent turnover per year. per year for the first 30 years of his career, even when you see him updating his public holdings, you know, he's not sitting there. You know, there's changes being made, you know, constantly. And especially as a microcap investor, we're investing in small, you know, emerging companies. You know, in many ways, we're trying to find the next Tom Brady when he's playing in high school, you know, and so it's similar as like an NFL scout trying to scout talent,

Starting point is 01:01:09 whether from a college team or a college scout trying to scout talent from a high school, school team. That's what we're trying to do. We're trying to, yeah, I'm trying to find the next small cap company in microcap land. And I know I'm not going to be right all the time. And so there's always going to be this turnover to where, you know, I'll do as much as you don't as I can and has all those attributes I like to see. I'm going to put it in the portfolio. And I still know I'm going to be wrong 30 or 40% of the time. And, you know, like I said before, the key to success in this business is selling those winners, you know, as soon as you can and holding those winters as long as you can.

Starting point is 01:01:42 And so that, that's how I view turnover. And so because of these are small emerging companies and they're impressionable businesses, I kind of compare microcap investing to watching your three-year-old kid. You know, you're not going to let your three-year-old in your living room or let them in your house alone for very long or else to burn your house down. You know, that's the same thing with microcaps. You have to stay on top of these companies because they, you know, things can change in an instant.

Starting point is 01:02:05 You know, it's your initial due diligence that gets you into them, but it's that continuous maintenance due diligence, keeping the pulse of that company that is going to save you a lot of pain and losses and also keep you in them. So turnover, I think, is always going to be a part of a successful microcap strategy. I think if you coffee can microcaps, you'll go broke. Very interesting. Last question for you, now that you are running a fund after being independent for so long, I'm curious what kind of drove that decision and led you to take on other people's money at this point. Sure. So I'm 41 now. And so in 20 or, yeah, I guess it's been three, four years ago, you know, I'm sitting here in the corner of my house, which is where I'm at now.

Starting point is 01:02:48 And, you know, I could keep doing this for the other 10 or 20 or 30 years, but I've been doing this for 20 years. And, you know, I was talking to my wife about it and we prayed about it and we're like, you know, it's all there is. I continue to do this. But I also run into people all the time that say, hey, you know, I love what you do. I'd love to give you some capital. And I always said no because I always say no. And then something about maybe it's a midlife crisis. I just said, you know what, maybe I can do this. And so I started thinking about it and put the pieces together for it and decided to kind of raise a small amount of capital and start matching some outside capital. That's what I started doing in 2018. And now we match capital for about 60 families

Starting point is 01:03:26 that kind of want some exposure kind of to the way that I invest in microcap companies. And it's been great. You know, I kind of did the opposite of what other people do it. where they start a fund, you know, they build up a huge ownership in the GP, and then they just give all their investors money back and just manage their own family office. So I kind of did it differently where I just got to start from nothing, you became a full-time private investor and now managing a fund, you know, kind of did the opposite. It's been great. And I'm glad it turned out this way because, you know, one of the other advantages of MicroCat Club for me is the talent that is on there, you know, if Buffett, if Lynch, if all these folks started in

Starting point is 01:04:05 microcaps, it's not too far-fetched to think the next great investor is a microcap investor today. And that microcap club community has some of the best investors in the planet. Some of them are 17, 18, 19-year-olds that spend 28 hours a day searching for great companies. And so be able to leverage that talent, creating those networks. You know, I pulled it. I have a full-time analyst with me now, who's the youngest member to ever get into microcap club the age of 15. You know, just being able to utilize that talent, you know, it's just huge. And so our mandate as a fund, we were first kind of North America and now we're Australia and the UK.

Starting point is 01:04:39 I don't want to find the best small public companies in North America. I'm going to find the best small companies in the world. And that's the goal here. And obviously we're concentrating 8 to 10 holdings. And so our hurdle rates are high. But it's been a lot of fun. And it's been a great challenge. And it's not without difficulties, but it's been a blessing.

Starting point is 01:04:58 Yeah. I mean, one of my other questions on that was just why not structured as an ETF? but even ETFs, I think you have to hold a minimum of 20-something holding. So probably just not concentrated enough. Is that correct? It is. It's too difficult. And what I do is not scalable.

Starting point is 01:05:15 You know, we run a small amount of capital and not saying that I don't want to put limitations on myself, you know, because I think if we are successful, we will look more small cap than microcap in five years. You know, what I do is really not scalable. It can't just take on an influx of $100 million. tomorrow. Well, Ian, this was so much fun. I really enjoyed our conversation. This is a great first time to have you on the show. I'd love to have you back more. So before I let you go, I do want to give you the opportunity to hand off to the audience where they can find you. I know

Starting point is 01:05:45 you're on Twitter and some other places, MicroCab Club, et cetera. Just give a handoff where people who might be interested to follow along. Sure. Yeah, I mean, you can find me on Twitter. My handle is my name, Ian Castle. And you can find me on microcap club.com. My capital management website is www.if.if.com. And so you can find me in all three of those locations. And I appreciate sharing my journey a little bit with you. I hope I'm back on. I really enjoyed it.

Starting point is 01:06:11 All right, everybody. That's all we had for you this week. If you're loving the show, please don't forget to follow us on your favorite podcast app. Definitely reach out to us. You can find me on Twitter at Trey Lockerby. And if you haven't already done, so be sure to check out all the resources we have for you

Starting point is 01:06:24 at the Investorspodcast.com. And with that, we'll see you again next time. Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to The Investorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP431: The Big World of Microcaps w/ Ian Cassel

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.