We Study Billionaires - The Investor’s Podcast Network - TIP480: Why Microcaps Have The Best YTD Performance w/ Ian Cassel

Starting point is 00:00:00 You're listening to TIP. On today's episode, we welcome back microcap expert Ian Castle. I interviewed Ian back in March on episode 431, where we explored the concept of investing in microcap stocks. It's been one of my favorite discussions over the last year, so we are excited to welcome back Ian to discuss his recent annual microcap leadership summit and some of the ideas that came out of it. In this episode, you will learn some reasons why microcaps are outperforming some of the larger cap segments. How Ian compares the current market to 2008? Risks and opportunities appearing as interest rates move higher. Private equities, recent interests and public markets.

Starting point is 00:00:40 Some strategies and stock ideas from the recent summit and much, much more. I always enjoy speaking with Ian. He brings a deep knowledge of the world in microcaps and draws from some other amazing investors in the space. I really hope you enjoy this as much as I did. So, without further ado, here's my conversation with Ian Castle. We're listening to The Investors 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. Welcome to The Investors Podcast. I am your host, Trey Lockerbie, and I am so glad to welcome back

Starting point is 00:01:27 our friend Ian Castle to the show. Ian, so happy to have you. Welcome back. Thanks for having me back. It's my pleasure. Well, at the time of this recording, the S&P is down 23% year-to-date, The NASDAQ is down 31%, give or take. Large caps are down 24%, mid caps are down 21.5%. Small caps are down 23%, and microcaps are down 18%, according to the MSCI index. So this really surprised me. And I was excited to have you back on because last time we were chatting, I was sort of under this impression that during a downturn like we're currently experiencing, microcaps might

Starting point is 00:02:06 perform the worst because there's a lot less liquidity involved and you might get, you know, no bid happening, let's say. So how do you interpret the performance of microcap stocks year to date? No, I think you raise a good point. I think there might be two or three different reasons to kind of explain that. And you're right. Normally during kind of bare market environments, especially through recessions, you know, microcap as a whole will underperform the overall indices. you know, even what I tell by investors that are invested with me, it's like, hey, if the market's down 30, we're going to be down 45, you know, if we're not okay with that, this is it for you. And so that kind of explains the volatility. Normally, the lows are lower and the highs are higher, but

Starting point is 00:02:46 overall, hopefully outperform the indices. I think what makes it unique kind of what we're going through the last six, nine months, 12 months even, is, you know, the euphoria in the markets was mainly larger companies and it was mainly larger technology companies. Most were small caps or mid-caps or even large caps. And when you kind of look at the universe, which I'm sure you do and others do, you know, you have Shopify down 80%. You know, Netflix is a very mega cap company down 62%, you know, year to date. Even the SPACs, the SPAC boom that we had, most of those were majority small caps or larger when you're looking at a market cap spectrum. And, you know, even the meme stocks, whether it's game stop, even know that's down from whatever it was, down to whatever it is. I think

Starting point is 00:03:30 it's still a $7 to $8 billion market cap. And so those aren't microcaps. And so I think it got overheated a lot more in the larger tech stocks, which is why the NASDAQ, I think, is down 30% year to date compared to the microcap indices, which I think the I shares Russell microcaps down 25-ish. You mentioned 18, but it's down less than the NASDAQ overall. And so I think that's one of the reasons. And I think another reason, too, is we haven't really seen, at least,

Starting point is 00:04:00 I don't think quite yet, if we will in the future, haven't seen sort of the recessionary effects of this drawdown, the overall market's down, but we haven't seen like some significant downticks in the overall economy yet. And I think if that hits in, you'll see maybe another like lower in microcap. And I think maybe another reason is, you know, microcaps as a whole depending on where you invest and, you know, the biggest benefit to being a microcap investor is you are a stock picker. You can choose your spots and you can choose what companies you want to invest in. And a lot of these companies are kind of domestic. You know, they have domestic manufacturing, domestic employment, domestic markets.

Starting point is 00:04:36 And so they might not be susceptible to the geopolitical headwinds that we face or macroeconomic headwinds that some global larger companies may face. And so sometimes, you know, being some of these small caps that are domestic is more of a defensive posture as well. And I can't say that's in general the overall landscape of microcap. But I think those are maybe three reasons why the microcaps as a whole have kind of outperformed even the NASDAQ, your debate. That's a very interesting point, that last one. So the first one you made, though, am I understanding correctly that you were saying it's almost defensive?

Starting point is 00:05:12 And the fact that it's down less than, say, the bigger caps, was it because it was sort of underperforming to begin with? You know, as things got frothy up top, microcaps were kind of buzzing along, but not as dramatically. And so, therefore, the downside has been less as well. Yeah, exactly. I mean, I remember having conversations a year, year and a half ago with investors saying, why would I wouldn't bother invest in microcats when I could just buy a large cap compound or make 35% and have less drawdowns, you know, over year after year after year, which is what we've experienced at the last six or seven years. So, yeah. Of all the downturns you've experienced to date, and I know there's been, you know, quite a few since you started doing this, how does the current market compare? I think this is the worst that's been that I've seen since 2008, 2009. We aren't yet level of fear that I remember from that time period.

Starting point is 00:06:05 I mean, we all thought the world was ending. You know, kind of like what I said in the earlier answer to your question. You know, we haven't really seen sort of the economic hits, well, and at least here in the U.S., the domestic business climate quite yet. You do when maybe housing and real estate, but not so much. I mean, I still go out to the restaurant and it's full on a Tuesday night. You're still seeing the consumer out. and spending money. So it doesn't mean that it's not going to get worse than it very well could.

Starting point is 00:06:29 But I do feel like it is probably as bad as I've seen since 0809, but it's certainly not quite as bad. I mean, the hardest part about dealing with kind of drawdowns is it makes you more and more short term instead of kind of pushing out your time horizon. And so, you know, your portfolio drops 20% and you're excited to buy more. Then it drops another 10 or 20%. You're like, well, wait a minute. You know, then all of a sudden you're on the phone with management asking them the same questions. you just did the month prior because you just want to get that verification that everything's okay. And then you buy more. And then all of a sudden you just run out of dry powder to buy more.

Starting point is 00:07:02 And then it drops another 10 or 20 percent. And you're just kind of frozen. And, you know, nothing's worse. Drawdowns are the most painful when you don't have to cash and take advantage of them. And so that's one of the lessons that I went through, you know, last two or three kind of recessionary environments that I went through was it always feels good at least have some cash on the sidelines, even if it's just a little. bit, you know, even if you're just buying another 1% of a position somewhere, you know, over time, at least it makes it feel emotionally, mentally, psychologically, like you're taking advantage of the situation. And so, and, you know, what I tends to happen to is like the lower things go,

Starting point is 00:07:38 the more you turn yourself, at least for me being a stock picker, the more I start thinking about the macro market, inflation, interest rates, you know, Elon Musk, whatever the case may be, things that are distracting me from kind of the micro focus. And so everything just gets you thinking more short term. You can't mentally handle being down another 10 or 20 percent. So you just tap out. And so it's important to just kind of stay in the game, stay in mentally and emotionally. You brought up Elon. I have a quick question there about that. So there's been a lot of signs, let's say, about what the top was of 2021. And it seems like, you know, we ran up all the way to the end of the year. But around November, December timeframe, Elon sold about almost $7 billion worth

Starting point is 00:08:18 of Tesla stock. I'm thinking he said he'd never do. You had things like Beeple, NFTs, selling for 69 million. You had the meme stocks, as you pointed out earlier, 600 or so SPACs, IPOing. I mean, looking back, was there anything that signaled a definitive top in the microcap market specifically? I think it was just a combination of all those things. I think people point to whether it was Elon Musk selling or point to Chimov and the SPAC boom that took place. And maybe the SPAC boom was maybe a better gauge because, I mean, you generally, with the SPACs, had sort of $100, $200 million revenue businesses that were growing 100%, but also losing $100 to $200 million a year. And, you know, it's just like, how is that sustainable? And I don't

Starting point is 00:09:03 want to be it. You know, I don't want to hit on SPACs as an investor's vehicle or anything like that. But I think, you know, it was a combination, I think, of everything. And it's hard to disconnect from that type of environment and stay rational because I was fairly fully invested then and I'm fairly fully invested now. And so you just kind of have to step back and be okay, be emotionally neutral towards the current environment, and keep that. to that kind of three, four, five year investment time horizon looking at it. As investors, we're always trying to do that, be emotionally neutral, as you just said, and keep a stoic approach to investing, almost as if we're sharpening the skills in preparation

Starting point is 00:09:37 for times like these, right? I feel like a lot of discussions I've had in the last few years have been sort of like, okay, but when the time comes, we'll be ready, right? But what tools have you used to keep you calm through the current storm we're going through? I'm a concentrated stock picker. I've always been. I was more concentrated than my youth, but I'm still probably fairly concentrated now. I'm primarily looking to invest in the best six to ten companies I could find. And to do that, you have to do the work and build the confidence to own these things through any type of volatile environment. I'm not a big fan of saying that you must be stoic or you must be lack of emotion or you must get rid of your emotions. This is a very emotional

Starting point is 00:10:18 game that we play. You know, I'm investing in my family's livelihood. You know, I have 70 other families that have given me some portion of their capital to invest with me alongside. I take that seriously. You know, I didn't make that money they gave to me. You know, I take that or trust seriously. And so I think a certain degree of emotion is good because it gets you up at the start of every day and keeps you focused on what you need to do to get the job done. And so I know for me, with drawdowns, the way I kind of stay emotionally neutral is understanding, what I can control and what I can't control. And even the things I feel like I can't control, I'm not really in control of the outcomes.

Starting point is 00:10:55 So what I can't control is the macro environment. What I can't control is where interest rates are going or when they're going there for inflation or whatever, who's going to go to war with whom. And so the way I deal with that is really paying attention to the micro focus, really handling that at the portfolio level. And I think I may have explained this in a previous interview with you, but I really have call it six kind of attributes I'm looking at when I'm investing in a business. And it's very particular, kind of two top level ones.

Starting point is 00:11:24 So a combination of scarcity and tailwinds. You know, I'm looking for one-of-one businesses when I invest in them, not one of a thousand, not looking for another company that's marketing the same product or services, somebody else just a little bit different. Like, really truly looking for one-of-one. And it's just like Picasso in the art world. Like the prices go up and up with people, when there's something that's scarce, it's in demand.

Starting point is 00:11:46 That's what I'm looking for it. And then also obviously tailwinds. You know, it's easier to invest when there's a tail win at your back rather than a head win in your face. And so that's kind of like the top level, but the kind of getting back down into the four kind of key attributes is I'm really looking for businesses that can grow through a recessionary environment. And there's not very many of them out there.

Starting point is 00:12:05 You know, I'm also looking for a business that has a balanced sheet that can weather the storm of a bad economic climate, not only to weather it, but to be aggressive. So they can acquire a competitive. when their competitors, you know, really can't because they're over-levered or they just financially can't do anything. Also, we talked about intelligent fanaticism, I think, before. You know, I'm looking for those great leaders that show signs of intelligent fanaticism that put great management, you know, build a great team around them. And lastly, obviously, looking for evaluation where I can at least double my money or at

Starting point is 00:12:39 least I feel like I could double my money within three years. And what was excited about the current environment to that last point is the last six, 12 months specifically in microcap and also elsewhere is you've had multiples contract significantly. And so for the first time in maybe a half a decade, you see that you might be able to have multiple appreciation again, which is pretty stellar when you look at some of these business, especially if you're investing in good ones, you know, the fact that, hey, we might get multiple expansion again. And that's really how you get multi-backers. You get multi-baggers from really growing earnings per share and then multiple expansion over time. And so I'm really

Starting point is 00:13:16 excited about the current opportunity set. And lastly, we already hit on it before. But just being able to have some cash on the sidelines to take advantage of these opportunities, you know, is really, really important. That cash component is interesting to me because it takes a certain amount of discipline and probably quite a lot of discipline to have that cash in this current moment, right, without maybe liquidating along the way. So has this been a cash position you've been either holding or building over the last couple of years and you're kind of getting some gratification from having done that? No, I wish I could say that, well, maybe I don't wish I would say it was true.

Starting point is 00:13:51 I'm not a big man of holding a lot of cash. I have some good friends who are great investors, too, that they've been 30, 40% cashed, you know, since 2015. I'm talking about just even having 5, 8% cash that you can take advantage of situations. And sometimes that cash comes in into place from selling out your worst idea, you know, and redeploying that into your best ideas. So it's not just a static cash position, but it's just a static cash position. but it's just kind of redeployment.

Starting point is 00:14:16 So you don't have $120 billion sitting around like Buffett. I got it. Okay. So you mentioned this defensibility again. I'm kind of curious with the rates rising as swiftly as they are. You said you're seeing an increase in opportunities. I'm also kind of curious though if you're seeing an increase in risk, right? Because a lot of these smaller companies, they might be just more vulnerable.

Starting point is 00:14:36 Maybe they've got a strong balance sheet, but the liquidity is going away. And maybe their access to cheap debt to continue building is going away. How is that sort of impact? the current opportunity set for you? I would say it's mainly a positive outcome, the current environment. Again, I'm mainly looking for really great businesses that are cash flow positive, that have good balance sheets. And when you look at across the ecosystem, microcaps, I think 18% are profitable.

Starting point is 00:15:04 And so right there, you cut out 80% of the ecosystem, you know, right, right, realligate. And that's what I tell people for the first time that are looking at microcaps. I think it's easy just to look at the next story stock. That doesn't have any revenue. But I try to caution people towards that. And you can do that later on. But to start out, I would tell people to look at the income statement, focus on the profitable businesses that are out there.

Starting point is 00:15:25 And that probably cuts out 95% of the issues you'll have investing in the space. You mentioned having companies also that thrive through a recession, which is really interesting. I'm kind of curious, though, with the investors you have now, are you resetting expectations even further a little bit saying, hey, we had this basket of stocks, but they're going to grow a little slower over the next couple of years and what that's going to do to performance? Or do you feel like this is actually going to propel some of these companies forward? I think the way I position with investors is, you know,

Starting point is 00:15:56 every investor that invests alongside me, even when they were coming on two years ago during the height of the bull market, it was, you know, we're going to have, the market's going to draw down 30 percent and we're going to draw down 40. Yeah, and that's just the way it's going to be. You're scared by that. And obviously, it's easy for them to do. say, oh, yeah, I can take the volatility when you're in that moment. But, you know, I think you really have to guard against people having your rational expectations. And so I think from the investor standpoint, I've warned them. And I think I have a great group of investors. They're mainly small business centers, to be honest with you. And they understand the complexity

Starting point is 00:16:28 of small business because that's what we invest in. And it's been a benefit there. In regards to the companies, very few, if any, have seen a decrease in growth rates. A couple of them have seen an acceleration of growth rates. So that's why it gets really, really attractive. It's not to be too simplistic, but if I think a business is going to grow 25% a year over the next three years, which is basically a doubling of their revenue over three years, and the multiples investors are currently willing to pay for that stock are historic lows. I know that probably the return on that investment will match the growth rate of that company.

Starting point is 00:17:03 So I would expect to hopefully the stock would double over the course of three years. But if the multiple actually starts to expand again, that's where you get the leverage on that. And that's where you can get two, three, four X on your money over a course three or four years. And right now it's a very opportunistic time because you've seen the multiples contract 50, 60, 70 percent in some cases for businesses that are profitable that are still sustaining high growth rates. 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

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Starting point is 00:21:46 I wish I did to some degree. I know it was a very painful experience, but gosh, there were a lot of opportunities that came out of it. And not a lot of people, I guess, really think about this, but it took quite a long time for it to bottom out, right? It took like almost a couple of years. And so if that's sort of what's ahead of us, I guess what's kind of throwing me a little bit. And I'm kind of curious on your take here is that everyone seems to be bearish right now. And I know that maybe in the markets and in the professional arena, that was the case in 2008. But on Main Street, I don't remember that being so much the case, just people not being so privy to what was happening exactly in the markets. So now that I'm more inside of it, I am just looking around being like, wow, well, you always hear this idea that, you know, the herd is not always correct. And you got to go against. it. So when I see everyone as bearish as they are, now it somewhat gives me pause, even though this time is probably correct, where people are just seeing all the same signals and it's going to play out similarly. Have you been experienced something similar to that in any degree where you're looking around saying, hey, this looks, I've seen this movie before, but does it give you

Starting point is 00:22:45 pause at all? I'm just kind of curious. No, it is. And I think you're right. I mean, usually the loudest voices are bears. And that's just how it is. It's how it's always been. And compared to 2008, 2009, there's, you know, so many were ways for people to have a voice. or whether that's podcasts or whether that's, you know, social media or what have you. And so it does seem louder. It does seem like everybody is bearish. And it does get me excited about the opportunity set. And I think what also, you know, just because the overall markets go down and more from

Starting point is 00:23:13 here potentially, it doesn't mean that some of the equities that you're invested in, they might not go down. Like some of the small cap and microcap stocks on my watch list, you know, a lot of them hit their lows May, June and they're still 30, 40 percent off the lows. So it doesn't mean, like, if the stock market goes down, another 10% that everything else needs to go down 20 or even make new lows. So you always have to be looking at where is this business going to be in three years, you know, and kind of just keep to that time frame. It's so easy to just get called up and what's next quarter going to look like.

Starting point is 00:23:42 Probably the worst environment that I saw was actually during Q4 earnings for last year, which would have been, because that would have been like March timeframe. And it was just, that was the worst earnings period. I think I've ever seen where companies would come out and they would beat estimates and their stocks were down 10% the next day. If they met estimates, they were down 20%. And if they did not meet estimates for Rannels, they were down 40. That's when you saw these huge drawdowns and some of the mega caps. And that was just an awful time period.

Starting point is 00:24:11 It's like you were juggling dynamite as an investor going into the earnings because you didn't know how bad it was going to be. You just knew it was going to be bad. So a lot of ways it fell worse earlier in the year. So I guess maybe just the point I would make, it's just because the market may go down as it means that the stocks that you own will go down. especially if they're higher quality.

Starting point is 00:24:29 And that's what I realized through the 0809 time period. I was mainly in three companies, and one of them was down 62% peak to trough. But it troughed in late 2008. And I think by late 2009, it was already back to its highs. And six months later, it was doubled from there.

Starting point is 00:24:49 And so what you see is kind of a lot of times quality bounces back first. And so, and I think it usually bottoms first, you know, because people want to look at quality first to dip their toe back in the market again. And that's what I experienced back in 0809. The other thing I experienced, obviously, to benefit microcaps was even in that environment,

Starting point is 00:25:07 there were still larger investors and larger pools of capital that were interested in owning things that were growing rapidly, earning more money, not diluting that they didn't own. And so there was still bid support and undiscovered, profitable growing businesses. Speaking of a dip in their toe in, something we're seeing right now, which is kind of interesting is private equity taking an interest in the public markets. You had Brookfield allocating about $110 billion. What is the implication of this? And do you think we'll start seeing a lot of, I guess, an increase in companies going private maybe in the next year? I wouldn't be surprised by it. If you think about it, I think there's usually a six to

Starting point is 00:25:45 18 month lag between private valuations and public valuations. So public valuations get hit first, and then it takes another year or so for private valuations to catch up. And kind of in the interim, I mean, people racing to raise capital take advantage of public equities being lower. And you saw that, you mentioned Brookfield raising $110 billion. Historically, on MicroCap Club, we've had, I think we're up to 880 companies profiled by our members since 2011, so over 10 years. And I think about 18% have been acquired, you know, which seems like a big chunk of companies than it is.

Starting point is 00:26:18 But I think it tends to end flow more with kind of the valuations overall. So I would not be surprised to see a lot of M&A activity. really spark up and get more robust over the next six to 12 months. And I think that's what you see in Brookfield, $110 billion raised, mainly focused on kind of Canadian public companies, which is interesting. And to give you an idea of the size of $110 billion, we all know what that is and means. But there was a paper written by Dr. Parrott of Perret funds. I think it was back in 2008, 2009 called the MicroCap Advantage. And I remember reading that. And it was like halfway through that white paper, he talks about just the size of the microcap ecosystem in the United States. And back

Starting point is 00:26:57 then, this was obviously 12 years ago. I think he, I think he said it was around 300 billion, the entire microcap ecosystem in the U.S. And he kind of went through it and said, okay, well, let's just say a third of these businesses that are microcaps are insider held. And let's say the other third, let's just say is somewhat owned by the large holders or institutions. So that means that basically for $100 billion, you could buy the entire float of every microcap in the United States, $100 billion, which I don't know if Apple or Berkshire has that on their balance sheet, but it's kind of funny to think about. So that kind of gives you the size of kind of what $100 billion could do even today. And I think when I ran the numbers three or four years ago,

Starting point is 00:27:39 the end of buddy had a Bloomberg. I had him kind of like do some of the screen and figure it out. I think it was around $500 billion was the microcap ecosystem here in the U.S. So it's simple. There's five companies probably today that individually have a market cap over 500 billion. And that's pretty much the size of the entire microcap space. I read an article the other day. And actually, as I see an ant walk across my floor right now, it talked about ants. And if you were to combine all the ants on Earth, like into like a ball, the entire mass of all the ants on Earth is actually larger than all mammals and all birds mass put together, which is. together, which is incredibly, you think about like the entire mass is of ants, you know,

Starting point is 00:28:21 versus, you know, all mammals and birds, just shows how many ants there are in this world. You know, I kind of compare that to microcaps. Yeah, there's just a lot of microcaps out there. It's 55% of all public companies in the U.S. It's 70% of all public companies in Canada and similar percentages around the globe. And most people haven't heard about any single one of these companies. But they have a big influence, you know, over the economy, over everything. Here in the U.S., I think I looked and it was, I think they support close to three or four

Starting point is 00:28:48 in jobs in the U.S. It's probably 10 or 15% of the job market in Canada. It's a big impact that my earcap has. I love that. It's interestingly enough, I've heard that answer are the most like humans, right? They're the most social creatures. They go to war with each other. I mean, really fascinating.

Starting point is 00:29:05 You don't think about it like that because they're so small, but they have, man, a lot of similarities here. I'm kind of curious about your portfolio. A couple of things here. One is, you mentioned having a strong balance sheet, but I know that you focus a lot on the founders and having them involved in the company. And sometimes that's an important checkmark for you. Are you seeing founders doing something similar, meaning they've got capital, they've got some dry powder of their own and they're buying back shares? Have you seen any of that start to

Starting point is 00:29:31 happen? Or is that something you look for? It is. I mean, nothing's better than seeing a founder or management team put skin in the game supporting the equity. And you are seeing that more and more, especially with businesses that at the business strength and the balance sheet to be able to take advantage at this environment because if you're a management team and you just saw your equity, you go down 50, 60 percent, your best ROI for that cash in a balance sheet might be just buying your own shares, eating yourself, you know, cannibals, as you would say. And you are seeing more and more of that. And that's, I'm also very attracted to that as well.

Starting point is 00:30:03 They, you know, as it relates to kind of my portfolio, and again, kind of getting back to kind of drawdowns, what I find to during drawdowns is, you know, really forces you to think deeply about what you own. and why you own it. And I tend to get more concentrated during drill downs because, you know, some of the things that you have, you know, I have two or three things in the portfolio where you're kind of half convicted. All those things go away, you know, when you watch things drop.

Starting point is 00:30:31 You know, you don't have time to things that you're half convicted in. And, you know, sort of the best thing about this drawdown too in particular, because there was some violence with a drawdown depending on what you were in, is a lot of times the losers in your portfolio, meaning of the things that you would like to sell are down just as much. is the winners, you know, which are the things you want to buy more of. So it's allowed you to kind of upgrade your portfolio, you know, through this. And that's what I've seen in my own portfolio for the last called six to nine months,

Starting point is 00:30:58 just getting more and more concentrated and upgrading the portfolio and really cutting the portfolio back to those positions that you truly, truly believe in that you can't live without. I was listening to an interview with Rick Rubin. And Rick Rubin, you know, he's one of the greatest music producer of all time. I think he worked with was it, Beasie Boy. He's Eminem, Metallica, Adele, Aerosmith, Dixie Chicks, Jay-Z, all across many, many genres, just an amazing producer. And part of the interview, he talks about how he believes less is more. You know, in music, it's easy.

Starting point is 00:31:32 You know, you want to keep building upon the music adding things to it when in reality, a lot of times you should be cutting it away. So you can hear each individual thing and, you know, and bring them together. You can actually hear each one. And he talked about how he builds a successful album. And he talked about how usually, if you want to have a 10-song album, what they'll do is they'll work with the musician to work on 25 songs and then they'll cut it back to five or six songs. And then they'll only add the ones that make it better. And I kind of compare that way he builds a hit album to how you should be building a hit portfolio. And that's kind of what I've done over the last six or 12 months in my own portfolio is really just take it down from where I was at 10 positions down to six.

Starting point is 00:32:13 We're the ones I really truly believe in. And then from there, I'm only going to add something that makes that portfolio better. And so we've added maybe one position over the last three months during this grow down this environment. And I think that's a good lens to look at portfolio construction, at least for me being a concentrated stock picker. It's not for everybody the way I invest. And I don't say everybody should invest like me. I would hope you wouldn't.

Starting point is 00:32:33 But that's kind of way I think about it. With the idea of stripping away, you've added one position. Have you taken any way? Have you stripped down the portfolio? Yes, you kind of mentioned there? Yeah, no, absolutely. We were probably at 10 positions going into the end of last year. I stripped down about four or five positions and took it down to the bare minimum,

Starting point is 00:32:56 ones that I really, really loved. And then now adding, as we see, opportunity. And the one position we added is a company that we had followed for 10 years, that just happened to inflect on some things where the valuation made sense and excited about the opportunity. So, yeah, I stripped it down from 10 to 6. and now looking to add. But I'm fine with the portfolio being the way it is.

Starting point is 00:33:17 I really am excited about what we own and why we own it. Did you see a fundamentals shift that gave you kind of pause in your thesis? Yeah. I think that's one of the businesses that we end. I mean, just to show you some of the volatility, I mean, one of our largest position we bought at, let's say, $10 per share, we initiated a position in early 2020. And then it hit 50 by the end of 2020.

Starting point is 00:33:41 And then it went down 50%. from the end of 2020 to the middle of 2021. And then it's just kind of meandered a little bit. And now it's probably slightly higher than what it was a year ago, even though we've gone to the smart environment. I like to say, like, well, that position went down last year instead of this year. Markets went down this year. But that business of the whole, that was what we invested in it.

Starting point is 00:34:03 It was a $15 million revenue business growing 30% a year. And today it's a $40 million revenue business growing 40% a year with 90% growth. margins. And so from a multiple perspective, if it's a lot cheaper than when we initiate the position in it. So you're finding, that's what I mean, like, but the opportunity right now is you can find some really good situations that, you know, the multiples have contracted down, they're growing into them. And eventually that equity is going to take off again. That Rick Rubin fact is kind of interesting about building a record or an album. And his studio, Shangri-Law is kind of interesting because there's apparently no art on the walls. He keeps the

Starting point is 00:34:41 walls blank so that the artist doesn't have any impressions. The artist is able to create with no influence, if you will. But I'm kind of curious, you know, as a portfolio manager, we are all looking for some kind of influence. Is there something you've been using as of late to kind of guide you and help inform you as you've been going along? Is there something that influences you or some resource that you build on, maybe outside of microcap club? Probably the biggest asset I have is the relationships I have with other investors. And some of that is fostered through Microcap Club because it is a place where people at least online can meet and greet and that type of thing. But just some of the relationships that I have with other investors

Starting point is 00:35:18 that invest differently than me too. You can always learn a lot about yourself when you kind of meet bizarro Treg or Bizarro Ian where it's somebody that does the complete opposite of you, but it's successful. You can usually learn something for something like that. For me, it might be looking at a deep value investor and seeing how they invest or whatever it may be. But I really am fascinated by learning from other folks that are really successful that invest differently than me. Because there's usually one or two things that I can pick up that I can apply to my investing that will be beneficial and accredit to me and my investors. I mean, you don't need to make these huge changes. A lot of times, investor maturation isn't about making these huge step changes.

Starting point is 00:35:57 It's about little tweaks in the fringes. And that's where the alpha's made. Well, I imagine that was some of the impetus for starting the microcap summit. And I'd like to talk a lot about that here because you just recently held this. It's the seventh year you've been doing this and you had 19 investors come and speak about strategy and even stock picks. So I'm kind of curious, just off the top here, what were some of the big maybe headline takeaways that stuck with you?

Starting point is 00:36:23 Yeah, thanks for bringing up the summit. Yeah, that just concluded last week. And, you know, this year was virtual once again. And, you know, really what the goal of the summit is, it's called the Micropat Leadership. summit. It's really to do three things. You know, you want to have an event that educates and inspires folks. You want people to learn something. You want people to hear some good investment ideas. And you also want to provide the opportunity for them to meet other people like them. And a lot of that's easier to do in the physical form. And so we, this is our seventh summit this

Starting point is 00:36:54 year. This is our 20, the third in a row that was virtual. But kind of virtual for us, it had its benefits too, because we've been getting more and more global as a community. And, you know, even when we had our event in Chicago physically in 2019, about half of the attendees flew in from overseas. So it's a very kind of international group. It's getting more and more global. So this year, it's a two-day, it was a two-day virtual event. The first day, I tried to handpick 15 to 20 this year was 19.

Starting point is 00:37:22 19 of the best stock pickers in microcap that I knew to give short presentations, 20-minute presentations. The first 10 minutes on their process, their strategy would make them unique. and the last 10 minutes on their favorite microcap at the current price. And so we had a wide diversity of types of microcap investors that presented from different areas of the world. And it was the first time we ever did something like this at the summit. And everybody seemed to enjoy it.

Starting point is 00:37:50 I mean, I always look at it as, okay, I'm pretty experienced in this space. What would I want to pay attention to from 8 a.m. to 5 p.m. And this is pretty cool. And so we had a really big variety of investors and ideas. And, you know, we had deep value investors. the story stock investors, you know, everything in between. And we're actually starting to publicize some of those on our YouTube channel, one microcap club's YouTube channel that we're pushing out right now.

Starting point is 00:38:13 So people want to listen in on some of them. You can do so. It's free. But it was a great event. So that was day one. And then day two, try to hand select a dozen kind of unique microcap companies that were very global. You know, and so we had, you know, we only had a dozen companies that we had seven

Starting point is 00:38:30 different countries represented from Finland's. Denmark, the UK, Australia, obviously, US, Canada, Belgium. And, you know, it was 10 million market cap companies and 300 million market cap companies. You had story stocks, value stocks, you had diagnostic companies, the companies trying to build an airline company. You know, it was a full variety, you know, and that's one of the tough things is people that tune into our event. You know, not everybody invest the same, you know, so you're trying to get a company or two, or at least the entertainment value to where you can keep people interested in these in these presentations throughout the day. I think we did that. I was really excited about the lineup we had this year. It was a great

Starting point is 00:39:10 event. It just ended. It's like playing a wedding every year, so I'm glad it's over for now. But it's always fulfilling. 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. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 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 Riders spend 80

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Starting point is 00:42:27 charges and expenses. This and other information can be found in the income funds prospectus at Fundrise.com slash income. This is a paid advertisement. All right, back to the show. Were you experiencing through that summit more of a bullish or optimistic sentiment than the compared to the bearish one we were just talking about? Yeah, no, it is. I mean, I think there's opportunities every, I know for me, you know, I don't know if it's a contrary to me, but through what's going on over in Europe, I'm kind of more intrigued with what's happening in Europe from an investment standpoint, like what opportunities are there. And so I really tried to get some companies that were in some areas in Europe that might not be as susceptible to some of the challenges that other areas

Starting point is 00:43:09 of Europe might be. So we had a company from Finland, you know, where 50% of their energy consumption comes from uranium. And something if they're not quite, it's not like Germany where things could get really bad or things of that. So I tried to get some really interesting microcaps that were in some interesting countries that I knew nobody would have heard about. Very few people, probably in those countries have heard about those companies, but they happen to be publicly traded on those local exchanges over there. And, you know, I think we showcase kind of some of the better, or a couple of the better microcap companies that are over in that area as well.

Starting point is 00:43:40 So it was, I know for me, I tried to have a global focus and also trying to understand a little bit that everybody was running away from Europe. Let's try to showcase some European microcaps that are doing things differently. I think I know the answer to this one, but I have to ask because, you know, something that stood out to me was a lot of these investors that spoke, they weren't solely or I'd say a few of them weren't solely microcap investors, right? So they had a strategy that would kind of dip into micro, but other things as well, no one pitched this. But when you see companies like Google or Alphabet, for example, today, you know, trading at a P.E. of 18, right? Like, do you ever get tempted,

Starting point is 00:44:16 right? You know, you're a microcap investor, but you see some of these major caps or large caps getting fairly cheap by historical standards. Was that a topic of discussion at all? I'm curious. No, we actually make sure that we don't talk about that. No, I'm just kidding. Only microcaps center. No, I understand. I think there is opportunity of large caps. And, you know, there's quite a few, even quite a few fund managers that presented in our day, one of the event where, you know, they own a hundred million market cap alongside Google in the portfolio, you know, and that's completely fine, obviously. You don't have to be just a microcap investor. I think, you know, to anything.

Starting point is 00:44:51 you just, everybody's goal should just try to find, you know, the next great undiscovered company, whether that's a billion, Marcia Cap or 10 million. It doesn't matter. Who cares? Just go find it before somebody else. That's kind of our marching call before Micro Cap Club. You know, beyond the stocks that were pitched at the summit, you featured the guests, I just mentioned that a lot of them had very unique strategies, which is, I imagine the appeal

Starting point is 00:45:13 and why you invited them in the first place. But were there a few strategies that stood out to you or interested you, maybe even surprised you from their presentations? I'm probably somewhat biased, but there was a couple of reasons. And all of these will be public shortly on our YouTube channel. So there's one that I really enjoyed. Harris-Cuppermans was really good. People enjoy his communication style and people would enjoy his presentation,

Starting point is 00:45:37 which was just released. More of a macro type of investor that takes big swings. And he does own a microcatch, and that's the one he presented. Another really great presentation was from Jason Hirschman, who's a good friend of mine. He's a full-time private investor, managing his own family office. It doesn't really have anything to sell anybody per se, but he gave his presentation itself on his process, his strategy was just really, really unique. And he's a phenomenal investor.

Starting point is 00:46:03 That's kind of the interesting thing about microcap investors and investing in general. Like some of the best investors I know aren't necessarily hedge fund managers or professional investors. Sometimes they're small business owners, you know, and the best investor is really the key attribute is you're trying to find out the truth on a company. If I, you know, boil it down to first principles. That's what it is. You're trying to find the truth, whether that, obviously you go into every situation,

Starting point is 00:46:28 reading filings, reading press releases, listening to earnings calls, read earnings transcripts. But that's all information the company has put out for you to read or hear or absorb. You really need to get out there and dive deeper into the situation to find actually what the truth is behind a company and where it's going and where it's position. If I'm going to find out about you, Trey, obviously, I'll talk to you, but if I really want to find out to you about you, I'll talk to your best friend, I'll talk to your business associates. And that's what it takes, kind of the microcamp world to find out what's really going on. All right. You mentioned Harris Cupperman.

Starting point is 00:47:00 He's also known as Cuppie. A lot of people call him Cuppie for short. And I really liked his stock pick that he presented. You just released this along with a few others, as you mentioned. For those who are unfamiliar, we interviewed Cuppie in April. It was episode 428. And he pitched a stock called Lee, L-E, and Lee provides local and regional news and advertising services in the U.S., which, you know, might sound like it's just a melting ice cube at this point. But actually, there's this digital revenue portion, a silo of the business that's growing quite rapidly and the biggest contributor to the EBITA. The enterprise value right now is around 600 million. The market cap is 100 million, as you mentioned, growing revenues and free cash flow. I mean, this is a really interesting stock.

Starting point is 00:47:44 And the annual volatility is around 50%, which stood out to me. But you know what? Almost every stock we've talked about or that was pitched, it seems, in the microcap world, has a volatility around 50%. It seems to be kind of par for the course there. So not a major asterisk, but something to be, you know, familiar with. I just found it really interesting. I kind of thought that was something to maybe explore a little bit further.

Starting point is 00:48:04 But another presenter was Paul Andriola. And Paul appears to be the best performing investor in the club. I mean, his stat is almost 10x. seems like anybody else that's on the platform there. How would you describe his strategy and what was it like to kind of learn from him? Yeah, and I've been friends with Paul for a lot of years. And the way our ranking system works at MicroCat Club, which is what you're referring to, is every company that you profile, we collected, see what the starting stock prices,

Starting point is 00:48:34 and then you get points based on the performance of that stock pick. So if I profiled something in a dollar and it goes to $2,000, you get 100 points and went to $3. you get 200 points. So the percentages are basically the amount of points you would get. And it's the tractors, too. If you profiled something at 10 and it goes to five, it works in the opposite direction. And so he happened to be the one that profiled expel a long, long time ago. I think at like 30 cents and it went to $100, $100 per share.

Starting point is 00:49:01 And so that's been the main driver of that return profile. Ironically enough, Jason Hirschman, who I talked about earlier about paying attention to him when his presentation comes out, he actually owned 5% of that company from a dollar. to 100. And so he's sort of the goat of holding that company. He's an incredible investor. So, yeah, I think, to Paul, he is really, really good at finding these small, high growth, profitable microcaps in Canada. So that's kind of has been his focus for the last 20 years. And he's really, really good at it. And only takes one. It seems like that's quite impressive. It's sort of your point about, you know, Harris and Lee, and not specific to that company in general.

Starting point is 00:49:38 You see that quite a bit in microcap where you have a business where one part of the business is declining. Another one is going, is accelerating. Overall, it's showing that the company's not growing at all, maybe even declining when in reality there's a smaller part of the business that's growing rapidly. And it might be a business like that where it's newspapers, you know, as well, I don't want anything to do with that. It doesn't screen well because it's not really growing. So you find things like that. And it's why it's also important to dig below the surface of the financials on all of these businesses because you can find some hidden gems that are kind of, about to kind of break through and hopefully be found by a majority of investors. And a lot of that

Starting point is 00:50:20 means you just have to do the work to read through the file, least to find out those situations. And that's a big part of what we do as well. Now, did you present at the summit or did any of the MicroCap Club founders present? Because I imagine people want to hear from you as well. I imagine they would, but I was the MC for the entire event. So I was exhausted. And I would much rather put other people in the pedestal rather than myself. So I just played hope. the whole time. Fair enough. Fair enough. If you were able to see the future a little bit and you knew we were going into another year or two of a bare market, would you do anything else to hedge? And I guess what I'm kind of asking about is maybe not hedging in the stock market,

Starting point is 00:50:58 but do you look to other asset classes outside of microcap stocks just for your general portfolio? I don't, but I'm not advising that. Microcap investment is the only thing I've been doing since I was a teenager. It's the only thing I can, I feel like I've been edged. And every time I've tried to get into other things. I've got my hand slapped. So I just kind of focus on this niche of the market. And if I knew the U.S. is going into a recession for the next six months, 12 months, however long, I probably wouldn't do anything differently than what I'm doing right now. And I don't hedge strictly long only in a concentrated portfolio of fire caps. And my way to hedge is just being in the most unique best companies I can find that are growing rapidly, that great balance sheets

Starting point is 00:51:38 that can endure a recession and take advantage of one. You know, and that's kind of way I try to hedge out my risk. It doesn't mean that the portfolio will not be valid. Certainly will be. But, you know, in the long term, you know, it always kind of keep to that three to four year, five year time horizon. So Sid Grover from Canterbury presented TDW at the summit. And that kind of raised a question for me. I mean, given everything we're seeing in the market, did a lot of people come out with energy opportunities? Was that a bit of a theme? Or was he kind of alone in that space? No, he wasn't alone. I think we had maybe two. or three investors, I believe Michael Melby, who's going to be coming out shortly. He runs

Starting point is 00:52:18 Gate City Capital. That'll be another one to pay attention to. So, you know, Michael Melby, he runs Gate City Capital to hedge fund. He's mainly deep value, which everyone in deep value up into the last six months have gotten decimated, as you know. But I think he's up 700% in the last nine years compared to 200% for the S&P and a deep value strategy. I think that's somebody you should pay attention to. So he pitched an idea. I believe his was energy. And, And then Josh Young as well presented. And his was obviously energy too because he's energy centered. So I think there was three energy ideas.

Starting point is 00:52:51 So beyond these summits that you've been putting on, how do you currently, you know, spend your time building your knowledge? Are there books that you've been reading or currently reading? And do you stick to fiction, nonfiction? Like, how else do you influence yourself as the artist we were speaking about earlier? Yeah, I mix it up. So right now I'm reading crime and punishment. I'm going through a novel phase. So I've just been kind of go with some novels.

Starting point is 00:53:13 I mean, from a pure investment book standpoint, you know, after you read 100 books on investing, the value gain from the incremental investment book kind of goes down and down. And so most of kind of what you learn from that point forward is through the experiences that you get as well. And so a lot of my reading is, well, when the pleasure side would be more novel related. And then on the investing side, it would be reading, obviously, on individual companies and industries, you know.

Starting point is 00:53:39 So it's mainly focused on those two areas. I used to, you know, spend probably an hour or two every two or three days just doing art, you know, chargoles and stuff like that. I do find it's beneficial to kind of stretch the other side of the brain because what we do is very quantitative. You know, it's good to cut it. And that's why I think I've got into this novel phase kind of lets the imagination go a little bit.

Starting point is 00:53:58 And a lot of times that's where, you know, your creativity is fostered to, kind of gives your brain some gaps to form ideas. And so it's important for me. It's part of the process. But right now, yeah, reading crime and punishment, probably read another novel after this one. The investing books that I read, obviously like William Green, who's hosts on the Investors' podcast, you know, I read his book. It's amazing. But primarily it's industry or company-centric reading on the investing side. Probably the best book that I've read for investing in microcaps

Starting point is 00:54:26 is a book called Sleuth Investor by Admer Mendelman. And it's all about sleuthing and how to try to find information on companies. You know, kind of gets back to the point I made before about the key to this is just finding the truth. And that's a great book on how to salute and try to find non-public public information on companies. That's the best way to put it, you know, unique public information. So, you know, that's probably the best book that is the most applicable to microcap investing. I think having the skills of a financial journalist or any type of journalist type will do really well at microcalf, you know, just digging, digging, digging. Very cool. And with crime and punishment, I'm curious, is that sort of

Starting point is 00:55:08 sort of one of those things where, you know, you spent years or decades even reading all these nonfiction classes. And now you're finally getting able to go back to the classics that you never got around to because I've experienced that for myself as well. It is. Yeah, that's exactly right. You hit the nail on the head. Like somebody, I've got a stack of books I've been reading to read for feels like 20 years that I'm finally getting to. So you're exactly right. Yeah, I have to agree. I mean, you know, fiction is almost more important than the nonfiction in some ways. There's a lot of research that goes in. And definitely you can learn almost as much for more sometimes. I'm not as good, though, about reading fiction. I've got to be honest.

Starting point is 00:55:41 Well, Ian, it is always such a pleasure to have you on the show. I always look forward to these discussions. Before I let you go, though, I'd like to give you an opportunity to hand off to the audience where they can learn more about you and MicroCap Club, the Summit, any other resources or books you want to share. We'd appreciate it. Sure. Thanks for the opportunity to come on the program again. It's been a pleasure. People can find out more about me at microcapclub.com. You can also find me on Twitter. That's at Ian Castle is my handle.

Starting point is 00:56:12 I do run some outside capital, and that website is www.if.if dot capital. Now, can anyone join the microcap club? What are sort of the qualifications and or requisites? Sure. Yeah. So anybody can join in two different ways. You can either become a member or a subscriber. So to become a member, which means you can participate on the forum.

Starting point is 00:56:36 You write a two to three page investment thesis on your favorite micro cap stock. And we usually get 20 to 30 of those applications every month. At the end of the month, all our members vote on each one of those applications. And if you get enough votes, you get in as a member. If you don't, you don't. And usually about 10% of people get in. It's kind of, usually the hurdle rate. And so that's one way to join and that's free.

Starting point is 00:56:58 Kind of get in on merit. And you can also join by subscribers. having which is $500 a year, and that's view-only access of the forums and the conversations that we're having internally on microcatclub.com. And so internally, it just looks like a message board where if somebody profiles company XYZ, they write up a thesis and that starts the thread, and that starts the conversation. And since 2011, you know, we've had a rate 800 companies profiled on there by our members for the last 10 plus years. So it's a great way to find ideas. It isn't a guru service. It isn't a here taking instance.

Starting point is 00:57:32 10 top picks and go make money. This is strictly, I want to find out with a bunch of smart people in this space of microcap investing like and why. And then it's up to you to kind of make up your own decision on what you want to do with that information. Well, I really encourage everyone to check it out. And especially these summits, these are unbelievable resources you're putting on. I appreciate you actually distributing and disseminating the presentations.

Starting point is 00:57:56 And for free, you can check these out on YouTube and they're 20 minutes long. They're packed with amazing information from incredibly. smart people. So I highly encourage you to check it out, everybody. All right. So with that, Ian, I really appreciate the time and I hope to do it again soon. Thank you. Thanks for having me on. All right, everybody, that's all we had for you this week. If you're loving the show, don't forget to follow us on your favorite podcast app. And if you'd be so kind, please leave us a review. It really helps the show. If you want to reach out directly, you can find me on Twitter at Trey Lockerby. And don't forget to check out all of the amazing resources we've built for you at the

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