Yet Another Value Podcast - BONUS EPISODE: Michael Liu from Intelligent Fanatics Capital Management LIVE in VEGAS

Episode Date: May 21, 2023

BONUS EPISODE with Michael Liu, Analyst at Intelligent Fanatics Capital Management - this interview was recorded live at the Planet MicroCap Showcase: VEGAS 2023. Topics covered: discovery process for MicroCap stocks, building relationships with management, disagreements with management, groupthink, all followed by Q&A from the audience. For more information about Michael Liu and Intelligent Fanatics Capital Management, please visit: https://if.capital/ You can Follow Michael Liu on Twitter @michael20171 : https://twitter.com/michael2017l Chapters: [0:00] Introduction [1:20] Michael Liu and Intelligent Fanatics Capital Management backgrounds [2:25] Discovery process for MicroCap stocks [5:51] Building relationships with management teams [9:47] How does Michael handle disagreements with management teams [11:56] Avoiding the MicroCap groupthink echo-chamber (or not, if the collective is right) [14:29] Herd mentality in MicroCaps and executing on information arbitrage [19:33] Q&A with audience

The following is a bonus podcast. It's an interview I did at Planet MicroCap in Las Vegas at the end of April. I had an absolute blast at Planet MicroCap. I had an absolute blast during this interview. And if you're interested, the next Planet MicroCap conference will be September 6th through 7th up in Vancouver. So please give this podcast and listen. And if you like this podcast, if you want to go learn more about microcaps,

look into Planet MicroCripe, September 6th and September 7th in Vancouver. This panel represent, well, this is supposed to be a live podcast, but it's live to tape. So, you know, we're playing with it a little bit. But this is for a podcast that is by far my favorite finance investing podcast out there. That includes even my own. And I'm really thankful for the, you know, our working relationship that we have here. And so I'd like to introduce Andrew Walker, host of the yet another value. podcast and his guest Michael Liu from the intelligent fanatics capital management guys take it

away thanks Bobby it's really great to be here Vegas one of my favorite cities is my first time being at the planet microp conference but already a blast Michael thanks for coming on for the second time I guess yeah thanks Andrew thanks Bobby too so I so I think what we're going to try to do is we're going to do maybe just 10 or 15 minutes of me interviewing you a little bit of your more your background all that type of stuff and then we're hoping I mean, we've got hundreds, thousands of people in the audience. We're hoping to get some live questions and try to go with that. So I guess just to start, Michael, how did you, I know you've been at Intelligent Fanatics

for about five years, maybe you can talk about Intelligent Fanatics, how you joined, what you guys tried to do, all of that. Yeah, for sure. So at IFCM, we're a small, microcap focus, long-only fund, probably similar to a lot of people here. We're fairly concentrated in five to ten positions, started about five years ago, although it doesn't feel like five years, mainly because I guess time goes by so fast. And we're really focused on the, our mantra is sort of finding great companies early. And, you know, I focus personally

a lot on the early part in terms of finding companies sort of in the beginning stages of developing greatness and sort of those multi-baggers that come out of the microcap universe. Perfect. So I guess to start, you guys, microcap focus, I know, I think, You said 5 to 10, but that might even be generous. I know you and I've talked, a lot of it isn't two. Just how are you balancing looking for new microcrops? How are you trying to find new microcrops? Because one of the things I have planted my crap, there's hundreds of, there's thousands

of my crap, dozens of them are presenting here. And I think a lot of people, me included, when you're looking for microcrops, like there is really a turning over the rock issue because you'll turn over 10 rocks and nine of them will be so obviously bad. And, you know, it can be really difficult. So how are you guys kind of weeding out and, like, looking for new microcaps. Yeah, no, I totally agree.

I think the microcap universe is a special place in the stock market because, like you said, it's so vast. You can't know every microcap, the same you could know, for example, every S&P 500 company if you wanted to. And also, as you say, you know, 99% of the microcaps out there are really uninvestable companies, with the exception of obviously all the companies here. And I think that's just because of the structural

side of the space, you know, there's not a lot of microcap IPOs these days. So the way that a company becomes microcap is it starts out as a big company, runs a bad business model, and then goes down 99% and that's how you find yourself in the microcap space. So having that 10,000 foot view of the industry, what I like to look at and what I see as sort of a defining characteristic of the beginning of great companies is some sort of strategic pivot or transformation that occurs in a microcap company always precedes those multi-bagger runs that you find because all of these companies really are not that great if it continues as business as usual that business as usual is what brought the stock down 90 to 99% from highs right so there needs to be something very

fundamental and structural and strategic that changes about the company in the early stages so this could be something like a new CEO coming in and you know totally changing up the strategy some companies you know some companies have really good management teams but they're just selling the wrong products, and you have great sales for selling the wrong products, they're not going to be able to sell something. So, you know, that strategy could be to in-license new products and push through your sales team. Broadly speaking, I think every single expense category of a company can be pivoted in order to create that sort of strategic transformation that I'm talking about. So you look at, you know, cost of goods sold. Like I just said, you can

change what you sell. GNA, you can change the management team. Sales and marketing, you can change the sales and distribution arm. Usually something about the company is wrong, and that thing that's wrong needs to be identified and changed, and that's what starts the runs of a lot of successful microcaps internally. And then externally, there can also be, you know, the industry can just come to them. You can have a perfectly fine company in a perfectly fine industry that dominates their niche, and it's the classic case of, you know, a company that dominates their niche, does what they do really well, and that niche starts to grow and inflect. We did a podcast recently, you and I on Cog State, which we can also talk about today, if there's time.

Cog State was really an example of an industry where they dominated their niche of this, you know, this niche, they're a niche CRO for Alzheimer's, and now the Alzheimer's space is really coming to them. So some aspect of change has to be incoming to a company to really, you know, set it off on that path of really strong returns out of the microcap space, in my opinion. And that's what I spend my time looking for. Earlier you mentioned, you know, a lot of times the inflection point is the side stock's 90 to 95 percent and in general the stock drops 95 percent a CEO change is going to happen and that's a lot of times necessary because the business needs to change the business

needs inflect one of the things i have struggled with is building relationship with managements both a the initial reach out and starting to build a relationship and build a relationship of trust over time but then b i do feel like i've built some relationships with management teams you know i thought they had a chance to build a really interesting company and kind of getting burnt by management teams. And I'm happy to ramble on and on and on about all the times I've been by management teams. But I want to ask you, you know, you focus on these microcaps, you're running a concentrated portfolio, you're looking for the next right companies. That's going to involve finding good CEOs and building a relationship with them. How do you approach

building a relationship with the management team? So what I've found is that if you are the 20th institution to go meet with a management team and then you sit down in front of them and you ask them, so what do you do? You know, it's a different feeling than if you're the first person to go to them when, for example, a new CEO just comes into the company or a new strategy change just starts that they start talking about the transcript, and you sit down to them and you're the first investor to give them a call, and then you're like, wow, this is amazing, and then you refer five very high-quality other investors to the same company. That gives you a very different stance in the CEO and the management

team's eye than, you know, if you're just another institution that's doing the due diligence that they do on 500 different companies. like I said, we're very focused on finding great companies early, and the early aspect means finding them exactly at the point of change, because that's when you really build up this relationship with management, as you say, and that's very valuable for a whole host of reasons, besides just knowing the management team well, which is really important, right? If you know a management team well, you can tell in future conversations if the CEO's tone is changing, if they're, you know, you have a baseline for how the company operates and sort

the pulse on the soul of a company. But at the same time, there's a lot of other benefits that come out of getting to know great companies early and being the first person to really truly understand a company. The other thing is, you know, as a microcap grows, inevitably, you know, it goes from no institutional ownership and no retail ownership or, you know, smart or dumb to a lot of institutional ownership and a lot of smart retail investors that then go to own the stock. And my favorite question to ask a management team, whenever I go to, you know, I go to study a new company is, are there any other long-term shareholders that you know that know the story really well that, you know, I can go talk to because, you know, it's a different feel, everybody knows, here knows. It's a different feel talking to an investor about a company than a CEO about a company, right? Investors can say whatever they want. CEOs are very guarded sometimes. It's hard to have an initial conversation sometimes. So if you are the ax on a name and you find the company first, then you sort of, you know,

build, tie your reputation to that company and, you know, you file on the company, you have the company in your 13Fs, you're one of the early shareholders. That's a very big benefit to meeting other investors, too, other really smart investors. And, you know, at IFCM, we've got to know a lot of way smarter investors than us by just being early to certain names and then, you know, having other investors reach out to us because, you know, we know those names well, not even better than the other investors necessarily, but just that, you know, we have the first feel. So it's a great way to meet other investors, to network, to understand management to, like you said, you know, it's a, the dream is to be first to finding a company, be the ax on the name, which all other investors

go to ask you about what's happening with that company and any news, have a really good relationship with the CEO where, you know, they'll take your calls, they'll answer your text, they'll budget time to get lunch with you if you're in the same city. That's the dream. And it doesn't pan out always but when it does it's a cool dream to have how do you handle disagreements with management teams right so management goes and doesn't acquisition you don't agree with or they pursue a business strategy you don't agree with like one of the issues i've had is you're you're close with the management team they do a decision you don't like you know you call them you rationalize why you think it's wrong uh they tell you why they think it's their correct one and then just going forward

it's very difficult because you know a lot of these and i guess we'll talk about this a little more in bit little bit of a bet on the jockey versus the horse. It's both, but the jockey is very important. If they're making one, two, three decisions that you don't agree with, do you kind of give them the rope to go out and do that and prove themselves, or is that just an instant, you know, you're running a very concentrated portfolio.

One mistake can kill you. Is that just an instant we need to pull the plug? Yeah, I mean, it's definitely totally case by case. I think that, you know, IFCM, intelligent fanatics, it's really like, like you said, a bet on the management team, we put a very high emphasis on the management team. And so we tend to give our management management teams a lot of leeway in terms of making other decisions with the assumption that they

understand the industry better than us. And that was always, of course, the reason that we got invested in these companies in the beginning was we believe that management had better understandings of the industry and better connections in the industry than us. So, you know, we give a lot of rope to management teams, but it's more, in my opinion, about how much the management team is risking with new strategies. I think every microcap CEO, every CEO that comes into the microcups space, wants to do something. You don't become a CEO of a microcap making 100 or 150K because you want to make like 100, 150K, right? You want to buy 10% of the company and turn it into a billion.

So a lot of these microcapped CEOs have big visions of the future, and they want to execute on those visions. And it's fine if you take 10 or 20% of the company's cash and speculate on some of these things that may or may not work out. That's totally fine. But if it's like a big distraction on management times and a lot of money, then it's a totally different story. It's difficult to invest in the business where something you disagree with is potentially running the risk of bankrupting the company. Last one, and then we'll start opening it up to questions. So, you know, I know Intelligent Fanatics is highly involved in MicroCap Club. You know, the microcap and value investing communities aren't exactly big.

most people talk to each other. And one worry I have, I have seen it myself, it's possible that you guys have too, is you tend to get names that are Finchwit favorites, that are microcap favorites, and kind of everybody piles into them. And, you know, I know you guys talk to some very smart investors, but I know you guys can also, like, all the smart investors concentrate in the same microcap or, you know, Planet MicroCap here, everybody, there's the same most popular companies. How do you avoid, like, that echo chamber of, hey, we're in MicroCap Club, we're running

intelligent fanatics, we talk to the other four sharpest microcap investors. We all think XYZ microcap is the best. We've all got a position in this thing. You know, we can out bullish each other. We can be blind to the, how do you avoid that type of group think? Well, to be clear, the best way to avoid it is by being right. Group think is great if you're holding a hundred bagger, right? Because then you're going to hold it the whole way and you're only going to have an echo chamber telling you to keep holding and buying the stock, and that's the right decision. So if you're 100% here, you're right, Groupthink is very good to have.

Other than that, of course, which is not realistic. I love your confidence here. Just find 100-baggers be right and you don't have to worry about anything else. Unfortunately, that really doesn't work in practice and Groupthink has really hurt us in the past. I think it's important to do your own research. And like I said, have an independent mindset

when it comes to companies. So this is my very personal preference. but like I just like have a harder time getting bullish on companies that I've heard about from other people, even if it's just one or two people that know about a company, rather than stuff that I find myself. And it's like a personal disconnect in my brain or something like that. I like the thrill of chase, the thrill of the chase and finding stuff on my own where I'm the only per, or I feel like I'm the only person looking at a company. And I think it's, but I think it's important to maintain that kind of a more independent view and analysis of a company.

And that also helps if you're sort of the cutting edge of a company. So like I said before, if you are the first person to find a company, you're the axe on the name, you know it the best, you know, you're usually the first one to do analysis on new developments with the company. Every time the quarter comes out, you sort of have a sense of what to look for, and you can be first to making decisions on, you know, what's good and bad and sort of driving that narrative rather than relying on other people's opinions and other people telling you what to think.

The way I've told people this before is every now and then, like, markets are generally pretty efficient, and this is a little large cap of microcats, but it definitely applies to microcaps too, because I know I've seen it. Every now and then there will be a press release or an earnings release or something that will come out, and the market, if you really know a company well, you'll say, oh, this has really clicked for me. This is massively value creation, accretive, or massively value destructive, and the market will not respond.

And if you see that thing, a lot of times it presents, this is. I don't want to say trading, but a lot of times it presents an opportunity where a position is significantly de-risk, and you can really increase your position in it. Like, this is the opposite area, but I'd know there was a microcalf that I was long five or six years ago that announced an acquisition, and I thought it was one of the worst acquisitions I'd ever seen, and I called the CEO, I had an okay relationship with the CEO, CFO. I called them and I said, this is terrible. Your stock's trading for five times earnings.

Like, you're buying this company for 12 times. there's absolutely no synergies. There's huge questions about this company's long-term sustainability. I was letting them have it. And I remember I was letting them have it. And it was 9.30 and the market opened and the stock was up 20%. And I remember thinking, oh, well, I guess I can't yell at them because maybe they created a ton of value.

And four days later, the stock was down from that call, was down 50% because the market had picked up on what I did. Like it was a terrible acquisition with no synergies. And I can list other examples. But that one always stuck in my mind where I knew the company really well. I knew this was a terrible acquisition. The market's first instinct was to send the stock up because maybe there was a headline EPS accretive number or something

because, you know, interest rate was zero. But if you really knew the company, you knew this was very bad. It also brought into questions about their business. And, yeah, that's more trading than long-term investing. But you had to have done years of work on the company before to know that that specific announcement was quite bad. And that can happen with good positions as well, too. Yeah, I mean, what's cool about the microcap space is that, you know,

People say it's just as efficient as large caps. I think it is more inefficient. All investing is about finding stuff before other people. And in the microcaps space, microcaps can go, you know, days after lethal... I've seen microcaps where lethal news to a company is released. And investors just don't 100% understand how it has to do with the company, so they sort of ignore it until the stock starts to go down. And when the stock starts to go down, then everybody starts to ask, oh, what's going on, and then they can point to that piece of news, right?

So there's a bit of herd mentality when it comes to microcaps always. If every investor out there assumes that the market is efficient, then the market will drive what other investors do, and it becomes a reflexive cycle, and that reflexivity can sometimes be wrong if somebody just puts in a fat finger trade in the beginning or something like that, right? So there is some, like you said, maybe once a year there are weird opportunities like that,

where there will be news on an external third-party database or something like that, or that the company releases themselves, like you said, that people don't understand that only people that really, really follow a company closely and really, like, have that pulse on the company and a really good relationship with management where you can talk to them and verify everything you don't know, only people that have those kinds of relationships can act on those opportunities. And they're fleeting.

It's just a couple of hours or a couple of days. But it's a very solid potential way to make, you know, a couple, 10, 20, to 50%. And you have to have done the work ahead of time is really the critical thing. So there's the opportunity to find stuff like that early too. And then the whole premise of finding great companies early is executing on that arbitrage,

but information arbitrage, but doing it on a much larger scale, you know, where you can put hundreds of thousands, millions of dollars to work in a microcap. And by finding it early, by finding a great company early before everybody else discovers it. I think especially in microcap,

it's important to do your own. own work to find new companies because a lot of the times there really is not a lot of liquidity available before a company goes to fair value. You know, the constraint to everybody, every large fund investing in a microcap is how much money can I put into the company. If I think Apple can go up 10 times tomorrow, I could tell all my friends about it. We could all lever 10 times and put all our networks into it and it wouldn't budge at 1%, right? Whereas a microcap that could go up 10 times tomorrow on some news, somebody is going to put, you know, the max couple millions of dollars that you can put in. And that's the end of that. And that's one person that would drive all their

returns because, you know, there's only that much liquidity available. And you really want to own that for yourself, along with the whole host of other benefits that I said, about buying stock. You saying me and all our friends can lever up and invest in Apple tomorrow and have it go up 10 times. Maybe not you. No, no, it just made me remember Bobby. I forgot to put the disclaimer. Disclaimer, nothing on this podcast panel is investing advice. Please consult a financial advisor, please don't lever up and go invest in Apple tomorrow, expecting it to go up 10 times. We'll include more in the show notes, live transcript, everything, but please remember just consults financial advisor.

And we've got a question here, and we'll just start opening it. One of the things you were just talking about is how an acquisition can really make a difference, and that happened in one of the stocks that was supposed to be here, but now they're not coming, I guess. And I think you guys know what I'm talking about. the Assertio acquisition of quantum. So it is funny. Bobby and I were talking before, and I said,

oh, that's pretty interesting. He said, yeah, they just had something. Are you familiar with the situation? Only cosmetically. I think there's some people in the audience that know the company much better than me. Would anybody like to comment? I'd like to know if they think

if the acquisition was as bad as the stock market took it today. Oh, so we'll have a real open panel if anybody wants to start commenting on a already have. I need the disclosure of you own the stock. Neither of us do. I don't.

Yes, I do. Have you had difficulties clearing and trading OTC stocks? I know fewer and fewer brokers seem to be taking them these days. You go first and I'll add something. Yeah. At certain brokers, they have weird disclosures where they think you're affiliates of an OTC company if you're buying large amounts. of the company. I think interactive brokers is one of the big ones that has done that.

Other than that, I don't think there are too, too many issues besides the typical issues of, you know, a huge spread, illiquidity, and, you know, the fact that you can't buy any of them usually. But, yeah, that's all that I'm aware of, but I'm sure there's probably other stuff in the industry as well. I've tried to trade some of the darker stocks, you know, the ones where you need to sign up and sign an NDA to get financials and all that sort of stuff. I won't mention any specific names, but we prime at one of the larger banks, or one of the mid-tier banks, and we have had a ton of issue with giving them to custody them. You know, I wasn't even thinking, and, you know, one day a broker sent in and said,

hey, you guys bought 10,000 shares of this company, and it was a very low dollar price, so this was a very small amount, and the next day our broker called us and said, hey, we can't custody this. What are you guys doing? And they agreed to make an exception because it was only a couple thousand shares, but we've had a lot of issues with custody in those really dark type stocks. Obviously not anything that's like normal OTC pink sheets, but the really dark stuff we've had some trouble.

Sorry, yeah, this kind of goes along with that. Really setting up the structure of the fund in itself. We've been trying to set up a microcab fund for a couple of months. We talked to a bunch of brokers, and these are NASDAQ traded. We're not even talking OTC, and, you know, they won't even touch it for most of them. do, they're like, yeah, we'll charge 4%. And I'm just wondering if you have any advice for, like, where to go to look for, you know,

any kind of brokers that'll handle that kind of business or whatever. Are you looking to work with, like, brokers to take down big blocks? Or if you're saying NASDAQ, NASDAQ relatively liquid, I mean, I think you could do interactive brokers and just do it that way. Yeah, they said no dice. I talked to interactive brokers. They've got new laws and new rules in place or whatever. They've got a whole thing.

They won't even touch any microcap fund, really. know, I'm feeling we should have had my COO come up and present instead of me, it sounds like. Do you have any thoughts on that? I think there are some good, you know, sort of budget microcap-focused brokers out there. We could maybe talk after we have, we use MS Howells. I don't think, you know, that's what we use as a prime. And they work very well. I have a question.

You both are nearly in this. same business and you both do deep dive research on on different tickers. What's your observation when it comes to analyzing, let's say, a CEO of a microcap company, how much time he spends watching his bottom line versus how much time he spent speaking to media? I know there's some kind of a combination that's probably acceptable to you. I'm curious as to what that might be. Why don't you go ahead and all follow? Yeah, just to clarify, are you asking how much time the CEO spends on the business versus how much on IR and sort of, you know, talking to investors and stuff like that?

Yes, and also, you know, where's his attention and where should it be? I think the best CEOs, in my opinion, are the ones that are very talkative on IR, but only when talking to us. and other than that, focus entirely on running the business. But more realistically, I think, you know, the CEO's job, some people CEOs consider their job as to be maximizing value for shareholders. And that sort of makes sense when you think about it as creating per share value. But the way to do that is, you know, in the long term, to create sustainable per share value, you really have to focus a lot on the business and the bottom line, rather than talking

to investors. investors is more of a short-term mentality, in my opinion. Yeah, look, I just add, I 100% agree. I'd like, I want CEOs to be able to talk, but, you know, A, the CEOs who are always putting out press releases and trying to get media tours, I, you know, I know as a podcast or maybe I'm going against my interests here, but I generally don't like to see that. I love CEOs who are open to talking to shareholders, but who call the list really quickly. So, you know, if a shareholder comes in, and especially smaller caps, CEO, the shareholder comes

and says, I'm interested in the company. I'd love the CEO to say, okay, yeah, I'm open to talk, but then call really quickly. You know, if they're not a serious person who's doing serious research, I know there are some companies who they blast out every time they do an earnings. Hey, anybody who wants a follow-up call, send it. Like, I'd love them not to do that. Like, only talk to your most serious shareholders who really understand the business and only talk to them when they feel like they really need an update card to something.

I want my CEO spending their time building the business and driving shareholder value, not trying to find new shareholders or kind of coddle shareholders and, hold their hands to understanding the business. Yeah, I think the other thing, just to follow up on that real quick, is I think the role of CEOs in microcaps can sometimes be overstated. I think the CEO can only do so much in like 100% organization, right, which is a microcap.

And a lot of CEOs rightfully focus most of their time on capital allocation. So what they can do is big sweeping strategic changes, like I was talking about before, closing and restarting divisions, doing new sales distribution channels, and stuff like that, reallocating to R&D versus, you know, marketing, stuff like that. They can do huge, big sweeping capital allocation changes like that. And then obviously with buybacks and stuff, a lot of CEOs try to game that,

and that works out in the long run as well. But what really drives the operational efficiency of a business is really whoever is under the CEO. So, you know, the next level of management and then the sales force that the company has, the people that the company has, I think that can be overlooked a lot of time. You can have a very intelligent, you know, well-connected CEO, but if he or she is not able to bring on a team under them to actually like make the sales and actually build the products and actually do the R&D and all that,

then, you know, the company usually doesn't do too well. Whereas some companies have a CEO or founder who may not be that good at computers, may not be that good at, you know, thinking of new ideas, making products, but they know a lot of people in the industry and people trust them and people, think that they're honest and they own the company. And people know that when they go to that company, they'll be well paid, they'll be taken care of, you know, their interest

will be aligned. And those companies actually tend to attract really high-quality employees, which then creates, you know, really high-quality financial performance, I've found. Michael, how much time do you spend talking to some people outside the C-suite and your companies, inside the companies, but outside the C-suite? Obviously not as much time as talking to the CEO, but you can sort of, you can get a broader sense of the quality of a company's employees by not necessarily talking to them, because everybody can talk well and tell a story, but backing it up by like performance. So, you know, a lot of the times in microcaps, you'll have interesting situations pop up where all of the employees come from

like a prior company that they all cited before. You have this group of people. There's a, there's a couple of examples of companies like this, and they all tend to do pretty well, where there's a group of people, especially lower level of employees that all come from like, you know, prior companies that got bought out and did really well or startups they found it that did really well and things like that and they all follow each other they all follow the best products in the market that's a that's a pretty good signal when you're not just hiring people and you can look on LinkedIn and stuff like that we're not just hiring people that have like one to two years here at this company and they jumped in the next company and they jumped in the next company right

when you hire people that have you know 30 years at the same company that sort of implies that they're loyal they do stuff really well and you know the company has a a really good reputation as well. It's the whole gang. We loved hanging out. We built this old company over 10 years. It was a great success. Now it's two years later.

Let's go build the next one. That's great. No, I was just wondering, because I used to spend a little bit more time doing it, and I specifically remember once I reached out to a head of engineering at a company and tried to talk to him, and it was a very stilted conversation. He was very much an engineer. And then 30 minutes later, I got a panicked email from the CFO that was like,

hey, you talked to our head of engineering. We didn't know you were going to do that. And now he's a complete basket case. He doesn't know how stocked investors. Like, oh, man, maybe I shouldn't be reaching out to people under the C-suite without kind of clearing it with the management teams first. Yeah, what I found as CEOs don't tend to like that. But a great way to talk to a company's lower level, when I say lower level, but like next level employees is by going to like trade shows and stuff where they're presenting at. They'll be pretty open there.

And you'll get a really good sales pitch too. Just a quick question. You focus on the inflection point. You're trying to find that moment in time for. company how do you balance out against the adoption of their products you know they're they're getting going but the the rate of acceptance is going to push out the quintessential cash flow positive moment another three months or so yeah um my point is it's it's getting there it's just not as fast it's yeah the adoption curve is a little slower or i mean takes time yeah exactly so definitely

some companies need to be bought immediately so Some need to be tracked and some need to be never bought ever for your entire life no matter what happens, right? So what I spend a lot of my time doing concretely is I look at press releases of companies every day looking for, so like almost all press releases in the microgob space, looking for signs of a strategic pivot or transformation taking place. So, you know, and now's a new CEO. That's interesting. Mark it down.

New CEO. And then what, you know, what are they trying to do and then track that over the next couple of quarters? It's a pretty comprehensive way to get to every single company, because if you look at every press release, by definition, every earnings report, you're going to have looked through every company that puts out a press release on their earnings, which is most of the companies. So that's a pretty comprehensive way to look at companies. And like I said, every time, you know, there's something interesting happen, maybe a strategic partner from the industry invests in them and wants to take their products to market.

Well, that's something you can mark down and track. And then you have this very dynamic database of companies in the microbreeding. Cap Space, you don't have to invest in any of them when the transformation just starts. And you're not going to miss anything because nobody's going to invest in any of these things when the transformation just starts, right? Everybody wants to see progress. But having this dynamic and evolving database on changes happening to the microcups space, you know, allows you to track stuff over time and make the decision when you feel is right

when the inflection is actually happening. And maybe like you say, they are a couple months away from Castro positive, somebody told me that in Australia there was a study done that unprofitable companies start to run nine months before they become break-even. And anecdotally, that does seem to be the case. So I don't know if that's a good strategy to have, but the other issue is that every company in the world will, every unprofitable company in the world will say that they're nine months away from break-even because that's like a sufficient amount of time that you can say, well, it's just going to be another nine months, you know, three months later. So you got to balance all the

decision-making as usual. It's all somewhat circumstantial, how much you believe in the management and you believe in the strategy. Yeah, the devil's really in that turn. Question. How do you think about selling, whether things go well or when things go unexpectedly? I think selling is one of those things, too, like you were talking about before, Andrew, where there is opportunity to react faster than the rest of the market when things are deteriorating. Obviously, if you're talking to management regularly, then you're getting more regular updates on the business than just the earnings releases. You're not going to get anything non-public, but maybe you can pick up on something

and maybe, you know, if you ask the CEO questions about the broader industry as a whole, you can pick up on something. So there's a bunch of different reasons to sell, which is sort of that classic saying about management buying, and it's just about keeping your original thesis in mind, not seeing thesis drift and sort of seeing when that thesis is broken. And sometimes selling when the stock is down isn't a good feeling, but it's necessary. And I think, you know, you can overcome that feeling if you just, like, I think as Drucken-Milling said, if you're very confident, then selling a stock shouldn't really matter.

In fact, if you're really confident, you should be happy to sell a stock because you can create more cash to buy stuff that you're going to be, that, you know, you're going to find in the future and that's going to do really well. No, and just I love what you said on the talk to management, and obviously not getting material non-public, but if you talk to them or even if you just follow a company for a long enough time, you know, sometimes on the earnings call, you'll hear them. And you can just, if you had never listened to the company before, you'd be like, oh, that was a fine earnings call. But every now and then, you'll have a company, you know, they've got a big product, and they say, yeah, We can't wait. The sales force is ramping up. We're seeing great signs. And then, you know, six earnings calls in. You listen to one and they say, hey, you know, we're dialing back to Salesforce a little bit. The macro economy is uncertain. We want to make sure the supply jingo is fine. And if you were just a normal person listening to that call, you'd be like, yeah, everything they just said makes sense. But if you really knew that company, you'd say, oh, my God, like the factory must be on fire. My gosh, what a change in tone. And that can be a great sign. As you said, things are shifting. It's time to sell. If you talk to management every month. you know, every now and then you'll hear them and you're not going to sell a company and break a thesis just because there's a little macro uncertainty, but you can really hear the difference in tone and maybe it's time to reassess. Bobby.

I think that's all. Is the question how to turn the microphone on? Yes. Solid call out. My question for you guys, for both of you here, you know, from an investing perspective, Right now, we're recording this on April 25th, 2023. What's keeping you guys up at night the most? When you think about either your portfolio, markets in general, love to hear your thoughts there.

Why don't you start? I might have to think about that. Okay. What's keeping me up the most at night is why do all of my stocks keep going down every day? It just doesn't make any sense to me. I don't know. The world is a scary place.

I was emailing with some friends. Like, I started my fund in late 2015, early 2016, and since then, we've had multiple debt crises. I mean, COVID was the most scary thing to me. Right now we've got, in 2022, we had, hey, Russia's invading, and maybe we have nuclear war, like, all a bit scary. But to me, it's just, look, I know what I own. I think I understand the long-term trends. I think they're a lot more valuable than they're trading for in the market right now, and I think they're going to be a lot more valuable. for the most part, that gives me a lot of confidence at night,

and most of the CEOs I trust pretty well, the couple of positions I have where I think the value is much higher, but I don't trust the CEO that much. That's probably what causes me to lose the most sleep at night, and maybe that suggests, like, hey, you know, if you're losing sleep over the CEO, maybe that's not a position you should have. Maybe we should go find some intelligent fanatics

and just only invest in those guys. But there is a lot of value there. You want to try? Yeah, I mean, you know, every microcap, long-only investor is an optimist by nature, and I feel like, you know, what keeps me up at night is still, like, excitement for the future. There's so many companies out there. There's so much stuff to find. I love the thrill of the chase and finding great companies early. So, you know, I get really excited doing that. I don't worry a lot about our holdings, but I do worry, you know, like we said

before, you know, there's always tells when a company is about to do bad right before it does bad. and if you're very, very close with the company, there's very, very many tells that the company is going to do bad, and there's an equally good amount of tells that the company is about to do good, and it's just about which ones you want to focus on. The tells that a company is going to do bad, it can vary so much, it can be the smallest things.

One thing that I found that has a really good hit rate of a stock about to go down, which is absurd to think of, and probably isn't going to work anymore, is if a company goes from announcing quarters, somewhat ahead of time. So for example, if they always like announce a couple weeks before the deadline,

or if they, what should recall, if they always pre-announced the quarter, and then they say we're not gonna do that anymore or they push the announcement until the end of the quarter, that usually means that they're waiting for positive news to hit so that they can make the quarter seem better than it was. That's happened in several instances that I can think of.

And it really shouldn't in my opinion, or I wish it doesn't because we were long, all of those companies that had happened. But, you know, just stuff like that. So it's always worrying about little gimmicks like that. You know, the other thing that does keep me up, and like if we had done, obviously this is a microcat focus conference, but if we had done this conference nine months ago,

I think, you know, anybody we mentioned Silicon Valley Bank and First Republic II would have thought those were unbelievable companies. And, you know, literally, with Silicon Valley Bank, literally you could have woken up Monday with a stock that was trading at $250 per share. And on Friday, you would have woken up and your stock was worth zero. And I guess one of the things I try to be ruthless about is it's not completely everything can, you know, a company could blow up overnight or something, but just trying to eliminate those, hey, go instantly to zero risk, trying to take out that real left tail of the portfolio side risk. And I think I've done a good job of that, you know, the ways you do that, avoiding companies with extreme leverage, though obviously if you can, you could take a small position in a company with extreme leverage and do really well if it works out. But just trying to avoid that overnight disaster risk where, you know, the truth is, if that happens to you, you took on way more risk that you probably took on way more risk in the company than you thought you were.

You probably misanalyzed it. So just trying to avoid that type of stuff. Any more questions? Yeah, we prefer right-tail risk where the company can go up five times in a day and we'll never go down. Which sometimes happens in microcaps, although not in this environment. You need something like 2020 for that. Michael, everyone knows the list that you have for buying companies. companies, what tops your list for not buying this company?

I mean, definitely red flags, so there's a lot of red flags. I did some work in the past actually shorting companies and finding companies that were good short opportunities. So there's a whole host of financial red flags, like the book Financial Shenanigans, has a great list of those things. Bad management teams are a really, really big issue in the microcure. in the microcaps space, there's a lot of, you know, people that are involved in downright criminal activities that play in the microcap space still. And, you know, they sort of try to hide them, like maybe their wife owns the LLC that owns the company or something like that, but inevitably, you know, it's fairly easy to find bad players in the microcps

space if you just look at their past deals and you sort of Google them. That's probably the biggest list to immediately ignore the company. Besides that, you know, we will entertain anything as an investment, the most important thing is finding a company that feels special. I think there's a lot of good companies out there and you can lose a lot of time and effort trying to find good companies out there and sort of stuff that will mediocrely chug along,

give you like 5% returns with a lot of volatility over time, and that stuff is just easy to get lost in. So we really put a high emphasis on something special and if after a couple conversations with management following a company for a couple of months, It doesn't feel like there's anything special about the business. The business is just sort of existing and growing and doing what they do as a normal operating business

without a big vision for the future, without unique assets, without a big transformation or pivot taking place and things that could happen in the future. Then that's usually a sign that the company isn't special. It doesn't have that special ingredient, that unique asset. And unfortunately, those, you know, we don't,

Michael, you mentioned the CEO hiding a relationship with his wife owns the LLC and that type of stuff. You know, one of the things I've been joking about recently is if I had never invested in a company that had a related party transaction, I would have done much better. And I know one company you and I have talked about in the past that you're long currently, we don't have to say this specific company. It has a lot of related party transactions that I think wrongly caused me to exclude it from what I wanted to invest in. How do you get comfortable, because in microcabs, most companies do have some related party transactions. How did you get comfortable in that instance that the related party transactions were kind of kosher versus a lot of others where they've got the related party transactions?

It's just the biggest red flag you can have. It's really about finding a management team that you know is honorable that's not going to screw minority holders. And you can very easily do that with related party transactions. The way you find that a manager team is honorable, it's really difficult. I mean, you can look up their past and see that their deals have done well. you can see that they don't participate in shady industries. You know, it can be something as simple as when you go to eat with them, they pick up their tab with their personal card, not with the corporate card.

And they don't do it for show. They just feel like that's the way that business should be done. That's the thing that ought to be done. If you can find examples where the management team could have exploited something somehow, but chose not to, that is usually a signal that the manager team is honest, and the related party transactions won't, you know, aren't a risk that people think. think they are. And that's an opportunity. Perfect. Well, I think we hit the nail on the head with our time limit. So we're going to thank all of you for showing up, listening to us Ramble. Look forward

to seeing you all throughout the conference. And we'll go for there. Michael, thanks for popping on this with me. Thanks so much, Andrew. A quick disclaimer, nothing on this podcast should be considered investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks. Thank you.