Trey Lockerbie (03:02):
So what’s interesting about that, as an entrepreneur, I look at that and I say if you were an entrepreneur and you started a business and you started growing that business and then all of a sudden, someone said, “Hey, guess what? Your business is worth $30 million.” You would be so stoked on that. You would be so excited. That would be a dream come true. You would be like, “This is the most incredible thing ever.” And yet in the public markets, no one cares. Like that is like the smallest of small potatoes ever, just to even qualify as a microcap stock. So since no one cares about these stocks, the liquidity just isn’t there it would seem and so that can create these really wide discrepancies in price and the bid-ask spreads, et cetera. Is the fact that they’re getting such a negative connotation around the idea of people trying to get out of these stocks and couldn’t and saw this bigger loss and so it’s become this narrative that, “Hey, you’ll experience more loss involved.” Walk us through I guess what is creating the narrative there?

Ian Cassel (03:55):
You know, that’s a very good question. I mean when you think about microcap investing, we’re investing in small emerging companies. And I kind of put small emerging companies, if you’re an investor, you kind of have three ways to invest in them, whether it’s venture capital on the technology side, There’s some private companies obviously, whether it’s just kind of more smaller private equity also private companies, and then there’s the public way to do that, which is microcap. Ironically enough, when you look at those two other ways to invest, whether it’s venture capital or private equity, the common public or retail investor doesn’t really have access or at least good access to those marketplaces. There’s some ways you can do so in the venture capital community today, but let’s just be honest, I mean even the venture capital side, it’s those top five venture capital firms that are getting the best deals, that are negotiating the best prices, that are doing the best deals quite honestly. You have to know the right people, you have to be at those firms, you have to go to the right schools, that type of thing.

Ian Cassel (04:51):
With public microcaps that are publicly traded, I mean that opportunity set is open to everybody, whether you have $500.00 in your brokerage account or $5 million or $5 billion, There’s oppurtunities precessed. The Interesting thing about microcaps being public and illiquid is it’s probably the only area in the small public or small company arena that really keeps the institutions out because they’re so illiquid. It’s much easier an institution investing $500 million, $1 billion plus to invest in these venture capital companies or private equity companies because they can be in control of the deal, they can mark the price, and they can buy the entire company in most cases. They really don’t want to buy 1% of a $35 million market cap company, it doesn’t really serve a purpose.

Ian Cassel (05:39):
So there’s this advantage to a small retail investor that’s astute, that knows how to read financial statements to find these really good companies that are unique, that are growing, that are profitable, that are small, because the institutions are kept out of them. The institutions can only buy them once their companies get larger, their stocks become more liquid, and then they can buy them. So it’s one of the only areas I think in investing where the small retail investor has a distinct advantage because the institutions are almost kept out of the city gates. You have this playground to yourself, and that’s what attracted me to it 20 years ago is somebody like me could get an advantage over other people, and I’m not the only one. I mean Warren Buffett, Peter Lynch, Joel Greenblatt, all these great investors, most of the great investors got started investing in microcaps because this is an area in their early years when they were imagining small sums where they could get an advantage over others, and that same kind of structural advantage still persists today and I think it might be why is this kind of space kind of broad brushed kind of as this sleazy ecosystem, I think it maybe is because they are mark to market everyday, they are public, you see the amount of failures, you see the stocks decline on a daily basis.

Ian Cassel (06:56):
And I would be one to say if the venture capital community had the same mark to market every day, you would see a similar type of chart pattern, where you have those power laws that persist even down here in small equities where 20% of the companies are probably going to be the next winners and the other 80% are not going to be, and so I think it’s unfair just because those great investors started here companies like Walmart, Amgen, Intuitive Surgical, Monster Energy, Netflix, even Berkshire Hathaway when Warren Buffett took it over was a microcap company. And I think historically, those companies would also be the best performing public companies ever. They started or came out of the microcap ecosystem and even on an economic level, I think this is probably a little dated, maybe five or six years ago, but when I had a CapIQ subscription, I actually added together all the employees of the microcap universe and it was like three or four million jobs which is more people than Walmart employees. So it’s a universe that also is impactful in the economy and it’s important that we support that.

Ian Cassel (07:55):
So a big part of kind of my public outreach, whether it’s on Twitter or through MicroCapClub is really just to remind people how important this ecosystem is, and it’s legitimate and it’s been around for a long time and those sustainable advantages still exist today.

Trey Lockerbie (08:10):
Right, but you just used the term sleazy with that ecosystem as like … That is just such an interesting word that I have to dig in on a little bit more. Is it sleazy because it’s prime for like pump and dump schemes? Do you find fraud more frequently in these stocks or is there some other sort of negative risk that goes along with it?

Ian Cassel (08:30):
Unfortunately I think most folks get their first entree to microcaps through some newsletter they get in their mailbox or inbox that promotes a 10-page glossy newsletter on why Company XYZ is the next Amazon, and then if you looked at the disclaimer, you’ll see that somebody paid $2 million for distribution of this newsletter and I actually tracked, I think I had a list of 42 that I received at my house and 100% of the time, within two years, they literally went down 99%, those companies.

Ian Cassel (09:02):
And so unfortunately I think, the public gets their first entrée into microcap investing from the very worst part of it. Those types of newsletters that produce like these companies that really have no chance, that are going to go down. And that’s why when people talk about microcap investing with me or when I talk to them about it, I always say, “Listen, when you look at the public company universe that are microcaps, around 16% of these companies are profitable. Focus on that 16%. If you just focus on the profitable companies in microcap, it gets rid of 95% of your issues.”

Trey Lockerbie (09:37):
Very interesting, and just more on that kind of idea of them being so small that the liquidity and the volume of trading could have such an impact. I’m kind of curious why we haven’t seen let’s say the Reddit community entering into the microcap space or if they have I’m not aware of it but obviously even GameStop was slightly above that. Maybe they were in that $500 million range at the time but do you see that happening at all in the microcap space where the retail raters are coming in and making some sort of impact?

Ian Cassel (10:06):
Not yet, but I certainly kind of agree with you, it wouldn’t be surprising to see them come downstream into microcap. Because more and more of these companies are actually uplisting in the New York Stock Exchange. A lot of them here in the United States, I would say probably over 50% of microcaps trade on the OTC markets, and so a lot of those Reddit crowd, they won’t participate in anything that’s OTC markets but they would if it’s trade on the Nasdaq or New York Stock Exchange. So I think it wouldn’t be surprising to see that activity pick up. We certainly see a little bit of it but not to the extent that we saw in GameStop or AMC or things like that.

Trey Lockerbie (10:39):
Well I love the idea of Buffett and Lynch and Greenblatt all getting their start in this space and it makes total sense that as they accumulated more capital, they just needed to put that capital to work in bigger companies, right? Now Buffett has that high class problem nowadays of hardly being able to find a company big enough, so that’s where he’s gone. But I’m curious, how did their performance in microcaps compare to the larger caps they’ve been investing in later on?

Ian Cassel (11:06):
When you look at the Buffett Partnership, I believe he started that in 1957, and when he started that partnership, I think it launched with around $100,000.00 in capital and so $100,000.00 in 1957 dollars is about $1,000,000.00 today. So Warren Buffett launching today would have launched his partnership at $1,000,000.00, and that partnership ran till 1968. By the time the partnership ended in 1968, I believe he had around $100,000,000.00 in capital in those dollars, which is around $800,000,000.00 today. Which is pretty incredible when you think about it, he went from basically $1,000,000.00 equivalent today to $800,000,000.00 over the course of 11 years in that fund, and in the middle of there, I believe it was … Some Berkshire zealot is going to yell at me. I think it was 1965 that he kind of bought control of Berkshire so during that partnership actually bought control of Berkshire Hathaway and Berkshire Hathaway even on an inflation-adjusted basis was a micro cap even in today’s dollars.

Ian Cassel (12:08):
But he started purchasing kind of large chunks of public companies and even a few private companies even in the mid 1960s. So his kind of entrée into microcap probably only lasted a few years because he was so successful, he quickly grew out of that ecosystem. When you look at his performance kind of over those first five or six years, I mean they were actually probably fairly equivalent to what he did over the next 10 years. Which makes sense when you think about it. If I’m the best varsity QB of my high school football team, hopefully I excel and become the best QB on the college team and things like that. So your performance can sustain at different levels and different market cap classes and that’s what the greats do. I mean they’re able to kind of continue on with their success, compounding those great rates as they go upstream and up market cap.

Ian Cassel (12:57):
So I think most of his microcap experience was the first five or six years, and I believe he compounded at 31% gross during his partnership years, 25% net, which was probably on track with what he did over the next 10 years once he was kind of going upstream a little bit further.

Ian Cassel (13:13):
When you look at somebody like Peter Lynch, I think he launched his fund officially to the public in the early 80s, and I think he had around a 22% average rate of return. So probably somewhat similar but a little bit better than what he did then when he was forced upstream because he went from matching $100 million in the early 80s to about $16 billion by the time he left. So he was obviously going upstream but he also increased the amount of positions that he was in. I mean he was in 1,200, 1,300 companies at a time by the time he was done, which is pretty amazing if you think about that being an active investor and being in over 1,000 names.

Trey Lockerbie (13:51):
Incredible. Yeah, back in 1999, Buffett said that he could still achieve 50% annual returns if he was working with $10 million or so. What strategies do you imagine he’d be implementing in that case? Would it simply be just concentrating heavily into these smaller companies I think like you are or are there like … Are we talking Greenblatt spinoffs and other kind of strategies thrown in there. What do you think the playbook would look like?

Ian Cassel (14:16):
I think it would probably be yes, concentrated. And again, he’s one of the smartest people on the planet. So you have to watch when you talk about concentration because everybody glorifies it but it is a dual-edged sword. But I think if Buffett was doing it today it would be a combination of probably small micro, small cap companies and probably doing something similar to what Brent Beshore does where it’s acquiring private small companies for two or three times cash flow. It would probably be some combination of that but concentrating in that approach.

Trey Lockerbie (14:46):
As you mentioned earlier, some small companies eventually grow up to be bigger companies. Netflix comes to mind, they IPOed a little over $300 million. What are some of the biggest success stories that you’ve followed from micro that have transitioned into macro?

Ian Cassel (14:59):
That’s a good question. I mean there are some big bulge bracket names like Walmart when it went public in 1971 as an IPO, it was a microcap. Intuitive Surgical was kind of like Netflix where it was kind of a larger microcap. Monster Energy in one of those Monster draw-downs that it had actually went down into microcap for a short period of time. Berkshire Hathaway like I said, I believe Celgene as well, and there’s a few other kind of life science companies that made huge runs over time.

Ian Cassel (15:28):
There’s also a bunch of companies that a lot of people probably haven’t heard of that I mean listen, you can 10x, 100x, and still be a relatively small company too. A company like XPEL, and the symbol is XPEL, that was a company that was profiled on MicroCapClub by one of our members at $0.25 a share back in 2012 or 2013 that hit $100.00 a share last year and so that’s the other thing that kind of attracted me to kind of the smaller area of microcap is because you can find a $10 or $20 million market cap company and if 10x’s, it’s still only a $100 or $200 million market company.

Ian Cassel (16:04):
But I think one of the other interesting parallels to this conversation is also illiquid micro caps. Roger Ibbotson, who’s a Yale finance professor, also runs Zebra Capital, he actually has a few whitepapers on illiquidity as a factor, and he did some work looking at all market cap classes, all liquidity profiles, going back to 1971 and in one of his reports, I think the most recent one that’s public is year ended 2017 or 18, but he updates it annually. But he has in there a matrix and it shows the best performing companies since 1971 and every year, since 1971, it’s illiquid microcaps. Not liquid microcaps, not mildly liquid microcaps, but illiquid microcaps versus liquid large caps, illiquid large caps, mid caps, small caps. Since 1971, the best performing kind of quartile is illiquid microcaps.

Trey Lockerbie (17:00):
Now what do you attribute that to because when I hear that, I think of the real estate analogy where most people’s wealth is from their home and that’s almost purely correlated to the fact that it’s so illiquid, they can’t day trade in and out of it so they just default to holding it for a long period of time. Is it something similar to that effect in this example?

Ian Cassel (17:20):
My theory, this is just my theory because I kind of experienced it during the financial crisis of 2008-2009, is the illiquid microcap segment is normally the not institutionalized area, they’re not in any ETF or anything like that, and so I think the main reason why that area of the market does the best is during draw-downs like the crisis or even what we went through with COVID, a lot of times those companies don’t perform as bad because they’re not up against institutional outflows. People aren’t saying risk off, pulling capital out of funds that own them or the ETFs that own them. So that’s my theory.

Trey Lockerbie (18:03):
What are your general thoughts on microcap ETFs? They’re relatively new and from what you just said, I’m coming up with this playbook of, “Okay, maybe we look at the holdings in those and then go elsewhere,” to the more illiquid ones. But I’m curious, what are your general thoughts?

Ian Cassel (18:18):
I think those microcap ETFs are meant to scale and microcap is not an area that’s really necessarily meant to scale. It’s really the ultimate stock picker’s universe. I think the worst way to own microcap is to own all of them, and when you look at the companies that are in those ETFs, I mean the iShares Micro-Cap Index, which I think the symbol is IWC, I believe owns around 1,500 microcaps, 78 or 80% of them are unprofitable and it’s really just a vehicle built to scale that hopefully catches some inflows or outflows and historically outside of last year, where it actually outperformed decently or did pretty well, it’s been really miserable over the course of time, the longterm performance of that index and I think that’s something you’ll see across the board in any microcap ETF that owns over 1,000 names. Because microcap is really meant for stock picking.

Trey Lockerbie (19:14):
You know, the psychology around microcaps is super fascinating to me. For instance, the fact a stock is a microcap doesn’t automatically mean it’s a value play, but for some reason, there’s this bias there. So case in point, when Tesla was ripping in 2020 to the point of it being worth more than like the entire energy sector, they did a five to one split, they went from $2,200.00 to $446.00. The stock then doubled from there, right? And then Alphabet just announced a twenty for one stock split going from $2,700.00 down to $138.00, and I would bet that something similar is going to happen, right? Just because people just look at the share price and say, “Oh, that looks more affordable to me. What a deal. It went from $2,700.00 to $138.00.” And they don’t pay much attention to the market cap, which I think is a huge issue. I’m curious if you have any examples of a microcap stock that you consider to become insanely overvalued.

Ian Cassel (20:12):
That’s a good question. I mean overvalued is in the eye of the beholder in some ways. I mean I think what you do see is overvalued sometimes is just purely a story stock that has no revenues, has really nothing. Maybe it’s promoting some IP that it has or a technology that has yet to sell that sells for $100 million, $200 million market cap. But then again, you can say the same thing that’s what the venture capital world is in the business of doing too, having companies that have no revenues trade at a billion dollar marketplace.

Ian Cassel (20:41):
So it’s hard to think of any single company that comes to mind as overvalued. I think what you said earlier about people not understanding the difference between market cap and stock price also occurs down here. There’s a lot of people that look at a $0.25 stock and think, “Well that’s cheaper than this $5.00 stock,” and not realize the market cap is actually bigger on the $0.25 stock than the $5.00 stock, and that’s why it’s important to understand how to just look at simple things like the amount of shares outstanding and the fully diluted shares outstanding so you can get a feel for what the business is actually worth.

Ian Cassel (21:13):
So I certainly see a lot of that down here in the microcap universe as well, but kind of the other thing to your point, I think we’re in an incredible time period where the largest companies in the world are just … I mean just the operating performance that they continue to put out is incredible when you see the largest companies in the world still growing 30% a year with 30% operating margins. There’s a reason why they’re being valued where they are. It’s just the operating performance is incredible.

Trey Lockerbie (21:42):
Yeah, you mentioned earlier that you would want to focus in on profitable microcap stocks. I actually found that surprising because since they are more enterprising, then you think you would focus or weight profitability a little bit less, right? Because they’re probably reinvesting a lot of capital, trying to grow and get bigger. Why are you saying that we should be more focused on profitability in the case of these younger stocks we’ll call them?

Ian Cassel (22:07):
I think the newer you are to microcap investing and understanding financial statements, the more important it becomes to focus on the profitable segment. Strictly talking about the new investor looking at microcap, I think the bigger issues you face are when you invest in unprofitable businesses. Because unlike the private equity and venture capital world where they’re flush with capital and resources, it’s actually pretty hard for a microcap company to raise capital effectively and I’ve seen it time and time again, a thousand different times in a thousand different ways, a small microcap company be ineffective in raising capital and the way they raised it completely destroyed shareholder value and so my biggest risk as a microcap investor is dilution, and so I’m really trying to find those companies, even today, even though I’ve been doing this for 20 years, I do invest occasionally in some unprofitable companies but it’s really because I think they’ll be inflecting profitability within 24 months and they have the balance sheet to get there. But for the most part, your biggest risk is dilution as a microcap investor. So I think focusing on profitable companies that don’t need to raise capital is the best way to go.

Trey Lockerbie (23:14):
Now how often are you finding that with these microcap companies, the actual founder is still attached to the business, and if you do find that, is it any sort of advantage in your mind?

Ian Cassel (23:26):
I’m personally attracted to founders for a lot of the same reasons other people are as well because they built the business and it is more prominent in small microcap companies that the founder is running those businesses. Which is probably another reason why I like microcap investing, it’s not unusual that most of these companies, there’s 10, 20, 30% ownership by that founder. And it’s one of the reasons why in 2016, I started working with Sean Iddings and we wrote two books on intelligent fanaticism and basically what I believe is the smaller the company, the more important management becomes, the more important the CEO, the board, the people that is around he or she becomes, and so I wanted to drill down on that even more, so in 2016, me and my co-author Sean Iddings, we wrote two books, I have one here called Intelligent Fanatics Project and intelligent fanatics is a term that Charlie Munger used to describe an entrepreneur that built something from scratch and build it into an organization that not only grew up to be a larger company but became dominant in what they were doing, in their geography, in their industry, globally even. And not only became dominant, they sustained that domination over decades and I was always interested in what type of caliber person or what quality or traits did the individuals that founded those companies, how did they create a business like that.

Ian Cassel (24:47):
Because a lot of these companies were in industries that were highly competitive. Maybe they were in commodity businesses, they didn’t necessarily have a product that was just better than everybody else. We took some of the intelligent fanatics that Charlie Munger mentions in his speeches, and we kind of dug into their past and kind of rewrote their stories, their personal and professional stories and tried to pull out some lessons from them and it was a fun project for me because I really just wanted to fine-tune my qualitative lens for investing and we had so much writing the first one we wrote another one and we cover I think eight intelligent fanatics in the first book, another nine in the second book, and then we actually brought in some interns from India to write one for India, looking at entrepreneurs in India.

Ian Cassel (25:27):
So it was actually three books out by us, and so I think for me, I’m attracted to founders. A big part of my time is trying to find those great leaders that have these intelligent fanatic attributes in them. That’s why I spend a lot of time talking to management as part of my investment process.

Trey Lockerbie (25:44):
I’d love to explore some of those attributes. What you just said kind of reminded me of a couple of things. My interview with Brent Beshore, he mentioned that you’re looking for founders who are in it for the right reasons and also they don’t need the money anymore. So I think about Berkshire Hathaway as well, all of the executives there could have retired many times over, they’re all wealthy people, but yet they want to roll out of bed and go read 10Qs every day. So do you find something similar with the attributes you’re exploring with these founders? Are they just passionate? Walk us through the attributes.

Ian Cassel (26:17):
Yeah, I mean, and it’s no they need to have all eight of these, I wish it was that easy, you can still fail and have these attributes, business still takes luck. But I would say the number one thing that I picked up on that I really applied after doing the research was the part about constantly putting great people around them. I run into, and Brent Beshore uses this term too, and we connected on a lot of levels because he kind of does what I do but in the private universe, but he uses the word hustle. Like he finds a lot of businesses that are a two or three person hustle, and you can scale a hustle up to a $2 or 5 or 10 million business. But it will always just be a hustle unless you put great people around you that will allow you to scale the business, and you run into that a lot with microcaps as well.

Ian Cassel (27:05):
You can find quite a few companies that are good businesses even, but they’re actually limited, the ceiling is that founder because he will never let go enough to bring in great talent around him or her, and I don’t want to invest in hustles. I’ve done that before and you can even do that profitably, but I want to invest in something that could be a $10 million revenue company go to $100 million, go to a billion, and for that, you need to have somebody that puts great people around them and so probably the biggest thing from the book that I’ve applied today is really doing a lot of analysis on the people that the CEO has around him or her and their operations and doing interviews with them. Are these people truly unique? Are they the best? And what I don’t want to see is a bunch of yes men or women that are around the person. That’s probably the number one thing I took from the book was that because honestly, I put too much emphasis on studying the person themselves, going into this research, and going out of it, it actually was probably spending less time looking at the person and more about the people around them.

Trey Lockerbie (28:04):
Yeah, interesting. The Jim Collins quote, a genius with a thousand followers kind of comes to mind and when he did his research, he found that actually those leaders performed worse off than the others who were more democratized. Very interesting, I want to explore your strategy a little bit further. As I understand it, you run a highly concentrated portfolio or at least you used to. I love the quote that concentration creates wealth and diversification maintains wealth. Do you think there’s truth in that and as you have accumulated more capital and even launched a fund now, do you consider diversification more?

Ian Cassel (28:41):
Yeah. I’ve also been concentrated. A little bit of my backstory in two minutes was I got introduced to microcaps when I invested in a few technology companies during the dot com bubble in the late 90s. They quickly went up and then they quickly went down when the bubble burst, and those companies became microcaps. So that’s how I kind of got introduced to them and I think when you lose money like I did quickly, it either motivates you or demotivates you and for me it just kind of motivated me to dig into this ecosystem and I found this wild world of microcap investing and back then all the activity on small microcap companies was on public message boards like RagingBull and InvestorsHub and Yahoo Finance message boards, and the reason why all the activity is there is the investor base of most of these small companies is mainly retail, and so that’s where people would go to connect and share research and that type of thing and so for the better part of 10 years, I was on public message boards and I met a few mentors on there and that type of thing and through some luck and some skill I was able to become a full-time private investor in 2008 during the depths of the crisis.

Ian Cassel (29:47):
And through all that kind of investing through two ups and downs in the marketplace kind of zeroes you in on what strategy works well and for me and my strategy, I would say it’s kind of characterized as I’m trying to find unique businesses that there’s not another one like it out there that’s public and so the formula I like to use is kind of this combination of tailwinds, scarcity, story, and undiscovered.

Ian Cassel (30:14):
That’s kind of the top level framework I use, and so for me, tailwinds is important in a business because it’s a lot easier to operate a business when there’s a tailwind instead of a headwind. And I kind of compare it to the jet stream going from west to east in the United States, when the jetliners utilize that jet stream, it takes like an hour or two off the time that it takes to go from L.A. to New York, and that’s how I would invest too. And so I’m trying to find these businesses that are in this tailwind, Josh Wolfe of Lux Capital kind of I believe refers to it as an inevitable arrow of progress, kind of like how it went from mainframe computers to personal computers to laptop computers to one you have on your phone to one you have on your wrist. Probably going to be implantable. It’s kind of undeniable progress and so I’m trying to find kind of things that fit that where it’s a lot easier to invest when you’re in a tailwind.

Ian Cassel (31:11):
The second thing is kind of scarcity and scarcity is I think one of the most unique parts of investing, it’s one of the most powerful things that drives price. So scarcity is when demand outstrips supply and prices are forced to go higher. I think the most extreme examples of this is kind of when you see consumer demand hitting a single product category, like Tickle Me Elmo or Beanie Baby bubble, that type of thing. I mean I’m not interested in finding the next superficial bubble, but I think the same thing happens to unique businesses that are public when there’s not another one out there that’s like it and institutions want to get exposure to that area and that type of business, that’s where you get these undervalued situations that can trade at overvalued prices and I want to find undervalued companies that can get overvalued. I’m not a deep value investor, I don’t want to find something that’s undervalued that can get less undervalued. I want to get something that’s undervalued that can get overvalued and great businesses always become overvalued because there’s a scarcity of them, and so I just want to find those types of situations when they’re small.

Ian Cassel (32:17):
When I first got started investing, I was mainly a story stock investor believe it or not. I wasn’t really looking too much at fundamentals. Now we just try to find these things that there was another company out there like it, there was a tailwind, and it had a great story, and so actually a good example of this is a company called Quepasa which was a Mexican social network 10 years ago and it was the only public social network that existed 10 years ago, it was before Facebook went public. And that stock went from $1.00 to $10.00 simply because institutions needed exposure to this new thing called social networks, and it just propelled that stock to ridiculous valuations because it was the only one of one. And so that’s kind of the dynamic I’m going to fine, just combining fundamentals with it, not just hype, and I’m going to find like I said one with a good story and one that 100% of people will gravitate to, where it’s easy to find the incremental buyer of a story because it’s something you and I would believe in.

Ian Cassel (33:10):
So you kind of combine that with undiscovered, which is quite honestly, I mean most of my microcaps are undiscovered, so that’s the easy one. That’s kind of the last piece of it, and so just trying to find things that institutions don’t own because not necessarily for the upside, but during those time periods of 2008-2009, institutions can’t sell what they don’t own. And so a lot of times you’re safer in situations like that as well during the bad times. And so that’s kind of like a top-level framework.

Ian Cassel (33:37):
When I first started investing, I was in two or three companies and that’s how I built my capital from I would say 2000 to 2007, 2008, literally in two or three companies. And today, as my capital has grown and now I manage outside capital, it’s still very concentrated in I would say eight to ten, seven to nine, something like that, depending on the opportunity set. So I’m still very, very concentrated and I look at the full ecosystem. It’s not just the United States, Canada, but also the U.K. and Australia. There’s dynamics in those other geographical locations that make it very interesting as a micro cap investor. Where here in the U.S., quite honestly, there’s less and less great opportunities going public small that have real businesses attached to them, but in Canada, in Australia, those markets still have really interesting companies that are going public, You know as a $25 million revenue company growing 30% a year that’s profitable. You still see those, and so it’s important, unlike 10 years ago, that a microcap investor is not kind of landlocked to their geographic location. Because that’s what brokerages allow you to do. You can buy stocks in any market now.

Trey Lockerbie (34:46):
And how do you sleep at night, being that concentrated?

Ian Cassel (34:50):
It’s all I’ve ever done. So I was more concentrated before, but it’s also like a big part of my strategy is just knowing these companies better than most other investors because that’s what’s going to save you from the losses and that’s what’s going to keep you in these things to hold the gains. Because that’s the key to investing. You want to sell your losers as quick as you can and hold your winners as long as you can.

Trey Lockerbie (35:10):
I have some curiosities around you becoming a full-time independent investor in the trough of 2008. Because that’s a very interesting time. Obviously a very opportunistic time to get into it. Were you able to sidestep the decline there and you found yourself kind of flush with cash, ready to put it to work in that instance or what kind of led you down that path and then my second question would be how do you live off of that? How do you peel off cash from these positions just to cover overhead over time?

Ian Cassel (35:39):
Good question. So probably by, so what happened, a little bit of my chronological order here, was in undergrad from ’99 to 2003, went right into grad school, 2003 to 2005, and I kind of fell in love with microcaps kind of in the middle of undergrad and I went right into grad school because I got into an assistantship that paid for my tuition and I kind of viewed that as a socially acceptable way to kind of waste time and hone this craft by going to graduate school to be honest with you. And so after that, I still didn’t have enough capital saved, but I was still learning. I had a few mentors, I was starting to visit companies pretty regularly by then. I actually had a system down to where I would go visit a company like on a Friday and I could get back by classes on Monday morning and I had it all figured out. So it was quite a fun time.

Ian Cassel (36:28):
Then I did some consulting from 2005 till around 2007, and then around 2007, I felt I had enough capital that I could just quit doing consulting and just live off my own balance sheet. But I really didn’t feel comfortable doing so because I didn’t feel like my strategy was tested through a bear market, not knowing that one was right around the corner. And when the bear market hit in 2008, I was not unscathed. I was in three companies, like I said, I was very concentrated. Two of them went down 55 to 65%, which was probably fairly normal from peak to trough. The other one went up to 280%, and the one that went up 280% wasn’t some triple bull-levered gold ETF, it was actually just a fast-growing technology company that was profitable that institutions didn’t own. And that kind of really drilled into my psyche that even in a market like 2008, when things were really bad. Even during that time period, institutions are still attracted to great businesses they don’t own. Because that company went up 280%, even while the market got flushed out. And all those companies that were down 55 to 65%, they were still high quality and all of them made up those losses in about four months in 2009.

Ian Cassel (37:47):
And so I decided to cut that cord, it wasn’t like it was in the beginning of 2008, it was at the end of 2008, when I felt like, “Okay, a lot of those ones that were down 65% already troughed by that point in time,” and I just felt like, “Okay, now I feel like I can do this.” So that’s when I decided to kind of like cut the cord of the consulting I was doing at that point in time, and then just make a go of it being a full-time private investor. But I also think it’s important to point out I was single, I live in Lancaster, Pennsylvania, which is the heart of Amish country, the cost of living here is very low. I was not living in Manhattan in New York where I needed $25,000.00 a month to cover my expenses. Here in Lancaster, I had it down to where I just needed $1,300.00 a month because I was single with no responsibilities, that type of thing. So it’s a completely different situation than what other people might be going through or if I was going through it now, quite honestly, now that I’m married with two kids.

Ian Cassel (38:38):
When it comes to paying bills, it’s not easy. It’s mentally draining, more so than the money it takes to pay bills is selling stocks to pay bills, and it’s one of the bogeys that I used for when I wanted to go full-time quite honestly was what is the amount of capital where I could sustain two 30% down years in a row and I wouldn’t feel like I’d have to change my entire strategy or approach. I wanted to be able to get punched in the face and still be able to move forward using the Rocky term, and so for me, that was kind of my bogey for when I wanted to pull the trigger in going full-time was when I knew I could sustain a couple punches and still not have to change what I’m doing.

Trey Lockerbie (39:18):
In that example though, do you put any emphasis on microcaps that are producing dividends? Do you put any kind of weight on dividends at all for that reason? Or do you even find any microcaps that are producing dividends? I mean is that a factor at all?

Ian Cassel (39:33):
For me back then, no. No, there was no dividends. I was strictly looking for high growth rate, profitable microcap companies. There are microcap companies to answer your second question, there are microcap companies that pay dividends. You have to watch out because some of them aren’t sustainable because they’re small, impressionable businesses.

Trey Lockerbie (39:52):
A lot of this micro strategy conversation is just bringing up a lot of VC analogies in my mind and I’m kind of curious, I mean so many companies like you mentioned earlier are choosing not to go public because they’re getting eaten up by VC and even PE, and I think that has to do a lot with just the fact that those firms get a lot more control over the company. It’s not even the capital, it’s the terms that go along with it. Do you find that in the microcap world, there’s more activism in a similar fashion where people are coming in, trying to take more and more control of the company just maybe because they can?

Ian Cassel (40:28):
The part about activism, I believe 65 or 70% of all public activism happens at the microcap level. So I think that is a big part of … I think you do see a lot of that in microcap and I know lots of activist fund managers, that’s what they do. That’s not how I invest, I’m not an activist when I get involved. I try to look for good situations that can become great, not bad situations that I can make a little bit less worse. I believe the last time I checked, worldwide there was 63,000 public equities and I think around 30,000 are microcaps as defined by U.S. but a lot of times in those markets too microcap is defined differently. Like India for example, a $600 million USD market cap company in India is actually like a mid cap. So you kind of have to watch how you define things, but yeah. I would say probably the rule of thumb is probably 40%, 45% of all public equities are microcaps. And there’s 8,000 in the U.S.

Trey Lockerbie (41:22):
All right, so there’s 8,000 microcap stocks just in the U.S. How are you sifting through a universe that large? You did found MicroCapClub where a lot of members are making recommendations, doing the analysis, creating conversations, dialogue. I imagine that’s become a big resource for you but even in the early days, I mean how are you sifting through all of that and coming up with opportunities?

Ian Cassel (41:48):
You know in the early days, I wish I could tell you, “Oh, well you just subscribe to MicroCapClub and that’s all you ever need.” No. It’s one tool in the tool set to find ideas, so MicroCapClub would be one and just a quick thing on MicroCapClub. That’s a site I started in 2011 to be a tool for my personal investing and I just wanted to get other smart investors in this niche of investing in a private forum, discuss what we liked and why. And so that’s what that is today, it’s a private forum, there’s around 300 active members from around the world and really just our mission is trying to find the next Walmart, Amgen, you name it, those types of companies.

Ian Cassel (42:25):
And really proud of the efforts of the club. It’s not a guru service, it is not a sign up to this and we’ll give you 10 stocks to go buy today. That’s not what we’re about. It’s all about idea generation. There’s probably 10 to 20 new ideas a month that are posted on that forum, and so we have a pretty good record of picking winners. I think since 2011, so we hit our 10 mark earlier this last year, I think we’re up to 241 companies that were profiled by our members have doubled or more since they were profiled, and that’s not some high water mark or high tick, that’s actually from where they’re profiled to where they closed last month, and that’s a pretty cool metric because there’s been about 800 companies that members have profiled over the last 10 years, 240 of them have doubled or more, which is pretty cool.

Ian Cassel (43:11):
But anyway, to answer your other questions. So that’s one way. The other way is just simply networking with other investors which I’ve been doing since … For the last 20 years. Another great way, but a lot of people don’t do it, is just brute force A to Z. Going through all public companies. It sounds tedious, but that’s what it takes, that’s what I did originally back in the early 2000s, that’s what I did last year in the U.K. I literally went through 1,100 companies on the London AIM Exchange, A to Z. Because that way, you’re not missing anything. And a lot of times that’s your edge as an investor is doing the work, going through a mountain of uninvestable ideas, trying to find that great one. Like that’s your edge, it’s because of your willingness to do that when other people aren’t.

Trey Lockerbie (43:53):
It’s like Buffett with his Moody’s book, scrolling through-

Ian Cassel (43:56):
Exactly.

Trey Lockerbie (43:56):
So in that case, I mean why not use a screener nowadays to filter through … I’m sure you have certain metrics that you like to find in stocks, why not use a screener?

Ian Cassel (44:07):
I do use some screening but not in the traditional sense and what I mean by the traditional sense is I don’t do a screen for let’s look at every company under a $300 million market cap that has over $30 million revenues, that’s growing 30% per year, that has over 65% gross margins, that has insider ownership over 15%. You can go down through that list and you’re going to be left with 100 companies. And that’s the same 100 companies everybody else is looking at. I would rather do a screen that is a screen for insider buys or rights offerings, which is another … It’s a fancy word for insiders putting more money into their company, because that usually is alerting you towards a transformation in a business, and so those are the types of screens that I like to use because it’s triggering me to something happening in that business. And so those are the types of screens that I do more readily than just those fundamental screens.

Trey Lockerbie (44:58):
Now once you’ve done a screen like that, do you find that you then default to some circle of competence that you like to stay within? Are there any industries that you say, “Nope, that one’s not for me.”

Ian Cassel (45:11):
I’m fairly generalist. I would say I don’t invest in utilities, but I don’t think there is a utility that’s a microcap. No that’s not true, I think there are a couple. But no, I mean pretty much any industry is open to what I’m looking for, and really the way I invest is different than other people. It’s just like in large cap, you’ll find value investors, growth investors, people that focus on life science companies, people that focus on mining companies, people that focus on momentum or whatever. If you can find those same types of investors just focusing on the smaller segment, and so the way I invest is different from somebody else.

Ian Cassel (45:44):
So kind of my four hurdles for investment are number one, is this a business that can grow through a recession? It’s more of a qualitative type of hurdle, and when you put just that type of framework around the ecosystem, that gets rid of 95 to 98% of the companies that are publicly traded. Number two, do they have a balance sheet that can weather a storm where they can also act with occasional boldness, like during the COVID trough or a financial crisis when their competitors are going under, can they take advantage of that situation? Number three, is that management team showing signs of intelligent fanaticism? Are they showing those attributes that we’re looking for? And number four is on valuation, is this a business that I think can fundamentally be worth double where it’s at today in three years? Kind of supporting a 25% CAGR over the longterm.

Ian Cassel (46:32):
So those are kind of those four filters that I kind of look at every business through, but those aren’t going to be the same ones that other people will, and that’s fine. There’s a lot of ways to win in investing as you know.

Trey Lockerbie (46:44):
Yeah, surviving through those downturns is super interesting. You mentioned that sometimes microcap stocks are less affected because the institutional money isn’t in them to begin with, so therefore they’re not selling out and this analog came to mind for me in real estate where when I was looking at homes during 2008, the average home price went down 50% unless you lived in Los Angeles where I live and it was only 25%. I found that very interesting. That was for homes over $1,000,000.00, but you get the point. So is there something similar here or some metric where in downturns, microcaps historically have only gone down x% versus y% in other size caps?

Ian Cassel (47:22):
What I would be interested to know is based on kind of those criteria I outlined, how did they perform through a downtrend? And I haven’t done that work as a whole. I don’t have the resources to be able to pull that off. You can pull off what like the IWC, the ETF does through … It’s going to do worse than everything else. So you can kind of pull out the generate data but I’d be interested to know how kind of types of situations that I look for have done, I don’t know unfortunately. I had my instance through 2008-2009, but that’s a sample size of one.

Trey Lockerbie (47:56):
I talk a lot about Buffett because he’s my main reference, but going back to that visual of him scrolling through the Moody’s book, I mean it’s basically said that he was essentially doing the calculations in his head as he’s going through that book and even nowadays he’s got that too hard box on his desk to discard things that are out of his circle of confidence if you will. I’m curious to know how much your strategy is quantitative versus qualitative. So once you are going through even A to Z like you mentioned on these stocks, are you modeling things out, you’re visiting these management teams so I imagine there’s a lot of qualitative that goes into it. What does the balance look like between quantitative and qualitative in your strategy?

Ian Cassel (48:36):
It’s probably 50/50. When it comes to modeling and pulling out Excel, I’m probably a big fan of Peter Lynch, crayon and napkin type of thing. That’s what I’m doing, obviously a little bit more detailed than that, but I would say it’s probably an equal mix of quantitative and qualitative. I mean one of the things I did early on, depending … We all go through this maturation process as an investor, and when we start out as investors, we’re probably overly focused on fundamentals and financials. That’s why everybody starts out as a deep value investor because it’s all they know. It’s easy to just scrutiny for that or look at financial statements. And then you kind of move from that to maybe looking at management teams and then you overemphasize that area, thinking that, “Oh right, I found the next Henry Singleton, he knows how to allocate capital,” and you kind of overly emphasize that area and then you overemphasize a certain industry and so I find like the maturation process of investors just all about kind of educating yourself in a new area, you end up overemphasizing this area too much, you end up stepping back, realizing that it’s all a piece of a massive puzzle and everything should be emphasized equally.

Ian Cassel (49:43):
And I’ve done that so many times throughout my career where I overemphasize the importance of these little nitty gritty details on a leader or what he did, well he’s paid $10,000.00 a year too much or something like that, he’s not investible. Stuff like that. Where you have to step back and see it as a whole picture and so today I would say it’s much more equal because of 20 years after doing this, and my investment strategy today is made up of all those past experiences. I started as a story stock investor and so story is still important to my strategy today. I’m going to find these businesses that have a great story. I’m going to find businesses that have a great leader. I’m going to find businesses that are unique where it’s one of one, where it’s not another … It’s not the thousandth company marketing a product a little bit differently, hoping to gain share. I want to find businesses that are scarce where there’s not another one or two … Hopefully there’s only one or two other public ways to play in that business or trend or industry.

Trey Lockerbie (50:36):
That idea of scarcity is interesting to me because it kind of flies in the face of something we’ve discussed on this show before when it comes to smaller companies which is optionality, and maybe I’m misperceiving this, but the way you described it, it sounds like you’re looking for things that almost have a monopolistic application or product instead of having a product or service that is highly optional and they might be able to branch off and do lots of different things even in different industries perhaps. Am I getting that right or is optionality part of the strategy in some other way?

Ian Cassel (51:09):
Absolutely part of it, the optionality. Scarcity, it’s mainly just trying to find those very unique one of a kind businesses or situations that’s out there. That’s mainly what I mean by scarce and even scarcity down to the share structure. I found that the best leaders treat their shares like gold, they don’t dilute a lot. And so I love … Scarcity even goes down to the illiquid stocks, well there’s a scarcity of shares. So every incremental buyer, if they want to buy that stock, the stock’s going to go up because there’s not enough shares at this price. And so scarcity kind of falls under the full gamut of a quality business even down to the share structure of a company, the leader and everything. But I certainly look for optionality. I love it when there’s two or three ways to win.

Trey Lockerbie (51:55):
When Buffett and Lynch and these guys were running highly concentrated microcap type of portfolios, there was actually high turnover. A lot of people think of them as the buy and hold forever types but there was actually some high turnover and the performance didn’t seem to suffer from it. So is that something you find with your own portfolio as well, where the turnover might be higher than normal, maybe it’s just less of a buy and hold strategy per se, but the performance isn’t hindered in the same way?

Ian Cassel (52:22):
Yeah, I mean I think in today’s day and age there’s been sort of this over-glorification of just buy and hold investing, even by active managers, and I think it’s partly because of the rise of private equity and venture capital. Everyone’s trying to invest in public markets with the same kind of permanent capital kind of mantra. And I think also, I think when it comes to active investing and stock picking, I think it sounds more cerebral and thoughtful when you appear to do all the work upfront and then you’re just going to park it, you sit it and forget it. It makes it look like you did just a mountain of work and you’re so convicted in this name. When you look at somebody like Peter Lynch, he had I think 200 or 300% turnover per year. Warren Buffett had 50 to 100% turnover per year for the first 30 years of his career. Even when you see him updating his public holdings, he’s not sitting there. There’s changes being made constantly, and especially as a microcap investor, we’re investing in small, emerging companies. In many ways, we’re trying to find the next Tom Brady when he’s playing in high school.

Ian Cassel (53:32):
So it’s similar, it’s like an NFL scout trying to scout talent when they’re from a college team or a college scout trying to scout talent from a high school team. That’s what we’re trying to do, we’re trying to … I’m trying to find the next small cap company in microcap land, and I know I’m not going to be right all the time. And so there’s always going to be this turnover to where I’ll do as much due diligence as I can, it has all those attributes I like to see, I’m going to put it in the portfolio and I still know I’m going to be wrong 30 or 40% of the time and like I said before the key to success in this business is selling those winners as soon as you can and holding those winners as long as you can.

Ian Cassel (54:08):
And so that’s how I view turnover and so because these are small emerging companies and they’re impressionable businesses, I kind of compare microcap investing to watching your three-year-old kid. You’re not going to let your three-year-old in your living room or let them in your house alone for very long or else they’ll burn your house down. That’s t he same thing with microcaps. You have to stay on top of these companies because things can change in an instant. It’s your initial due diligence that gets you into them but it’s that continuous maintenance due diligence, keeping the pulse on that company, that is going to save you a lot of pain and losses and also keep you in them. So turnover I think is always going to be a part of a successful microcap strategy. I think if you coffee can microcaps, you’ll go broke.

Trey Lockerbie (54:53):
Very interesting. Last question for you, now that you are running a fund after being independent for so long, I’m curious what kind of drove that decision and led you to take on other people’s money at this point?

Ian Cassel (55:04):
Sure. So I’m 41 now and so in 20 … Yeah, I guess it would have been three, four years ago. I’m sitting here in the corner of my house which is where I’m at now and I could keep doing this for another 10 or 20 or 30 years but I’ve been doing this for 20 years, and I just talked to my wife about it and we prayed about it and we’re like, “Is this all there is you know, I continue to do this,” but I also run into people all the time that say, “Hey, I love what you do. I’d love to give you some capital,” and I always said no because I always say no, and then something about … Maybe it’s a midlife crisis, I just said, “You know what? Maybe I can do this.” And so I started thinking about it and put the pieces together for it and decided to kind of raise a small amount of capital and start matching some outside capital. That’s what I started doing in 2018 and now we match capital for about 60 families that kind of want some exposure kind of to the way that I invest in microcap companies.

Ian Cassel (55:59):
And it’s been great. I kind of did the opposite of what other people do it where they start a fund, they build up a huge ownership in the GP and then they just give all their investors’ money back and just manage their own family office. So I kind of did it differently where I just kind of started from nothing, became a full-time private investor, and now I’m managing a fund. Kind of did the opposite. It’s been great, and I’m glad it turned out this way because one of the other advantages to MicroCapClub for me is the talent that is on there. If Buffett, if Lynch, if all these folks started in microcaps, it’s not too farfetched to think the next great investor is a microcap investor today and that MicroCapClub community has some of the best investors on the planet. Some of them are 17, 18, 19-year-olds that spend 28 hours a day searching for great companies.

Ian Cassel (56:48):
And so being able to leverage that talent, creating those networks. I have a full-time analyst with me now who’s the youngest member to ever get into MicroCapClub at the age of 15. Just being able to utilize that talent is just huge, and so our mandate as a fund, we were first kind of North America, now we’re Australia and the U.K. I don’t want to find the best small public companies in North America, I want to find the best small companies in the world. And that’s the goal here, and obviously we’re concentrated in eight to ten holdings, and so our hurdle rates are high. But it’s been a lot of fun, and it’s been a great challenge, and it’s not without its difficulties but it’s been a blessing.

Trey Lockerbie (57:24):
Yeah, I mean one of my other questions on that was just why not structure it as an ETF but I mean even ETFs I think you have to hold a minimum of 20 something holdings, so probably just not concentrated enough. Is that correct?

Ian Cassel (57:37):
It is. It’s too difficult and what I do is not scalable. We run a small amount of capital and not to say, I don’t want to put limitations on myself because I think if we are successful we will look more small cap than microcap in five years. What I do is really that scalable, it can’t just take on an influx of $100 million tomorrow.

Trey Lockerbie (58:00):
Well Ian, this was so much fun. I really enjoyed our conversation. This was a great first time to have you on the show. I’d love to have you back more, so before I let you go, I do want to give you the opportunity to hand off to the audience where they can find you. I know you’re on Twitter and some other places, MicroCapClub, et cetera. Just give a handoff where people who might be interested to follow along.

Ian Cassel (58:19):
Sure. Yeah, you can find me on Twitter, my handle is my name, Ian Cassel. You can find me on microcapclub.com. My capital management website is www.if.capital, and so you can find me on all three of those locations and I appreciate sharing my journey a little bit with you and hope I’m back on. I really enjoyed it.

Trey Lockerbie (58:38):
All right everybody, that’s all we have for you this week. If you’re loving the show, please don’t forget to follow us on your favorite podcast app. Definitely reach out to us. You can find me on Twitter at Trey Lockerbie, and if you haven’t already done so, be sure to check out all the resources we have for you at theinvestorspodcast.com. And with that, we’ll see you again next time.

Outro (58:55):
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