Ian Cassel – Investing In Tiny Stocks - [Invest Like the Best, EP.24]

My guest this week is Ian Cassel, a microcap investor who is always on the lookout for small companies which are run by men and women who are what he calls intelligent fanatics. Ian’s livelihood is based on the success or failure of a small group of companies that you have never heard of—he takes the idea of “skin in the game” to another level. We explore what Ian looks for in managers, why investors might want to invest in microcap companies, and the benefits of a frugal approach to life. Buying public companies that are as small as the ones which Ian considers is an entirely different style of investing than what most of us are used to in the public markets. Please enjoy! For comprehensive show notes on this episode go to investorfieldguide.com/ian/ For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

  This podcast is sponsored by CFA Institute, the global association of investment professionals whose mission is to lead the investment profession by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals, working to build an investment industry where investors' interests come first, financial markets function at their best, and economies grow. The Chartered Financial Analyst credential is the most respected and recognized investment management designation in the world. The views expressed in this podcast do not necessarily represent the views of CFA Institute. Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best.

• 0:43Patrick O'Shaughnessy?

  This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

• 0:59Speaker 01

  Patrick O'Neal is a principal and portfolio manager at O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 1:21Patrick O'Shaughnessy?

  My guest this week is Ian Castle, a micro-cap investor who is always on the lookout for tiny companies which are run by men and women who are what he calls intelligent fanatics. We discuss what Ian looks for in managers, why investors may want to consider micro-cap stocks as a category, and the advantages of a frugal approach to life. For show notes on this episode, visit investorfieldguide.com/Ian. And now, please enjoy my conversation with Ian Castle.

• 1:53Patrick O'Shaughnessy?

  Well, Ian, thank you very much for doing this with me today. We're going to cover some interesting, uncharted waters for the podcast, specifically the micro-cap, public micro-cap investing space, which will be a lot of fun because, obviously, it's a part of the market that is probably not even a part of most people's portfolios. It's a very small, the collective market cap of all microcaps is like one mega-cap stock. So it's often the case that these companies are undercovered. But I want to start with this idea that you have, it's also titled a book that you wrote called Intelligent Fanatics. And maybe a fun way to do it, since I just finished the book, would be to read a quote from early in the book from one of these intelligent fanatics. His name

• 2:37Patrick O'Shaughnessy?

  was John Patterson, who some will be familiar with. I had heard the name, but I didn't know the story, and it's really well-told in the book, who ran the National Cash Register Company. And this is from 1888. So this is a well-seasoned quote. He said, "The business that is satisfied with itself, with its product, with its sales, which looks upon itself as having accomplished its purpose, is dead. The actual burial may be postponed, but it is dead because it is not going forward. To my mind, nothing can ever be good enough. I am always dissatisfied. I preach dissatisfaction. I can always see where something might be better, and therefore, our business is never at rest, and I never want it to be. The throbbing heart of a business is the intense desire to do better. When that desire ceases, the

• 3:18Patrick O'Shaughnessy?

  heart stops beating." So, pretty clear mission statement or character type from John Patterson. So maybe, building off that, you could tell us how you came to this idea, what it is, and how you came to this idea of an intelligent fanatic?

• 3:32Speaker 02

  Sure. No, I'd be happy to. And first, I just want to thank you for having me on the program. I'm a big fan of the podcasts, and it's obvious, when you listen to some of your podcasts, the time and effort and energy that you put into making them. You can see it on the quality on the other side, so I appreciate it.

• 3:49Speaker 02

  I would say that I first stumbled around the concept of intelligent fanatics when I was talking to my co-author Sean Eddings. And the term intelligent fanatic was first used by Charlie Munger 10 or 20 years ago to really explain an exceptional entrepreneur, an exceptional founder, somebody that grew a business from something of insignificance to something that is significant. And oftentimes not dominating what they did, the market, the niche, the product category, for one or two years, but ended up really being a market leader in what they did for decades, 20, 30, 40, 50 years. And really, it's the idea of going to see how they built these businesses, but really how they were able to sustain that competitive advantage for such a long period of time,

• 4:32Speaker 02

  which, as you and I both know, it's really hard to be a market leader, let alone sustain it for that period of time. And the reason I got so interested in that concept itself was just because I'm a micro-cap investor, I primarily am looking at small emerging companies. And the smaller the company, the more it is a bet on that founder and that management team's ability to execute. And so, a lot of my time is spent evaluating founders and management teams of these small companies. And I really just wanted to dive in, just for my own investment purposes, to try to figure out, is there some commonalities that I can at least apply to my investing that will allow me to be able to find these intelligent fanatics that are running micro-cap companies sooner than other investors?

• 5:16Speaker 02

  And so, then, going back to the Intelligent Fanatics book, Sean and I had a similar connection with the term. And it got reintroduced to us, maybe 18 months, two years ago, by Professor and Fund Manager Sanjay Bakshi, who wrote a great article covering some intelligent fanatics in India. And that really reintroduced the term to me. And then, we just decided, you know, let's look at the intelligent fanatics that Charlie Munger and Warren Buffett both mentioned in their speeches and their writings, and let's retell their stories, you know, trying to find the information that we can find, either in books or articles, or case studies that were written prior, and retell those stories. And that's really how the book was founded, and that's what the book is about.

• 5:57Patrick O'Shaughnessy?

  If you had to give, we'll get into more detail when we cover your investing process, you know, specifically how you're evaluating these founders, one by one, but if you had to give at a high level, the most common traits shared by these intelligent fanatics, what would they be?

• 6:12Speaker 02

  I would say they just had a firm Understanding and vision and commitment and perseverance towards what they wanted to accomplish in their businesses and their ability to attract talent around them at the most opportune times to be able to execute and really grow a decentralized organization and create a culture that everybody kind of worked towards one common goal, which is harder and harder as a company grows, and their ability to innovate and just stay small even though they were large, larger companies. And I don't want to say either that there's a strict model to it. There's a lot of luck involved. Jeff Bezos even talks about how much luck was involved in Amazon. But I think there is at least somewhat of a blueprint to see how these people built their businesses and incentivized employees

• 6:57Speaker 02

  and created that culture of excellence from a very early stage that seemed to just continue on as the company grew and prospered. And a lot of these intelligence finacks that we highlight in the book, I mean, they didn't operate in sexy industries. I mean, we're talking about steel or airlines or whatever you call it.

• 7:12Patrick O'Shaughnessy?

  Cash registers.

• 7:13Speaker 02

  Yeah, exactly. Cash registers.

• 7:15Patrick O'Shaughnessy?

  Before we get into the more specifics, I'd love to spend a little bit of time on micro cap as a space. Maybe first, why? Why that space? Because I think, I'm sure there are intelligent fanatics up and down the cap spectrum. So why micro cap to begin with? What unique opportunity does it present relative to, say, you know, buying the SPY?

• 7:35Speaker 02

  Sure. Now, it's a good question. And I believe the micro cap space has been an inefficient or less efficient marketplace for decades. And I think it's going to continue to be that way for a long, long time to come. And I think it's for several reasons. And I'll probably start with the, maybe the less significant one first. And that is, I tend to believe that there's a really big misperception about what the micro cap space is about, oftentimes referred to by the derogatory word penny stocks. There's been, quite frankly, an all out assault on the micro cap space by the financial media, by the regulators, by a lot of people that have scared away a lot of investors from the space, even in the last seven or eight years. It's gotten worse. And so...

• 8:20Speaker 02

  I think just that aspect alone is create more or even a less efficient market than there was probably even 10 or 20 years ago. But if you don't mind if I would get on top of my soapbox maybe for a minute, I'd just like to kind of maybe provide more of a realistic picture of what the space represents. If we were to look at all the public companies in North America, that includes the United States and Canada, there's approximately 20,000 public companies and roughly half of those companies are micro caps, so around 10,000 micro cap companies. And you mentioned it earlier, if you actually take all those 10,000 micro cap companies and roll them up into a ball and form one company, it would be about the size of Google, so about a $550 billion company.

• 9:02Speaker 02

  And so that kind of goes to show how large and how small the space really is. But another interesting thing is that if you were to take those companies, those 10,000, roll them up into a ball and add together the amount of jobs that they employ, it's very significant. It's around 2.8 million jobs. And even though a lot of the financial media, the regulators even, they like to broad brush this whole space as some uninvestable wasteland of insignificant companies that are unimportant, that are run by a bunch of sleazy, slimy operators that shouldn't be public in the first place. But I think that everybody can agree 2.8 million jobs is very important, very important to the economy. And then taking it a step further, I mean, most of the best investors ever got their start investing in micro caps, Warren Buffett, Peter Lynch, going down the line to Jill

• 9:46Speaker 02

  Greenblatt, they all started investing in small micro cap companies. It's how they built their initial wealth and how they built their initial capital. And even the best companies ever, performing companies ever started as small micro cap companies, Walmart, Celgene, Amgen, even Jazz Pharmaceuticals just in the last six years. And so this is a vetted investment class, the best investors started their careers here. And even in the present day, if you were to evaluate the best performing stocks in the last 10 years, those companies that have gone up 1,000% or more, approximately 80% of those companies originated out of the micro cap space, companies like Papa John's or Buffalo Wild Wings even, IMAX, Patrick Industries, which is up 18,000% since 2009. So.

• 10:30Speaker 02

  I think when you hear those qualitative, the qualitative framework around that, I think you get a different picture. That's just a realistic one. Obviously, there's a lot of risk in the space, but I think people with a firm fundamental financial understanding that can read a financial statement can do well investing here.

• 10:46Patrick O'Shaughnessy?

  One of the things that fascinates me about micro caps, so maybe we should put a real definition around it. Typically, it's 200 million of market cap or smaller. Is that kind of...

• 10:56Speaker 02

  Usually, it's 300 million or less.

• 10:57Patrick O'Shaughnessy?

  Okay, so let's call it 300 million. It's such a small exposure. There really is no, there isn't a micro cap ETF, but effectively, it looks like a small cap ETF when you kind of run the analytics on it and the return stream. So there's really no index-like way of gaining exposure to this massive universe of however many thousands of micro cap stocks in North America. And the research that we've done suggests that you probably wouldn't even want it because just the pure beta part of it doesn't tend to do that much better than, say, small caps. It's extremely volatile, as we were talking about. But it does seem to be incredibly ripe for, it's a very high dispersion space. So opportunities to outperform or earn some sort of alpha, whether your benchmark is the Russell micro cap or the

• 11:42Patrick O'Shaughnessy?

  S and P 500 even, the broad market, Russell 3000. It does seem to be the most fertile space, which, you know, in our research suggests, kind of corroborates what you said about a less efficient space. And so I want to dive more into that specifically because it's sort of the party line these days that, you know, as you get upstream in the S and P 500, large cap, just index that, super low cost, it's extremely hard to beat, less efficient space, which I quibble with and can argue with. But as you get down, it seems like the investment management complex has said, okay, be active in small cap, maybe micro cap, maybe emerging markets, places like this, because they're less efficient. So maybe

• 12:25Patrick O'Shaughnessy?

  can you flesh that out for me? What does that actually mean to you? Do you think that that's true? And if there is less efficiency, what are the key drivers of that? Why is the price discovery less effective down there?

• 12:37Speaker 02

  I think there's one main reason, which I'll spend a balka my time on. And... The reason why it's really been a less efficient market for so long and why it will continue to be is something that you hit on, which is larger, smarter money can't invest in these small companies because they're too illiquid. And the reason why there's opportunity for extraordinary returns is because of illiquidity. That's why. For the same reason why people think it's risky is the reason why there's opportunity. And if you ever want to read some interesting white papers and research studies on this, I'd point you towards Roger Ibbotson, who's a Yale Finance professor. He's the CIO of Zebra Capital Management. And he's a pretty distinguished author. He wrote some books.

• 13:18Speaker 02

  I think he won the Graham and Dodd Scroll Award seven or eight times. But he's put out some really interesting research papers. And one of them in particular, which he updates annually, which makes it very useful, is he looks back since 1972 at approximately 3,000 companies and analyzes those companies by different categories such as value, momentum, liquidity, volatility, the market cap size. And you can go to the website and pull it up. And one of the most interesting takeaways from it is the part that he analyzes these companies based on the market cap and liquidity levels. And what he found was since 1972, the best performing area to be in as a whole was small,

• 14:02Speaker 02

  illiquid companies. And they averaged 17.8% or something like that. But I think interestingly enough is the fact that the worst performing area to be in was small, liquid companies. So I think one of the main takeaways there is that liquidity kind of trumps size as a return predictor. It's not the fact that these companies are small that presents opportunity. It's because they're illiquid, and that's why there's opportunity there. And it's one of the reasons why I, in particular, with my personal investing strategy, focus on the smallest 20% of the micro-cap space, those companies that are sub 50 million market cap, which, believe it or not, there's still 7,000 companies that are below 50 million market cap, which is still more companies than that trade in the New York Stock Exchange and the NASDAQ combined.

• 14:47Speaker 02

  So there's still a lot of companies.

• 14:48Patrick O'Shaughnessy?

  So what happens when you go to buy these stocks? I mean, the bid/ask spreads must be... Crazy. I mean, how do you think about market impact and, and holding period and things like that?

• 14:58Speaker 02

  You know, for the, for the most part, I don't think about the illiquidity as much because I don't think about illiquidity. I think about if I'm going to be right and I just focus on is my thesis correct? Because what happens is you have a management team that performs, the fundamentals improve, the stock goes up and liquidity goes up. It's just a function of what happens. You probably know that too. You know, a stock that's at 50 cents trading 10,000 shares a day is going to be at $2 trading 200,000 shares a day. It's just how the market functions. And, you know, one of the reasons why I pay attention to the sub 50 million is because there's no institutional investors in this area. And that's, I basically go where the illiquidity is greatest, which is the sub 50 million level. And there's a big difference between a 20 million market cap and a $200 million

• 15:40Speaker 02

  one. Usually when you get up there, they become more efficient because they're institutional. Usually by 200 million, you're 30, 40% institutionally owned. You're indexed through the Russells. You know, they're fairly liquid by then.

• 15:50Patrick O'Shaughnessy?

  Yeah. How do you think about requirements for consideration before we get to what the business does or the founders are, et cetera, just to protect yourself from some of the negative parts of this wasteland that you called it before?

• 16:03Speaker 02

  Yeah, I mean-

• 16:04Patrick O'Shaughnessy?

  In terms of liquidity or size or price, are there any tricks that you use or screens that you use to set an initial universe for consideration?

• 16:12Speaker 02

  I primarily look at just the quality of the business. And I don't use screens. The way I generate ideas has historically been through just kind of word of mouth, talking to a group of friends that also invest in micro caps, public and private forums, reading press release and SEC filings. My partner at Micro Cap Club, I mean, he's a full-time investor. He literally reads every SEC filing and press release on every micro cap company in real time manually as they come out. And it's just a lot of work, but that's the way he can find these inflection points in businesses when press releases come out. And so primarily those are the avenues that I've found ideas. But, but really, it's really just setting a high hurdle rate for my incoming investments on a quality measure of that business. And,

• 16:56Speaker 02

  you know, I look at seven or eight different things. And, you know, if you have your investment checklist of- 10 things that you look for, keeping the bat on your shoulder unless you get a 10 out of 10.

• 17:06Patrick O'Shaughnessy?

  How often are you changing a portfolio? So actually, even before we get into that, and I ask because of the costs associated with trading in micro cap, where turnover can be very expensive. How many stocks would you typically have in your portfolio at one time?

• 17:21Speaker 02

  So I'm a little bit different than many investors in the fact that I'm fairly concentrated. And people that know me probably are laughing right now because I'm a very concentrated investor. I primarily invest in the best four, or five, or six companies that I can find, you know, and try to, you know, hold them for the, for the long term. So the way I do things isn't right for everybody, you know? I often say like, the, the more experienced you are, the more concentrated you can be, you know? And so it's, it can be a difficult place until you really have your strategy refined and defined.

• 17:50Patrick O'Shaughnessy?

  So how, how long, uh, let's take the five or six that you own today. Well, how long on average would you have held them for?

• 17:56Speaker 02

  Uh, my largest position that I hold today is a company that I've owned since 2010. And the second largest position that I own today is something I owned since 2012. And then there's a couple other ones that are probably in that two-year timeframe. And I've only swung the bat once at a new idea in the last two years.

• 18:14Patrick O'Shaughnessy?

  Wow.

• 18:15Speaker 02

  Which was about six months ago.

• 18:16Patrick O'Shaughnessy?

  So, so sort of constant screening.

• 18:18Speaker 02

  Yeah.

• 18:18Patrick O'Shaughnessy?

  Without any pressure to deploy capital.

• 18:21Speaker 02

  Correct.

• 18:21Patrick O'Shaughnessy?

  Just waiting. The punch, the kind of Buffett punch card idea, it sounds like is.

• 18:25Speaker 02

  Yeah.

• 18:25Patrick O'Shaughnessy?

  It may have been influential on you.

• 18:26Speaker 02

  It definitely was. I mean, when I look at my, I keep an investing journal. And when I look at my biggest mistakes, it's when, you know, I bent my rules and started looking at eight out of 10s and seven out of 10s. And I rationalized my way into mediocre investments, you know? And that's how you're getting yourself in trouble, you know? There's, you know, just keep the hurdle rate for income investments as high as you can. And don't be afraid to say no to a lot of things because you have to.

• 18:49Patrick O'Shaughnessy?

  Maybe you could pick one of the five and use it as a lens through which to describe your process and the sort of business that you're looking for.

• 18:58Speaker 02

  Sure.

• 18:59Patrick O'Shaughnessy?

  Um, and hit on some points, whether it be the source of that company's moat or competitive advantage, um, the key characteristics of the founder or founders. So maybe, maybe we'll go down the rabbit hole a bit on, on, on an individual name that, given, given the size, people may not have heard of.

• 19:14Speaker 02

  Well, I'd like to. I'd like to steer clear of individual names because these things are still pretty illiquid. Sure. But I can give you the characteristics of what I look for. You know, I think we've hit on intelligent fanatics. Obviously, I'm looking for an exceptional owner-operator. And normally, you know, look for management ownership to be 20% plus of the business. You know, I don't have to tell you, it's just, you oftentimes find better management teams when they own a big chunk of the business because they make better long-term decisions for shareholders. And so that's why I pay close attention to investing in mostly founder-led companies. And that's something that's normal in most small microcaps. I would say 80% of them are probably founder-led. So you just run into that quite a bit. The second thing is I look for companies that dominate the market that they're in.

• 19:58Speaker 02

  The book Zero to One by Peter Thiel really helped define this for me. It's something that I was sort of doing before, but after reading that book, it helped define that, this aspect of really trying to invest in businesses that dominate a market. And kind of much, much similar to what he said in the book, you know, for a microcap to dominate their market, that means it's a small market. And that's, that's the case here. And the reason why I like to look at companies that dominate a small market is it somewhat vets the management team for me, which is a big risk in microcap investing. Because if a company is dominating what they're doing, it means that management has at least enough competence to either develop the market that they're in or take market share away from a competitor. So it's a great way of kind of qualifying management, at least historically, to what they've done.

• 20:42Speaker 02

  And they also just tend to have a nice moat around their business, usually a few things that provide a moat. And also, the companies that dominate their market generally have pretty good, high-quality fundamentals and financials as a company, as a whole. And I'm not, but I'm not looking just, you know, to invest in a company that dominates a market that's not growing. You know, I want to look for a market that's also growing. So I'm looking for companies that can sustain a double-digit growth rate, top and bottom line, and really grow by reinvesting their internally-generated cash flows back into themselves at higher rates of return, you know, the simple, you know, compounding, kind of compounder.

• 21:20Speaker 02

  You know, then probably the next thing is I try to find companies that have balance sheets that have little debt on it. I've always enjoyed Peter Lynch's quote, which is, "It's hard for a company to go bankrupt when they don't have any debt." And so I try to, I found that to be true, you know, travel light, travel far, as they say. And also, companies that have a clean capital structure, a clean share structure, they don't have very many shares outstanding. Their owner operators treat their shares like gold. You know, they have a very low percentage of their diluted share count in the form of options, or warrants, or preferred shares, or things like that. They just treat their shares like gold. And then, you know, really, the last two, something we already talked about, but no institutional ownership, preferably, because that means-

• 22:02Patrick O'Shaughnessy?

  Zero.

• 22:02Speaker 02

  Yeah, preferably zero. Yeah, the lower, the better. And then, I'm primarily looking to buy the companies when they're fundamentally undervalued. I'm looking for situations that are undervalued that can get overvalued. And what I mean by that is, I want to initially take a position in something that is fundamentally undervalued today, but I really want to invest in companies that are starting to show the signs that they could perhaps be a great company. And that's what I mean by something that can get overvalued, because there's a reason why Amazon, and Google, and other companies trade at higher multiples than their peer groups, because they have great businesses. So I'm going to try to find these great businesses early. And my margin of safety is buying them when they're fundamentally undervalued, when I initially purchase them.

• 22:41Patrick O'Shaughnessy?

  Let's talk about value, because this is, you know, I come at everything from a factor or quantitative standpoint. And I know the value factor works, however you define it, price to book, price to cash flow, price to sales, price to earnings, EBITDA, take your pick. It works. And obviously, you can get nuanced and make it better, but the key idea is to buy at a discount. Just a clean, simple statistical discount has provided a pretty big edge. And the widest edge that we've observed is in microcaps. And it gets bigger the further away you get from the S and P 500.

• 23:12Speaker 02

  Right.

• 23:13Patrick O'Shaughnessy?

  So you get, at least on paper, before costs, which are significant, these huge excess return gaps between, say, just the cheapest 10% of microcap stocks and the rest of the market. And I don't have the numbers with me, but I'd be curious. Why not just do it that way? Why not just say, okay, I believe in micro caps. I believe in, in value. Maybe just take a pure quant approach and say, okay, I'm going to buy a basket of cheap, higher quality micro cap stocks. The intersection of those two things. Take a kind of a Joel Greenblatt approach, if you will, that he popularized in his book, and just be systematic about it. How, how in your valuation approach are you doing more than just a simple, you know, the P E's law?

• 23:57Speaker 02

  I mean, I think it's, I think the answer is there's just so much more that, and it's just through kind of experience of investing in these things for so long that you pick up on these little qualitative and quantitative nuggets that only through time you realize that those little qualitative nuggets you didn't put that much emphasis on before, you know, were really significant when you look back, you know? And so just even looking at, obviously you could screen for it, but looking at management salaries and how they're incentivized, things of that nature. And it's just, I think it's, I think these small micro caps are the ultimate stock picker's market. You know, it's hard to create a quant strategy around them based off, based off financials. I mean, I'm, I'm a, you know, this is not endorsing, I'm a cap IQ subscriber. So, I mean, they're a decent firm, you know, but even they get a lot of the screens wrong when you do, you know, on these little, small companies.

• 24:42Speaker 02

  And so it's really hard to get very accurate information, even on these very small ones, because they're so small and unknown and there's always companies entering the space and some exiting and, you know, it's just hard to get real quality data on it as well. But I, I would rather focus on trying to find, you know, those best half a dozen companies that are really run by exceptional owner operators that can, you know, make a thousand percent return, you know, 2,000 percent.

• 25:06Patrick O'Shaughnessy?

  So let's phrase it a little differently. So let's say you identify a new one.

• 25:09Speaker 02

  Mm hmm.

• 25:10Patrick O'Shaughnessy?

  Someone who's 11 out of 10 on the intelligent fanatic scale. How do you, what is your price discipline? How, what, at what point or what trigger would be too expensive for you to consider it, even if it's the greatest?

• 25:22Speaker 02

  Right.

• 25:23Patrick O'Shaughnessy?

  You know, management team that you found. How do you discipline yourself on the price side?

• 25:27Speaker 02

  You know, usually I try to form not a model, but really kind of a framework for what I think that company can produce in cash flow and earnings moving forward two or three years. And usually looking forward about 12 months and then back into a multiple that I feel comfortable paying up to. And normally I pay up to an amount with my initial investment when I initially start buying something. I try to leave myself where I think I can at least make 50% just on the arbitrage of just not people knowing this company exists, you know, yet. And then, you know, this company is growing 30% and trading at 10 PE, you know, that, you know, I'm willing to pay up to 10 for that because I think once they continue to grow and it gets discovered, it can trade at 15, 20, 25 PE. You know, just that's kind of simply like sort of how I look at the fundamental framework.

• 26:11Patrick O'Shaughnessy?

  So pretty much a discounted cash flow approach to valuation.

• 26:14Speaker 02

  I try to make it based on earnings because that's ultimately what drive these things over time.

• 26:17Patrick O'Shaughnessy?

  Yeah. And do you think about the, do you care about the statistical cheapness in the portfolio? So like, do you know what the, like the PE of the portfolio, for example, is today that you own?

• 26:27Speaker 02

  I have no idea. I couldn't even tell you what my performance was last year. You know, I just, I don't keep track of those things because I don't manage other people's money. I don't. It's not important that much, that important to me to keep track of what my performance is.

• 26:39Patrick O'Shaughnessy?

  What are the reasons for selling one of these businesses? So I don't know how long you've been doing this in, in the form of private only five stocks, five to 10 stocks, let's call it. How often have you sold something and gotten out of something?

• 26:53Speaker 02

  You know, there's, there's probably four main reasons why I would sell. Number one is, you know, you find something better.

• 26:59Patrick O'Shaughnessy?

  Yep.

• 26:59Speaker 02

  And it does happen. You know, that's probably the number one reason you just find something better that's better than your current lineup of companies. But it needs to, when you find something, when I find something new, it can't just be 10 or 20% better than investment I made. It needs to be substantially better, you know, because I put the time and effort to know these positions so well. And to trust management and I oftentimes I do, you know, trust the execution of the companies, you know, to replace a company that I trust or a management team that I trust with something that is new, that I haven't built up that trust level in. You know, I'm not going to replace that just to make what I believe is another 10%. You know, it needs to be, you know, significantly better than what I currently own. So you're constantly looking at the, your current. Five or six companies and trying to always be in the best companies you can find.

• 27:44Speaker 02

  But a new investment needs to be a lot better, not just a little better. And so the second reason would be if the story changes, often, which happens quite often. You know, something might come out of left field that just changes the investment thesis or management does something where it just, you know, there's just cracks start forming. You see them. So that's another reason why you would just sell. Management incompetence, you know, sometimes you see them do something so stupid you can't own it anymore. And then also, you know, when something gets overvalued, it doesn't happen enough, but when something goes from trading at, you know, a 10 PE to 100 PE, it might be smart to take at least a little bit off the table. And so that would be the fourth kind of main reason why I would sell a position.

• 28:24Speaker 02

  But, you know, with my strategy and approach, which is fairly concentrated, you know, I think, but I think this goes for everybody that has a semi-concentrated approach to microcaps. I think your most important thing, not to quote Howard Marks, but the most important thing is to know your positions better than most because everyone wants to achieve a multi-bagger in the portfolio, but the problem is to achieve a multi-bagger, you have had to hold a multi-bagger in the portfolio. And the only way to develop the conviction to hold something that goes up 50%, 200%, 1,000% and really just steer clear of the peanut gallery yelling at you every step of the way and you'll run up against a bunch of articulate naysayers that are just throwing in bombs at you, saying you're an idiot for holding this thing. The only way to develop that conviction to hold is to know these

• 29:09Speaker 02

  positions better than the next person. And I don't mean that to sound egotistical. It's just the fact that these businesses, not many people know they exist, so you have the ability to know these businesses better than most others. And it also, you know, when you know these companies really well, it allows you to see the cracks form in your investment thesis before others. So it gives you that time advantage to be able to hopefully get out of your position and minimize your losses. So that's why I say, you know, the most important thing is to know these businesses really, really well.

• 29:36Patrick O'Shaughnessy?

  Is it fair to say that intuition plays a pretty large role in all of this for you? I think of intuition as like we've just internalized some sort of pattern recognition that we're better at, so it's not gobbledegook, it's basically something real. But is that fair that you've just sort of through immersion in the companies themselves, in the world of the competitive set in the microcap space, that you've developed sort of a feel, if you will?

• 30:04Speaker 02

  No, I think that's a fair assessment. It's only been through 15 years of doing this and really having close connections with probably 100 management teams that you get to kind of see what the qualities the winners had versus the losers.

• 30:17Patrick O'Shaughnessy?

  There's a huge universe of private companies that are similar size in terms of revenue and earnings as the companies I'm sure that you own, especially if you're looking at sub $50 million. Is that an area that you've considered applying your same process to looking for the equivalent of an intelligent fanatic that's just doing it privately or outright buying businesses that are really small with partners with outside money?

• 30:44Speaker 02

  Right.

• 30:45Patrick O'Shaughnessy?

  Seems like there's an even bigger opportunity set there where the same principles would apply. So any thoughts there on exploring the private market?

• 30:52Speaker 02

  I think it's really interesting. I mean, I've had a few conversations with Brent Bayshore, who you interviewed here. He's a really interesting guy. We really connected. And I think the reason why I would stay away from that is to buy a private business. I don't want to operate a business. I just kind of like being passive and evaluating the founders and invest in the good ones that I find that can become great and let them manage the business. And obviously you can still do that in private equity, you can just let them continue to run it. But I don't need to be that hands-on. And there's enough opportunity in these small microcaps, I've found, that I think there's still some really good opportunities out there. Every time I've stepped outside my area of expertise, which has been several times over

• 31:37Speaker 02

  the last 10 years, I've gotten my ass handed to me. And so it all pointed back to, let's continue to just be the best investor you can be in this microcap space because there's an opportunity here.

• 31:46Patrick O'Shaughnessy?

  So what does a person look like who can and should do this? Where, you know, this is your full-time job and it's, it's your money. It's not, you don't have outsiders' money, which is the more typical model for someone that's doing the degree of, and the depth of work that you're doing on, on companies. So maybe first, why no outside money? And second, if there's someone, a category or a set of tests for someone that you, or the set of criteria that you think a person has to have to do what you do, what would those be?

• 32:18Speaker 02

  So I think maybe an interesting, something interesting that I picked up on is, you know, just through MicroCap Club as the site with our membership, I would say some of the better investors in this space are entrepreneurs themselves, are small business owners themselves, because they know what it takes to grow a small business into a larger one. And oftentimes, they have the right intellect and the ability to, to kind of understand what that entrepreneur, founder, or CEO is going through. So I found that a lot of the good, the good investors in the microcap space do have that entrepreneurial or small business experience running a business. And, you know, that's kind of the unique thing about these small microcaps too. The investors that invest in these small ones is mostly kind of retail or, or very small institutions. But I think that's probably a common thread, is I think a lot of entrepreneurs

• 33:03Speaker 02

  would tend to gravitate to these because they have a lot in common.

• 33:06Patrick O'Shaughnessy?

  And then why not do this with, with outside money? If there are, is it, is it a question of opportunity set? Would outside, is there just such a limited capacity in, in buying companies that are this small and not wanting to be, you know, too much of the, too much of the float? What are the limitations?

• 33:21Speaker 02

  Well, I mean, I think I maybe have to go back in time a little bit and describe kind of why I'm a private full-time investor.

• 33:27Patrick O'Shaughnessy?

  Yeah, we should have done that already.

• 33:28Speaker 02

  No, that's okay.

• 33:29Patrick O'Shaughnessy?

  That's my fault.

• 33:31Speaker 02

  But I ended up, so, but I'll start back even further. But I started investing, I met my parents' financial advisor. This was during the internet bubble craze. My parents sat me down when I was a junior in high school and said, here's $20,000, this is all you're getting. You decide where you want to go to school, but this is all you're getting. So, you know, if you want to blow it all in one year at F and M, which is right down the road, or go to Millersville, which is a community college. And I was getting more introduced to the markets and I loved it, and specifically small technology companies. I decided to, okay, I'm going to go to the community college so I can invest this full amount into the market. And so that's what I did, you know, and the 20,000 went to 40 or 50 or 60, whatever it was. And at the same time, my sophomore year in college, I worked for a local stockbroker.

• 34:12Speaker 02

  And it was a pretty significant office. I think we had about 200 million under management, which is a decent amount, had about 1,200 clients. And I was more or less a glorified secretary there. So I was answering the phones and some other things, but when the internet bubble burst, I fielded all those phone calls that came in from, you know, angry, upset, sad, you know, and I just got berated. I just got the shit beat out of me on the phone, quite honestly. And going into that experience, I thought that I was going to be a stockbroker and that I was going to manage other people's money. And coming out of that experience, it kind of turned me full tilt. You know, I did not want to deal with the emotions of others, you know, investing is hard enough, dealing with your own emotions, let alone those of others.

• 34:51Speaker 02

  And so that was kind of the tipping point for me from that point forward that, you know, I really just wanted to figure out how to do this and do this on my own. And, and I was just starting to get into the micro cap arena too. But, you know, I quickly turned that 60,000 into about five around that same time. And I started looking at smaller companies, even smaller companies by that point in time. And when I was still in college, I took a bus trip up to New York City from Lancaster. I'd fake business cards made, had Castle Capital on them. And I went to a conference here in New York City and there was a company in particular that caught my attention that I just, you know, wanted to meet with.

• 35:30Speaker 02

  And so I got into this conference somehow and I was able to get a one-on-one with the CEO and the CEO was Hugh Panero of XM Satellite Radio. And so at the time XM Satellite Radio, which now merged with Sirius, you know, was this small, it was a micro cap. I think it was 150 million micro cap. So it was a larger one. But there was a lot of risk involved with the business and they launched these satellites up into space and had no subscribers and a pile of debt. But for some reason I was interested in it. So I met with them and came out of that meeting just energized and I plowed that $5,000 into XM Satellite Radio stock at $1.78 a share. You know, I can remember it just like yesterday. And 14 months later. Through a series of positive events and the stock went to $34, you know, from $1.78

• 36:14Speaker 02

  in about 14 months and I sold like $25 or $30 but and this by the way, this whole experience was 110% luck that I even made any money on it and I realized that but I point to that point in time with where kind of my love affair with a micro cap space started because it was the ability for even somebody a nitwit like me to be able to sit down with a management team and actually have a discussion with them, you know, I wasn't going to sit down with Jack Welch at the time and talk to him or any of these large cap operators. It's the access to management that really drew me in to kind of the micro cap arena as a whole.

• 36:47Patrick O'Shaughnessy?

  So, so building on that, what was your next step? How did you then start at a bigger scale evaluating more businesses one by one? What was the kind of next step in your, it sounds like probably self-education largely, but, but maybe there are mentors that figure in here too.

• 37:03Speaker 02

  Yeah.

• 37:04Patrick O'Shaughnessy?

  So, so what, what's the middle piece between that, that great starting story and what we are today?

• 37:09Speaker 02

  Sure. Most of the information flow and collaboration at that time in the early 2000s dealing with micro caps was all in public message boards. So websites like Investors Hub, Silicon Investor, Raging Bull, that's just where people were that talked about these companies and that's where you went to build your reputation. And so I was part of that group and you're, you're always there kind of typing about what you liked, why you liked it, defending it. And I met a bunch of great people, including a few gentlemen that ended up being mentors of mine during that, that period of time. And one of them, you know, you can get nuggets of wisdom from anybody and one, one of the gentlemen in particular, I mean, to put it honestly, he was a stock promoter. And I ended up meeting

• 37:51Speaker 02

  with him, took a trip out to, to where he lived and we just met and he just, the thing, the thing that he taught me was just his ability to just access management and he was just a likable guy and he could take a story and drill it down to about 30 seconds and he could sell that to anybody. It was just an amazing thing to watch and he just kind of like, so there's people like that, the people like, well, why would you associate with him? But they all kind of provided these little, little things that I was able to capture the Good of and leave out the bad. And then, you know, I learned from several people like that on how to apply these concepts. And, you know, even a simple concept like that, it's something I do with my own investments. You know, it needs to be a simple story. If I can't tell the story in 45 seconds to you, and if you're not energized by it, you know, there's something wrong with it.

• 38:35Speaker 02

  You know, it's either too complicated, or, you know, I just don't know it well enough. And so there's been a series of kind of mentors that I ran into over the next five or six years. And so I went from undergrad at Millersville University to going for my MBA at Villanova. And I got into a, I got into an assistantship program at Villanova, which kind of paid for my tuition as I went. And so that kind of provided me even more time to kind of hone my craft. But it was more or less just through trial and error, losing my own money, you know, over and over again, making some money, learning from my mistakes, and just kind of figuring it out, that, that allowed me to then, after I graduated from graduate school, I worked for an advisement firm out of New Jersey,

• 39:17Speaker 02

  and quit there three months later to start my own kind of advising, kind of IR-related firm. And my main goal when I started that was to get out of it as soon as I could. And so I did that for three years and had enough capital by the end of 2007 into 2008, and then just went full-time. And that's what I've been doing ever since.

• 39:35Patrick O'Shaughnessy?

  So I'd like to get into that lifestyle, right, which is very unique, right? Where your, your income and livelihood is based on the performance to some extent, year to year, that you have a, you have a very long-term view, it sounds like, obviously, on, on the businesses that you own, and you don't care about price action, but draws on that portfolio, assuming, you know, you take them to, to fund your life, is an interesting little side topic that I'd like to get, get back to in a minute. But before we do that, I'd just love to hear about how you approach a new business. So let's say something has come on your radar, and, and you're interested in doing, you know, your, your version of due diligence on the business model itself. What does that process look like?

• 40:18Patrick O'Shaughnessy?

  So this is something that I'm trying to understand better as someone who's always just approached companies quantitatively, to get a better sense for industries and unit economics and. Founder skills and moats and things like that. So how do you approach a new business? What is your process for trying to understand the business model? And you can get as specific here as you want. I think it'd be really useful. What's your process?

• 40:43Speaker 02

  I would say the main process, when I find something I think is interesting, I really try to pull up all the public information that I can find. Just read all the annual reports that I can find. And some of these companies are young. Some of them have only been around for three or four years. And some of them have been around for 15 years. So just trying to get the full story of the company from their public financials first and foremost, because you can learn a lot just by reading those. And I try to do as much of that type of quantitative and qualitative legwork before I reach out to management and try to have a discussion on some. Because a lot of times you don't know the right questions until you do all this work.

• 41:18Patrick O'Shaughnessy?

  So get even more specific there. So you've got, let's say you're reading your 10Ks and your 10Qs and supplemental stuff. What then are you doing? Are you modeling the company somehow in Excel? Physically, what are you doing to understand or begin to kind of build your own picture of the business before even getting to that management layer?

• 41:41Speaker 02

  I normally don't do too much modeling. Usually what's attracted me to it has been some sort of inflection point in their business or their earnings report or something like that that showed that a tide has changed. And I have my own kind of, kind of take it back maybe a step further more than you want. But I kind of have my circle of competence of ideas that might be made up of 30 to 60 companies right now that I think qualify as good, really good businesses that I just watch. And some of them just aren't good enough either valuation wise for me to really make the effort to dig into them. And then there's a whole bunch of other companies that just kind of fall under the radar. But I think it's really just the majority of just going through filings and just going

• 42:25Speaker 02

  through those things, just trying to kind of... Trying to figure out what this story is as much as possible. And even talking to some customers, if you can, it's really easy with consumer products companies because you can buy it in the store, you know, talk to people that are selling it and things like that. But, you know, it's just all of that stuff kind of blended together.

• 42:42Patrick O'Shaughnessy?

  Other industries or sectors that either you focus in or actively avoid?

• 42:46Speaker 02

  I say this and I kind of laugh because one of my investments is something that goes against, completely against the grain of what I normally invest in and it just happens to be the biggest winner of my portfolio today. We can get into that in particular later, but I would say I try to steer clear of companies that are very capital intensive. Companies where it takes 20 million, 50 million, 100 million dollars to pump into it to get one dollar out. So companies like oil and gas exploration, mining exploration, life sciences, biotechnology, things of that nature. Because my biggest, one of my biggest risks as an investor in microcaps is dilution and having a management team that doesn't know how to raise capital effectively and many of them don't in this small microcap world.

• 43:28Speaker 02

  And so by taking rid of, getting rid of those companies, by only focusing on companies that don't need to raise money, you actually negate out a lot of the risk in microcap investing as a whole. So I primarily steer clear of those industries. And outside of that, I would say that I try to apply a couple kind of frameworks around the businesses that I end up investing in. I really love kind of Warren Buffett's, I think I even tweeted this out the other day, but he, he did a speech in 1987, he talked about, you know, if he was given a million or billion dollars, you know, he couldn't hurt Wrigley's chewing gum company, you know, if he was giving, given 10 billion dollars and he couldn't go out and hurt Coca-Cola, he couldn't make a dent in that company. You know, and that's just, you know, a good way of assessing the quality level of those businesses and those brands. And I try to use that same framework on the companies when I find them.

• 44:13Patrick O'Shaughnessy?

  So let me reframe that to make sure I understand what you're saying. You're saying if, if you pick a company and you say to some other third party, okay, here is 50 million bucks, go build something to compete.

• 44:27Patrick O'Shaughnessy?

  With Wrigley's or whatever company it might be, that if the answer is even with that money, I couldn't do it, that is sort of like a backwards way of getting to some sort of moat.

• 44:38Speaker 02

  Yeah, correct.

• 44:40Patrick O'Shaughnessy?

  Okay.

• 44:40Speaker 02

  That's correct.

• 44:41Patrick O'Shaughnessy?

  Interesting.

• 44:41Speaker 02

  And believe it or not, you can find companies, even these small ones, because that's primarily a lot of the risk in these small companies is even if they have a good business, they're going up against competitors that are have much more resources than they are. So that's almost the common framework I apply is, okay, here's a company with unlimited resources, how could they disrupt this business? And also, I always like to see the quality level of their product or service they're creating. Do the customers that they sell their product or service to, do they really need that product? If that product didn't exist in today's marketplace, would it cause that customer a lot of pain and aggravation? And so I like to invest in pain relievers, call it like a pain relievers subset. And so there's a couple, a couple other kind of more general frameworks I try to apply to the companies on a qualitative level.

• 45:24Patrick O'Shaughnessy?

  So as you've tried to assess or identify these moats, so companies where even with a stack of cash, you couldn't go replicate it, what are the dimensions, the most common dimensions of a moat, of an enduring moat that you find or look for?

• 45:39Speaker 02

  You know, it could be IP related, but oftentimes it's just the amount of time and effort that the companies put into just building the brand and the customer service systems and everything. It's just very, very hard to disrupt. I mean, one of my investments in particular, it would take, it wouldn't matter if a company had $500 million, it would take five years from a start to get to where they are today. And that time aspect is huge because in five more years, there'll be five years ahead still, hopefully.

• 46:10Patrick O'Shaughnessy?

  Seems like the key, maybe the traditional ways of thinking about a moat would be demand side, so like network effects, where probably in micro cap space, that's a less common moat aspect that you see. A brand is always the one that pops most to mind, that certain brands have such an incredible value, which is based not just on something ephemeral, it's based on the client experience, the goodwill, the trust that's been built up in that brand over time. It seems like maybe brand and experience and execution, I guess,

• 46:43Speaker 02

  Right.

• 46:44Patrick O'Shaughnessy?

  might be components that in your world, in very small companies, are more important than the more traditional like economies of scale.

• 46:51Speaker 02

  Right.

• 46:51Patrick O'Shaughnessy?

  Network effects, things like that, that define the modes of much bigger businesses.

• 46:57Speaker 02

  Right, right.

• 46:57Patrick O'Shaughnessy?

  You think that's kind of right?

• 46:59Speaker 02

  Yeah, and it's interesting, and you always verify that too. I mean, one company that I own, you know, I went and talked to one of their customers, and this customer, the gentleman I talked to, controls about $2 billion in sales. You know, and I had the ability to actually talk to him and say, you know, the company I'm invested in, you know, is their product as good as what they say? And he's like, "Yeah." He's like, "It's great." He's like, "'Cause if it wasn't, I wouldn't buy it. You know, I'd buy somebody else's." And so just constantly kind of verifying what you believe, you know, so you don't have that confirmation bias on what, just because I own it, it's going to go up, or whatever it is.

• 47:34Patrick O'Shaughnessy?

  Can we come back to lifestyle?

• 47:35Speaker 02

  Sure.

• 47:36Patrick O'Shaughnessy?

  Frugality in our exchanges, leaving up to this, that word has come up a couple of times. A frugal mindset, or an efficient, maybe?

• 47:44Speaker 02

  Yeah.

• 47:44Patrick O'Shaughnessy?

  mindset for how you think about investing your own time and money outside of your, you know, your key holdings in your portfolio. So maybe just talk a little bit about, tell me a little bit about that, about the philosophy that you've developed out of necessity.

• 47:58Speaker 02

  Right.

• 47:58Patrick O'Shaughnessy?

  over the years for how you live.

• 48:00Speaker 02

  Yeah, I mean, I get asked by other people quite a bit about kind of that decision to be a full-time private investor, and I don't want to glorify it, you know, because everybody's like, "Oh, wow, that's great." You know, it is very, very hard, you know, especially with my investment strategy of concentrated, long-term investing. I can't tell you how difficult it is to have to sell long-term investments to pay short-term bills. It doesn't matter if your monthly expenses are $2,000 or $30,000. You know, it is just, the anxiety and the stress level of it is 10 times more than the amount that you have to liquidate every month. It's just awful. And you don't think about it as much during the good times, when things are working. It's when you, you know, when you're down 20 or 30%, which is bound to happen, and you still have to pay the bills.

• 48:42Speaker 02

  And it's, but, you know, it's also, kind of the pros of it is the autonomy, you know, and the ability, you can do this wherever you are, whether you're in Tokyo, San Francisco, or here. As long as you have an internet connection, you can buy a plane ticket to go visit a company, you can do it. And so, that's the pro of it. And... You know, especially if you are internally driven that you want to see what you can do and get the best out of life, you know, you can't be the best at what you want to do doing it part-time, you know, and that is really what drives you. And it can't be really about getting rich. It has to be about really just being really passionate about, you know, what your purpose is and that you want to be the best at what you can do. I mean, you know it too, it's like so many people, they unfortunately work an eight-to-five

• 49:24Speaker 02

  job they hate and hope, you know, generally a lot of people like what they do, but then they go home and they work for a couple hours in their hobby, you know, whether it's building model airplanes or whatever it is. And then 10 years later, they're wondering, you know, what if I would have spent time, you know, eight hours a day building model airplanes and maybe opening a storefront in my local shop, what would have happened? You know, and so it's, it's really just, and that's kind of what happened to me when I was a sophomore in college, working for that financial advisor. It was just that tipping point of, I want to do this and I went to bed dreaming about it and I woke up every day reaffirming it. You know, I just wanted to be a private full-time investor, but fully knowing that you can't spend too much, you gotta live a frugal life, you gotta, because you make hay while the

• 50:09Speaker 02

  sun's out, as they say. And you gotta just keep your, keep your fixed costs low and your variable costs variable, you know, so you can turn on a dime if you have to. And when I made the decision to go full-time, it was when I was single. And so it's a much harder decision, I think, if you're married and have, have kids. You know, I oftentimes think about that too, you know, because I can, I can afford to go broke myself, if it's just me, you know, but when you throw a wife and a kid into it, I can't take them down, you know, and so that's the other mental kind of drain on you, like you can't fail, you know? But hopefully all of your experience that you put in over the last 10 years, you know, it forces you to make your best decisions when your back's against the wall. And I had occurrence of that two years after I went full-time, I got married.

• 50:53Speaker 02

  And I had one of these black swan events occur in one of my positions in one of my in my portfolio. It was a it was a 35% position, you know, my portfolio, this one company. And it was one of those, you wake up and it's 50% down. And two days later, it's 70% down. And it was one of those real trying times for me, just because you start questioning everything, you know, your strategy, your philosophy. The last eight years of me being able to do this, was that just luck? You know, you start questioning everything. But really, it was just kind of staying disciplined, you know, able to dig myself out of that hole and take and learn from it what I could. That was that was hard. But, you know, you also have the benefits. Once you figure it out that you can, it's, I love what I do, you know, it's, I would never trade this for the world. And you'll like this story

• 51:36Speaker 02

  too. But I think it was the day before we got married, I told my wife, I said, you do realize that I would rather live on the street than have to get to work for anybody ever again. And she just, she looked at me and furrowed her brow. And I was like, that might not have been the right thing to say right before we got married.

• 51:50Patrick O'Shaughnessy?

  At least you gave the information.

• 51:54Speaker 02

  Yeah, exactly. That's what I thought I better learn now. But, but it's great. You know, it's great. But I also don't want to glorify it because it's, it is really hard, you know, having to sell your positions. But it's, but it's also, I don't want to glorify the fact that it's stressful, just because it's the same decision any small business owner makes, or anybody that gets rid of their safety net in life, to go after their dream, you know, do, you know, whether it's to start a business or whatever. It's a similar type of decision process.

• 52:18Patrick O'Shaughnessy?

  Yeah. So it's, it's becoming a constant theme of the people I talk to, that they have identified a curiosity, either early in life or later, and made some decision. And so your sort of threshold crossing moment, sounds like it was pretty early, in terms of your experience, you know, thinking you were going to be a broker, and then, and then obviously realizing what, how difficult and emotional that could be, but still loving investing. And so it seems like if you're willing to persevere and endure a 50, 70% drawdown in a major position, that's what I think, that stuff happens.

• 52:53Speaker 02

  It just happens.

• 52:54Patrick O'Shaughnessy?

  And it happened. Equivalents of that happen everywhere.

• 52:57Speaker 02

  Right.

• 52:58Patrick O'Shaughnessy?

  And it's only through, I would argue, like a very consistent, persistent, almost systematic approach to loving what you do, that you can emerge through those things. Seems to be the case with your story.

• 53:10Speaker 02

  I think probably the other thing I'd add to that, too, is, in a way that I think I've been lucky, and I put this in kind of air quotes, is that I was, I'm basically as young enough. As I could be to be able to experience two bear markets.

• 53:26Patrick O'Shaughnessy?

  Yeah.

• 53:26Speaker 02

  So of 2001, you know, 2000, 2000, you know, I was still 19 and I experienced it emotionally. Not as much as I would in 2008, but before I went full time, I needed to experience another bear market. And that was one of the things I worked down in my journal, like I was not going to go full time until I experienced another bear market to see if my strategy could be tested and I could prevail. And that's what 2008 kind of did for me is reasserting the fact, okay, I can, I can do this. And so I needed to be tested again.

• 53:56Patrick O'Shaughnessy?

  Fascinating. What is the most memorable individual day of your career investing in these tiny stocks?

• 54:07Speaker 02

  Um, it's a good question.

• 54:10Patrick O'Shaughnessy?

  You might have already mentioned it.

• 54:11Speaker 02

  I know, I was like, I think I may have.

• 54:13Patrick O'Shaughnessy?

  If it's the 50% drawdown, what's the second most memorable?

• 54:17Speaker 02

  I'll tell you, this is a, this is an interesting story. There was a company that memorable, I don't know if it was good or bad, depends what side you're on. But there was a company I invested in, in the mid 2000s and it IPO'd at a dollar. And I was literally bought the first shares of this company when it went public. And I made it a decent sized position. This would have been in 2006. And in 2000, so it ended up going to eight or nine dollars and I ended up selling out of my position. It was a significant position. It was one of the main reasons why I was the ability to, to go full time in 2009. So I sold it and I had a good relationship with management.

• 54:57Speaker 02

  Over the next two years, that stock would go to $30 a share. And it would pay a dollar a share dividend.

• 55:06Speaker 02

  It was, it was, it would have been like, you know, I could have lived on an island the rest of it, you know? And that, you said a day, this is more like of an experience, but you go through those things where it is just mind boggling.

• 55:16Patrick O'Shaughnessy?

  What company this was?

• 55:17Speaker 02

  It was a company called Gold Resource Corporation. And it's, it's since fallen down, you know, back to five or six dollars or something like that, but.

• 55:25Patrick O'Shaughnessy?

  A round trip, you're doing just fine.

• 55:26Speaker 02

  Yeah, yeah. So, but yeah, but it was just mind boggling. I mean, I remember watching it at $30 and they paid a dollar a share dividend. And I was just like, really? I was like, it's like a kick in the teeth, you know? But that was one of those that I, for whatever reason, I remember that one more than a lot of things.

• 55:40Patrick O'Shaughnessy?

  What about the kindest thing that anyone has ever done for you? And I'll just leave this open ended.

• 55:46Speaker 02

  Sure. I think something that sticks out in my mind is, I don't know if you know Sanjay Bhattacharya? He's a professor and fund manager.

• 55:54Patrick O'Shaughnessy?

  I know the name.

• 55:56Speaker 02

  I got to know Sanjay on Twitter, of all places, which is interesting for a US micro-cap investor to find a Indian mid-cap investor, is how he would probably qualify himself. And he started following me, I started following him, and we just started an email exchange and things like that. And I think I mentioned before how he wrote an article covering the intelligent fanatics of India. And it's something that, I was thinking about this book, maybe for a year before that, but it was really after reading that, that kind of gave me a push to kind of go after it. And after I read his article, I emailed him and I just said, "Sanjay, I mean, this is a great article. Is there any resources that you could point me to that would help me expand my mindset

• 56:41Speaker 02

  around this concept of intelligent fanatics? Is there anything?" I thought he would just email me back right away and say, "Yeah, here's the book, The Outsiders," or something like that. But he didn't respond right away. About two weeks later, I get an email back from him. And he said, "Here you go, Ian, I hope you enjoy." And in there was a PDF, and the PDF was 60 pages long. And in the PDF, he listed about 18 different references of books, articles, case studies, research reports. And then below that, he took out the parts of those books, case studies that applied to intelligent fanatics, and he highlighted them. And below that, his commentary on each thing. And I was just blown away, not by, obviously, the quality of what he just gave me, which was like the Holy Grail. I was like, "Oh."

• 57:26Speaker 02

  But the fact that anybody would take the time and effort to do that for somebody that I never met him personally before, even talked to him on the phone, and maybe had five email correspondence with him. It hadn't taken him hours to put and assimilate that much information into one PDF for somebody he barely knew across the world. And that was something that I've told him a few different times. I was like, "That was pretty cool."

• 57:46Patrick O'Shaughnessy?

  He has a presentation, I think it's called Floats and Moats, about Warren Buffett's and Charlie Munger's evolution as investors, which is...

• 57:57Patrick O'Shaughnessy?

  I don't know much about him, other than having been through that presentation. It's the most interesting take on Buffett's career that I've ever read. And I've read all that, you know, I've read all the, the major biographies and, and books written about Berkshire and Buffett. It's fascinating. And so I can imagine that, that same mind applied to

• 58:17Speaker 02

  Oh, it was.

• 58:18Patrick O'Shaughnessy?

  uh, sketching out this, this idea of an intelligent fanatic would be interesting to read. I'd love to get my hands on that.

• 58:23Speaker 02

  Yeah, I know it is. And he's just an amazing guy. You should, you should definitely have him on an interview. I mean, he's much more important than I am. And he's just a very knowledgeable, just kind-hearted guy. I mean, and just reaffirmed also kind of a concept in your life of, you know, trying to pour value into others, you know, every time you, you can.

• 58:39Patrick O'Shaughnessy?

  It reminds me that I forgot to ask about formative books. So maybe we could spend, spend a minute there. And I won't limit it to books, because, you know, obviously there, there are papers, sometimes articles, anything, conversations, people that have influenced the way that you think or view the world. And maybe the, the twist I would put on it is specifically books that have changed something about how you either act or view things. So Zero to One was a good example that you gave earlier, the kind of book that I'm after. But, but books that fit that mold, what would be some that come to mind?

• 59:10Speaker 02

  I would kind of categorize them in two categories, personal development and kind of business and investor development. On the personal development side, and I think the first book that I remember reading over and over again, when I was a senior in high school, you know, I could just tell that I wanted to brush up on my speaking skills, you know? And so I took a Dale Carnegie course my senior year, and they make you read How to Win Friends and Influence People, which is kind of like the bible of that class. And I remember reading that and then reading that three or four times. And soon after that, reading Think and Grow Rich by Napoleon Hill, which is also a classic that kind of helped me kind of reaffirm kind of how to set goals and how to just reaffirm those goals in my mind. And that's what I did basically through my early twenties, just about full-time private investing or whatever your goal would be.

• 59:54Speaker 02

  And those are two books that kind of set me on the right path early on that I can remember. And then on the investing side of, actually maybe I'll mention something else. One of the things, if you were to ask me, kind of What I do every morning that is kind of a ritual. I would say one of the things is I try to read or listen to something that will inspire me to get my day started out in the right track because I believe that you should be start each day like you're being fired out of a cannon, you know, and so you've got to find those things that will light your own fire so you can get the most out of each day. And so, you know, one of those books I'm reading now, which I think is a great book, is Tim Ferriss's book Tools of Titans. It's one of those things, especially for a person that might not have a lot of time,

• 1:00:34Speaker 02

  given their season in life, which with a 16-month-old, I have less and less time to read. And so it's a great book that's because it's three to four-page chapters and you can just read three or four or five of them every morning. And it's something that can, you'll learn a lot from and it can inspire you. And there's another book called Getting There that is kind of set up a similar way where it just kind of tells stories of leaders and whatever they did, you know, really short kind of 10-page nuggets that are easily digestible. And so those two books that I kind of powered through that kind of provide that inspiration to start each day. And on the, on the business and investing side, I mentioned to you, reading thousands of annual reports, and I know that's not a book, but I'll tell you what, when you read a company's annual reports, 10 of them or five of them in a row, it reads like a book

• 1:01:19Speaker 02

  because there's, you know, there's ups and downs and heroes and villains and good endings and bad endings. And I, I point to that as being very formative for my investing and my investment philosophy because it just, it focused me on developing a circle of competence early on and establishing what my two-hard pile was very early on, being able to say no to things quicker.

• 1:01:40Patrick O'Shaughnessy?

  Is there a company that people could go do this for? This is a really useful exercise, I think, and a good litmus test to find some company that's interesting and read five or 10 years of its annual reports. Is there a company that you can think of where doing that, going through that exercise, say, looking back 10 years through today, you think would be interesting or maybe even formative for, for people to kind of see how this thing flows?

• 1:02:05Speaker 02

  I would say any, any company that maybe somebody just has, is drawn to, you know, go back and just read their filings, you know, back before people knew about them and just see how the company, see how the business was explained, you know, see how the, the CEO himself talked about the business. One of the formative books. Not to get on this rabbit trail, but another formative book for me was, you know, William Thorndike's, you know, The Outsiders. And that's, a lot of those principles I've applied to what I look for, you know, in, in the founders that I look for as well. You know, there's just these really, these were kind of classic type folks that just didn't really necessarily care about Wall Street. You know, that's why, you know, a lot of them just didn't like talking to analysts.

• 1:02:47Speaker 02

  The old Sam Walton of Walmart, you know, driving his pickup truck when he was worth 25 billion. He's like, he just didn't care what the world thought about him. It's like, you know, it's like, yeah, yeah, yeah. But, but anyway, I didn't mean to go down that rabbit trail already, but I can't think of a, I would say, pick a company that you enjoy and then just go and learn about them. One of the, another good book is a book called Hundred Baggers by Chris Mayer, came out two years ago. And he talks about the different attributes of companies that have went up 100X. And it was kind of an off take of Thomas Phelps' book, Hundred to One, The Stock Market, which was written in the 1970s, that looked at the similar thing. Chris Mayer basically takes off where Thomas Phelps left off in time and, and describes

• 1:03:30Speaker 02

  the next 365 companies that went up 100X. And what's interesting, not only is the book really good, and it's a very easy read and it's very good, but in the back is an index of companies, of those companies that went up 100X. And what I've found to be a fun exercise is actually going back and looking at those companies when they were very, very young and trying to pull up articles and if they were public, reading the filings and just seeing what those companies, how they communicated, you know, all of those things. And, you know, I did that for maybe 30 or 40 of those companies. And it was really interesting to go back to see how these CEOs talked about their business. You know, like William Thorndike says, they, they talked about kind of per share, you know, metrics when they talked about the business. And another little commonality in the companies I look in today, it's like oftentimes in

• 1:04:15Speaker 02

  their investor presentation, they'll have a slide showing the SG&A as a percentage of revenue, how it's declined over the last five years. They're proud of that. You know, they show revenue per employee and profit per employee. They should want to show how productive they are. It's like, and it's not something they've been taught to do. They do it.

• 1:04:29Speaker 03

  Intuitively. Yeah. Fascinating. Well, this has been a blast. It's obviously an area of the market that gets virtually no attention because like you said, it can't. Most major investors can't own these businesses even if they wanted to. And so it's a neat area of opportunity, I think, sounds like for a very specific brand of investor out there. Yeah. Or for the piece of a very specific investor's portfolio, maybe not the whole thing. But it's been fascinating to learn about your process and history. So thanks for the time. I appreciate you having me on. Thank you.

• 1:05:02Speaker 03

  Hey, everyone. Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter, @Patrick_OShag, O-S-H-A-G. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.