IAN CASSEL: The microcap ecosystem is an incredible place. Whether you join the site or not, I don’t care. I just want more people to know that it exists. It’s an amazing place for the smallest student investor to have an advantage for once. You don’t want to invest where the institutions are. You want to invest where they’re going to go.

CHARLES MIZRAHI: My guest today is Ian Cassel. Ian is the founder of the MicroCapClub, an exclusive forum for experienced microcap investors who focus on companies with market caps that are less than $300 million.

CHARLES MIZRAHI: Investing gurus like Warren Buffett and Peter Lynch launched their careers by investing in microcaps. Microcap companies are the smallest public companies that exist, representing close to half of all public companies in North America. Companies such as Berkshire Hathaway, Walmart and Netflix started as microcaps. Investors who were able to identify these companies early on — and others like them — would have been able to see 20, 50 or even 100 times their money.

CHARLES MIZRAHI: Ian is also the chief investment officer of Intelligent Fanatics Capital Management — a money management firm that invests in microcap stocks. I recently sat down with Ian to talk about how he finds quality companies. We also talk about how the inefficiencies that attracted Buffett and Lynch are still alive and well.

CHARLES MIZRAHI: Ian, thanks so much for being on the show. I greatly appreciate it. I’ve been looking forward to it since I became a subscriber about a year ago.

IAN CASSEL: It’s an honor to be here. Thanks for having me on.

CHARLES MIZRAHI: All right. Before we begin, what the heck is a microcap? Explain it to me as simply as possible.

IAN CASSEL: Microcap companies are the smallest public companies in the world. Everybody has heard of Google, Facebook and Netflix. Well, half of all publicly traded companies are microcap companies — which are defined by having a market capitalization that’s less than $300 million. [I’ll] give you an example. In North America — the U.S. and Canada — there are roughly 10,000 microcap companies. And nobody has ever heard of most of them.

CHARLES MIZRAHI: Why is that? Why don’t people hear about them?

IAN CASSEL: Well, they’re too small. They’re too illiquid for any of the large brokerage firms to bother researching. In fact, that’s sort of an opportunity for the retail investors. This is an area of the market where they really have structural advantages as a small, astute investors.

IAN CASSEL: Larger pools of capital — mainly institutional capital — can’t invest in these companies until they grow and become more liquid. So, they’re on the outside of the city looking in, and the small investors have the advantage.

CHARLES MIZRAHI: So, they have very few eyes looking at them because Wall Street can’t look at them. They’re just too small — $300 million isn’t even a rounding error for most hedge funds. They’re just sitting there. Many of them are mispriced, right?

IAN CASSEL: Exactly. If we look at the microcap ecosystem — let’s say there’s 20,000 public companies in North America — like I said, around half of them are microcaps. There are still 10,000 — half the marketplace. If we divide up that microcap ecosystem — sub $300 million. When you look at the $200 million to $300 million market cap, you do see some institutions getting involved.

IAN CASSEL: That’s when you start seeing research coverage, and brokers follow it. They become more known, and they’re more liquid. Quite honestly, it’s a more efficient market. When you go smaller — say, sub $200 million or $100 million — you get into an arena where most of the investors that own the companies are retail investors.

IAN CASSEL: There’s very little institutional ownership and no research coverage. If you’re an investor in this area, you have to do the research. You have to do the primary research about these companies because there’s nobody else to lean on.

CHARLES MIZRAHI: If you read about Buffett, he was going around buying shares of illiquid companies from farmers 50 or 60 years ago. Information — especially financial information — was disseminated at a snail’s pace. It was by mail, and you had to go filing. There were a lot of mispriced opportunities in the marketplace.

CHARLES MIZRAHI: So, we’re seeing the same markets today that we saw 50 or 60 years ago?

IAN CASSEL: Yeah. A lot of people don’t realize it because they look at microcaps as the derogatory term “penny stocks.” It’s just a negative term, quite honestly. Those are really microcaps. They don’t realize that folks like Warren Buffett, Peter Lynch and Joel Greenblatt all started their careers as microcap investors.

IAN CASSEL: Many of the world’s greatest companies started as microcaps. Even Berkshire Hathaway — when Buffett took it over in the 60s — was a was a microcap company on an inflation-adjusted basis. Amgen and Intuitive Surgical — most of the world’s best-performing stocks have originated out of the microcap ecosystem. Wal-Mart, Netflix and Monster Beverage — all these companies have come out of it.

IAN CASSEL: And yet, a lot of people like to put this negative broad brush over the ecosystem of microcaps. But the best investors started here. Some of the best companies started here. This has been a vetted investment class. Quite honestly, it’s one that will remain structurally inefficient for decades to come — like it has been for decades.

IAN CASSEL: It’s not just me saying that. There have been some white papers written on it. In fact, a good friend of mine has looked at all the CSRB data since 1926.

IAN CASSEL: If you looked at all of the publicly traded companies since 1926 and divided up by market cap size, the smallest decile — the sub $115 million market cap — outperformed all other deciles. I believe the compounded growth rate in that smallest decile was 17.5% compounded, versus the next best — which was the next largest— at 12.5%. So, 17.5% or 12.5% is a huge difference since 1926.

IAN CASSEL: To take it a step further, a Yale finance professor — his name is Roger Ibbotson, and he runs Zebra Capital — did a white paper looking at illiquidity as a factor of outperformance. He looked at all the public companies in 1971. I believe the last time his research was updated was 2017. He also looked at illiquidity. And believe it or not, illiquidity was a big driver of outperformance. He had a matrix in his white paper that showed illiquidity, and then the microcap, small-cap, mid-cap and large-cap.

IAN CASSEL: Across the market cap spectrum, the best performing area was the illiquid — or the least liquid — component. So, since 1971, the highest returns were from illiquid microcap companies.

CHARLES MIZRAHI: You’re telling me that Berkshire Hathaway, Amgen and Netflix were all “penny stocks” or microcaps?

IAN CASSEL: Yes. All of those were microcap companies. Some of them actually IPO-ed as small microcap companies. Others may have IPO-ed — or went public — as larger companies or small-caps. And then they ended up going down and becoming microcaps. But then — just like a Phoenix rises from the ashes — they became large-caps or mega-caps. Most of the best-performing stocks originated — or were at one time — microcap companies.

CHARLES MIZRAHI: So, this is a way for investors — if they know what they’re doing — to find the next Berkshire Hathaway, Netflix or Amgen while it’s still trading at a very low market cap and doesn’t have a lot of institutional representation. Analysts aren’t even looking at it. Its illiquid. You can just buy these things, forget them, grow with them and make huge returns. Is that — more or less — right?

IAN CASSEL: Well, I wouldn’t say it’s a buy-and-forget or a coffee-can-type portfolio. All of these companies are small, emerging companies in many regards. And a lot of them evolve in not-so-good ways. I’ll give you a couple of examples, and we might get into this a little bit.

IAN CASSEL: I’m the founder of a site called MicroCapClub.com. We have some of the best microcap investors from around the world — about 250 folks. Some of them are institutions, and some are retail investors. But we see a lot of the best — small — ideas on MicroCapClub.

IAN CASSEL: Since the club was founded in 2011, members have profiled around 750 microcap companies. That’s a lot of companies. When we look at some of the outperformers, around 22 of those companies have gone on to be 10x stocks — so 1,000% returns or more. That’s a good number. But that’s 22 out of 750.

IAN CASSEL: Another interesting statistic is that around 240 of those 750 have doubled or more since they were profiled. Again, that’s a nice chunk of 750. But if we were to look at just the law of large numbers of companies that were profiled by fairly experienced microcap investors, around half of them are up, and half of them are down. So, it’s still important to pick the right companies.

IAN CASSEL: A lot of times, these are small, emerging companies. They might do really well with one or two products. But they have to evolve as companies and businesses to be able to become bigger. Some of them do, but a lot of them don’t.

IAN CASSEL: So, it’s not as easy as picking 15 of these things and forgetting about them. In fact, that’s probably a good way to go broke in this strategy. You need to keep your pulse on what you own. You need to know what you own. That’s the secret to microcap investing: Know your positions better than most. Really understand these micro-cap companies.

IAN CASSEL: The cool thing about microcaps is that they’re small businesses. You don’t have to analyze them like you would General Electric — which has 85 different subsidiaries across the world. They’re simple businesses. They’re easier to understand. It’s easier to find where the levers are. So, I think it’s an incredible place to invest — especially for investors who know how to do their due diligence and read financial statements.

IAN CASSEL: When most investors go astray in this space, [it’s because they] invest in the story stocks. They invest in the companies that aren’t profitable and aren’t real businesses. That’s when people tend to lose a lot of money quickly.

IAN CASSEL: If we’re looking at the metrics across microcaps in North America, out of 10,000 microcaps, about 15% of them are profitable. My best advice to anybody new is to focus on that 15% and real businesses.

CHARLES MIZRAHI: If you have a small business — let’s not look at it as a stock. Let’s look at it as buying a business. Because in many cases, they’re are really small. If we take on that mindset, it changes the game. Since we’re passive investors, what would you say is the most important thing to look at — especially when buying a microcap — so we’re not part of the 700 who lose money, and we can make 10x, 20x or 100x?

IAN CASSEL: I would say the most important thing is revenue growth and earnings per share growth. That’s the most important thing. Right alongside that, [it’s important] to do research about the founder, the CEO and the management team.

CHARLES MIZRAHI: Let me interrupt for a second and ask you a question. You wrote these books — Intelligent Fanatics. I read both of them. One of them was: Intelligent Fanatics: Standing on the Shoulders of Giants. And the other was: Intelligent Fanatics: How Great Leaders Build Sustainable Businesses.

CHARLES MIZRAHI: You and your coauthor dissected companies and founders — I think eight or 10 in each book. So, I got a well-rounded lesson on how great companies started from leaders with vision. You called them “intelligent fanatics” because it was the CEOs or founders who made the businesses in a pretty mundane industry.

IAN CASSEL: That’s correct. Those two books came about because one of our members on MicroCapClub — Sean Eddins — reached out to me and started writing a chapter about one of them in the first book. He reached out to me, and we connected on it.

IAN CASSEL: The term “intelligent fanatic” was derived from Charlie Munger. He used the term in one of his speeches. The definition of an intelligent fanatic is somebody that built a business from nothing up to something of significance.

IAN CASSEL: Usually, they ended up dominating their niche, geography or industry. And they not only dominated it over a year or two but for decades. It formed the question: How did they build their business in the first place? And then: How did they sustain that dominance over a long period of time?

IAN CASSEL: As a microcap investor, you need to find great leaders early if you want to find great companies early.

IAN CASSEL: I was interested in fine-tuning my qualitative lens for finding leadership. That’s really what drew me to coauthoring both those books with Sean.

IAN CASSEL: Uncovering some simple lessons in all the stories that we retell in those two books has really helped me and my investing. Believe it or not, one of the main takeaways from them is that a lot of the really small microcap companies are just hustles. It’s one or two people, and they’re just hustling. You can build a business from $0 to $10 million or $15 million a year in revenue if it’s just a hustle.

IAN CASSEL: The problem is that they’re their own selling. It’s never going to be a $50 million business — or a $100 million or more business. I run into those situations quite a bit when analyzing microcap companies. I want to find people who can build a good team around them and form that hustle into a real, scalable business. That’s really what I’m trying to find as a microcap investor.

CHARLES MIZRAHI: One of the most fascinating CEOs — that I loved reading about — was Sol Price. Sol Price was the mentor to Sam Walton of Walmart and Jim Single of Costco. I’m missing someone else. Was there a third company?

IAN CASSEL: Bernie Marcus of Home Depot.

CHARLES MIZRAHI: Bernie Marcus. Right. So, this one man — Sol Price — came up with a new concept in retailing.

CHARLES MIZRAHI: Tell me some thoughts on that. Delve into that. If you can find the next Sol Price in these microcaps, you’ll hit a grand slam.

IAN CASSEL: [If only] there were 1,000 Sols out there to invest in. But it only takes one. If you can find someone as special as him — or even somebody that’s half as good — in the microcap arena, you’ll do really well. 

IAN CASSEL: That was one of the interesting things about Sol. He continued to mentor others. You had people like Sam Walton reaching out to him and wanting to learn from him. They were kind of competitors. But they would still talk to each other. He would still help people. He had a legion of fans of other retailers who built huge companies — whether it was Home Depot or Costco. They idolized him and built $10 billion companies alongside him.

IAN CASSEL: He started a company called FedMart. It did really well, and then I believe Costco ended up acquiring his interest in that. That’s how it evolved. But he was a great example. He was one of my favorite intelligent fanatics because of his ability to compound capital for his shareholders over 40 or 50 years. It was impressive.

CHARLES MIZRAHI: It’s not in high-tech. It’s not in the internet. It’s not in search. It was in retail. Every day retailers open their stores, and all their trade secrets are out on the floor. There’s nothing secretive about retail. It’s all exposed.

CHARLES MIZRAHI: Sol Price was able to do it. And he mentored people who went on to become giants and totally recreate the retail landscape.

IAN CASSEL: It’s interesting when you can trace a lot of things back to Sol. He’s one of the originators of wanting to sell things as cheap as possible to the consumer. He wanted to create that flywheel of heavy volume at a low margin.

IAN CASSEL: Wal-Mart picked up on that. Jeff Bezos picked up on that online. People say: “Jeff Bezos is basically Sam Walton — just taken online.” But Sam Walton was taking much of Sol Prices’ vision to another level. As you go through the generations, you can trace things back to Sol Price in a lot of ways.

CHARLES MIZRAHI: It’s fascinating when you have a leader — or as Charlie Munger, Warren Buffett’s partner put it: “intelligent fanatics” — or people with a vision who want to drive the business. I remember Buffett said that Bill Gates would have been successful in owning hot dog stands. He would have been No.1 in the world. It’s that vision. It’s the ability to communicate that to your people, solve a problem and continue to create a culture that grows and grows.

IAN CASSEL: Yeah. But investing is still hard. You brought up Warren Buffett and Bill Gates. They’ve been friends since the mid-90s, but Buffett has never owned Microsoft. And it’s been an incredible investment. Even when it’s obvious, it’s still hard to pull the trigger on some of these things.

CHARLES MIZRAHI: I want to get to another point, which is the importance of finding a great leader. I want to focus on that.

CHARLES MIZRAHI: In terms of the approach that I take with Alpha Investor — which is my newsletter — one of the main things I look at is the CEO. If you can find a Michael Jordan or LeBron James and ride on their coattails, you’ll have already solved the problems that most businesses have. So, I agree with you 100%. If you find a business that’s making money and not losing it…

CHARLES MIZRAHI: You take 100 stocks, and you’re down to 15 or so. I think you said about 15%. And then you wait for the next Warren Buffett, Sol Price, Sam Walton or Jeff Bezos and latch onto their coattails. It’s not complicated, but it takes a lot of patience. And as you mentioned, it takes a lot of hard work and research.

IAN CASSEL: A lot of it is common sense — especially when you’re looking at smaller companies. You want to see a CEO who has skin in the game, owns a nice piece of the company and is motivated by his equity position — not from a high salary or stock options.

IAN CASSEL: One of the big things that I look for is — and it’s probably the main area where my investing has evolved by writing these two books — do they put great people around them? They want to build a sustainable company that’s around 50 years past their death. They want to get the best talent they can find. They don’t need to be the smartest person in the room. They just want the smartest people in the room to work for them.

CHARLES MIZRAHI: Right. I’m sorry to interrupt you. Andrew Carnegie — the richest man in the world in the early 1900s — was worth hundreds of billions of dollars. He never owned 100% of any of his businesses — which is fascinating. He always found people smarter than him, invested alongside them and let them do their work.

CHARLES MIZRAHI: By the time he was 40, he was staying in New York and writing. He had this magical way of looking at the world — that was destroyed in World War I — and making a peace campaign throughout it. He sat back and reaped the rewards of investing in smart people.

IAN CASSEL: Exactly. And a lot of their processes are set up to cultivate talent and promote from within. If you start there, you know that you’re not going to have a ceiling if you continue to perform. It’s creating opportunity.

CHARLES MIZRAHI: Right. So many people look at investing and get overwhelmed by numbers and spreadsheets. But business boils down to making and selling things, treating your customer right, taking care of your people, getting out there with a message, getting your customer engaged and doing the right thing. It’s nothing more complicated than that.

CHARLES MIZRAHI: That’s what I think every business boils down to. Business doesn’t boil down to a whole bunch of spreadsheets, matrices, consultants and studies. It’s about doing simple things right more often than the next guy. When you look at the microcap space…

CHARLES MIZRAHI: Full disclosure: I’ve been a member for a while. I don’t contribute. To contribute, you have to meet strict criteria and be approved by you folk. Someone has to put in a stock pitch and be approved. How many members do you have?

IAN CASSEL: It doesn’t cost any money to be a member. You just have to prove your worth by applying. An application is a two to three-page investment thesis on your favorite microcap stock. Every month, our membership votes on all of the applications we’ve gotten in the preceding month. Normally, we have around 20 applications per month, and maybe two to four ultimately end up getting in.

CHARLES MIZRAHI: But then you have a whole portion of membership which is just voyeurs — like me — who pay the money and watch what you brainiacs do when you find stocks, right?

IAN CASSEL: Yeah. We have a subscription for people who don’t have the time or ability. You just pay $500 and view our conversations.

CHARLES MIZRAHI: I don’t think I’ve come up with an original thought in my whole business career. I just watch what other people do and figure it out. I say: “A whole bunch of smart guys came up with this. I can use part of my brain power to sift through that and find someone who’s the best of the best.”

CHARLES MIZRAHI: Another thing I want to tell investors who are listening: You don’t have to be original. You don’t have to create the next X, Y or Z — or find the person who’s creating it. What you need to do is keep it as simple as possible and clone ideas.

CHARLES MIZRAHI: If you see great investors investing in something — or if you see a great CEO jumping to a new company — it’s as simple as that. It’s about following great CEOs into great businesses. I think Buffett said about Tom Murphy that no matter what business Murphy was in, he would have invested regardless — just by following great leaders. Do you find the same thing in microcaps?

IAN CASSEL: Yeah, I do. That’s why MicroCapClub was created. I don’t need to find these ideas. I can utilize 250 other people and see what they liked and why. We all invest differently. There are people who only invest deep-value stocks. Others only invest in growth stocks. Some people invest in mining, but there are also people who hate mining. We have people who hate biotech and people who love it. We have all of that on MicroCapClub. Every niche of investing that’s present in larger caps is still present in these smaller companies. The businesses are just smaller.

CHARLES MIZRAHI: What I found out by being a member and looking at some of these small stocks…

CHARLES MIZRAHI: I just want to mention that one of these companies had a market cap of $50 million — which isn’t even a rounding error in some research and development areas of tech companies. I think CEOs get paid more than that.

CHARLES MIZRAHI: The whole company was worth $50 million. When you looked at it, the balance sheet was strong. The CEO had a fantastic track record. Earnings and revenue were increasing. Its customer base was strong. Everything was working. Yet, the stock was selling at 50% or 60% — and sometimes less than the cash in the bank.

IAN CASSEL: You’ll find some really bizarre situations, and sometimes it’s just because nobody really knows about him. Or, nobody has done the work to get to know him. It’s really a combination of those two things.

IAN CASSEL: One of the little qualitative tricks that I use to find good companies is [to look for] management teams or a CEO who has had previous success. I love it when I see a CEO who comes into a new situation and funds the company himself because he made $50 million or 100 million in an exit somewhere else. You see them funding their vision for the future. They’re not influenced by Wall Street, bankers or brokers — who try to distract them. They can fund their visions themselves.

IAN CASSEL: There aren’t very many — but you might find one or two a year where you find a qualitative attribute that gets you to sit up a little straighter in your chair and dig in. Those are the ones that I found work out pretty well.

CHARLES MIZRAHI: You don’t need 100 of them. You say one or two a year. I’m talking one or two every three years.

CHARLES MIZRAHI: Think about this: You met Buffett in the 1950s in Omaha. You hit the lottery. You gave him $10,000 — which is worth $300 million or more today. You didn’t have to do anything for that. You just had to find him and invest with him — not even understanding what he did.

CHARLES MIZRAHI: I remember Don Keough — who later became chairman of Coca-Cola — lived across the street from Buffett, but didn’t invest with him. He said: “The guy works out of his bedroom. He’s a nice guy and all, but I’m not investing with him.” That was the biggest regret of his life.

CHARLES MIZRAHI: So, once you find that great CEO and latch on to them, you should ride that out for as long as you can — hopefully for decades. The point that I want to make — and I’m sure you have so many examples of this — is that you don’t need tons of them. You need a few. If you find those that do the 10x, 50x and 100x, you’re pretty much set.

IAN CASSEL: Yeah. Microcap is a game of slugging percentage — not batting average. Even somebody like me — who’s pretty well versed in this space — when I look at my own portfolio, I’m a rather concentrated investor, so I’m in a dozen companies. I know I’m going to be wrong about four or five of these things.

IAN CASSEL: I start buying them when I see signs of greatness. Then, I watch them evolve. If they evolve in good ways, I add to them. If they evolve in bad ways, I take them off and find something else.

IAN CASSEL: It’s really about trying to find those three or four out of a dozen — which end up being big winners. And a big winner could mean doubling, tripling, 5x or 10x. But you’re always going to have some losers. You’re not going to be right all the time. It’s important not to beat yourself up over that. Nobody’s perfect.

CHARLES MIZRAHI: I have a friend of mine who’s in private equity. He says: “We strike out a lot. But we don’t hit home runs. We hit grand slams. So, we might have 10 companies, and eight of them strike out. But the two that we do hit are grand slams. They make up for those eight and then some. It seems that microcap is the same way because the upside is enormous when you do hit it.

IAN CASSEL: Yeah, it’s similar. They call it power laws. They’re kind of similar to those you’d find with venture capital, where you’re looking to hit it with two out of 20 or two out of 30. Hopefully, you can hit it two or three out of 10 or 12.

IAN CASSEL: Those same power laws are present in small public companies. And there are other small, emerging markets. The interesting thing is that, when you look at small private equity, venture capital or microcap, we’re all invested in small companies.

IAN CASSEL: Everybody hears about private equity and venture capital. They’re all over the news. Everybody wants to be the next Andreessen Horowitz, but you very rarely hear anything positive about small microcap companies. The irony is that out of those three buckets, microcap is the only place where the small, astute investor has the advantage.

CHARLES MIZRAHI: Why do you think that is? Why don’t you hear more about that?

IAN CASSEL: Those two areas I mentioned — small private equity and venture capital — are still rather institutionalized. The best dealers are going to the larger institutional venture capital firms. You just don’t have that element in small microcaps. It’s kind of bizarre, but a lot of people almost see illiquidity as riskier than no liquidity. We have some liquidity as small public companies. And yet, we’re kind of seen as this very risky investment class. I would say there’s a lot more failure in venture capital than in small microcaps.

CHARLES MIZRAHI: Why do you think that is?

IAN CASSEL: I don’t know why there’s that misperception. To be honest with you, it has always bothered me. It’s one of the reasons why I’m so active on social media — just about the space in general. It just bothers me.

CHARLES MIZRAHI: You mention microcaps to people, and the first thing they think is — if you explain that they’re small caps, and stocks that sell for $1 or $3 — penny stocks. “Penny stocks? They’re scams.” Many of them are. Why is that perception so overblown among the entire asset class?

IAN CASSEL: I think it’s because of two reasons. I think the No.1 reason is that the first entree somebody gets to microcaps is from this glossy hard mailer you get in your mailbox once or twice a year that says: “Buy XYZ. It’s the next Amazon.” And it’s a $2 million promotion that a company paid to get the word out on their company.

IAN CASSEL: Over a five-year period, I collected all of those. I think I got 43 of them, and 99% percent went to $0. So, you just think about all the people who also get something like that. They might throw a little bit of money at it. They see it go down to $0. Then, they don’t want anything to do with that space anymore. I think that’s No. 1.

IAN CASSEL: No. 2 is that I don’t think there’s a large investor who’s holding the flag for the microcap ecosystem. Yes, Buffett, Greenblatt and Lynch started here, but they grew out of the space. It’s the space where you’re constantly losing your best investors because they evolve up and out.

IAN CASSEL: They can invest here if they manage $0 to $20 million. But they can’t invest $1 billion and still invest in these small companies. So, there’s nobody left to say: “This is a great space” anymore. It’s kind of like a college football team. You’re constantly losing your best players.

CHARLES MIZRAHI: Yeah, but that’s a tremendous advantage for people like yourself.

IAN CASSEL: It is.

CHARLES MIZRAHI: You know what you’re doing. You never want to play poker against professionals or experts. You want to play against a marketplace that doesn’t have your smarts. As Buffett says: “If, after a little while, you don’t know who the patsy in the poker game is, you’re it.”

IAN CASSEL: Exactly.

CHARLES MIZRAHI: In most investing, you’re the patsy. You don’t have as much information. You don’t have as much research as JPMorgan, Morningstar, Argus or any of these firms. You don’t have that information edge. But the microcap is a place where you can have an edge, and it’s not crowded.

IAN CASSEL: Exactly. You nailed it on the head. It’s an opportunity to find real, growing and profitable businesses. They’re likely not going to be the ones that you get in your mailbox.

CHARLES MIZRAHI: These companies would never spend $1 million on promoting their stocks. They’d take that $1 million and use it to expand their businesses.

IAN CASSEL: Exactly.

CHARLES MIZRAHI: So, you can write off anything that’s glossy — glossy mailers, phone calls, emails or anything to that effect. If a company has to go out of its way to pitch itself — and it’s all about the stock price — you want to hold onto your wallet and run.

IAN CASSEL: Yeah. At some of the best operators that I’ve invested in, Investors aren’t No. 1.  Their customers and employees are. I don’t know where investors are, but it’s probably down the list. They’re after stakeholder’s and suppliers. They’re down further. That’s what you want to see as an investor. You want to see a business and leadership team where its employees and customers love the company. That’s the part of the due diligence that’s most important.

CHARLES MIZRAHI: Over the last couple of days, I saw one company on your site that everyone was hot and heavy on. I forgot the name of it. You probably know it. Someone mentioned that they just hired an investor relations firm and spent money to pump up the price of the stock. Everyone turned really sour about that. Does that sound familiar?

IAN CASSEL: Yeah. Believe it or not, we saw a lot more of that five or six years ago.

IAN CASSEL: You see less of that today because it leaves such a negative taste in the mouths of experienced investors in this space. I don’t want to say: “Investor relations is bad.” I don’t mind if a company has an investor relations firm because it needs help telling a story or creating an investor presentation. I get that. It’s really those areas that aren’t tasteful, such as the hard mailers I talked to you about — or sending out email blasts. Good companies won’t do that.

CHARLES MIZRAHI: Right. So, let’s go through this again. Stay away from the penny stock mailers. Stay away from companies that are losing money. You just narrowed 100 down to about 10 or 15 right off the bat. Then, if you go with those 15 and find businesses that you can understand — run by CEOs or founders who have vision and skin in the game — and you like their stories, you have a very good chance of doing well.

IAN CASSEL: Yeah, exactly. And you’re still not going to be right all the time. But over time, as you grow as an investor, you’ll know the little things to look for. You’ll get better and better the more you do it.

IAN CASSEL: My best advice to people who are new to the space is: Stay away from the unprofitable companies. Look for leadership teams that have skin in the game and have really great backgrounds. Look for the businesses that could sustain a double-digit growth rate and remain profitable over the foreseeable future. You’ll do pretty well to invest in a basket of companies that fit that.

CHARLES MIZRAHI: Right. So, I never looked in this space. Never. And this is only for my personal account with a very small amount of money. It’s money that I could definitely afford to lose, and it won’t upset me in the least. It’s an asymmetrical bet. The most I lose is X, but the most I can make is X times 100 — hopefully.

CHARLES MIZRAHI: I found one company on your site where the management was triple-A. These people were in the business for years. They were in the pharmaceutical business, so they had a product that was already out there, approved and sold by another company.

CHARLES MIZRAHI: All they do is sit back and collect the royalties. Right off the bat, I have a profitable company, smart management and cash flow coming in. So, the whole thing is buying when the price is right.

CHARLES MIZRAHI: I saw that the price had a big downturn a few days or weeks ago. I said, “OK, everything lined up there, and I just increased my chances of success by tenfold.”

IAN CASSEL: That’s the other funny thing. Even the really good businesses are still volatile securities and stocks. You’ll have a day when somebody just decides to put in a market order, sell a chunk of stock and it’s down 20% for no reason.

CHARLES MIZRAHI: That’s a great advantage to someone who knows.

IAN CASSEL: You just have to be aware, opportunistic and watch the companies that you own — or want to own — during those periods of time when the volatility gives you an opportunity.

CHARLES MIZRAHI: Could you talk about a company that you have no position in, seems to come up a lot on your site and that people are hot and heavy about for all the good reasons?

IAN CASSEL: This isn’t a recommendation. This was the No.1-performing stock on MicroCapClub when it was profiled back in 2013. I’m just giving you an example of a success story. It’s a company called XPEL.

IAN CASSEL: It’s a company that was profiled at $0.36 per share. The company makes paint protection film to protect cars from scratches, dings and things of that nature. It builds up its brand in very high-end cars — Ferraris and Porsches. They would go to all the club meetings, and they built up a good business. Back then, the business had about $15 million or $16 million a year in revenue. XPEL sells its film to dealers, and the dealers put that film on cars. So, they have a lot of dealers throughout the world.

IAN CASSEL: Anyway, the company grew from that size to one of almost $200 million in revenue. It’s working its way up to that. The stock went from $0.36 to $60 in five years — which is pretty incredible. And that’s not some tech-heavy play. We’re talking about selling paint protection film on cars. I don’t know what type of bagger that is. What’s $0.36 to … I don’t know. It’s a lot.

IAN CASSEL: That’s one of the big winners we’ve had. Obviously, there are plenty of losers that I could also discuss.

IAN CASSEL: But that was one company that had an “intelligent fanatic” leader who owned a big chunk of the company, had great people around him and just kept on executing. He didn’t dilute shareholders along the way. He didn’t do any toxic finances to fund the company. He just grinded it out and built an amazing business.

IAN CASSEL: It’s still a small-cap. It’s not like it’s a large-cap or anything like that. It’s still relatively small compared to other public companies out there.

IAN CASSEL: But that was our biggest success on MicroCapClub, so I thought I’d bring it up.

CHARLES MIZRAHI: So, a member brought that up as an investment opportunity?

IAN CASSEL: One of our members profiled it at $0.36 per share.

CHARLES MIZRAHI: How did they find it?

IAN CASSEL: I believe Paul Andreola profiled that company. He’s a rather prolific, successful investor in Canadian microcap companies. He mainly invests in Canada microcaps. He was just aware. He was looking at companies that were growing, profitable and had insider ownership. He talked to management, liked what he heard and profiled it for the MicroCapClub.

CHARLES MIZRAHI: Another thing that’s pretty amazing with microcaps is that you can get management on the phone. That’s something hedge funds and institutional investors get access to in multibillion-dollar companies. The average person would never be able to speak with the CFO or CEO. But with microcaps, he’s usually the same guy who’s also sweeping the floor. So, when you do call with a question, you’ll often get that guy on the phone.

IAN CASSEL: It’s what drew me to the space 20 years ago — the ability to talk to the people running the company. I couldn’t do that with Steve Jobs back in the day — or any large company. But a lot of these microcap companies [have people who] are happy to talk because they’re not used to it.

CHARLES MIZRAHI: There was a company I invested in that was in our newsletter about 10 or 12 years ago. I called it and I knew we had a winner because it had an answering machine for its investor relations department.

CHARLES MIZRAHI: You called up and they said: “We’ll get back to you.” I read the 10K. I read the annual report. I had a small question. I got a call back around three or four days later. This was around 2010. It was somewhere in Texas. I don’t remember the small town that it was in. The founder and CEO called me back and said: “I heard you had a question. What is it?” I started speaking and asked: “What do you do there?” And he said: “Well, I’m the chief bottle washer. It’s my business.”

CHARLES MIZRAHI: We talked for about an hour and a half, and he explained the business to me. I asked: “Who’s your competition? How do you go about doing that?” I felt like I was Warren Buffett in the 1950s — calling people.

CHARLES MIZRAHI: Anyway, we made the recommendation. The company was Atrion Corporation (Nasdaq: ATRI). The company made small little things like contact lens solution cases and catheters. It had a small, niche market. At one point, the stock was up eight or nine-fold. It was there in plain sight. I said: “Do you have any analysts come out?” And he said: “Who the hell wants to come out to see us? We’re too small. We’re in a dusty place about an hour and a half from the main airport. No one bothers us.” That made me so happy because nobody was looking at it. It was a $200 million stock at the time.

IAN CASSEL: You see that quite a bit. I love finding companies like that. They grow profitable and dominate a small niche in the market. It really vets management because it usually tells you that the company either took market share from somebody else, or it created the market it’s in. Either way, it vets the management team and says that it’s experienced. They know what they’re doing.

IAN CASSEL: So, I love to find the companies that dominate a small market. I don’t need to find something that has a $10 billion addressable market. It can be a $50 million or $100 million. I don’t worry about it too much. When you have customers that love you, they end up pulling you into other places where they’re underserved.

CHARLES MIZRAHI: Yeah!

IAN CASSEL: The market ultimately ends up expanding.

CHARLES MIZRAHI: The customer will direct you to the business you should be in and how to get better. They’re not your customers, they’re partners. They want to see you grow, and you want to see them grow. It’s a very symbiotic relationship. I’ve always found that that’s the way the greatest businesses have grown — especially from your books. The owner, CEO, C-suite people, and management see the customers as partners. And they’re going to grow together. If they’re happy, I’m happy.

IAN CASSEL: Yeah, agreed.

CHARLES MIZRAHI: Ian, thanks so much. I think what you’re doing is really valuable. You’re providing a little bit of sunshine into an area that’s rife with hucksters. You’re separating the wheat from the chaff. You have a bunch of smart people doing it. It’s a $495 charge to join your group. But even if people don’t join your website, I highly recommend your books: Intelligent Fanatics. You can learn how CEOs become great and what makes them great. And you can learn how to replicate that.

IAN CASSEL: I appreciate that. I think the microcap ecosystem is an incredible place. Whether you join the site or not, I don’t care. I just want more people to know that it exists. It’s an amazing place for the smallest student investor have an advantage for once. You don’t want to invest where the institutions are. You want to invest where they’re going to go.

CHARLES MIZRAHI: Or where they can go now. Some of these companies don’t even have conference or earnings calls because no one cares about them.

IAN CASSEL: Yeah, exactly.

CHARLES MIZRAHI: Ian, I wish you continued success. The site is MicroCapClub.com. You started it. It’s a really great site for a lot of information. You have two books. The first is: Intelligent Fanatics: Standing On The Shoulders Of Giants. The second one is: Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses.

CHARLES MIZRAHI: I think that these should be required readings in business courses. I’ve had interns who are great at making love to a spreadsheet. But talk to them about the qualitative parts of a business, and they just don’t get it because many of them have never run one.

CHARLES MIZRAHI: Then, you start reading about Sam Walton lying down between the aisles and Sol Price’s Price Club to measure the distance between the shelving. Sol Price almost threw him out of there. But it’s those simple things. If you find managers with passion, drive and vision, it doesn’t take much to latch onto them and make money.

IAN CASSEL: My goal is to find intelligent fanatics early. That’s what everybody should do, too. I’m glad you enjoyed the books, and I appreciate the opportunity.

CHARLES MIZRAHI: Great. Ian, thanks so much. It was a pleasure having you today. I wish you continued success.

IAN CASSEL: Thank you.

CHARLES MIZRAHI: Thanks for listening to this episode of The Charles Mizrahi Show. If you’re a new listener, welcome! If you’ve been listening for a while, we’re glad to have you back. Either way, we’d love to know what you think of the show. Please leave a review if you listen on Apple Podcasts. Reviews make it easier for others to find the show. You can also see a video of the interview on The Charles Mizrahi Show channel on YouTube.