Ian Cassel | The Best Performing Investments Are Small-Cap Companies Under $114M Market Capitalization

Ian Cassel is a full-time microcap investor and founder of MicroCapClub, the MicroCap Leadership Summit, and co-founder of the Intelligent Fanatics Project. Ian started investing as a teenager and learned from losing his money over and over again. Today he is a full-time private investor that supports himself and his family by investing in microcaps.  In this interview, Ian shares regarding his approach to investing, his successes and failures as a microcap investor, and why investors should consider focusing their investing efforts on microcap companies.

0:05 Introduction

2:04 How Ian got started in microcap investing

10:45 What is the MicroCapClub?

15:10 Ian discusses the thesis of why someone would want to invest in microcaps

21:38 Ian breaks down his one-sentence investment strategy word-by-word: “My goal is to own the smallest, most illiquid, least institutionally owned, misunderstood businesses I can find that are run by intelligent fanatics.”

36:15 Ian’s past and current investment experience with junior mining stocks

38:57 Does Ian’s strategy work for pre-revenue companies with no cash flow such as most junior miners?

42:50 The main differences Ian sees in US microcap equities vs Canadian microcap equities

46:20 Cautionary advice regarding accessing initial capital to get started in microcap investing

BEGIN TRANSCRIPT:

Bill: Welcome back, ladies and gentlemen, and thank you for tuning in to another Mining Stock Education episode. I’m Bill Powers, your host. Today, I’m joined by Ian Cassel who is a full-time micro-cap investor, he’s the founder of MicroCapClub, the MicroCap Leadership Summit, and he’s the co-founder of the Intelligent Fanatics Project. Ian started investing as a teenager and learned from losing his money over and over again. Today, he’s a full-time private investor that supports himself and his family by investing in micro-caps. I invited him on the program today to talk about all things micro-cap investing, and also so that he could share his wisdom, his successes, and failures with us. That being said, Ian, thank you for joining me and welcome to the podcast.

Ian: Thank you, Bill. I’m really honored to be on the podcast and really look forward to, hopefully, sharing some wisdom with some folks that listen to your program.

Bill: This is your full-time passion and you’re good at it, so I appreciate you taking the time to share with us. Let’s get a little bit of your background. How did you begin to focus on this niche, micro-cap investing?

Ian: Well, you know, to explain that, I can probably retell the story that got me interested in micro-caps and, to do that, I’d have to go back to around 1997 and to date me, I’m 37 years old, so I would’ve been a junior in high school, at that point in time, in 1997. And my parents sat me down and they told me that, you know, they’d save for me around $20,000, up to that point, and they sat me down as a junior in high school just so that I would know that that was all I was going to receive and that, you know, I could use that for my college education. And I could, you know, really decide where I wanted to go, at that point, and I could go to a more expensive university or college and probably spend that in one semester or I could go to a less expensive university and maybe I could, you know, use that for the entire 4 years.

And, at the same point in time, it was, you know, sort of the bull market in internet and technology companies. It’s 1997, and I was getting more interested in the markets, just like a lot of other people were at that point in time. And I decided, you know, “I’m gonna go to a local university and also work almost, or equivalent, of full time and, that way, I can work and pay for my college education, and then, I can invest this money, this $20,000, into the marketplace.” And so, that’s, ultimately, what I did and I ended up investing in two or three small-cap technology companies, which was all the rage in the late 1990s and did fairly well, up until the top of the bubble, I turned that $20,000 into $100,000 or so by 2001.

But ultimately, that bubble collapsed, as we all know, and, you know, I ended up averaging down into those same two or three companies, the whole way down, and I ended up losing about 90%, 95% of that money from the peak, so I was left with about $5,000. And, you know, that was a very humbling experience, but it was also, you know, a great learning experience.

And really, around that time, it’s sort of been, you know, 2001 or so, I was starting to look at smaller and smaller companies. Maybe it’s because everything was dropping as well but, you know, I started looking at micro-caps. And one of the first companies that I looked at was a company called XM Satellite Radio. And many people might know of XM Satellite Radio maybe down here, in the United States, maybe you also do in Canada as well, but that would later merge with Sirius and become Sirius XM. And pretty much every new vehicle that is produced has a Sirius satellite radio that’s in those vehicles. But, back in 2001, it was really just a story. You know, this company, XM, had, you know, maybe a billion and a half in debt, they had really very little subscribers, they had no OEM agreements with car manufacturers. And it really was a coin flip whether this company was gonna survive or not. And it was a micro-cap company back then. You know, it was around 150-million market cap, so it was a rather larger one.

But, you know, I fell in love with that story because, you know, back in 1997, everybody listened to Terrestrial Radio on their cars. You know, and if you got 10, 20, 30 miles outside an area, you’d start losing reception and you’d have to find another radio station. And, you know, really just the idea of having 100 crystal-clear radio station channels, you know, across North America, was a story that appealed to me. And so, I can’t really say that the fundamentals of the company got me interested in it, it was really the story.

And also, you know, a lot of people were betting against this company. You know, I think 41% or 42% of the shares were sold short at the time. But nonetheless, this was a company I was interested in and, through my research, I saw that they were going to be presenting at a micro-cap conference, up in New York City. And, you know, I called the conference organizer, I said I was Ian Cassel with Cassel Capital, which I just made up off the top of my head. And sure enough, they let me come to the event, and, you know, I was a little bit surprised by that, but only, I think a month or two later, I realized there was actually a Cassel Capital that was out of New York and they probably thought I was the founder’s son or something like that.

So here I was, you know, I would’ve been about 20-years-old, 21-years-old, at the time. And now, you know, I could go up to this conference, I’m from Lancaster, Pennsylvania, so that’s the South-Eastern corner of Pennsylvania, never really been into New York City too much, at that point in my life. So, you know, I put on my suit that I wore in my senior-high-school photos, got on a bus at 5:30 a.m., had some fake business cards made, and headed for New York City and read the annual report of XM on the way up. And, ultimately, ended up going to this event and sneaking my way into a one-on-one meeting with the CEO of XM Satellite Radio, at the time, spent about 10 or 15 minutes with him. Really, I was just infatuated with that story, coming out of that meeting, like a lot of people are, the first time you talked to a management team. Ran out of there, took a bus home, couldn’t sleep that night, took that $5,000 or $6,000 I had left, bought XM Satellite Radio at $1,78 per share. And, almost immediately, the company started doing good things, you know, and what resulted was one of the biggest short-covering rallies that I’ve ever seen. You know, those 42% shares that were held short in that company, they ultimately ended up covering, as the company signed OEM agreements, refinanced their debt. And, over a 14-month time frame, that stock went from $1,70 to $34 per share.

And so, ultimately, I ended up making all the money back that I lost in that internet dot-com era. And obviously, as your listeners gonna probably thinking to themselves, that was 150% luck. You know, I was at the right place, at the right time, with the right amount of courage and the right amount of luck to pull that off. And, you know, so I definitely don’t say that skill, but I really point to that story as what drew me into the micro-cap ecosystem. And, you know, it wasn’t XM Satellite Radio, wasn’t the thought of, you know, satellite radio in general, it was what drew me into micro-caps was the ability, for a little person like me that was just a retail investor, albeit, I did lie a little bit, to be able to sit down with a management team across a table and have a conversation with them. You know, that was just an amazing experience, and really, from that point on, I’ve just been focusing on micro-caps, since then, in 2002. And, you know, really, just from there, just kind of started to learn the ropes from different people. You know, back then, in the early mid-2000s, all the activity was on message boards, so here, in the United States, back then, it was Raging Bull, Yahoo Finance, InvestorsHub, you know, it was probably equivalent to your Stockhouse or other message boards you have in Canada. But that’s where all the activity occurred, and so, that’s where I was.

And, you know, I stumbled upon other people that were likeminded, and a couple mentors along the way, and really just learned the ropes by losing my money over and over again, like you said in the opening remarks, to where I then became a full-time private micro-cap investor, in 2008, which was an interesting time period as well, and really have been doing this full-time, just my own capital, for around 10 years now.

Bill: What was the initial draw to the micro-cap sector? Before you took your first investment with that money that your parents had given you, was there a book you read or a famous person or someone you knew that had success in micro-cap investing that kind of piqued your interest?

Ian: You know, I can’t really point to a book or anything like that, I think it was just the time period, you know, I started looking at it because the market was crumbling. And I think a lot of these companies that were high flyers, at that point in time, you know, the Dot-Com Bubble, you know, crashed. A lot of them became kind of micro-caps, at that point in time, and I just kind of started looking around at other companies at that point. You know, I can’t even really say that, at that point, I even knew what the term micro-cap meant. You know, more or less, I was just now looking at these smaller equities and, you know, looking at something that, instead of trading at $18 a share, was trading at $1 per share, and just being enamored by the fact that, “This just needs to go to 2 and I’ll double my money.” That seems easier than buying a $15 stock and going to $30 and, obviously, that’s not exactly the truth either as we all know. But I think it was just kind of the time period that got me interested into the space.

Bill: And then, out of your journey and your personal success, you launched the MicroCapClub. So what is the MicroCapClub?

Ian: So MicroCapClub was launched in 2011, so that was about 3 years after I became a full-time private investor. And, you know, at that point in time, I just wanted to see more ideas. And I had my own personal blog, at that point in time, and I had a pretty big following of this blog. I’ve always been a concentrated investor, so I’m usually always in four, five, six names tops. And, you know, I’d be on this blog talking about what I liked and why. And, you know, after a period of time, when you have a lot of followers, you start to, unfortunately or fortunately, you know, start moving the markets in these small liquid stocks, that you were talking about. And I just saw that as a liability, you know, I didn’t like that type of exposure. And so, I decided, you know, “What’s kind of a platform that I could create that would allow me to kind of share my insights and ideas and what I liked but also would allow other experienced micro-cap investors to share ideas on what they like?” Because I was interested in what other people were looking at as well.

And I really looked around at a couple of websites that were doing a great job. There’s one, down here, in the Unites States, called Value Investors Club, which was started by Joel Greenblatt, he’s a famous investor. And I kind of took some of the ideas that they were doing and I kind of took a couple of ideas from a couple other websites and kind of melded it together to form MicroCapClub. And it’s really meant to be an idea generator of ideas. And it’s really grown nicely, not in quantity, but really of quality. I mean we’ve always fairly consistently had between 150 and 170 members of MicroCapClub, and so, what I mean by that is to become a member of MicroCapClub, all you have to do is submit an investment thesis on your favorite micro-cap stock, a two to three-page investment thesis. And then, the membership votes on the quality level of that thesis. And if you get enough votes, you get in, and if you don’t, you don’t. There’s no fee to become a member, you know, it’s pretty much that easy. And so, we have…you know, I shouldn’t say it’s that easy, we’re talking about 10 applications a month and maybe one or two get in every month.

But, just over the last 7 years, we’ve had a really good core group of 150-160 members that, you know, really cover the full swath of investing. There’s people that invest in junior resources, there’s people that don’t invest in juniors, deep-value investors, there’s growth investors. You kind of have a full gamut of interests on MicroCapClub, so, you know, if you can picture the back end of it, it looks very much like a message board. We have over 600 companies now that have been profiled, there’s some company threads that have 1,000 comments on them and there’s some that have one or two. But usually, every month, we have, you know, between five, six, seven new ideas posted by the members, every month, that are from, you know, pretty intelligent folks that know what they’re doing, pretty much everybody that’s a member is pretty experienced. And so, it just gives you a really good look of new ideas, on a monthly basis, and that’s really what MicroCapClub is about.

Bill: There’s a lot of people listening to this podcast and our interview, right now, that are interested with what you’re saying but they’re thinking of themselves, “Well, I definitely can’t write a professional paper that, you know, full-time micro-cap investors will critique, to be a member of that.” For those individuals, what does your website offer?

Ian: So, in 2016, so it was mainly the model I just discussed for about 5 years. There was no, you know, monetization of it at all, in fact, it was, you know, me just spending money on it, keeping it going because it was a great tool for my personal investing, that’s why it was built. But, at a certain point, you know, I thought, “Okay, let’s turn this into a business that can actually support itself.” And also, what I found was, at least down here in the United States, there was a lot of brokers, fund managers, analysts, basically people at compliance departments, that wanted to be a part of MicroCapClub but couldn’t because their compliance departments wouldn’t allow them to post on a message board, even though it’s even private.

And so, I thought, you know, “Maybe a great way to do all this is just have a subscriber option.” And so, today, we have a subscriber option, so people can pay $500 a year to gain access to our private forum. It’s a view-only access, so you can’t post, but it gives you a view-only access and you’ll be able to see the conversations that are occurring on MicroCapClub for $500 a year.

Bill: If you were at a coffee shop and you’re sitting down with a new acquaintance, someone that’s financially-savvy, and they’re listening to your story and you’re explaining how you invest in micro-caps, how would you lay out the thesis to them of why one would even wanna begin investing in micro-caps?

Ian: That’s a great question. You know, I believe, and I still believe this, that the micro-cap arena represents, you know, one of the best opportunities for individual investors to get market beating returns, and I mean that. You know, micro-cap, at least down here in the States, is defined as public companies with market caps less than 300 million. You know, there’s some people that say 500 million or some that might say 200, but probably the most used definition is 300 million market cap or less. In the U.S., that’s around 50% of the public companies that trade on the U.S. exchange, and that’s around 8,000 companies. The U.S. actually has around two to three times the amount of micro-caps as Canada has. But the interesting thing about Canada is, I believe, around 68% of your public companies are micro-caps. So I often joke to Canadian investors that, you know, by default, you’re micro-cap investors.

But I think the micro-cap ecosystem, you know, it’s a proven…so I’ll give you kind of a historical backdrop, it’s a proven investment arena to find kind of mispricing and misunderstood companies. I mean you have the greatest investors ever like Warren Buffett, Peter Lynch, Joel Greenblatt, and many others that started their careers investing in small micro-cap companies. That’s where they started their careers. You know, and when we look, historically, at some of the best-performing companies ever, they started a small micro-cap companies, like even Netflix, or Emgen, or Celgene. Walmart went public, in 1971, as an OTC company. Berkshire Hathaway, believe it or not, when Warren Buffett took it over. Even on an inflation-adjusted basis, Berkshire Hathaway would’ve been considered a micro-cap company back then. And, you know, those companies had astonishing returns.

And even, you know, if you bring it more into the present, if you look at the best-performing companies of the last 5, 6, 7 years, around 80% of the companies that have gone up a 1,000% or more have originated out of the micro-cap ecosystem. And so, you know, kind of giving that backdrop, you know, this is a vetted-investment class, the best investors ever invested here. The best returns, historically, of companies, from Walmart to Berkshire Hathaway, they were micro-caps when they started. And, in the last 5 or 8 years, 5 to 8 years, the best-performing companies have come out of this space. And I think the structural advantages of a micro-cap investor have existed for decades, and I think that will likely continue for decades. And, you know, what I mean by that is that larger smarter capital, mainly institutions, can’t invest in small illiquid stocks until those stocks are higher and more liquid. And, you know, even an institution managing $50, $100 million, which, in today’s world, would be considered a tiny institution, you know, they can’t invest in a company that’s trading $10,000 worth of volume per day, like many of you or us can. So there’s sort of this inherent barrier to larger smarter capital even being able to invest in these small illiquid companies.

You know, but one of the interesting things that I know a lot of probably listeners have realized, over the years, and, Bill, you’ve realized too is that same small micro-cap company that trades $10,000 worth of stock per day, at let’s say 25 cents per share, will likely trade $50,000 worth of stock per day at 75 cents per share, and that it will probably trade $200,000 or $500,000 worth of stock per day at $1.50 per share. And so, as that stock ascends, larger capital then can start to buy it. And it’s why you see sort of these greater and greater waves of volumes enter a stock, as it ascends, because it allows institutions to take part in it. And, you know, it’s sort of the maturation of a good company and a good stock is, you know, you just have this purely retail investor base. And, as the stock…as the management execute stock goes up, becomes more liquid, you have institutions then taking advantage of the liquidity and being able to participate in that security. So I think, unlike any other investment class where, you know, you might have a window of opportunity, or an arbitrage opportunity, to take advantage of it, I think the micro-cap ecosystem it’s one that…if you’re a talented individual investor managing a small amount of capital, you can get market beating returns in this arena.

Bill: You mentioned how you had access to that CEO because you were so persistent as a 20-year-old, before you made that investment, would that be one of the competitive advantages or the main competitive advantage a micro-cap investor would have, that the CEO will actually take our call and listen to us and field our questions?

Ian: You know, I think it is. I mean, I think I could also probably overplay that too just because, you know…and I’m sure there’s some listeners here that have talked to management teams before, just because you have access to them and they talk to you doesn’t mean that anything they say will come true. So you kinda have to take it for what it’s worth. You know, I usually don’t talk to the management teams until I’ve done such a significant amount of background work on the company that I’m 75% sure it’s gonna be a buy decision. And I think that’s important for a lot of people doing due diligence into companies is, you know, do a lot of the front-end work, do a lot of the scuttlebutt research that you can do up front before you even talk to management. Because until you do so, you really don’t know the right questions to ask.

And what I found too is I found that most management teams will talk to you in the micro-cap ecosystem. And that doesn’t matter if you’re investing $10,000 or $1 million, I think that management teams are very receptive to investors that ask good questions. You know, so just don’t get on the phone with the management team like, “So what do you do?” You know, that’s not gonna be productive for them or you, they don’t want their time wasted. And so, my best advice to investors that are new to kind of the qualitative aspects of investing, like talking to management, is do a lot of front-end work so you know what the right questions are to even ask.

Bill: Yeah, and you have a well-thought-out investment philosophy and, every year, you analyze your one-sentence guiding investment thesis. Can you share with the audience what is your one-sentence investment strategy and break that down for us word by word?

Ian: Sure. You know, a few years ago, I started writing out my investment strategy in a single sentence. You know, and I found that exercise, which I started several years ago, to be one that was good and it really focused me. You know, it might surprise people to hear this but that sentence that I write out, every year, has changed quite a bit over the years. And I don’t view that as a bad thing, I think everyone’s investing strategy should evolve over time. In fact, I think if it doesn’t, normally, you know, you end up dying out as an investor. And it doesn’t mean that you have to make big leaps in your investment strategy every year, it might be just small changes in the fringes, but I think everybody’s investment strategy should evolve over time.

And so, my investment strategy, my one-sentence is this. I want to own the smallest, most-illiquid, least institutionally-owned misunderstood companies I can find that are run by intelligent fanatics. I wanna own the smallest, most-illiquid, least institutionally-owned misunderstood companies I can find that are run by intelligent fanatics. And I know that’s a mouthful. And so, just like Bill…like you said, I can dive into each one of those areas, which I think are important, you know, but I really want to be invested in the smallest micro-caps. So, as we talked about earlier, you know, a micro-cap would be defined as 300 million or less, well, I really wanna invest in the companies that are 150 million or less.

And when you actually look at that swath of companies that are 150 million market-cap or less, that’s around 8,000 companies, which includes Canada. And that’s a lot of companies, that’s more companies than that trade on the New York Stock Exchange and the Nasdaq combined, which is about 6,000, by the way. But I really wanna invest in the smallest micro-caps, and the great thing about it too is we have empirical evidence that shows that the smallest decile of the marketplace has vastly outperformed all other market-cap deciles for, you know, 80 years. In fact, from 1927 to 2016, the smallest decile of the public markets, which would be market-caps less than 114 million, has outperformed all other market cap classes. It’s not even close. The average performance, across the smallest decile, since 1927, is averaged around a 17% compounded return. And to kinda give you the Delta on that, compared to the next decile, which would be 500 million market cap, the 500 million market cap decile would be about a 12% annualized return compared to the smallest, which is 17%.

Bill: And, Ian, that includes all the companies that go to zero as well?

Ian: Yeah, I mean that includes everything. I mean it’s pretty wild when you look at the data, and that’s the kind of empirical evidence that one of our members actually pull up all of the data from CSRB, you know, which has all that, and he calculated all of it. We have actually a blog article on our website that kind of goes over that data, it’s like a 10-page white paper that he wrote, it’s pretty interesting. And so, I wanna be in the smallest micro-caps.

Okay, so number two. I wanna be in the most-illiquid. And here again, you know, it’s not just me talking about it or saying that we have some empirical evidence. There’s a DL finance professor by the name of Roger Ibbotson, he’s also the chairman and CIO of Zebra Capital. He’s written several white papers, one of them is titled “Liquidity as an Investment Style,” where he argues that liquidity should be given, you know, equal standing as a factor at a size, value, growth, momentum, you know, as an investment style. And what he did was he analyzed a 3,500 market-cap universe since 1971 to 2017. And the great thing about this white paper is he actually updates the data every year annually. And what you’ll see here is the best area to invest in, since 1971, is illiquid micro-caps. And the interesting thing is, since 1971, illiquid micro-caps have produced around 16% compounded returns, since 1971, but liquid micro-caps have only produced basically break-even returns since 1971, which is, you know, really interesting when you think about that. And so, what this tells us, so far, empirically, the evidence is you wanna be invested in the smallest micro-caps and you wanna be invested in the most illiquid smallest micro-caps, which, obviously, would go against everything that you read about anywhere.

So the next word of this sentence would be the least institutionally-owned. And this one’s kind of a catch-all here because if we wanna own the smallest and least liquid micro-caps, by default, you know, these companies are not gonna be widely held by institutions. You know, the illiquidity in these small public companies provides that embedded barrier of entry, which I talked about before, for larger pools of capital. But what I also found, and I think why it’s such a disparity between liquid micro-caps and illiquid micro-caps, why liquid micro-caps perform so poorly is, at least down here, in the United States, the larger micro-cap segment is institutionally-owned. And so, oftentimes, when we’re in an economy that is neutral or bearish, institutions that have micro-cap exposure, either through an open-ended, you know, micro-cap fund or through like a Russell Microcap Index, you know, the first thing they wanna do is take a risk off. And so, the first thing they do is they sell their micro-cap exposure. And you see, kind of, in the marketplace, at that point in time, you see just this constant bid whacking and these larger micro-caps. And even though they’re liquid, they’re still small. And I just think that’s one of the reasons why, historically, liquid micro-caps as well do poorly is because institutions owned them, quite honestly. And so, that’s the third thing.

The fourth would be I wanna own the least institutionally… Oh, I’m sorry, next one will be misunderstood. Why do I wanna invest in misunderstood situations? And this is actually the word that I changed from last year, I used to have quality business instead of misunderstood business, so I changed it to misunderstood. And what I found, over the years, is, you know, I’m gonna strive to find situations that are misunderstood by the marketplace. It could be that the business, the management, the intellectual property, the product or service or the potential is misunderstood. But I wanna invest in these situations before kind of the qualitative factors start to boil beneath the service and show up in the financials. You know, I wanna invest in these companies before others, before institutions find them. And so, I wanna find them when they’re misunderstood by the marketplace.

And the third, or the last, the final one is intelligent fanatics. Why do I wanna find companies run by intelligent fanatics, what even is an intelligent fanatic? I think, as many of your listeners can attest to, the smaller the company, the more important the management becomes. The smaller the company, the more you’re betting on the founder, the CEO, or the management team. And I think the reason for that is, as a small company, every decision is amplified when that company is small. So leadership is very important. And to really, when you think about it, to find great companies early, you need to find great leadership early. And Charlie Munger, who many of your listeners probably know, but he’s Warren Buffett’s right-hand man, at Berkshire Hathaway, he was the first person to use the term, “Intelligent fanatic.” He used the term to describe a world-class business builder, you know, someone that built a small business into a great one. And not only one that was a great business but one that dominated its niche, or industry, or geography over a long period of time. And Charlie Munger actually mentions a few of these intelligent fanatics in his speeches and his writings, and the interesting thing is that many of the people that he mentions aren’t widely-known. You know, he’s not mentioning Steve Jobs or people that everybody hear about in today’s headlines.

So, back in 2016, another MicroCapClub member Sean Iddings and I wrote a book called “Intelligent Fanatics Project,” and you can find it on Amazon, where we retell the stories of some of these great business builders, that Charlie Munger mentioned, and we analyze how they grew their business. And we also found that…in this first book, when we analyze these eight intelligent fanatics, we found some common elements, common behaviors, common principles that were, you know, common across all these individuals that he mentioned, which was pretty interesting. And we had so much fun writing that first book, we wrote a second book, highlighted another nine intelligent fanatics and pulled out a few more principles as well. And then, finally, last year, almost to the day, in 2017, we launched intelligentfanatics.com, which is a community around studying great leaders. It’s not about finding stocks, it’s really about studying leadership. And then, your listeners can go to the website, intelligentfanatics.com, to find out more. And, you know, for only 60 bucks you can get all the books I just mentioned, including 15 case studies we’ve written over the last year as well.

So, you know, maybe one point I’d make now is the purpose for me kind of getting into this intelligent fanatics area is I really wanted to fine-tune my qualitative lens for investing. Like I said before, you know, if you wanna find great companies early, you need to find great leaders early. And so, it’s a lot easier, as an investor, to hitch your sidecar to one of these intelligent fanatics and just to enjoy the ride. And so that’s really the purpose of me studying great leadership and intelligent fanatics in general. I think probably the next question that is obvious is well, “What are some of these intelligent fanatic behaviors or principles?” You know, “What are you looking for when you’re trying to spot a great leader early?” You know, unfortunately, a lot of times, it’s the opposite of what you’ll find in many junior-resource and micro-cap companies. You know, unfortunately, what you find in many micro-cap companies is, you know, kind of the following behaviors, they look and act like armature business people, they’re arrogant, they are charismatic storytellers, but they don’t execute. They kind of reinforce short-term behavior, they over-promise, they under-deliver, they constantly talk about the stock, they focus on the story more than the company, they tell you more than they should when you sit down and talk to them, you know, they have multiple investor-relations firms. You know, they might have big-company experience, they may have worked for Newmont, but they don’t have small entrepreneurial experience, which is necessary to build a small company. You know, a lot of times, they’re caretaker management and not owner management. They might own some stock but not enough to truly care. You know, the company is oftentimes gonna build to benefit them, not investors or even their customers. They’re spendthrifts, they like to show that they drive a Ferrari, they drive a car that nobody else can afford at the company. The board of directors is their country club.

You know, and so, I think as I kinda checkmark all those, I think a lot of us can think of some companies that come to mind. And, unfortunately, it’s probably a lot of companies that come to mind when we look at those behaviors. And so, what I found, over the years, is, given enough time, the management teams that exhibit enough of those behaviors I just mentioned fail. They might work in the short term, they might work for a promote or a pump, but they’re not gonna sustain themselves over the long term. You know, like an old promoter type told me, years ago, he said, “They can get him up, but they can’t keep them up,” is what he said referring to the stock price. You know, and, oftentimes, that’s what happens when you find leaders with those behaviors. You know, unfortunately, most micro-cap investors are actually attracted to those types of behaviors, to those types of leaders. You know, many investors like to be sold, they like big, bold, short-term catalysts and promises, even if they don’t come true. You know, most micro-cap investors would rather have a 5% shot at a 500% return, in the next 6 months, rather than an 80% chance of a 100% return in the next 36 months.

And, you know, to kind of hit on that last point, you know, 100% return in 3 years probably sounds extremely boring to everybody listening. But that’s a 26% CAGR. And if you sustain that, you’re the best investor in the world. So I think it’s an interesting lens to look through. A real quality lens is, “Can I double my money in 3 years?” Which sounds boring but you’re beating everybody in the world over the long-term if you can do that. So the best advice I can give investors is, oftentimes, your biggest impediment to long-term wealth creation is your desire to get rich quickly. You know, there’s no traders in the Forbes 400 richest list, there’s only investors. You know, so think about that. You know, and, in the same regard, there’s people that got extremely wealthy from investing aren’t thinking about where they’re gonna make a 500% return in 6 months. They’re looking for situations, for businesses, and stocks where they can’t lose money.

So, you know, anyway, back to the question again. So what are some of the intelligent fanatic behaviors and principles that we found and now studying 100 intelligent fanatics, those leaders that built enduring dominant companies? Well, first, these leaders aren’t running a deal. They aren’t running a stock, they’re building a business. You know, their decision-making and vision is extremely long-term. They don’t cater to short-term interests, short-term investors or any type of short-term mindedness. They often go misunderstood, for a long time, because they don’t necessarily cater to Wall Street or Bay Street. You know, whether the stock is 20% higher tomorrow, or next month, or the next 6 months isn’t really that big of a concern to them. They’re extremely focused on the customer and their employees because they know if their customer and employees are happy, the shareholders are, ultimately, gonna be happy.

You know, and what we also found is they’re boots-on-the-ground leaders, they own a lot of the company, they have an average or below average salary, they showcase frugality. They aren’t driving a Ferrari, they’re driving what their employees are driving. You know, intelligent fanatics also tend to just think differently and better than the competitors do. And so, those are just kind of such a small slice of behaviors we’ve picked up through studying intelligent fanatics. And unfortunately, a lot of this is the opposite of what investors traditionally look for.

Bill: As you’ve been sharing, I can just apply a lot of the wisdom of what you’re referencing and discussing to the junior mining sector, which is the primary focus of this podcast, as you know. But I’m interested, what’s your past and current investment experience with junior mining stocks in your own portfolio?

Ian: I’m actually fairly versed in the junior-resource space. In fact, back in…I think it was probably 2005 or 2009, I had bulk my portfolio in a few junior-mining companies. You know, it was a fascinating experience being involved, back then, I mean the junior-resource scene, back then, was a frenzy. I mean, it was probably similar to the marijuana frenzy going on today. You know, one good drill hole, like I told you, Bill, before we could start the program, one good drill hole would probably get you a 100-million market cap, two good drill holes would probably get you a billion market cap. You know, and so, times have certainly changed but my portfolio, back then, mainly focused on an emerging low-cost gold producer, and a drilling company, and I had another company in there as well. And both those companies, which was primarily my portfolio, did fairly well. They were both run by management teams that just thought differently than the rest, both those management teams hated dilution, which is rare amongst resource companies, especially back then. You know, the emerging low-cost gold producer, as an example, you know, in 5 years, went from a couple drill holes in the ground to a fully-producing mine, in 5 years, and paid out $1 per share dividend. It’s just an amazing accomplishment they did. In fact, I think that company was the best-performing company, over like 6 or 7-year, out of all junior-resource companies. Again, a slice of luck in there as well.

But then, I had completely sold out the resources, in 2010, which was also a lucky call, and I moved on to other industries. I do own one junior-resource company today, in the portfolio, which is actually the same person that ran one of the companies that I was invested in, back in that time period, in 2006-’07. And, you know, the only reason I’m invested into him is he views mining as a businessman, not as a stock jockey. And so, I’m investing in him and his vision and his business sense. And that’s the only junior-resource company I own today.

Bill: So you only are looking at junior-resource investments today if you know the management and have a rapport with them?

Ian: You know, in this case, yes. I wouldn’t call myself actively looking for junior-resource investments, this one was, you know, because I was close to him, over the years, knowing that he was getting involved in another situation and he did it successfully three or four other times, in the public marketplace, you know, it was sort of a no-brainer to hitch my sidecar again, if you know what I mean.

Bill: Most junior-resource stocks, as you know, are explorers and developers, which means they’re pre-revenue, their balance sheet is negative, they have negative cash flow. So when we’re looking at these investments, we’re trying to assess, “How much cash do they have? What’s their burn rate? Where are they gonna get the cash from? Are they gona dilute my position?” Things like that. So my question is twofold. Number one, in your own portfolio, right now, what percentage are pre-revenue micro-caps? And then, the second, and follow-up question to that, is do you frequently invest in pre-revenue companies and how does your investment thesis work with a pre-revenue micro-cap company?

Ian: Sure. And I think some of the comments you made in the question…probably exactly the way I would answer them, but let me go through it again. But I do, to start off, I do think that the investment strategies I have today can work for pre-revenue companies. It’s just that, when they’re pre-revenue, you really need to make sure that you’re betting on an intelligent fanatic. And to kind of break down my portfolio today, I think I have around 10% of my portfolio in pre-revenue companies, maybe I have another 40% of my portfolio in companies that produce revenue but aren’t yet profitable. And the remainder is in profitable businesses.

And, you know, you have to be careful, obviously, with pre-revenue companies, whether it’s junior resources, or technology, or life sciences. You know, those are predominantly the three industries where you find pre-revenue. What I found, as investors, especially as micro-cap investors, our biggest risk is dilution. So when you invest in companies that need to raise capital constantly, you’re betting that the CEO can raise capital effectively. And when they’re out trying to sell the stock to institutions or investors to raise capital, they aren’t focusing on the business. You know, but that’s something that your listeners already know.

So I think it’s important to know how much they’re gonna need to raise and the timeframe for that. You know, are they gonna have to raise 5 million, 10 million, 50 million, 300 million? You know, when I was more regularly invested in junior-resource companies, I specifically looked for those companies that needed to raise less than 20 million to reach cash flow. Because I’ve always figured that was a figure, up to 20 million, that is raisable. You know, when you’re talking about 50, 100 million, God forbid, it’s a potash project, it’s a billion. You know, that’s a lot of money, that’s a lot of dilution. And then, you know, how’s a 25 million micro-cap company gonna raise $100 million today? You know, they aren’t. You can’t expect good drill results to move the markets anymore like they used to. So you gotta make sure that management has a plan to cash flow and that the capital needed is a realistic and raisable amount, given the valuation of the company and the currency of the company. You know, or you find a company that has a good balance sheet and enough cash in the balance sheet, so you can afford to wait.

And, you know, believe it or not, one of the areas that I pivoted to was actually Canadian non-resource companies, over the years. And so, you know, a bulk of my portfolio…and I kinda mentioned earlier, you know, 40% of my portfolio is in companies that produce revenue but are kind of on the inflection point of profitability. I found that to be an interesting niche because you can find companies that don’t have balance sheet risk, you don’t have dilution risk, but are getting close to that profitability area. And when they’re not profitable, they don’t fall under a lot of screens, and so, a lot of people aren’t looking at them until they become profitable. And so, there’s an arb there that you can usually get some significant gains in, just from a company, you know, not earning money to breaking even, to earning 5 or 10 cents a share that can produce a 10 bagger. And so, that’s predominantly where I focus on today and why.

Bill: When you look at the U.S. micro-cap equities versus the Canadian micro-cap equities, what are the main differences that you see there?.

Ian: You know, the capital markets for micro-caps in the U.S. versus Canada, it’s really like night and day. The powers that be are really almost trying to kill off the micro-cap ecosystem, down here, in the United States. You know, just the other week, I believe it was another major brokerage firm, Merrill Lynch, that won’t allow anyone, any client to buy a stock under $5. I mean, think about how absurd that is. You know, here in the U.S., our private-equity and venture-capital markets are, you know, a lot more mature, a lot more robust than I think they’re up in Canada. I think something like $800 billion has gone into private equity since 2010. You know, and so, down here, because of that, companies now have the capital or the access to stay private longer, maybe even forever. I don’t know why there’s such a misperception in the U.S. You know, when you’re looking at micro-caps, which are small public companies, versus small private companies, which are, you know, private equity, I don’t understand why there’s such a hate there. I mean, it’s really ridiculous, when you think about it, that, you know, Bill, you can go on right now and fund $5,000 on Kickstarter into an idea that somebody has, to turn a beer keg into a wheelbarrow or something like that. You know, but they won’t let you buy a profitable micro-cap company with audited financials. You know, it just doesn’t make any sense. So there is a big difference right now.

So I think the Canadian capital-market system is a lot healthier for micro-caps right now, and I hope it changes here in the U.S. I think a dynamic that is interesting is, you know, I’m a U.S. citizen, and really, I only started investing in Canadian equities in 2012, 2013. You know, and for a couple years there, there was a great arb up in Canada, because, especially in the non-resource space, because everybody was focused on resources, up in Canada, the non-resource micro-caps, up there, nobody was paying attention to them. And so, you could find some really quickly growing profitable companies, up there, trading for, you know, 5 PEs, when the equivalent company, down here, would’ve been trading at 25 PE. And that arb has closed, over the years, over time, and we’ve seen it on MicroCapClub, you know, over a 3, 4, 5-year time period. There’s a lot of investors investing in Canada right now. And so, a lot of those companies are now trading on par with the U.S.

But one of the interesting dynamics that I’ve seen, and this relates back to even junior resources, is, you know, a lot of people now invest in Canadian equities, you know, that are down here in the U.S. But what I found is there’s very, very few Canadian investors that invest down to the U.S., on the U.S. markets, which has sort of always been odd. And I’m always seeing kind of the reverse thing happen now where, even though the U.S. micro-cap scene is getting beat up by, you know, regulators and everybody, you know, that I’m starting to see some…you know, just in the last 6 months, 3 or 4 different micro-cap situations that were really good opportunities, that were under the radar. And so, I think, at some point, it’s gonna turn to where I think some Canadian investors are gonna find opportunities, down in the U.S., I think that’ll be healthy. But I think, overall, as time goes on, it’s gonna be more and more important for investors not to be locked into the geography or the country that they are citizens of, it’s gonna be more important, over time, for a micro-cap investor to be a worldwide micro-cap investor.

Bill: The micro-cap sector, which encompasses the junior-resource sector, those potential high returns can often draw out greed in us, which can cause us to make poor decisions. And my question relates to accessing that initial capital to begin to micro-cap invest. You were gifted, from your parents, with that initial capital that got you started. There’s people that are listening to this podcast, right now, they’ve been inspired by what we’ve talked about, your success, and maybe they’re thinking to themselves, “Okay, where am I gonna get some money to really get going? I need to throw more than 300 to 700 bucks at this thing to get going.” I’d like for you to speak to those people. And just so you know, over the last two years, I’ve had two gentlemen on my podcasts, both of which have focused on the junior-resource sector, and they both sold their house, took that capital, and tripled their money in about two years or so. And actually, realized those gains, which then, that was the platform for them to become full-time resource investors. So what’s your thoughts on doing something like that and can you speak to that person that may be tempted to make a potentially unwise decision to access that initial capital?

Ian: No, I mean, I think it’s a good question. And, you know, I would never encourage anyone to take a huge amount of risk. You know, it’s one thing if you already own your home outright and you decide to sell it to start renting, you know, that might be a decision, even outside of becoming a micro-cap investor, that might make sense, given where some real-estate prices are up in Canada. But that’s another conversation. But, you know, to take out a second mortgage or take a mortgage to come up with capital to invest in junior resources or micro-caps in general, you know, there’s a lot of risk of there. And I think, for any person…and yes, you mentioned a couple people that were on your podcast too, you know, but I’m sure there’s another 100 people that did that, that lost everything.

And again, the human desire to get rich quick is their biggest impediment to building long-term wealth. You know, after the Dot-Com Bubble crashed, and I told my story already, you know, it was like $6,000, $7,000 that I invested then into XM. You know, but I was able to grow that amount to an amount that allowed me to become a full-time investor by 2008. And obviously, I got lucky along the way, I bet big along the way, but, you know, I didn’t go into debt, I didn’t go on margin. And I think probably the best advice I could give somebody is you don’t need to take a lot of risk, I mean, you know, taking out a second mortgage on your house, or just, you know, doing something stupid. You just need to give yourself the time and your portfolio time to really be who you wanna be. You know, you’re gonna run into people that got rich quickly by taking a lot of risk. And when you ask them, you know, they know they got lucky. And unfortunately, many of them lose it all again. You know, why is that? It’s because their luck took them to a place that their character and process couldn’t keep them. You know, so take your time, you know, instead of focusing on where you can make 500% in the next 6 months, invert that and find situations where you can’t lose. But because, believe it or not, the latter is actually where you’re gonna find a lot of multi baggers.

Bill: Yeah, absolutely. Very sage advice. Ian, I’ve really appreciated our conversation. This has been very insightful, and I know our listeners have enjoyed it as well. Before you go, can you share more about how people can follow you on the web?

Ian: Sure. You can follow me on social media. I’m on Twitter, I’ve always enjoyed the Twitter platform, you can find me there. My handle is my name, Ian @iancassel, I-A-N-C-A-S-S-E-L. Obviously, I’m on MicroCapClub, which is microcapclub.com, and also, intelligentfanatics.com.

Bill: So I encourage listeners to go check that out. Give Ian a follow on Twitter, he often tweets out much proverbial wisdom as it relates to investing and also, life in general. Ian, I appreciate you taking the time. Thanks for coming on the show.

Ian: Thank you, Bill.