VALUE: After Hours (S05 E23): Ian Cassel On Small & MicroCap Growth And Value, How He Finds Stocks

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In their latest episode of the VALUE: After Hours Podcast, Ian Cassel, Jake Taylor, and Tobias Carlisle discuss:

  • The Lightning-In-A-Bottle Portfolio
  • Finding Picasso-Type Situations
  • Find Companies With Growth & Survival Qualities
  • Investing Lessons From Trees
  • Stocks Earn The Right To Grow Into Larger Positions
  • 10:3 Inversion Shows A Lot Of Weakness
  • Reverse-Splits Are A Good Idea
  • The Difference Between Very Good & Great
  • Buy Companies That Have Fallen Out Of The Russell 2000
  • Double Digit 10-Year Returns
  • Monster Bounces In Small-Cap Value

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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Full Transcript

Tobias: And we’re live, I think hopefully. This is Value: After Hours. I’m Tobias Carlisle, joined as always by my cohost, Jake Taylor. Special guest today, Ian Cassel.

Jake: In the house.

Tobias: The microcap king.

Jake: [laughs]

Tobias: Small and microcap king.

Ian: What an intro. [laughs] Thanks for having me on.

Tobias: To see Ian– [crosstalk]

Jake: King of the Lilliputians. Is that [unintelligible [00:00:24]

Ian: [laughs] Well, it’s interesting. Toby, I was actually going to throw you a softball right out of the gate if you’re ready for it, which I think you are, because this is right up your alley.

Tobias: People aren’t here for my views, but they’re here for yours.

Ian: That’s all right. We’ll get to that. What’s more interesting is, I actually dove into what you’ve been saying for the last 10 years, and wanted to talk about it now finally, but– [crosstalk]

Tobias: It probably looks cheap enough.

Ian: [laughs]

Jake: Can I squeeze in one quick thing before we dive into-

Ian: Absolutely.

Jake: -softballs for Toby?

Ian: Yes.

Jake: So, I have a request of The 10, which I don’t often make, and that is that we have so many tons of awesome ideas to build at Journalytic right now that I need help. I need more help. We need another, at least one, maybe two full-time software developers to join the team. So, I’ll post something on Twitter, I already did, with more details about it. But we’re looking for a very user-focused engineer, preferably more than five years of experience, ideally with both a passion for coding and investing would be great, because that really helps to have more sympathy or empathy with the user, and has experience building user-facing web applications. This is a startup, so of course, it tends to be more about equity than it does about salary per se, but doesn’t mean– You’re not going to be making “day in the life of” videos on Instagram from what we’re doing, [Tobias laughs] but it’s a pretty rare opportunity.

So, I think, please, if you’re listening and you’re that person or you know someone who’s an A+ developer, please, please, please get in touch following through on this website. I know the right person’s out there. I need a little bit of your help finding them. So, that’s my request of The 10 for today. So, carry on.

Ian: Is that a paid position, Jake?

Jake: Oh, yeah, it’s a full-time paid position.

Ian: Yeah.

Jake: It’s a real career.

Ian: No– [crosstalk]

Tobias: [unintelligible [00:02:21] an exposure. No, I’m just kidding.

Jake: I’m the only one who’s unpaid in this whole thing. [laughs]

Ian: Welcome to being a founder, right?

Jake: Yeah, [crosstalk]

Ian: Just another soft pitch to you, Jake. I use Journalytic every day now.

Jake: Oh, awesome. [unintelligible [00:02:37]

Ian: Oddly enough, it’s just as much just for notetaking and journaling as it is even the stock part of it. I just find it really easy, really intuitive to use, and I’ve done a couple of Zooms with you and your team that you have, and I think it’s incredible what you’ve produced in such a short period of time. And I think you’re going to make a big difference for the investment community.

Jake: Thanks, Ian, I appreciate that. Yeah, we’re just getting started, so got lots of even bigger ideas to build onto that, so it’s very exciting.

Ian: [crosstalk] How big is the team right now?

Jake: Yeah, we have four developers, a full-time designer, and then like a COO, basically, and me.

Ian: Awesome.

Jake: Yeah.

Ian: Well, we all want to see you succeed and I know you will. So, thanks, mate.

Jake: I wouldn’t mind seeing me succeed also on this one.


Tobias: Before we get into the softballs, let me give a– [crosstalk]

Jake: Geography lesson?

Tobias: TeslaToTheMoonVille, what’s up? Boston. Highland Park. Camas, WA, Washington. Riyadh. Scotland. Astoria, Oregon. Minneapolis. Bendigo, what’s up? I salute the Bendigo– What time is it there? It’s like 03:00 AM, 04:00 AM? Madison, Wisconsin. Spirit Lake. Tallahassee. San Diego. Copenhagen. Altamonte Springs. Hamburg, Germany. Birmingham, Alabama (Not England). Toronto. Santa Monica, I think. Yeah, “Here for Ian Cassel’s views.” Me too. Victoria, British Columbia. Canberra. Good one. Edmonton, Canada. Hartola, Central Finland. All right, that’s an amazing spread. Good to see everybody. Thanks for joining us. Here for the great, Ian Cassel. One softball, and then we’ll dig into Ian.

Ian: [laughs] We got all 28 of them. So, it’s good.


Jake: Wait, who’s running the bot farm if you’re on the show right now?

Ian: [laughs] I guess the softball I was going to give you, Toby, was you mentioned in a tweet, I think it was back on May 30th, you talked about the EV to EBITDA value spread, and I think it got up to 4.3 at that point in time. That was a couple of weeks ago. I think value’s made a little bit of a rebound in the last couple of weeks, but maybe not. Slight [unintelligible [00:04:55] bounce.

Jake: Yeah.


Ian: No. One of the things that was interesting to me is just historically that chart, it’s up to 4.3, which I think during the, what, dotcom time period, and during the GFC, it got up to 3, but historically, it’s been around 2. How should somebody generally look at that? Is that basically saying that the cheapest stocks trade at half the multiple of everything else on average? Is that the right way to think of that?

Tobias: Yeah. So, currently it’s at 4.3. That’s an Alpha Architect chart from their website. I think you have to log in to see it, but I don’t think you just have to register. It doesn’t cost anything. I post it every time it updates. It just shows the spread between the median stock. So, I think they track 1,500.

Jake: Yeah.

Tobias: Yeah. So, it’s that largest 1,500. So, it doesn’t neatly fit into Russell 1000 or Russell 3000, but it’s that midpoint. And then, it looks at the median stock in there. So, that’s the 750th stock and it compares it to the median stock in the cheapest portfolio, which is the 75th stock.

To what extent that adds some–? Makes it unclear. I don’t know whether an average of those portfolios would be better, but I think that it’s a reasonable way to do it, I think. And so, what it shows at the moment is that the spread between the cheapest portfolio and the median stock of the whole universe is basically as wide as it has ever been. And it’s wider now than it was in 2000 at the very peak. What followed on from there was very good performance as that spread closed and also wider than 2009 at the bottom, which also delivered very good returns to EBIT to that portfolio.

Obviously, it can keep on blowing out. I would have said, when you got to the 2000 peak, that was about as good as it’s ever going to get, or the 2009 bottom. But clearly, we’ve moved way beyond there. I don’t know why. It could be composition of the portfolios. Maybe it’s energy heavy. Energy is overearning, and people don’t think that energy can continue to over earn or something like that. But I still think that it represents a pretty good opportunity set even if energy is overearning.

Jake: Toby, do you have any sense of what the upper portion of the distribution looks like today? Because we knew in 1999 that that was very, very expensive, and you had some just really egregious– It’d be interesting to see if they added to that chart what the– [crosstalk]

Tobias: The expensive side?

Jake: Yeah, what’s 1500 minus 75? Whatever that number is. 1425?

Tobias: Well, I think– [crosstalk]

Jake: [crosstalk] the distribution, and then overlay that on where does that live?

Tobias: From the growthiest stuff. The growthiest stuff topped out probably when Ark topped out February 2021, and it’s come in quite a lot since then, and it probably bottomed in February, and it’s expanded since then. If you look at the bear market rallies in 2000, there were several that were 40% plus rallies.

Jake: I think 17 total, if I remember right within that.

Tobias: The categorization of a market as a bear market or a bull market, I always just find hilarious. I tweeted this the other day where I said, “We’re down 10% from the peak in the end of 2021, and we’re declaring it a new bull market because we’re up more than 20% from the bottom a few months ago.” It doesn’t make any sense to me. But if it has to be categorized, I guess that’s the definition of 20% from whatever bottom.

Jake: From anything.

Tobias: I find it weird, but I don’t think it’s very helpful to say it’s a bull market or a bear market. It’s what it is. It’s going up or down, and it’s going up at the moment. It could easily start going down. I think there’s a lot of reasons why it will, but you can [unintelligible [00:09:02] because I’m always pretty bearish.

Jake: [laughs]

Monster Bounces In Small-Cap Value

Ian: Well, it was wild. Mark Vonderwell, hat tip to him, he’s a microcap club member, and he posted on it maybe a week or two ago. But he mentioned really– I think a lot of people are aware of the outperformance of small cap value since 1927. So, it’s almost 100 years. It’s common knowledge that value stocks have outperformed growth stocks and then small stocks have outperformed big stocks. So, small cap value have outperformed overall. What’s crazy is just those long duration underperformance periods. You mentioned how there was, like, just over the last, what, 98 years, there’s been a 17-year period, a 19-year period, a 7-year period, and a 17-year period, and now we’re in a 16-year period of underperformance.

So, what’s crazy is you’ve had three quarters of the time that small cap value has, I guess, underperformed, or at least fairly performed. And yet, small cap value, over that duration, has beat the S&P 500 by 14X, which just shows how volatile and explosive those up years are. It’s important. They’re usually five- to seven-year stretches.

Tobias: It happened recently. In 2020 from the bottom, when it finally bounced, it took a little bit longer. But when it bounced, it was a monster bounce. It just given it all back now, for whatever reason. I think that what tends to happen is value outperforms out of the bottom of the bear, because I think that it’s all of the most sensitive– They’re small, so they’re not as well resourced as bigger companies. So, they’re just sensitive to the business cycle, because there’s one business often in them, rather than several business lines, several products. They’re just very sensitive.

So, there’s the fear that they’re going out of business, the genuine fear that they’re going– They’re not going to make it. You can see that narrative now. People are worried about, “Well, what if we go into a recession or a depression? What happens to small cap value?” It’s going to get beaten up, because these are all cyclical businesses. That’s true. And then when they don’t get beaten up, they recover because it looks like they’re going to make it. So, they’re cheap.

Jake: Yeah.

Tobias: So, I think that’s what happens.

Jake: The binary of when you go from zero of existential, “This could die,” to like, “Well, it’s going to survive.”

Tobias: That’s cheap.

Jake: There’s a lot of alpha in, I think, going from zero to one there.

Tobias: I think that’s all value, but I think that’s particularly pronounced in small cap value.

Ian: How much of it do you think is just the growth of index investing and ETFs leaving out the less liquid companies in general, hence, these names are just falling to the–? [crosstalk]

Jake: Orphaned?

Ian: Yeah.

Tobias: It’s always been the case though, even before all the indexing. Those periods of underperformance have always existed. It’s sensitivity to the business cycle, which– I know that there’s a theory that indexing means that all of the money flows to the biggest companies, but that’s always been the case. That’s not anything new. That’s why the opportunity exists. That’s why you get the returns. If you can stomach the drawdowns and you can hold on, it’s not a particularly exciting– There’s really only two states in small cap value. There, it’s terrifying and we’re underperforming by so much. And then, there’s a boom bubble bust. It’s over as quickly as that. It’s like a firefly. But the returns in those short periods of time are so big that it’s outperformed to an extraordinary amount over the whole period.

If you dig down into the composition of those portfolios, they’re hard to buy. That’s why I think it tends to better as a quant strategy or you need to be a– I’m forgetting his name now. Who was the redheaded stepchild of Buffett’s golden head boy at Graham-Newman?

Jake: Schloss.

Tobias: Schloss. You got to be like a Schloss-type personality where you can just go in and buy the boring stuff and hold hundred positions and not worry about it. Even though he wasn’t a quant, that’s basically a quant type– [crosstalk]

Jake: Pretty well– pretty systematic.

Tobias: Yeah. I’m not pure quant. I’m more like Schloss than I am like a quant. I try to buy reasonable businesses, very undervalued, at a cyclical bottom and hope that if it comes around that you get the good performance for value that they capture it.

Jake: It’ll be well deserved when the worm turns.

Find Companies With Growth & Survival Qualities

Tobias: Let’s talk a little bit about– So, you’re small and micro, but you’re probably at the other end of the spectrum from me. I always think of you as being a little bit more growthy, even though I’m sure we overlap in some positions, because I hold quite a few and I tend to buy some of the better stuff in there too.

Ian: Yeah.

Jake: Ian, would you say it’s more growth or more quality, or is that a false dichotomy to you?

Ian: No, I would like to think that’s a fair assessment. I try to combine the two areas of growth and survival, because I think just focusing on growth, basically just a growth investor, it’s not right because you also need to survive, and survival is what maybe more of deep value or value focus on to a certain extent. So, I think the combination of those two equals quality. Growth and survival, both those sets of characteristics. And so, generally looking for companies that can sustain a high organic growth rate, one of one unique businesses, but also have a balance sheet that can endure that have a business that can hopefully grow through a recession. All those survival attributes combined with the growth is what I think makes for a really unique small business. It doesn’t mean that they’re less volatile than any other business or any other stock that’s small. So, to answer your question, Toby, yeah, we’re underperforming this year.

Tobias: SPY? What are you underperforming when you say you’re underperforming?

Ian: Basically, the IWC, which is the iShares micro-cap index. It’s what I have out there. Yeah. So, we’re underperforming that year to date. I even hate looking at benchmarks, because we zig where the market zags. Not only because of our portfolio construction, but because we have a couple of very bulky positions that can either make us look like heroes in bad times or look like losers in great times, depending on the quarter of the month. So, to give you guys an example, I think last year in June, we were down like 45 year to date. And then by the end of the year, we finished down 15. So, we slugged our way back.

Jake: Don’t call it a comeback.

Ian: Yeah, exactly.

Jake: [laughs]

Jake: So, you just live with the volatility. The larger your largest position becomes, the more your portfolio will follow that large position. We have a big bulky position. So, if you have a 30% or 40% position up or down 10%, that’s a plus or minus 3% or 4% on the portfolio. That’s like a 3% or 4% position going to zero or doubling. [crosstalk]

Tobias: And they’re small, so they tend to move around like that too. They can just trade-

Ian: They do.

Tobias: -wide. Yeah, it’s meaningless. Noisy.

Ian: It’s interesting right now the time period we’re in, because we’re having some– The Russell indexation is occurring. We’re right in the middle of that where they announce who the new additions and deletions are.

Jake: Oh, okay. Kicking. yeah.

Ian: Yeah. And so, that can influence some things. But it’s usually not as much or pronounced as what you think. It’s sort of like this voodoo black world of how do they actually acquire these shares.

Jake: Yeah.

Ian: There’s some companies that I follow, one of them I own– or two of them I own that were included, and then there’s a basket of other ones that I just follow. These are situations where the indexes literally probably have to buy 25% of that company’s float in a two-month period. All of those stocks, since they announced the addition, are down.

Jake: Really?

Ian: Yeah, there’s all this hearsay on micro-cap club or other boards too, like, where do they get these shares? The algo is accumulating or shorting this to that, and how do they block off this stock? It’s all basically a big distraction, to be honest with you. But it is an interesting time period because of some of this volatility you’re seeing because of the Russell inclusions.

Tobias: Do you see the volume go through? Does sufficient volume go through for them to have amassed the position that they do, or you don’t even see the volume go through?

Ian: You normally see it the day of inclusion, which I believe is June, was it 24th, 27th, somebody’s listening to this probably knows. It’s one of those dates.

Jake: Mark your calendars.

Ian: Yeah. Usually, what you see is in the last hour of trading, you’ll just see volume, and then some block trades go off in their securities, and that’s when you’re wondering, “Well, how did that happen or who’s the other side of this?”

Tobias: Like, that way it has them somewhere.

Ian: Yeah, some people believe they start actually acquiring shares months in advance, but it still doesn’t make sense. So, it’s a fun thing to just watch and try to theorize on how to do this.

Jake: Put your tinfoil hat on and then–

Ian: Exactly. Yeah, exactly.


Buy Companies That Have Fallen Out Of The Russell 2000

Tobias: One of my favorite strategies used to be buying stuff that fell out of the Russell 2000. I’ve done that a few times, because it gets trashed the day that it comes out. And then if they’re reasonable businesses, there’s a good chance that they get included again in the 12 months’ time. If they’re reasonable businesses and you don’t mind holding them, then they do get included and they get that pop and you can jump back. You can sell into that at the same time, but that’s not accumulating in front of them. That’s just accumulating when they come out.

Jake: I would wonder– [crosstalk] Well, go ahead, Ian.

Tobias: “June 23,” says BrownMarubozu. Bozu.

Ian: Okay. Yeah. I know there’s some the other indexes, like Vanguard has some small cap indexes too that have inclusions that are not the same time. Those I found, you do see a reaction. Even the S&P has a couple of other indexes. I know when Expel got included a year or so ago. You saw 10X average volume in a day or two in that thing up 25%. So, you see it some things when they’re included, but not others.

Jake: Interesting.

Tobias: BrownMarubozu says, “The ETFs make a deal with a broker to guarantee the close on entry on the 23rd. Then, they split the profit between where the broker is able to buy the position at the entry price.” Interesting.

Ian: Yeah.

Tobias: [crosstalk] Brad ActuallyFinance has a good thing about– “Dan Rasmussen’s crisis investing paper nicely quantifies the factors that bounce out of the bottom. Small, value, illiquid, some debt & some cash flow.” That’s a good portfolio.

The Difference Between Very Good & Great

Ian: [laughs] Yeah, it’s definitely an interesting time period. One of the other things that I’ve been writing on switching subjects, Jake, this would probably interest you too is, this overall thought process of the gap between whether it’s sports, or whether it’s art, or whether it’s whatever it is the difference between being very good and great, how much of a gap that is.

Jake: Mm, yeah.

Ian: You see it most easily in sports. I was reading this article about Matt Ryan. He was the Falcons QB for a lot of years, and I think– where did he go to Colts or Texans? I forget where he– [crosstalk]

Jake: Colts.

Ian: Colts. Yeah. So, he ended up– There was an article in ESPN that was written about him and where– It’s kind of a depressing article. During his career, actually, I think historically, he’s in the top 2% or top 98%, however you want us to call that in overall statistics. So, he’s up there, but no one would consider him one of the greats. You could say, it’s not winning a Super Bowl, or we’re not winning enough playoff games, or blowing a lead too many, that type of thing. But it’s fascinating when you look at that across sports. I read an article on golf as another example. It was pretty interesting. They mentioned, if you’re a PGA Tour player, and if you just shot even par every single tournament during the year, like, where would you stack up?

Jake: Yeah.

Ian: So, if you shot even par every single round the PGA tour, you would have 41 starts, you’d miss 22 cuts, you’d have 16 top 50s, six top 30s, one top 20. I think you’d make $1.1 million, and you’d be 118 from the FedEx Cup. So, that’s even par. If you were one under– [crosstalk]

Jake: That’s basically buying the S&P 500, right?

Ian: Yes.

Tobias: [laughs]

Jake: That’s indexing?

Ian: Yeah. And then the other one was, if you average one under par every single round, so 41 starts, you’d only have 12 missed cuts, you’d have 24 of the top 50s, you’d have seven top 20s, four top 10s, you’d make $2.8 million. You’d be 26 in the FedEx Cup points. So, averaging even to averaging one under par every round gets you from 93rd to, what, 26th, I believe, or something around there. Now, if you went to two under par, so you averaged two under par every single round the PGA Tour, 41 starts, you’d only have two missed cuts, you’d have 31 top 50s, you’d have 13 top 10s, two wins, and you’d be number one the FedEx points.

Jake: Unbelievable.

Ian: The difference between even par and two under par– [crosstalk]

Jake: Shooting a 72 and shooting a 70.

Ian: Yeah. It’s pretty wild. You see that across all sports. Generally– [crosstalk]

Jake: Yeah, tennis has another one like that, where I think it was maybe Nadal that they had the numbers on, or maybe it was Djokovic. He started winning like 52% of his points instead of like 50.5% or something. It was just a real marginal improvement. And then all of a sudden, sets you’re winning, tournaments you’re winning, you’re like 90% chance of winning at that point, the whole thing. It’s insane. These little tiny micro improvements, this is what I find it to be so fascinating in the investment context is that, there are all these little tiny accumulations of advantages that we can get if we work on them, and none of them are– There’s no silver bullets. It’s just about finding little places to improve, but they add up in huge ways, and they make it so that you end up having a really good shot at doing well.

Ian: This is actually an advertisement for Journalytic, but anyway. [laughs]

Jake: Oh, jeez.

Ian: It is interesting. I was journaling about it. Same thing with baseball as you know, Jake, you love baseball too. Difference between getting a hit 25% of the time and 35% of the time is about $20 million a year in the major leagues, which is crazy when you think about it.

Jake: It’s bananas.

Ian: So, there’s all these instances of just small incremental improvements can make a big improvement, or distraction in the game of sports are also investing. One of the hardest parts with investing, as we talked about Jake, is just that ability to know if you’re tweaking because of the time lag in the feedback loops of investing. It just takes so much time to know if what you’ve changed is working.

Jake: Yeah.

Ian: You don’t want to wait 10 years to see if what you are changing now works or not.

Jake: You also don’t want to overfit to the last bit of time and fight the last war.

Ian: Yeah. But I think that’s where just having better tools– This wasn’t meant to mention Journalytic. But having better tools to be able to just track your decision making, track your watch list, or maybe you have a bizarro portfolio of things that might represent a different way of how you would invest, but something you’ve always wanted to try to see what actually works over time. But anyway, that’s something I’ve been journaling about a little bit more. I might turn it into an article or something at some point.

Jake: You’ve been on a tear with articles, by the way, man. You’re covering all kinds of ground in these, story after story. What I like is, there are stories I haven’t heard about before. I don’t know where you’re mining these from, but it’s good stuff.

Ian: Now, it’s been fun to get the creative juices flowing a little bit on the writing side. I get really bored writing just about investing. I like to have some personal connection there or some other historical connection there, so it actually connects with people and not just reading numbers and stuff like that. So, yeah, it’s been fun.

Tobias: One of the interesting things about sport over time is that, there’s an Australian batsman, Don Bradman, who’s like a Babe Ruth type character, around about the Great Depression and outstanding– You can substitute Babe Ruth. It’s exactly the same idea. Just a massive outlier.

Jake: Which sport is this?

Tobias: Cricket.

Jake: Is that a real sport?

Tobias: [laughs] Well, you can use baseball.

Jake: just joking.

Tobias: So, it’s like Babe Ruth is an outlier from that period, and it’s unlikely that we ever see anybody like Babe Ruth again. The reason is not that Babe Ruth was so much better than everybody at the time. It’s that the distribution of talent, the distribution of skill was so wide just because they hadn’t made the training quite as consistent. So, you had more worse players to pick off. So, the average hasn’t moved up much. It’s just the distribution is much more tighter than it once was, so that– [crosstalk]

Jake: Paradox of skill that Mauboussin’s written about.

Tobias: Yeah. That’s it.

Jake: To get tighter outcomes.

Ian: I was reading an article about– I think you guys might know something about this. Like, they were talking about just the advancements in sports, about how generally people are getting faster, stronger, better, blah, blah, blah, blah blah. The only one where the sport hasn’t gotten faster is horse racing. I was listening to a podcast. They were talking about this, where the horses are– Like Secretary, it’s still like the fastest horse that ever did. There hasn’t been advancements in that way. Because of, I guess, some of the diversifying of genes throughout the years, they still use the same bloodlines, and so they’ve been diluted down or what have you. I forget what the reasoning was, but that was fascinating.

Tobias: There’s also the thing that, if they jump out in front on a sand track, they tend to win by a long way, whereas on grass, they tend to be a little bit tighter together. I vaguely remember that statistic. All Australians have a base level of horse racing knowledge, because there’s a Melbourne Cup once a year, so we all have– I know nothing about horse racing other than that little tidbit, so that’s probably even wrong. Forget you heard that.

Ian: [laughs]

Double Digit 10-Year Returns

Tobias: I’ve got this little chart, so I’m going to try and do this chart sharing. Ian prompted me to do this. So, this is absolute forward PE for the Russell 2000 suggests double-digit 10-year returns. I was going to talk about the chart, but now I’m going to try to share the chart. So, we’ll see [crosstalk] very quickly. You guys see that, coming through?

Jake: Yeah.

Tobias: Can you see my good my cursor?

Ian: Yeah.

Tobias: Does the cursor show up? Yeah, the forward returns are good for Russell 2000. Does that help you at all, Ian, or do you slide underneath those?

Ian: No, that’s a good chart. Well, we were talking about, I think, before we started the show, about Joel Greenblatt. He did a couple interviews recently. I think he just did one a few days ago. But the one that Mark Vonderwell posted on was done back in March, where Joel Greenblatt talked about how cheap the cheapest decile is. In fact, I think he said that at that point in time, they were in the– [crosstalk]

Tobias: I have that up. Keep talking. I’m going to share it.

Ian: Yeah, 90th percentile of cheapness or something like that, where historically, whenever the cheapest stocks got down to the 90th percentile of cheapness, the forward returns were 50% or 60%, something like that. There it is.

Tobias: Yes. When we started talking about this, when it got over the 90th percentile and so, the Gotham yield 13.67 forward returns were 62%, and then it moves up pretty quickly here.

Jake: Yeah. It’s unreal, actually. It’s a pretty good dispersion around– It’s not the worst data spread you’ve ever seen as far as showing a relationship that makes sense.

Tobias: It should make sense. How do you feel about your portfolio? No one’s ever going to give you a bad answer.

Jake: I hate the setup, but I love my portfolio.


Tobias: Do you have anything like that? The way I think about my portfolio is that, basically what you’ve just seen that yield on the portfolio, plus I can see a reinvestment rate and the return on that reinvestment rate. And so, those two combined together gives me this expected return, which is how I think about the portfolio. So, when it goes against me, the expected return goes up. So, I don’t feel bad.

Jake: Let me try to reframe it for you Ian. In all the years that you’ve been doing this, how do you feel about the prospects of today’s portfolio for you versus other times in history?

Tobias: What metrics are you looking at? What are you thinking about when making that assessment?

Ian: At least for the basket of stocks that I follow and even the watch list in general, I don’t know if they’ve ever been cheaper. That’s cheap, as in the eye of the holder. You can pull up the IWC. It’s up like 4% year to date. Not like microcaps have been crushing it overall as a market cap class. But in generally, how I think about it is when I’m looking at a business that’s, again, unique, hopefully a one of one business that’s publicly traded, hopefully growing 20% plus organically. Hopefully, it has a balance sheet that can endure. Hopefully, it’s profitable. If not, it has a clear runway to profitability. As long as I’m buying that company at a fair value or less, I initially make that purchase. I oftentimes believe that, and I think it plays out over the last 20 years of me investing this way. But my forward returns will match the organic growth rate of that business, because obviously– [crosstalk]

Jake: Organic revenue growth rate?

Ian: Yeah.

Jake: Oh, interesting.

Ian: Historically, that’s been pretty. As long as you’re not paying 20 times sales for something, let’s say you’re buying four times sales, and let’s say that’s below the industry type of multiple for that subset of companies. As long as you’re buying at or below that point, as long as the company is not going to dilute you. Your forward return should likely match that organic growth rate of that company, and that basically means no multiple expansion. God forbid, you get multiple expansion over top of that, which we all know, like, levers that return up a little bit more. [crosstalk]

Jake: That also would mean that you’re not really banking on margin expansion, either. Yeah, where’s the operational efficiency that might drive further bottom line.

Ian: Correct.

Jake: Kind of interesting.

The Lightning-In-A-Bottle Portfolio

Ian: Yeah. So, that’s the overall general theme of how I think about things. And so, from that perspective, always looking three, usually three years, but let’s say five years out, where do I think this business will be on the revenue side, even profitability side, operating margin side? Do I think it can continue to grow, let’s say 30% a year, the next three years? If I don’t think they’re going to dilute me, they have a clear runway to get there. That’s generally what I think their overall return should be for that equity. I’m actually writing about this. It’s probably a blog post this week. I’m titling it, Lightning in a bottle. Some of the best performing micro caps have, I would say, three core elements.

Number one, they were small. And so, small could be sub-hundred million, let’s just call it that. And generally, it’s that way because you have the full pathway of discovery yet to occur in that equity. If you’re sub-hundred million, you’re going to get some maybe institutional ownership, but you’re mainly retail owned, so you have yet to experience the institutional discovery of that equity, which pushes it up as the volume increases. Bigger, bigger pools of capital find it. The next thing is, either a high organic growth rate or a high operating leveraged business. Either one or two or both of those things combined are crucial. And number three, a small outstanding share count. When you combine all those three, you have, what I call, Lightning in a bottle. I came up with that lightning in a bottle phrase from actually, I forget who it was. It was this guy, Pieter Musschenbroek. He’s from the Netherlands. He’s the one that developed the Leyden jar, and that’s the jar that actually Benjamin Franklin used to capture the lightning in 19– [crosstalk]

Tobias: Literally, lightning a bottle.

Ian: Yeah, like, a lightning in a bottle. Basically, that was the predecessor to the current capacitor was this Leyden jar. And so, that’s where I started down this pathway of lightning in a bottle. That’s what these stocks are. The companies that make the biggest sustained moves upwards, because you find micro caps that can go from 1 to 5 or 1 to 10 and go back to 1. You can find them and you can do well trying to play those. But the ones that actually sustain the momentum are ones that produce earnings per share really, really quickly. They go from $0 to a $1 to $2 in earnings per share really quick, and it takes everybody off guard. Because there’s a scarcity of shares, there’s illiquidity. Again, one of those three things was a small outstanding share count. [crosstalk]

Jake: Would the implication for that at a portfolio then be like, if it’s not working within a year or six months, turn it over and you got to get to the next one. Then the ones that do work, you hold them. You have a more active farm system basically is one way to think about it.

Ian: Yeah. I posted some ideas on this to the micro cap club on our forum, and we had some discussions going back, mainly on, I think everybody would agree on the start small, high organic growth rate or operating leverage. What I mean with operating leverage is, you can obviously find companies that can grow revenues 5%, but they have such high fixed cost where every incremental dollar basically falls to the bottom line. So, you can have things growing 5% that can grow the bottom line 100%. There’s also going to be lightning-in-a-bottle situations, because that really impacts the EPS line.

Finding Picasso-Type Situations

Ian: But where we were going back and forth was just on the small outstanding share count. I do find when a company has 10 million shares outstanding or less, I think it just sets itself up to be a Picasso type situation, like Pablo Picasso.

Jake: Scarcity. Yeah.

Ian: Yeah, scarcity. Pablo Picasso, I think he produced 1,900 original paintings over his career. Most of them are being held by private collectors and museums. Very few of them come up for sale every year, maybe one or two. When one or two come up for sale, they go for tens of millions or $100 million plus, because it’s a wealth status symbol owning one of those paintings. There’s just a scarcity of those types of things out there. I think when you find a great business, that is a one of one business, and it’s high organic growth rate, it has a few amount of shares outstanding. There’s always going to be another wave of capital that wants to participate in that. When you have a small amount of shares outstanding, people have to pay up to acquire shares just like that Picasso. That’s what I’m interested in finding. I don’t know, it sounds too grossy to say this, but I believe it. I’m going to find things that are undervalued that can get overvalued. [crosstalk]

Jake: What do you do about figuring out management to make sure that that small number of shares doesn’t become a large number of shares that are in their pocket? [chuckles]

Ian: I remember I did this, this was like six, seven years ago. But overall, I believe it’s around 16% to 17% of all micro caps, at least in North America, are profitable.

Jake: Okay.

Ian: Usually, when I tell anybody, that’s new to microcap investing, focus on those 17% and a lot of your worries go away.

Jake: Right.

Ian: This was a long time ago, but I remember looking at, what was the share structure of the companies that were profitable? I think at that time, it was 45% of the profitable micro caps had 20 million shares or less outstanding. And so, it goes back to that whole theory of great owner operators, people that care about their share structure and that treat their shares like gold. It makes sense that they would have less shares outstanding. They don’t dilute readily. They don’t want to dilute. They want to keep those shares. They know the earnings power of increasing EPS. And so, generally, what I find too is, the companies that have a small amount of shares outstanding that don’t have preferred or different classes of shares, don’t have a lot of warrants or options that incentivize properly. Those people that are doing the right thing are mainly these companies that have a smaller amount of shares outstanding. [crosstalk]

Also, especially here in the US, not to cut you off, Toby, but not here in the US. The other thing about few shares outstanding is, let’s say you have 10 million shares out, you have a company earns $10 million a year. That’s a dollar per share. You have a company with 100 million shares out, they own $10 million a year, that’s 10 cents a share. Well, that one with 10 million shares outstanding is probably going to trade at $10, plus the one with 100 million shares outstanding is going to trade at a $1 or $2. Here in the US at least, you have different types. Institutions can’t buy that thing, that’s a $1 or $2, but they can look at the thing that’s $10 plus because of penny stock rules. [crosstalk]

Jake: Right. There’s some structural cut offs that-

Ian: Exactly.

Jake: -screen you out of the game there.

Ian: So, when you have lesser shares outstanding, you actually have a higher stock price. It sets you up to be viewed by larger pools of capital that can potentially participate in owning your company.

Tobias: It’s a pretty solid quant screen you’ve produced there, Ian.

Jake: [laughter]

Tobias: So, Mark [unintelligible [00:39:05] said the same thing about the shares outstanding on this podcast when he was on a while ago. The reason that what I wondered was, there are probably two types of management teams that come out. There’s a lot in particular in smaller micro cap land where the business is a marginal business, but they’re making their money by selling shares in this business. And so, they have huge numbers of shares that’s saying, they don’t really ever need to make money at a company level because that’s not how they make their money. So, I was wondering how you screen those guys out. So, that’s interesting.

The function is that, if the market cap is going to be sub-hundred million, and you need the share price to be over $10 when it crosses $100 million or thereabouts, then they need to be 10 million shares outstanding. So, it’s just you back into the 10 million share number. So, that works really well. That’s a good little model.

Reverse-Splits Are A Good Idea

Ian: You’ve had a lot of companies also do reverse splits to get to that point too, to either stay listed on the NASDAQ and other things.

Tobias: How do you feel about those?

Ian: I think it’s a good idea.

Tobias: Are they hiding it?

Jake: Cheating.

Tobias: Is it doing the buyback where you’re buying all of the options? You issue 15% of your share capital and options, and then you do a buyback and mop it all off, is it the same idea?

Ian: No, I think it depends on the situation, just like everything. I think it makes a lot of sense for a company that– Here in the US, it’s different than Canada, it’s different than Australia in those public markets. Here in the US, you do have less companies going public that are small and micro. Yeah, you still have some life sciences companies raising $10 million going public to raise money for a Phase 1 trial, but you’re having less real companies go public small here in the US. And so, oftentimes, what you see when it comes to new ideas, if you want to call them new is it’s actually an old business with an old management team where there’s a transformation, where a new management team takes it over, does a capital injection, and all of a sudden, that company transforms from something to something else. And so, a lot of the new ideas are these transformations.

I don’t do a lot of screening, but me and Michael Liu, the one thing we do is, like, large insider buys, rights, offerings, things that can put their hand up and say, something might be transforming. Here you’re seeing a new management team put skin in the game. That spikes my interest. And so, a lot of times when something like that occurs, they’re already grandfathered into the previous cap table of that public equity. Sometimes, they’ll do a reverse– [crosstalk]

Jake: Cleanup to do.

Ian: Yeah, some cleanup to do. And so, a lot of times you have that too, which I don’t blame them either. You want to be at the best situation to win.

Investing Lessons From Trees

Jake: You guys want to squeeze some veggies in?

Tobias: Yeah, let’s do some veggies. Good idea.

Jake: So, this week is all about the life of trees. So, we’re staying in a biology area. A lot of it’s from this book called The Hidden Life of Trees by Peter Wohlleben, I believe his last name is. So, trees are actually very interesting to study because they exist on such long timelines. If you guys remember, I don’t remember which Lord of the Rings movie it was, but where the trees are talking and they can move around, but they’re incredibly slow. I think they were actually pretty far spot on with that, as you might notice, as I’m going to give you some more facts about this stuff.

Most people have heard of that bristlecone pine tree, the Methuselah tree in California, that’s 5,000-ish years old. But apparently, there’s a spruce tree in Norway, that’s more than 9,500 years old which boggles the mind. It’s like 115 times the average human lifespan. But a typical beach tree or oak tree will usually live between 400 years and 500 years. Something I learned, like, trees are way more social than I ever thought. They can distinguish between their own roots and other roots of other species, and they can even recognize the roots from related individuals of their own species. They can actually share food within their root structure with their related individuals. Food, just meaning like sugar and water, basically. But they won’t share with other species.

Beach trees, they’ll actually synchronize their photosynthesis, because some trees have a better vantage point, like, their canopy is getting more sun than others, just the way that they grew and however they structured themselves. They’ll equalize out the differences underground by sharing resources underground through their roots. It’s almost like a form of Social Security in a way. Some are earning more, and others earn less, and they equalize it a little bit down at the root level. So, acacia trees that are being eaten by a giraffe will give off this warning gas that’s detected by neighboring trees, and then they’ll start to ramp up–

Tobias: [unintelligible [00:44:03]

Ian: Yeah, there’s a crisis at hand, and they’ll start ramping up the pumping of these toxic substances to deter the herbivores that are probably going to move down the line to them. If you add a pinch of crushed spruce or pine needles to a drop of water that’s containing protozoa, they’ll be dead within a second. They’re actually pretty powerful chemicals. A lot of the chemicals that we know of in the world that we use are come originally from trees and plants and everything. Most of our medicines are derivatives of plants, and we’ve just figured out how to make them synthetically.

So, when a caterpillar takes a bite out of a leaf, the leaf tissue actually sends out an electrical signal, just like human tissue that’s injured. The signal doesn’t travel in milliseconds though like in humans. It moves at about a third of an inch per minute. So, this is like electrical signal is just very slowly moving through the tree, and eventually after about an hour, it gets to the place where it needs to that tells it to ramp up the defensive compounds, these chemicals, to then reach the leaf and then spoil the meal for the caterpillar, basically. It makes you wonder, like, if trees, they can tell actually which species is invading them. Do you want to guess how they can tell which species that’s actually eating them?

Tobias: The saliva.

Jake: That’s right.

Tobias: No way.

Jake: Yeah. Actually, they can tell the saliva of what’s eating them, and then they’ll release a specific pheromone that will then attract– Basically, they have this whole arsenal of different chemicals they can release, and they can pattern match to the species that’s invading them, and it will attract a beneficial predator that will come and eat that caterpillar. So, they’re basically sending up the signals chemically like, “Hey, this animal is here that’s hurting me. Come eat him,” basically. Researchers also found that that roots crackle at a frequency apparently of like 220 Hz, which maybe seems not that big a deal, like, burning wood crackles, like, who cares?

What’s interesting is that, when seedling roots were exposed to that 220 Hz crackling, they oriented their tips in that direction, which almost makes it– Trees can actually hear effectively is another thing that you could say. The tree canopy itself tip in a forest will capture 97% of the sunlight, meaning that just 3% filters down to the forest floor. It seems like the saplings would be starved of energy, basically. But it turns out that for young trees, it’s better to grow slowly and to scale in a way that allows them to build at a much slower rate, and that they’ll actually live much longer than–

Modern forestry will target a max age of between 80 and 120 years on a plantation of trees before they’ll cut them down. But that would still be a very, very young tree under normal conditions. That’s an adolescent tree by the time when it’s 80. And so, when they grow slower in the natural forest, their cells are actually much, much smaller and they’ll contain almost no air, as opposed to when they grow very fast, they use air as part of the cell. Where it comes in is that anytime that basically the air will allow fungi to– When fungi gets in there, that’s like a requisite for the air. They need air basically to respire. And so, when trees grow quickly, their rings get really huge, and they contain a great deal of air, and that makes them susceptible. If fungi gets in there, it can feast, basically.

Whereas when they’re smaller, if they grow slower, they’re much tighter rings, smaller amount of wood, and they’re much harder to penetrate for fungi, so they’re actually much more resilient. But it’s weird. A small beech tree can be 100 years old, and it’s still basically like waiting in the wings under its mother who’s 300 years old, and it’s waiting for its turn even though it’s 100 years old.

Tobias: Like, King Charles.

Jake: King Charles.


Jake: Exactly right. So, in places where there’s a lot of sunlight, the trees will go for broke and try to grow as fast as they can to capture all that light, but they typically don’t live as long then in those situations. The ones who grow more carefully will live longer, as I’ve said a few times now. The ones that grow very fast are much more susceptible to drought and temperature changes, wind blowing them over invasive species. To pull out the analogy, I was going to ask you, Ian, if this fits with you. It makes me Wonder if hypergrowth companies might be comparable to the fast growing trees that are showered by a lot of VC sunlight that they’re just trying to get big as fast as they can, and that maybe you would almost like, “Boy, if our growth rates are too high, then maybe that’s indicative of the fact that, ‘Okay, it’s growing a lot, but it might not be a very solid growth for a very long-term outcome.'” What do you think about that, Ian?

Ian: I thought you’re going to compare it to that or maybe Ark or something like that, but I was ready for it. [laughs] I think it’s pretty fair. I think it’s hard to find a company that can grow very, very quickly and not be just incinerating cash. I think that’s the key to it all as well. There’s companies that can actually grow at a decent pace and still have the right people, processes, culture in place to sustain that and support that growth over time, including the customer. So, I think overall, generally, you’re probably right. I was thinking about another analogy while you were talking too towards the end when you were asking me that.

Ian: I was reading about Frank Thomas, the baseball player.

Jake: Sure.

Ian: He was just a big guy.

Jake: Big Hurt.

Ian: 6’5″ or whatever, but he was also known– He was in that steroid era with McGwire, and Sosa, and all those guys. But he was a first Hall of Famer, because everybody knew that he was legit, like, he was not juicing. In fact, he would take big offense. He was hitting 40 home runs and everybody’s hitting 70, and he was a huge behemoth of a person.

Jake: Yeah.

Ian: He’s, I think, one of four players to have, including Mantle and Ted Williams, some trifecta of statistics or whatever it is. So, he’s an amazing player. I often thought about that, where it must really suck to be doing to be winning the right way and be overshadowed- [crosstalk]

Jake: Overshadowed, yeah.

Ian: -by people doing it the wrong way.

Jake: Right.

Ian: That’s what I was thinking too, when you’re telling me the tree story.

Jake: Yeah.

Ian: Yeah, that’s interesting.

Tobias: Couple of good comments here, JT, before you move on.

Jake: yeah, good.

Tobias: “Jake’s definitely doing shrooms.” [laughs] The other one is, “The Ents are going to war.” That was it. Both from BuonoB. People love it.

Jake: Ah, thanks. So, one interesting last fact. So, if you think about plants, they’re all about absorbing sunlight, right? If you thought about the sun that hits us is white light, which is basically contains all of the colors. And so, you would think if they were super-efficient at capturing all the light, that plants would actually look black because they would absorb all the light and there’d be nothing reflected into our eyeballs for us to call that a color. Chlorophyll, as you know, is how leaves process light. If it was super-efficient chlorophyll, then there wouldn’t be any light that would be escaping from there, basically. So, there’s this weird quirk apparently called the green gap. In chlorophyll, it can’t use a certain part of the light spectrum, which happens to be the green part of the light spectrum. So, what we’re really seeing when we look at something green is that it’s just the waste material, like, a rejected part [Tobias laughs] that the plant can’t use, and that’s why they’re green. It’s funny to me that we find basically the plant’s reflected trash. We find that to be verdant, and beautiful, and attractive to us.

Tobias: What luck.

Ian: Yeah.

Jake: Yeah.

Tobias: I got a question from the crowd, from Samson. “Is there still a recession this year?” That’s probably directed to me, but Ian, do you want to have a swing at that?

Ian: No. [crosstalk]

Tobias: What do you see in your little neck of the woods? I don’t mean little neck of the woods. I mean, the little companies in your neck of the woods.

Ian: Well, literally, the little companies in my neck of the woods, here locally in Langeloth, Pennsylvania, I have three business owners I usually go to with questions. One of them owns a fairly large residential construction company. One of them owns a fairly large fleet fueling, so delivering diesel delivering fuel to large businesses, seeing how volumes are over time.

Jake: This is the tip of the spear.

Ian: Then my brother-in-law runs the family business that I was supposed to take over, which I neglected to do, which now [Tobias laughs] they do commercial, like, they do wraps on tractor trailers, trucks, basically advertising. So, they’re the front edge of businesses buying new trucks, new things.

Jake: No wonder you recognized Expel.

Ian: [laughs] Yeah, I made that [unintelligible [00:53:20] a long time ago. So, between those three datapoints, I get a pretty good gauge on what at least the local economy or regional economy here is. Outside of the residential construction business, who has seen some, as you would expect, some pullback, everyone else is still churning along fairly well, at least here locally. My brother-in-law’s business, they’re busier than they’ve ever been on the fleet feeling side. He said two months ago, there wasn’t really any kick down in volumes, but it just felt weird, like, it could have turned into something. But it’s been pretty consistent since then.

Jake: Like a vibe session?

Ian: Yeah, exactly. It’s more of a vibe. So, I know that’s not the answer you were looking for, Toby. You were probably looking more from a microcap perspective, but that’s on the ground.

Tobias: It’s all data. It’s all good.

Jake: Yeah.

Ian: Yeah.

Tobias: Yeah. I don’t know either. I tweeted out a series of charts. I don’t want to go through all of them, because it’ll take a long time.

Jake: Wouldn’t you think it would take a fair amount of time? If banks pull in their loan books and become more conservative, it would just take time to propagate, right? You wouldn’t see it right away. So, I don’t know, I think these are really hard, but that’s something I would think.

Ian: Yeah.

10:3 Inversion Shows A Lot Of Weakness

Tobias: The main thing that I look at, just because it’s a simple metric is that 10:3 inversion. The 10:3 is still very, very inverted. It’s less inverted than it was. But as we all know, it’s the un-inversion that is the thing that tends to be the most proximate event to the actual declaration of the recession. The inversion was October 25 last year. The shortest period of time has been six months, that gets you to April 25 and the average is 12 months, which is October 25 this year. So, I think that if it happens between now and January 25, 2024, as the 95% confidence interval for when it occurs. And so, I’ve been looking at a lot of charts. It seems to me like there’s a lot of weakness out there. So, I think it’s probably coming up.

What that means for the stock market is entirely something else, and I don’t know the answer to that either. But I don’t think that any of the behavior that we’ve seen so far in the stock market rules out a recession or rules out a stock market crash at some point, a proper one. So, I’m still bearish. But then I always am, so take everything I say with a grain of salt.

Ian: Well, I think it depends on your investing strategy too, if you should care about when to pinpoint things. For what I do, I’m a stock picker. I’m trying to find things where I don’t have to worry about the macro as much, trying to find those types of businesses, the key survival characteristic, if you want to call it that. But if I was– [crosstalk]

Tobias: Yeah, I like that. Me too. That’s how I think about it too.

Ian: But if I was more of event-driven macro, I certainly would be looking more so– [crosstalk]

Jake: Starved to death a long time ago?

Ian: Yeah, exactly. And that too. Yeah. [laughs]

Jake: I’d be flipping burgers if that was–

Tobias: Do you look internationally, Ian?

Ian: Yeah.

Tobias: Have you bought anything? Where do you look, English speaking countries? Developed English speaking countries, is that where you end up?

Ian: Predominantly. Yeah, that’s a good way to characterize it. Yeah. So, US, Canada, Australia, Europe, that’s the sandbox. We have 22– Our portfolio, we’re very concentrated, but we’re also fairly active under the surface in some of the smaller positions trying to find those minor league players to bring up from the farm system. Give them some playing time. They don’t play well-

Jake: See how they do.

Ian: [crosstalk] backed out.

Jake: Yeah. [laughs]

Ian: Yeah. And so, I think last year, to give you an idea, we own six, seven companies in the portfolio. We added eight, took out eight last year, that type of thing and still we’re constantly-0

Jake: [crosstalk] percentage-weighted basis, there’s core that don’t move, and then-

Ian: Correct.

Jake: -a lot of churn under the–

Ian: Yeah, trying to find the next batch of veterans, basically, that can earn the right to being paid more, if you want to look at it that way, baseball term. [laughs]

Jake: Yeah. Sign on your long-term contract.

Ian: Yeah.

Tobias: You find something promising, you put a small position on, dig into it properly, or watch out trades for, not trades, watch how the business improves over a period of time and then make a decision one way or the other and move on to the next?

Stocks Earn The Right To Grow Into Larger Positions

Ian: Yeah, that’s pretty much how it goes. It might start out as a 1% or 2% position, even as you’re– We have an overall framework, and that obviously gets rid of 98% of the universe. And then you’re left at 2%, and then you have a conversation or two, you dig into it. You might put on a 1% or 2% position as you’re getting to know management, you’ll fly out there, meet with them, you’ll see if they do what they say, you’ll see if the business executes, you average up, hopefully, if it ends up working, or you take it back off if it’s something that isn’t something you connect with or they don’t deliver. So, that’s where the turnover occurs. Yeah, to answer your other question, yeah, we have one investment in Australia, and that’s been pretty good legacy position since late 2019.

Tobias: Do you talk about who you own or you don’t? That’s for investors.

Ian: Yeah. [laughs] No, it’s a company called Cogstate. I mentioned it actually, I think, on Bill’s podcast before. But that’s a company that we identified mainly from that characteristic I talked about before, where it was rights offering. The management team and board ponying up a significant amount of capital to inject into the business, caught our attention, we did a couple of calls with management. We found it to be pretty unique. They executed really well, and that was a small position that turned into probably our second largest position today– [crosstalk]

Tobias: Perfect.

Ian: Because it went up– [crosstalk]

Tobias: That’s where to make it a big position.

Ian: Yeah. That’s probably the biggest way I’ve evolved too. I think in the past, I think it’s an issue for a lot of investors, not just myself, is just averaging down into things. I’m very cognizant of how much capital I’m devoting to a position. So, you’d rather have it a 5% position that grows to 20% rather than make it a 20% position. That’s the way I view it. I like to see them win. I want them to earn that right. It’s an easier way to sleep– [crosstalk]

Jake: Organic growth, if you will.

Ian: Yeah, it’s an easier way to sleep at night with a position when they’ve earned the right too, because you already have probably a few quarters or a few years of trust built in, because they’ve gone up, they’ve executed. So, it’s an easier way to live with a larger position if they are in the right.

Tobias: That’s awesome. That’s time. Thanks, guys.

Ian: Yeah, thanks for having me on.

Tobias: Thanks, Ian. That was great.

Jake: Ian, [crosstalk] seeing you.

Tobias: Yeah, that was fun. We’ll try and have you back more often. Thanks, everybody. We’ll be back next time, same bat channel, same bat time. See you then.

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