Full Transcript: Chris Mayer and Ian Cassel on Moats and Microcaps
The 100 Year Thinkers - Owner-Operators, Intelligent Fanatics, and the Last Moat
Matt: You’re watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. This is an extra special 100 Year Thinkers — that means Bogumił Baranowski is with me as co-host. We have author of 100 Baggers, co-founder of Woodlock House Family Capital, Chris Mayer with us today. Chris, how we doing?
Chris: Great. Good to see you guys again.
Matt: Chris, we found you a new friend. I know — you —
Chris: An old friend.
Matt: A new old friend.
Chris: New old friend.
Matt: We’ve got the founder of MicroCapClub, author of the forthcoming Stock Picker in September of later this year, Ian Cassel. Welcome on.
Ian: Thanks for having me on. This is gonna be a blast. Good to see all you guys again, good friends.
Matt: We are super excited to do this. And Chris, if it’s all right with you, we’re gonna give — no — our new guest of honor... It’s not. All right.
Chris: Oh, yeah. If you’re gonna give him the first question — I thought you were gonna give it to me. So I was objecting already.
Matt: All right. Ian, you’re in the hot seat first, because you published this note, and this is where I wanna start. And I know we’ve wanted to do this behind the scenes for a while, so this is really exciting to make this happen in public and capture this. So you wrote this note, The Last Moat, and you basically said that as AI flattens the information playing field, the only edge left is presence. This is near and dear to my heart. I am very, very excited by this thesis. So being in the room, being on the call, being at the factory — walk us through what’s in that piece and why a Bloomberg Terminal’s not coming to replicate
Ian: you. This is gonna be an open-ended question, so if you don’t mind, I think maybe what would help is me to kinda frame it up, kinda telling my origin story and kind of investing a little bit. Let ‘em know. Try to do it succinctly. But I kinda got into investing when I was a 16-year-old, so that was 1997, to date me. So right as the internet bubble and technology bubble was about to take off, my parents sat me down and they gave me $20,000. They said, “You know, you can do what you want with it. Spend it on a car, go to college with it, but this is all you’re getting.” And they kinda gave me a choice as a 16-year-old to make that decision, and they opened up an account with their financial advisor. They put that money into it, put it in my name, and I started getting kinda snail mail about small cap tech stocks ‘cause it was around that same time period. And so I kinda got enamored with that, and I kinda bought 1,000 of this one, 1,000 of that one, and they all did was go up.
So all of a sudden, all of my money was in these tech stocks, and by the time I graduated, which was 1999, it turned into about $120,000. And of course I thought that was all skill, which we all know that was all luck. You know, a monkey could have threw a dart at a newspaper and picked a winning stock back then, and I was that monkey.
But that’s kind of how I got started by getting bit by the greed bug. And when I went to college — I ended up going to a cheaper university so I didn’t have to spend all that money. I just worked part-time for a financial advisor, and that allowed me to stay close to the market, stay close to my portfolio. And so that would’ve been ‘99, 2000, 2001 when I was a sophomore in college. So 2001, as you can imagine, was very interesting. I was basically a glorified receptionist at this financial advisor office. And so then I watched my portfolio go from 120,000 down to eight, and then also having to answer the phones from 1,000 clients during that crash made an impact on me.
And so a lot of those small cap tech companies turned into microcaps, and I kinda got baptized into the space. And so I ended up liquidating the portfolio, but I was interested in the smaller subset of companies called microcaps, and the first one that I looked at was XM Satellite Radio, which then turned into Sirius Satellite Radio. Back then it was a story stock, and I was a sophomore in college. I saw Hugh Panero, the CEO at the time, was presenting at a conference up in New York City. I called the conference organizer. They said I could come. I did say that I was from Castle Capital. You know, AUM was $8,000, but I had some fake business cards made.
Got on a bus from here in Lancaster, went up to New York City, and kinda weaseled my way into a one-on-one meeting with that CEO in between his institutional meetings. And quite honestly, I don’t even remember what was said in that 10-minute conversation. But you know, I came out of that meeting with my eyes as big as saucers. I just talked to a CEO. It was amazing. And came back and bought XM at $1.78 per share, and then it went on a 14-month rally where it went to $34 from $1.78. And you know, once again, that was all luck as well. But I always like to start with that story because I kinda started my love affair with microcap stocks because of the ability for an idiot like me back then as a 20-year-old to sit across the table from a management team and feel like I could gain some valuable insight.
And yeah, did I actually gain any valuable insight back then? You know, probably not. Well, I know I didn’t. But I know that was kind of the starting point for me kind of doing more management meetings in person. I had some mentors that showed me the ropes of how to do better at these conversations, how to do company visits and this type of thing. And was I good at them the first one to 10 times? Did I gain any actual knowledge from it? Maybe, maybe not. But the more you do them, the better you get at picking up the things that do matter. And the more you do them, you don’t get anchored to the sunk costs of either the expense of traveling there or the time it takes to do the real work up front — to where you can disconnect that from the buy decision, you know?
‘Cause the first 10 meetings you do, you’re like, “Oh, this is amazing.” You know, you’re the most bulled up you ever were. Your expectations are high, and you just buy the stock anyway. You know, so it just takes time and reps to actually do it well. And today I’m just grateful that I started when I was 20 because by the time I actually think that it became an advantage five, seven years later I was still young, I could still apply that. And it’s just like everything, it compounds. You know, the more reps you do, the more interviews you do across industries, the more that kind of pattern recognition and intuition impacts your investing strategy. And I think it’s just the ability to sit across the table and get more out of the conversation than just sending an email or even doing a Zoom call — it’s night and day difference.
Bogumił: Ian, real quick — you focus on smaller companies. I spent most of my career with larger companies. Do you think you have a special edge with those smaller companies? Maybe the management speak with you in a different way than large companies that are — the CEO’s so busy going to events, holding investor meetings. They speak a language that might be missing some of the details that maybe the smaller company would share with you.
Ian: Yeah, I mean, I think that’s accurate. You know, I think the smaller investor has the ability to actually speak to the CEO in microcap companies, where you obviously probably don’t have that luxury, maybe even in small cap and especially probably not as much mid cap or large cap unless you’re just showing up on a Q&A at an earnings call. So I do think that’s kind of another advantage in microcap — you do have access to management teams. And by and far, I mean, most good management teams, they will take the time to speak with you if you do the work and you ask good questions and you prepare. And they respect you for that. It doesn’t matter if you have $10,000 in a Schwab account or if you’re managing $100 million. I think people respect people where it’s obvious you did the work up front.
Matt: Chris, you got more than $10 in a Schwab account, I hope. But also talking to management — what do you do?
Chris: Yeah, that last part — I would definitely agree with that. And I’ve been in meetings with other professional money managers, and sometimes I’m shocked at the questions they’ll ask. I’ll be like, ah, wincing. That’s in the filing, you know? So it’s amazing. And management teams, I will say sometimes they’ll be a little dismissive, or they come in the meeting with a certain preconception of what you are. You know, the American hedge fund manager — and they think... And it takes some time to win them over. Like, if you do the work and you show that you know some things about their business, and you’re bringing something to the table, you’re asking insightful questions that aren’t necessarily in the filings or something they’ve addressed already, then they are willing to spend more time with you.
And I’ve had really good meetings that way where it’s taken a while. It’s not like the first meeting you win them over. Maybe not even the second, but you know, you’re there and it’s two, three years later and you’re still there. And a lot of things have happened and a lot of the other people he’s talked to are gone. I’ve had meetings where CEOs popped out of their chair and started writing on a whiteboard and giving me all this good information about how that company works and how the organization works.
So I will say though — you have to change expectations a little bit. I’d say if you go in thinking you’re going to learn something from management, like they’re going to tell you some kind of secret that nobody knows, you’re going to be very disappointed because that rarely ever happens. In fact, if it happens, it’s kind of a red flag because then you think, well, if they’re leaking out stuff to you, who else are they leaking stuff out to? But what you really gain when talking to management — and this doesn’t apply for all businesses either — what you really gain is just a better understanding of the business. Like if you really want to be a long-term investor and own the business, sometimes it helps to have the CEO just really walk through how does this business actually work? How do you really win business? You know, and you get into the particulars of how things work. And the more you know about that particular business, then the easier it is to hold on later when you’re tested — when the market tests you and you’re down 50% or whatever.
And that’s what I think is really the value in the work — it deepens your understanding of that business and it makes it easier for you later to know when news hits or whatever, you have the ability to judge on your own, not relying on what media says or analysts say, whether it’s material or not, whether it matters or not.
Ian: Yeah, I think I kind of view every position at the start the same as building a relationship — whatever relationship you have. And the first time you meet somebody, it’s kind of like the first date you had with your spouse. And the key is continuing that relationship and putting in more reps with the CEO. You need to get to know them. And to your point, Chris — the edge isn’t necessarily informational, it’s relational, in some regards. You know, it’s kind of like — especially at microcap — it’s the same as I think all of us: your spouse doesn’t have to tell you that they’re mad at you. You just know because something changed in their tone, their cadence, whatever the case may be, because you know them well enough to know who they are. And I think that’s kind of the benefit of not just doing one meeting, but getting to know management teams and building that relationship over time.
And especially in an area like microcap — and we’ll get into this later — I would say the base rates are they have shorter shelf lives than small caps or mid caps or any of the larger ones. You know, the advantage in that relationship is not necessarily so you can build the conviction to hold longer than other people — 80% of the time it’s so that you can spot the signs of your thesis cracking before others and sell. So it’s kind of a two-way street a little bit more, I think, when they’re these smaller, more fragile businesses.
Chris: I have to say, Matt, there’s one other thing. There’s another side to meeting with management as well, and that is that you can get charmed by them, and you can start to like them, and it clouds your judgment. So there’s a lot of times you have to be very careful. I don’t want people listening to this to think suddenly they have to talk to management teams to perform well, because that’s not true. You know, there’s lots of investors who actually make it a point not to talk to management. I always think of Walter Schloss. I mean, he did like 15% for, I think, five decades, and he didn’t talk to management. And Joel Greenblatt writes about this in his — I think it’s The Magic Formula book — where he’s telling individual investors not to talk to management for that reason. ‘Cause you can get snowed, you can get charmed, and then you’re stuck. I think it helps in certain situations.
In most situations for Ian, I mean, he’s dealing with microcaps. There’s often not a lot of research, not a lot of stuff out there on it. The research you do — you’re doing the original research ‘cause it’s not like there’s a lot out there. But if you’re covering a larger company where there’s a lot out there, there’s just a lot of coverage, there’s a lot of experts, a lot of people you can talk to — then maybe it’s not as important to talk to management. So it really depends on the situation, I think.
Bogumił: Chris, you’ve done a lot of research on business moats, how those companies remain durable and grow and succeed. We’re talking about the investor moat. I’m curious, how do you reconcile the two in your process? You’re looking at the business moat, but then you have a certain investor moat — talking to managements, not talking to managements, getting to know them, following them for a while. Can you talk about the two different moats that you can develop? I have a feeling that Ian is strong on the —
Chris: Like investor moat — meaning like an edge that I have?
Bogumił: Yeah, yeah, in the process or in the fact that you do talk or don’t talk or how you go about getting to know the businesses.
Chris: Yeah. I actually don’t know that I have much of an edge on the analytical stuff. We all do the same thing. You know, we all look at the free cash flow, look at the margins. We try to get a handle on competition. Everybody does the same kind of thing. A lot of that is out there. I think the edge that I really have is just the ability to look out longer than most people and hold on longer — and really be a long-term investor — where a lot of people still say they’re long-term investors, but then they’re parachuting out the first time you get an earnings miss and the stock’s down, and then they concoct reasons why the thesis is broken, and they write this stuff in their letters to their investors. And I look at it and say, “Well, you could have sold for that reason at any point in the last five years.” You know? It’s not a sudden thing. So yeah, I think that’s part of it — just being focused on long term, because then a lot of things fall aside and are not as important.
Bogumił: I think what Ian mentioned — you mentioned the key word for me, which is conviction. You know, I wanna write a piece about it — it’s not the stock, it’s you. And the key idea that I have is: what do I need to know to stay invested in a company? And I think especially Chris, but I think Ian you as well — you wanna know enough so you can have the conviction to hold it through the tough time. When it goes down, when it goes nowhere, when everybody questions it. And what do you need to get that conviction? It’s a curious place to be. Everybody’s looking at the same things. Everybody’s going to the same meetings. One walks out with conviction, the other one has no conviction about the idea.
Ian: I mean, I think there’s two parts of it. For me, because I invest in small companies, I think the relational aspect of management is important to me. But I also think it’s important kind of across all market cap classes that when you’re analyzing a business and really doing that maintenance due diligence on a constant basis, you find some way to verify the trajectory of that business independent of what management’s telling you. And just trying to figure out how exactly to do that — that will change from industry to industry and company to company. But I think you combine those two things to have an independent view, despite the stock being down 30% year to date or up 30% year to date. I think that’s the key.
Matt: Well, I wanna jump to stuff that’s down a lot and challenging conviction with what you know. So I wanna talk software. Robert’s not here, but Robert Hagstrom had this really interesting story that we had with Chris and Bogumił before about why and when and how they sold some of the software stock exposure and as they were thinking through this. And I’m just curious, especially around this — and Chris, this is to you first. You don’t have to talk about specific companies you own in this way. We can talk philosophically about it. But AI came for software. It showed up in the stock price. You’re looking at your relationships with some of these companies, your understandings, and you’re deciding what you still like and what needs to be updated. Could you just walk us through how you can tell if a moat can survive?
Chris: Yeah. The only software companies I own are all what we call vertical market software. It’s just a label and a name. But what it means is this is software that is dedicated to very specific verticals, so very specific industries — whether it’s running an auto body shop or a transit system or whatever. And those systems have particular advantages. I also hear this term “system of record” tossed around — that’s the place where truth lives, you could say. It’s the place where the auditors rely on. It’s the place regulators go to. It’s the place where, in a world where companies are sued, that’s where the legal system’s gonna go. Yeah, there’s lots of reasons why you wouldn’t wanna mess with that. So you’re deep in the individual process of that vertical. You have the system of record. And a lot of times these are tiny, narrow verticals. It’s very different, some of these vertical market software companies, than the horizontal market, which is where you have one software product but can go across a lot of industries.
The vertical one — the mission-critical stuff tends to be vertical. So what does mission-critical mean? It’s another phrase people throw around. Well, that’s stuff that you need to run your business. Like if you’re running a big dental practice or something, if your customer relationship management software goes down, maybe you’re inconvenienced, but you can still operate that day. But if your vertical market software goes down, you can’t see patients that day. It’s the difference between what your employees log in to every day to do their job versus what’s nice to have. So I was very confident that those vertical market software companies would be fine in AI, and plus they’re using the tools themselves. It’s not like an AI native would be facing incumbents that are using the tools themselves, plus have all the deep vertical knowledge, plus the data and the trust and all that.
So I’m still surprised that it’s drawn down as much as it has. I think maybe a lot of people just threw software all out together in a bucket, and now we’re entering a phase where people are gonna start to sort more carefully through who the winners and who the losers are. I mean, there’s a great difference between Wix — which does web development — or Zendesk versus Salesforce versus vertical market software that’s within Constellation, for example, that’s running transit systems or something. And I think this has been around a while. I mean, they’ve talked about it in every annual meeting for at least the last two, maybe three years. So when it came, I felt I was pretty well prepared for it, but certainly I didn’t expect this kind of drawdown. But given the history of markets, this happens a lot — getting cut in half. Even the best stocks routinely get cut in half on their journeys. So in some ways we have to expect it.
Matt: ‘Tis but a flesh wound, though. What, in your conversation with management when you’re going through this — what are you listening to from the managers? Is it that they’re agreeing with your own analysis of the situation? Is it the way they reframe it to you without falling in love with their story? ‘Cause there’s a reason they’re the people in charge.
Chris: Yeah. Well, this is really interesting because this gets to where Ian will surely agree — not only when you talk to the management team of your own company, but when you talk to management teams of other companies in that industry, you can see what kind of stories they tell. And that’s really interesting ‘cause sometimes they won’t say the same thing. So I’ve had meetings where I’ve walked out of one management team at a vertical market software company and I’m like, “Ugh,” that was a little concerning. Like they were maybe a little more dismissive of AI, a little more reactive about it. Versus going to another one where they’re telling me already use cases and things they’ve done and how they’ve saved their customers millions of dollars doing X and Y, and they’re looking at it like an opportunity and they’re really excited about it — man, I walked out of that one feeling much better. So you can get some differences. And then — individual investors can’t do this so easily — but I also love talking to people who are not management, but who worked in the company or used to work in the company. So somebody who used to run a division within a software company — talking to them and getting their perspective because they’re now more removed. So they have the expertise, but they’re sitting outside, so they’re giving you a different perspective. It’s all these things kind of filter in.
Bogumił: Ian, are you seeing any tailwinds in your space? You’re talking to managements, listening to what they say. I feel like we turn from very positive on AI to being very worried about AI. Any tailwinds that you’re seeing that will actually improve some existing businesses or maybe launch new ones?
Ian: Well, maybe to start — in software in general, the microcap software companies, it’s a little bit of a dodo bird. There’s not many of them that exist. They’re kind of low quality, kind of minor league competitors in a major league game, a lot of them. In fact, I can only think of like a couple that I think are probably leaders in their little niche that they occupy, and that’s about it. Most of them are uninvestable, if that.
I think the questions that I tend to ask — and so I don’t really have any software companies in the portfolio — I think where it does impact me is when I am talking to even a traditional company and asking them how they’re utilizing AI. Right? And then you get to benchmark that, as Chris said, against competitors or other people in that industry to see where they stack up. Because the one thing you don’t wanna do is be invested in a company that still has kind of this wall up in front of them. They’re not doing anything with it. They’re just gonna end up getting disrupted if they aren’t. And so I like to just ask them simple questions — because a lot of times the companies I’m invested in are simple companies.
So just: “Tell me about one workflow where AI has changed internally,” and see if they can give you a concrete example. And hopefully they can. And ask them how did you — there’s people that were freed up — how are they being reallocated in the organization? Things like: what data do you have that your customers don’t have? Because proprietary data — AI models when they’re built on just public data, they’re just gonna get eaten up by the frontier models that are out there. But if they actually have proprietary data that they can use for their own AI to compete, that’s something that’s really interesting. And where does the data go that you then have? You know, all those types of questions.
So it’s those simple top-level questions I like to ask. And it’s fun when you find certain companies in certain industries. I’m an investor in one company — which I won’t name ‘cause it barely trades — but it’s a flooring roll-up in the US, and they’re buying companies at one to two times EBITDA. It’s a very brick-and-mortar, hands-on situation — it’s flooring — dirty, that type of thing. And they’ve completely used AI from inventory management to the sales process from the top down. And it’s pretty wild how much it’s changed their organization in the last 12 months, and that does show up in the financials. So I think it’s interesting, especially in those industries that historically have had maybe lower gross margins and things like that, where you can see that impacting the bottom line in a positive way.
Chris: Yeah, I think a lot of this will — I mean, I think Mark Miller at Constellation Software said that it’s table stakes. Eventually we’re not gonna really talk about it. Everybody’s gonna use it, everybody’s gonna have it. It’ll just be like the internet or something. No companies today would say, “Yeah, we have a competitive advantage because we use the internet.” So what? So does everybody. And eventually, I think that’s where we will be with AI. But for now, it’s like this kind of weird in-between moment where some people are really gung ho and using it and you can see they’re making an impact in their financials. Others are being a little more of a laggard about it. So yeah, it’s really interesting. We’ll have to see how it shakes out, of course.
Matt: Ian, with that stuff — when do you parse if this is just what Chris said, like a shot in the arm, a one-time boost, a parallel shift upward — “Oh, we do this better now” — obviously the profit margin’s not gonna increase forever. How do you think about integrating AI and if the company has a handle on it, where this is a competitive advantage for them — or at least a durable strategy for them going forward — versus it could be problematic? How do you understand it?
Ian: I think in certain very tangible industries, I’m not quite as worried about the disruption factor. A lot of them, I just wanna see that they’re doing something.
I’ve still run into probably half the companies I speak to aren’t doing anything, and that should scare you. Yeah. It scares me.
Chris: Yeah. For my part, I can’t think of a company that’s doing something that someone else in their industry can’t also do. Which again makes me think that it’s gonna be something more like the cloud or mobile — it’s just a tool eventually everyone’s going to use. And yeah, you said it — one-time boost — that may be it. Whether it’s on the labor productivity side or whatever, but long term, eventually everyone will have it, and the big beneficiaries will be the consumers.
Bogumił: Ian —
Ian: But all the disruption — to Chris’s point — it presents opportunity. I think we all have scenarios where certain companies go up into the right and make you feel like a genius. And then there’s other ones, or other points in time in those same companies, where it becomes a battleground. And the battleground is you really diving in to see if it’s worthwhile holding this thing 50% down. If the story changed, the thesis changed, if the industry changed. And a lot of investors, first of all, aren’t even willing to do it or put in the work to even develop that conviction. And second of all, you just have to ask yourself: is it worth facing this headwind of perception for however long it lasts? Should I just play an easier game? And so that’s kind of the internal struggle we all come across individually in companies and also when events like AI affect software.
Bogumił: Is it a moment where you have to catch up, keep up, or you’re gonna lose to existing or new competition? Or do you feel like all those companies have a chance? I’m reading those studies and I’m amazed how many studies show how some companies have not even tried it. They said they failed at it. I’m using AI to run anything that my brain doesn’t need to participate in. I’m trying to use AI as much as I can to organize processes. Absolutely. Even scheduling the podcast, following up, checking the dates, not missing anything — AI just checks things for me. Do you think we have to keep up, catch up, and some of the companies will just totally miss it? Kind of like the switch from brick and mortar to online — some companies just totally missed it.
Ian: Yes.
Bogumił: Yeah. The short answer is yes. Yeah. Is it easy to tell who and how? Like, is it part of the culture? I think it’s such a shock to the system for a lot of companies that they even have to consider this kind of a switch. If all the workflows work — they have that many employees doing the work — why would they even be thinking about it? I think even the larger companies might have a harder time to switch than maybe the smaller companies that Ian is more exposed to. Is there —
Chris: I don’t know.
Bogumił: Yeah.
Chris: I don’t know, because the larger companies have bigger IT budgets — they have more muscle to throw at it. So it really depends on — you mentioned it — culture. Some companies do have a very good — they’re decentralized. They have a culture that encourages experimentation, and so you can see it there. But I would say we’re at the point now where you should be seeing something happening. The company should be talking about it and showing some sort of results because it’s not that new. It’s been around a little while. So if they’re not doing it now, then I would start to be a little bit concerned. I’m with you, Bogumił. I use it all the time.
Matt: It seems silly not to be using this all the time for different things. And the reality too of finding out about something that you’re oblivious to — I love that. Like, we’re about the same age, and my experience with XM Radio is like a buddy in college going to work for them, and me being like, “Who? What do you get, like a rental car or something? Like the thing that they try to give you for free?” And then he’s on this rocket ship, and I don’t even know it’s a rocket ship until I see him five years after college is done, and he’s still working there and clearly doing much better than I’m doing. And I’m going like, “Oh, that’s what happens when you get into one of these things.”
So Ian — you’ve said you’ve got about a 10% chance of still loving a microcap in 24 months. And I’m curious because inside of all this grand theory and inside of all this grand stuff, you find an idea, you have conviction, you develop it. Yes, we wanna see these things take off over long time horizons, but a 10% chance of still liking something — that’s worse than the divorce rate in America. Interrelational scenario before. What’s up with that?
Ian: Yeah, I mean — investing in small companies — and I’m talking about we initially at the fund that I manage, we initially invest at 50 — five zero — million market cap. And there’s just a big difference between a $50 million or $20 million market cap compared to even a $200 million or $500 million market cap. Right? Like the —
Chris: Well, give — so give — what’s the revenue roughly of those companies you’re looking at?
Ian: Well, if they have revenue.
Chris: Okay, there you go. So that’s why I wanted him to say that.
Ian: Yeah. So a lot of times it’s — you’re investing in something that’s doing $10 or $15 million revenue, breaking even. And you’re trying to look at it as: can this company even double in size and earn two or three? And it sounds like a very small incremental change going from 10 to 20 and going from breaking even to earning two. But in my world of nano cap, that’s probably a two or three bagger — just a company that can grow that much without diluting you. And really the bet you’re making long term on that management team is: can this management team transform this hustle business into something that can scale? Because we all know small — I mean, it’s kinda like you’re walking around your local small town. Some of these companies probably wouldn’t be the largest company in a small town. They’re very small.
And so because of that, even with my 25 years of experience doing this — looking at great leaders and understanding businesses — the shelf life of these companies is oftentimes shorter than what I think. Because they do hit a streak where they have a product that kinda takes off for a period of time, and then it stops. So I would say the base rate on a winning stock in microcap is one that goes up 3 or 4 or 5X over a four to eight quarter period of time, and then they fall flat on their face because they didn’t have the people, processes, culture, or innovation to kinda scale and innovate and diversify their business into something that could actually reach escape velocity.
So it’s hard. I mean, I kinda compare it — Chris, you invest probably somewhere between $500 million and obviously midcap, call it in that range. And it’s just apples and oranges when you compare —
Chris: Yeah. I mean, I used to love to invest in microcaps. You remember, Ian. I was in the newsletter business earlier in my career. I used to love the little microcap. And I’ve been to Ian’s conferences — great — and yeah. My thing with the microcaps — what I remember is lots of very quirky entrepreneurs doing things and creating businesses a lot of times just completely bootstrapped. But I think one of the biggest challenges — which is why there’s that low survival rate — is that you have a really good entrepreneur who has an idea, created this product. But as we know, the skill then to transfer that to a business that actually generates cash and profits — can you manage people, can you manage the supply chain, can you expand and do all that — that’s a different skill set. And sometimes they can’t make that jump. There’s a lot of times I can think of microcaps I love, but the management team, they’re almost more like enthusiasts, like hobbyists. They loved what they were doing, they loved what they were making, they thought they were gonna conquer the world, but they didn’t have the business skills part to really nail that. So that, at least in my experience, has been one of those challenges.
Ian: Yeah. It’s just difficult. Like, I kinda compare it to — trying to think of a good sports analogy. Think Tom Brady — he was drafted in the sixth round in 2000. And then he sat on the bench for a year. And then in 2001, Drew Bledsoe I think lost the first two games. Bledsoe gets hurt. He steps in in 2001, takes them to an 11 and 5 record, and then wins the Super Bowl. And —
Chris: After that Super Bowl is when Chris Mayer would buy that stock.
Ian: Kind of a proven leader. And then he’d go on to win five more Super Bowls. You know, where I’m trying to find Tom Brady — not in college —
Chris: High school.
Ian: Not in high school, no, like fifth grade midget football. It’s just really hard to do it back then. It doesn’t mean you lose money on the ones that don’t cross that chasm. You know, you can still make really good money on the ones that don’t become the outlier success story. You can still make hundreds of percent return. But they’re just not gonna be that thing that you could ever hold for 10 or 20 years.
You know, it’s my intention to find things that I can hold forever, but very few will kind of earn that right as you hold them. There’s gonna be some that you hold for six months or two years, and other ones you’ll hold for 10. And you’re constantly trying to find those ones that are worthy of truly owning. So...
Matt: When you’re hanging out around the Peewee football thing, and you’re looking for which kid’s deflating the ball.
Ian: Yeah, exactly. That’s right.
Bogumił: But it’s such a good point because for an outsider, a total outsider, they might think that a microcap or small cap — it’s a space where you find the next Facebook, the next Netflix before people recognize it. It’s not that space. These businesses are trying to figure out how to become successful operators of even a small scale. Chris, I wanna ask you about hundred-baggers. You have a different perspective — not 24 months. You’re talking about years. Sometimes it takes years for them to get to the 50x or 100x. With the technology, with AI, with companies scaling so much faster, do you think we’re gonna get to the hundred-bagger sooner than ever before? Any hope on that front?
Chris: Well, I don’t know. Part of the challenge now is when companies go public, they’re a lot larger than they were. So sometimes, yeah, you’re getting them — they’re already multi-billion dollar companies, well along the way. So that makes it, in some ways, a little tougher. But there’s always opportunities. I mean, especially now — one trade-off going the other way is you can invest abroad a lot easier now than, say, 20 years ago. So I always feel like there’s lots of things to look at across the world, and I don’t know if it’ll be faster or not.
I suspect if it is, then there’ll be other trade-offs in that — corporate lifespans are maybe shrinking, and so there are some other factors involved in that too. I don’t know that it’s gonna change that much. I suspect if somebody does a hundred-bagger study 20 years from now or 30 years from now, they’ll probably get somewhat similar results from the study I did, which I got somewhat similar results from the one Thomas Phelps did back in 1972 looking back to the ‘30s. So certain principles don’t really change that much.
Matt: I wanna go to one of the other ideas that I think you both share some love for here. So I wanna talk about intelligent fanatics, because I think this shows up in a number of different spaces. Ian, I’m kicking this one to you first. Do you wanna define the term? Do you wanna talk about your — your just minor, slight side interest in this topic?
Ian: Yeah. So I guess it would’ve been probably 2010, 2011, 2012 — I really kind of pivoted to this realization that especially in small microcap companies, whether they’re public or private, to find a great company early, you need to find a great leader early. And starting to kind of dive into the qualitative aspects of investing, the cultural aspects of running a business and how to create something that can obviously scale, but even dominate.
And so Charlie Munger was the first to use the term “intelligent fanatic.” I first heard about the term from a good friend of mine, Professor Sanjay Bakshi over in India. He wrote an article back in 2015 on the topic. And from 2015, I kinda just dived into it with two feet, along with a friend of mine, Sean Iddings. And we just started looking at, first of all, the intelligent fanatics that Charlie Munger mentioned in his speeches and writings, and then basically looked into their stories, retold their stories, pulled out valuable lessons in it, and turned it into a book called The Intelligent Fanatics Project. And then we found another eight that we thought kind of pattern matched those first eight, and then wrote a second book. And the books sold like 125 copies, so it’s not like anybody bought them. But the value there was just the three or four years of kind of research into that and just studying hundreds of these great business builders that ultimately grew a company from nothing into something that dominated their niche, geography, industry. And it was pretty enlightening. So I used that then to at least try to help me fine-tune my lens for finding quality leadership in small microcap companies.
Bogumił: Chris, I have a feeling that you won’t disagree. You like owner-operators running those businesses and turning them into much bigger successes. Can you talk about why they’re so important, those owner-operators?
Chris: Yeah. I love finding the owner-operated company with a talented individual who loves the business and lives and breathes it all the time. And yeah, I mean — there are various studies that show that companies with CEOs with high insider ownership tend to outperform their peers. Now, this is not like all the time, but general population compared to general population, yes. And there are other traits. So I think one of the big ones is founders will invest counter-cyclically. Hired guns tend to pull back when things get difficult, because they are more worried about not being criticized or called out — they wanna retain their jobs, and it’s easier to just do the thing that, if everyone else is cautious, be cautious too.
And I think that really came out in the 2008 crisis. I remember reading about people like John Malone — who was the main owner of a lot of the companies he ran — who was investing heavily in 2008. So that’s one example. And I think when you have an owner like that, they’re just always thinking more about doing new things, trying different things, and it’s bound to work out in the long term. They think about — I would say, a lot of those hundred baggers, when you think about it, many of them are associated with a person. Like if I say Apple, you think Steve Jobs. If I say Walmart, you think of Sam Walton. There’s usually some kind of brilliant entrepreneur somewhere along the line there that really built and grew that business, and so that’s what I would love — to invest with people like that.
Matt: Ian, where do you see — is there an upper limit, especially in microcap, nano cap, smaller stuff with those incredible owner-operators? Is there a — how do you track when somebody maybe is outgrowing their britches or has been there too long, or that advantage has gone away, especially in the tiny space where you operate?
Ian: Well, it’s incredibly difficult. If I knew that, I’d probably be on an island somewhere. And I think Chris is 100% spot on given how he invests — to focus on founders — because in the really small ones, kinda what we talked about before — I’m not necessarily looking for a founder, but just because they’re a founder doesn’t mean they know what they’re doing. Doesn’t mean they know how to scale a business. Chris is correct in looking for them because when he’s investing in them, they’ve likely already scaled this business very significantly. They’ve proven to be competent and good stewards of capital.
Chris: Yeah — Tom Brady’s already got a Super Bowl right there.
Ian: Yeah, exactly. Like, I’m still trying to figure out... So I don’t necessarily have a qualitative filter of “this needs to be a founder,” because I find that successful leaders in microcap can kinda come from different areas. They obviously could be a first-time founder, but they could also — I mean, the easiest great leader to spot is just what I call a repeat winner: somebody that’s built a company before, sold it, exited or whatever, and is bringing the gang back together again to do it in something small. In fact, that’s more of a qualitative filter I have for my investing — management transitions. You know, when you see a new management team with pedigree stepping into an existing position, you usually can buy it at a value price, because the old shareholders are getting angry and they’re sick of dealing with this, and they punt it down to a value or deep value price. New management team comes in, hopefully injects skin in the game with their own money and then redoes the strategy. Something old becomes something new. Deep value turns into value, turns into growth, and you get multiple expansion on top of everything. And so I think those repeat winners are a great place to find ideas — those transition points.
But also even high insider ownership isn’t necessarily something I need, because some of the good leaders are — call it like Robin. You know, Batman gets killed and Robin takes over or some sort of thing like that, where you have the second in command that all of a sudden takes over because the guy that was in charge — or gal — didn’t do an appropriate job. The second in command usually has a chip on their shoulder. They have something to prove. And just because they didn’t get in at the founder’s level with cheap stock and don’t own 20% of the company doesn’t mean that they aren’t completely full of ambition to make their mark. And so I kind of find those — that’s a breed of really good leader, the one that feels like they have something to prove. And it doesn’t matter if they own 1% of the company and they might be poor — they’re still gonna do a great job.
So it kinda goes across the full gamut of kinds of leaders that I look for. I don’t think there’s one overarching theme of it needs to be this or that. But to your question about how do you know if they’ve reached the ceiling — I mean, I think you just look at the business. I just tend to focus on the business, stay close to the business, always have a one to three year view on where I believe the business will be in that one to three-year point of view. Give them some wiggle room to disappoint, give them a lot of room to exceed expectations, and do the best you can.
Matt: I’m looking for the Nightwing CEO. Like, I would carry that metaphor into a book. I’m just — Bogumił, I cut you off. Pardon my comic book interruption.
Bogumił: No, no. I just have to ask because quite a few companies we’re all paying attention to are going through a transition. You know, Berkshire — and Apple. I mean, it’s gonna be a second person after Steve Jobs. What are your thoughts? I mean, I’m personally really impressed with what happened with Apple since Steve Jobs left. I’m not so sure what’s gonna happen with Berkshire. I have some thoughts about it. But you have those incredible companies that we associated with one individual, and then they leave.
Chris: Yeah.
Bogumił: Chris, you have some thoughts?
Chris: Well, I mean — what Ian said, I agree. It’s like there’s exceptions to everything. So yeah, I love the owner-operators, but there are times when you can get a — just like you said — a number two takes over and they don’t own a lot of stock because they haven’t been there that long. They weren’t founder, but they’re very talented people in any case. And so there’s reasons to stay with them. I mean, Berkshire is an interesting one. I actually tend to think that for Berkshire, there’s still a lot of stuff that can be done on the operational side that perhaps Buffett was not cracking the whip on, and so somebody else can come along and do a lot. There’s probably some businesses there that probably should be trimmed or should be gone. So I think there’s opportunities for something like that. You can — when you have someone new come in, they bring that fresh perspective also, which can be valuable, especially for businesses that have been around a long time. So you can definitely — I mean, those transitions themselves can be interesting times to look at a business.
Bogumił: Does the same thing apply, Ian, in your space? Somebody new comes in?
Ian: Yeah, I mean, it can. I mean, that’s literally one of the main things I look for — management transitions. Keyword searches: CEO change. And you might find 20 or 30 of these things a year, and you pass on 95% of them. But it’s that one that you see kind of that pedigreed repeat winner of a management team that already had success before in one or two other endeavors step into this small, opaque situation that just happens to have a ticker symbol. And you’re wondering — it kinda makes you sit up in your seat a little bit more, wondering, “What are these group of high-powered folks doing in this small thing?” That’s the type of spidey sense you wanna have go off in your mind, and that’s what immediately makes me clear the schedule, pick up the phone, get on a plane, and try to find out what reality is. Because especially if they’re putting skin in the game — that’s something that can be a very exciting opportunity and turnaround story.
Bogumił: They can make a big difference. Ian, you wrote a piece about asking a question — are you an analyst or an investor? And we’ve been talking a lot about researching stocks, asking people, doing all the due diligence. At some point, you become an investor. You have to buy a few shares. You have to build a portfolio. What are your thoughts about those two different skill sets? I met people who are amazing analysts, but they never really could manage a portfolio — as much as I respect their research.
Ian: Yeah, I mean, I think when it comes to analysts, that encompasses one skill of maybe six or seven skills of stock picking — finding an idea.
Matt: Yeah.
Ian: It doesn’t encompass these six or seven other ones, which is fully executing on a great idea. You know, which is — when to buy at valuation, initial position sizing, averaging up, averaging down, selling — all of those kind of inherent skills that we all go through every day as active stock pickers. Not every day, but periodically.
I’ve recently had a wonderful conversation with Lee Freeman-Shor and Claire Flynn Levy. They wrote a book called Stock Market Maestros — here recently, just came out in March. And a lot of people maybe read Lee Freeman-Shor’s first book, The Art of Execution, which was another great book. It’s an easy read. You can fly through it in probably a couple hours. And in that first book, he allocated a billion dollars across, I think, 45 different managers across the world. A lot of them are high-profile fund managers that we would all know — allocated 10 million, 20 million here or there, everywhere. But he told them to only invest in their top 10 best ideas.
And then he basically analyzed their trade data over the next 10 years. And kind of the two or three takeaways from that first book was: first of all, the best stock pickers in the world that he allocated to, they were right 49% of the time. Their hit rate was 49%. It’s about a coin flip whether they’re right or wrong on an individual investment. The second thing that I thought was interesting that he kinda came to the conclusion of was he thought that the ones that did outperform, 80% of them were lucky — not skilled. And this could be another hour-long conversation. You know, they bought Costco 20 years ago and held it. You know, they bought some company a long time ago and just held it. And obviously, again, I would agree — because I’m a concentrated stock picker — that takes skill to hold onto something during that rollercoaster. But his point was when you analyzed all the other trades from a skill perspective, it didn’t show they were really that skilled. So he kind of viewed it as those folks were lucky.
And so the second book — what they did was he teamed up with a data analytics firm, Essentia Analytics, which Claire Flynn Levy owns, and they basically analyzed 10,000 active funds and created an algorithm to look at those seven skill sets of when to buy, sell, position sizing, adding — all this stuff — and basically identified 12 managers that they could actually identify as skilled based on their execution of their decision-making.
And then interviewed them and pretty nice interviews on how do they average up? Do they average down? Like, do they have any portfolio rules? What are their limits? What constraints do they put on themselves? How do they capture more of the wins and cut most of their losers before other people? And it was really just a fascinating book, and I’d recommend everybody go buy it because it’s really good — another easy read.
But I think it’s just another point that those folks thought very deeply about each one of those skill sets — the valuation part, the holding part, the when to add part, the when to sell part. And one of the things that they unanimously said was the hardest part, even for successful fund managers, was selling losers. It was like the one thing that even the best that they profiled in that book were the hardest to do. And it’s an interesting thought exercise ‘cause it made me rethink some things with my own strategy and be self-reflective with it, but also kind of seeing where the future is going.
You know, they can now — if you pay her firm — where it’s accretive to those folks mentioned in the book was all those folks gave her their data. She looks at it and says, “This is which decision that you’re most deficient in. The data shows, based on your strategy over the last 15 years, if you just held things on average 15 months instead of 12” — or whatever the dynamic is — and then those managers apply that into their strategy. And seeing them, their alpha increase based on seeing their deficiencies, understanding it, and then making changes into their strategy — how that impacted their performance over time.
I haven’t done that with my own yet ‘cause I don’t wanna be that self-reflective yet. Just joking. But I think most of it is kind of the execution of a great idea, not necessarily the idea itself — because especially in microcap, I’m probably the same way, probably 40% or 50% win rate — which means I better be capturing my payoff ratio, which means you’re capturing more of the gain than you’re losing in the loss across the board in the portfolio. You know, it needs to work. And anyway, I don’t know if that helped anything, but it was certainly — it’s a book I would point people to, and those skills are the most important part about being a good stock picker.
And I think depending on how you invest, some of those skills are inherently less important or more important. For example — if you were to be simply a buy and hold investor and try to have a low attrition rate, which I think Chris would and does a great job at — the selling part of it isn’t as important per se, potentially. So certain ones of those skills are less or more important dependent on your strategy and where you invest.
Matt: It’s interesting because selling losers, the hardest thing — that means buying losers is the easiest thing. So avoiding that goes a long way. I mean, Chris, any thoughts on what Ian just said and how you think about both the analytical side and the behavioral side of actually building a concentrated portfolio?
Chris: Yeah. Again, it really depends on what you’re investing in. But I tend to be very humble about my ability to trade around things well, whether it’s adding to things at the right time or trimming things at the right time. And so I try to avoid those decisions as much as possible. I try not to trade. And then since I’m investing in things that generally these are good businesses with good track records, they’re gonna be worth more in five years probably. And so you have that tailwind which covers some mistakes too. If you pay up a little more for something, over time the business will bail you out. And plus you can always — with position size becoming important — if you leave yourself plenty of room to add, you can get through those kinds of...
I don’t know if it’s a mistake, but — that’s another thing — what’s a mistake in investing? Sometimes hard to know. What looks like a mistake and then you think three years from now you say, “Oh yeah, that was a mistake.” But then you look at it five years, you say, “Well, now it looks good.” Then you go seven years, “Well, it looks like a mistake again.” You know, depending where the end points are when you measure things, it can be very difficult to know what’s a mistake and what isn’t.
Ian: I think that first point you made, Chris — or the second point — is something that I’ve had to learn over 20 years. I realize more and more the importance of that initial position sizing. In my early years I would overly express that — and when I was just building my capital, I was in three or four positions. You can get more concentrated than that. And so yeah, if you weren’t taking a 25% position, it didn’t really work. But even now — I’ve kind of gotten away from “if I’m not putting 15% at cost into something, then I don’t have the conviction to own it.” I’ve completely changed that mindset.
Chris: Me too. Yep. Me too. I still make that mistake occasionally where I’ll get a little enthusiastic about something and make it a little bigger, but I almost always regret it. So yeah, it’s better to start slow, start small, and really grow into that position.
Ian: I love small positions that become large positions.
Chris: Yeah. Love that. Because you always learn something when you own something versus —
Ian: Yeah — and you let it grow naturally into something bigger that earns the right to that position size, instead of you forcing it to the market that you’re right by putting more capital into it.
Matt: Yep. Yeah. There’s definitely a life lesson inside of that. Guys, this has been outstanding. We’re gonna do a round two. Maybe we’ll even let Robert Hagstrom come hang out for one of these. Chris, people wanna bug you on the internet — where should they look you up?
Chris: Well, you can Google Woodlock House, you can find my website there and a contact page. Yeah, that’s probably the best way.
Matt: Ian, same question for you. Where should they bug you? Tell us just a minute about this book you have coming out later this year, ‘cause we’ll get you back for that. We’re all excited.
Ian: Sure. Yeah, you can find me on microcapclub.com. It’s kind of an online community for microcap investors. My fund’s at if.capital — it’s IFCM Capital Management. Coming out with a book September 15th. It’s called Stock Picker. It’s kind of a culmination of a bunch of my writings over the years, with my narrative kind of woven in between all of these chapters. And it’s mainly on the temperament side, the emotional side, and also those skills that we talked briefly about during this episode.
Matt: Chris, you too? When’s the book? Talk to me about that.
Chris: Yeah, it’s June now. June 16th is the publication date for The Investor’s Odyssey.
Ian: I’ll have you back for that. Great book. I read it.
Chris: Thank you.
Ian: It’s a good one.
Chris: Thank you. Yeah, I read Stock Picker as well. It’s very good. So we swap manuscripts.
Matt: This is like a good trading strategy too. This is the relational part of the trading strategy. That’s right. All right. Excellent. Well, I wanna thank you both for joining us. Bogumił Baranowski, Talking Billions — make sure you check out all his stuff too. This is a little experiment for the 100 Year Thinkers, so if you’re watching this, if you’re listening to this — leave a comment, like, subscribe, all the things. You know what to do. This is Excess Returns. Check us out on Substack too. We’ll have a summary of this episode and a transcript. Thanks, guys, for joining me today.
Chris: Thank you. It’s great. Thanks for great questions, and yeah, good to chat with Ian.
Ian: Yep, good to see you.
After-show recap — Matt Ziegler and Bogumił Baranowski
Matt: As always, we pressed stop, then we kept on talking because this was too much fun, and I was like, “You know what? We’re just hitting the record button. Let’s do our little recap like we like to do.” I mean, that was awesome, right? Is that just me?
Bogumił: It was so good. I have so many thoughts, but I really loved Ian’s story about falling in love with investing, and I think a lot of listeners and the two of us can really relate to that moment. We felt like, “I could really do this. Like, I could really be a part of this. I could figure this out.” And he’s talking about those early days, the ‘90s, when he thought he was a genius and all the stocks were going up. A lot of us don’t even remember that time. I remember watching it from afar. I was in high school, so I wasn’t participating, and I was hearing those stories about taxi drivers, truck drivers buying islands and just living a dream, and then it all came crashing. You know, he made all this money. Very humbling. Do you have some thoughts about that falling in love with investing?
Matt: Yeah, because — and like you. So me, you, Ian — all in roughly the same age bracket here. I wasn’t involved in markets at that era. Like, I remember the history class in high school when we were talking about this stuff in that go-go period, and I can only imagine what stuff my history teacher was speculating on that we’re having this conversation in class. But for the most part, literally my awareness comes in college and after with, like, a friend going to work at a place like Sirius. And that’s one of the first companies that I remember being aware of in the zeitgeist, like the actual share price — where I wasn’t just hearing something random on the news or in a paper about the Dow or whatever, the S&P at the time.
And it’s really interesting to think. For me, it took the financial crisis for me to be — I was interested, and then that loss is what made it complete. That’s where I was hooked with the crisis. I was engaged starting in around 2006 or ‘7, and that was me getting bit by the bug. But then the chaos, and the “nobody actually knows anything” — that was the part where I was like, “Oh, this is exciting now.” I mean, your story — yours is finding the Peter Lynch book. Like, where’s your story?
Bogumił: Yeah. Yeah. So when I was going to college and then grad school, it was soon after the internet bubble burst, and my professors — I’m pretty sure now — lost a lot of money in the process, and we did all kinds of things: options pricing, obviously macroeconomics, economics, everything else in between, accounting. But nobody sat down with me the way Peter Lynch did with his book, and he said, “Stocks are small pieces of businesses.” Such an obvious truth that even I feel embarrassed to share it here, but nobody sat down with me. I felt like the stock market is this casino where people go and play. It’s not. I mean, it could be if you want it to be, but it’s not. Everything that it is — it’s a place where you can buy small pieces of businesses, and you can hold them over a longer period of time. You choose them, and those businesses are successful or not, they grow or not, but the fact that I can become an owner of a business along with the founders, owner-operators that Chris and Ian were talking about today — just blew me away. I wanna ask you if you have a thought.
Matt: Yeah, I have a thought on that because I was aware of these things. So what’s interesting is I don’t actually think I tangibly knew people who lost money in the tech bubble. But same reason I had a friend who went to work for Sirius — I’m getting this music production degree and studying this stuff and working in recording studios and stuff like that. And so in the early 2000s when the tech bubble was imploding, we are all obsessed with Apple the business, not Apple the stock. So we’re all talking about Apple the business being disrupted. We are all users in the art space. Like, we all had to use Apple computers to do the work that we did. It was either you were gonna build something from scratch and run Linux on it, or the Apple OS was the only thing, as recording studios were starting to do the full conversion from analog to digital. That was the only reliable operating system for running the software that we needed for our very much downstream businesses. We had to draft contingency plans for the businesses. If Apple were to go out of business, what were we going to do? Incredible.
So my obsession was with the companies and not the stock price, and it wasn’t till a full four or five years after that that I realized those went together, and then the financial crisis is the part that connected it to me. Which is wild.
Bogumił: Take me to the AI thing — because so I’ve thought a lot about this as an adult now, more adult than I was an adult then, about the way disruption came into the business that I was a part of, and I didn’t understand the macro consequences or ways to think about it at the time. I see AI doing this now. The way that they explained AI and vertical versus horizontal businesses and stuff — I’m going back to replay this as soon as we’re done recording. It was so good. What do you think?
Matt: It is so good. You know, we feel like — I was listening to an interview with Iain McGilchrist, who gave us the left and right hemisphere thinking, but he’s talking about humans and machines. It’s a recent interview podcast — people can look it up, search his name. I was really impressed with how he phrased the AI question because he said for a long time, we were looking at machines and humans, and we were trying to show that the machine can be as good as a human. Now we’re trying to show that a human can still be as good as a machine. And he has a point. The second point he had was AI is very good about information processing that we confuse and we call intelligence. Intelligence, and wisdom and knowledge and all that — it’s a different thing. And I’m hearing him and I know he’s right, and I was trying to bring it home.
Bogumił: So I’ll bring it home with a very quick anecdote. Like in my real life, I’m managing a business investment practice. I have a podcast, I write, I have clients, I have a lot of things going on, and there are so many processes that I would love AI to do for me, and they fall in a couple of buckets. Some of them I used to enjoy doing, and AI can just process that information faster — like reading a transcript and telling me where to pay attention based on my prompts, all of those things. But then there’s a thousand little tasks that automation requires such a precision that it just doesn’t do it. AI is 70, 80% correct, but I just don’t know which one is the 20, 30% that’s not correct. So I end up doing quite a few tasks still that I don’t think require my highest intelligence, but neither automation nor AI can reliably — emphasis on reliably — do.
So extrapolate this to a 10,000-employee company and I can see how it’s a challenge. You know, we do want to do it. It doesn’t do everything we think, and I don’t think it might ever do because there are a lot of nuances. There’s a lot of human element, and unless it’s a true assembly line — which real work never is — they cannot entirely replace what we’re trying to do. And I’m not even talking about human touch, higher value added — just mundane tasks. Do you have some thoughts about it?
Matt: Yeah. I’ve been thinking about this a ton too, for the same reason. I keep finding the gap that I can’t quite close or I can’t quite bridge. And I’ve been reading — did you ever — I don’t know how much science fiction you read — the Dennis E. Taylor Bobiverse series, starts with We Are Legion.
Bogumił: Yeah. I’m reading it this weekend then.
Matt: Well, I’m into the third book. There’s I think five in the series — widely regarded as the trilogy is the core. But the part of it that I’m fascinated by is it deals with the relationship between humans and AI. This was written some years ago, within the last decade or so. But one of the parts is as this artificial intelligence that’s been created and mapped across human thinking — this can exist as an independent entity — and it’s the relationship between this AI entity that thinks and acts like a person and humans. But now this supercomputer AI entity, even that has to decide when to replicate itself, when not. Where the limits are, when there’s an environmental factor, when there’s a human psychological factor, when there’s all these different parts for different parts of the puzzles to solve, and how to explore, how to think, how to be unbounded by time and still understand this.
It’s a really interesting almost mirror image of the question that you’re asking. And those three books have pushed my brain in such a direction to think about where this is actually going, and I’m arriving at a similar conclusion where there are so many different areas where there’s gonna be different advantages that evolve and devolve over time — that we just wanna have the tools to solve it. We want those table stakes. But we wanna respect how many new gaps this is going to create or cause that may or may not be able to be bridged, and how we use these tools to navigate it. And every giant business and every tiny business — they’re versions of those same problems. That totally changes the investment landscape probably for the rest of our careers, right?
Bogumił: Very much so. And Chris pointed out something that rhymes with what you say. I love the dental office story — they have software that maybe will scrub your scheduling for the day, and then other software that will not allow you to serve your patients today. And I think that distinction, when we look at different companies out there: which one are you? And the second one is we do have software that kind of everybody uses — it’s ready off the shelf and we all use it. I joke with my wife that I feel like I’m a computer scientist, not an investor, because I’m just running different apps to do different things. I mean, I can’t even do a filing without a website, and then everything is online. Everything is in an app. Everything is a download, upload. Like, I feel like I’m a computer scientist here.
But anyways, I feel like I’m super excited about what it can do. I’m even more excited for smaller operators that have limited time. I don’t know how larger companies have raised it. Chris said that they have the budget, but they have tens of thousands of employees that have to get on the same page. I used to work at a firm that had a hundred-plus employees. We never found the same page on a lot of things. So anyway — I wanna ask you about the microcap universe, because Ian pointed out something that I kind of knew about, but I think for the benefit of this audience — when a lot of people think of smaller companies, they think they’re gonna find the next Facebook among them. So they buy the small company and they wait for the $50 million company to become a trillion-dollar company. He reminded us yet again that it’s not the case. What did you think about that?
Matt: I feel like I talk to clients about this stuff a lot, because I spend a lot of time talking about public versus private companies — because somebody owns a company, they started a company or whatever else — and differentiating and helping to explain: you still have equity in something. Here’s your public equity, here’s your private equity, and private equity can mean a lot of different things. Inside of private equity, we have all these different flavors. We have venture companies or startups that have tremendous scale opportunities. And then we also have some of the types of companies that Ian is looking at, where they’ve figured out how to scale up to a point, but they’re not Instagram-scale companies. They’re not things that are gonna grow in these same ways. So we have to apply, in many cases, like a larger public company framework to a much smaller private company framework.
And so translating that to clients with their own smaller businesses that are, in many cases, privately held or whatever, and going, “Well, what are lessons we could derive from, I don’t know, Berkshire Hathaway?” Or pick another company you admire in the public space where there are lessons we can derive — and then which things can’t we derive? Because I think those anti-examples are also really powerful too. Why is your property management company trying to copy Google — or Tesla — pick your Mag 7 stock or whatever. Like, why would your company in this space be trying to copy that playbook? And that can be really powerful too, and so I see a lot of layers of this differentiation and lessons I think about a lot.
Do you think about this much? I do, and I feel like when people say, “What’s a good business?” — I can explain, but one business has a potential to be just a $5 million in sales business, and the other one could be a trillion dollars in sales, and it’s absolutely defined. Like, if your family has the most prosperous gas station in town, they could have a very comfortable lifestyle. But until you start opening multiple gas stations and start scaling this into a chain of gas stations with, I don’t know, little supermarkets attached and all that — you are a business that, however efficient you become, you might run the whole thing on AI, I don’t know, have a robot walk around and wash people’s windows — it’s still gonna be maybe five and a half, six million. There is a limit to how much you can make and squeeze out of a gas station, right? So unless you’re scaling this — and I think the point that they were making, especially Ian — this is all you can get out of that company. And I think it’s such a reminder. That’s why he’s not holding this for 20 years. He’s holding it for that time that makes sense to him.
Bogumił: I really like that point. It’s so useful to see these in context, I think. And that was part of why I was so excited to get Ian and Chris together and then have you share perspectives like that too. Because if you understand the Russian doll approach — like how one thing fits in another — you can get lessons from jumping back and forth, which is really, really special. So I know I already said it once, but people wanna bug you — where should they look you up online? Let’s put a bow on this for people.
Matt: Talking Billions. That’s the Talking Billions, my Substack, my name, Bogumił Baranowski. You’ll find me there. I actually have this fun thing that I do — I look up recent people that sign up to my Substack, not all of you guys, but enough of you guys, and I send you a personal email. So don’t be surprised that you sign up and you’re gonna hear from me. I’m really, really curious who is reading, and I’ve started so many fascinating conversations, and some of them — I would say even friendships — out of this experiment. So sign up and don’t be surprised if you get a quick email from me.
Bogumił: All right. Make sure you go to Bogumił’s Substack — we’ll put a link in the comments to that. You’re watching Excess Returns. I’m Matt Ziegler, Cultish Creative, all those things too. This is an absolute ball. I mean, we’re expanding the 100 Year Thinkers universe. This is what we’re doing here.
Matt: Hey, it was so good. It’s so good. So this is Excess Returns. Again, check out the Substack. Like, comment, subscribe, all the things below, and we are out.