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The Last Moat | Chris Mayer and Ian Cassel on the Stock Picking Edge AI Can’t Replicate
01:16:46
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- [00:00]
Matt Ziegler
In the latest episode of our new show, the 100 Year Thinkers, Ian Castle and Chris Mayer join Matt Ziegler and Bogomil Baranowski to discuss software AI and where the last moats in investing still exist. We have included this episode in the Excess Returns feed, but if you want to keep receiving new episodes, you can subscribe to the 100 Year Thinkers on all major podcast platforms using the links in the episode description. Thank you for listening. We hope you enjoy the show.
- [00:19]
Chris Mayer
I think maybe a lot of people sort of just threw software all, all out together in a bucket and now we're entering a phase where people are going to start to sort more carefully through who the winners and who the losers are.
- [00:30]
Ian Castle
Tom Brady, you know what he was drafting the sixth round in 2000, you know, and then he sat on the bench for a year and then in 2001 Drew Bledsoe I think lost the first two games. Let's so gets hurt. He steps in in 2001, takes him to an 115 record and then wins a Super bowl, you know, and after that super bowl is when Chris Mayer would buy that stock that have a proven leader and then he'd go on to win five more Super Bowls and he would have cagred it at 25%. You know where I'm, I'm trying to find Tom Brady. Not in college, high school. Not in high school, no. Like fifth grade midget football.
- [01:05]
Chris Mayer
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, you know, sometimes I think the edge that I really have is just the ability to look out longer than most people and hold on longer.
- [01:22]
Matt Ziegler
You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use for better questions lead to better decisions. This is an extra special 100 year thinkers. That means Bogo Baranowski is with me as co host. We have author of 100 Baggers, co founder Woodlock House Family Capital, Chris Mayor with us today. Chris, how we doing?
- [01:42]
Chris Mayer
Great, great. Good to see you guys again.
- [01:44]
Matt Ziegler
Chris, we found you a new friend.
- [01:46]
Chris Mayer
I know you an old friend.
- [01:48]
Matt Ziegler
A new old friend.
- [01:50]
Chris Mayer
New old friend.
- [01:51]
Matt Ziegler
We've got the founder of Micro Cap Club, author of the forthcoming Stock Picker in September of later this year, Ian Castle. Welcome on.
- [01:59]
Ian Castle
Thanks for having me on. This is going to be a blast. Good to meet you. Good to see all you guys again, good friends.
- [02:04]
Matt Ziegler
We are super excited to do this. And Chris, if it's all right with you? We're going to give our new guest of honor. It's not all right.
- [02:11]
Chris Mayer
Oh, yeah, yeah, yeah. If you're going to give, give him the first question. That's. I thought you were going to give it to me. No, I was objecting already.
- [02:20]
Matt Ziegler
All right, Ian, you're in the hot seat first because you published this, this note. And this is where I want to 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 Bloomberg Terminal's not coming to replicate you.
- [02:54]
Ian Castle
This is gonna be. That's an open ended question. So if you don't mind, I. I think maybe what would help is me to kind of frame it up, kind of telling my origin story, kind of investing a little bit. Let them try to do it succinctly. But you know, I kind of got into investing when I was a 16 year old, so that was 1997 to date me. So to kind of like right as the Internet bubble and technology bubble was about to take off, my parents sat me down, they gave me $20,000. They said, you know, you can do what you want with it, spend on a car, go to college with it, but this is all you're getting. And they kind of 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 in my name, and I started getting kind of snail mail about small cap tech stocks because it was around that same time period. And so, you know, I kind of got enamored with that and I kind of bought a thousand of this one, a thousand of that one. And you know, they all they did was go up. So all of a sudden all of my money was in these tech stocks. And by the time, you know, I graduated, which is 1999, turned into about $120,000. And you know, of course, you know, 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, you know, that's, that's kind of how I got started by getting bit by the greed bug. And when I went to college I worked for, I ended up going to a cheaper university so I didn't have to spend all that money. I just worked part time for Advisor and that allowed me to stay close to the market, stay close to my portfolio. And so that was. It would have 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 8. And then also having to answer the phones from, you know, a thousand clients during that crash, you know, made an impact on me. And so a lot of those small cap tech companies turned into micro caps and they kind of got baptized into the space. And so I ended up liquidating the portfolio. But I was interested in this 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, saw Hugh Panera, the CEO at the time, was presenting in 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 had some fake business cards made, got on a bus from here in Lancaster, went up to New York City and kind of weaseled my way into a one on one meeting with that CEO in between his institutional meetings. And quite honestly I don't remember what was said in that 10 minute conversation. But you know, I came out of that meeting, you know, my eyes as big as saucers. I just talked to a CEO, it was amazing and came back and bought XM at $78 per share. And then it went on a 14 month rally where it went to $34 from a $78. And you know, once again that was all luck as well. But I always like to start with that story because I kind of 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. There's my lucky break, you know, once again. And you know, but I know that was kind of the starting point for me, kind of Doing more management meetings in person. You know, I had some mentors that showed me the ropes of, you know, 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 ten times that 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, because the first 10 meetings you do, you're, you're like, oh, this is amazing. You're the most bullet 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, you know, 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, you know, I was still young, I could still apply that. And, you know, it's just like everything, it compounds. You know, the more reps you do, you know, the more interviews you do across industries, the more that kind of pattern recognition and intuition, you know, impacts your investing strategy. And, you know, and I, 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 is night and day, you know, difference.
- [08:00]
Bogomil Baranowski
Ian, real quick, you focus on smaller companies. I spend 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. The large companies that are the CEO 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.
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Ian Castle
Yeah, I mean, I think that's accurate. You know, I think the smaller investor, you know, has the ability to actually speak to the CEO in microcap companies, where you obviously probably don't have that luxury. You know, 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 and A and an earnings call. So I, I do think that's kind of another advantage, you know, in microcap is you do have access to, to management teams. And you know, 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, you know, and you prepare, you know, and you. And you know, 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. You know, I think people respect people, that it's obvious you did the work up front, Chris.
- [09:16]
Matt Ziegler
You got more than $10 in a Schwab account, I hope. Yeah. But also talking to management. What do you.
- [09:22]
Chris Mayer
Yeah, no, that last part, you know, that I would definitely agree with that. And I've, you know, been in meetings with other professional money managers, and sometimes I'm shocked at the questions they'll ask. You know, it's. I'll be like, wincing, you know, that's in the filing, you know, so it's amazing. I mean, and management teams, I will say, you know, 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. So if you do the work and you show that you know some things about their business also, and you're bringing something a little to the table, you're asking, you know, 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. I've had really good meetings that way where. And 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 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. Gone. So I've had. I've had meetings where, like, CEOs popped out of his chair and started writing on a whiteboard and, you know, giving me all this good information about how the company works and the organization works. So I will say, though, there's tough to change expectation a little bit. I'd say, like, 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, ever happens. In fact, I mean, 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 if this, and this doesn't apply all 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, it helps to have the CEO just kind of really walk through like how does this business actually work? What, 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 that's really the value in the work is that it deepens your understanding of that business and it makes it easier for you later then to know when news hits or whatever. You, you have the ability to on your own, not relying on what media says or analysts say, whether it's material or not, whether it matters or not.
- [11:46]
Ian Castle
Yeah, I think it's, I kind of view every position at the start the same as building a relationship, you know, with a relationship you have and you know, the, the first time you meet somebody, it's kind of like the, the first date you had with your spouse, you know, and the key is continuing that relationship and putting in more reps with the CEO. You need to get to know them. And you know, to your point, Chris, like the edge isn't necessarily informational, it's relational in some regards. You know, it's kind of like the, especially at Microcap, you know, it's the same as I think all of us. You, your spouse doesn't have to tell you that they're mad at you. You just know, you know, because something changed in their tone, their cadence, you know, 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, you know, building that relationship over time. And especially in an area like Microcap where, and we'll get into this later but you know, they, I would say the base rates are, they have shorter shelf lives, you know, than can, than small caps or mid caps or any, 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, you know, 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, you know, a little bit More, I think when they're. These smaller, more fragile businesses have to
- [13:15]
Chris Mayer
say, Matt, there's one other thing. There's, you know, we should say 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 know, you have to be very careful. Like, I don't want. I don't want people listening to this to think suddenly they have to talk to management teams to, like, 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, like, Walter Schloss. I mean, he never, you know, he did, like, 15% for, I think, five decades, and he didn't talk to management. You know, And Joel Greenblatt writes about in his. I think it's the magic formula book where he's telling angel investors not to talk to magic for that reason. Because, you know, you can get snowed, you can get charmed, and then you're stuck. So you don't have to. I think it helps in certain situations. In most situations, for Ian, I mean, he's dealing with micro caps. You know, there's often not a lot of research. There's not, like a lot of stuff out there on it. The research you do is you're doing the original research because it's not like there's a lot out there. But if you're, you know, covering a larger company when 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. You know, then maybe it's not as important to talk to Med. So it really depends on the situation, I think.
- [14:30]
Bogomil Baranowski
Chris, you've done a lot of research on business modes, how those companies, you know, remain durable and grow and succeed. We're talking about the investor mode. I'm curious. How do you reconcile the two in your process? You're looking at the business mode, but then you have a certain investor mode. Talking to managements, not talking to managements, getting to know them, following them for a while. Can you talk about the two different modes that you can develop? I have a feeling that Ian is
- [14:55]
Chris Mayer
like investor moat, meaning kind of like an. Like an edge that I have.
- [14:59]
Bogomil Baranowski
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?
- [15:05]
Chris Mayer
Yeah, I actually don't know that I have much of an edge on the analytical stuff. And 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, you know, sometimes 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 as a lot of people still say they're long term investors, but then they're parachuting out the first time you get an earnings myths and stocks down and then they, you know, 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, it's not a sudden thing. So yeah, I think that's, I think that's part of it just being focused on long term because then a lot of things, you know, fall aside and I know it's important.
- [16:01]
Bogomil Baranowski
So I think what Ian mentioned, you, you mentioned the key word for me, which is conviction, you know, because I, I want to write a piece about. It's not the stock, it's you. And the key idea that I have is that 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 want to 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 that 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.
- [16:40]
Ian Castle
I mean, I think, I think there's two parts of it. I mean, 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 is to find some way to verify the trajectory of that business independent of what management's telling you, you know, and just trying to figure out how exactly to do that and that will change from industry to industry and company to company. But I think you combine those two things, you know, to have an independent view. You know, despite the stock being down 30% year to date or up 30% year to date. I think that's the key.
- [17:21]
Matt Ziegler
Well, I want to jump to stuff that's down a lot and challenging conviction with what you know. So I want to talk software. Robert's not here, but Robert Hagstrom had this really interesting story that we had with, with Chris and Bogamil before about why and when and how that 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?
- [18:08]
Chris Mayer
Yeah, I mean, so the only software companies I own are all. We call it vertical market software. So. Yeah, exactly. 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. You know, whether it's running on auto body shop or a transit system or whatever. So and those systems, they have particular advantages. They're, you know, often hear this term system of record tossed around. So that's. That is the place where truth lives. You could say it's what place where the auditors rely and it's a place regulators go to. It's in a world where we're. Where they're sued, companies are sued. That's legal system is going to. Yeah, there's lots of reasons why you wouldn't want to 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, narrow verticals. So it's not like 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. So the vertical, the critical 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. You know, like if you're your customer relationship, if you're running a big, I don't know, dental practice or something, if your customer relationship management software goes down, 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. You know, that's, it's the difference between what people, 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. So it's not like, you know, an AI native is facing incumbents that are using the tools themselves plus have all the deep vertical knowledge, plus you know, the data and the trust and all that. So I was, I'm still surprised that that's drawn down as much as it has. So, you know, I think maybe a lot of people sort of just threw software all, all out together in a bucket and now we're entering a phase where people are going to start to sort more carefully through who the winners and who the losers are. I mean, there's great difference between, you know, wix, which does web development, or Zendesk versus Salesforce versus you know, vertical market software that's within Constellation, for example, and it's running transit systems or something.
- [20:42]
Ian Castle
So.
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Chris Mayer
Yeah, and I think that comes from, I mean, the AI story. Even though the share prices have only really collapsed since last summer, this has been around a while. I mean, they've talked about it every AI, every annual meeting for at least the last, I'd say two, maybe three years. It's been something that's out there. 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, of markets, this, I mean, this happens, this happens a lot. Getting cut in half, even, even the best stocks routinely get cut in half on their journeys. So in some ways, you know, we have to expect it.
- [21:21]
Matt Ziegler
Tis but a flesh wound though. What in your conversation with management, when you're going through this, like, what are you listening to from the managers? Is it, is it 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? Because there's a reason they're the people in charge.
- [21:39]
Chris Mayer
Yeah, well, this is really interesting because this is, gets to where, you know, Ian probably will surely agree, but when, only when you talk to the management team, your own company, but then you talk to management teams of other companies in that industry so you can see what kind of stories they tell. And that's really interesting because sometimes they won't say, won't necessarily say the same thing. So I've had meetings where I've walked out of, you know, one management team at a vertical market software company where I'm like, yeah, you know, that was a little, a little concerning. Like they were. Maybe they're a little more dismissive of AI, they were a little more reactive about it, you know, versus going to another one where they're telling me, you know, already use cases and things they've done and how they've saved their, you know, customers millions of dollars doing X and Y and you know, then. And they're looking at like an opportunity and they're really excited about that. Man, I walked out of that one feeling much better, you know, so you can, you get, you get some differences and then I think individual investors can't do this so, so easily. But I also love talking to people who are not management but who like worked in the company or used to work in the company. So somebody who used to run a division within such and such software company, you know, talking to them and see, getting their perspective because they're now they're more removed so they have the expertise or they're sitting outside now, so they give you a different perspective. So it's all these things kind of filter in.
- [23:01]
Bogomil Baranowski
Ian, are you seeing any tailwinds in your space? You're talking to managements, listening what they say. I feel like we turn from very positive on AI to being very worried about AI and any tailwinds that you're seeing that will actually improve some existing businesses or maybe launch new ones.
- [23:18]
Ian Castle
Well, maybe to start like first one software in general, like 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, Yep. In fact, I can only think of like a couple that I think are probably, probably would be kind of 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. 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 and then you get to benchmark that like as Chris said, rightly so, against, you know, competitors or other people in that industry to see where they stack up. Because the one thing you don't want to do is be invested in a company that still has kind of this wall up in front of them, you know, they're, they're not doing anything with it, you know, they're, they're just going to end up getting disrupted if they, if they aren't. And so I like to just ask them simple questions because these, a lot of times the companies I'm invested in are simple companies, you know. So you know, how, just tell me about one workflow, you know, where AI has changed internally, you know, and see if they can give you a concrete example, you know, and hopefully they can, you know, and ask them, you know, how did you, there's people that were freed up, you know, how are they being reallocated, you know, in the organization, you know, things like, you know, what data do you have that your customers don't have? You know, so that proprietary data, you know, AI models, you know, when they're built on just public data, you know, they're just going to get eaten up by the frontier, you know, models that are out there. But if they actually have proprietary data that they can use for their own AI to compete, you know, that's something that's really interesting. You know, where does the data go that, that you then have, you know, all those types of questions. So kind of, there's simple, top, top level questions I like to ask. And, and it's fun when you find kind of certain companies in certain industries. I'm an investor in one company which I won't name because it barely trades but you know, it's sort of a, a flooring roll up in the US and they're like buying companies at one to two times ebitda. It's a very brick and mortar, hands on, its flooring, you know, dirty, that type of thing, you know, and they've, you know, completely used AI, from inventory management to the sales process, you know, from the top down. And it's, it's pretty wild how much it's changed their organization in the last, you know, 12 months. And that does show up in the financials, you know. 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.
- [26:04]
Chris Mayer
I think a lot of this will, and this will just be, I think Mark Miller, Constellation Software said that it's, that it's table stakes. You know, eventually we're not going to really talk about it. Everybody's going to use it, everybody's going to have it. It'll just be like, you know, the Internet or something. No companies today would Say yeah, we have a competitive advantage because we use the Internet. So what? So is everybody. And eventually I think that's where we built. We will be with AI. But for now it's like this kind of weird like in between moment where some people are really gung ho and using it and you can see, you know, they're, 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.
- [26:42]
Matt Ziegler
Of course Ian, with that stuff, when do you, how do you parse? If this is just like what Chris said, like a shot in the arm, a one time boost, a parallel shift upward and like, oh, we do this better now, like obviously the profit margin's not going to increase forever. Obviously. It's just how do you think about like integrating AI and if the company has a handle on it, where this is a, 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?
- [27:15]
Ian Castle
I think in some of these, I think in certain very tangible industries, I'm not quite as worried about the disruption factor. You know, a lot of them, I just want to see if they're doing something. And I've still run into probably half the companies I speak to, you know, aren't doing anything. And that, that should scare you. It scares me.
- [27:35]
Chris Mayer
Yeah. I mean 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 going to be something more like the cloud or mobile or, you know, it's just, it's a tool eventually everyone's going to use. And yeah, you said it one time, boost. That may be it. You know, we get whether it's on the labor productivity side or whatever, but long term, eventually we'll have it and the big beneficiaries will be the consumers.
- [28:01]
Ian Castle
All the disruption kind of to Chris's point, what he said, like it, it presents opportunity. I think we, we all have scenarios where certain companies go up into the right and makes you feel like a genius. You know, there's other ones or other points in time in those same companies where it becomes a battleground, you know, and it's the battleground is you, you know, 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 well, 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, you know, is it worth facing this headwind of perception for however long it lasts? You know, should I just play an easier game? You know, and so that's. That's kind of the internal struggle we all come across, you know, individually in companies. And also, you know, when events like
- [28:50]
Bogomil Baranowski
AI affect software, is it a moment where you have to catch up, keep up, or you're going to 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 is not involved or needs to participate in. I'm trying to use AI as much as I can to organize processes, 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.
- [29:38]
Ian Castle
Yes.
- [29:39]
Bogomil Baranowski
Yeah. Short answer is yeah. Is it easy to tell who and how? 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 be even thinking about it? I think he. I think that even the larger companies might have a harder time to switch than maybe the smaller companies that Ian is more exposed to. Is that.
- [30:06]
Chris Mayer
I don't know. Yeah, I don't know. Because the larger companies have bigger IT budgets and bigger, you know, they have more muscle to throw at it. So it really depends on. You mentioned IT culture. Some companies, they do have a very good. They're decentralized. They have that culture that encourages experimentation, and so you can see it there. But I would say we're at the point now where, yeah, you should be seeing something happening. The company should be talking about it and showing some sort of results, because again, it's not. This is not that new. Been around a little while. So if they're not doing it now, then I would start to be a little bit concerned. Yeah, I'm with you, Bogomil. I use it all the time.
- [30:49]
Matt Ziegler
It seems silly not to be using this all the time for different Things So if you talk to somebody and I same, I love in the reality too of like finding out about something that you're oblivious to. I'm laughing in the, like we're about the same age and my experience with like XM radio is like a buddy in college going to work for them and me being like, who like when 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 like 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. I'm going like, oh, that's what happens when you get into one of these things. So you've said, Ian, you've got about a 10% chance of still loving a micro cap 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 want to see these things take off over long time horizons. But I mean a 10% chance of still liking something is, that's worse than the divorce rate in America scenario before. What's up with that?
- [32:00]
Ian Castle
Yeah, I mean it's investing in small and I'm talking about, you know, we initially, at the fund that I managed, we initially invested 50, you know, 5,0 million market cap. You know, and then it's just a big difference between a 50 million or 20 million market cap compared to a even a 200 million or 500 million market cap. Right.
- [32:22]
Chris Mayer
So give, what's the revenue roughly of those companies you're, you're looking at?
- [32:25]
Ian Castle
Well, if they have revenue. No.
- [32:27]
Chris Mayer
Okay, there you go. So that's why I wanted, that's why I wanted him to say
- [32:32]
Matt Ziegler
no.
- [32:33]
Ian Castle
So it's like, you know, some, so a lot of times it's, you know, you're, you're, you're investing in something that's doing 10 or 15 million revenue, breaking even. And you're, you're trying to look at it as, you know, can this company, you know, even double in size and earn two or three? And it sounds like a very small incremental change going from 10 to 20 and earning and breaking even to earning 2. But in my world of nano cap, that's probably a two or three bagger, you know, just the company that can grow that much without diluting you. And really the bet you're making long term then on that management team Is can this management team transform this hustle business into something that can scale? You know, because we all know small. I mean, it's kind of like you're walking around your, your local small town. I mean, some of these companies probably wouldn't be the largest company in a small town. You know, they're, they're, they're very small. And so this, because of that, you know, Even with my 25 years of experience doing this and looking at great leaders and understanding businesses and, and kind of understanding everything, you know, they're. The shelf life of these companies is oftentimes shorter than what I think, you know, because they do hit a streak where they have a product that, you know, kind of takes off for a period of time and then stops, you know. So I would say the base rate on a winning stock in Microcap, you know, is one that, you know, goes up 3 or 4 or 5x over a 4 to 8 quarter period of time and then they fall flat on their face because they didn't have the people, processes, culture, innovation to kind of scale and innovate them and diversify their business into something that could actually scale up and reach escape velocity, you know, so it's, it's hard. I mean, I kind of compare because I think, Chris, you, you invest probably somewhere between 500 million and obviously mid cap, you know, call it in that range and it's just apples and oranges.
- [34:38]
Chris Mayer
Yeah, I mean, I used to love to invest in microcaps. You remember Ian? I mean, you know, I was in the newsletter business earlier and earlier in my career. I used to love the little microcaps, so, and I've been. Ian's conference is great. And so, yeah, I mean my, my thing with the microps, what I remember is, you know, lots of like very quirky entrepreneurs doing things and creating businesses. A lot of times just completely, you know, scraped together, you know, raise bootstraps, the old whole thing. But I think one of the biggest challenges, which is why that I have this feeling one of the factors in that low survival rate is that, you know, you have a really good entrepreneur, 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. And 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, you know, they can't make that jump. So some, a lot of times I can think of microcaps I love, but the management team, they're almost more like enthusiasts, like Hobbyists, you know, they loved what they were doing, they loved what they were making. They thought they were going to conquer the world, but they didn't have like the business skills part to really nail that. So that's often, at least in my experience, that has been, that has been one of those challenges.
- [35:53]
Ian Castle
Yeah, yeah, it's a, it's, it's just difficult. I kind of compare it to trying to think of a good sports analogy. The Tom Brady, you know, what he was drafting the sixth round in 2000, you know, and then he sat on the bench for a year and then in 2001, Drew Bledsoe, I think lost the first two games. Let's. So gets hurt. He steps in in 2001, takes him to an 115 record and then wins a Super bowl, you know, and after that super bowl is when Chris Mayer would buy that stock.
- [36:22]
Chris Mayer
Yeah.
- [36:23]
Ian Castle
Kind of a proven leader. And then he'd go on to win five more Super Bowls, and he would have cagraded at 25%. You know, where I'm, I'm trying to find Tom Brady. Not in college, high school. Not in high school, no. Like fifth grade football, it was just really hard to do it back then. It doesn't mean, if it, it doesn't mean you lose money. On the ones that don't cross that chasm, know, you can still make really good money, you know, on the ones that don't become the outlier success story, you can still make hundreds of percent return, but they're just not going to be that thing that you could ever hold for 10 or 20 years. You know, it, you know, it's, it's my, you know, it's my intention to find things that I can hold forever, but very few will kind of earn that right. You know, as, as you hold them, there's going to be some that you hold for six months or two years and other ones you hold for 10. And you're constantly trying to find those ones that are worthy of truly owning.
- [37:18]
Matt Ziegler
You know, so when you're hanging out around the peewee football thing and which kid's deflating the ball. Yeah, exactly.
- [37:26]
Bogomil Baranowski
But it's such a good point because for an outsider, total outsider, they might think that a micro cap or, you know, 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 want to ask you about 100 beggars. You know, you have a different perspective, not 24 months. You're talking about years. Sometimes it takes years for them to get to the 50x100x with the technology, with AI, with companies scaling so much faster, do you think we're going to get to the hundred beggar sooner than ever before? Any hope on that front?
- [38:07]
Chris Mayer
Well, I don't know. You know, part of the challenge now is when companies go public. They're a lot larger. Yeah, than, than they were. So sometimes yeah, you're getting them. They're already multi billion dollar companies, you know, well along the way. So that makes it in some ways a little tougher. But there's always opportunities. I mean especially now. I mean one trade off going the other way is you can invest abroad a lot easier now than say 20 years ago. So yeah, 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. So I don't know that it's going to change that much. I suspect that somebody else does a hundred bagger study 20 years from now or 30 years from now, they'll, we'll probably get somewhat similar results from the study I did in which I got somewhat similar results from the one Thomas Phelps did back in, you know, 1972, looking back to the 30s. So there are certain principles don't really change that much.
- [39:13]
Matt Ziegler
I want to go to one of the other ideas that I think you both, you both share some, some love for here. So I want to 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 you want to define the term. Do you want to talk about your, you're just minor, slight side interest.
- [39:34]
Ian Castle
Yeah.
- [39:35]
Matt Ziegler
In this topic.
- [39:37]
Ian Castle
Yeah. So I guess it would have been probably 2010, 2011, 2012. I really kind of pivoted to this realization that especially in small micro cap 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, you know, running a business and how to create something that, that can, you know, 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 a, he wrote an article back in 2015 on the topic. And from 2015 I kind of just dived into it with two feet, along with a friend of mine, Sean Eddings. And you know, we just started looking at first of all the intelligent fanatics that Charlie Munger mentioned in his speeches and writings and then kind of 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. Then we found another eight that we thought kind of pattern matched those first eight and then wrote a second book. And you know, the book 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, 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 micro cap companies.
- [41:24]
Bogomil Baranowski
Chris, I have a feeling that you won't disagree. You, 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?
- [41:35]
Chris Mayer
Yeah, I love, I love finding the owner operated company talented individual, loves the business business and breathe living lives and breathes it all the time. And yeah, I mean, well, there's various studies that show that companies with CEOs with high insider ownership tend to outperform their peers. Now this is, you know, it's not like all the time, but general population compared to general population. Yes. And, and there's other traits. So I think, you know, one of the big ones is, you know, founders will invest countercyclically. So you know, hired guns tend to pull back when things get, get difficult because they are more worried about, you know, not being criticized or called out or. Yeah, they, you know, want to retain their jobs. 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, you know, people like John Malone, who was, you know, main owner of a lot of companies he ran, was investing heavily in 08. So that's one example. And I think, you know, that 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. You know, they think about, I would say Like 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, you know, if I say whatever it is, if I say, you know, Walmart, think of Sam Walton. There's, 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.
- [43:21]
Matt Ziegler
Ian, where do you see like, is there an upper limit, especially in micro cap, 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?
- [43:41]
Ian Castle
Well, it's incredibly difficult. If I knew that, I'd be on an island somewhere. But you know, it. And I think Chris is 100% spot on, given how he invests to focus on founders because, you know, in the, in the really small ones, kind of what we talked about before, you know, I'm not, I would like to find a founder, but just because they're a founder doesn't mean they know what they're doing, you know, it 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, you know, and good stewards of capital, you know, down.
- [44:16]
Chris Mayer
Tom Brady's already got a Super bowl right there.
- [44:18]
Ian Castle
Yeah, exactly like, yeah, exactly like I'm, I'm still trying to figure, you know, so I don't necessarily have kind of a qualitative filter of this needs to be a founder because I find that successful leaders in Microcap can kind of 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, you know, for my investing is 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 pun 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, you know, redoes the strategy. Something old becomes something new. Deep value turns into value, turns into growth and you get multiple expansion, you know, on top of everything. And so, you know, I think those repeat winners are a great place to, to find ideas, those transition points, you know, but also, you know, even high insider ownership isn't necessarily something I need just because, you know, some of the good leaders are, call it like Robin, you know, Batman gets killed and Robin takes over or you know, some sort of 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, you know, 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, you know. And so I kind of find those kind of, that's a breed of really good leader, the one that feels like they have something to prove and it doesn't matter. They own 1% of the company and they might be poor, you know, but they're still going to do a great job. So it's kind of goes across the full gamut of kind of types of things, you know, or 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, again, after my rambling to your question about how do you know if they reach the ceiling? I mean, I think you just look at the business. I mean, I just tend to just focus on the business, stay close to the business, always have a one to three year view on where I believe the, 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 you know, do the best you can.
- [47:06]
Matt Ziegler
I'm looking for the Nightwing CEO like I want. I would carry that metaphor into a book. I'm just. Bogomil, I cut you off. Pardoned my comic book interruption.
- [47:17]
Bogomil Baranowski
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 going to be a second, 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, I'M not so sure what's going to 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.
- [47:47]
Chris Mayer
Yeah.
- [47:49]
Bogomil Baranowski
Chris, you have some thoughts?
- [47:50]
Chris Mayer
Well, I mean, certainly what Ian said, I agree. You know, it's like there's exceptions to everything. So, yeah, I love the owner, operators, but there are times when you can get a, you know, just like you said, a number two takes over and, you know, they don't own a lot of stuff because they haven't been there all along. They weren't found there. But they're very talented people in any case. And so there's reasons to stay with them. I mean, you know, Berkshire is an interesting one. I actually tend to think that for Berkshire, there's a lot of stuff that can be done on the operational side that perhaps, you know, Buffett was not cracking the whip on. And so somebody else can come along and, and do a lot. There's probably some businesses there that probably should be trimmed or should be gone. So, yeah, I think there's opportunities for something like that. You know, you can, and that's 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.
- [49:00]
Bogomil Baranowski
Does the same thing apply, Ian, in your space? Somebody new comes in?
- [49:04]
Ian Castle
Yeah, I mean, it can, I mean, that's, it's literally one of the main things I look for is management transitions, you know, keyword searches, you know, CEO change, you know, 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 and one or two other endeavors step into this small opaque situation that just happens to have a ticker symbol, you know, and you're wondering, it kind of lets you, makes you sit up in your seat a little bit more, wondering, what are these group of high powered folks doing this small thing, you know, that's the type of Spidey sense you want to have go off in your mind. And that's what immediately makes me clear the schedule, you know, 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, you know, that that's something that can be a very exciting, you know, opportunity and turnaround story.
- [49:58]
Bogomil Baranowski
They can Make a big difference. Ian, you wrote a piece about, well, asking a question. Are you an analyst or an investor? And we've been talking a lot about, you know, 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.
- [50:24]
Ian Castle
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. It doesn't encompass these six or seven other ones, which is fully executing on a great idea, which is when to buy it. Valuation, initial position, sizing, averaging up, averaging down, you know, selling all of those kind of inherent skills that we all go through every day as active stock pickers. Not every day, but partially. It doesn't take those into account. I've recently had a, a wonderful conversation with Lee Freeman Shore 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'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. Kind of 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 you know, kind of the, 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, you know, whether right or wrong on an individual investment. The second thing that I thought was interesting that he kind of came to the conclusion of was he thought that the ones that did outperform 80% of them were lucky, not skilled. You know, they, they, and, and this is 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 figure that takes skill to hold on to something, you know, during that roller coaster, you know. But his point was, when you analyzed all the other trades, you know, from kind of a skill perspective, it didn't show they were really that skilled, you know, so he kind of viewed it as those, those folks were lucky. And so the second book, what they did was he teamed up with a data analytics firm, Essentia analytics, who, who 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, you know, their position, sizing, adding all this stuff up. And then basically tore out of that 12 managers that they could identify that were actually skilled based on their execution of their decision making. And then interviewed them and you know, pretty, pretty nice interviews of like, how do they average up, do they average down? Like do they have any portfolio rules? What are their limits, what are their, what's their constraints they put on themselves? You know, how do they capture more of the wins and cut most of their losers before other people? You know, that's kind of what it comes down to. And it was really just, it's a fascinating book and I recommend everybody go buy it because it's really good. Another easy read. But I think it's just to another point of, you know, the, those folks, you know, they thought very deeply about each one of those skill sets. The, the valuation part, the holding part, the when to add part, the when to sell part, you know, all of these things. And you know, one of the things that they unanimously said the hardest part even for successful fund managers was selling losers, you know, as like the one thing that even the best that they even profiled in that book were the hardest to do. And it's an interesting thought exercise because it made me rethink some things with my own strategy and be self reflective with it, you know, but also kind of seeing where the future is going, you know, like they can now, you know, if you pay her firm. I mean, where it's accretive and where it was accretive to those folks mentioned in the book too was all those folks gave her their data. She looks at it and says this is which decision that you're most deficient in. You know, the data shows based on your strategy over the last 15 years, if you just held things, you know, 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 that and then making changes into their strategy, how that impacted their performance over time. I haven't done that with my own yet because I don't want to be that selfish, but just joking. But, but, but I think most of it is kind of the execution of a great idea, not necessarily the idea itself because especially in microcap, you know, yeah, I'm probably the same way. Probably 50 or 40% win rate, you know, 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, you know, across the board in the portfolio. You know, it needs to, it needs to work. And so anyway, I don't know if that helped anything, but it was certainly, it's a book I would point people to and those, those things are definitely something. 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, you know, if you want 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 it, like the selling part of it isn't as important per se potentially, you know, so like certain ones of these skills are less or more important, dependent on your, your strategy and where you invest.
- [56:15]
Matt Ziegler
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?
- [56:36]
Chris Mayer
Yeah, I mean, you know, again, it really depends on what you're investing in. But I tend to be very humble about my ability to, you know, 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. You know, I try not to trade. And then since I'm investing in things that generally these are good businesses with good track records and you know, they're going to be worth more in five years probably, you know, and, and so you have that slight, you have that tailwind which, which covers some mistakes too. So you're, you know, if you pay up a little much, pay up a little more for something over time, that the business will bail you out. And plus you can always it what's where position size becomes important. If you leave yourself plenty of room to add and you can, you can get through those kinds of, you know, I don't know if it's a mistake, but that's another thing is like what's a mistake in investing? Sometimes hard to Know what looks like 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 away, it looks like a mistake. Depending where, where the endpoints are, when you measure things, it can be very difficult to know what's a mistake and what is it.
- [57:53]
Ian Castle
I think that first point you made, Chris, or the second point was it's, it's, it's something that I've had to learn over 20 years. Like I, I realize more and more the importance of that initial position sizing, you know, where in my early years, you know, I would overly express that, you know, and, 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 you know, even, even now it's, I've kind of gotten away from the, you know, if I'm not putting 15% at cost into something that I don't have the conviction to own it, I've completely changed that mindset.
- [58:32]
Chris Mayer
Yep, me too. I still, I still make that mistake occasionally while getting a little enthusiastic about something, make a little bigger. But I almost always regret it. So yeah, I mean it's, it's better to start slow, start small and really grow into that position.
- [58:45]
Ian Castle
I love small positions that become large positions.
- [58:48]
Chris Mayer
Yeah, I love that because you always learn something when you, when you own something versus because you, you, you let
- [58:53]
Ian Castle
it grow naturally into something bigger that earns to that position size instead of you forcing it to the market that you're right by putting more capital into it, you know.
- [59:01]
Matt Ziegler
Yeah, there's definitely a life lesson inside of that. Guys, this has been, this has been outstanding. We're going to do round two. Maybe we'll even let Robert Hagstrom come hang out for one of these. Chris, people want to bug you on the Internet. Where should they look you up?
- [59:17]
Chris Mayer
Well, I mean you can go you Google Woodlock House. You can find my website there and contact page and then. Yeah, that's probably the best way.
- [59:26]
Matt Ziegler
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 because we'll get you back for that. We're all excited.
- [59:35]
Ian Castle
Sure. Yeah. I mean 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. You know, it's kind of a culmination of a bunch of my writings over the years, kind of with my. My narrative kind of threaded, you know, woven in between all of these chapters. And it's mainly on kind of the temperament side, the emotional side, and also those skills that. That we talked briefly about, you know, during this episode.
- [60:11]
Matt Ziegler
Chris, you too. When's the. The book talk. Talk to me about that. What's.
- [60:15]
Chris Mayer
Yeah, It's June now. June 16th. It's publication date for the Investor's Odyssey.
- [60:22]
Ian Castle
Great book. I read it. I read it. It's a good one.
- [60:25]
Chris Mayer
Thank you. Thank you.
- [60:26]
Matt Ziegler
All right.
- [60:27]
Chris Mayer
I read Stock Picker as well. It's very good. So we swap manuscripts.
- [60:34]
Matt Ziegler
This is like a, you know, a good trading strategy, too. This is the relational part of the trading strategy. All right, excellent. Well, I want to thank you both for joining us. Bogoville Baranowski, talking billions. Make sure you check out all his stuff, too. This is a little experiment for the hundred 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 2. We'll have a summary of this episode and a transcript. Thanks, guys, for joining me today.
- [61:05]
Chris Mayer
All right, great. Thanks. Great questions and, yeah, good to chat with Ian.
- [61:09]
Ian Castle
Yep. Good to see you
- [61:12]
Matt Ziegler
as always. We pressed stop. Then we kept on talking because this is too much fun. And I was like, you know, we're just hitting the record button. Let's do our little recap like we like to do. I mean, that. That was awesome, right?
- [61:23]
Bogomil Baranowski
It's not just. It was. 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, you know, 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. He made all this money. Very humbling. Do you have some thoughts about that falling in love with investing.
- [62:09]
Matt Ziegler
Yeah, because like, and I mean, I hinted at it too. And, and like, you so me, you, Ian, all in roughly the same age bracket here. So it's. 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 like speculating on that were 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, you know, 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 and P at the time. And it's really interesting to think. For me, it took the financial crisis for me to be, I was like, 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, yours is, yours is fine in the Peter lynch book. Like, where's. Where's your story?
- [63:21]
Bogomil Baranowski
Yeah, yeah. So when I was going to college and then, you know, 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, you know, options, pricing, obviously, you know, 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 business is such a 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 want to ask you.
- [64:24]
Matt Ziegler
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 the, 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 is 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 going to 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, 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?
- [65:31]
Bogomil Baranowski
Incredible.
- [65:32]
Matt Ziegler
So my obsession was with the companies and not the stock price. And it wasn't until a full like four or five years after that that I realized those went together. And then the, the financial crisis is the part that connected it to me, which is wild. 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 like as soon as we're done recording.
- [66:14]
Bogomil Baranowski
It was so good.
- [66:15]
Matt Ziegler
What do you think?
- [66:15]
Bogomil Baranowski
It. It is so good. You know, we feel like I was listening to an interview with Ian 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, I was really impressed with how he phrased the AI question because he said, you know, 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 the human can still be as good a machine, as good as a machine. And I like he has a point. The second point he had was AI is very good about information processing that we confuse and we call it intelligence. Intelligence is wisdom and, you know, knowledge and all that. It's a different thing. And I'm, I'm, I'm hearing him and I know he's right. And I was trying to bring it home. So I'll bring it home with a very quick anecdote. Like in my real life, I'm managing it, 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, love, 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 or 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. 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, you know, 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 like mundane tasks. Do you have some thoughts about it?
- [68:35]
Matt Ziegler
Yeah, I've been, I've been thinking about this a ton too, for the same reason. It's. 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 the Babiverse series starts with we are a Legion.
- [68:51]
Bogomil Baranowski
I'm reading it this weekend. Then
- [68:54]
Matt Ziegler
I'm. I'm into the third book. There's, I think five in the series, widely regarded as, like, the trilogy is the core book.
- [69:00]
Bogomil Baranowski
Okay.
- [69:00]
Matt Ziegler
But the part of it that I'm fascinated by is so it. It deals with the relationship between humans and AI. This was written some, some years ago. Within the last couple of decades. Within the last decade or so. It's not like you're not reading something from 50 years ago, thinking about AI. But one of the parts is as this artificial intelligence that's been created and mapped across, like human thinking or whatever, this can exist as an independent entity. And it's. 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 it's not, 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 the book has pushed, 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 it's. There are so many different areas where there's going to be different advantages that evolve and devolve over time that we just, we want to have the tools to solve it. We want those table stakes, but we want to 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, their versions of those same problems, that totally changes the investment landscape probably for the next. Probably for the rest of our careers, right?
- [70:39]
Bogomil Baranowski
Very much so. And Chris pointed out something that rhymes with what you say, you know, he said, and I love the dental office story. You know, they have software that maybe will scrub your scheduling for the day and the other software that will not allow you to serve your patience today. You know, and I think that distinction, when we look at different companies out there, which one are you? Right. And the second one is we do have software that kind of everybody uses. It's, you know, ready, off the shelf, and we all use. I definitely, 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 even like do a filing without, you know, a website. And then everything is online, everything is 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 embrace It Chris said than 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 100 plus employees. We never found the same page on a lot of things. Anyways, I want to ask you about the micro cap 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 going to 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?
- [72:11]
Matt Ziegler
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 like 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. And inside of private equity we have all these different flavors and we have venture companies or startups that have tremendous scale opportunities. And then we also have some of the types of companies that he's looking at where it's, they figured out how to scale up to a point, but they're, they're not Instagram scale companies. They're not things that are going to grow in these same ways. So we have to apply in many cases like a larger, larger public company framework to a much smaller private company framework. And so translating that to clients with their, their own smaller businesses that are in many cases privately held or whatever and going, well, what are lessons we can derive from, I don't know, Berkshire Hathaway or pick another company you admire in the public space where there's lessons we can derive and then which things can't we derive? Because I think those, those anti examples are also really powerful too. Why is your property management company trying to copy Google or Tesla or 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, do you think about this?
- [73:49]
Bogomil Baranowski
I do. And I feel like, you know, when people say what's a good business? I can explain, but one business has a potential to be, you know, just a $5 million in sales business and the other one could be a trillion dollar in sales business. And it's absolutely fine. Like, if your family has the most prosperous gas station in town, they could have a very comfortable lifestyle. We talked about gas stations on this show a lot, but we love our
- [74:13]
Matt Ziegler
gas stations on this show.
- [74:14]
Chris Mayer
Yeah.
- [74:15]
Bogomil Baranowski
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, you know, wash people's windows. It's still going to be maybe five and a half, six million. I don't know what the number is. People are listening here, maybe know better. 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 is, especially Ian, this is all you can get out of that company. And I think it's such a reminder. That's why, you know, he's not holding this for 20 years. He's holding it for that time. That makes sense to him. I really like that point. Yeah.
- [75:00]
Matt Ziegler
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 know, you share perspectives like that, too. Because if you understand the sort of, like Russian doll approach, like how one thing fits in another, you can get lessons from jumping back and fourth, which is really, really special. So I know I already said it once, but people want to bug you. Where should they look you up? Online. Talking billions.
- [75:26]
Bogomil Baranowski
Let's do talking billions. My substack, my name, Bogum Baronoski. 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 going to hear from me. I'm really, really curious who is reading. And I 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.
- [75:57]
Chris Mayer
All right.
- [75:58]
Matt Ziegler
Make sure you go to Bogomil's substack. We'll put a link in the comments to that you're watching Excess Returns. I'm Matt Ziegler. Cultist, creative, all those things, too. This is an absolute ball. I mean, we're expanding the Hundred Year Thinkers Universe. This is what we're doing here.
- [76:11]
Bogomil Baranowski
Hey, it was so good.
- [76:13]
Matt Ziegler
It's so good. So this is Excess Returns.
- [76:15]
Chris Mayer
Again.
- [76:15]
Matt Ziegler
Check out the substack like comment, subscribe all the things below. And we are out.
- [76:19]
Thank you for tuning into this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess Returns network@excessreturnspod.com if you have any feedback or questions, you can contact us@excess returnspodmail.com no information on this
- [76:39]
podcast should be construed as investment advice.
- [76:42]
Ian Castle
Securities discussed in the podcast may be
- [76:44]
Matt Ziegler
holdings of the firms of the hosts or their clients.