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5min chapter
The Quantum Realm
The Compound and Friends
The Advantages of Investing in Microcaps
Most of the best performing stocks ever started as microcaps, meaning they didn't go public with a huge valuation. 80% of the stocks that went up 10x or more between 2012 and 2022 originated out of the microcap ecosystem globally. Warren Buffett's first stock purchase? It was a microcap. Expel is still a $2 billion company today at $036 per share; it hit $100 a share last year.
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Speaker 3
You have the same things. It's just these are smaller companies. Do you buy small caps that microcap was forced upon them? Or are you buying companies that are on the way up and hopefully growing out and maturing out of that phase? So that's a good question. So I
Speaker 2
am more drawn to rising stars, what I call them, than a fallen angel. Because I like to find new ideas, ideas that haven't disappointed anybody yet. You're rather than, yeah, there's tons of specs that are down from the 2 billion market cap to 80 million. But they've already disappointed 90% of people. They already still have four analysts covering them. They're just too known. I'd rather find something new that has yet to
Speaker 1
have that. They're messy. They're not like companies with promise. They're like companies with pissed off shareholder base. You mentioned that most of the greatest investors ever started in microcaps. And most of the best performing stocks ever started as microcaps, meaning they didn't go public with a huge valuation.
Speaker 2
So talk about that. Yeah, so Warren Buffett, Peter Lynch, Joel Greenblatt, you can go down the list. They all started their careers investing in microcaps for their same reasons. What was Warren Buffett's first stock purchase? It was a microcap. Berkshire Hathaway itself was a microcap. And on a flation just basis, back when he took it over. It was a tiny company. It was a microcap.
Speaker 1
So all you have to do is find another couple of those. Yeah,
Speaker 4
it's so easy. But all those, I mean,
Speaker 2
it makes sense. Because this is where the structural advantage of the investor is that large institutional smarter money can't invest in these companies because the illiquidity profile. It doesn't make sense for a billion dollar fund to worry about a $700 million market company that they'd have to buy
Speaker 1
20% of the business to even have an allocation. OK, 80% of the stocks that went up 10x or more between 2012 and 2022 originated out of the microcap ecosystem globally. Yeah. What are a few of those?
Speaker 2
So I think it was Jenga Investment Partners at a London data report globally on all companies between May of 2012 and May 2022. And one of the things, I think it was like 83% of the companies that made the biggest returns originated out of the microcap ecosystem. And that was companies that trade on the Nordic exchanges from the
Speaker 4
NASDAQ globally.
Speaker 1
But it just shows that the big winners come out of these small companies. And it makes sense. I mean, it's easier to make a bigger one. What's the biggest one that you could think of other than the XM radio example? So on
Speaker 2
microcap club, which is a website, it started in 2011, which basically, my whole goal when I graduated college was to become a full-time private investor. And luckily, I was able to reach that goal. And the depth of the GFC, so in May of 2009, cut the cord with a couple consulting gigs I was doing. And then kind of came with the idea of I went on launch microcapclub.com, which was basically a private forum for experienced investors like me in this niche of investing. Talk about this. I want to see you at idea flow. Yeah. I want to get the best investors in this niche. Talk about what they liked and why. And so since 2011, and again, I wasn't monetizing a site back then. It was costing me 30 grand a year just to have it and look professional, look better than what we were. And it monetized until 2017. But today, it's a pretty cool brand. I think it's the best one in the world, quite honestly. And one of the things we do is we track the performance of every single company that was profiled by a member. So if you remember, you might profile a small company. It starts with a thesis. It starts with
Speaker 1
a question. What's a profile like seeking alpha style just to write up on a stock that people don't know about?
Speaker 2
Two to three page investment thesis, kind of your favorite microcap. And so just to give you some stats, there's been 900 companies profiled in microcap clubs since the site was started. 164 of them have been acquired. Oh,
Speaker 1
wow.
Speaker 2
And obviously, there's some big winners in there. You mentioned winners. The biggest winner is a company called Expel. Expel. It's still a sub $2 billion market company today. But it was profiled by a member in 2014 at $0.36 per share. It hit $100 a share last year. Still $87 a share. So that's a $200
Speaker 1
bagger. And you didn't have my email or?
Speaker 2
Well, ironically enough, this is the sad. I remember traveling around to deal. So expelled, they make the paint protection film that's on the front of cars. So if you have a high end car, or even a middle car, you probably have an option to put this clear plastic film in the front of your car to protect it from rock chips. And we stumbled upon it in 2013. And it was again, $0.36 stock, which that would have been a $8 million market cap. It's $8 million, not $800,
Speaker 1
$8. And now it's almost $2 billion, you said? Yeah, it's about $1.7 million, $1.8 billion. So what in a smart strategy? I'm sure this has been attempted. So I'm like, I kind of know the answer. But intuitively, we're in a really smart, repeatable kind of factory strategy, B, to buy microcaps right at the precipice of when they're crossing over into small cap. And of course, not all of them will keep going up. But of course, the one that's about to become a mid cap has to pass through small cap first. So maybe that's your filter, like that's your screener. Has that kind of thing been attempted in a quantitative way before that
Speaker 4
you're aware of? I think it
Speaker 2
has. I know a lot of people try to game the Russell inclusion, which just happened what last week, where they try to game that.
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