Do you know what a micro-cap stock is? In this week’s episode, Josh and Austin are giving you the run down! Joined by an expert in this very niche corner of the stock market, Mariusz Skonieczny, they cover what exactly micro-cap stocks are, how to analyze them, and detail how this strategy fits into a well-diversified investment portfolio. Listen in now to learn everything you need to know about micro-cap stocks!
Main Talking Points
[1:08] – Who is Mariusz Skonieczny?
[2:28] – What are Micro-Cap Stocks?
[3:38] – What Attracted Mariusz to Micro-Cap Stocks?
[5:38] – How do you Analyze a Micro-Cap?
[10:07] – A Day in Mariusz’ Life
[11:35] – Is There a Point Where Micro is No Longer Micro?
[12:27] – How Do You Position Portfolios in the Volatile Market?
[14:55] – Who Seeks Out Micro-Cap Stocks?
[18:04] – How Does Micro-Cap Stock Investing Fit Into a Well-Diversified Investment Portfolio?
[18:45] – How You Can Connect With Mariusz
[19:48] -Should You Invest in Micro-Caps?
[20:38] – Dad Joke of the Week
Links & Resources
Invest With Us – The Invested Dads
Free Guide: 8 Timeless Principles of Investing
Social Media
Full Transcript
Intro:
Welcome to the Invested Dads Podcast, simplifying financial topics, so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey, hey, hey. Welcome back to the Invested Dads Podcast, the podcast where we take you on a journey to better your financial future. Today, we are joined by Mariusz Skonieczny, who is an expert in micro-cap stocks. This is super exciting that we have another guest here on the podcast with us. Thank you for joining us today.
Mariusz Skonieczny:
Yeah, yeah. Thank you for having me.
Josh Robb:
Yeah, now micro-cap… Now as a kid, I played with Micro Machines. I don’t know if that has anything to do with what you’re going to talk about today, but I am somewhat of an expert on that, but not micro-cap stocks.
Austin Wilson:
Ah. We have a lot to talk about Josh, it seems like.
Josh Robb:
Yes, apparently.
[1:08] – Who is Mariusz Skonieczny?
Austin Wilson:
Let’s ask the expert. Thanks for joining our show, like we said. Again, we’re excited to have you. Looking forward to educating our listeners on an area of the market they might not be super familiar with. Mariusz, if you would not mind just briefly introducing yourself, where you’re from and what you do currently.
[2:28] – What are Micro-Cap Stocks?
Mariusz Skonieczny:
Yeah, thank you guys. I’m originally from Poland. I grew up there, spent my first 16 years in Poland and then after my first year of high school, I came to the United States, finished high school obviously and then went to get a degree in finance. That was 2003. Originally, I entered the investing side on the real estate side, because I was interested in real estate. That’s when I read Poor Dad, Rich Dad books, in the early 2000s and I became a Real Estate Appraiser, both on the residential and on the commercial side and then I became a broker, selling apartments in the Midwest with the team. But during this entire time, I was studying stocks. I was reading everything I could on Warren Buffet and then when the financial crisis came 2008-2009, literally on December 31st 2008 I said, “I’m quitting. I’m going full time into stocks,” and that’s when I had $10,000 to my name and over the 12 years since I quit, I turned that into $7 million, focusing strictly on micro-cap stocks, which by definition, micro-cap stocks are companies that have a market capitalization or equity value of less than $100 million and I focused on that sector for one and one only reason. It’s most people don’t know this sector exists, so I have very, very little competition.
Josh Robb:
Mm-hmm (affirmative) and when we’re talking about that, these are publicly traded companies. That’s how you’re able to invest in them, but they’re the smaller size. When you’re talking about under $100 million in market cap, a reference point would be Austin, what Apple traded above a trillion dollar market.
Austin Wilson:
2 trillion. Yeah, much smaller.
[3:38] – What Attracted Mariusz to Micro-Cap Stocks?
Josh Robb:
2 trillion recently. That’s one other extreme end of that piece. You’re talking smaller companies, sometimes they’re startup or earlier into their life of being a publicly traded company, but like you said, there’re less players in there. It gave you the ability to find some opportunities. Now, was there an overlap? Did you for a while, trade in small homes while you’re a realtor and then moved into micro-cap companies? Or was there this always fascination with the niche side of things, like you talked about real estate and rentals, were you always looking for an opportunity where not a lot of people were or what drew you into the smaller side?
Mariusz Skonieczny:
Well, when I was in real estate, I noticed that I just didn’t have the passion for the industry. I treated real estate as just one type of a business and I was fascinated with understanding how businesses operate, what makes a business good or bad, average and I just didn’t feel like real estate was a great business. I didn’t have the passion for it. That’s why I left and one comment stuck to me, why I focused on micro-cap stocks is because, I remember years ago, Warren Buffet was asked at a Berkshire Hathaway meeting, what he would do if he was graduating college and had 10,000 to his name, how he would allocate this money and he said that he would focus on smaller obscure companies, because the investment industry is not set up to be competing in that space and as a result of this, the probability of mis-pricing is the greatest. Notice that I said probability, because just because you go into that space, doesn’t mean you’re going to be successful. I would say 80 to 90% of the companies that are small and are trading on those micro-cap exchanges, I wouldn’t touch. I just focus on the 10 to 20%, which are real companies, that have real customers, real businesses, real solutions. I don’t focus on the promises. We’re going to find cancer. We’re going to find gold. We’re going to change your life. We’re going to make everything wonderful. No, I don’t focus on promises. I focus on money and you’re right, some of these companies are startups. Usually I don’t focus on startups, but because of their size, they are usually at the beginning stages, that they’re far away from being mature. But with that being said, I want to make sure that they have clients. I want to make sure that they have revenues, because that’s important to me.
Josh Robb:
Yep.
[5:38] – How do you Analyze a Micro-Cap?
Austin Wilson:
Yeah. That actually brings up a great question. Obviously in my job, I’m doing a lot of evaluating of large cap US stocks. There’s information galore for these stocks. There’s analyst recommendations and reports and the financial statements are super easy to find and they’re all easy. Everything’s easy to find and locate and analyze for stuff like large cap US stocks. When you get down even to small caps, it’s a little bit harder to find good coverage and micro-caps like you said, pretty much not covered at all. How do you go about analyzing a micro-cap company?
Mariusz Skonieczny:
Well first of all, after I find it… Let’s say, I usually focus on three exchanges, OTC which is Over The Market, Toronto Stock Exchange Venture TSXV and then Canadian Stock Exchange. I won’t go through every company on the exchange. Canadian Stock Exchange for example, has 800 companies. I went through every single one. Toronto Stock Exchange, I think has 3000. I went through every single one and because I’m not interested in 80 to 90% of them, it’s very quick to eliminate them. If they’re pharma or cannabis, no revenues, no thank you, next and I already know what I want. I already know what businesses I want. I want good businesses. I don’t go to the micro-cap space to find average businesses. I can do that on NASDAQ and I don’t need to go. Then once I find the ones that I like… For example, if I can see that they have some recurring revenues or they have nice margins or something special about the product, maybe the clients have switching costs, it’s tough to switch from one provider to another or maybe their software service is so ingrained in the client’s operations, that it’s like oxygen that it’s hard for them to switch. Once I find those characteristics, then I usually get on the phone and I call the customers. I call the customers. I want to hear it from the customers. What is it that you like about this product? Why are you using this product versus the competitor? Is it hard to switch for you? How does it compare to the other product?
Then I’ll get on the phone and I will research employees and current employees. I’ll go to LinkedIn and I’ll find out who works there, see if I can contact them. Who used to work there, those are the best ones, because they’ll tell you all the dirt that you need to know on the CEO and what’s wrong with the company and it’s not like I’m looking for a perfect company. There’s no such thing, but I just want to know what I’m getting myself into. Then I’ll get on the phone, see if I can talk to maybe suppliers or directors, former directors. I want to know the whole story and then once I do this kind of work, then I know what I’m getting myself into. But as you pointed out, there’s very little research on these companies, because they’re so small and financial analysts or financial advisors or hedge funds, they can’t really touch them, because they’re too small for them. They need to look for the big whales, because the financial industry is driven by assets on their management. My research efforts actually can give me an informational advantage. My efforts are worth it. It doesn’t do me any good to do this kind of work on Tesla. Everybody knows about Tesla. Everybody’s scrutinizing everything about it. I’m just wasting my time, most of the time. It’s not going to generate alpha, but if I go into these smaller companies where 99% of US investors don’t even realize that these exchanges exist, hedge funds, mutual funds and financial advisors can’t really go there. When I can get on the phone with the CEO and do this kind of work now, now it’s worth it. Now I can discover things way before the financial industry discovers them. I can predict revenues way before they show up and computers can find them.
Austin Wilson:
Yeah.
Josh Robb:
And with that, you mentioned a couple of different exchanges. Do you see a lot of turnover of companies on those exchanges? Is there a lot more new companies popping up, that you have to continue be screening through and looking for?
[10:07] – A Day in Mariusz’ Life
Mariusz Skonieczny:
I don’t really pay attention too much to the turnover, because when I get those companies, I stay with them for years, 5, 5, 3, 3 to 5, 3, 7 years and I don’t have to always look for opportunities, because some people ask me, “Well, what does your day look like?” My day look looks like I sit on my butt all day long and I do nothing, because what am I going to do? If it’s going to take me three years or seven years to experience a 5X or 20X my money, what’s the point of continually finding new opportunities? Once I have my, 10 or 15 positions that I have, it’s usually just monitoring them and of course I always look, but I can find you a great investment opportunity every week, but what good does it do to you, if you keep jumping from one to another? It’s not that hard to find a 10-bagger in micro-cap space. The hardest part, is to sit on your butt and actually experience the 10-bagger. That’s the hardest part, because we get stimulated all the time. It’s Ukraine and Russia, how do we trade? Fed is raising interest, how do we trade? There’s always so much stimulation, that we always have to fight, be like, “No, sit. Sit, just stay with your companies,” and Charlie Monger said that, that the toughest part for money managers to do, is to sit and do nothing. That’s the hardest part.
Austin Wilson:
Yeah.
[11:35] – Is There a Point Where Micro is No Longer Micro?
Josh Robb:
Yep and you mentioned a 10-bagger and in our industry, that means it’s gone up 10 times or 10X, just so our listeners understand what that meant and you’re right. It’s a buy and hold strategy from your perspective, is you do all the due diligence, you find a good company you like and believe in and then you invest in it and then let it do its job. Do you have a high end? It may start out as a micro-cap, but if it grows, do you have a top point, where say it’s getting too big or if you like the company doing the research, it doesn’t matter how big it grows to, you don’t sell out because it’s no longer a micro-cap? Do you allow that to grow?
Mariusz Skonieczny:
Well, the ideal situation is to find a small company on those secondary exchanges, let them grow into something bigger and let them up list to NASDAQ or New York Stock Exchange and then of course, when they up list to those exchanges, they get more exposure, more hedge funds can buy it, more institutions can buy it, more retailers can buy it and you’re hoping that it will get repriced and it will get valued correctly and then you have to evaluate from that point of view it’s like, is this still a good investment? Yes, but yeah.
[12:27] – How Do You Position Portfolios in the Volatile Market?
Austin Wilson:
Obviously, the further down the market cap spectrum you get, the more volatile holdings typically get. Micro cap’s notably a very volatile area of the market. How have you looked at this aspect that’s unique to this part of the market in general and how have you positioned portfolios for that or are you just like, it doesn’t matter, I know it’s coming, I’m buckling up and we’re just doing it?
Mariusz Skonieczny:
The volatility is absolutely there, because those companies are less known. There’s less people trading them and consequently, there’s less liquidity. Less liquidity means higher volatility and higher volatility can be viewed as good or bad. Most people don’t want touch it, because it’s so volatile and I want to touch it, because it’s volatile and it keeps people away. Even some people are like, “Well, you’re talking about micro caps. Aren’t you worried about the competition?” No, no, because the competition is always going to stay away, because it’s so volatile and volatility is important to them. Volatility usually increases with time as the company gets better. I’m not too concerned about this, but this is the price you have to pay. Absolutely. I have situations where I’ll buy something at 1:00 PM, I’ll go and take a nap and it’s down 30%, because John from North Carolina decided to unload his entire position, while I was taking in a nap and now I’m down 30%. It’s just the way it is. It’s never going to be different. You just have to have stomach for volatility. The most important thing for me, is to make sure that the business is sound, because if the business is sound and it’s good, great margins, then I know it’s going to come back, but if the business is not sound, they have lots of debt… I’m not saying that all of them have to be profitable right away, because a lot of companies choose not to be profitable for the sake of growing, but I need to make sure that they have enough money in the bank, they’re not going to go out of business. That’s what I focus on and volatility, it’s just a distraction, but you’d be surprised actually. Right now with this Ukraine and Russia situation going on and everything’s going up and down like a yo-yo, many of my micro-cap companies have less volatility than the big names.
Josh Robb:
Because they have less impact from international exposure probably?
Austin Wilson:
Yeah.
[14:55] – Who Seeks Out Micro-Cap Stocks?
Mariusz Skonieczny:
Yeah and then usually the people that are in them, I would say the people that go and seek out that space, tend to be either crazy gamblers or very intelligent people and the crazy gamblers usually go for the cannabis mining stocks, but when it comes to true businesses, it’s usually very intelligent people, businessmen that own these stocks and they tend to not panic too much during these times.
Josh Robb:
You mentioned one thing while you were talking about, if somebody decides to offload their position and it affects the stock price, that’s the volume of trading during the day. In micro-cap, there’s probably a lower volume. Do you find that as an issue sometimes for you, especially as your assets have grown, that maybe when you enter a position, do you care about the trading volume and how much your trade in or out would impact it? Is that part of your analysis?
Mariusz Skonieczny:
No.
Josh Robb:
No. Okay.
Mariusz Skonieczny:
No. I just know that if I want to build a big position, I’m not going to reveal the name, but recently I took a position in a company and I own 1% of it myself and it took me a week to acquire the position. I can’t do it all in one day and it will be the same if I need to sell it, because if I dumped it all, I’m going to crash the stock price by a lot, but I know better. It would take me a while. That’s why it’s so important to do the proper research and really be comfortable with the company. If the exchange closes for five years, are you going to be okay holding? If the business is good, I am and if the business is bad, well, you have a problem.
Josh Robb:
Yeah. It sounds like you really took Warren Buffet’s concepts and said, “Okay, I’m going to apply that to this sub sector of the stock market, that the big players aren’t paying attention to and I’m going to take the same idea of finding a well-run company and you mentioned, they don’t even have to have profits, but probably what you’re looking at is cash flow. If they’re generating cash, but reinvesting it into the company, that’s a good sign. They may not be showing profits and be kicking that out, but if they’re showing that cash flow, you’re excited about that, for that size company.
Mariusz Skonieczny:
It’s the revenue, it’s the revenue and gross profit what I want, because after they generate gross profit, what do they do with this gross profit? And if they choose to show very little profitability, but that marketing expense is used to acquire more customers and then they’re sticky and it just keeps growing and every January, they don’t start from scratch, then I’m like, “I don’t care. I actually prefer you not to show any bottom line, because I know where this is going. I know that at some point you’re going to be profitable, but what good does it do for you to pay out a dividend right now or anything like this, if you can much better reinvest it to grow the company.”
Josh Robb:
Yep.
[18:04] – How Does Micro-Cap Stock Investing Fit Into a Well-Diversified Investment Portfolio?
Austin Wilson:
As we just talked about a little bit, the risk in terms of volatility, is a lot higher in the micro-cap space than it is with large caps. That may turn people off of putting their entire nest egg into the micro-cap space, because hey, maybe they want a little bit more stability than that over time. How might micro-cap investing specifically fit into a well-diversified, average investor’s portfolio?
Mariusz Skonieczny:
Yeah, I would say everybody has to make the decision on their own and that’s why I don’t share publicly my investment portfolio with people, because my portfolio is all a micro-cap stocks and I don’t want people to copy me. They all have different income levels, different ages, different risk appetite. When I share my investment ideas, I just share it and people have to decide on their own, how much they want to diversify, how much they want to have in gold, in large caps, in this real estate or that. It’s really up to them.
[18:45] – How You Can Connect With Mariusz
Josh Robb:
And you do share your ideas. Can you mention a couple ways that listeners can follow or connect with you, if they’re really interested in your approach?
Mariusz Skonieczny:
Some ideas, few ideas I share on my public YouTube channel. The best way is just to take my impossible name to pronounce and just put it into YouTube and you’ll find my YouTube channel and then most of the ideas that I have, are behind pay wall, which is microcapexplosions.com. That’s where I share the research and interviews with the CEOs and the stuff that I share on my YouTube channel, it’s very much in length for the companies that I choose. I also do interview CEOs and for example, the three companies that I have on my YouTube channel, I made a 10 video series on each company, explaining why I like it and why I think it’s a good idea.
Josh Robb:
Yeah. We will link for all listeners. It’ll be linked on our website. Anybody that follows our blog and our podcast, will be able to see that.
[19:48] – Should You Invest in Micro-Caps?
Austin Wilson:
Josh, any thoughts on the question that we always ask?
Josh Robb:
Yes.
Austin Wilson:
Should someone invest in micro-caps?
Josh Robb:
Yeah.
Austin Wilson:
I know where you’re going with this, but we have to ask it.
Josh Robb:
Yeah and you said it exactly, right. It really depends and it depends on their risk appetite, their goals and what they’re trying to achieve. For someone who has the ability to stomach that extra volatility, that could be a space where if they’re willing to put the work in, because you’re right, it’s a lot more of an effort to find those diamonds in the rough, when you’re looking at that space, because you’re right, you have to really make sure you’re happy with that company that you’re investing in, which is true anywhere, but especially in the micro-cap space, that the listeners really just need to decide, is there a purpose for this in my portfolio? Does this help me achieve my financial goals?
[20:38] – Dad Joke of the Week
Austin Wilson:
Absolutely and Josh, I know it’s a little later in the episode, but do you have a dad joke of the week for us?
Josh Robb:
I do have a dad joke. Here it is. Our dad joke of the week. It’s just really a thought here. When I was told I was going deaf, that was really hard for me to hear. That’s our dad joke of the week.
Austin Wilson:
There you go. Good job Josh. Well Mariusz, thank you so much for joining us. This has been fantastic. We will definitely link your websites, both of your website. We’re going to link the, I have them both right here, Classic Value Investors and MicroCap Explosions, as well as your YouTube channel on our post, on our website and our social media, so that our listeners can follow you, but thanks again for being part of our episode. This is a very unique opportunity that our listeners have, to hear from someone who is in a very niche corner of the stock market.
Mariusz Skonieczny:
Yeah. Thank you guys for having me.
Josh Robb:
Yep and we’ll talk to you guys next week.
Austin Wilson:
All right. Have a great week.
Outro:
Thank you for listening to the Invested Dad’s Podcast. This episode has ended, but your journey towards a better financial future, doesn’t have to. Head over to the InvestedDads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe and don’t miss the next episode. Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin, or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management, may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions or forecast provided herein, will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.
