Microcap investor Jason Hirschman on his method, $XPEL and the Buffett salad oil scandal | S07 E29
Summary
Investment Strategy: Jason Hirschman emphasizes a strategy he calls "salad oil investing," focusing on buying stocks when their valuations are impacted by external factors unrelated to their core business operations, similar to Warren Buffett's approach with American Express during the salad oil scandal.
Microcap Opportunities: Hirschman discusses the potential of microcap stocks, highlighting their ability to offer significant returns due to their niche roles and the inefficiencies present in the market, despite the inherent risks and volatility.
Expel Case Study: He shares his successful investment in Expel, a microcap company, during a patent lawsuit crisis, demonstrating the importance of thorough due diligence and strategic position sizing in high-risk investments.
Global Market Insights: Hirschman notes the increasing attractiveness of international markets, particularly in Europe and Japan, for microcap investments due to better profitability and unique opportunities not present in the U.S. market.
Technological Impact: The rise of AI and Substack platforms is changing the microcap landscape by making it easier to research and disseminate information about small companies, potentially increasing their visibility and liquidity.
Risk Management: Hirschman stresses the importance of managing existential risks through careful due diligence, position sizing, and understanding the unique challenges and dynamics of microcap investing.
Market Dynamics: He discusses the evolving microcap environment, including challenges like private equity buyouts and the need for investors to adapt by exploring international opportunities and leveraging new technologies.
Transcript
And we're live. >> I think we're live. It's hard to tell. It says it's still setting up your meeting for YouTube live. So I guess it'll let me know at any moment now. In any case, that's uh it's value after hours. I'm Tobias Carlo joined as always by my co-host Jake Taylor. Our special guest today is Jason Hershman. Uh Hudson >> 215 capital. >> 215 capital. >> 215. Jason, welcome. It's good. Uh, you know, and I you and I have become friends over the last couple years, so it's exciting to to have you on the show. >> No, it's really really appreciate being here on the show and and uh really excited to talk about what's uh what's going on out there. >> Jason, so uh maybe >> you're you're well you're you're well known in the in the value community uh and the small cap value community particularly, but uh perhaps not so much to the broader community. Rather than me give you an introduction, why don't you tell us in your own words how you became Hudson Capital 215? Sure. Small is the small cap value community in the room with us, Toby? >> Yeah, it's I'm all over. >> It's in the room. It's in it's in the corner over there. Yeah, absolutely. Well, let let me just give a little bit of background about myself. And now I was I was involved in a small family business from 1996 through 2022. started to focus 100% on investing. We have family office, the Hudson 215 Capital. Uh I've been investing since uh my early 20s and it's been fun turning five figures into six, then seven, then eight, and now nine figures. Um so guys, I think your audience has probably deeper knowledge of Birkshire Hathaway than any other financial podcast in the developed world. So, I think I can reduce my approach to two words that every hardcore Warren Buffett fan knows. And those two words are salad oil. >> I'll say it again because every hardcore Buffet I heard the little nod there. So, you you know those words, salad, oil. But for every Gen Z listener who hasn't memorized all the old school Warren Buffett stories, okay, what was the salad oil scandal? So back in ' 63, 1963, uh American Express had an asset lending operation, right, that made a large loan to Allied, vegetable, oil, or frying backed by tanks of vegetable oil. Unfortunately, Allied deceived American Express and others by filling those tanks primarily with salt water and a thin layer of vegetable oil on top. Right? So when the scandal broke, Allied went bankrupt. American Express was hit with claims almost equal to its end of year 1963 market capitalization. But Amex's uh warehouse lending business was incorporated as a separate entity. Right? So Buffett conducted great due diligence and made sure that Amex's poor travelers checks and budding credit card operation uh had not lost the confidence support of retail customers, businesses and banks, right? It had not. So Buffett's partnership bought 5% of American Express as it fell in reaction to the scandal. You know, sad oil investing or as I sometimes put it like non-operational turnaround investing is like buying like a publicly traded stock when the valuation is being hit or held back by something outside its core business operations. Right? I've done it with Expel in 2016 because of the 3M patent lawsuit. Uh I've done it with alternative asset managers in 2013 and later actually when their K1 partnership structure uh kept valuations low. Uh I've done it with CME and Mastercard which were far from profit maximizing prior prior to ipoing uh because of their cooperative ownership structures. But I think there there are two other lessons I think from the AX solid oil scandal which I think are crucial for fundamental investors. First uh you know value investing to me isn't necessarily low PE or like low price to book or low price to cash flow. I mean, I've read that that Buffett bought this Amex stake in 64 between 35 and $38, but also read that his AX position was bought at closer to, you know, $41 per share. So, like Amex reported $2.52, uh, in the early 1963, uh, you know, before the sell scandal, uh, the stock was trading around $63. Like, even at Buffett's purchase, uh, price, Amex was trading like in line with the S&P 500 at the time. Uh second, you know, should you be a value investor like or a growth investor? I think the best opportunities tell you the answer. Value of growth, I think the answer is yes. Uh again, consider American Express when Buffett bought it in 1964. Travelers checks and money orders were top two segments, but you've got this amazing young credit card operations, too. Uh and actually, I have a I just want to read you a a few lines from the 1964 AX annual report. about the credit card operation because I I think they're hilarious. Uh if for like if you like geek out on like on investing uh for the American Express credit card, 1964 was a year of unprecedented growth. Uh billings total 344 million, a remarkable 42% increase over 19 over 242 million build in 1963. Total number of cards in force at the year end increased 20%. And this is the money line, right? These increases were the largest of the last 5 years, strengthening our conviction that the market for this comprehensive credit instrument is far from saturated, right? In 1964, it's just it's just hilarious. Um, so yeah, to me like when you get these rare opportunities, you know, combining like value and growth as I experienced with Expel, you have to take advantage, right? You have to follow the bottom line, you know, be greedy when others are fearful. Now may uses like a few performance figures my younger son's utma to illustrate the formentioned points right I'm using his account record because it's a bit less concentrated more conservative and and the cash flows are frankly just easier to track I'm not going to refer to the real real dollar amounts but I'll use like real percentages and ratios right we put a dollar in mid 2006 a dollar in each in January 2007 and 2008 and 50 cents in January 2009 so $3.50 invested in four different calendar years. Okay. Is in in the S&P dividends reinvested that 350 turns into about $23.65 as in the end of like June June of this year, right? No taxes, ETF management fees or withdrawals apply, right? The 2006, 2007, 2008, you know, dollar CAG in the tens or so. Uh that lucky 50 cents invested in early 2009 earned about 14.6% 6% through June in the S&P 500. Now, my son's portfolio turned that 350 into $70 at the end of June, right? That's about a 17.5% CARE. By the way, that's with all the dividends and realized capital gains taxes paid out of the account, right? Also, because we wanted him to have some skin in the game, we withdrew some of his UTM money to pay for part of his private high school education. So, it's really not apples to apples with the S&P 500, but there's but there's one hitch. Those returns are based on the premise that his expel investment went to zero, right? That did not happen. So include those expel returns or the returns of positions purchase a with his after tax expel proceeds and the portfolio turns 350 into $130. So that's that's about a 21.7 tag or net net of tax realized you know gains uh despite some tuition withdrawals from mid 2006 to June 2025. I think it's it's a pretty solid job. Now, this is a portfolio that holds it, but it also holds, you know, Blackstone, Apollo, Aries, the alts, Mastercard, which we bought in 2006, Visa, which we bought in 2010, CME, ICE from 2008, uh, and some micro caps and small caps like a company called Hype and Theon and Nordst, and a few other micro caps and small caps. I I just can't disclose today. So I I think you know this is like a stard oil investing portfolio and I think it can be applied to all sorts of assets. You know for my son's upma my goal is an 8020 result. 80% of investments should outperform the S&P 500. So that this was like a later entry lower risk but also like lower reward approach. Uh you know so I'll pause there. I certainly want to talk about why I like micro caps and small caps and also why the I see the opportunity set going forward at least for me which makes my historical returns difficult to replicate. But I can I can go on and talk about micro caps or we can pause and see maybe where some of your listeners are are uh are handling from today. Toby, >> I thought the uh 8020 was 80% of the portfolio has to do better than 20% IRRa. Uh yeah, it kind of kind of maybe historically worked out that way, but but uh I just want to put a little context. I know there's so many like professional investors come on and they can't talk about their records. Um I just have my own just family money. So I thought maybe we just put out there at least one account give people a little bit of context also to show that you know sometimes like you know the difference between 17 and 21 I mean just a few percentage points but over time it really adds up the difference between like you know like $70 and and and you know like $130. It's it's it's a dramatic difference. Um but happy to go to talk about micro caps and small caps if you don't mind. Jason, um, let's just talk about, so Amex was going through a, uh, a crisis not related to its main business. It was this secondary business where they were, >> uh, issuing warehouse receipts for order they supposedly had stored in their warehouses. >> Meanwhile, they've got this >> credit card franchise. And the question for Buffett is, are people still accepting the credit cards? because now there's potentially there's this credit risk that >> the vendor doesn't get paid. And so they're like, "Ah, do do we continue to accept this or not?" He goes and sits in restaurants and discovers that people, you know, are basically completely oblivious to this thing going on. And so he thinks it's it's a pretty good bet. My question is for Expel. So Expel is a slightly different situation where it's a newer business. um they have similar sort of crisis but more directly related to their core business. So how did you think through the the expel issue and the crisis and how can you just talk to us a little bit about expel? >> Yeah, I I think we could uh we could talk about expel. Um what I can say is that um uh I was I was very fortunate to team up with another investor uh Locktock and Barrel uh who was also a micro cap club member and who's also a patent attorney. Um and in my business life I submitted my first US utility patent application at age 21. Um so and I've sued and been sued for patent infringement. So we we made a good team uh and by the way I always say lockstock and barrel deserves the lion share of the credit for for expel. So what what we did uh to try and like understand the situation better. Uh we brought samples of expel paint protection film after 3M sued expel. We sent it out to a laboratory to be deconstructed. uh determined that expelled film did not violate 3M's patents and further determined you know through our own analysis that that 3M's patent they say pay protection film patents were were very weak. Um so you see for those those two things determining that 3M's patents were were very weak and also determining that that 3M's patent that Expel's film did not violate 3M's patents gave us a lot of confidence. Now 3M is a giant, right? Expel is a tiny company. So there's always the potential that even if you have all the facts on your side, you know, things can things can go wrong, right? And uh as you probably know, um uh Buffett sized the Amech position, I think around 18% or so of his of his Buffett partnership. Uh and and honestly, I did the same thing with with Amex. I sized about 18% of of my my assets at the time. Um, but I can tell you that after I received that chemical analysis report in mid April 2016, I really stepped up my purchase of Expel shares the day I received that report. Right? So from April 13th, April 13, 2016 through November 25, 2016, I personally purchased 40% of the Expel shares that traded on this primary exchange, uh the venture exchange up in up in Canada. Now, that sounds like a lot. Uh but 40% of 1,600,000 shares is still not that many shares. And those 1.6 1,656,795 shares that traded over seven months or so. That only added up to $1.8 million, right? So, again, we we talk about like micro cap opportunity and and illiquidity. Um, you know, there's so many people like they they love the expel story, right? they they love the the uh you know maybe the dream I wish I had expel the opportunity was there but it wasn't huge right um now in the first uh the lawsuit went public in December 30th 2015 through the end of of 2016 there were 4.4 million shares that traded but in the first 10 trading days 1.4 4 million shares traded. Uh but they were purchased so quickly after the lawsuit. Is that really investing or is that like speculation in like paint protection film sardines really at that point? >> Um so you know and one other thing that I think people forget is that you know it was very fortunate for me that that lock barrel that mid 2015 there was like a bare market for micro caps particularly up in Canada. Uh and expel had like disappointed unofficial guidance in late 2015 right before the lawsuit. So in 2015, Expel was trading above about $33 before the mis misguidance and micro cap recession and lawsuit, right? Which nothing would be wrong with 11 to 12 bagger, right, to the current price, but it's not the same as the 30 or 40 or 50 bagger I have on my remaining shares um even at the current expel price because of that that collapse, right? Which gets us back to the the importance which I think every value investor knows of like purchase price, right? purchase price is so important even over a longer time period. So Jason, how then like I'm trying to think of a scenario where how do you get comfortable with the potential existential risk like you know that salad oil you know he he knew the business was still good but what if there had been and you knew that it was kind of bulkheaded based on the corporate structure but I'm thinking about like maybe would be a good like AIG for instance in 2008 you have a very good insurance business but you have this kind of derivatives trading arm that ended up kind of bringing the whole thing down. Um, you know, how do you how do you kind of separate what's actually an existential cris, you know, like could kill the company and what is sort of more headlines and and other over and above just I guess due diligence and then position sizing like for the managing that risk. I'm going to give you a sort of like like a like an odd answer and it's it's sort of tied to the um it's tied to the the numbers when I broke out expelled let's say for my uh my son's utma and like the non-expel like saying like okay what what would happen if it went to zero you know I think ironically enough like if you people know if they're a pretty good investor and and even if it went to zero okay I I felt that I still could compound money at a very good rate. Um, and I wasn't putting in like 60 or 70 or 80%. I'm not I'm not one of these like young Turks who just could put in, you know, 90% in there and >> yolo >> and yolo, right? Uh, you know, I was in my like late 30s or early 40s, you know, build up some assets. I can't I can't is it I I can't play Candyland or whatever and go back to or shoot some ladders and go all the way back to the bottom anymore. No, I just I just I'm just I I can't do that, right? Um I I think you know, honestly, Jake, I I don't know if you know that's why you size things, right? You know, in some ways, right? There's there's no way of like handling all the risks. Uh and everybody knows like a level of concentration they're they're com, you know, they're comfortable with. And I will say I it's a difference between I think sizing it a cost like I did and also just letting it run after some of these things were were resolved you know into a much larger position. Um so but but I I don't have a a great answer for you Jake. >> I think that's a pretty good answer. I I I like that I like that approach towards sizing. Helps you deal with the uh deal with that sort of risk. Uh talk to us a little bit about micro caps. What's the what's the attraction there? That's distract there. That's that's the uh that's the question and we uh >> I run a micro cap fund too, guys. Just I'm not >> Yeah, I understand you know. Um so yeah. Yeah. >> So, so you know I'm really asking you why should >> the attraction there just sitting there like what is the attraction? Let me come up with something here. Damn it. >> Help me out. >> Help me out. Right. Look, let me let me then let me do the uh you know when in doubt always munger something. Right. So let me invert the question and say what hasn't changed in the micro cap world over the past 10 years and then I'll talk a little bit about what what has changed in the micro cap world according to me. >> That's even better. So I think the micro cap world um I think particularly in the United States and Canada still resembles Thomas Hobs's uh like famous line like nasty brutish and short right >> so here's some simple data that like I just from a from a screening and data tool that we use like portfolio 123 for the last fiscal year I think there about maybe 361 out of 500 S&P 500 companies that generated a return on equity of 10% or better uh for micro caps between 10 and400 million US dollars on market capitalizations with their primary exchange in the USA or or Canada only 526 out of like 3,154 generated an ROE of 10% or more. So that's like 16.6% of companies and and frankly those figures make micro caps look good. There are 29 S&P 500 companies with negative common equity but generated by positive net income. So you find companies like AutoZone or low is among them, right? But you know so much common stock over the years the shareholder equity is is negative and their ROE is basically infinite right but there's companies like Fizer which maybe they earned a little bit less than a 10% ROE in 2024 but because of like sizable goodwill and intangibles on their balance sheet now among the 526 USA and Canadian market caps with an ROE of above 10 you'll find 55 names with a positive ROE and a negative common equity they're like these are not auto zels right they're not auto cells you're like you see like a perennially money losing company with negative shareholder equity with like one year of positive accounting profit. For example, there's like Victor Mining Group with a $50 million market cap and made $101,000 in net income in 2024 after years of losses and has negative share earn equity of like negative 1.2 million, right? You know, and for the record, I do not own any shares like Victor Mining Industry Group, right? So, please please don't go out there and say like ATRA likes it, you know? No. Okay. So, you know, by the way, the ROE figures are not much improvable with larger micro caps, but to be fair, these figures are using reported earnings, which may or may not be helpful for some micro caps, small caps, and we'll talk about that a little later. So, the ROIs aren't aren't great. Uh, and what's also challenging is persistence, right? Even back then or now, a lot of micro caps disappoint a good percentage of their investors who quite frankly expected more and faster than what they're receiving, right? So, and Ian's talked about this too a little bit, like micro caps often string together a few quarters of topline growth, a few quarters of operating margin improvement. They race ahead, they hit the next pothole, and they bend an alloy wheel, and you know, there they sit, right? So, they're very well suited for six months to two-year holding periods. And to be fair, at the right price, right, you can make good money buying a money- losing unknown company that graduates to break even or profit mediocrity, right? You can make three, five, 10 times your money in some cases buying something that turns out turns into like a 10% ROE company. But to make that 10 times, I think you really probably had to exit when expectations were greater than a long-term 10% RO biz, right? You're taking advantage of that that overexuberant expectation. I think in some ways like the fact like many USA and Canadian micro caps are so poorly suited for like longerterm investors so often given to like fits and starts so little populated with like long-term winners. This actually creates an opportunity for like investors like me, right? The greatest returning micro caps over the long haul are rarely owned by those who like originally own their shares because it takes a different SC of SE skills to know which micro cap is like worth suffering for. Um so I I think you know what micro caps what has changed so micro caps are particularly well suited I think for the investing substack phenomenon right everybody loves to read about a new name right and there's so many like new to you names in the micro cap space you combine substacks with like chat GPT and it's easier than ever to do like research and publish like respectable respectable respectable articles about market caps like one after another um I think it's also like another pushpull dynamic. Um, you know, like more attention like additional investors chasing after the same name, uh, potentially pushing up prices is not normally associated with higher long-term returns. But the micro cap space is not the large cap space, right? Micro caps in USA and Canada, particularly Canada as a group like net share issuers. So higher share prices could actually lead to lower levels of equity dilutions like every dollar raised. like it actually lower the cost of capital for micro caps. So and and I'm not saying there's a potential the micro cap community could see both higher share prices and more volume because of the substack phenomena and you know highly higher average daily volume also going to open more names like more hedge funds right so I think that potentially we could see like a sur style like reflexivity loop >> that helps micro caps you know perception shaping reality which sh you know shapes perception and so on um so that's how I see >> like lowering lowering the cost of a of a good write up then kind of puts more more companies on the potential menu of investors. >> Yes. Yes. You know, so there's I think it's this the Substack and I think in AI are really um are really changing things. Um and and honestly I think if you don't mind where where is it here? Yes. What and the high-tech high-tech technology here, right? We got this >> this chart here which I think you've all seen but I'll just describe right. It's the the torsten slack chart highlighting the you know 40% of Russell 2000 companies that reported negative trending 12 months earnings. We all know it if you're if you're a a value guy looking for evidence of an overvalued market like maybe someone here, right? Or if you're a small cap investor uh like myself, like you've seen that chart, you know that chart. You know, you like you you know you you think about it before you go to bed at night. Um, so earlier I I highlighted some of the like 10% ROE threshold figures for micro caps in like you know the S&P 500 but I also like maybe maybe it's not as much meaning as it may seem. So I I want to give credit to like Alger Management for publishing an article, but what I believe is like the most important academic paper for small cap and micro cap investors in many years. And this this this paper has a really sexy title, reassessed earnings with reassessed earnings with capitalized intangibles. Right now we all know that the percentage of company uh investment in intangibles versus tangibles has been growing dramatically these past decades. Right? GAP treats tangibles and tangible investments very differently. Right? Expensing typically versus capitalizing in many cases. Now this wonderfully named academic paper what it does it capitalizes intangible investments and rightly offsets uh a portion of the advert advertising past intangible spending. So the net effect is uh earnings as a percentage of revenue improves 900 bips. The effect is magnified for the small cortile stocks in the study. A 2200 bips improvement. So what that what that means is six nearly 60% of the smallest cortile are reclassified as profitable from unprofitable thanks to capitalizing intangibles. Um and what's also interesting to know wis to me is that the the stock market performance of those gap losers but capitalized profitable firms produces returns 1600 basis points higher than the overall universe in the study. >> So and plus since they reclassify intangibles um they shipped them to the investing section out out of the uh vecting se section of the uh cash flow statement. >> Yeah. out of the from the operating it also changes the the operating cash flow to look look much more impressive. So what I think what we have here in is in the near future I think AI tools are going to allow investors to much more easily manipulate gap financial statements to unlock more accurate economic earnings. And this is what micro cap and small cap uh have historically lacked, right? Uh which is being like remedyed by AI and Substacks, right? They need effective but affordable tools to identify tiny stock opportunities and broadcast them to a wider audience. So I think that's really what is changing in the micro cap world, right? Before quality stock coverage was something only the big boy firms covering big boy stocks could manage. Um, so to me this is like the biggest difference in the last 5 to 10 years for the micro cap community. Of course the big risk is like illquidity and cheap tools also attract charlatans of all sorts, right? So we're going to have to see how this plays out. >> Yeah. The there's the amount of noise that can be created is going to just go off the charts. >> Yes. Right. And you already see this because human nature doesn't change, right Jake? I mean all the tools can change and there's there's always going to be a desire for you know someone who promises um you know tremendous returns in a short period of time right and if that attracts more more eyeballs if that attracts more subscriptions then you know garbage in garbage out. >> Yeah. Or you could you could camp out outside Drake's house with a uh whiteboard too. I saw that that seems to to buy some. There was there was some there was some like Twitter investor who like wrote a like thread about me just like a few days ago um who like like characterized my like expel investment as like a thousand bagger right you know and and I I corrected him as no it's it's not that but nobody reads like >> 950 at the most guy >> exactly exactly you know it's like you know I I always thought that you know I mean I and I'm getting all this attention I didn't have to take my clothes off so that's it's it's you one hand it's like it's cool and interesting but sometimes I like I cringe a little bit because like like the important messages are being lost right about like risk control about the importance of prices being paid uh you know diversification at some level um these are all important things you know and and uh um I started off reading a lot of John Nef and nobody even knows who John Nef you know you know you know you guys nod your head you know Vanguard Windsor at one point the just part of the country. Uh, nobody cares about these guys any, right? >> Just just just the three of us and about probably one/4 of your listeners. >> Uh, Jason, we usually do at the top of the hour uh some veggies from Jake. I'm just going to do a quick I'll do a quick shout out to all the folks at home. Uh, Tallahassee, what's up? Pedika, Israel, Maxin, Valpare, how's it? Cleveland, Lausan, Switzerland, Bethesda, Brandon, Mississippi, Lewis, Delaware. Thanks for spelling it out for me. Breton, Boise, Houston, Jupiter, Florida. Good on you, Sam. You've already won there. Belleview, Nashville, Toronto, Snomish, Nashville, Tmacula, Sardinia, Italy, >> Poland. >> Hopefully I'm saying these correctly. >> There's always a first time. AI AI Toby is going to pronounce them all correctly in about three years. >> God, wouldn't that be great? I'll hit the beach. >> Mu London, Minnesota. Last one. All right, JT, hit us with the vegetables. >> All right. Well, you know, knowing that Jason was coming on and that he he has a reputation that is perhaps not always deserved as he was just saying as far as like being this micro cap only kind of investor. Um, and I knew that that wasn't totally true either. Uh, but I wanted to focus on something in the smalls kind of category of potential veggies. Uh, maybe more like peas or something. Uh, but let let me set the scene. Uh, we're underwater at a at a coral reef and sharks are cruising by like these shadowy submarines and parrot fish are grazing leisurely on coral and and a panopoly of fish are just swimming around in this messing chaos of color and motion and then something quite strange happens. A shark slows down and hovers and then it opens its mouth and into the mouth swims this tiny fish and it's called a cleaner rass. Wr. And this bold little thing wiggles in and starts nibbling parasites off the shark's gums and gills. And the shark doesn't chomped down on it. It just waits patiently, almost like it had booked a dental appointment. And what in the evolutionary world is going on here? Uh, and before we untangle that, we will give you some fun facts about cleaner rases. Uh, they're what's known as sequential hemaphrodites. uh meaning most of them are born female, but if the dominant male disappears for whatever reason, the biggest female in the group will literally change sex and take his role. So, they're bringing a whole new meaning to the term next man up. Um, the cleaner asses also punch way above their weight in in cognition. Experiments suggest they can recognize themselves in mirrors, which is a sign of self-awareness. It's quite rare in animals. Um, evolution gave them this sharper social intelligence because their livelihood really depends on reputation and trust. And there might even be clues in our own intelligence about, you know, our our minds being sharpened by the demands of of being so social. Uh, like we had to figure out who was trying to trick us or and who wasn't and who, you know, coming up with good ways to trick each other. Uh, young rasses learn how to clean by watching the adults. Uh, so they even start with practice clients like smaller, less dangerous fish before moving on to sharks and groupers. So there's actually like cultural transmission like skills passed down, not just encoded in DNA like most animals. Uh, so it's like this apprenticeship reef style. So as you know, like nature is very rarely this feel-good story. It's it's red and tooth and claw. And so why does an apex predator like a shark capable of obliterating this little rass in a nancond suppress its instinct to chomp down? And it's because that tiny fish is is quite useful. It's it's indispensable even. And it's been performing these functions for millions of years, generation after generation. And the rass offers a service the shark can't perform itself with this parasite removal. And without them, you know, these parasites spread, the fish populations weaken, the whole reef might get sicker and even collapse. So, you wouldn't think it, but this quiet mutualism is a pillar of the ecosystem's resilience. And now, let's attempt to torture this analogy uh into place. >> This is the best part. >> Yeah. >> So, you know, replace sharks with Fortune 500 companies and replace the RAS RA ras with these micro cap businesses. So, these tiny companies, you know, they don't necessarily try to beat the sharks. They're too small. They know that they could never outmuscle Amazon or Tesla, but instead they find their niche, tiny but vital role and and a cleaning station kind of in an economic grief. And just like the Razes, they survive by being indispensable. So, let's maintain a little bit of sobriety here. Like many micro caps are landmines. They're they overpromise, underdel. Some are penny stock casino chips or zombie businesses kept alive by dilution. Uh, and some are the investing equivalent of of a false cleaner fish, which is apparently the species that mimics the rass and in look and behavior, but then it sneaks in and it starts like biting off the scales of the the fish it's supposed to be servicing. Uh, so, you know, it impersonates the real business value to get that kind of quick hit. And I think you probably see that a fair amount. So, yes, due diligence critical and and you know, most micro caps will never grow into these giants. But that's not really the point. Like what we might seek is those whose utility to the shark is so high it becomes symbiotic fixture in the environment. Uh and just because a firm is small doesn't mean it's it's not significant. Small businesses make up 99.9% of the US businesses. It's a very long tale and they employ nearly half of America's workforce. They they are the reef. Uh and small mid-size enterprises defined as firms with fewer than 500 employees produce around 44% of US output. So almost half the economy. So the Fortune 500 companies dominate stock indexes, you know, but the real scaffolding of America's economy is built on millions of small firms. So they're kind of the connective tissue uh that kind of keep the sharks healthy, to be honest. And what's what's equally striking is is how dynamic these these small firms are. Since 2020, amid pandemics, inflation, supply chain shocks, they've created 2.6 million net new jobs. And much of this coming from these younger firms that are less than 5 years old. So um these the cleaner assasses remind us that survival is not just about being big. It's it's about being indispensable and that can mean you can be indispensable at any size. Uh so it's finding your niche embedding delivering steady reliable value and micro caps that embody this kind of model. They may not scale to the moon but they they can certainly endure and be be great long-term businesses to own. So, you know, in investing, we're often everyone is chasing scale, especially these days. Uh, and you know, they they want that next giant, that next shark. Uh, but sometimes the best returns can come from spotting the rasses in the world. These tiny firms with niches so vital that the ecosystem sort of bends around them. And survival isn't always about size. It's it's really also about that indispensability. >> Good returns from cleaner rases. >> Cleaner rashes. Yeah, I think I'm here. the the the evolution of that to the micro cap investors. We went from ras to dumbass. But but we're but we uh uh but we're out there. We're making it. >> I think that was sperm well worthy. JT >> was it? Okay, good. >> Yeah, I think I think >> that was a good one. I like that one. I like that one. >> We might want to hear more about cleaner assasses in the future. >> Well, I've given 125% of my knowledge base about cleaner assasses at this point. If that's it, you're you're all out of harass. Okay. >> Jason, do do you think if there's a lot of attention brought on smaller micro cap in the way that you're suggesting with like chat GPT and and Substacks that some of the return goes away? I mean, if you're demonstrabably able to like sift through and identify the the nuggets of gold in there. Does that bother you? >> I think I I think I think over time it it it does. I think there's there's always a a a um like a like a challenge, right? I mean the I think but the the offset is you know thanks to you know interactive brokers thanks to Zoom thanks to the same same tools uh you know micro cap investing has turned from a uh a USA you know in Canada to really a worldwide search right our our net is much larger you know we're uh we're looking at Swedish and Polish and tiny Japanese uh rats right uh and I think that is that is perhaps the the offset that uh you you always want to be somebody any any investor in somebody's um it's always is always a difference always a struggle like wait what what what things don't you change or what do you change um and and Munger has has talked about this like what ponds do you want to fish in right trying to bring us back to the uh uh sort of ca analogy here so you know we're finding that you know a lot more in like looking at you know opportunities in in Europe uh and even in Japan right if you told me uh 20 years ago that I would be like spending part of my time in 2025 studying the Japanese divorce market. You know, I would I would have, you know, I would have laughed, right? But I what I found like, you know, with with some age and some wisdom is that what what makes people laugh today sometimes can make them cry tomorrow because that's the opportunity they they missed. >> Yeah. >> Right. uh particularly in the micro cache. You end up with these weird little like little niches. Um uh and and uh and and it's it's it's it's it's very fascinating. That's that's half the fun of being a micro cap investor going down these these rabbit holes uh and doing a lot of research. >> What do you think of the opportunity in Japan? >> You know, Japan, I have to I have to admit, you know, I was I was very cynical about Japan for for many years. And this is actually one of the downsides of experience, right? Right? I've seen so many times when these promises of like Japanese, you know, they're going to, you know, this is this is the time Japan really gets their acting gear, right? And it's like, forget about it, right? And so, you know, for a long time, um, I I just avoided it. And I still think, you know, there's a lot of opportunities in in you looking for, uh, you know, something that that trades at a 14 PE but an EV ID of like two because they have all this cash in the balance sheet and there'll be some process by which they get cash back. But honestly, what what what we're doing we're focusing on is thinking about, okay, what's the next step? Okay, once these these value opportunities start to go away, once the average valuation goes up, I think there's actually a number of of micro cap and small cap really good businesses which are just not being paid attention to, right? Maybe they trade at a 13 times PE or or or 11 times, you know, EVID, which everybody like every four in Japan says, "Why should I pay up? Why should I pay for that when I get something at three?" >> Yeah. But they really should be trading because they have such great opportunities ahead of them and they're growing so quickly and their return invested capital is so high. They should be trading at at much higher rates and there's maybe there's an opportunity there for like a very long long run. And that's really like our game, right? So it comes back to like okay where where can I apply my skill set you know where in the world can I apply my skill set and now I'm starting to see opportunities in Japan and that's probably because of like again these chat GPT type tools like I could translate things and get much more effectively and get much more information in English than I used to and then you combine that with like expert expert interviews and then okay now may maybe we can play in that market a little bit. Do you have any view on that effort by the uh uh the exchange in the in the in Japan to you know there's trying to get their stock price above book value. There's some penalty for not doing that or some social stigmatism for not doing that but no other >> I've seen you know I think it's I mean it seems to be working I'm not I'm not an expert in that. Uh I I've seen like there maybe one reference to like some some company that gave maybe a uh a dividend not based on market capital but based on a percentage of their book value. Uh and since the book value was so much greater than the than the than the market cap like it immediately like moved the stock up. Um, and so I I think there's I I think that's finally I mean finally starting to get resolved, which is I think is interesting, but again I I it's not really the the area that we're like really playing in. We're we're we're fascinated with Japanese divorces here at Hudson 215 Capital. Right. What can you tell us about Japanese divorces without >> What I can tell you about Japanese divorces is that um um the again sometimes it's I mean um what's going on in Japan is that there was a loosening of it used to be very very difficult to be become an attorney extremely difficult and then they they loosened the standard some because it was just too difficult and this is like maybe like 10 15 years ago and so there was a a growth in the number of of attorneys right Uh at the same time >> that's when it all went downhill >> at the same time at the same time you also have um u you know like in Japan is is aging right and you have divorces which like very simple divorces you don't even need lawyers in Japan but there's more complex divorces that are occurring because people getting divorced also at at a at a later age there much more like people getting divorced at age 40 or 50 or even 60 right where now you have to really split assets uh you know there's sometimes children involved um and and so that's there in essence you also now need attorneys are are competing for for like divorce clients and so that's creating an opportunity for for basically uh you know websites which are are just collecting you know like basically a collection of of divorce attorneys that people who are looking for divorce you go on to and and then hook you know they hopefully get hooked up with a particular attorney. So again, it's it's a weird little niche. Um, but you know, these these and it's not just divorce attorneys, it's also other other attorneys too. But the divorce attorneys seem to be uh one of them because a corporate attorney like a leader leading part because a corporate attorney sometimes you have reputation, right? Attorney can get therefore doesn't need like advertise to get new clients. Uh divorce attorneys is there's more advertising necessary, right? It's not 16 you don't have like 16 friends who all got, you know, are getting divorced or have gotten divorced recently. you may not even want to talk about it with any of your friends yet, right? So you you you try and you know use like search engines and something like that a little bit more. So we get back to these tiny little weird markets, right? Which are which are opportunity and that's that's that's my bread and butter. >> Is are you sort of looking outside of the US because you think the US is picked over or expensive or or is there any reason for that? >> Well, you know, when when you get back to it, right, I mean the challenge is is like we put in let's say 1.8 8 million into expel, right? Uh, and that was, you know, less than 20% of our our assets at the time. Well, if I want to put the same amount of of of if I put the same amount of money into something, that's like less than 2%. Right? So, Expel was a magic unicorn, right? How do you find 20 magic unicorns or 10 magic unicorns? And really, the answer is you don't. um you know um and and I think there's a there's a temptation uh when you win the Super Bowl, right? You want to get back to the Super Bowl, right? You love that feeling of like winning the Super Bowl. Uh but but there's so many dynasties of one or dynasties of two, right? Because because all these competing human emotions uh and greed and people, you know, the desire for credit comes into play. So, you know, I I really don't want to have to move to look at larger companies, but I do I do need more opportunities, right? So, that's that's a reason to go abroad. And and frankly, there's just more profitable businesses abroad than there are here at the micro cap space or the sub 100 million, you know, market cap space. So, you know, it's the old Peter Lynch line like, you know, how do you go out of business, right? When you run out of cash, right? I I do not want to like invest, you know, uh, a lot of money into a a US money losing micro cap where I, you know, it's going to take me two months to get out, right? And so, you're like, you're like the obese fat man trying to squeeze your way through like a very narrow window in order to get out, right? You are it's not going to be pretty and you're going to get scratched up to hell, right? So, I have to I have to look abroad and and frankly my Why not use the advantages of of of size, you know, to to help me, right? Um, you know, one one of the things that I learned as a as a small businessman because we were like a small, you know, seven figure revenue business, our large customer, you know, fairly concentrated was like a multi-billion dollar entity, right? So you there are like so many little things you have to do and we yet we we found somehow somehow found a way to increase like gross margins from like mid-30s to like low 50s right technically they should have been squeezing us right it it all comes down to like creativity like you know 10 15 20 little things that you try and put together like to create opportunity so you know my kids are older right I'm a I'm a 50-year-old like I'm dying my beard will be may may need to dye eyes beard but it's not doing it. Uh so you know why not get a place in Europe that I can use as base operations right? you know visiting companies is so important to me so important to my style right I can go there I can spend time there I can just you know if as a UN investor if you're here and you want to visit you know Europe you gota like you want to visit six companies seven companies you got to do like three months in advance try and schedule it all together no being you know in Europe and you know just do things a little easier a little quicker you know hopefully find that company a little sooner right and that's that's what occurred with this the company called hype which is a nicotine pouch uh distributor right We were one of the first outside investors to go. We walk in, the lobby has a ping pong table, right? And like this is a tech company. This just happens to be a nicotine. This is not really a nicotine business, right? There was a another and this is an odd one. Okay. Another CEO in in in Europe sitting across them at at a conference table um you know like basically diagonally. And this guy who was answering our question and he was like so immersed in answering the question. He like but while he was like answering the question he didn't even know what else was going on. He was like so immersed in giving the answer. Takes off his shoe, takes off his sock, starts like picking at his toes like little toe flex or like just like landing on me and like you know on Zoom you don't get this right but like you want a immersed toe CEO. Some guys like so focused on the business he doesn't realize like little like tow jam and toe fleck is like going off into the world and you know and I I hate to say it because you know you know that that that that tow jam investment is like a multi-bank right so >> put that on your checklist everybody >> put it on put it on the checklist right you know so unfortunately now there's going to be some CEO who like goes to like like the micro cap club conference now takes office you know like you know shoe and does the same thing just to project that, right? So, uh uh it only it only can be used one time. >> Jason, what do you think about the argument that there's been this um gradual worsening of the micro cap opportunity because either there just haven't been as many coming in because either SA and Oxley or there companies are held privately for longer so they go public when they're bigger or private equity is picking out the good ideas from from that. Have you have you seen that in in practice? >> I think it's worse and always getting worseer. Uh look, I mean I think we we all we all know that line and I do see uh you know some examples in Canada which I think are very disturbing uh in some ways that that like micro cap companies they've done a few raises they're finally breaking even finally going to be you know hopefully going on the that that that finally exponential and then PE comes in takes them out management gets a good piece of the action too right and meanwhile So you know small investors like us are the in essence the bag holders funding this company through the through the losses and the PE firm is going to get the gains. So I I think that's that is a that is a risk. Uh that is a reality. Um it's again it's a reason why I go into like Sweden which I think you need like 90% of shareholders to agree in order to be taken out. Uh and I think that's very advantageous to say you know for for investors like myself overall. But I I think I I agree with you. uh or agree with the premise that that's that's that's a problem, right? And hopefully what you do is you offset it by going internationally. >> Do you feel like there are other countries around the world that have you feel comfortable as an outside shareholder in Japan and Sweden or Switzerland? Sweden, Sweden in particular, I think Sweden actually has a a large number of individual companies uh which I think are are small but profitm. Um I think Sweden you have a lot of CEOs who speak English. You also have a lot of CEOs tend to be very I hate to say it a little more honest in some ways than than American Michael Keap CEOs who tend to be a little bit too PT Barnum Bailey, you know. >> Yeah. >> Kind of kind of attitudes. Um, I was I was talking to like a Swedish CEO maybe a couple years ago and and they had a new product and this like did the first installation in in in a in a garage um in a garage renovation, a commercial garage renovation. He's like, "So, how does how's it going?" He's like, "It's going terrible. We really screwed up." You know, uh um sometimes you don't get that kind of honesty with with uh American micro cap CEOs. Um, so I I think I think there's a lot of of of of foreign CEOs and I also didn't make another another statement here. I I think American management teams compared to the price you see for like foreign manager teams, I think we're in some ways grossly overpaid at the micro cap, small cap level. And that's partly because of the the pay level of the of the large caps and the way it just oozes up. Um and so what you end up seeing therefore is sometimes a lot more uh equity dilution whether just from the need for a secondary sooner or just from more stock options or restricted stock given to management which you know you start diluting things to three or 4% a year uh you know and now it's you're turning a stock into an equity option right um you know timing really matters and I really don't want to invest in in a in a in a situation where I got to be right by uh by you know two three two days from now. >> Yeah. Especially if you're you're carving out 4% a year and it seems like they're not delivering on you know the operation results like why do you get this? >> Yeah. And then you just you just you know you watch yourself you know the way you lower your percentage of ownership is by getting diluted away right which is not exactly what what you what you want. So you know micro caps have always been like an not always but has been it's like an outlier situation right um you know you know you can invest you know throw 10 darts at S&P 500 companies um you know throw another 10 darts every year you know rebalance and you're probably going to retire okay you do that in the micro cap community you throw 10 darts at any micro cap stocks rebalance and you know next year >> would you like fries with that >> yes and now you're now you're a Walmart greeter Right. At age 60, not not even at age 65, right? Because you can start at 25. You you'll need to be a Walmart greet by age 29 because you'll be like bankrupt in like four years. >> What are what are some red flags for uh micro cap investors? While we're speaking about uh short paths to >> back to work. I see. Um >> what do you what do you really dislike? >> Too much equity issuance. Too much >> obviously too much too much equity issuance. You know, I I always I I prefer a smaller TAM, right? And maybe possibly dominating a smaller TAM rather than the um >> 1% of >> Chinese Chinese math and excuse my, you know, Chinese math uh PowerPoint that say we get 2% of this gigantic market, right? We're going to be, you know, 17 times larger than we are today, right? And for some reason the IR guys, they constantly like push those those those those kinds of presentations out. You think they would have learned? But but no. >> Any other red flags? >> Oh, uh I mean >> from experience maybe. from experience. I think the um um you know, one of the the maybe what I have not paid as much attention to uh in in the in in the past as I should have is like the importance of a of a board uh a decent board to a micro cap or at least not a bad board to a micro cap. Um I I >> every company >> did not >> every company but you know these especially these like these these tiny mind caps right the CEO has so much on their plate and they really you know they don't need another distraction or they or they need some help and so the board really is you know can can really be either a positive or or negative like uh you know m like magnifying element. I mean when there's when it's a it's a low mass and therefore inertia >> is low and any force acting on it is going to have more impact than typical. >> Right. Right. Absolutely. And and you see a lot of these these um you know sometimes you know these boards like they try and like micro caps like they try and attract like bign name experienced people on the board from like very large companies who have like no idea what it's like running like a little micro cap right because well you can't hand things off like your assistant who hands it off to their assistant who hands it off to their assistant >> right and I think that's the uh uh that's the thing I also like to talk to not just the CEO but at least the CFO or some other people in the uh in a in a micro cap because I find that uh you a lot of times you get a very you know a CEO is very very competent the question is can they build a team around that right in some ways you have to scale you know when I started off micro caps I have to I I honestly I started at first was more attracted to like high gross margin micro caps uh and I've now turned to more like low gross margin micro caps and the reason is at any given market cap that low gross margin market cap typically has like more employees. Um and so what I find is like seeing a company like okay at a $80 million market cap if you have like a hundred or 60 employees versus like a team of like 12 the 60 employee one you can see whether this the CEO knows how to scale in terms of hiring right knows knows how to delegate a little bit more at a at a at a given level of market capitalization. So I' I've sort of you know that's that's not neily true with with with uh with large caps when in some ways you know maybe you want like a 70 or 80% you know super high gross margin SAS kind of kind of situation but but micro caps are different. >> Yeah the 60 employees looking a little bit more to the future not sort of necessarily maximizing the returns on their current infrastructure whereas the smaller one is getting as much out of it as they possibly can. want to get it out there. But but you know I I you got to see you know boy like can you get escape velocity right that's always what it comes down to like market caps micro caps right can can this rocket ship actually take off or is it just going to go along and just you know come back down to earth and so any kind of little clue about escape velocity is is priceless obser like a hypothesis I'd curious what you think of this if I sort of imagine S&P 500 companies as They're probably all sort of like happy families culturally that they're, you know, all the same whereas, you know, the what is it? Toltoy, uh, you know, and >> and and unhappy families are all uniquely unhappy. Uh, but like that there's probably like higher variance of culture within the micro cap community relative to S&P 500, which I kind of feel like might look a lot more homogeneous culturally. I mean, you're never gonna have an S&P 500 CEO who takes off their shoe and socks and and like, you know, like, you know, dribbles little toe flex on you, right? I mean, that that doesn't that does not occur. Um, because they're like great politicians, right? In order to get up to that level, you have to have some political skill. Uh, but I think you're right. I think there's there's certainly I mean, there's absolutely more variance uh in in micro caps. Uh, you know, the the challenge is for a lot of young people who get into micro caps, right, to get the the lotto mentality. um there's a real desire to to get off, you know, I'm age 26 and I don't want to work in a job for the rest of my life. Um I want to be a full-time investor, right? So, you end up subconsciously being pulled to like lottery tickets because if in in some ways if one of them pays off now you're like in be a full-time investor, you know? I I uh I mean I didn't start becoming a full-time investor in my my 40s and everyone just thinks I'm nuts for doing so. But but I was working in the family business with my dad for many years. And and honestly, um I really enjoyed it. I I I loved working with my dad, you know, and there's something, I think, to be said for actually making something, not just, you know, trading, you know, which which is which is fine. It creates a lot of value for for the market, but you know, producing something for for actual customers to use, I think has a lot of just emotional value to me for many years. And I I didn't want to give that up. making payroll is like a real, you know, that's >> Yeah. And this is something to be something to be said to see, you know, an employee hopefully move on to something better in their life and, you know, um but yeah, it was it was a lot of fun, but you know, in essence, it was time to move on to a new chapter, too. >> Jason, uh we're coming up on time. If uh folks want to follow along with what you're doing or get in touch with you, what's the best way to do that? >> Yeah, Toby Carlile. No, >> no. I mean, they I uh you can find me at atrackk180 uh on Twitter. You can find me on on micro cap club under um you can search for Hudson 250 Capital World's Worst uh website and and uh you know, send me a message. >> Who's the website even for, Jason? It's just it's it's for the problem that I have here at Shake is that you know like you reach out to companies and they're used to certain structures. >> Okay. >> Right. Right. So if you say like your family office and you're set up a certain way and you know and have this website, okay, that somehow it gives you legitimacy. They they >> you know that's that's what it's always set up for just to get off. >> It's a beer just to get uh get them. >> It's just a beer. It's kind of like your mustache to give you a little bit of respectability. >> Yeah. You think that's what it does? >> But but serves no purpose. >> Theoretically. Theoretically, >> but my my my website is about as well developed as your mustache. I'll say that. >> There you go. I'll take it. >> Uh thanks so much, Jason. Incredible uh incredible lessons from >> No, I'm know you had a lot of fun and uh really really enjoyed it. >> We appreciate it. Thank you, JT. Any final words? >> I got nothing. >> Check out Journalytic, folks. Uh >> sure. >> Uh >> why not? We'll be back next week. Sbet time, same channel. See everybody then. Thanks. Peace.
Microcap investor Jason Hirschman on his method, $XPEL and the Buffett salad oil scandal | S07 E29
Summary
Transcript
And we're live. >> I think we're live. It's hard to tell. It says it's still setting up your meeting for YouTube live. So I guess it'll let me know at any moment now. In any case, that's uh it's value after hours. I'm Tobias Carlo joined as always by my co-host Jake Taylor. Our special guest today is Jason Hershman. Uh Hudson >> 215 capital. >> 215 capital. >> 215. Jason, welcome. It's good. Uh, you know, and I you and I have become friends over the last couple years, so it's exciting to to have you on the show. >> No, it's really really appreciate being here on the show and and uh really excited to talk about what's uh what's going on out there. >> Jason, so uh maybe >> you're you're well you're you're well known in the in the value community uh and the small cap value community particularly, but uh perhaps not so much to the broader community. Rather than me give you an introduction, why don't you tell us in your own words how you became Hudson Capital 215? Sure. Small is the small cap value community in the room with us, Toby? >> Yeah, it's I'm all over. >> It's in the room. It's in it's in the corner over there. Yeah, absolutely. Well, let let me just give a little bit of background about myself. And now I was I was involved in a small family business from 1996 through 2022. started to focus 100% on investing. We have family office, the Hudson 215 Capital. Uh I've been investing since uh my early 20s and it's been fun turning five figures into six, then seven, then eight, and now nine figures. Um so guys, I think your audience has probably deeper knowledge of Birkshire Hathaway than any other financial podcast in the developed world. So, I think I can reduce my approach to two words that every hardcore Warren Buffett fan knows. And those two words are salad oil. >> I'll say it again because every hardcore Buffet I heard the little nod there. So, you you know those words, salad, oil. But for every Gen Z listener who hasn't memorized all the old school Warren Buffett stories, okay, what was the salad oil scandal? So back in ' 63, 1963, uh American Express had an asset lending operation, right, that made a large loan to Allied, vegetable, oil, or frying backed by tanks of vegetable oil. Unfortunately, Allied deceived American Express and others by filling those tanks primarily with salt water and a thin layer of vegetable oil on top. Right? So when the scandal broke, Allied went bankrupt. American Express was hit with claims almost equal to its end of year 1963 market capitalization. But Amex's uh warehouse lending business was incorporated as a separate entity. Right? So Buffett conducted great due diligence and made sure that Amex's poor travelers checks and budding credit card operation uh had not lost the confidence support of retail customers, businesses and banks, right? It had not. So Buffett's partnership bought 5% of American Express as it fell in reaction to the scandal. You know, sad oil investing or as I sometimes put it like non-operational turnaround investing is like buying like a publicly traded stock when the valuation is being hit or held back by something outside its core business operations. Right? I've done it with Expel in 2016 because of the 3M patent lawsuit. Uh I've done it with alternative asset managers in 2013 and later actually when their K1 partnership structure uh kept valuations low. Uh I've done it with CME and Mastercard which were far from profit maximizing prior prior to ipoing uh because of their cooperative ownership structures. But I think there there are two other lessons I think from the AX solid oil scandal which I think are crucial for fundamental investors. First uh you know value investing to me isn't necessarily low PE or like low price to book or low price to cash flow. I mean, I've read that that Buffett bought this Amex stake in 64 between 35 and $38, but also read that his AX position was bought at closer to, you know, $41 per share. So, like Amex reported $2.52, uh, in the early 1963, uh, you know, before the sell scandal, uh, the stock was trading around $63. Like, even at Buffett's purchase, uh, price, Amex was trading like in line with the S&P 500 at the time. Uh second, you know, should you be a value investor like or a growth investor? I think the best opportunities tell you the answer. Value of growth, I think the answer is yes. Uh again, consider American Express when Buffett bought it in 1964. Travelers checks and money orders were top two segments, but you've got this amazing young credit card operations, too. Uh and actually, I have a I just want to read you a a few lines from the 1964 AX annual report. about the credit card operation because I I think they're hilarious. Uh if for like if you like geek out on like on investing uh for the American Express credit card, 1964 was a year of unprecedented growth. Uh billings total 344 million, a remarkable 42% increase over 19 over 242 million build in 1963. Total number of cards in force at the year end increased 20%. And this is the money line, right? These increases were the largest of the last 5 years, strengthening our conviction that the market for this comprehensive credit instrument is far from saturated, right? In 1964, it's just it's just hilarious. Um, so yeah, to me like when you get these rare opportunities, you know, combining like value and growth as I experienced with Expel, you have to take advantage, right? You have to follow the bottom line, you know, be greedy when others are fearful. Now may uses like a few performance figures my younger son's utma to illustrate the formentioned points right I'm using his account record because it's a bit less concentrated more conservative and and the cash flows are frankly just easier to track I'm not going to refer to the real real dollar amounts but I'll use like real percentages and ratios right we put a dollar in mid 2006 a dollar in each in January 2007 and 2008 and 50 cents in January 2009 so $3.50 invested in four different calendar years. Okay. Is in in the S&P dividends reinvested that 350 turns into about $23.65 as in the end of like June June of this year, right? No taxes, ETF management fees or withdrawals apply, right? The 2006, 2007, 2008, you know, dollar CAG in the tens or so. Uh that lucky 50 cents invested in early 2009 earned about 14.6% 6% through June in the S&P 500. Now, my son's portfolio turned that 350 into $70 at the end of June, right? That's about a 17.5% CARE. By the way, that's with all the dividends and realized capital gains taxes paid out of the account, right? Also, because we wanted him to have some skin in the game, we withdrew some of his UTM money to pay for part of his private high school education. So, it's really not apples to apples with the S&P 500, but there's but there's one hitch. Those returns are based on the premise that his expel investment went to zero, right? That did not happen. So include those expel returns or the returns of positions purchase a with his after tax expel proceeds and the portfolio turns 350 into $130. So that's that's about a 21.7 tag or net net of tax realized you know gains uh despite some tuition withdrawals from mid 2006 to June 2025. I think it's it's a pretty solid job. Now, this is a portfolio that holds it, but it also holds, you know, Blackstone, Apollo, Aries, the alts, Mastercard, which we bought in 2006, Visa, which we bought in 2010, CME, ICE from 2008, uh, and some micro caps and small caps like a company called Hype and Theon and Nordst, and a few other micro caps and small caps. I I just can't disclose today. So I I think you know this is like a stard oil investing portfolio and I think it can be applied to all sorts of assets. You know for my son's upma my goal is an 8020 result. 80% of investments should outperform the S&P 500. So that this was like a later entry lower risk but also like lower reward approach. Uh you know so I'll pause there. I certainly want to talk about why I like micro caps and small caps and also why the I see the opportunity set going forward at least for me which makes my historical returns difficult to replicate. But I can I can go on and talk about micro caps or we can pause and see maybe where some of your listeners are are uh are handling from today. Toby, >> I thought the uh 8020 was 80% of the portfolio has to do better than 20% IRRa. Uh yeah, it kind of kind of maybe historically worked out that way, but but uh I just want to put a little context. I know there's so many like professional investors come on and they can't talk about their records. Um I just have my own just family money. So I thought maybe we just put out there at least one account give people a little bit of context also to show that you know sometimes like you know the difference between 17 and 21 I mean just a few percentage points but over time it really adds up the difference between like you know like $70 and and and you know like $130. It's it's it's a dramatic difference. Um but happy to go to talk about micro caps and small caps if you don't mind. Jason, um, let's just talk about, so Amex was going through a, uh, a crisis not related to its main business. It was this secondary business where they were, >> uh, issuing warehouse receipts for order they supposedly had stored in their warehouses. >> Meanwhile, they've got this >> credit card franchise. And the question for Buffett is, are people still accepting the credit cards? because now there's potentially there's this credit risk that >> the vendor doesn't get paid. And so they're like, "Ah, do do we continue to accept this or not?" He goes and sits in restaurants and discovers that people, you know, are basically completely oblivious to this thing going on. And so he thinks it's it's a pretty good bet. My question is for Expel. So Expel is a slightly different situation where it's a newer business. um they have similar sort of crisis but more directly related to their core business. So how did you think through the the expel issue and the crisis and how can you just talk to us a little bit about expel? >> Yeah, I I think we could uh we could talk about expel. Um what I can say is that um uh I was I was very fortunate to team up with another investor uh Locktock and Barrel uh who was also a micro cap club member and who's also a patent attorney. Um and in my business life I submitted my first US utility patent application at age 21. Um so and I've sued and been sued for patent infringement. So we we made a good team uh and by the way I always say lockstock and barrel deserves the lion share of the credit for for expel. So what what we did uh to try and like understand the situation better. Uh we brought samples of expel paint protection film after 3M sued expel. We sent it out to a laboratory to be deconstructed. uh determined that expelled film did not violate 3M's patents and further determined you know through our own analysis that that 3M's patent they say pay protection film patents were were very weak. Um so you see for those those two things determining that 3M's patents were were very weak and also determining that that 3M's patent that Expel's film did not violate 3M's patents gave us a lot of confidence. Now 3M is a giant, right? Expel is a tiny company. So there's always the potential that even if you have all the facts on your side, you know, things can things can go wrong, right? And uh as you probably know, um uh Buffett sized the Amech position, I think around 18% or so of his of his Buffett partnership. Uh and and honestly, I did the same thing with with Amex. I sized about 18% of of my my assets at the time. Um, but I can tell you that after I received that chemical analysis report in mid April 2016, I really stepped up my purchase of Expel shares the day I received that report. Right? So from April 13th, April 13, 2016 through November 25, 2016, I personally purchased 40% of the Expel shares that traded on this primary exchange, uh the venture exchange up in up in Canada. Now, that sounds like a lot. Uh but 40% of 1,600,000 shares is still not that many shares. And those 1.6 1,656,795 shares that traded over seven months or so. That only added up to $1.8 million, right? So, again, we we talk about like micro cap opportunity and and illiquidity. Um, you know, there's so many people like they they love the expel story, right? they they love the the uh you know maybe the dream I wish I had expel the opportunity was there but it wasn't huge right um now in the first uh the lawsuit went public in December 30th 2015 through the end of of 2016 there were 4.4 million shares that traded but in the first 10 trading days 1.4 4 million shares traded. Uh but they were purchased so quickly after the lawsuit. Is that really investing or is that like speculation in like paint protection film sardines really at that point? >> Um so you know and one other thing that I think people forget is that you know it was very fortunate for me that that lock barrel that mid 2015 there was like a bare market for micro caps particularly up in Canada. Uh and expel had like disappointed unofficial guidance in late 2015 right before the lawsuit. So in 2015, Expel was trading above about $33 before the mis misguidance and micro cap recession and lawsuit, right? Which nothing would be wrong with 11 to 12 bagger, right, to the current price, but it's not the same as the 30 or 40 or 50 bagger I have on my remaining shares um even at the current expel price because of that that collapse, right? Which gets us back to the the importance which I think every value investor knows of like purchase price, right? purchase price is so important even over a longer time period. So Jason, how then like I'm trying to think of a scenario where how do you get comfortable with the potential existential risk like you know that salad oil you know he he knew the business was still good but what if there had been and you knew that it was kind of bulkheaded based on the corporate structure but I'm thinking about like maybe would be a good like AIG for instance in 2008 you have a very good insurance business but you have this kind of derivatives trading arm that ended up kind of bringing the whole thing down. Um, you know, how do you how do you kind of separate what's actually an existential cris, you know, like could kill the company and what is sort of more headlines and and other over and above just I guess due diligence and then position sizing like for the managing that risk. I'm going to give you a sort of like like a like an odd answer and it's it's sort of tied to the um it's tied to the the numbers when I broke out expelled let's say for my uh my son's utma and like the non-expel like saying like okay what what would happen if it went to zero you know I think ironically enough like if you people know if they're a pretty good investor and and even if it went to zero okay I I felt that I still could compound money at a very good rate. Um, and I wasn't putting in like 60 or 70 or 80%. I'm not I'm not one of these like young Turks who just could put in, you know, 90% in there and >> yolo >> and yolo, right? Uh, you know, I was in my like late 30s or early 40s, you know, build up some assets. I can't I can't is it I I can't play Candyland or whatever and go back to or shoot some ladders and go all the way back to the bottom anymore. No, I just I just I'm just I I can't do that, right? Um I I think you know, honestly, Jake, I I don't know if you know that's why you size things, right? You know, in some ways, right? There's there's no way of like handling all the risks. Uh and everybody knows like a level of concentration they're they're com, you know, they're comfortable with. And I will say I it's a difference between I think sizing it a cost like I did and also just letting it run after some of these things were were resolved you know into a much larger position. Um so but but I I don't have a a great answer for you Jake. >> I think that's a pretty good answer. I I I like that I like that approach towards sizing. Helps you deal with the uh deal with that sort of risk. Uh talk to us a little bit about micro caps. What's the what's the attraction there? That's distract there. That's that's the uh that's the question and we uh >> I run a micro cap fund too, guys. Just I'm not >> Yeah, I understand you know. Um so yeah. Yeah. >> So, so you know I'm really asking you why should >> the attraction there just sitting there like what is the attraction? Let me come up with something here. Damn it. >> Help me out. >> Help me out. Right. Look, let me let me then let me do the uh you know when in doubt always munger something. Right. So let me invert the question and say what hasn't changed in the micro cap world over the past 10 years and then I'll talk a little bit about what what has changed in the micro cap world according to me. >> That's even better. So I think the micro cap world um I think particularly in the United States and Canada still resembles Thomas Hobs's uh like famous line like nasty brutish and short right >> so here's some simple data that like I just from a from a screening and data tool that we use like portfolio 123 for the last fiscal year I think there about maybe 361 out of 500 S&P 500 companies that generated a return on equity of 10% or better uh for micro caps between 10 and400 million US dollars on market capitalizations with their primary exchange in the USA or or Canada only 526 out of like 3,154 generated an ROE of 10% or more. So that's like 16.6% of companies and and frankly those figures make micro caps look good. There are 29 S&P 500 companies with negative common equity but generated by positive net income. So you find companies like AutoZone or low is among them, right? But you know so much common stock over the years the shareholder equity is is negative and their ROE is basically infinite right but there's companies like Fizer which maybe they earned a little bit less than a 10% ROE in 2024 but because of like sizable goodwill and intangibles on their balance sheet now among the 526 USA and Canadian market caps with an ROE of above 10 you'll find 55 names with a positive ROE and a negative common equity they're like these are not auto zels right they're not auto cells you're like you see like a perennially money losing company with negative shareholder equity with like one year of positive accounting profit. For example, there's like Victor Mining Group with a $50 million market cap and made $101,000 in net income in 2024 after years of losses and has negative share earn equity of like negative 1.2 million, right? You know, and for the record, I do not own any shares like Victor Mining Industry Group, right? So, please please don't go out there and say like ATRA likes it, you know? No. Okay. So, you know, by the way, the ROE figures are not much improvable with larger micro caps, but to be fair, these figures are using reported earnings, which may or may not be helpful for some micro caps, small caps, and we'll talk about that a little later. So, the ROIs aren't aren't great. Uh, and what's also challenging is persistence, right? Even back then or now, a lot of micro caps disappoint a good percentage of their investors who quite frankly expected more and faster than what they're receiving, right? So, and Ian's talked about this too a little bit, like micro caps often string together a few quarters of topline growth, a few quarters of operating margin improvement. They race ahead, they hit the next pothole, and they bend an alloy wheel, and you know, there they sit, right? So, they're very well suited for six months to two-year holding periods. And to be fair, at the right price, right, you can make good money buying a money- losing unknown company that graduates to break even or profit mediocrity, right? You can make three, five, 10 times your money in some cases buying something that turns out turns into like a 10% ROE company. But to make that 10 times, I think you really probably had to exit when expectations were greater than a long-term 10% RO biz, right? You're taking advantage of that that overexuberant expectation. I think in some ways like the fact like many USA and Canadian micro caps are so poorly suited for like longerterm investors so often given to like fits and starts so little populated with like long-term winners. This actually creates an opportunity for like investors like me, right? The greatest returning micro caps over the long haul are rarely owned by those who like originally own their shares because it takes a different SC of SE skills to know which micro cap is like worth suffering for. Um so I I think you know what micro caps what has changed so micro caps are particularly well suited I think for the investing substack phenomenon right everybody loves to read about a new name right and there's so many like new to you names in the micro cap space you combine substacks with like chat GPT and it's easier than ever to do like research and publish like respectable respectable respectable articles about market caps like one after another um I think it's also like another pushpull dynamic. Um, you know, like more attention like additional investors chasing after the same name, uh, potentially pushing up prices is not normally associated with higher long-term returns. But the micro cap space is not the large cap space, right? Micro caps in USA and Canada, particularly Canada as a group like net share issuers. So higher share prices could actually lead to lower levels of equity dilutions like every dollar raised. like it actually lower the cost of capital for micro caps. So and and I'm not saying there's a potential the micro cap community could see both higher share prices and more volume because of the substack phenomena and you know highly higher average daily volume also going to open more names like more hedge funds right so I think that potentially we could see like a sur style like reflexivity loop >> that helps micro caps you know perception shaping reality which sh you know shapes perception and so on um so that's how I see >> like lowering lowering the cost of a of a good write up then kind of puts more more companies on the potential menu of investors. >> Yes. Yes. You know, so there's I think it's this the Substack and I think in AI are really um are really changing things. Um and and honestly I think if you don't mind where where is it here? Yes. What and the high-tech high-tech technology here, right? We got this >> this chart here which I think you've all seen but I'll just describe right. It's the the torsten slack chart highlighting the you know 40% of Russell 2000 companies that reported negative trending 12 months earnings. We all know it if you're if you're a a value guy looking for evidence of an overvalued market like maybe someone here, right? Or if you're a small cap investor uh like myself, like you've seen that chart, you know that chart. You know, you like you you know you you think about it before you go to bed at night. Um, so earlier I I highlighted some of the like 10% ROE threshold figures for micro caps in like you know the S&P 500 but I also like maybe maybe it's not as much meaning as it may seem. So I I want to give credit to like Alger Management for publishing an article, but what I believe is like the most important academic paper for small cap and micro cap investors in many years. And this this this paper has a really sexy title, reassessed earnings with reassessed earnings with capitalized intangibles. Right now we all know that the percentage of company uh investment in intangibles versus tangibles has been growing dramatically these past decades. Right? GAP treats tangibles and tangible investments very differently. Right? Expensing typically versus capitalizing in many cases. Now this wonderfully named academic paper what it does it capitalizes intangible investments and rightly offsets uh a portion of the advert advertising past intangible spending. So the net effect is uh earnings as a percentage of revenue improves 900 bips. The effect is magnified for the small cortile stocks in the study. A 2200 bips improvement. So what that what that means is six nearly 60% of the smallest cortile are reclassified as profitable from unprofitable thanks to capitalizing intangibles. Um and what's also interesting to know wis to me is that the the stock market performance of those gap losers but capitalized profitable firms produces returns 1600 basis points higher than the overall universe in the study. >> So and plus since they reclassify intangibles um they shipped them to the investing section out out of the uh vecting se section of the uh cash flow statement. >> Yeah. out of the from the operating it also changes the the operating cash flow to look look much more impressive. So what I think what we have here in is in the near future I think AI tools are going to allow investors to much more easily manipulate gap financial statements to unlock more accurate economic earnings. And this is what micro cap and small cap uh have historically lacked, right? Uh which is being like remedyed by AI and Substacks, right? They need effective but affordable tools to identify tiny stock opportunities and broadcast them to a wider audience. So I think that's really what is changing in the micro cap world, right? Before quality stock coverage was something only the big boy firms covering big boy stocks could manage. Um, so to me this is like the biggest difference in the last 5 to 10 years for the micro cap community. Of course the big risk is like illquidity and cheap tools also attract charlatans of all sorts, right? So we're going to have to see how this plays out. >> Yeah. The there's the amount of noise that can be created is going to just go off the charts. >> Yes. Right. And you already see this because human nature doesn't change, right Jake? I mean all the tools can change and there's there's always going to be a desire for you know someone who promises um you know tremendous returns in a short period of time right and if that attracts more more eyeballs if that attracts more subscriptions then you know garbage in garbage out. >> Yeah. Or you could you could camp out outside Drake's house with a uh whiteboard too. I saw that that seems to to buy some. There was there was some there was some like Twitter investor who like wrote a like thread about me just like a few days ago um who like like characterized my like expel investment as like a thousand bagger right you know and and I I corrected him as no it's it's not that but nobody reads like >> 950 at the most guy >> exactly exactly you know it's like you know I I always thought that you know I mean I and I'm getting all this attention I didn't have to take my clothes off so that's it's it's you one hand it's like it's cool and interesting but sometimes I like I cringe a little bit because like like the important messages are being lost right about like risk control about the importance of prices being paid uh you know diversification at some level um these are all important things you know and and uh um I started off reading a lot of John Nef and nobody even knows who John Nef you know you know you know you guys nod your head you know Vanguard Windsor at one point the just part of the country. Uh, nobody cares about these guys any, right? >> Just just just the three of us and about probably one/4 of your listeners. >> Uh, Jason, we usually do at the top of the hour uh some veggies from Jake. I'm just going to do a quick I'll do a quick shout out to all the folks at home. Uh, Tallahassee, what's up? Pedika, Israel, Maxin, Valpare, how's it? Cleveland, Lausan, Switzerland, Bethesda, Brandon, Mississippi, Lewis, Delaware. Thanks for spelling it out for me. Breton, Boise, Houston, Jupiter, Florida. Good on you, Sam. You've already won there. Belleview, Nashville, Toronto, Snomish, Nashville, Tmacula, Sardinia, Italy, >> Poland. >> Hopefully I'm saying these correctly. >> There's always a first time. AI AI Toby is going to pronounce them all correctly in about three years. >> God, wouldn't that be great? I'll hit the beach. >> Mu London, Minnesota. Last one. All right, JT, hit us with the vegetables. >> All right. Well, you know, knowing that Jason was coming on and that he he has a reputation that is perhaps not always deserved as he was just saying as far as like being this micro cap only kind of investor. Um, and I knew that that wasn't totally true either. Uh, but I wanted to focus on something in the smalls kind of category of potential veggies. Uh, maybe more like peas or something. Uh, but let let me set the scene. Uh, we're underwater at a at a coral reef and sharks are cruising by like these shadowy submarines and parrot fish are grazing leisurely on coral and and a panopoly of fish are just swimming around in this messing chaos of color and motion and then something quite strange happens. A shark slows down and hovers and then it opens its mouth and into the mouth swims this tiny fish and it's called a cleaner rass. Wr. And this bold little thing wiggles in and starts nibbling parasites off the shark's gums and gills. And the shark doesn't chomped down on it. It just waits patiently, almost like it had booked a dental appointment. And what in the evolutionary world is going on here? Uh, and before we untangle that, we will give you some fun facts about cleaner rases. Uh, they're what's known as sequential hemaphrodites. uh meaning most of them are born female, but if the dominant male disappears for whatever reason, the biggest female in the group will literally change sex and take his role. So, they're bringing a whole new meaning to the term next man up. Um, the cleaner asses also punch way above their weight in in cognition. Experiments suggest they can recognize themselves in mirrors, which is a sign of self-awareness. It's quite rare in animals. Um, evolution gave them this sharper social intelligence because their livelihood really depends on reputation and trust. And there might even be clues in our own intelligence about, you know, our our minds being sharpened by the demands of of being so social. Uh, like we had to figure out who was trying to trick us or and who wasn't and who, you know, coming up with good ways to trick each other. Uh, young rasses learn how to clean by watching the adults. Uh, so they even start with practice clients like smaller, less dangerous fish before moving on to sharks and groupers. So there's actually like cultural transmission like skills passed down, not just encoded in DNA like most animals. Uh, so it's like this apprenticeship reef style. So as you know, like nature is very rarely this feel-good story. It's it's red and tooth and claw. And so why does an apex predator like a shark capable of obliterating this little rass in a nancond suppress its instinct to chomp down? And it's because that tiny fish is is quite useful. It's it's indispensable even. And it's been performing these functions for millions of years, generation after generation. And the rass offers a service the shark can't perform itself with this parasite removal. And without them, you know, these parasites spread, the fish populations weaken, the whole reef might get sicker and even collapse. So, you wouldn't think it, but this quiet mutualism is a pillar of the ecosystem's resilience. And now, let's attempt to torture this analogy uh into place. >> This is the best part. >> Yeah. >> So, you know, replace sharks with Fortune 500 companies and replace the RAS RA ras with these micro cap businesses. So, these tiny companies, you know, they don't necessarily try to beat the sharks. They're too small. They know that they could never outmuscle Amazon or Tesla, but instead they find their niche, tiny but vital role and and a cleaning station kind of in an economic grief. And just like the Razes, they survive by being indispensable. So, let's maintain a little bit of sobriety here. Like many micro caps are landmines. They're they overpromise, underdel. Some are penny stock casino chips or zombie businesses kept alive by dilution. Uh, and some are the investing equivalent of of a false cleaner fish, which is apparently the species that mimics the rass and in look and behavior, but then it sneaks in and it starts like biting off the scales of the the fish it's supposed to be servicing. Uh, so, you know, it impersonates the real business value to get that kind of quick hit. And I think you probably see that a fair amount. So, yes, due diligence critical and and you know, most micro caps will never grow into these giants. But that's not really the point. Like what we might seek is those whose utility to the shark is so high it becomes symbiotic fixture in the environment. Uh and just because a firm is small doesn't mean it's it's not significant. Small businesses make up 99.9% of the US businesses. It's a very long tale and they employ nearly half of America's workforce. They they are the reef. Uh and small mid-size enterprises defined as firms with fewer than 500 employees produce around 44% of US output. So almost half the economy. So the Fortune 500 companies dominate stock indexes, you know, but the real scaffolding of America's economy is built on millions of small firms. So they're kind of the connective tissue uh that kind of keep the sharks healthy, to be honest. And what's what's equally striking is is how dynamic these these small firms are. Since 2020, amid pandemics, inflation, supply chain shocks, they've created 2.6 million net new jobs. And much of this coming from these younger firms that are less than 5 years old. So um these the cleaner assasses remind us that survival is not just about being big. It's it's about being indispensable and that can mean you can be indispensable at any size. Uh so it's finding your niche embedding delivering steady reliable value and micro caps that embody this kind of model. They may not scale to the moon but they they can certainly endure and be be great long-term businesses to own. So, you know, in investing, we're often everyone is chasing scale, especially these days. Uh, and you know, they they want that next giant, that next shark. Uh, but sometimes the best returns can come from spotting the rasses in the world. These tiny firms with niches so vital that the ecosystem sort of bends around them. And survival isn't always about size. It's it's really also about that indispensability. >> Good returns from cleaner rases. >> Cleaner rashes. Yeah, I think I'm here. the the the evolution of that to the micro cap investors. We went from ras to dumbass. But but we're but we uh uh but we're out there. We're making it. >> I think that was sperm well worthy. JT >> was it? Okay, good. >> Yeah, I think I think >> that was a good one. I like that one. I like that one. >> We might want to hear more about cleaner assasses in the future. >> Well, I've given 125% of my knowledge base about cleaner assasses at this point. If that's it, you're you're all out of harass. Okay. >> Jason, do do you think if there's a lot of attention brought on smaller micro cap in the way that you're suggesting with like chat GPT and and Substacks that some of the return goes away? I mean, if you're demonstrabably able to like sift through and identify the the nuggets of gold in there. Does that bother you? >> I think I I think I think over time it it it does. I think there's there's always a a a um like a like a challenge, right? I mean the I think but the the offset is you know thanks to you know interactive brokers thanks to Zoom thanks to the same same tools uh you know micro cap investing has turned from a uh a USA you know in Canada to really a worldwide search right our our net is much larger you know we're uh we're looking at Swedish and Polish and tiny Japanese uh rats right uh and I think that is that is perhaps the the offset that uh you you always want to be somebody any any investor in somebody's um it's always is always a difference always a struggle like wait what what what things don't you change or what do you change um and and Munger has has talked about this like what ponds do you want to fish in right trying to bring us back to the uh uh sort of ca analogy here so you know we're finding that you know a lot more in like looking at you know opportunities in in Europe uh and even in Japan right if you told me uh 20 years ago that I would be like spending part of my time in 2025 studying the Japanese divorce market. You know, I would I would have, you know, I would have laughed, right? But I what I found like, you know, with with some age and some wisdom is that what what makes people laugh today sometimes can make them cry tomorrow because that's the opportunity they they missed. >> Yeah. >> Right. uh particularly in the micro cache. You end up with these weird little like little niches. Um uh and and uh and and it's it's it's it's it's very fascinating. That's that's half the fun of being a micro cap investor going down these these rabbit holes uh and doing a lot of research. >> What do you think of the opportunity in Japan? >> You know, Japan, I have to I have to admit, you know, I was I was very cynical about Japan for for many years. And this is actually one of the downsides of experience, right? Right? I've seen so many times when these promises of like Japanese, you know, they're going to, you know, this is this is the time Japan really gets their acting gear, right? And it's like, forget about it, right? And so, you know, for a long time, um, I I just avoided it. And I still think, you know, there's a lot of opportunities in in you looking for, uh, you know, something that that trades at a 14 PE but an EV ID of like two because they have all this cash in the balance sheet and there'll be some process by which they get cash back. But honestly, what what what we're doing we're focusing on is thinking about, okay, what's the next step? Okay, once these these value opportunities start to go away, once the average valuation goes up, I think there's actually a number of of micro cap and small cap really good businesses which are just not being paid attention to, right? Maybe they trade at a 13 times PE or or or 11 times, you know, EVID, which everybody like every four in Japan says, "Why should I pay up? Why should I pay for that when I get something at three?" >> Yeah. But they really should be trading because they have such great opportunities ahead of them and they're growing so quickly and their return invested capital is so high. They should be trading at at much higher rates and there's maybe there's an opportunity there for like a very long long run. And that's really like our game, right? So it comes back to like okay where where can I apply my skill set you know where in the world can I apply my skill set and now I'm starting to see opportunities in Japan and that's probably because of like again these chat GPT type tools like I could translate things and get much more effectively and get much more information in English than I used to and then you combine that with like expert expert interviews and then okay now may maybe we can play in that market a little bit. Do you have any view on that effort by the uh uh the exchange in the in the in Japan to you know there's trying to get their stock price above book value. There's some penalty for not doing that or some social stigmatism for not doing that but no other >> I've seen you know I think it's I mean it seems to be working I'm not I'm not an expert in that. Uh I I've seen like there maybe one reference to like some some company that gave maybe a uh a dividend not based on market capital but based on a percentage of their book value. Uh and since the book value was so much greater than the than the than the market cap like it immediately like moved the stock up. Um, and so I I think there's I I think that's finally I mean finally starting to get resolved, which is I think is interesting, but again I I it's not really the the area that we're like really playing in. We're we're we're fascinated with Japanese divorces here at Hudson 215 Capital. Right. What can you tell us about Japanese divorces without >> What I can tell you about Japanese divorces is that um um the again sometimes it's I mean um what's going on in Japan is that there was a loosening of it used to be very very difficult to be become an attorney extremely difficult and then they they loosened the standard some because it was just too difficult and this is like maybe like 10 15 years ago and so there was a a growth in the number of of attorneys right Uh at the same time >> that's when it all went downhill >> at the same time at the same time you also have um u you know like in Japan is is aging right and you have divorces which like very simple divorces you don't even need lawyers in Japan but there's more complex divorces that are occurring because people getting divorced also at at a at a later age there much more like people getting divorced at age 40 or 50 or even 60 right where now you have to really split assets uh you know there's sometimes children involved um and and so that's there in essence you also now need attorneys are are competing for for like divorce clients and so that's creating an opportunity for for basically uh you know websites which are are just collecting you know like basically a collection of of divorce attorneys that people who are looking for divorce you go on to and and then hook you know they hopefully get hooked up with a particular attorney. So again, it's it's a weird little niche. Um, but you know, these these and it's not just divorce attorneys, it's also other other attorneys too. But the divorce attorneys seem to be uh one of them because a corporate attorney like a leader leading part because a corporate attorney sometimes you have reputation, right? Attorney can get therefore doesn't need like advertise to get new clients. Uh divorce attorneys is there's more advertising necessary, right? It's not 16 you don't have like 16 friends who all got, you know, are getting divorced or have gotten divorced recently. you may not even want to talk about it with any of your friends yet, right? So you you you try and you know use like search engines and something like that a little bit more. So we get back to these tiny little weird markets, right? Which are which are opportunity and that's that's that's my bread and butter. >> Is are you sort of looking outside of the US because you think the US is picked over or expensive or or is there any reason for that? >> Well, you know, when when you get back to it, right, I mean the challenge is is like we put in let's say 1.8 8 million into expel, right? Uh, and that was, you know, less than 20% of our our assets at the time. Well, if I want to put the same amount of of of if I put the same amount of money into something, that's like less than 2%. Right? So, Expel was a magic unicorn, right? How do you find 20 magic unicorns or 10 magic unicorns? And really, the answer is you don't. um you know um and and I think there's a there's a temptation uh when you win the Super Bowl, right? You want to get back to the Super Bowl, right? You love that feeling of like winning the Super Bowl. Uh but but there's so many dynasties of one or dynasties of two, right? Because because all these competing human emotions uh and greed and people, you know, the desire for credit comes into play. So, you know, I I really don't want to have to move to look at larger companies, but I do I do need more opportunities, right? So, that's that's a reason to go abroad. And and frankly, there's just more profitable businesses abroad than there are here at the micro cap space or the sub 100 million, you know, market cap space. So, you know, it's the old Peter Lynch line like, you know, how do you go out of business, right? When you run out of cash, right? I I do not want to like invest, you know, uh, a lot of money into a a US money losing micro cap where I, you know, it's going to take me two months to get out, right? And so, you're like, you're like the obese fat man trying to squeeze your way through like a very narrow window in order to get out, right? You are it's not going to be pretty and you're going to get scratched up to hell, right? So, I have to I have to look abroad and and frankly my Why not use the advantages of of of size, you know, to to help me, right? Um, you know, one one of the things that I learned as a as a small businessman because we were like a small, you know, seven figure revenue business, our large customer, you know, fairly concentrated was like a multi-billion dollar entity, right? So you there are like so many little things you have to do and we yet we we found somehow somehow found a way to increase like gross margins from like mid-30s to like low 50s right technically they should have been squeezing us right it it all comes down to like creativity like you know 10 15 20 little things that you try and put together like to create opportunity so you know my kids are older right I'm a I'm a 50-year-old like I'm dying my beard will be may may need to dye eyes beard but it's not doing it. Uh so you know why not get a place in Europe that I can use as base operations right? you know visiting companies is so important to me so important to my style right I can go there I can spend time there I can just you know if as a UN investor if you're here and you want to visit you know Europe you gota like you want to visit six companies seven companies you got to do like three months in advance try and schedule it all together no being you know in Europe and you know just do things a little easier a little quicker you know hopefully find that company a little sooner right and that's that's what occurred with this the company called hype which is a nicotine pouch uh distributor right We were one of the first outside investors to go. We walk in, the lobby has a ping pong table, right? And like this is a tech company. This just happens to be a nicotine. This is not really a nicotine business, right? There was a another and this is an odd one. Okay. Another CEO in in in Europe sitting across them at at a conference table um you know like basically diagonally. And this guy who was answering our question and he was like so immersed in answering the question. He like but while he was like answering the question he didn't even know what else was going on. He was like so immersed in giving the answer. Takes off his shoe, takes off his sock, starts like picking at his toes like little toe flex or like just like landing on me and like you know on Zoom you don't get this right but like you want a immersed toe CEO. Some guys like so focused on the business he doesn't realize like little like tow jam and toe fleck is like going off into the world and you know and I I hate to say it because you know you know that that that that tow jam investment is like a multi-bank right so >> put that on your checklist everybody >> put it on put it on the checklist right you know so unfortunately now there's going to be some CEO who like goes to like like the micro cap club conference now takes office you know like you know shoe and does the same thing just to project that, right? So, uh uh it only it only can be used one time. >> Jason, what do you think about the argument that there's been this um gradual worsening of the micro cap opportunity because either there just haven't been as many coming in because either SA and Oxley or there companies are held privately for longer so they go public when they're bigger or private equity is picking out the good ideas from from that. Have you have you seen that in in practice? >> I think it's worse and always getting worseer. Uh look, I mean I think we we all we all know that line and I do see uh you know some examples in Canada which I think are very disturbing uh in some ways that that like micro cap companies they've done a few raises they're finally breaking even finally going to be you know hopefully going on the that that that finally exponential and then PE comes in takes them out management gets a good piece of the action too right and meanwhile So you know small investors like us are the in essence the bag holders funding this company through the through the losses and the PE firm is going to get the gains. So I I think that's that is a that is a risk. Uh that is a reality. Um it's again it's a reason why I go into like Sweden which I think you need like 90% of shareholders to agree in order to be taken out. Uh and I think that's very advantageous to say you know for for investors like myself overall. But I I think I I agree with you. uh or agree with the premise that that's that's that's a problem, right? And hopefully what you do is you offset it by going internationally. >> Do you feel like there are other countries around the world that have you feel comfortable as an outside shareholder in Japan and Sweden or Switzerland? Sweden, Sweden in particular, I think Sweden actually has a a large number of individual companies uh which I think are are small but profitm. Um I think Sweden you have a lot of CEOs who speak English. You also have a lot of CEOs tend to be very I hate to say it a little more honest in some ways than than American Michael Keap CEOs who tend to be a little bit too PT Barnum Bailey, you know. >> Yeah. >> Kind of kind of attitudes. Um, I was I was talking to like a Swedish CEO maybe a couple years ago and and they had a new product and this like did the first installation in in in a in a garage um in a garage renovation, a commercial garage renovation. He's like, "So, how does how's it going?" He's like, "It's going terrible. We really screwed up." You know, uh um sometimes you don't get that kind of honesty with with uh American micro cap CEOs. Um, so I I think I think there's a lot of of of of foreign CEOs and I also didn't make another another statement here. I I think American management teams compared to the price you see for like foreign manager teams, I think we're in some ways grossly overpaid at the micro cap, small cap level. And that's partly because of the the pay level of the of the large caps and the way it just oozes up. Um and so what you end up seeing therefore is sometimes a lot more uh equity dilution whether just from the need for a secondary sooner or just from more stock options or restricted stock given to management which you know you start diluting things to three or 4% a year uh you know and now it's you're turning a stock into an equity option right um you know timing really matters and I really don't want to invest in in a in a in a situation where I got to be right by uh by you know two three two days from now. >> Yeah. Especially if you're you're carving out 4% a year and it seems like they're not delivering on you know the operation results like why do you get this? >> Yeah. And then you just you just you know you watch yourself you know the way you lower your percentage of ownership is by getting diluted away right which is not exactly what what you what you want. So you know micro caps have always been like an not always but has been it's like an outlier situation right um you know you know you can invest you know throw 10 darts at S&P 500 companies um you know throw another 10 darts every year you know rebalance and you're probably going to retire okay you do that in the micro cap community you throw 10 darts at any micro cap stocks rebalance and you know next year >> would you like fries with that >> yes and now you're now you're a Walmart greeter Right. At age 60, not not even at age 65, right? Because you can start at 25. You you'll need to be a Walmart greet by age 29 because you'll be like bankrupt in like four years. >> What are what are some red flags for uh micro cap investors? While we're speaking about uh short paths to >> back to work. I see. Um >> what do you what do you really dislike? >> Too much equity issuance. Too much >> obviously too much too much equity issuance. You know, I I always I I prefer a smaller TAM, right? And maybe possibly dominating a smaller TAM rather than the um >> 1% of >> Chinese Chinese math and excuse my, you know, Chinese math uh PowerPoint that say we get 2% of this gigantic market, right? We're going to be, you know, 17 times larger than we are today, right? And for some reason the IR guys, they constantly like push those those those those kinds of presentations out. You think they would have learned? But but no. >> Any other red flags? >> Oh, uh I mean >> from experience maybe. from experience. I think the um um you know, one of the the maybe what I have not paid as much attention to uh in in the in in the past as I should have is like the importance of a of a board uh a decent board to a micro cap or at least not a bad board to a micro cap. Um I I >> every company >> did not >> every company but you know these especially these like these these tiny mind caps right the CEO has so much on their plate and they really you know they don't need another distraction or they or they need some help and so the board really is you know can can really be either a positive or or negative like uh you know m like magnifying element. I mean when there's when it's a it's a low mass and therefore inertia >> is low and any force acting on it is going to have more impact than typical. >> Right. Right. Absolutely. And and you see a lot of these these um you know sometimes you know these boards like they try and like micro caps like they try and attract like bign name experienced people on the board from like very large companies who have like no idea what it's like running like a little micro cap right because well you can't hand things off like your assistant who hands it off to their assistant who hands it off to their assistant >> right and I think that's the uh uh that's the thing I also like to talk to not just the CEO but at least the CFO or some other people in the uh in a in a micro cap because I find that uh you a lot of times you get a very you know a CEO is very very competent the question is can they build a team around that right in some ways you have to scale you know when I started off micro caps I have to I I honestly I started at first was more attracted to like high gross margin micro caps uh and I've now turned to more like low gross margin micro caps and the reason is at any given market cap that low gross margin market cap typically has like more employees. Um and so what I find is like seeing a company like okay at a $80 million market cap if you have like a hundred or 60 employees versus like a team of like 12 the 60 employee one you can see whether this the CEO knows how to scale in terms of hiring right knows knows how to delegate a little bit more at a at a at a given level of market capitalization. So I' I've sort of you know that's that's not neily true with with with uh with large caps when in some ways you know maybe you want like a 70 or 80% you know super high gross margin SAS kind of kind of situation but but micro caps are different. >> Yeah the 60 employees looking a little bit more to the future not sort of necessarily maximizing the returns on their current infrastructure whereas the smaller one is getting as much out of it as they possibly can. want to get it out there. But but you know I I you got to see you know boy like can you get escape velocity right that's always what it comes down to like market caps micro caps right can can this rocket ship actually take off or is it just going to go along and just you know come back down to earth and so any kind of little clue about escape velocity is is priceless obser like a hypothesis I'd curious what you think of this if I sort of imagine S&P 500 companies as They're probably all sort of like happy families culturally that they're, you know, all the same whereas, you know, the what is it? Toltoy, uh, you know, and >> and and unhappy families are all uniquely unhappy. Uh, but like that there's probably like higher variance of culture within the micro cap community relative to S&P 500, which I kind of feel like might look a lot more homogeneous culturally. I mean, you're never gonna have an S&P 500 CEO who takes off their shoe and socks and and like, you know, like, you know, dribbles little toe flex on you, right? I mean, that that doesn't that does not occur. Um, because they're like great politicians, right? In order to get up to that level, you have to have some political skill. Uh, but I think you're right. I think there's there's certainly I mean, there's absolutely more variance uh in in micro caps. Uh, you know, the the challenge is for a lot of young people who get into micro caps, right, to get the the lotto mentality. um there's a real desire to to get off, you know, I'm age 26 and I don't want to work in a job for the rest of my life. Um I want to be a full-time investor, right? So, you end up subconsciously being pulled to like lottery tickets because if in in some ways if one of them pays off now you're like in be a full-time investor, you know? I I uh I mean I didn't start becoming a full-time investor in my my 40s and everyone just thinks I'm nuts for doing so. But but I was working in the family business with my dad for many years. And and honestly, um I really enjoyed it. I I I loved working with my dad, you know, and there's something, I think, to be said for actually making something, not just, you know, trading, you know, which which is which is fine. It creates a lot of value for for the market, but you know, producing something for for actual customers to use, I think has a lot of just emotional value to me for many years. And I I didn't want to give that up. making payroll is like a real, you know, that's >> Yeah. And this is something to be something to be said to see, you know, an employee hopefully move on to something better in their life and, you know, um but yeah, it was it was a lot of fun, but you know, in essence, it was time to move on to a new chapter, too. >> Jason, uh we're coming up on time. If uh folks want to follow along with what you're doing or get in touch with you, what's the best way to do that? >> Yeah, Toby Carlile. No, >> no. I mean, they I uh you can find me at atrackk180 uh on Twitter. You can find me on on micro cap club under um you can search for Hudson 250 Capital World's Worst uh website and and uh you know, send me a message. >> Who's the website even for, Jason? It's just it's it's for the problem that I have here at Shake is that you know like you reach out to companies and they're used to certain structures. >> Okay. >> Right. Right. So if you say like your family office and you're set up a certain way and you know and have this website, okay, that somehow it gives you legitimacy. They they >> you know that's that's what it's always set up for just to get off. >> It's a beer just to get uh get them. >> It's just a beer. It's kind of like your mustache to give you a little bit of respectability. >> Yeah. You think that's what it does? >> But but serves no purpose. >> Theoretically. Theoretically, >> but my my my website is about as well developed as your mustache. I'll say that. >> There you go. I'll take it. >> Uh thanks so much, Jason. Incredible uh incredible lessons from >> No, I'm know you had a lot of fun and uh really really enjoyed it. >> We appreciate it. Thank you, JT. Any final words? >> I got nothing. >> Check out Journalytic, folks. Uh >> sure. >> Uh >> why not? We'll be back next week. Sbet time, same channel. See everybody then. Thanks. Peace.