Don’t Give Guidance

Ian Cassel Blog, Educational 7 Comments

One of the biggest mistakes I see microcap management teams make is giving guidance. Most microcap management teams believe that because ~75% of large(r) caps give guidance and 37% of those companies give short-term quarterly guidance, that they should as well. They are mistaken. In 2006, McKinsey & Company analyzed companies that issued guidance versus those that didn’t. They concluded guidance provided scant value, imposed a direct cost in management time, and fostered excessive short-term focus. As a full time private microcap investor, when I see a microcap management give guidance, it is a red flag that tells me they are not focused on the long-term.

I’d like to share with you part of my background as it will give further insight into my “no guidance” belief system:

In 2005, I was Getting Started and about to graduate from Villanova University with an MBA. The time leading up to graduation was very stressful. I was completely addicted to microcaps, but what was I going to do upon graduation? When you are young-passionate about microcaps and trying to build capital, the hardest decision is how to make a living doing what you love. Even the thought of working for a larger Wall Street firm made me want to throw up in my mouth.

During my two years at Villanova, I spent my excess time talking to management teams and other microcap investors. I didn’t apply for the traditional internships, so I felt I was more or less unemployable. A few months before graduation, I evaluated my options and chose the path that aligned best with my long-term objectives. I decided to work for an investor relations firm that catered to microcaps.

After six months on the job, I realized I didn’t really need the infrastructure the firm provided, so I formed my own advisory firm. I didn’t take any clients with me, so I started from scratch. I wanted to hand pick my clients like I did my investments. I watched my expenses like a hawk because I had to. My first year advising I made a whopping $19,000 in revenue. It didn’t matter though because I was in control, and I was doing things my way. I would rather earn $19,000 doing what I love than $190,000 working for someone else doing something I hate. My goal was to make enough money to support myself and give my portfolio time to snowball.

One thing I realized early on in my career was that microcap companies that gave guidance weren’t rewarded for doing so. In fact, it was a lose-lose scenario. All guidance did was set investor expectations and put management’s neck on the guillotine. Small microcap companies are owned mostly by retail investors. Retail investors need to let their minds wander in “potential”. When management sets expectations it kills the retail investors wandering mind. They get bored. It is much better to let investors do the work and set their own expectations. The other issue is there are so few real investors in the microcap space. Management cannot afford to be in a position to lose investors trust by not hitting guidance. How do you not lose investors trust and not set expectations? DON’T ISSUE GUIDANCE.

I advised a handful of companies between 2005-2008. A few went down, a few went nowhere, and a few became 10-baggers. “No Guidance publicly or privately!” is what I would preach to my advisory clients. I would drill this message into the executive’s skulls. Some listened to me, and some didn’t. One CEO I worked with really got it. He had this professional yet nonchalant demeanor that was sort of, “This is what is happening in the industry, this is what we are doing, this is how I think and see things, we are in the right place at the right time, I don’t know or care what we will earn next quarter, buy the stock if you want”.  The company didn’t issue guidance and missed analyst estimates four quarters in a row. It was the craziest thing because the stock actually rallied after every missed quarter. Investors and analysts still loved the company and management. They had no one to blame but themselves because they set the expectations, not the company.

In late 2008, I quit advising to become a full time private microcap investor.

Successful investing is difficult because everything about it is counterintuitive to human nature. Most investors do the wrong thing at the wrong time. The same thing can be said for management teams trying to increase shareholder value. It should be the goal of every company to have a full valuation. A fully valued share price opens doors for the business, increases morale among employees, and creates many other positive feedback loops. Many companies believe the way to increase shareholder value is through promotional IR campaigns, countless road shows, and telling investors everything they want to know. The irony is to get a fully valued share price you really need to do the opposite. It is important for management to be accessible but never to the extent it takes too much time away from the business. The best performing microcap companies focus on business execution and never tell investors everything they want to know (publicly or privately).

When I evaluate my past and present multi-bagger CEO’s they had an ever-present long-term focus. They were/are not interested in attracting short-term focused investors. Very few, if any, provided guidance of any kind. All guidance does is reinforce short-term thinking. No guidance requires investors to come to their own assumptions and expectations. It attracts a shareholder that is willing to dig deep to understand the businesses that they own. The short-term focused lazy investor will be quick to complain and say a lack of guidance is a reflection of management’s lack of understanding of the business. I would just say this: There is a reason why Warren Buffett, Sam Walton, Jamie Dimon, and many of the best managers of all time are vehemently opposed to guidance.

If microcap management teams want to attract quality long-term investors then they must communicate a long-term focus. It isn’t just management’s fault. It’s our job as shareholders to encourage long-term thinking in our management teams even if it’s against our short-term tendencies. We need to eliminate the influence of short-term investors on microcap management teams. We need to look in the mirror and become better investors ourselves (myself included}, which is one of the goals of the first ever MicroCap Leadership Summit. Next time you meet with a microcap management team look them in the eyes and tell them, “Don’t Give Guidance”.

MicroCapClub is an exclusive forum for experienced microcap investors focused on microcap companies (sub $300m market cap) trading on United States and Canadian markets. MicroCapClub was created to be a platform for experienced microcap investors to share and discuss stock ideas. MicroCapClub’s mission is to foster the highest quality microcap investor Community, produce Educational content for investors, and promote better Leadership in the microcap arena. If you are a passionate microcap investor, Join Us.

About the Author

Ian Cassel

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Ian is a full-time microcap investor. He is the founder of MicroCapClub, CIO of Intelligent Fanatics Capital Management, and co-founder of IntelligentFanatics.com. Ian started investing as a teenager and learned from losing his money over and over again. Microcap companies are the smallest public companies that exist, representing 48% of all public companies in North America. Berkshire Hathaway, Wal-Mart, Amgen, Netflix, and many others started as small microcap companies. Ian’s belief is the key to outsized returns is finding great companies early because all great companies started as small companies.

Comments 7

  1. Very true…. Most of micro-cap companies have volatile sales cycles due to very high growth, some are in triple digit growth mode, these are smaller businesses and sometime can easily miss targets or due to 1 single material even can crash their sales cycle or revenue cycle, so estimates or guidance is unnecessary at the stage of growth they are in. Also agree that the management team which can possible be 1 person acting as the CEO, CFO, PFO has enough on his/her plate. Resources have to be allocated wisely, guidance could be a distraction and unnecessary factor to confusing potential new investors. All the best….

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    Steve Martin said it best — “Be so good they can ‘t ignore you.”

    This should be management’s goal towards the business. The best investor relations strategy is when the business is so good it pulls investors in.

  3. Hi Ian,

    I got a question about companies that are unable to file their SEC filings on time. I was wondering what your opinion is on this matter. Most people see it as a red flag, but for some microcap companies who have limited resource and where the CEO is also the CFO and President, it looks like they just want a couple of extra days to work on their filings and save money. Would you see that as a legitimate reason to not file on time?

    Thanks

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  4. Hi Ian

    Just a quick question about companies that offer guidance. Do you simply not invest in companies that offer guidance??

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      I can think of three companies in the last 8 years that I invested in that issued guidance. All of them were losers. If I would find a business I liked and the management did issue guidance, I would try to influence them to stop.

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