Finding Great Leaders Early

My love affair with microcaps started 23 years ago when I traveled to meet the first microcap CEO I ever met face to face. The ability for a moron like me to sit across the table and ask questions was exhilarating. I felt like I had an edge. 

I don’t even remember what I asked him. I don’t even remember what he said. I just remember buying the stock and having it go up 15x in 14 months. This experience gave me the (false) confidence I needed to commit to microcaps. 

Instant success is a curse and a gift. The curse is you think luck is skill. The gift is you know it can be done. Then it’s a race to turn luck into skill before you lose it all.  

Since then, I’ve had hundreds of reps evaluating and investing in CEO’s and leaders. Yes, it takes time to put in the reps via interviews and conversations. But it takes the most time to build relationships with leaders who have produced outsized returns over the long-term (5+ years). I started to develop pattern recognition.

Microcaps are small businesses. Small businesses have shorter shelf lives than larger businesses. In microcap you see a lot of flash in the pan successes that do well for a season (1-2 years) and then fade back to mediocrity. 

All public CEO’s have a report card and it’s called a long-term stock chart. If you study the attributes and characteristics of leaders that outperformed the market over a 5-10+ year timeframe you start noticing certain behaviors. The behaviors can be distinctive even from those leaders that had success for only a season. 

The name of my fund is IFCM MicroCap Fund. The IFCM stands for Intelligent Fanatics Capital Management. The term Intelligent fanatic was first used by the late Charlie Munger to describe a great business builder. I even co-authored two books on the subject with my good friend Sean Iddings. Here is presentation I gave in 2019 – What Does An Intelligent Fanatic Look Like? . It’s always the people that attract us to a situation. Why? The moat of any small business is management.  

I recently hosted a webinar with my investors. I had the leaders of our top five holdings give presentations followed by Q&A with me, and then my investors had a chance to ask questions. It showcases our knowledge of the business but also our relationship with management. Our relationship with management is our edge. 

The market caps ranged from a $25 million market cap to $300 million market cap. $9 million in revenues to $70 million. Each one from a different industry, solving different problems for different customers. From the outside looking in they look like they have nothing in common. But if you zoom in closer we feel there is one thing they all have in common. They are run by exceptional people. Time will prove if I’m right. I know I will be wrong on some. 

Most long only quality focused stock pickers are looking for a founder/CEO with 10%+ ownership, a low salary, frugal, can operate a robust organization out of an 500 square foot office in a strip mall (sarcasm), that also has the resources to buy stock every quarter (also sarcasm). But it isn’t this simple. They can come in all shapes and sizes.

I’ve found over the years that potential intelligent fanatics can be put into four categories. Each category isn’t mutually exclusive, so there can be overlap across these four categories, but I’ve found them to be distinctive. 

1. Repeat Winners – These leaders are the easiest to find because their track record is in their resume. They have experience building small businesses into larger businesses. Their track record, reputation and experience allow them to move faster and better the next time they build something. 
2. Overlooked Superstar – These leaders often emerge during a turnaround. Perhaps the individual was the second in command of the business and now has the chance to step into the CEO seat. Perhaps the individual is someone that worked for a larger company that wants to make an impact on a smaller company. Perhaps the person has always been underestimated and has something to prove. They have something to prove to the world, prove to themselves, prove to the naysayers. Sometimes they don’t have a big ownership stake because they weren’t the founder, they aren’t rich, they didn’t get a chance at a founder’s cost basis position. They might only own 1-5% of the business but the fire within them is just as hot. 
3. Batman and Robin Combination – Whether it’s Warren Buffett and Charlie Munger, or Bill Gates and Paul Allen, or Larry Page and Sergey Brin – you see a lot of batman and robin success stories in business. They are rarely Co-CEO’s but different management roles, or management and board roles. You can find successful Batman and Robin combinations in microcap. They normally bring a ying and yang type of thought process (vision + detail oriented or aggressive + conservative) to the business and that are complimentary to decision making. 
4. First Time Founders/CEO’s – They might not have a long-term track record like repeat winners, but their track record of execution is happening in real time. You can see how they talk about the business, write about the business – you can see how thoughtful they were in crafting their team and board. It’s a mix of things combined with execution that are clues this individual could be an intelligent fanatic. 

One of our smaller positions is a Batman and Robin combination where Batman is the largest shareholder who financially backstopped the turnaround. Robin was the leader on the ground leading the turnaround. Robin only owns 1-2% of the company. Neither Batman nor Robin are the highest paid person in the company. They have the complete respect of the organization and you’ll see why. 

In a private email exchange I asked the "Robin" about his role in the turnaround and his response struck me..

“I have thought about this question myself.  Here is what I have come up with to explain what happened at our company:

An Olympic athlete becomes weak.  After visiting the doctor, he is diagnosed with cancer.  He goes to a surgeon who removes the cancer.  The athlete heals fully.  Then, after all that is over, the athlete trains very hard and wins a gold medal.  Was the surgeon responsible for the gold medal?  Of course not.  I am just a surgeon who removed a cancer, but the success this company has enjoyed is due to the hard work and dedication of the people here.  While I have had very little to do with that, I am still proud of my contributions, the most important of which is a focus on profit and not revenue. Old management and most people who are not educated in business focus on revenue and run into problems trying to achieve it.   

The direction the business took in terms of product development, sales and marketing strategy, and product fulfillment came from the people running these departments, not me.  I could be replaced by a decent financial person and this company would not miss a beat.”

You don't know the business, industry, or even the valuation, but you read the passage above and you want to buy the stock. Why? Because this is the type of leader you want to invest in. This is the type of leader you wish you had early in your career. This is the type of leader you want to become. Great leadership isn’t invisible. You just need to find them.  

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