How long will it Last?

In 1896, gold was discovered in the Klondike region of northwestern Canada. That small moment sparked one of the wildest gold rushes in history. Within a year, nearly 100,000 people from all over the world packed up their lives and headed north, hoping to strike it rich.

Most didn’t find gold. But one man didn’t just get rich, he became a legend.

His name was Alexander McDonald. People called him “Big Alex.” He wasn’t famous when he arrived in the Yukon. He was a strong, quiet man who had worked in mines most of his life. Born in Nova Scotia in 1859, McDonald had spent years digging in the ground for silver and gold, first in Canada, then in Colorado and Alaska. He never found much. But he learned something more valuable than gold, he learned how the mining business worked.

When McDonald arrived in the Klondike around 1895, he wasn’t looking to dig. He was looking to deal.

One day, he made a trade with a Russian prospector. For just a sack of flour and some bacon, McDonald got Claim 30 on Eldorado Creek. That patch of land turned out to be one of the richest gold spots in the whole region, producing up to $5,000 worth of gold a day.

But McDonald didn’t dig it himself.

Instead, he came up with a clever idea. He let other miners dig on his land, and in return, they gave him half of whatever gold they found. This system, called a “lay”, made him rich fast. He didn’t have to swing a pickaxe. He just collected gold from miners working on his land.

Soon, others copied his method. But McDonald had a head start. He used the gold from Claim 30 to buy more and more land, sometimes using borrowed money, even with high interest. 

By 1898, he had stakes in over 70 mining claims and was known as the biggest landowner in the Klondike. Some said he was worth $30 million. Others said not even McDonald knew how rich he really was.

If Big Alex walked by a piece of land and paused to look at it, other people rushed in to buy it. His opinion was worth more than gold.

But Big Alex wasn’t just about money. He gave a lot away. After a fire burned down the Catholic church in Dawson City, he donated $30,000 to help rebuild it. He gave to hospitals. He let guests take gold nuggets from a bowl in his house like candy. And he once said gold was just “trash”, he only cared about buying land.

In 1898, McDonald traveled to Europe. He met the Pope in Rome and was given the title of Knight. In London, he got married. When he returned to Dawson, he was still rich, still famous, and still buying land.

But the gold rush was slowing down.

By 1899, most of the gold had already been found, and prospectors were heading to a new discovery in Nome, Alaska. But McDonald stayed. He kept buying land, even when it was no longer valuable. He couldn’t stop. 

Slowly, his fortune disappeared.

He spent more than he earned. His land stopped producing gold. He had taken on too much debt. By the time he was 50, he was living alone in a small cabin, still searching for gold, hoping for one last lucky strike.

He died of a heart attack while chopping wood in 1909. He had just $30,000 left, far less than his debts. He died poor.

When I heard this story of Big Alex I couldn’t help but think of the parallels with stock picking and crowd behavior. 

Being early matters, but Big Alex’s problem was the Klondike gold rush only lasted for three years. Big Alex never sold, in fact he tripled down on his levered bet right at the top, and then the gold ran out. 

In a recent interview, investor and author Robert Hagstrom said the most important question to ask is, “How long will it last?”.

Hagstrom cited work done by Michael Mauboussin and was referring to the competitive advantage period or moat of a business.

This question is especially relevant for microcaps since they have much shorter shelf lives. We are often drawn to a microcap situation after a breakout quarter or a couple great quarters in a row.

Every microcap multi-bagger is the result of a management team that strung together two or more great quarters in a row. Small stocks need momentum to reach escape velocity. The more quarters they string together the higher the stock goes.

It's like dominos. Two great quarters in a row and the stock is probably a double. Three great quarters a triple. If a management can string together four to six great quarters and investors believe the momentum will continue - this is a 10-bagger.

The hard truth is the momentum usually runs out before we think. Microcap companies reach a ceiling in leadership, opportunity or both. Only a select few can backfill appropriately with talent, processes, and execution to continue the momentum and reach new highs. These management teams are uniquely skilled in scaling a business. I write about this here. 

Most winning stocks won’t win forever. In microcap, the most important question you must answer is, “How long will it last?”.

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