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The Run

If you consider yourself a stock picker – at some point in your life you must do the work others aren’t willing to do and form extreme conviction in something you believe in.

Archie Karas was born on the island of Cephalonia, Greece. His father was a poor construction worker. Archie remembers shooting marbles when he was a kid and betting on each game. He made decent money doing it. He worked construction as a teenager. He then worked on a ship for two years being a waiter. Finally, opportunity knocked. The ship set sail for the United States. 

At the age of 17 he ended up in Los Angeles. He didn't speak English, so he got a job in the kitchen of a restaurant. In the restaurant was a bowling alley and pool hall. He started playing pool on breaks and soon became an expert pool player. Archie started making more money playing pool than working. He would play $1,000 games, then $5,000 games, then $40,000 games. He amassed $1.2 million from playing pool.  

Soon no one wanted to play him anymore, so he started playing poker. He fell in love with poker and poker fell in love with him. He would amass around $2 million in winnings. His nick name was "The Greek". He grew a reputation for having no limit. He played for big stakes and had no fear. 

Finally, his luck turned and lost everything. He was down to his last $50 and decided to go to Las Vegas to start over. Archie found someone to lend him $10,000 at 50% interest. At the first table, he tripled the capital in three hours. He paid the person back and kept playing. 

This was the start of a legendary 3-year winning streak that would later be called "The Run." He turned $50 into $40,000,000. 

"The Run" received a lot of public attention, and scrutiny from casinos. They put the screws to him. The casinos started accusing him of framing, and he was arrested five times for casino scams. He spent 73 days in jail. His name was put in the infamous "Black Book" - essentially banned for life from Las Vegas. Today He's broke and still lives in Vegas. Archie still claims his innocence.

When I was in college, I wrote down, “$10k and two 10-baggers equal millionaire.” My goal was to be a full-time private investor. It was a motivating force for me. Did I do this exactly? No. Directionally? Yes. In fact, I think 99% of active stock pickers got to the first million this way. You need a few big wins in a row. You must go on a run. 

I shared “$10k and two 10-baggers equal millionaire” on social media a year ago and it was met with 10% positive reactions and 90% negative reactions. The 10% were stock pickers that have done it or those that felt motivated by it. The 90% were people that will never achieve it because they don’t believe it can be done. 

Many people took the statement the wrong way – that a person must take big risks. No, it simply means finding a few great companies when they are small and holding them. Many of the best investors ever started in microcaps. Many of the best performing stocks ever started as microcaps. 

Finding great companies early has never gone out of style and never will. Yes, it’s easy to say and hard to do. It’s hard to find them, and even harder to hold them. What makes it harder still is that a small percentage of the winners will become sustainable monster winners. Most of the winners will eventually fall right back down. They have a short shelf life. Very few deserve to be held for 5+ years. 

Many people try at least once to bet on a small stock hoping it becomes the next monster winner. Unfortunately, they get the recommendation/tip from a friend or paid advertisement or some Judas Goat. They lose most of their money and never want to hear about microcaps ever again.

This is why microcap has such a bad reputation. Most investor's first experience with a microcap is a bad one. First impressions matter. They should have focused on profitable companies instead of story stocks. They should have done actual research instead of viewing the investment like a once per year trip to Las Vegas.

One of my early mentors grew his portfolio from a few thousand dollars to over $150 million in microcaps and then smallcaps. No one knows of him or his accomplishment but his family, close friends (and me). He still lives in the same modest house where he and his wife of 45 years raised their children. 

In another article, I wrote:

“You don’t hear much about full-time private investors because publicity doesn’t benefit them. In fact, publicity hurts them. Full-time private investors like the fact that even family and friends don’t quite know what they do for a living. They like the fact that they’ve built up an extensive knowledge level in a niche of the market where it doesn’t benefit them to arm-wave their successes. The advantage of the private investor is you can go places bigger money can’t, and build up investment knowledge in an area where few others bother. You can live a comfortable life fishing the same small pond because you know where the fish are. The ability to fit into society, live below your means, and do so under the radar is a big advantage.”

Jason Hirschman is another full-time private investor that grew a portfolio from thousands to nine figures. If you intend to buy and hold winning stocks you must also embrace drawdowns. Every big winner has soul crushing drawdowns as they ascend to heaven. 

“Drawdowns are a privilege. It only comes to those who earn it, and I really believe that.” -  Jason Hirschman (source)          

If you consider yourself a stock picker – at some point in your life you must do the work others aren’t willing to do and form extreme conviction in something you believe in. But it takes work. YOU must do the work. YOU must form the conviction. The peanut gallery and your emotions will be screaming at you to sell. Holding winners is extremely lonely.

If you can't handle being criticized for your convictions/positions, then you aren’t ready to make real money. Successful investing means doing independent research to form independent conviction so you can achieve uncommon outlier returns.

You will make mistakes. You aren’t perfect. You will buy stocks you shouldn’t. You will sell winners too soon. You will hold losers too long. You can’t learn this game without loss, pain, and discomfort. Whether it’s taking a variant or contrarian view on a business or absorbing the gut shots of being wrong along the way - stock picking takes courage. 

Brene Brown said, “If you choose courage, you will absolutely know failure, disappointment, setback, even heartbreak. That's why we call it courage. That's why it's so rare.

Every individual stock has its own mini bull/bear market going on within its equity independent of the stock market. Every great stock will have quarters and years where they go nowhere or drawdown against the tide of a bull market and make you look/feel foolish for holding. You will look/feel like an idiot and a hero several times, sometimes in the same year. 

Here are the stages of winning stocks: 

  • Stage 1: [Stock Goes Up] - More buyers than sellers. 
  • Stage 2: [Stock Peaks] - Multiple expands until there are more sellers than buyers.
  • Stage 3: [Stock Down] - Fundamentals backfill.
  • Stage 4: [Stock Resumes Going Up] – Multiple contracts until more buyers than sellers.

Stage 3 can last for quarters or years and this is when a tough decision must be made – Do you hold through Stage 3 or trade around it? The more money you manage the harder it is to be nimble, so it’s natural the more money you accumulate the longer-term you become if you invest in illiquid things. It’s also why overall returns come down as your portfolio grows from $10,000 to $1 million to $10 million to $100 million. It’s why Buffett was confident he could make 50% returns on $1 million and less confident with $50 billion. He can’t be as nimble. 

The hardest part of achieving a great long-term investment track record is over half the time your returns will look average. Especially if you are concentrated - you can go years where it feels like you are working hard for mediocre returns waiting for the fundamentals to backfill/multiples compress to springboard the portfolio to new highs. But then it finally happens and the previous year’s efforts, perhaps helped by a better macro environment create circumstances where you don't have to work as hard for your returns. The world works for you and pulls forward 5-10 years’ worth of returns and riches in a single year. “Whew” you feel smart again. 

Over the years I’ve realized a portfolio has a certain rhythm to it and the longer you invest the more you can tell whether the portfolio is in tune or out of tune. The “in tune” moments are amazing. The whole portfolio is in sync, not necessarily from a performance perspective, but just holistically you can feel it’s in perfect tune. Every instrument (stock) is doing what it’s supposed to be doing in perfect harmony. If you added a position or took one away it would hurt the portfolio and the rhythm. 

Then in a moment everything feels out of tune. The out of tune moments make you feel like you lost control. It might be from a surprise negative announcement from your largest position or just market forces pulling the portfolio lower for no reason. Or maybe it’s from just being wrong on your last few investments. You start to lose confidence. You become unsettled. 

Losing streaks compel you to do dumb things at the wrong time. You invest in new things you shouldn’t or double down on the wrong things (losers) trying to make back what you lost. You throw Hail Mary’s like there is 5 seconds left in a tie game when you don’t have to. It’s sort of what happened to Archie. He got more aggressive instead of less aggressive and then his luck ran out. Stock picking is like golf in that it takes discipline, self-confidence, and not letting one or two bad shots get to you. You must get good at forgetting and moving on so you stay in the rhythm. In those moments it’s okay to play a little smaller, not bigger. 

I've always loved this quote from Stanely Druckenmiller on position sizing and confidence,

“People ask me what I learned from George Soros. I thought, when I went there, I was going learn what made the Yen and the Deutsche Mark go up and down, and that kind of thing. No, what I learned was position sizing is probably 70 or 80% of the equation. It's not whether you're right or wrong, it's how much you make when you're right, and how much you lose when you're wrong. I've also found, as an investor, I believe in streaks. You see it in baseball, you see and everything else. I see it in investing. Sometimes you're seeing the ball, sometimes you're not. One of my number one jobs, is to know whether I'm hot or cold. And when I'm hot, I'm supposed to turn the dial way up. Not say, okay, I'm up 40% this year, let's go, this will look good at the end a year ago, take a break. No, you got to make hay while you're hot. And then when you're cold, the last thing you should do is try and make big bets to get back to even. You should tone yourself down.”

Stock picking is about discipline, patience, self-awareness and self-confidence. The first two are knowing what you are looking for and only acting on the great opportunities. The second two are knowing yourself and believing in yourself and knowing another run is just around the corner. 

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MicroCapClub is an exclusive forum for experienced microcap investors focused on microcap companies (sub $500m market cap) trading on United States, Canadian, European, and Australian markets. MicroCapClub was created to be a platform for experienced microcap investors to share and discuss stock ideas. Since 2011, our members have profiled 1000+ microcap companies. Investors can join our community by applying to become a member or subscribing to gain instant view only access. 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. For more information, visit https://microcapclub.com/ and https://microcapclub.com/summit/

 

 

 

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