Idea Brunch with Mike10947310
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Mike10947310!
Mike10947310 is an anonymous Twitter account focused on microcap investing with a bias towards tech. Mike previously co-founded a bootstrapped fund that traded in response to breaking news and now manages his own capital and shares ideas on his free Substack. Mike’s first idea Alarum (ALAR) is up ~60% since published and his second idea TSS Inc (TSSI) is up ~250% since published.
Mike, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and your investing process?
Absolutely, thanks so much for having me!
I always loved markets and stories, so in college I studied English and Economics. After I moved to NYC, I worked briefly in investment banking and then at a tech startup. The startup was hardware-focused, so when the pandemic hit, we weren't deploying much of anything. My focus returned to markets.
During this period, I began noticing certain inefficiencies and opportunities in the small-cap space, particularly around economic events and earnings releases. My roommate and I co-founded a fund to trade our savings from our previous tech/finance jobs. It soon became a full-time job. We’re entirely bootstrapped and returned our (albeit tiny) starting capital many times over.
Nowadays, I have largely exited from this business as it has increasingly become a software-first venture where a fundamental investor like me can’t add as much value. I use the capital I’ve accrued to invest predominantly in microcap stocks, and I write about my investments. I’m typically doing the same thing—information arbitrage—but over a longer time scale. I want to capture moves that will play out over months or years rather than over hours or days. This allows for greater compounding, is more tax-advantaged, and can be less emotionally volatile.
If you read the literature on why momentum is a consistent anomaly, it essentially comes down to more and more investors slowly catching on to a story. But few people talk about the converse of that—we can use stock momentum to see where stories might be developing. Instead of simply investing in a basket of small-cap stocks exhibiting momentum, I like to use momentum in a certain stock or sector to look into other companies in the small-cap space which might not have responded appropriately yet will also be beneficiaries.
You mentioned that you co-founded a fund that traded on news reporting and press releases. Can you tell us a little more about that and your learnings from that experience?
During 2019, my roommate—a software engineer—and I noticed that the general chaos in the markets afforded opportunity. For instance, a company might reveal on an earnings call that their operations will be closed indefinitely. Early on in the pandemic, even this sort of announcement wasn’t priced in for hours and hours. At first, we might simply screen for all such announcements and be indiscriminately short.
Soon we realized it would be better to be more tactical about our trades. We realized this model could be systematized and data-driven. Together we worked to track how more news stories impacted different securities. On any one event we might only make a thousand bucks. But in aggregate they added up. Plus, because we had a data driven approach, we could hone in on certain factors (e.g., which companies responded predictably after earnings) that correlated with more aggressive moves. We bootstrapped our own savings from our day jobs. Over time, our trading venture became our full-time job due to our success. As I mentioned, I am largely in an advisory role at this point.
The learnings from this time have been truly influential. First, I’ve learned that you must always ask why an opportunity exists. Whether it’s a quantitative strategy or a specific pick, thinking backwards about why something is cheap is better than screening for cheapness and thinking about why it might grow.
Similarly, in the microcap space, you’ll come across several ready answers for why something is cheap. These might be “too small”, “too illiquid”, “too complicated”, “too new,” or “too anti-ESG.” These are all legitimate explanations for an optically low price, but they are explanations that often may be hiding opportunity.
Finally, from my fund, I’ve learned how few people really do the work to know companies, and especially microcaps, in and out. When you deeply understand a company, even if it's not a buy today, you will eventually come across a bit of news or a change in the situation that may mean it’s worth a position. Others won’t have figured it out as quickly. In this space, few companies truly trade sideways for years and years, and very few companies immediately price in information.
There are tens of thousands of names in the microcap and OTC universe. What are your favorite methods for finding new ideas to research?
The biggest thing is probably brute force. That might be unpopular but the easiest way to win is simply turning over more stones. If I am half the investor you are but I look at 30x more opportunities I bet that I will win. If you spend 10 hours a day looking at microcaps you’ll be in the top 5% of familiarity with different stories and companies. Over time, by doing this, you will begin to see certain recurring themes that often are the bellwether for opportunity. Here are a few examples of idea buckets I like:
New Management: I look for situations where a company is historically solid but unexceptional, and recently has had new management come. Bonus points if the new management is coming in due to some non-critical circumstance like original ownership retiring.
Uplistings: Oftentimes if a company has done well enough to uplist, growth will continue, but there will be an initial hit to the company since they may dilute to pay uplisting costs (given that a large reason for uplisting is the ability to more easily raise capital). Pay attention to any net-income profitable microcap that is uplisting.
Initial Successes: If it’s the first quarter of positive NI or OCF in years, it is highly likely that many other investors had expected such positive results several quarters ago, but have gotten exasperated and thrown in the towel. Ironically, now is the time that the story may finally be working out, so dive deep!
Simply Too Cheap: It’s rare to find these situations and usually there’s some “hair” like a short report or a previous mismanagement. But there are situations where a company is doing something like growing revenues at 20% with good visibility into revenue growth continuation, is a non-cyclical industry, and yet is at mid to high single digits P/E. It’s always worth a look when you see this.
Microcaps are notorious for “value traps,” poor governance, and self-dealing. What are some common red flags you try to avoid in microcaps? And how have you grown as an investor since you started?
In the beginning I certainly was far too optimistic with giving credit to management teams and I fell into value traps. I think that because I would be a good steward of capital, I assumed they would be as well. I’d known intellectual incentives truly matter, but it took losing money to truly grasp it. Now I look for companies where management teams have an excess of alignment. That can go beyond mere ownership, too. If an insider is already enormously wealthy, I would discount their ownership in a microcap in regard to their level of shareholder alignment. Conversely, if an insider is inheriting a family business, they may have an alignment that goes far beyond the monetary.
In terms of governance, one easy proxy is to look into the quality of the filings. That’s what initially attracted me to $TSSI—when discussing risks and business outlook, they have better 10-Ks than some NASDAQ companies. I mean, this was a $12m company publishing well-researched white papers about the future of the data center landscape! If a small company is putting in all that effort, it’s often because there really is something meaningful they want to communicate.
Additionally, I think Ian Cassell’s “formula” is beautifully simple: find companies that can grow revenues, achieve profits, and do so without diluting. It sounds straightforward but it’s rare to find a company that can do all three. If a company is pouring everything into marketing, revenues will grow, but it’ll burn cash. Likewise, other companies can “chug along” but would need significant investment—which usually means large dilution—to unlock growth. As an individual investor, you don’t need to settle for these situations. If you can accept volatility you are better off waiting for those unique opportunities where the formula is fulfilled and sizing up.
Additionally, I am a big proponent of looking at companies that are already displaying some momentum. It is psychologically more difficult to buy a stock that is up 50% YTD, but this is a fallacy, because the risk/reward could actually be much higher. And in this case, you actually know that the market has been paying attention!
Finally, I believe that writing about your investments is a key way to avoid red flags. When I write I am more honest with myself than when I think. Writing a strong pitch also forces you to go into all aspects of a company that you might otherwise thoughtlessly overlook. This can reveal that a company isn’t value, but rather a trap.