MARIUSZ SKONIECZNY | From Microcap Explosions

"All companies, big and small, have something in common - when they were born, they were small. Amazon, Apple, Microsoft, Harley Davidson, and even Nike all started in a garage. They were tiny before they became big. In Wall Street terms, they were risky before they became investable. It took these companies years to establish their dominance."

MARIUSZ SKONIECZNY is the founder of MicroCap Explosions. He is also the author of 11 books on the subject of investing. He graduated from Indiana University in 2003 with a finance degree. From 2003 to 2008, he was in the residential and commercial real estate industry as an appraiser and broker. During the 2008/2009 financial crisis, he left the industry to focus exclusively on stock market investing.

In 2009, he started with $10,000. By 2019, his account reached $1 million or 100x since the beginning. By the end of 2021, it reached $7 million. While his returns from 2009 to 2021 were impressive, don’t think that it was all straight up. It was hugely volatile. Welcome to microcap investing.

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

Portfolio tracker Sharesight tracks your trades,shows your true performance, and saves you time and money at tax time. Get 4months free at this link 

Disclosure: The links provided are affiliate links. I will be paid a commission if you use this link to make a purchase. You will also usually receive a discount by using these links/coupon codes. I only recommend products and services that I use and trust myself or where I have interviewed and/or met the founders and have assured myself that they’re offering something of value.

EPISODE TRANSCRIPT

Mariusz (6s):

I don't mind paying exactly what something is worth or I don't mind even over paying for something if I know that down the road, they're going to increase the value so fast that the value is going to catch up to it. But I don't feel like I need to get, "Oh, I need to buy something for 50 cents on a dollar today." It's okay. It's okay. Because if I'm paying a dollar for the company today and the company is worth a dollar but it's going to be worth 10 in three years, I don't mind paying a dollar.

Phil (35s):

Hi and welcome back to Stocks for Beginners. I'm Phil Muscatello. My guest today started with $10,000 in 2009. By 2019, his account breached $1 million and by the end of 2021, that reached 7 million. While these returns from '09 to '21 were impressive, it wasn't all straight up. It was hugely volatile. This is microcap investing. Hello, Mariusz.

Mariusz (1m 0s):

Thanks for having me.

Phil (1m 1s):

Thank you very much for coming on Mariusz Skonieczny runs MicroCap Explosions, a private membership website focused on finding investment opportunities at the smaller end of the market. From 2003 to 2008 he was in the residential and commercial real estate industry as an appraiser and broker. During the JFC financial crisis, he left the industry to focus exclusively on stock market investing. I guess real estate was tough back in 2009 then.

Mariusz (1m 29s):

Yeah, we didn't have very many sales at that time. You know, it's so typical of everything when you listen to someone like Warren Buffet: "Be greedy when others are fearful, be fearful when others are greedy", people never learn it. Like, yeah, it's a nice soundbite, but then when it actually comes to doing it, they just do exactly opposite. And that's what's happening. Instead of people buying real estate hands over fist, they were running away and scared running like a chicken with their heads cut off.

Phil (1m 58s):

And that's an important thing to note about investing in anything, whether it's stocks or real estate, is that psychology does play such a huge role in the process.

Mariusz (2m 9s):

Yeah, absolutely right. I mean, you would think that by now people would know there's so much information out there. It's not like it's something new, "Oh, I never heard about it." It's out there. And like, it's just goes in one ear and goes out the other.

Phil (2m 23s):

So, have you been investing in the stock market prior to 2009 when you started investing with your $10,000?

Mariusz (2m 30s):

Yeah. Well, I was playing around with it. I graduated college in 2003, so, you know, I didn't know much during that time, but I would say for the next five years I was learning and trying things out. I don't have too much of a recollection what I did back then, but yeah, mostly learning, trying things out, trying to find my way.

Phil (2m 51s):

So, what were some of those things that you learned at that period in your life?

Mariusz (2m 57s):

Well, it was always going back to the basics. I started with the right foundation because I started learning from the greats, all the value university in books. That's what I was reading at the time. And that's a good foundation and that foundation never changes. When you think of investing as fundamental, there's something behind every ticker symbol, it's not just a thicker symbol to gamble on, then it puts everything in perspective.

Phil (3m 25s):

Can you recall any particular companies that you were looking at So, the time and how you approached them and what the results were?

Mariusz (3m 32s):

Well, I was looking at mainly at that time when I started just at the big names. So, you know, Exxon Mobile, Home Depot just things that you could get a lot of information on from services such as Value Line. Or I remember this guy used to publish a book on stocks for, you know, 2007, every year he would have like a book, a hundred stocks to own for this year. And each company had a, like a one-page summary of what it was about so I would go through every page and learn about these things: what the returns on assets returns on equity margins, what these things were.

Mariusz (4m 15s):

`Yeah.

Phil (4m 16s):

So, starting with $10,000, that's quite a small stake to start with. How did you manage the size of each position that you were looking at that time?

Mariusz (4m 25s):

I usually would divide it among 10 positions at that time, 10% into each position. I was never really too big into over diversifying. I like to concentrate. There's this quote, you get rich by concentration and you stay rich by diversification. So, at that point, you know, I was in that building stage. I mean, I'm still very much concentrated right now but it's not so much by choice, but because certain positions I have locked in private placements. But you know, going forward, I would like to go back to being more towards, you know, at least 10 positions in my portfolio.

Phil (5m 6s):

So, you started off looking at the big names in the market. How did you start looking at the smaller end of the market? What was it that inspired you to look there?

Mariusz (5m 16s):

Well, it was both what a Warren Buffet talked about, but also my real estate experience. Because in real estate, when we would have to value or evaluate a particular property, you would get books and records from the owner and you'd have to make sense out of it. They were never correct. You have to go and confirm everything and make sure it's correct. Make some phone calls to fill in the blanks. So, it's kind of like, you know, you roll up your sleeves and you become a professional. And then I think at some point I heard Warren Buffet talking about, he was asked the question, "What would you do if you have $10,000 to your name and graduating college?"

Mariusz (5m 58s):

He said, “I would start at A, meaning A through Z, look at every company in the small cap space.” Because this is an area where the opportunity for mispricing or possibility for mispricing is the greatest simply because institutions cannot be in this space: they're too big, the investment injury's not set up in a way to find those opportunities. So, if you go out and you look at a lot of rocks and you overturn a lot of rocks, you will find, you know, opportunities that are much better than in the big cap space.

Phil (6m 33s):

So, what's your criteria when you're looking under the rocks, what are you actually looking for?

Mariusz (6m 40s):

I have a pretty open mind. I don't want to just have these hard rules. It's kind of like, you know, what's your criteria for finding a wife? Well, just be open-minded. I will look at any stock. Certain industries I don't want to touch; like mining cause they're horrible businesses. So, I tend to gravitate towards good quality businesses. Which means like, what are they, what is a good business from your point of view? What kind of client would you like to have: a one-time client or repeat client? Okay. A repeat client. If you want to grow revenues, do you want the growth to cost you a lot or do you want it to cost you not a lot? Do you want to be differentiated or have some kind of brand or do you want your clients to be able to switch from you very easily or do you want them to have some switching costs? So just things like that.

Mariusz (7m 30s):

When I look at revenues, I want to know, you know, how sticky those revenues are, what kind of profits those revenues have, is there room to grow? I will invest in companies that are not profitable yet if I think that they are on a path to become profitable. So yeah, and companies that might have what Buffett and Mongo called moats protections against the competitors, which, you know, like I said, switching costs is one of the protections, brand name. So, I look for good businesses, So, this kind of filtering process that you go through. These are not hard and fast rules.

Phil (8m 10s):

These are things that will evolve depending on the business. I know that some people when they're picking stocks and picking companies, they go through a number of criteria and they're very strict about it and they immediately filter out everything that doesn't meet those criteria. Are you a little bit more flexible than that?

Mariusz (8m 25s):

Yes. I don't want to be too stringent about it and I don't use a computer to help me find stocks. You know, I want to find them before a computer sees it. A computer can find you revenue growth, profitability, PE ratios, but computer cannot tell you why the revenues are there and why the revenues that are going to grow or not grow. Computer can't think. And what people tend to forget is that the revenues are not just because someone entered them in the Excel. The revenues are a function of the company solving somebody else's problem. So, I want to know what that problem is. I want to know why a company is solving the problem and why is the competitor not able to solve the problem or, you know, what's makes this company special versus another company.

Mariusz (9m 14s):

That's more important to me than the actual number. I will invest in companies that, you know, might not look great on paper right now, but I know those whys and then I can figure out what the revenues are going to be in the future based on that.

Phil (9m 28s):

Yeah, we hear the terms quantitative and qualitative analysis. So, it sounds to me like you're a bit more on the qualitative side, that you're looking for the qualities of the business, is that correct?

Mariusz (9m 39s):

Yeah, but I also want to have revenues because revenues are proof that the company's products are working. But in the smaller cap space, because these companies tend to be smaller, they have a lot of room to grow. You know, people categorize stocks into two buckets: growth stocks and value stocks. I think that's the stupidest thing that people can do because when you have a discounted cashflow analysis, growth is one of the variables in that equation to come up with the value. I don't mind paying exactly what something is worth or I don't mind even over paying for something if I know that down the road, they're going to increase the value so fast that the value is going to catch up to it.

Mariusz (10m 19s):

But I don't feel like I need to get, "Oh, I need to buy something for 50 cents on a dollar today." It's okay. It's okay. Because if I'm paying a dollar for the company today and the company is worth a dollar, but it's going to be worth 10 in three years, I don't mind paying a dollar.

Phil (10m 40s):

Okay. So, we're talking about the small end of the market. Can you give us a bit of an overview about what the actual size of the companies in the microcap and small cap sectors are? I mean, are we talking outside the Russell 2000 here?

Mariusz (10m 53s):

Oh sure. 'Cause a lot of the companies in the Russell 2000 are on NASDAQ, for example. I will look at companies that are not on NASDAQ yet. So, I will look at companies that are trading on OTC, which stands for over the market securities, or companies that trade on Canadian stock exchange or Toronto stock exchange venture. Those are going to be even smaller sub hundred million market cap. I have some companies 10 million in market cap. But a lot of times they're growing and being successful. They have plans to be part of Russell. They have plans to be part of NASDAQ and they are now on the secondary exchanges for various different reasons.

Mariusz (11m 35s):

Maybe they're not ready to be on the bigger exchange yet or maybe they want to save money right now. I have one specific company right now, two actually, that next year they're looking at up listing to NASDAQ. And that alone should rerate those companies because there's a lot more investors, there's a lot of investment community on NASDAQ so you have more people wanting to buy the stock that should probably rerate it on its own.

Phil (12m 2s):

Yeah. Because that's something that happens with companies once they move into a more serious, respected exchange, it comes to the attention of a lot more people. And I guess that's what you're looking for in terms of the company's growth that you want to invest in.

Mariusz (12m 15s):

Yeah, that's correct.

Phil (12m 16s):

Can you give us a bit of an explanation about volatility? What is volatility and why are these companies more prone to it?

Mariusz (12m 30s):

Well, when you have fewer number of people being involved, that alone reduces the liquidity. And if there's less liquidity, less people to buy the stock or less people to sell the stock, you're going to have those huge wild swings in the price. Because one day John decides to unload his position and he doesn't want to do it over a week, he wants to do it in 10 minutes. And then at that point, maybe not too many people are on the other side of the trade, then the stock can go down 20, 30% within minutes. And this fact alone keeps a lot of people away from that space because people are scared.

Mariusz (13m 9s):

But that presents an opportunity because a lot of times what happens is that the liquidity increases as the company gets bigger. So, you can acquire your position slowly, one day at a time, hold it long-term. And when the company does grow and goes to NASDAQ or another exchange, the liquidity increases and it just fixes itself. And then the liquidity is better, the company's bigger and more people want to buy it; the stock is going to be higher. Assuming of course the company performs fundamentally because that's, that has to happen. Just because somebody wants to move on NASDAQ doesn't mean automatically the stock price is going to go up.

Mariusz (13m 50s):

But if you pair it with getting bigger, getting more profitable, getting more revenues and then moving on NASDAQ, then that's the recipe for success.

Phil (13m 60s):

Mariusz, can you give us a real-world example of a company that you've studied, invested in and profited from in the past? I think that'd be worthwhile for listeners to hear your story on that.

Mariusz (14m 13s):

An example of a success story is Oroco, Oroco Resources. So, this was an asset play, not a business with revenues, Oroco, I found it in 2017, it's still trading on TSX venture, and they were involved in a legal situation over a Santo Tomas copper project, where in the year 2000 Santo Tomas copper project was owned by a Mexican guy. That Mexican guy sold the project to a crook from Arizona. That crook never paid him for the property, but took the property, took the title and everything. That Mexican guy wanted to get the property back but it was so complicated because the property was in Mexico, the guy was from Arizona, US and then the ownership was in Bahamas.

Phil (15m 9s):

So, three different jurisdictions, very complicated. He didn't have the money to fight the legal lawsuit. And that's where Oroco came in and they said, "We're going to pay for the legal battle, we're going to get you to property back. In return we're going to earn a 50% interest in the property." That property was, is massive, $500 million, especially now where copper is hot. So, it took them about 10 years to win the legal battle. I got involved after they won in Bahamas.

Mariusz (15m 40s):

Originally the managers were going to just pay for this from their own pockets, but the legals were taking longer and they needed help. So, they rolled in their interest of that Santo Tomas project or the legal situation into Oroco and Oroco financed the remaining battle. And when I got involved, nobody knew about the situation with the legal battle. I studied the situation. I studied the legals. I looked at all the papers that were filed publicly at the courthouse. And I realized that there was no way that Oroco was going to lose.

Mariusz (16m 21s):

There was not a possibility. The market cap at that time was $3 million, nobody was paying attention. I bought this many shares as I could. The long story short is they won the legal battle, they are progressing the property now through drilling and the market cap went from 3 million to about $500 million. So, you know, I made almost a hundred times my money on it. And very few people were aware of it. Hedge funds didn't want to look at it even after they knew about it, even after I told them about it, they didn't want to look at it because they didn't want to get involved in a legal situation. But if they just took the time to look at the legal situation, they would have realized that the legal situation was already resolved, but it just needed to be formalized.

Mariusz (17m 6s):

So that's an example of what can happen if you go to the places where others refuse to go and you can find assets or businesses that, you know, can change your life.

Phil (17m 19s):

That sounds suspiciously like a mining company though, Mariusz.

Mariusz (17m 22s):

Yeah. And that was my last mining company.

Phil (17m 25s):

Okay. Because before that I was involved in gold mining stocks and I will never touch them again. You see, this is a little different situation because they're not mining. They are, all they're doing is they're taking an asset and they are making certain studies on the asset. And then they're going to sell the asset to somebody that's going to screw up for sure, somewhere along the line, it's going to take them longer to put it into production, it's going to cost more, blah, blah, blah. But you know, when you get involved in these assets plays, you know, the asset is good. The way I knew that the asset was good is because this particular asset was being written in the geological books for students to study so I knew it was a monster already.

Mariusz (18m 6s):

I wasn't going to get involved in something that was promising something in the ground. This was already there. This was a situation where they had historical studies, historical drills, historical feasibility studies showing a net present value and just a market was just ignoring it or not seeing it. So, when I looked at it and it was at 4 cents at that time, I said, "It's worth five bucks." Like it was so clear already at that point by usually it's not like that. That's why you want to go one company at a time, one rock at a time. You unturn, it. You don't have any sort of rules and you unturn it and see what's there.

Mariusz (18m 46s):

I'm not going to have new rules and say, "I'm not going to unturn the rock because the rock is pink." Like no, I'm going to turn it and see what's under it.

Phil (18m 56s):

It's wrong with gold miners then? I mean, people are talking about, with inflation, that gold is going to be a hedge and that with mining companies, gold mining companies, they provide leverage into the gold space. You don't see it that way?

Mariusz (19m 10s):

Well, I mean, that's how I saw it because it's the responsible way of thinking: the fed is printing money, we're creating inflation, how do we protect ourselves? Well, gold. Gold is going to protect you because, you know, it's been protection over the years. And then the next thing you know, it's like, oh, I know this. Let's go into the gold mining stocks. Okay. You want to get robbed and you know, taking all your money. Yeah, go there. Terrible businesses, awful businesses. 90% of them fail. I made a video series, "Why I hate Mining Stocks" where I've profiled 10 companies. And I showed people, this is what they promised and this is what they delivered.

Mariusz (19m 51s):

And it was just shocking to people to see the kind of mess ups that they created. So now when I hear a story, "Oh, we're going to do this, we're going to do that." I just closed my ears.

Phil (20m 4s):

That's so speculative, isn't it

Mariusz (20m 6s):

Well, it's speculative and then the business itself is terrible business because if you're producing gold, your asset depletes, right? So, it's going to go to zero. The more successful you are, the faster you go to zero.

Phil (20m 16s):

That's a great point.

Mariusz (20m 17s):

So, then you have to look for other assets and then those assets governments are involved that want money from you and permitting is an issue. You constantly need to raise money because it's capital intensive. Everything about a good business, you just turn it around, that's your gold stocks. Everything is terrible. There's no brand, no switching costs, no mode, no nothing. I mean, there's a moat. Yes. There's a moat if you have a particular asset and it's great and it has a good grade. But I would just rather find those opportunities in the microcap space among good companies, than go into the microcap space and look for bad companies.

Phil (21m 2s):

So, most beginners start investing with bigger companies or ETFs or mutual funds. How can a learner start to begin to approach this sector with safety?

Mariusz (21m 10s):

I would say you have to have a true interest in businesses. Like if you don't have any interest, just stick with ETFs. But if you want to study them on your own and not have to rely on somebody else to tell you the answers. Like for example, the other day I was on the radio with, I think he was a broker from Wall Street, and I told him, "Hey, look at this company." And he looked at it and he came back and he said, "There's no information on this. I put it into my system and it's like, no way, am I going to touch it. There's no analyst covering it." Yeah, exactly.

Mariusz (21m 50s):

I'm the analyst, like, I did my work, you know, I called the clients, I called the company, I looked at the product.

Phil (21m 57s):

The analysts that are going to look at my YouTube videos to learn about the company and then run reports about it. But that's the opportunity, right? Because they look at it and they have to have everything given to them and fed with a spoon. Like I go out there and I find it and I learned about these businesses. It doesn't take a genius, right? Why is this gas station doing well? Oh, because it's on the corner, it's solving people's problems. They need gas and then they turn here and they do it. Why is this restaurant successful? Oh, because they make good food. Okay. Why do you buy Apple versus something else? Well, because it looks pretty. Like, just ask these questions.

Mariusz (22m 34s):

Like why, why, why, why? And you can figure out whether a business is good. At the end of the day, the business has to satisfy the customer, right? Has to solve a need or a want for the customer. And then it has to be able to provide that need at less than what it charges us. That's it, that's all there is to it. And is there more people that will want that service in the future? Is there more room to grow? It's not complicated.

Phil (23m 3s):

And smaller investors in this end of the market do have a lot of access to people in the company and CEOs. A small investor can ring up the CEO and get the story straight from the horse's mouth, can't they?

Mariusz (23m 16s):

Well, absolutely. The CEOs of smaller company we'll talk to individual investors and they do that all the time. Because there's no chance you can have Tim Cook from Apple to answer the phone and talk to you. It's not going to happen. And it's not necessarily, you want to call the CEO to get some inside information, a lot of times they will tell you things because they don't even know what they should, they shouldn't tell you. But the point is to learn about the business. Who is the best person to teach you about the business than the person who's running it, yeah? But like when you call, you should have already some kind of awareness of what the business is about so that you can have an intelligent conversation. I am involved in this one company that I bought a year ago. I would have never bought it if I didn't call the CEO, because I wouldn't understand what they're doing because the public filings were so confusing and so censored by the lawyers that I would have never known the plan of what they were trying to accomplish.

Mariusz (24m 10s):

Then you get on the phone and he explained it to me, exactly what they're trying to do, why they're going to be successful, you know? So he sold me on that company. And then from that point of view, then I had to of course do my own work to make sure that I was on board with it. But he accelerated my learning curve so much by talking to me for like two hours.

Phil (24m 32s):

And you mentioned that you've talked to clients as well. I guess that's an important aspect from which to view the business.

Mariusz (24m 39s):

Yes. Not all the times, because sometimes it's so obvious why they're using the product. But other times, if you talk to the clients, then you're going to understand why it is that they're using the product because you want to know, again, you want to know how this product is solving their problem or want. So, by talking to them directly, they'll tell you like why they're using it. You know, they're not going to sugar-coat it. There's just going to tell you and they're going to tell you if they're not happy about it too. Then you know it's like, "Okay, if you're not happy with this, is there another competitor you can choose?" If they tell you "No" because of so many reasons, then you realize that maybe this company has some switching costs.

Phil (25m 20s):

Okay, Mariusz. So, if people want to find out more information about you and MicroCap Explosions, give us some social media links and website and what you offer. Talk to us about what you offer as well, please.

Mariusz (25m 34s):

Microcapexplosions.com is my website. I would say go there because my name is hard to spell. You just go there and there's links to my social media accounts, whether it's public YouTube channel or Twitter or lined to my books. Yeah. Just go to MicroCap Explosions, which is a membership website where I share research on my investments, what I have in the portfolio. It's a paid website. It's $3,000 per year. But by going to their website, you can get links to my free YouTube channel and books so I would suggest that's the best place to go.

Phil (26m 8s):

And how many YouTube videos are you're producing? You seem to have quite a lot there.

Mariusz (26m 13s):

I'm trying to produce a video a day now. That's what I started a year with. I'm not so sure how long I can sustain it. With investments, the hardest part to do is to sit and wait for the investments to play out because people want to be active, especially the successful people with money. How do they usually make it? They make it because they're successful in some kind of business. So, they're the ones that got the clients, they're the ones that made things happen and now they're investing in a different enterprise and they just can't sit on their butt and do nothing. So, me creating content is a way for me to be able to sit on my butt and occupy myself while the thesis is playing out.

Phil (26m 54s):

That is one of the difficult parts though, isn't it? Is that we were speaking previously about volatility and suddenly your investment might go down in 20, 30% in value in one day, I guess a big part of what you're talking to his clients is managing the fear and the grief.

Mariusz (27m 11s):

Yeah. And my YouTube videos served a purpose to calming them down and telling them what's going on. But the idea that I told you about that I bought it at 4 cents. You know, I made almost a hundred times my money and I still have it. So, I bought it at 4 cents. It was at three bucks recently, now it's below but let's say you went from four to three. Now, there was a point of time when I held it, I bought it for four, it went to eight, okay?

Phil (27m 42s):

This is cents, is it?

Mariusz (27m 43s):

Cents. So, I bought it for 4 cents. Today it's at $3. But during the time after I bought it at 4 cents, two months or so, it was like $8. I was watching it one time. I was on the phone with my friend and I saw it go from 8 cents to 2 cents within minutes. So, imagine 75% down within minutes and most of my portfolio was tied to it. So that just shows you volatility. And it happens all the time.

Phil (28m 14s):

But how are you personally feeling? How did that make you feel?

Mariusz (28m 21s):

It didn't bother me at all because I knew that this was just a Blitch. Like it recovered within few days. It almost immediately recovered within minutes. But it's so common. Sometimes you have people that are involved in these names. They think it's Microsoft. They think they can just press a button and sell it. And then they dump all these shares on the market and there's no buyer on the other side. It just happens. It creates an opportunity, but that's the price you have to pay to be able to get those big returns. And if you cannot stomach the volatility. Yeah. Don't go into the kitchen.

Phil (28m 55s):

Mariusz, thank you very much for joining me today.

Mariusz (28m 57s):

Yeah, my pleasure.

Phil (28m 59s):

If you found this podcast helpful, please tell a friend. Especially if it's someone who needs to start thinking about investing for their future. You'll be helping them and helping me to keep this show on the road.

Chloe (29m 9s):

Stocks for Beginners is for information and educational purposes only. It isn't financial advice and you shouldn't buy or sell any investments based on what you've heard here. Any opinion or commentary is the view of the speaker only, not Stocks for Beginners. This podcast doesn't replace professional advice regarding your personal financial needs, circumstances or current situation.

Phil (29m 21s):

And thank you for listening to my podcast.

Stocks for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Stocks for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation.