Ian Cassel on obsessing over what is right

How refreshingly straightforward Ian Cassel was to talk to.

It seemed apparent to me that his clarity stems from a great deal of self reflection. It is difficult to live life on your own terms if that is not the case. I was much obliged when he agreed to be part of this series without any hesitation.

This is part of a series where I attempt to understand the behavioural traits and mindset of money managers and investors. At the end of this (edited) transcript, I have listed the 20 individuals interviewed for this series. Watch the video for the entire engagement.

IAN CASSEL is a microcap investor and founder of MicroCapClub. 

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When you started off as a full-time individual investor, it was your money on the line. You bore the price of your convictions or your errors. How insecure did that make you feel as an investor? How did it shape or mold your behaviour?

I was a full-time private investor for about 10 years - 2009 to around 2019. There's certainly a lot of emotional pressure when you make that leap.

It's easier being a full-time private investor when you're young and single, and your cost of living is next to nothing. I don't know how it is in India, but here in the US, when you get married, wives don't want you to rent. They want you to own the house to raise a family in. It's not cheap to have children. So expenses keep increasing.

Then there are the time constraints. Relationships take time – if you want to be a good father and a good husband. So instead of having 24 hours a day to research stocks, you then have 15 hours a day, and then 9 hours.

Everything kind of just gets constrained. Pressures come from everywhere. Time. Expenses. Your ability or inability to pay short-term bills while keeping a long-term investment focus. I'm a long-only concentrated microcap investor, which sounds like I juggle dynamite for a living, to most people. It's a very volatile portfolio, as you can imagine, but I’m used to it.

I think what helped me deal with the pressures was living in a calm place. I live in Lancaster, Pennsylvania. A pretty-low key, rural type of environment, with a lot of farms around this area. What I do for a living is volatile enough, so the lifestyle matters. It's important who you surround yourself with – be it spouse or friends or folks around. Also, having a calm demeanour.

But how did you deal with loss, because all your bets would not have played out as you envisaged. How did the losses hit you?

One of the things you realize pretty quickly is that losses are a part of the investment process.

You can't be a microcap investor and play for perfect, or you'll never pull the trigger on anything. And in fact, most big winners in microcaps aren't perfect looking when you first buy them. That's the reason they're inefficiently priced or cheaply priced. And that's obviously where the opportunity is.

I'm right on my investments for the right reasons, probably less than half the time.

I’m probably right for the wrong reasons maybe another 10% or 20% of the time.

Then I'm just plain wrong for the other times.

The key distinction to make is that losses and mistakes are two different things. If you invest in small emerging companies, you'll always have losses. In fact, if you aren't taking enough small losses over time, it means you're not taking enough risk.

So just because you lost money on something also doesn't mean that you were wrong for making the investment. The real issue is when we turn losses into mistakes. That happens when you don’t do enough of the work, you don’t do enough maintenance due diligence. Mistakes are sort of like unforced errors in tennis, where you know your actions or inactions turn small losses into larger losses. Those are the types of things that I like to rub my nose in and remind myself because I keep making mistakes, even though I've been doing this for 20 years.

You always said that you love a good story, and a good story sells. How do you make sure that the story is not just a deluded narrative. Just fluff. Specially in the microcap space where you don't have much research on a stock.

When I mean a story, I don't mean a story that is meant to deceive or embellish. I'm talking about stories that are core to the ethos of the business. A story that excites people. A story that people can get behind. One that customers, employees, stockholders naturally want to rally behind.

The microcap ecosystem in the US is about half of all the companies that trade publicly. Around close to 85% of those companies are unprofitable. I would lump those into the story stock companies. About 15% of them actually have a business that makes money. I like to focus on the 15% that actually make money, but also have a good story attached to them.

I try to buy companies that are undervalued that can get overvalued. The way a company gets overvalued is with consistent execution, combined with a great story that connects with people.

You once mentioned that after a mediocre quarter, it's not good to instantly average down. You gotta wait it out because definitely another quarter would follow. It sounded like a mistake you have already made. How have you mistakes shaped you? 

When it comes to averaging down, it is something that's kind of easy to do because you already own it. You're anchored to what the business used to be, and it just looks cheaper.

Let me reframe averaging down. If you personally lent someone money, and then they repaid half, would you give that person more money? Of course not. Yet we continually do that with our investing, where we average down into things that have a history of disappointing us.

I can't broad brush the whole action of averaging down by saying it is bad. It certainly is a good thing. But it's important to disconnect the business from the stock price, and only average down in stocks where the business is continuing to execute, or the business is accelerating. Because that's when you can kind of take advantage of why that stock is down.

Averaging down for averaging down purposes never works out.

So what is something you believed a while back, which you don't believe anymore. Like, say, when you started out to what you are today.

I actually started out as a story stock investor, and it was mainly because of a couple of mentors that I had who were more focused toward the story stock area of microcap investing.

I believed that management should spend maybe 30% to 50% of their time telling the story to investors, at investor conferences and doing investor road shows. What's the point of being public if people don't know you exist?

That shifted probably a decade ago when I realized that the key for management and the CEO is to create a business whose fundamentals attract the right investors to them. Focusing on the business instead of focusing on selling their story. More of a pull process, less of a push process. You know, Warren Buffett has that famous quote, “you get the shareholders you deserve.”

You also said that one tends to over analyze the stock when it's going down and under analyze it when it's going up. How did you mentally learn to disconnect between the business and the stock price? How did you bring yourself to that point?

The key is in obsessing over the right things. The right KPIs. Every business has of 2 or 3 main things to pay attention to.

Obsession can be a good thing, but it can also be bad when you start obsessing over every little detail about a business. About the things that don't matter.

I think the risk to concentrated investors, which I am - I hold 10 stocks in my portfolio, is overthinking your positions, and this can make you more short term. You start thinking that obsessing about positions equals precision. It doesn't work that way. The only thing you should be obsessing over are the key drivers of the business and what could kill your thesis.

In micro and small cap investing, reaction time is important. So what you should be doing is continuously having maintenance due diligence.

A lot of times when stocks are dropping, you start over analyzing every little single detail, and it of steals your courage to act on obvious opportunities that if the stock wasn't dropping, you would have been buying 5 days ago. It's important to be self-aware about where you sit on the emotional spectrum and not let the stock price pull the leash, to kind of use a person-dog analogy.

What is the leadership trait you look out?

Common sense.

In some regards, I'm really attracted to serial winners. People that have done it before, building a small company into something large.

I'm not normally attracted to management teams that were the CEO or the C suite of a large company, because to really be an effective microcap leader, you need to have entrepreneurial characteristics. The ability to grow something small into something that is maybe still small, but larger.

The common theme I see in microcap companies that ultimately become sustainable winners is management teams that have done it before, bringing the team back together again. You can tell you just by just looking at their bios, how they talk, how they operate, skin in the game, that you know they should be running a much larger business.

In this entire microcap space, opportunities aren't abounding. It's pretty risky. This is where luck and skill conflate. How do you view this whole paradigm of luck and skill?

A month ago, we held our Microcap Club Leadership Summit in Chicago. One of the speakers was Ryan Pape, CEO of XPEL.

He became the CEO when the stock was a $1 million market cap. Now it’s around $2 billion market cap. That is amazing. He also bought stock when he joined the company at 4 cents a share when it was a $1 million market cap. That's a 150,000% return. A 1,500 bagger on the equity. Only 7% dilution over 14 years, which is an equally astonishing feat.

I asked Ryan about luck. He said that luck was definitely a key ingredient to their success. They were the right product, with the right strategy, with the right brand, at the right time. When he took over the company in 2009, he never thought that it would get as big as it did.

I think luck is a key component to companies. I also think it's obviously key to investing as well.

It's also important for investors not to get too far out in front of their skis to use a skiing term. We're all trying to find a 10 bagger or 20 bagger or 100 bagger. But thinking about a business that way at the onset probably isn't the right way to find one. To find a 10 bagger, you first need to find a business or a stock that can double. Once it doubles, look out further and see if it can double again.

Getting back to luck, it doesn’t matter what your strategy is, but as investors, you'll ultimately over a lifetime pass on more winners than you ever let into the portfolio. The longer I invest, the more I realize that only a fraction of stocks out there, and only a fraction of winning stocks, are really meant for you. Your past experience, your diligence, your temperament, your timing, and yes luck, all collide and create a situation where you can build conviction at that point in time. I think that's the interesting thing about luck when it comes to investing in stock picking.

But I think we all suffer from survivorship bias too. We look at folks that have built something big, that are in the top 1% of their field, be it Michael Jordan or Tiger Woods or Jeff Bezos or Warren Buffett, or whatever. We look at what they've done in life, and how they did it and then extrapolate forward. And believe that that's all it takes to succeed. When in reality, there were 10 million other people that probably had the same work ethic and the same skills, but where luck and timing just didn't fall into place for them.

If your children had to follow to your footsteps professionally, what would be the advice you'd impart to them?

The best thing that I can do for them is just being there for them, which, unfortunately, in today's day and age is rare. That's the greatest gift I can give them.

Outside of just being there for them, I want them to see me live my dreams. Living the life that I want to live and accomplishing my dreams. The one thing that you realize quick with kids is that they don't do what we say, they do what we do. I have an 8-year old and a 5-year old. So they don't know what they want to do in life. But whatever dream that they want to pursue - astronaut, farmer, microcap investor, social worker, whatever - it's important that they know they can accomplish that. And I think the way my kids are going to know that they can accomplish their dreams is because they will see me accomplishing mine.

I don't think about them becoming microcap investors. But I do think a lot about making sure that they know that they can do whatever they want to do in life.

1. Prashant Jain
2. Sankaran Naren
3. Nilesh Shah
4. Vetri Subramaniam
5. Anand Radhakrishnan
6. Devina Mehra
7. Saurabh Mukherjea
8. Raunak Onkar
9. Samir Arora
10. Kenneth Andrade
11. Rajeev Thakkar
12. Aswath Damodaran
13. Ian Cassel
14. Vishal Khandelwal
15. Sanjay Bakshi
16. Ramesh Damani
17. Jim Rogers
18. Ben Carlson
19. Mohnish Pabrai
20. Christine Benz