VALUE: After Hours (S08 E30): Thousands of Micro Cap Stocks. Ian Cassel Finds the Winners. Here’s How.

During their recent episode, Taylor, Carlisle, and Ian Cassel discussed:

TRANSCRIPT

[Tobias] This is Value After Hours. I’m Tobias Carlisle, joined as always by my co-host Jake Taylor. Special guest today, one of our faves, Ian Cassel.

He’s back. He’s got a brand new book, Stock Picker. How are you, Ian?

[Ian] Good to see you. Doing great. Thanks for having me back on.

It’s always a pleasure.

[Tobias] We were having an interesting conversation just before we came on that. We should probably continue that because I think you’re talking about the challenges of staying relevant as a microcap site, which you’ve done very well over an extended period of time.

We were talking about, we were lamenting the difficulty of getting into the value investing club, which seems to favour long, complex theses over the quality of the idea. You had an interesting solution to that.

[Ian] Yeah. I think what preempted that was we’re in the process of rebuilding our microcap club community. It’s taken probably nine months to get to here.

We’re relaunching at the end of this month. We’ve been on the same platform for the last 15 years. As anything, when you’re on something for 15 years, you get confined to the limits of that platform.

Also, you just end up trying new things, adding new things, and the site just gets more and more cluttered over the years. It’s been fun to just tear it all apart and rebuild it for the next 15 years. I think in today’s day and age, especially in the last 15 years, there’s the onslaught of substacks and discords and everything.

Being able to build their own personal brand quicker and monetising it is something that community sites run into. Historically, and I still do, I view microcap club as a giant recruitment engine. I have viewed us historically as I want to be whoever the number one football team is in college right now, but I want to be Alabama football.

I view our community like that. It’s all about recruitment. We want to get the best recruits that are out there.

They want to play for our team because of our legacy of winning. We have some really good players on there, and they feel like they can win as part of our community. I’ve always looked at it that way.

The number one KPI I’ve looked at since inception isn’t the number of paid subscribers we have. It’s actually the number of new applications that come in from new applicants wanting to become members. The cool thing is that’s been hitting new highs even the last couple of years, and that might be a product of a bull market.

We get 25 to 30 new applications a month. The thing that I’ve been thinking about on the incentive side, and we haven’t announced anything yet, but I’ll be announcing that probably in another six months, is figuring out some ways to keep those young recruits longer on our platform. What usually happens is people build up a reputation and then they leave.

They go and they launch something somewhere else, and they can leave for a variety of reasons. Maybe they took a job somewhere that doesn’t allow them to post on a forum anymore. It could be just them wanting to launch their personal brand, which they should.

I did the same thing 15 years ago. How to keep those people on the site longer. I felt really from day one on the MicroCap club side that I don’t pick sides in regards to flavours of investing.

That’s one thing that I think we are different in addition to focussing on MicroCap, different from a place like Value Investors Club. I don’t have my snobby nose up at anything that’s not value or perceived as value. I want every flavour of investing to be represented on our community because quite honestly, every flavour of investing has goat investors that invest in that flavour.

First and foremost, I love a variety from story stock to deep value and everything in between. We want to continue to do that. Anyway, that’s how we’re going to continue.

We’re relaunching it. I don’t want to say too much more, but there’s going to be a lot of new features on there that I think people are going to really enjoy. I think we’re going to launch some new incentive systems that I think are going to surprise some people and benefit people as well.

Really just to continue to grow and prosper as we have over the last 15 years, turning into a global community now. Probably 25% of our users are from Europe, 10% from Australia. It’s not just US and it’s not just US and Canada anymore, which is also cool to see the space expanding because our long-term goal is to pull quality investors into the ecosystem because that’s how we just raise the standard of this investment class that has been forgotten by much of the financial industry.

[Jake] How’d the Vegas conference go?

[Ian] That was awesome. It’s hard to surpass my expectations, but that one did. We had a new location there at the Bellagio.

You were there, I saw you briefly for one of the days. We have a venue that matched what we want to do, the class level of what we want people to perceive micro-cap investing to be. It’s not in old Las Vegas, getting dollar beers and $20 room nights.

We want to present ourselves with a certain class. It was huge. The main KPI I look at for our events is how many one-on-one meetings each company has on average because that keeps us honest as a conference organisation.

That means we have to have high quality companies present because real investors don’t want to meet with dog shit, excuse the language. It keeps your quality level of company high, that attracts quality investors. You do that year over year, that just continues to grow and blossom.

The main thing I look for is how many how many meeting requests with quality investors are these companies getting. I think this last year we had 16 or 17 on average per company and we had 140 some companies that were there. These were real meetings, not like some other events where you’re dragging some people off the street and barely have a pause since they sit in this meeting and act like you care.

These are genuine ones. That’s how we make an impact. That’s how we judge our success and that’s how we’ll continue to grow that and hopefully turn the Vegas one into the Berkshire of microcap, create that reputational pool in the ecosystem.

This is a place to come once a year.

[Tobias] Tell us a little bit about the new book. This is a little bit more personal than I’m just holding up a copy now. Hold it over your face.

[Jake] I’ll preface by saying that I’ve known Ian for a really long time and there were still a lot of stories that I had never heard before that I really enjoyed. Then the way that you weaved it together with investment philosophy, I probably read it in two bites, two sittings. It was that good.

It went down that easy. I thought it was great.

[Ian] I appreciate that. I always said I was never going to write a book and that’s usually when you start thinking about writing one. That’s what happened with me too.

It’s probably something about hitting your 40s too that makes you self-reflect a little bit more. I wanted to produce a book that was readable, digestible, authentic, personable. I didn’t want it to read like an instruction manual where that I have all the answers or this is not an invest like Ian and I’m your guru book.

The world doesn’t need another one of those. I think whether you’re a novice or experienced, regardless of where you stack up on the flavour of investing that you apply to your own portfolio, I think there’s some nuggets in this book that you can pull out and hopefully help you think a little bit differently, hopefully, and then apply it to whatever you want to do. The goal is not to invest like me.

It’s to invest like you. I think that’s something the greats have all taught us. It’s in the areas that were unique is where the alpha is found, not how you’re going to clone somebody else and do exactly what they do.

It’s about that journey and finding out the best investor that you can be and every year becoming, hopefully, a better investor than the year before.

[Tobias] You say in the book that you went from an eat what you kill trader to a value-added investor. What’s the difference and what prompted the transition?

[Ian] That’s an hour-long conversation. Oh, here we go. I guess I’ll just start reading the book.

[Tobias] Here, let me start.

[Ian] I mean, when I started out in investing, I would characterise myself as a story stock investor in shorter term. I believe that usually an investor starts out as a stock picker two different ways. Either it was before or after taking an accounting course.

If you start out after the accounting course, you start out in value or deep value because it’s the only thing you know. There’s nothing against deep value, I’m just saying. If you didn’t, which I wasn’t even smart enough to even take an accounting course, you start out in story stocks.

It’s like the lowest common denominator. I started out in story stocks and because of that, it didn’t take me long to realise my main risk in story stocks is dilution and the company doing some dilutive capital raise that would crater the stock forever. Basically, my duration of holding period was measured in weeks to months, not years.

It was all about trying to get in and out as quickly as possible. I was starting to do management, meeting with management teams back then, but even regardless of that, I was more concerned with, okay, who is going to buy my stock from me 100% higher? That’s what my chief concern is.

I would say that was over time, that was 90, 10, 90%. That’s what I was looking after. Then over time, it’s like, all right, 80, 20, 70, 30, you start carrying.

What happens, I started caring about quality over time. If you want to stay a micro-cap investor, two things have to happen if you’re successful, because your capital is growing. You either have to get more diversified or you increase your duration because you can only shovel so much money down a handful of stocks.

You have a choice. It’s either get more diversified, add a few more positions, or just hold them longer or both. For me, it was mainly a little bit of both as my capital started to grow and my transition to become a full-time private investor.

Only then I was caring about business quality and fundamentals for that matter. The more stock of each one of these companies you own, it naturally pushes out your duration. Where in the beginning, I could get in and out in a quarter.

All of a sudden, I had to be in these things for two or three quarters, and it naturally forced you to become a quality investor. You needed to invest in a management team that can string together two or three or four quarters in a row and not just one. It forced you to become a quality investor whether you wanted to or not in a capital-constrained area that’s illiquid like micro-cap.

Then through some experience I had doing some consulting, I’m really learning about a lot of the problems that CEOs face just being CEOs of small public micro-cap companies. I started to have empathy for what they go through on a daily basis, and got to know them. Talking to management became more and more part of my repertoire as an investor.

Over time, as capital grows even more, I enjoyed the process of being that sounding board to a management team or CEO to where I could give them good advice on capital markets or from whatever. I could save them from themselves because a lot of these folks, even the good ones, they’re good operators, but they don’t know how to deal with capital markets. I transitioned to then becoming more of what I would call a value-add.

I’m not a value investor, I’m a value-added investor. Really, it’s only in the last three or four years I feel like I’ve reached that point. It feels good to reach that point.

I talk about active patience in the book. I think that’s how I would describe where I feel like I’m at now, only after 20 years, is the ability to still stay in these micro-cap companies. In my approach, from time to time, we’ll make direct investments into some of these smaller micro-cap companies, also buy stock in the open market, be a good sounding board to the management teams, our reputation at this point in time really helps us.

The CEOs want us on the cap table. They see a value-add to having somebody that doesn’t want to flip out in the next quarter. They understand our reputation that we have.

When I say we, I guess it’s me, but it’s really just me at the fund. It sounds better when you say we.

[Tobias] Yeah, exactly.

[Ian] Much bigger, much more prominent. I felt that in the last three or four years, we’ve done fairly well taking this hybrid PEVC meets public micro-cap approach of direct investing and also helping them. There’s something, I don’t know, again, probably about hitting your 40s where yeah, it feels great to buy low and sell high, but what feels even better is buying low, helping the company along the way, and knowing that you made a positive impact on that company and that company is better off because of you.

That reaches a fulfilment stage that I think hovers over top of great returns that is the cherry on top. That’s what’s exciting about today.

[Jake] More towards the cathedral and away from the casino. Yeah, exactly.

[Tobias] I think a lot of people would be interested to know how you transitioned to managing your own capital at 28. Can you describe that story for us?

[Jake] Besides just living like a monk?

[Tobias] Exactly.

[Ian] Don’t get married. Yeah, exactly. There’s a couple of different rabbit trails we’d go down with that one, but if you want to, I feel like I got a little bit lucky because I made that decision right after the GFC, the bear market and the GFC.

That was good timing. It’s not like I would have, and of course, in the moment, you don’t feel like you got lucky or like what I walk into, but I do feel like I probably wouldn’t have waited for a bear market. I think just having invested through a bear market, specifically that one, and specifically the companies I was invested in, really shaped my investment philosophy that I even have today, having gone through that experience and having made that decision right after that, because I kind of cut the cord of the consulting I was doing around like May, June of 2009.

That’s when I kind of officially became a full-time private investor. By that time, the decision was made based on the fact that I’d just been through this awful bear market. I kind of proved that I could face adversity and make it through.

And I also made the decision not like in a bull market, which most people are prone to do, would make this decision in a bull market, like the one we’re in, where they just take a 25 or 30% return. Well, I can just flip off 5% until infinity.

[Jake] Drag that down on the spreadsheet. Hey, look at my net worth.

[Ian] Yeah. Yeah. And so kind of going through a bear market, it was less about what I thought I could do on the performance side and more about what was I willing to endure on the pain side.

And for me, it was like the amount of capital I needed was an amount of capital where I could withstand a 50% drawdown and still not change the type of investor that I was. And the main kind of lesson learned through the GFC on the investing side, mainly was from a company called Zag that I was in back then. And it really shaped my investment philosophy even today, where middle of 2008, the world’s starting to fall apart.

I find this little company called Zag, fly out to Utah, meet with Robert Peterson, the CEO. They were making screen protectors for cell phones. The second generation iPhone came out in June 2008.

By that point in time, people realised they needed to protect this huge screen, and they were kind of a peripheral play on the Apple iPhone boom. And they were just at the right place at the right time. And the stock was at $0.65 a share, a $15 million market cap. They put up a penny in earnings in Q2 of 08, went to $0.05 in earnings in Q3. The stock was at $0.75, so on a $0.20 run rate. Nobody cared because the world’s ending.

But eventually the world did start to care by November, December, even though the world was still falling apart. And that company was up 300% when the S&P dropped 42. And I kind of came out of that scenario thinking, okay, I want to be in this.

I have a couple ideals on why it did well. First of all, it was growing revenue 200%, and the bottom line, 400%. It could self-fund its growth.

It didn’t need to tap capital markets. But I do think it’s because it was such a small, obscure micro-cap company that even through that bear market, which is generally not good for micro-caps because it’s risk-off, and especially the larger micro-cap segment, that are indices and the iShares, Russell indices, and other ones and other sister indices that they have. Usually in that environment, it’s just a constant bid-whacking on that larger or on the small-cap and large micro-cap segment as they liquidate and take risk off.

Where the smaller ones, no institutions own them to sell them. And that’s why they do better is because no institutions own them, actually, in a bear market.

[Jake] Yeah, you can’t get rug pulled if no one owned it to begin with.

[Ian] Exactly. Yeah, it’s just you and some other guy in their basement, living in their parents’ basement. Yeah.

And so that kind of solidified my investment philosophy. Okay, I want to find these really high organic growth rate companies that are small, and I want to get into them small, like sub 50 million, not when they’re 200 million already. And that’s still something even to this day, that it’s still kind of where we land.

That’s how small we want to go and are willing to go if we find the right companies.

[Tobias] One of the questions that when you were talking about seeking to hold beyond a quarter for two or three quarters, quality became more important. In a micro cap space, what are you looking for when you’re determining quality at a micro cap level? It’s difficult.

I don’t mean to frame it like that and make it sound like.

Why Microcaps Are Not Buy-and-Hold Investments

[Ian] No, no, you framed it correctly. I mean, because I believe a lot of people make a big mistake in micro cap by applying things that are applicable in larger caps down to micro caps, such as coffee canning, buy and hold and forgetting. I think you can do that, but it could be a painful lesson that you learn.

And it’s mainly because micro caps are small businesses and small businesses that are a lot different than large business, mainly because they’re filled with concentration risk. Key man risk at the top, probably product concentration, probably customer concentration, probably jurisdictional concentration. It was just a fancy way of saying they’re a lot more fragile and the possible outcomes are a lot wider and mainly the bad outcomes.

And so it’s important to kind of live in that reality in the micro cap space and realise that a lot of the winning micro caps, it’s just the season of winning. Very few of these companies deserve to be owned for more than a few years. The average hold period of my portfolio is still probably 12 months, 16 months, somewhere in that arena.

And I feel like I know what I’m doing. And it’s because it’s really hard to find a quality business. And really what you’re looking for is a quality management team that can execute consistently more than a few quarters, more than getting one good contract because they won and died in the right person, where, yeah, they show a 30% growth the next four quarters and then they have to replace that.

And it’s like, oh crap. And so that’s why like a micro cap winning stock normally does resemble that Lassonde curve, which I have in the book, which is kind of this discovery mechanism where all of a sudden they announce a big contract, they get a big order, you see the velocity of the contribution margin flow through the income statement because they’re probably under-investing in the business. All of a sudden they show up a big bottom line, then they put up another quarter.

The 10 PE goes to 30 to 50 to 60 as all the Excel junkies, Excel spreadsheet this thing out 10 years, it’s gonna be the next Tesla. And then guess what? They fall flat on their face at some quarter, probably at the next comp period when that contract rolls off.

And then it comes back down that first discovery of the Lassonde curve. And then most of them, and I mean like 90% of them never get back to that old high because the next move, the first one was momentum mainly. The second move needs to be a purely fundamental move.

And it’s gonna take probably two or three X the earnings power as it took the first move to get to the same price. And so that’s my rambling answer to it. It’s hard to find a management team that can execute though over more than a couple of years.

And it doesn’t mean they’re bad managers. It just means, hey, listen, it’s the competitive space. I mean, you’re a micro-cap company and there’s a hundred other competitors vying for the same customers.

It doesn’t mean you’re an awful human being that you didn’t execute. It’s just like, it’s tough, it’s business.

[Tobias] Have you found that the space has grown or shrunk over the period of time that you’ve been in there? In terms of like the number of companies, in terms of the competitors, what do you think?

[Ian] I think it’s probably down. I mean, I think the main thing that we see, I think we saw 10 years ago, but I mean, there’s not, I think it’s just the lack of higher quality small companies going public small. It’s like, you’re not getting Walmart in 1970 going public to micro-cap, and you can insert a bunch of other names that went public back then that were 30 million, 50 million micro-cap, which would still be a micro-cap on inflation adjusted basis today.

You’re just not getting that higher quality, small, growing, profitable business going public. And the irony is those companies are probably the ones that should best be public. And the counter to that would be like, why would they go public?

They’re already profitable. Well, it’s kind of what I told buddy Brent Bishore or anybody in private equity. Well, the reason you would go public is the one thing the public markets do better than the private markets in general, unless you’re part of an AI craze, is overvalue you.

If you can consistently grow revenues and earnings in the public space, like you could manufacture toothpicks. And if you can grow the top line 20% and the bottom line 50 for three years in a row, you’re gonna trade at a 25 PE. And if you’re a small business owner, that means that’s real value created and you don’t have to sell your company for four times cashflow to a private equity player.

So I do think that we do need to bring really good companies public again that are small. And I do think that there’s a reason to do so. I don’t think that that reason is properly articulated and it’s usually glossed over by people that are just saying how expensive it is, which it isn’t cheap.

But I do believe if you’re an entrepreneur that believes in yourself and if you’re simply, we see it time and time again, just a boring business that can go from 20 million in revenue, earning 1 million to 60 million earning four, that’s a five bagger in our world. It doesn’t need to be Google. It doesn’t need to be Tesla.

And I think that there’s a lot of good that can come, especially if it’s a brand that has a public image that can help get out there because they’re public. What needs to change for that to happen? I think it’s tough because the people pushing or complaining about the lack of public companies going public are the ones that benefit from just more slop going public.

They just wanna get more companies public, not higher quality companies public. And I’ve tried to have this conversation with some people, some exchanges, and it’s hard because the incentive is to get more companies public, not higher quality ones. And it doesn’t matter that I point to, do you realise all your success stories are these profitable growing companies?

Most of them are these companies that, yeah, this story stock did well and it was up a thousand percent this year, but three more years we’ll be bankrupted and not even on exchange. But the ones that are actually here for the last 10 years that you can point to with a long-term chart, those are like real businesses. And maybe we should focus on getting small businesses that are good businesses to go public again.

And then bring it down to the top.

[Jake] Instead of just trying to SPAC a science project just because you can.

[Ian] Right, exactly. And that’s the irony. It’s like the best companies that should be public are companies that don’t need to raise money.

Like they will do the best in the public markets, ironically.

[Tobias] What about a secondary exchange like the AIM or other ones around the world?

[Ian] Well, I think it’s better in certain geographies. Here in the U.S. it’s pretty bad. I think Canada is a little better.

I think Australia is a little better, meaning you still see growing profitable companies go public small. And some of these other geographies. And I think that’s why it’s become more important to keep an open mind in how you invest, to not be like landlocked to a certain geography, especially in today’s day and age, we can access any market in the world.

So I do think that there’s these pockets where maybe the VC or PE community isn’t as active or fervent as it is here in the U.S. where you still have companies going public that way.

[Tobias] Let me do a quick shot around the horn and then JT is going to give us some veggies. Breckenridge, what’s up? Gothenburg, Sweden, welcome.

Toronto, Snohomish, Pettit-Tikva, Israel, Bendigo, Victoria, late night, how are you? Tallahassee, Paris, France, Hartford, Alabama, Cincinnati, Honolulu Bay, what’s up? Honolulu, Honolulu, sorry.

Wiltshire, Clodge, Transylvania, Romania, Lawrence, Kansas, Quebec, Quebec City, Canada, Bellevue, Cincinnati. Thanks folks, good to have you here. Righto, JT.

[Jake] All right, so our veggies this week are based in Toby’s homeland of Australia, which if that’s even a real place, no one’s actually sure. But it’s a country where everything is already trying to kill you and the government still somehow decided that grasshoppers needed their own agency. And in fairness, the last time Australia went to war with an animal was 1932 and it was basically machine guns versus emus and the emus won.

So you can understand their abundance of caution there, but I’m digressing. So Australia has a full government commission for a bug, the Australian Plague Locust Commission, staff, aircraft, a bespoke budget, it’s all there. And a solitary desert locust is green or brown, it’s kind of shy, it avoids its own kind, but then it rains and vegetation booms and the population booms with it, of course.

But then when that vegetation dies back, all these locusts get squeezed together onto the last of the remaining green patches and they start bumping into each other. And a few fun facts about locusts, a swarm covering one square kilometre will hold roughly 40 million locusts and eat as much in a day as 35,000 people would. Each one eats its own body weight daily.

In 1998, a desert locust swarm rode the wind from West Africa all the way across the Atlantic to the Caribbean, 5,000 kilometres in about 10 days. And it’s not unusual for swarms to cover roughly 150 kilometres in a day. So pretty incredible.

But here’s where things get really interesting. No locust surveys the food supply, it decides, hey guys, let’s go swarm somewhere else. What happens is the other locusts keep brushing against each other’s hind legs.

And a team from Cambridge worked out that if they stroke the back legs of a solitary locust with a paintbrush for a couple of hours, the animal starts to change. Repeated touches trigger a surge of serotonin in its tiny little bug brain. And within hours, the shy locust wants company.

It’s drawn to others. And over days and weeks, the colour changes and the body changes and the brain physically changes. So it’s the same genome becoming a different animal effectively.

And biologists call them two different phases, solitary and gregarious. No information was really received. The legs just got brushed enough times and the chemistry did the rest of it.

And that’s how locusts then crowd together in biblical proportions is because they are rubbing each other’s back legs on accident effectively. Another research group found that locusts are actually cannibals, I don’t know if you knew that. And they’re driven by a hunger for protein and a salt deficiency usually.

And so talk about being hangry. But in a dense cloud, a locust that stops gets bitten from behind and usually on the abdomen for some reason. So every locust is doing really two things at once in the swarm.

It’s chasing the one in front of it, wanting to bite it and then fleeing from the one behind it who’s trying to bite him. And so it looks like a migration that has some kind of purpose, but it’s really just trying to stay away from and not be the one who’s lunch. So research actually proved this by cutting the nerve that lets a locust feel its own abdomen.

So they surgically altered locusts, they slowed down or stopped marching and they were six times more likely to get eaten. So we can think of the swarm as one machine really with two parts. Density kind of converts you and then the crowd won’t let you stop moving.

That change chemistry really pulls you in and then the bites from behind keep you moving. So let’s torture this analogy beyond oblivion now. We describe markets often as these information processing machines.

Data arrives, beliefs are updated, the price moves, it’s all efficient. But a lot of what touches a fund manager in a given week isn’t really that important information, it’s contact. The same prices are moving around on the screen every morning, the same themes in every meeting that you’re having, every conference, every podcast, whatever is hot or existential right now is kind of put in constantly onto you.

That stock that you don’t own going up again and again every day, victory laps on Twitter that we have to read, some competitor, other fund manager who you know isn’t as smart as you are but he’s putting up gaudy return numbers. None of this really changes the real value of that single business that you own but each one is like a little brush on the hind leg. And as a recent example of all this, semiconductors, one single industry, about 5% of the S&P 500 in 2020.

As of June of this year, it’s more like 20%. NVIDIA alone at like 7% or 8% of the index. If you didn’t own chips, you were getting brushed every single day by like a fifth of the benchmark.

And you brush a manager long enough and he might just start to convert and he starts wanting to be near the crowd. He didn’t really get new information, he’s just kind of becoming a different animal. And I’ve even heard stories of investment committees pushing their managers for more chip exposure which is kind of hard to ignore after a while, right?

And once you get sucked into the swarm, now the bites from behind start taking over. And this is the client calls asking you why you’re behind the benchmark. I mean, it’s obvious that AI is the future and there are choke points everywhere in the picks and shovels infrastructure.

Like how could you be so dumb not to own this stuff? Client calls, of course, eventually turn into redemption notices which probably I know feels a lot like someone trying to eat your abdomen. And we saw this with Terry Smith recently and I try not to name names, but remember he had this very catchy, buy good companies, don’t overpay, do nothing.

Well, portfolio turnover in the first half of this year was over 50%. So that’s pretty far away from do nothing. And his explanation in his own letter was a buy and hold strategy can only work if you are not subject to flows and we are.

So he couldn’t really afford to stand still like somebody behind him had teeth. So if enough managers are feeling the same bite, their buying will lift that index weighting, the underweight gets hurt more, gets more bitten. And this march upward is fed by capitulation.

So, of course, I always try to bring Buffett into every conversation to everyone’s dismay, but how did Buffett inoculate himself from this? Well, first, he and Munger, I think, are probably superhumans in their ability to think for themselves. So we should probably try even harder to maintain our own head spaces than they even did, since we aren’t superhumans.

But we’ll start with maybe some good news from biology here, which is that phase change that happens with the grasshopper turning into locust is reversible. If you take the crowd away, you stop brushing the legs. And over time, the locust goes back to being a solitary creature.

The gregarious isn’t the animal’s natural state. It’s a response to density. So, and I think maybe Buffett sort of understood this, maybe by instinct, but independence sort of works the same way.

It’s as much an environment as a personality trait, I guess is what I’m trying to say. So Buffett chose Omaha, not Manhattan, no computer on his desk. He reads the filings directly.

He doesn’t watch the tape all day. And he also, as far as kind of the bite of angry clients, he kind of removed the teeth. He shut the partnership down in 1969, put the capital inside of a corporation.

Now Berkshire shareholders can sell to each other, but they can’t take the money out. There’s no redemptions, no flows. The only bites he really endures come sort of at the peak of bubbles with Warren has lost it articles that always come up or the occasional like shareholder question about why aren’t you buying tech during the Berkshire AGM?

That would happen when things get really frothy. But there’s no benchmark that he has to beat by December that he’s chasing, that he’s worried about, you know, the IC looking at him and getting mad. He measured himself on five-year increments.

And, you know, his partner signed up for a long-term philosophy, not for like, you know, what’s gonna happen next quarter. So wrapping this all up, no single touch actually makes a plague and no single client call sort of turns you into a closet indexer. It’s the pressure that, then the pressure changes.

They don’t have to be that dramatic. It’s the repetitive grinding and nipping at you that can change you and your behaviour. Now, the good news is the locust plagues always end.

Everyone in history has, not because anyone really beats them. It’s the rain stops, the vegetation runs out, you know, the density falls and the machine runs in reverse then. And the brushing stops, the bite from behind stops and the locust goes back to being the shy green and alone.

And the swarm never really decides on its own to stop. It just runs out of things to eat. And every crowded trade ends kind of in exactly that same way.

So really ask yourself, you know, what’s brushing up against me? What’s trying to bite me from behind? And am I at risk at joining the swarm?

And is there anything I can do to limit the damage I can take?

[Tobias] Amazing, JT. I think someone needs to look into the scientists brushing the legs of grasshoppers and cutting the nerve to there. What’s the other side like in that part of the world?

[Jake] Yeah, science. Sometimes it’s a little ugly, but.

[Ian] I didn’t know if there was a relational lesson that you were going to pull out for married people, but I guess not.

[Jake] Well, yeah, I try to stay away from that subject.

[Tobias] I had, there’s a good question here, Ian. What are your thoughts on whether it was worth it to do it in small caps? When you’ve got $10 billion plus companies that seem to be sort of delivering the same returns.

[Jake] Or growth rates of some of the big tech companies that just boggle the mind.

[Tobias] Particularly recently, the earnings growth of that large companies has been bigger than mid to small.

[Ian] I mean, I think for me, I’ve just been in micro caps so long. It’s what I do. I like, I’m competitive.

You know, in the book, I talk about how I still, even in the fund, I still kind of hold myself up against the S&P 500. Not a lesser index, because I just am a competitive person. And I want to kind of compare what I’m doing against the 92 Dream Team.

I want to see my high school players, no name of players, beat the 92 Dream Team. And that’s what I’m kind of doing. And I like that competition of it.

So for me, I just play a different game. And I certainly understand if you’re, wondering if you should be invested in micro cap, why you would be thinking that way. Because the growth rates, as you said, Jake, of some of the largest companies in the world, still growing, you know, 50, 60, 100%.

In some cases, it’s just insane. Like, why would you bother? I mean, but I do think that for those that kind of look at the historical perspective of micro caps, how they’ve invested, kind of have some kind of feel about, okay, I don’t know where we are in this cycle, but maybe we’re closer to the end than the beginning.

You start to see an opportunity to invest in some of these smaller companies and get a piece of these smaller companies as part of your portfolio. But I do think it’s obviously difficult if you look at the last 10 years on the S&P and market cap weighted, how that’s done and wonder why you should be investing anywhere else. And it’s a good question to ask because only 10% of active managers can beat the S&P 500 over 10 years.

It’s incredibly difficult to beat. You know, everybody, most people you see on CNBC, they can’t beat the S&P 500 over 10 years, even though they act like it. And I think for most people, they should just be invested probably in the S&P 500 because it is the most formidable opponent that an active manager has.

But I think for those of you that want to play the game, want to pick stocks, I think picking stocks in micro cap is still the best place to pick them.

[Tobias] Yeah, they tend to be under followed, tend to be, as you say, less subject to the indices, to the whims of the folks trading the indices. More idiosyncratic opportunity.

[Ian] Yeah, and you have the same flavours of investing down here in micro cap as you do in large cap. And I find too, like the, usually whatever your occupation is as an individual, you probably have some sort of expertise that can be applied to micro cap investing in that industry, in that niche. And you would be surprised at how that can become the start of an advantage, even in investing in micro cap.

Some of the best micro cap investors I know are small business owners because they understand small business, volatility of it, but also they understand different little niches of areas that there’s probably 50 micro caps that exist in that area that are public and go find the best one that you might have an edge in. It’s a good place to start.

[Jake] It’s easier to be Peter Lynch down there than up in the big leagues.

[Ian] Yeah, but I think to your veggies, I think one of the things you were getting at Jake is, and one of the things I reflect on quite a bit is, I think it’s important for all of us as investors to continue to kind of push out the circle of competence and usually get nailed if you try to push out too far. And a lot of times, in the moment, it’s hard to know if it’s pushing out circle of competence or if it’s FOMO. And then the other way to look at that, like, well, it’s not FOMO if I’m not going into something that’s working.

Well, I’m gonna push out my circle of competence into things that aren’t working in the market. Well, that’s another set of problems, right?

[Jake] Yeah.

[Ian] Yeah, because all the greats do it. I mean, all the greats kind of push out, you know, Buffett started with cigar butts and ended as basically a private equity firm that’s publicly traded that provides credit debt. You know, he does everything under the sun now.

You know, he learned to paint with all the colours, you know, over 70 years, you know. And so it’s important that, you know, everybody wants to stay relevant in this game. They really do need to learn to paint with more colours, you know, and it doesn’t mean that you shoot cannonballs at new things and risk your whole portfolio.

It just means shoot some bullets, learn and expand.

[Tobias] I actually thought you were going somewhere different when you were referring to Jake’s veggies. I thought one of the things that you talk about in the book, one of the two things that you talk about, the mindset and the temperament, which is basically ignoring the crowd and focussing on your own research. So what’s your, how do you create those barriers so you don’t get swayed by the crowd?

How do you make sure that you’re not sort of getting high in your own supply? Like what’s the, how do you strike the balance? Well, it’s difficult.

Why Great Investors Ignore the Crowd

[Ian] And I think the way I do that would be different than maybe somebody else. I’m a very high touch management type of person, a lot of reps with management. I feel like that’s my moat is the relationships I have with the management teams I invest in.

And oftentimes that moat doesn’t mean, it can mean obviously that I can hold longer than others when something is working, but more than the coin flip, it’s because I can spot the signs of things cracking for others and getting out for others. And that becomes more important as you swing a bigger stick in capital.

[Jake] Can it be hard to leave if you have personal relationships with the managers? Do you feel like you’re kind of firing a friend?

[Ian] I think that’s the worst part of my style of investing is that it can feel very transactional on the relationship side. Because you build up almost a friendship with some folks, you know them, you probably spent several hours in person with them. Because that’s one of the things I try to do too is not just do 30 minute Zooms with a CEO and say, I know everything, but it’s just like anybody, you just, you wanna go out there on their turf, where they’re from and sit down and walk around and spend six hours, get past the first one or two hours of sound bites, get to see how they really are, how they really interact with people.

And that just takes time and work. And sorry for the rambling answer, but I think it’s also this part interpersonal is kind of where the world’s coming back to because of AI. You know, anything that’s public can be scraped, whether it’s transcribed an earnings call to financial data, to anything, it’s all becoming commoditised.

Your Real Investing Edge in the AI Era

What’s not commoditised is you willing to get on a plane and have a one-on-one conversation with a management team and try to gain some differential insights. That’s an edge that was around 80 years ago, and it’s still around there today. And it’s probably more important today.

Obviously, I believe that confirmation bias to how I also invest, but I do feel like that is becoming more important. You know, and even on building community side with Microcap Club and the events, like I think the events are becoming more important. You know, people just want to go out and meet the management teams in person because it’s becoming more and more of an edge to actually try to gain some differential insights through the old school way of building relationships.

Right? So, yeah.

[Jake] It’s gotta be hard though. If you go, you have a meeting and you’ve owned it for a year and you just, you see some cracks and you’re like, okay, I gotta get out in front of this. And then you, it’s hard for them probably not to feel judged if you’re punching out after the last visit, you know?

[Ian] It is, like it’s, I do think it’s the worst part, you know, and I’ve talked to some other fellow investors about it. But you can’t let that stop you from selling. You know, you have to stay rational.

You have to be like black and white on some of this stuff. And I mean, the good ones you still have relationships with afterward. You know, they know it.

You still run into them at the same event.

[Jake] Maybe I’ll be back.

[Ian] I might be back. Exactly. Actually the easiest ones are the winners that you ultimately end up selling a little bit out of and they can see you selling out of it because they get the no bow sheets every two or three weeks and they see that you’ve whittled down your position.

But even in those cases, like nine out of 10 of them they’re just like, oh, we’re glad you won. You know, you got some, you know, it’s like, we’re glad that you won. And that’s why I’m never insider selling when a stock is going up.

I don’t really pay too much attention to if a CEO sells a little bit. Obviously if he sells all of it, I would. But, you know, it’s like some of these guys and gals that are CEOs of public micro companies they’re not rich.

It’s like, they see their net worth go from 500,000 to 10 million, you know because they produced a great outcome for people. They should be able to win too.

[Jake] They might want to get out of the apartment that they were in.

[Ian] Exactly, right.

[Jake] They’ve been grinding for 15 years.

[Ian] Exactly, buy a boat or something, you know make some memories that actually matter, you know. So it’s like, that’s another thing that I think I probably can empathise a little bit more with them over.

[Tobias] How do you tell the difference between the fanatics and the promoters? Again, it’s difficult.

[Ian] You know, I co-authored two books on intelligent fanatics about 10 years ago. And I think the common theme in all the companies I invest in is I do believe they are overused term, you know incoming quality management or quality CEO but I don’t put a intelligent fanatic label over top of them. Like that intelligent fanatic label is one that’s earned and it can only be earned after they reach an escape velocity out of microcap.

That’s for sure.

[Tobias] You know, so they don’t deserve that.

[Ian] So I kind of qualify them as potential intelligent fanatics. But I do, but management is the most important thing. You know, I’m willing to look at any industry as long as I feel like there’s a very high quality leader at the helm, probably the last five or six years I would stay away from specific cyclical industries whereby in the last five years I’ve probably leaned into those cyclical industries because it was actually easier to spot great management of these, in these bad industries.

You know, when there’s a headwind or of a lower commodity price or what have you it’s almost easier to spot that company that’s growing in spite of it. And you’re like, what are they doing different there? Like everybody else sucks.

Like, well, that’s probably something in the leadership side or culture side. So I started doing that maybe five or six years ago and again, kind of evolving as an investor. But I think each, each one of these leaders hopefully is a potential intelligent fanatic and that they don’t deserve that until they, you know eclipse at least a billion market cap in my eyes.

[Tobias] What’s the mistake you’d like to unmake? And what’s the rule that comes out of it?

Why Averaging Down Can Destroy Your Portfolio

[Ian] The mistake that I’ve done the most is averaging down into losers. You know, I think averaging down especially in micro cap kills more investors than anything. And I think just need to be very very cautious with averaging down.

We did some evidence-based research into a bunch of different things. Brian Telford led the charge on this. He produced about 30 white papers specific to micro cap.

And one of them was analysing companies over the previous 10 years that had 60% drawdowns and how many of them recovered. And what was interesting? Well, first of all, I think it was something like 33 or 35% of all micro caps have a 60% drawdown.

So it’s a big part of it, but I think I have to look at I forget the exact number but it was something like 90% of them didn’t recover. You know, so once again, when you’re and I didn’t realise that and like it literally rewired me a little bit cause I was more prone to average down and average down. And after seeing that, I’m like, eh, you know it’s staring at that evidence of how what reality actually is those base rates versus what I want reality to be.

You know, I’m just, I’m very cautious with averaging down into situations. And I pay very close attention today to the amount of at cost capital I’m putting into a position. Cause as you and I, and everybody is well aware you can have a 3% position where you put 20% at cost into it, you know averaging down, you know, and that’s not good.

[Jake] So I think that- What do you think the difference is there though like big versus small, let’s say, I mean obviously there’s more tends to be more business inertia in the bigger company. So maybe that is a reason that reversion to the mean holds better in the big versus the small.

[Ian] Yeah.

[Jake] Do you have any, any ideas around that?

[Ian] I think so. I think, I just think that a lot of times again, a majority of microcaps are unprofitable. So that’s probably one thing, you know you’re talking about 82% of microcaps are unprofitable.

So a stock that’s declining in a company that needs to raise money. That’s not a good, yeah. So I think that’s probably a decent chunk of what we’re seeing.

But averaging down can be the worst thing somebody could do. It also can be the best thing you can do, you know but the main thing is you don’t want to average down into losers. And especially during, you know if you’re going through a period in your strategy or yourself where you’re just going through this losing season and you’re kind of reaching and what ultimately happens and you see it in fund managers, especially is, you know they start selling out of the things that are working at least a little bit to average down more into the losers.

[Jake] Yeah.

[Ian] And they concentrate more and more into their losers and they go bankrupt or then they just shut down. And you gotta, you gotta do the opposite of that. You know, when you’re going through that winning season you actually have to sell a couple of the losers because it’s taken all your mind share.

It’s taken all your positive energy refocused on adding a couple more stars to the lineup. Give yourself a couple more chances to win, you know get some runs on the board, get your confidence back. And that’s what people should be doing.

And so I just think there’s so many kind of emotional, psychological and financial reasons to be very cautious of averaging down.

[Tobias] You need that Paul Tudor Jones song, losers average losers. Yeah. Yeah, exactly.

How has the AI screening all of those tools changed micro caps, change that space to the people people are able to find them. Yeah.

[Jake] People have find them more do better research or is it just a wrong Slop fest for all the write-ups now of companies that someone couldn’t, didn’t have time to AI slop before.

[Ian] Well, I think, I think it’s like everything you have you know, a few pieces of it that are very, very good. And then a bunch of it, that’s bad, you know and it doesn’t mean that everything’s bad. It just means that, you know we see it on the micro cap club side.

I mean, the amount of AI DCs that are being submitted for applications is ridiculous. And it’s only going to get harder to actually differentiate if they are or not. You know, there’s software you can buy that will tell you supposedly if it’s AI or not or what percentage was AI.

[Jake] Do you think it matters? Like, I mean, there was this controversy with Druckenmiller, you know, he had an op-ed that everyone identified was written by AI. And he said, yeah, AI wrote it.

Like I’m not an English major. I don’t have time to do that. But if you stand behind what was written, I guess like, I don’t know.

How do you think about that kind of philosophically?

[Ian] Yeah, it’s difficult. Cause I, especially again, we’re I would say the average applicant is in their twenties you know, and you, you don’t want to see them just completely lean on an AI mechanism for thinking, you know, and it’s even on the application side. It’s why I like to see people that are kind of providing more human reasoning, you know like I talked to so-and-so or just stuff like that that shows they actually made an extra effort rather than just plugging in some good prompts into chat GPT and getting an output.

I do think it’s obviously very helpful, you know for the investing process, for setting up alerts there’s a bunch of new tools that are coming online that are useful, you know, using AI, you know for screeners, but again, that’s also completely commoditising kind of a lot of this stuff. You know, I think that the edge there’s still going to be these edge cases where it is an edge. I always, I laugh about this.

So like we, we redid our micro cap club website back in, I don’t know, maybe it was February. And I think we were like, or January. And we did it with AI, Claude built it and looked amazing looked 10 times better than what we had before.

You know, I was like, oh, this is amazing. We launched it. It was up for a month.

And all of a sudden all the websites look the same. I’m like, oh crap. Like everybody’s using AI to rebuild, you know and all of a sudden we look like everybody else.

You know, I was just like, oh, we finally like rebuild it again. I was like, we got to, this can’t look the same. And you see it in presentations.

I’m sure you do to Jake where it’s like it’s the same like structural elements and everybody’s things. It’s just like, there’s no creativity anywhere. And I feel like that’s same with applications and theses.

Like you just want to see something that makes it have a soul.

[Tobias] I think you should be able to stand behind your AI writing but it’s a little bit like that. I forget who it was, but some guy said he was misquoted in his own autobiography because he’d have to go to write the autobiography. If someone reads Stock Picker and they decide that they want to do it seriously they want to follow in your footsteps what do they do in their first year?

[Ian] Lose money. Cheap lessons, right? Yeah, exactly.

I would, again, I talk out I’m talking about both sides of my mouth here. I got started in story stocks, but you know but probably a good place to start would be to start in profitable companies. You’ll have less headaches, less landmines to deal with.

[Jake] Would you take an accounting course?

[Ian] Yeah, maybe take an accounting course. You know, even though it took me a little while.

[Jake] You’re going to curse these people to be deep value. What are you? I know, I know, I know.

[Ian] I worked at where I went wrong.

[Jake] Yeah, exactly. Way back at the beginning.

[Ian] But usually when I’m talking to a new person like it’s okay, just understand the language of business which is accounting, understand how to read an accounting statement because it does matter. And as you become more and more as you gain that more and more of that skillset then you can start kind of going outside the spectrum a little bit, like trying to make be predictive about, okay, this is a company that is I think can inflect on profitability. You know, start going down the risk curve a little bit.

You know, and that’s what I do as well. You know, but probably the safest way to start is in profitable. I didn’t.

So I’m talking about out both ends of my mouth, you know but it probably is the safest way for somebody brand new. And then again, if you’re somebody that’s already in a career path especially if you’ve been in a career for 10 or 20 years think about the knowledge you have in an industry and how that can be applied to specific companies in micro-cap and where you can gain an edge with that.

[Tobias] So you distinguish between, you say story stocks are companies that don’t yet have any of the what they’re going to do reflected in their financial statements. There’s companies where the story is the promise of what’s going to come. And then you think of yourself more as like a almost like listed VC.

[Ian] You mean to what I’m doing today? Yeah. Yeah.

I mean, I would say today it’s a combination of all those things. You know, I’d love to find high organic growth rate companies with a great story. And there’s some companies in the portfolio that represent that, you know high organic growth rate, profitable great story attached to it.

And then, but I still do have a couple pure play story stocks in the portfolio as well. And I still have some cheap stocks in the portfolio as well. And I think that’s the fun part about stock picking too.

It’s that first five years of my journey was specific to story stock. And then I got into junior mining, you know and exploration, which is still story stockish. You know, and then I only got into GARP and then like life sciences.

And I feel like each one of those periods you’re completely absorbed with that area. So you’re only painting with that colour in your portfolio. You’re like 80% in those themes.

[Jake] That was your blue period.

[Ian] Exactly. It was. And so now it’s like I can paint with different colours and that’s what the portfolio represents today is just the last 20 years of learning how to paint with these different colours.

[Jake] From a portfolio management, just I guess real quick before we wrap up, do you feel like that gives you then the chance to have like something that’s sort of always working and maybe a little less like, you know if you’re only one colour and no one wants blue paintings, you know for a while that, you know, is kind of hard to bear. But if you have all the colours and you there’s something sort of for everybody within the portfolio.

[Ian] Yeah. I mean, I don’t do it for others. It’s kind of just the way I’ve evolved.

And I’m not doing that for the investors itself but I do think that is the side effect of it. You know that, and one of the things like I’m I’m in like 12 to 15 positions instead of four you know, like 15 years ago, you know. And what I found was I don’t need to be take 20% at cost positions anymore.

I feel I can get the same performance out of three to 7% at cost positions. And I do better because I can add a few more players to give me a chance to win. It’s better for me to add four or five because that could be the one that really takes off given my framework.

And so it’s like, I feel like it’s it’s probably a little bit less volatile than it used to be back in the old days. That will certainly is when I had three or four stocks but I do feel like it does, it does it can zig and zag with the markets which is good and bad. You know, I can do really well when the markets go down and I can do really bad when the markets go up and everything in between.

Completely, that’s incredible.

[Tobias] Completely uncorrelated. Hey, Ian, that’s coming up on time. If the book is called Stock Picker by Ian Cassel if folks wanna follow along with what you’re doing get in contact, what’s the best way to do that?

[Ian] Yeah, you can follow me on X, which is my name, Ian Cassel. You can follow me on microcapclub.com. You can meet me at one of our events at planetmicrocap.com and you can find the book on Amazon and wherever books are sold.

[Tobias] Well, congrats on the launch, just happened. Yeah, thank you. I hope it goes well.

JT, any final words?

[Jake] No, always good to catch up with Ian. One of the greats and always make the…