I am big fan of Ian Cassel. I first came across Ian on Varindar Bansal’s (Omkara Capital) YouTube podcast. One of the things he said in that interview had a profound impact on my thought process (he said: “finding the right stock is 10% and holding on to it is 90%”), and I have followed him ever since.
For the uninitiated, Ian is a very successful microcap investor. Here is his intro from his LinkedIn profile:
Ian is a full-time microcap investor and CIO of Intelligent Fanatics Capital Management. He is the founder of MicroCapClub.com and co-founder of the IntelligentFanatics.com. Ian started investing as a teenager and learned from losing his money over and over again. A Microcap is a public company with a market capitalization less than $500 million. Microcap companies are the smallest public companies that exist, representing 48% of all public companies in North America. Berkshire Hathaway, Wal-Mart, Amgen, Netflix, and many others started as small microcap companies. Ian’s belief is the key to outsized returns is finding great companies early because all great companies started as small companies.
Idea behind this thread is to share his aphorisms, interviews and articles in one thread.
Patience in investing doesn’t mean you make slow decisions. Active Patience means knowing what you are looking for and doing nothing until you find it. When you do find it you can act in an instant.
The stock market’s job is to always make you feel like you are missing out on something.
The stock market’s job is to always make you feel like you should be doing something.
The stock market’s job is to get you to do the wrong thing at the wrong time.
When I was younger I would immediately take big positions. If I liked something, I would go all in. I was fearless. This strategy worked until it didn’t. Today I buy a third to a half of a full position after due diligence and I’ll add more as management executes. Inexperience almost always underestimates risk. The more you experience the more you respect what you are up against.
The amount of work you do on an investment often correlates with the amount of volatility you’re willing to endure to reach your goal. The more you know what you own the more volatility goes from being a risk to an opportunity.
When markets get a little jittery. Like clockwork all it takes is a few down days in a row for anything smallcap/microcap growth that is unprofitable to be down 30-40% from highs. All it takes is a tickle of fear to break conviction in such names and to realize profitability is important.
When a successful stock picker says - “I avoid investing in X (type of company) or Y (industries)” you can usually find a very successful stock picker that only invests in X or Y. You quickly learn that one great investor’s too hard pile is another great investor’s fat pitch.
Here is what a multi-bagger looks like over 10 years:
1 - 3 - 2 - 3 - 3 - 4 - 5 - 6 - 5 - 12
$1 to $12 in 10 years. A 28% CAGR.
Easy peasy.
When you find a microcap company that is consistently executing and surprising you in good ways and not bad ways. These are extremely rare situations. Hold on like your life depends on it.
Any lumpy business that is profitable with a good balance sheet should have a buy back in place to take advantage of short-term investors impatience. This way the lumpiness can be a feature instead of a flaw.
Stock performance is rarely linear. You sometimes have to hold onto a position for a few years before it goes up 300% in 6 months. It always looks easy in hindsight, but holding dead money is excruciating and few are willing to look wrong before they are right.
If you consider yourself a stock picker – at some point in your life you must do the work others aren’t willing to do and form extreme conviction in something you believe in. But it takes work. YOU must do the work. YOU must form the conviction. The peanut gallery and your emotions will be screaming at you to sell. Holding winners is extremely lonely.
Most multi-bagger stocks evolve (multiple expansion) from Deep Value → Value → GARP → Growth and yet so few investors can evolve and grow with them and hold on.
Over a lifetime you will pass on more winners than you will let into the portfolio. Successful stock picking means knowing what you are looking for and turning over thousands of opportunities to find them. In the process you will pass on many that will go up without you and own a few that are truly meant for you.
When the market goes higher all you see is more upside. You find every excuse to increase your estimates/expectations. When the market goes lower all you see is more downside. There is no multiple low enough. Don’t let the market jerk you around like a dog on a leash.
The older you get the more comfortable you become with who you are and the less you care about convincing others they should invest like you. You start to understand the real edge is in the areas you are unique/different and it’s a blessing others can’t see what you see right now. No need to waste energy proving you are right today when time and business execution will do it for you.
Investing is the ultimate mind game. You need a win, even a small win, in the portfolio every so often to keep your self-confidence. If you’re struggling stop yourself from getting super concentrated into fewer positions. This is how stock pickers go extinct. Do the opposite - add a position or two to give you more chances at getting a hit. Stay in the game.
To find a 10-bagger first find a stock that can double in three years on base case fundamentals (not hype) with no multiple expansion.
Stock picking means finding businesses today that other investors will like more than you later.
The main motivation for financial independence is to never have to work for/with people you dislike ever again.
Conviction isn’t proven when you can stand with the crowd around you. It’s proven when you can stand alone.
Stock picking is an individual sport so the winning streaks are intoxicating and the losing streaks excruciating. It’s how we deal with both extremes that sets us up for long-term success.
Market drawdowns are always a cascade because investors sell stocks that are only down 5% to buy more of the things down 10%, over and over again until everything is down.
How many small stocks have you liked more the longer you owned them? Be honest. Not many. The great ones you like more as time goes on because vision + execution occur and this creates a flywheel of trust. Those are the rare ones. They ultimately become your largest positions because management executes, the stock goes up, and you realize you may have found a stock that is truly worth holding.
If you want to get rich you must focus in on an area of your giftedness/strengths – the narrower the better – where you can be in the top 5% in the world. Crush it in a small place and your success will pull you into a larger place.
As stock pickers we are naturally wired “bullish” when we like something. When we like something, we want to like it more. When we own something, we look for reasons to own more. So we focus on what could go right and what could accelerate growth - Not what could go wrong.
When we buy something that is growing 20%, we only think about it growing 30%, not dropping back to 10%. When it happens we act surprised our excel model led us astray.
When a company disappoints us, 50% of the time it’s management’s fault for overpromising and underdelivering. The other 50% we are normally to blame. We got too excited.
When a business is doing well, we take the highest quarter ever posted and annualize it to justify the stock being cheap. This sometimes works but it often doesn’t.
It’s hard to control the bullish echo chamber in our brains. It doesn’t take long for our expectations to get a full standard deviation away from reality.
It takes time, reps and discipline to learn to stay rational and conservative. Low(er) expectations is a good friend to a stock picker. Valuation stays front and center and produces a better outcome when applied consistently.
Mediocre management teams occasionally do the right things and it almost surprises you when they do. Great management teams consistently do the right things. It’s the compounding of great decision making that leads to compounding of returns.
Most investors won’t like your investment idea until after it doubles.
More than ever investors seem to forget that the good management teams are also evaluating investors. It isn’t a one way exchange, even if investors feel they are more important. It’s why you should always over-prepare and be respectful. It’s always been funny to me how some investors seem to think that management doesn’t pay attention to who they take as shareholders and build relationships with. The good management teams know it matters a lot especially in the early days.
The larger a position becomes the louder your emotions become. You must find the right balance that allows you to stay rational.
Every multi-baggers journey is filled with the corpses of loud opinionated naysayers. You must do the work so you know when to buy. Do your own work so you know when to sell before others. Do the work so you can hold longer than others. You do your own work so you can stand alone.
In bear markets the stock market’s job is to find your breaking point. In bull markets the stock market’s job is to make you forget about valuation.
One of the greatest stock picking quotes of all time
“Take your losses quickly and your profits slowly because your objective is not just to be right but to make big money when you are right”
Don’t waste time having an opinion on every company. It’s a distraction. You only have to be right on what you own.
Investors hate to see other investors make money in things they don’t own/believe in. When you genuinely don’t care, it can be a superpower. You don’t get distracted holding in that negative energy and it frees you up to focus on what you’re doing/expanding your own circle of competence.
Investors hate to see other investors make money in things they don’t own/believe in. When you genuinely don’t care, it can be a superpower. You don’t get distracted holding in that negative energy and it frees you up to focus on what you’re doing/expanding your own circle of competence.
A big part of winning is persistence. Persistence is the ability to work hard and stay in the game long enough to get the results you seek.
The goal of stock picking is to find a handful of things you can trust while ignoring the thousands of things you can’t trust and being fine watching others make money on them.
If you’ve been a stock picker for 10+ years a small part of you always wonders if the last big winner you had was your last. You can’t believe that. A big win is right around the corner. Self-confidence is a requirement for survival.
Don’t let your ego grow as the stock price grows. Stay grounded. Stay vigilant.
The greatest currency is a good reputation. Work every day to make your name, your word, your handshake, your counsel, worth more than the day before.
@Apurva_Dubey
Thank you for the nice write up.
Indeed a revision of the known.
Liked the quote
When people, so called investors decide to take the profits early, all that they are actually doing is speculating rather than investing and holding on to losses would bias them to sunk cost fallacy.
Why is it that only a few make it to the top is because they have right mental models of investing, ideologies on picking up the right stocks and discarding the ones which have not made the list as per one’s research and due diligence and most important of all is NO ENVY and the right temperament in life and not just in investing.
It is not what have you have invested and made money that matters, but the ones you have discarded which, when invested would have made you broke.
It is a great idea. In fact, nothing is more important than this idea for a long term investor. Recently I came across this book- explaining the same idea-
"Over seven years, 45 of the world’s top investors were given between $25m and $150m to invest by fund manager Lee Freeman-Shor. His instructions were simple. There was only one rule. They could only invest in their ten best ideas to make money.
It seemed like a foolproof plan to make a lot of money. What could possibly go wrong? These were some of the greatest minds at work in the markets today - from top European hedge fund managers to Wall Street legends.
But most of the investors’ great ideas actually lost money. Shockingly, a toss of a coin would have been a better method of choosing whether or not to invest in a stock.
Nevertheless, despite being wrong most of the time, many of these investors still ended up making a lot of money.
How could they be wrong most of the time and still be profitable?
The answer lay in their hidden habits of execution, which until now have only been guessed at from the outside world.
This book lays bare those secret habits for the first time, explaining them with real-life data, case studies and stories taken from Freeman-Shor’s unique position of managing these investors on a day-to-day basis.
A riveting read for investors of every level, this book shows you exactly what to do and what not to do when your big idea is losing or winning - and demonstrates conclusively why the most important thing about investing is always the art of execution."
“In hindsight most big discoveries look obvious because we are judging the beginning by the end. In reality they were not obvious in the beginning. Most big stocks started as ugly ducklings. They were imperfect and unloved. They had hair, warts, and walked with a limp. Most investors were running away, not running to invest.”
We don’t want our kids to go through what we went through and then we get annoyed they don’t value the things we value because we had to work for them. Then you realize it was the scarcity and struggle in your life that made you who you are today.
Drawdowns and pullbacks are productive because you find out real quick which positions you have the least conviction in.
The stock pickers conundrum - we are all looking for the perfect opportunity. But often times an opportunity is an opportunity because it isn’t perfect yet.
By the time everyone calls it a great business the exceptional returns are usually in the rearview. The time to buy is when it is misunderstood, undiscovered and under-appreciated.
Holding isn’t inaction. Holding isn’t forgetting. Holding isn’t hoping. Holding isn’t passive. Holding is active maintenance due diligence. Having your pulse on a business and making the daily decision a company is worthy of your capital.
The best positions are the ones where you constantly have to average up because management keeps executing and it’s just as cheap 100-200% higher as it was when you initially purchased it.
1000 investors can be in the same multi-bagger stock and returns will be dramatically different - some will even lose money. Finding a great company isn’t even half the battle. Time horizon matters. Conviction matters. Price paid still matters. It’s the beauty of stock picking.
Anyone that says you shouldn’t watch stock prices doesn’t invest in illiquid microcaps. The opportunity to buy, increase a position, even sell, happens in seconds and minutes with a fat finger buyer/seller. Patience and discipline doesn’t mean you shouldn’t be actively watching.
Great investors evolve or go extinct. Don’t spend the next 10 years bragging about the returns you had 20 years ago. Stay in the game. Never label yourself a type of investor or you will stop growing. You are not a growth, resource, deep value investor. You are unique and not anywhere near the best investor you can be. It takes 10-20 years to learn all the colors you can paint with as a stock picker and then you go make your own painting.
It’s impossible to have the same conviction at the beginning of a new investment that you had/have after 2-5-10 years in a successful investment. Conviction is like building trust in any relationship. It takes time. It can’t be rushed. Every new investment is a new relationship.
Just because you lost money on an investment doesn’t mean you were wrong for making it. Sometimes you are dealt a great hand and you still lose. Often times there is nothing to learn. The lesson is to stand up, shake it off, sit back down and wait for your hand. Don’t hesitate.
When Michael Steinhardt was 20 years old he would go to great lengths to try to predict quarterly earnings by the penny on a few companies and “I did it very well. I was really good at predicting earnings.” Later on his fund would compound at 24.5% net per year for 29 years. I love how this game is played and in so many different ways. There is no right or wrong way. Just your way. The older I get the more I appreciate this.
The stock market is similar to life. Wrong decisions are often punished quicker than right decisions are reinforced. Successful investing is delayed gratification. It is called “delayed” because we never get the reward as quick as we think we deserve it.
Instead of making your largest position the one you think can go up 500% in the next 6 months, your largest position should be the one where you can’t lose over the next few years. Ironically, the latter is where you will often find the next multi-bagger.
As we accumulate a position, we curse the stock for moving higher, and as soon as we are done acquiring the position, we curse the stock for not immediately moving higher. We are all “long-term” investors that prefer our gains come as quickly as possible.
Building a big position in the portfolio is the same as building trust in a relationship. It can’t be rushed. You need to experience how the management/business will react in good/bad times and how they treat you. Let the position earn its scale.
Since 1990, the average drawdown in the S&P 500 has been 14% in a calendar year, and drawdowns of at least 10% have occurred in 19 of the past 34 years. Whenever you experience a drawdown it always feels like an outlier event when in reality the outlier is not having one in a calendar year. We haven’t had one in a couple years so everyone forgets what they feel like.
The more you know what you own the more volatility goes from being a risk to an opportunity.
Stress that stays inside us and has no place to go is called fear. Stress that is let go and aimed at something bigger than us is called faith.
If you loved buying stocks when they were 30-50-100% higher and now you hesitate. You didn’t know what you owned in the first place.
