On Sunday, July 28th TIP episode 648 was released under the title „Essential Skills for Successful Investing“. Ian Cassel shared his wide knowledge about concentrated Microcap Investing and also from his early days as a private investor up until starting his own fund.
Below are my notes from the episode:
For Fulltime Private Investors Strategy, Spending, Emotions, Lifestyle all need to be in harmony
Howmuch cash should you have aside to start out? Ian emphasized that Lifestyle matters. When he became a fulltime private investor he moved somewhere with a low cost of living (he still was single). He calculated he needs to live with a fixed cost per month of 2000 US$
he was afraid to be employed again
He never had any debt, mortgage debt or car debt. He always paid cash for things
he thinks that people with a capital base of 300k that think they can make a CAGR of 30% like 100K a year are irrational. Some people thought in 2021 this is feasible to do on a constant basis.
You need to be aware of the current environment. There have been NO recessions for a long time. People do not know any more how to invest in a bear market.
He focused on his breaking point. He wanted to have a portfolio that could sustain two 30% drawdowns. (Which is about 50% in total).Survival matters.
Strategy matters. long concentrated microcap investing was his approach. His returns are not consistent. He may lose money for a couple of years and then making a million dollars in year 3.
There is an amount of capital that affords you the patience to wait for those good times and not overspend. For him this was 2 million dollars. With this he felt comfortable in any market environment.
What is his withdrawal framework? Most fulltime private investors have 1-2 years of cash sitting there so they do not have to sell in the wrong moment. He only had some months typically (3 months) - now he sometimes thinks he would have liked more. When he was single 10.000 US$ cash a year was enough - when he was married with kids 30.000 US% cash.
He bought a house in 2014 - what he learned is that financial institutions do not like fulltime private investors. He had to pay down 60%. When he had a good year he would pay down any debt he had.
Did he have some kind of contingency plan? His number one goal was to be a fulltime private investor. He was able to do it when he was 27. He wanted to be it with 21 - it took him 6 years to get there. There was no Plan B.
Ian Cassel is currently preparing a presentation „The skills of stock picking“ in which he describes 6 core skills: Identifying, Valuation, Buying, Selling, Holding, Perseverance
Identifying/Ideas:
Five basic ways to find ideas: 3 ways how you go out to find things: 1. brute force (check everything - he is doing that, too. Sift through a mountain of sand to find that small diamond -few people do this. E.g. go A-Z through all OTC companies), check every press release/insider buy over a certain amount etc., 2. more fundamental screens, narrowing down the investment universe, he doesn‘t like it too much, as typically you end up with a small amount of stocks that everyone is looking at - what is leftover is fairly valued; what works better for him is comprehensive screens: e.g. look at all companies below 100 mio market cap; 3. researching companies - finding other companies e.g. suppliers, competitors, customers etc….
There are 2 more ways: they are how ideas find you. 4. networking 5. relationships
Valuation process:
Framework - can i double my money in 3 years?
What is the downside? —> Limit downside
Betting on the people - management is important, they want to find overqualified management teams
DCFing out the next 10 years won‘t work for Microcaps
Single digit P/Es - buy as close as possible as to where their earningspower becomes apparent to anyone else.
Buying:
Depends on the illiquidity profile of the company. Some of the companies it takes time to accumulate shares. You cannot easily buy a 3 or 5% position without impacting the price.
One of their position they started buying a year ago and now own 5% of the company.
Sometimes buying in low and then averaging up makes sense, you grow with the companies. At a higher price you may still be getting a better deal. Earnings power can compound
Holding:
Holding is one of the most important skills. You get in trouble if you try to overlay of what works in different classes to what they do in case of microcaps.
The fastest way to get broke is to coffeecan a bucket of microcaps.
They may have short winning streaks, for a year or 2. That is most Microcap successes
Trying to have a 2-3 year thesis on the business
Selling:
Selling after 2 years could be fine
Portfolio turnover is part of winning strategy in case of Microcap investing
Know at any point in time to stay rational and cut in case you have to
Stay close with the business and the management so you know before the rest when it needs to be sold
The stock goes up too far too fast — irrational moves. If you see a huge move on the multiple side it is time to sell.
Best reason to sell is when things go way too low in the short term
If you find something that is better
When a company underperforms and the investment reason starts to crack.
Perseverance:
Stock pickers after 20 or 30 years tend to be overdiversified in value traps
The market scared all the boldness out of them. The last multibagger they had was like 15 years ago. They stopped evolving as investors, they stopped growing.
That is why the last skill perseverance is so important. You can‘t father time and the market scare all the courage out of you where you can no longer pull the trigger and can act on the things that you should be able to act on.
The evolving of a stockpicker is important. Continuously have the curiosity and drive.
He talks about an exercise that he learned from Nicolai Tangen called Inertia Analysis. You run your performance with zero changes from the start of the year and compare to your real portfolio from January 1st throughiout the entire year and look at what you did to your portfolio to see if it detracted value. It does add value to your decisions.
He also talks about the importance of journaling - to journal all your decisions, what were your feeling during buys/sells. You then can start making decisions on how to improve on things you are doing bad.