08 February 2024

On today’s episode, Clay is joined by Ian Cassel to discuss multi-bagger first principles, what he’s learned from investor Tony Deden, and biases he has had to overcome to continue improving as an investor.

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.

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  • A 2023 overview for Ian’s fund.
  • Ian’s investment journaling and reflection process.
  • What Ian has learned from managing a fund for over 5 years.
  • How we can discover who we are as an investor.
  • What Ian learned from Anthony Deden.
  • The multi-bagger first principles.
  • A few case studies on multi-baggers.
  • Why high insider ownership doesn’t correlate with stocks that outperform.
  • How attribution bias influences investor behavior.
  • Ian’s experience on the saying, “Risk is what you don’t see.”
  • How Ian decides whether he should average down in a position or not.


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:00] Clay Finck: On today’s episode. I’m joined by Ian Cassel to discuss Multibagger first principles. Ian Cassel is a full-time Microcap investor and CIO of Intelligent Fanatics Capital Management. He’s also the founder of MicrocapClub.com. In this episode, we cover Ian’s investment journaling and reflection process, how we can discover who we are as an investor, what Ian learned from investor Tony Deden.

[00:00:24] Clay Finck: Multibagger first principles and a few case studies on multibaggers, how high insider ownership doesn’t necessarily correlate with stocks that outperform the market, how to effectively average down in a position and so much more. It’s always great bringing Ian on the show and I really appreciated the opportunity to chat with him about Multibaggers.

[00:00:43] Clay Finck: With that, I bring you today’s episode with Ian Cassel.

[00:00:49] Intro: Celebrating 10 years. You are listening to The Investor’s Podcast Network. Since 2014, we studied the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Clay Finck.

[00:01:16] Clay Finck: Welcome to The Investor’s Podcast. I’m your host, Clay Finck, and today I am thrilled to bring back Ian Cassel. Ian, such an honor to have you back on the show. 

[00:01:25] Ian Cassel: It’s awesome to be back. I appreciate the opportunity.

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[00:01:28] Clay Finck: Well, Ian, one of the things I just really admire about you is how thoughtful you are and how intentional you are in everything you do.

[00:01:36] Clay Finck: It’s made it such a pleasure for me in getting to know you over the past year or so. So with that said, during our previous chat, we touched a bit on journaling, and I’m sure you’ve thought about 2023 and done quite a bit of reflection on that front. Talk to us about what that process looks like and what sort of questions you ask yourself to improve as an investor.

[00:01:56] Ian Cassel: Yeah. Thank you. I appreciate that. You should probably talk to my wife first before you proclaim me as thoughtful but I appreciate the compliment and I’ll take it. One of the main things I do at year end is I try to analyze my mistakes versus my losses as micro cap investors, you’re investing in small, emerging.

[00:02:14] Ian Cassel: Businesses and you know you’re just not gonna be right all the time. The batting average was probably gonna be 50%, and so that means that you’re gonna be wrong more than half the time or at around half the time. And you’re gonna have to accept losses as part of this strategy. And I’m okay taking small losses and positions where I, what I’m not.

[00:02:35] Ian Cassel: Okay. With our mistakes, and what I would define as a mistake is when a loss turns into a bigger loss due to my action or inaction to react quick enough to a circumstance. And so what I try to do and be self-aware about is, okay, what were the losses in the portfolio during the previous year? I. And how much did my action or inaction create a bigger loss out of that?

[00:02:59] Ian Cassel: And so even last year in 20, I guess that would’ve been 2022, I had it outlined that and I forget what the numbers were, but let’s just say overall there was a loss of 5%. My mistakes added another 5%, and what exactly did I do or don’t do? That I can rectify in the next years and rub my nose in it now so I’m aware of it.

[00:03:17] Ian Cassel: So I don’t make those same mistakes. So that’s how I do it year to year. I’m also starting to do, and I did it passively, I’d like to start doing more actively is that inertia analysis, which I think we’ll get into maybe later too, where you take your January 1st portfolio as it sits January one and just hold it there, keep that to the side and compare that against.

[00:03:41] Ian Cassel: What your actual portfolio does through the year. Basically taking, okay, if you coffee canned your portfolio January one for the next 12 months. How did that compare against all of the actions that you made during the year with that portfolio? And that’s another way to compare what types of actions you’re doing and how that impacts or hurts your returns.

[00:04:00] Ian Cassel: Which I think is really interesting. 

[00:04:02] Clay Finck: Who was it again that shared that January 1st practice. Was it Nikolai? Tangent? 

[00:04:08] Ian Cassel: Yes, it was Nikolai, yes. 

[00:04:10] Clay Finck: I had a quote from here I wanted to mention from him. You actually just joined our mastermind community for Q&A and a and you mentioned how very few companies end up sticking in your portfolio of say, three to five years out.

[00:04:22] Clay Finck: You want to hang on to them, but oftentimes they don’t. Earn the right to stay in your portfolio. And there’s actually a lot of research that shows that the more we tinker with our portfolios, the more we actually end up hurting our investment returns. So it’s such a tricky balancing act. The quote I wanted to share from Tangent is the fewer decisions you make the better they become.

[00:04:42] Clay Finck: And I just think that’s such a powerful quote when thinking about making changes to our portfolio and. Once you get in the habit of tinkering, it’s so easy to keep tinkering and it really doesn’t feel like a big deal. But yeah. It’s such an interesting balancing act to consider here, 

[00:04:59] Ian Cassel: and there’s always two sides of it, right?

[00:05:00] Ian Cassel: There’s, I. How much of your tinkering is hurting your returns, but not all your tinkering will hurt your returns. You have people like Andrew from Turtle Creek that they do a lot of tinkering. They’re constantly Assessing, what intrinsic value is when it’s below intrinsic value, they’re buying more.

[00:05:15] Ian Cassel: When it’s getting closer, intrinsic value, they’re taking it off. So there’s lots of tinkering there in that portfolio, and that’s created alpha for them. So a lot of this is and I love that quote as well. It’s just trying to figure out like what part of your tinkering is hurting your returns, and I think that’s where journaling can really help every investor is when you make a decision to really journal about it.

[00:05:36] Ian Cassel: And you might find that, and it might take years for you to actually find this signal and the noise of your past experiences, but if you start journaling now, maybe in two or three years, you’ll find that, hey, you know what? I’m really bad at averaging down, or I’m really bad at averaging up, or I’m really bad with position sizing.

[00:05:52] Ian Cassel: Or I’m really bad with X, Y, or Z. And then you can be self-aware about the next time you do that, to remember, you know that this was a mistake you made previous years and it’s one you’ve made consistently and that’s how you. Grow and evolve as an investor is doing that. 

[00:06:07] Clay Finck Overdub: So it was in 2018 you launched your fund, Intelligent Fanatics, capital Management, and of course you’ve been investing for much longer than that, but I’m sure the fund itself has been quite a learning experience and.

[00:06:19] Clay Finck Overdub: I think after five or six years you get a sense of what you’ve got yourself into the types of investors you want to try and attract. And yeah, it’s just seems like a whole different beast. I’m curious to get your take on what you’ve learned about managing a fund for this long and maybe what you’ve learned about yourself in the process.

[00:06:39] Ian Cassel: It’s been a fun process. Before. Managing the fund. I was a full-time private investor just living off my own balance sheet in my portfolio for the previous 10 years. And then the previous 10 years after that I was building the portfolio and I was in school or a student or I did some consulting for a couple years as well.

[00:06:56] Ian Cassel: And to make the leap to managing other people’s money was an important one. It’s one that I put a couple years of thought into on how to structurally do it because of. My type of investing strategy, it’s concentrated, it’s a liquid and just trying to find the right investors.

[00:07:13] Ian Cassel: Everybody says that, but I feel like for me it’s really important And so putting a lot of time and effort into thinking who are the right investors for me to have alongside me that have the volatility tolerance to be able to get through a business cycle five to seven year period. And so putting a lot of time into that and really was blessed to find some really good investors.

[00:07:34] Ian Cassel: Letting the right investors self-Select in, which is basically a. Nice way of saying scaring people right out the gate with the volatility and how volatile it can be. And then letting the people that are inquisitive after that kind of reach back out and want more information. And so what that looks like for us, again, we’re microcap portfolio investing, small businesses that just happen to have a ticker symbol.

[00:07:55] Ian Cassel: And what I found is probably 90% of the investors that are with me today are small business owners or high net worth individuals and what I’ve found through the years is they understand small business better than financial professionals do. They naturally do the right thing when they should instead of the wrong thing.

[00:08:14] Ian Cassel: When we have a covid trough and the portfolio’s down, no one’s calling wondering what’s going on? Why are we down? They’re saying, should we put more in because they understand kind of business cycles better than financial professionals do. And so we’ve been blessed to find those types of investors.

[00:08:28] Ian Cassel: We’re not a institutional product we can’t take $20 million of capital from an endowment or things like that. We’re just, it’s just not how we’re set up. And so we’ve been blessed with the right investors and we’ve beaten our benchmarks since inception in late 2018.

[00:08:46] Ian Cassel: So I’m somewhat happy with our performance, but I think it’s really getting started and I plan to do this for decades to come. And I’m really excited about what the future holds for us. 

[00:08:56] Clay Finck: Since we talked about 2023, I know we can’t really paint the micro cap space with a broad brush just because there’s a wide range.

[00:09:04] Clay Finck: The, you mentioned $50 million market cap and below, and then it goes up to say 500 million or so. So it’s very different type of business, but you’re pretty plugged into the space. I’m curious just the micro cap space overall, if there’s any sort of themes that stick out in 2023. The impact of higher interest rates.

[00:09:21] Clay Finck: Industries that have emerged in the space or have gotten more attention in your network and your community I’ll let you take that in whatever direction you’d like. 

[00:09:32] Ian Cassel: It was really, A, 2023 was interesting because it was almost like two different years. You had the first part of the year, which was negative inflation was rising.

[00:09:42] Ian Cassel: And small caps, micro caps were getting smashed and you had the nail on the head with your question. It was really an interest rate thing. When interest rates go up, cost of capital increases, risk comes off. You saw it impact the VC space. Anything small business-wise got killed. And micro caps were, we’re suffering along with that.

[00:10:02] Ian Cassel: And then. Call it October, November, whenever the Fed pivoted. You probably know exactly when that timeframe was. Things snapped back the other direction. All of a sudden it was risk on, and we’ve seen a pretty big rally in my her cap as a whole starting November into December, where things were probably up 30, 40% from their trough in late October as a whole.

[00:10:21] Ian Cassel: Now, when somebody asked me about my her caps as a whole. It’s difficult for me to do it with a straight face because I do think the worst way to own micro caps is to own all of them. And so you can own the iShares Russell Micro Cap Index, which I don’t know, 1500 micro cap stocks and 78% of them are unprofitable, and quite honestly, probably a hundred of them are.

[00:10:43] Ian Cassel: Billion dollar plus market caps, even though it’s marketed as micro cap. But I think it’s the wrong way to invest in micro cap is to own all of ’em. Micro cap is the ultimate stock pickers kind of market. You wanna be picking stocks in this market, not owning all of ’em. 

[00:11:00] Clay Finck: Let’s dive into some of your content here.

[00:11:03] Clay Finck: I read your article titled Active Patience. How about you talk about this concept of active patience, and then we can dive into some of the interesting pieces here that I wanna, that I took away from it. 

[00:11:16] Ian Cassel: I wrote an article called Active Patience, and it was one that I started writing a couple months ago, and it’s a, it’s an idea that kind of sparked into my head.

[00:11:24] Ian Cassel: I, I wrote about active patience in another blog, maybe five years ago. And I could tell it connected with people and it connected with me and I wanted to just expound more on the topic. So it was fun to just spend some time and put together a article that I knew that would probably connect with a lot of different types of stock pickers and active investors out there.

[00:11:42] Ian Cassel: And really what active patience is it means knowing what you’re looking for and doing nothing until you find it. And it’s that simple and really active patience is the end goal for any successful stock pickers to know exactly what you’re looking for and have the patience to wait for it.

[00:12:00] Ian Cassel: And I think a, another good way to describe it is actually by inverting it a bit I get asked quite a bit. Buy new micro cap investors, you know how to find micro cap stocks to invest in. And my answer is probably really annoying because I never, I really usually answer that question with another question, which is what type of investor are you?

[00:12:20] Ian Cassel: And what are you trying to find? Because if you’re a deep value investor. Or if you’re a growth investor, if you’re a quality investor, or if you’re an oil and gas investor, or a life science investor or a special situations investor depending on what your time horizon is, your stomach for volatility is, especially the new ones.

[00:12:38] Ian Cassel: What I find new investors, they just don’t even know what they’re looking for, so it’s hard to answer the question on how to find it. And it sounds like a Yogi Berra quote or something like that, but it’s really hard to answer that question. And I think a lot of people go through years or even decades where they don’t even know really what they’re looking for.

[00:12:54] Ian Cassel: They’re just just bouncing around from this theme to that theme or this flavor investing to that flavor and investing. And so really the idea of around active patients is going through that maturation to figure out who you are, find out what you believe. Then living that out through the portfolio, 

[00:13:12] Clay Finck: you essentially 

[00:13:12] Clay Finck: just list three stages every investor must go through.

[00:13:16] Clay Finck: And it, it goes to what you’re saying there of what are you looking for? So you have developing your temperament, which is finding out who you are. Finding your principles, finding out what you believe, and then committing to your principles, living out what you believe. So talk to us about these three stages.

[00:13:33] Ian Cassel: Active patience isn’t something that you’re as an inborn skill. You’re not born with it. It’s something you have to take time and reps and figure out what it is. And developing your temperament, what you said, it’s finding out who you are and what temperament means, is developing kind of your views on risk, time horizons, volatility position sizing.

[00:13:53] Ian Cassel: And it really just means determining the type of investor and flavor of investing you’re gonna do that kind of fit your natural temperament so you can consistently and repeatably have a edge over time. And so it’s exactly figuring out like, are you a value investor? Are you a growth investor?

[00:14:11] Ian Cassel: What are you. Or a combination of both. And it doesn’t mean you have to label yourself, it just means trying to figure out what area of investing fits your temperament, where you can naturally take advantage of other people and the marketplace when your emotions are screaming at you to do the opposite of it, that you know that and realize that.

[00:14:30] Ian Cassel: And so I know for me it’s like. When you’re beginning investing, it’s almost if you were sitting down at a restaurant for the very first time and you’d never eaten food before, which I know is a stupid analogy because we’ve all eaten food, but it’s picture of you went to a restaurant, you never ate food before, and you’re looking at a menu and you have no idea what you’re doing, what would you do?

[00:14:49] Ian Cassel: You would just start ordering stuff and it would probably take 30 or 40 trips to that restaurant before you had everything on that menu, and it would take 30 or 40 trips before you figure out what you like. Yeah. And then all of a sudden, by the 40th or 50th time you only like these two things on a menu with 200 things on it, and that’s what developing your temperament looks like.

[00:15:08] Ian Cassel: You just have to put those reps in and try things. Overreach, go too big into a position, get hurt. Over trust management, get hurt, accepting some losses as the price of education. And that’s what figuring out your temperament is. And then once you have, once you realize kind of the flavor investing that you fit into, then it’s all about developing your principles and really trying to, and what, how I would define principles in this case is figuring out the characteristics of business and of people.

[00:15:40] Ian Cassel: That are mandatory for you to make an investment. And this can take again, years or a decade to figure out the types of businesses, situations that are attractive to you, the types of people that you know, that are mandatory for you to trust them and stick with them over the long term.

[00:15:56] Ian Cassel: And I made some references in that article. It took Buffett 20 years to go from deep value to quality. It took sleep in Sicaria almost a decade to go from searching everywhere in the world for deep value to find, to finally realizing that it was all about this business model called Scale, economic shared.

[00:16:16] Ian Cassel: It took Reese Duca. He mentions taking two decades where they were investing everywhere and he’s from IGSP. It took him two decades to go from investing in everything to only investing in vertical software companies. It took managers like Turtle Creek who you interviewed. It took them probably a decade to, to fine tune the type of business and the type of leader they’re looking for before they felt comfortable.

[00:16:40] Ian Cassel: Going from Canada down to the us, and so it’s really about defining what those principles are. And the last part is really just then committing to those principles and living them out every day. And what I think happens when you start to kinda live out those principles, when you, once you figure out who you are is the world starts to work in your favor.

[00:16:59] Ian Cassel: The world starts bringing the opportunities to you. Your network starts growing. They know. Exactly, and they people want you involved in their situations or their deals and everything just works in your favor. And Anthony Deden, he, I talked to him, he’s become a friend of mine I mentioned active patients to him, and he just said, yeah, it’s just like a, just like an art collector or you’re just thumbing through art catalogs and you know exactly what you’re looking for and you’re gonna thumb through these art catalogs month after month, year after year until you find that piece of artwork that you want.

[00:17:32] Ian Cassel: Or you find a couple pieces of artwork that you want, that you feel you want to add and keep and hold as prized possessions, as prized assets in your collection. I. I think that’s a good way to think about active patients as well, to get to that point to where you know exactly what you’re looking for.

[00:17:48] Clay Finck: The food analogy I really liked, and it’s just tying all these ideas together that we’ve talked about in our previous chat at the start of this one, thinking about the maturation of an investor, thinking about reflecting on 2023 and the mistakes we’ve made and it really resonates with me.

[00:18:08] Clay Finck: Say I’ve been investing seriously for. Five years or so, and each year you pick up these really major lessons and it really changes you when you make mistakes and you reflect on those mistakes and you really just hone in, narrow down what it is exactly you’re looking for and what actually works in markets given your temperament, what works for you, given your temperament and your skill set too.

[00:18:34] Ian Cassel: Yeah, it’s like you just have to. And you can’t like force it too much. All you can do is put tools around you like journaling to learn from your own mistakes. Whether that’s the inertia analysis we talked about and just try to push it as, as fast as you can. But some of these lessons they can only be learned over time.

[00:18:52] Ian Cassel: You can only figure out who you are over time. You can only figure out your principles. It took me, I think I mentioned that article too. It took me like 15 years to develop. Like my top-down strategy of what I’m looking for with scarcity and tailwinds and undiscovered and intelligent fanaticism.

[00:19:09] Ian Cassel: It took 15 years to come up with a bottom-up formula that I use around, okay, I wanna find businesses that can grow through a recession. I wanna find businesses with a good balance sheet that can endure through a bad time. I wanna find things that are at evaluation that I think can double over three years.

[00:19:23] Ian Cassel: It just took 15 years to figure out like what those principles for me should be. And, I think it’s a mistake to try to push too hard. It’s just gonna, it’s gonna happen when it happens, and as long as you keep at it, like a lot of people are listening to this it’ll take five years, it could take 20 years.

[00:19:39] Ian Cassel: But I think once you’re at a point where you know what you’re looking for, patience becomes an asset because it’s only a matter of time till you find something. And it doesn’t matter if that’s three months from now or three years from now. When you find the next thing, 

[00:19:52] Clay Finck: bill Miller calls the mistakes in the markets, tuition, payments, and oftentimes they’re.

[00:19:58] Clay Finck: Very expensive, but I think if you learn from ’em, they’re usually worth it. You mentioned Anthony Deden or Tony Deden. I’m curious to get more insights. It’s interesting running into someone like you. Who are some of your mentors that you’ve learned from? What have you learned from Tony? 

[00:20:15] Ian Cassel: Yeah he’s, I think he’s done one or two public interviews ever even find it on YouTube.

[00:20:20] Ian Cassel: He did one with real vision, maybe it’s going back four years and it has 1.7 million views. And it’s an incredible. It’s an incredible interview ’cause it lasts two and a half hours. And just the stories he tells and how he thinks about investing. And this is a gentleman that I don’t invest like him.

[00:20:37] Ian Cassel: He’s a different type of investor than most of the people that are probably gonna be listening to it. But I think there’s, you learn the most by listening to investors that invest successfully, that invest differently than you because it shows you your own holes in your own process or things that you could add to your process that can create alpha for you.

[00:20:56] Ian Cassel: So I think a lot of people just resonated to what he was saying, even though a lot of people don’t invest like him. And one of the areas that we did connect on that we both agree a hundred percent on is this idea of scarcity. I. Know and trying to find these businesses, these one-of-one businesses that just happen to be publicly traded, that have a good business, that have great management, where there’s not, it’s not one of a hundred UCAS companies that are selling the same product or service, just marketing a little bit differently or better, trying to find these really unique businesses.

[00:21:25] Ian Cassel: And that’s what I try to find in the MyHerCap space. And that’s kinda the first area that we really connected with. And. It’s not like I talk to him every day might be once a quarter we get on a Zoom and we just chit chat for a couple hours about investing and that type of thing.

[00:21:37] Ian Cassel: It’s been a good relationship. 

[00:21:39] Clay Finck: Is there a difference between a monopoly and a one of one business? 

[00:21:44] Ian Cassel: I think that a one of one business, it doesn’t mean it’s like the only one doing what it’s doing, but it might be the only one doing how they’re doing it, if that makes any sense. 

[00:21:54] Clay Finck: And I think another key part of that, potentially, I think I don’t know if it was you or someone else, when Facebook went public, they were the only public social media company. But there are probably other social media companies that aren’t public. So institutions, they want to get exposure. So this, I think that might be one of the big differences, is a one of one business that is the only one that’s public.

[00:22:16] Clay Finck: Might be one of the distinctions. 

[00:22:18] Ian Cassel: Yeah, I told you that story. That was a big winner I had back in when was that? That was like 2010, 11. Cape Hossa was the name of the company. It was the only public social network that was out there. And the stock went from one to 12 just because it was the only one.

[00:22:31] Ian Cassel: And institutions had to have exposure to it and it wasn’t as easy to get exposure in private companies as it is today, but yeah, no I’m trying to find these scarce businesses that are run by exceptional people. And I really love it if you can find something where it’s in a trend.

[00:22:49] Ian Cassel: It is in a theme that’s growing as a tailwind, where it’s not only the only public company in it, and a lot of times you find situations where it might be the only public company in this area. But in reality, it’s the eighth best company in that area. ’cause there’s seven private companies doing it better than they are.

[00:23:10] Ian Cassel: You want to find like the one that’s public and the best, which is really a hard hurdle to find. But if you can that’s really where you can find exceptional businesses, high quality, small businesses. 

[00:23:21] Clay Finck: Let’s transition here to talk about multi-baggers. We recently did a presentation that.

[00:23:26] Clay Finck: On this, and many people are interested in multi-bagger stocks because if they’re gonna be spending a lot of time researching companies researching management, then multi-baggers help make it worth their time if they’re able to find one, two, or three. And you shared in that presentation that.

[00:23:43] Clay Finck: Eighty-seven percent of all global equities that went up by 10 x or more, a thousand percent or more over the past 10 years were actually micro caps. And it’s definitely this niche space that I think people can naturally shy away from for various reasons. What have you learned in studying multi-baggers and what do you take away from that stat on eighty-seven percent of global equities emerge outta the micro cap space.

[00:24:10] Ian Cassel: In full disclosure, what people would say I. How many, what percentage of public companies are micro caps? Will, the answer to that is 65%. So you would hope that it’s at least 65% of multi baggers are micro cap stocks, but the fact it’s 87, it means that there’s a lot more as a percentage.

[00:24:28] Ian Cassel: Yeah, so that, that was a report that was put out by, and it’s free and accessible and downloadable. Jenga Investment Partners, which is an investment firm out of the uk, did that study and they found that yes, 87% of all global equities across all. Global markets that went up 10 x or more over the last 10 years.

[00:24:48] Ian Cassel: And that last 10 years would be, I think it was May, 2012 to May, 2022. 87% of those companies were originated out of the micro cap and nano cap arena. And I think that’s interesting. Not only because I’m a micro cap investor, I love, and I’m proponent of the space I think if you talk to most investors about multi baggers and multi baggers, a term that.

[00:25:09] Ian Cassel: Peter Lynch wrote about in his book, one Up on Wall Street and he was talking about how each bag, it was a baseball term. Each bag represents a base. And a 10 bagger is a stock that goes up a thousand percent. So that’s where the term multi-bagger came from. But I think when most investors think about multi-baggers, they think of companies like Google or Apple or Nvidia or Netflix or Meta, and yes, all those companies.

[00:25:33] Ian Cassel: Have been multi-baggers. I think Google’s A sixty-five-bagger since IPO Meta’s an eight or nine-bagger since IPO Netflix. A two-hundred-bagger. Apple seventeen-hundred-Bagger. NVIDIA. Now it’s probably up to a twenty-one-hundred-bagger. That’s a two-hundred-and-ten-thousand percent return since nineteen-ninety-nine.

[00:25:52] Ian Cassel: And yes, those companies. Are multi-baggers, and they’re the most, the largest companies in the world, the most owned companies in the world. And I think for a lot of people, when they look at companies like that, especially small business owners, which I’m, I know that there’s a lot of people listening to this that own small businesses.

[00:26:08] Ian Cassel: You look at companies like Google or Meta or Microsoft, and it’s like you’re staring at a business on another planet. It’s like these companies are doing a hundred billion revenues. They have a hundred. Thousand 500,000 employees. It’s like the size, the scale, the reach, the global footprint, the profitability.

[00:26:27] Ian Cassel: It’s like you’re looking at a business on Mars compared to the type of business that you run, that you manage. And what I think is interesting is, yes, those companies are multi-baggers, but a majority of the multi-baggers that occur in the public marketplaces don’t look like. Nvidia and Apple and Google, they look like businesses that are probably a lot like yours.

[00:26:48] Ian Cassel: You know the businesses that you run, that you manage, they’re a five or $10 million revenue business that’s slightly profitable that they can turn into a 30 or $40 million business and make more money. That’s what the real multi-baggers in the public marketplace look like. There are these small companies that can just grow revenues, grow earnings.

[00:27:05] Ian Cassel: And not dilute. And that’s really the first principles of finding multi-baggers is just find a small business that’s undiscovered, that can grow revenues and earnings and not dilute you. And in that presentation, I gave a few examples and I’ll just give one just because it’s fun to talk about one or two.

[00:27:25] Ian Cassel: I don’t own any of these companies. I’m not endorsing any of these companies. I’m just using these as examples of representations of types of companies that are actual multi-baggers. But there’s, it’s companies like an Armanino Foods, and this is AMNF. It’s an OTC company. It’s probably a 180 million market cap.

[00:27:43] Ian Cassel: It’s still a Microcap stock, and over the last 14 years, it went from a 10 million market cap to 140 million market cap. It’s basically a 14 bagger, 15 bagger. And so what’d they do? They didn’t grow revenues from one to a billion. Like the type of stories you read about in articles or the Wall Street Journal?

[00:28:03] Ian Cassel: They took revenues from, in 14 years, from 21 million to 66 million. Wow. That’s believable that you could see that happening. They took earnings from, in 14 years, from 1 million to 7 million. That’s not extreme dilution, 8%. So in 14 years, they took the business from 21 million in sales to 60 earnings from one to seven, 8% dilution.

[00:28:27] Ian Cassel: And that’s a 14 bagger. That’s a 1400% return in 14 years. And that company is a, actually the U.S market share leader in pesto sauce. So they have 65, 60 5% market share in producing pesto sauce in the United States. And that’s not some AI play, that’s not some huge story stock. But that’s just another example.

[00:28:48] Ian Cassel: Like another funny example is a company like Bioscience, which is up in Canada. So in 14 years, that company was a 14 years ago, that was a 700,000 market cap. That’s not millions of market cap. It’s a 700,000 and now it’s 90 million. So it’s still probably like a nano cap. And what they did was they in-licensed a product up in Canada for iron deficiency that they now sell in Canada.

[00:29:11] Ian Cassel: And revenues over 14 years went from 1 million to twenty-eight million, not one to a billion, but just one to twenty-eight million earnings from zero to 6 million zero dilution, and that’s 130 bagger stock. It’s 130 bagger stock in 14 years, and it’s still a 90 million market cap that no one’s ever heard of.

[00:29:32] Ian Cassel: And again, this is just a representation of what, like what real multi baggers look like in the public market space. And so that’s what I like to remind people is like a lot of the. A lot of these companies that Multibag are simply a company that can go from 10 million to 30 million in sales and go from 2 million in earnings to 5 million and just not dilute me.

[00:29:51] Clay Finck: Many in the audience are gonna be aware of Chris Mayer’s book Hundred Baggers, and one of my biggest takeaways from that book is understanding the twin engines, where if you’re looking at a quality business that’s well known, oftentimes is gonna have a high multiple and you’re not gonna get any expansion, but the magic happens when it goes from what you’re looking for, undiscovered.

[00:30:10] Clay Finck: So it’s trading at A. Pretty low multiple. They expand earnings, they become discovered. So you’re getting the, that tailwind of the earnings growth is when you get that twin engines. And when the Multibaggers, a lot of ’em are coming outta that. 

[00:30:25] Ian Cassel: You wanna find growth and value that’s how you get rich.

[00:30:29] Ian Cassel: You wanna find the companies when their value transitioning to growth and so it’s the double lever of multiple expansion. On earnings power. 

[00:30:39] Clay Finck: I just recorded an episode on Willis Johnson’s book. It’s called Junk to Gold. It’s on the growth story of Copart. Such a fascinating story. I looked at their IPO, they iPod in 94 at a, around a $75 million valuation.

[00:30:55] Clay Finck: Today, the value of the company is 45 billion, and it’s just been a. Slow and steady year in and year out. They grow revenues, they grow. Earnings obviously become more discovered over the years as their consistency is being appreciated. And a couple things are interesting about this sort of case study of a multi bagger that’s played out over decades and just been a consistent winner.

[00:31:16] Clay Finck: And I. If you would’ve bought it at any point, you would’ve found yourself with handsome returns over time with patience. So one of the first things that stands out to me about Copart is this is not a sexy business. They own a bunch of junkyards. They help people sell beaten up cars, and it’s not an AI play like you mentioned there.

[00:31:33] Clay Finck: And another thing that was interesting to me about this story was, they obviously definitely understood capital allocation, the value of a dollar and minimizing expenses, just all the things you like to see in a management team. But when they find that great opportunity, they were actually willing to issue equity, which I found quite interesting.

[00:31:53] Clay Finck: Because you put, I. Obviously you said three points there. Grow revenues, grow earnings not dilute me, Copart along the way. It’s tough to find data on this without looking up every single filing, but it seems that they did do at least a decent amount of dilution of relative to a lot of the multi-bagger case studies you’ll find.

[00:32:09] Clay Finck: So talk more about dilution and how this can be, a tricky thing to play when you’re investing in a company that is diluting 

[00:32:19] Ian Cassel: I think the tricky part, and it works in co-parts and other circumstances, when it’s a creed of dilution, if you wanna call it that a situation where the earnings are increasing faster than the dilution.

[00:32:33] Ian Cassel: So earnings power is still, earnings per share is still going up. And the hard part with small microcap companies. Comparing it is most of the managers just don’t know how to do those deals and they structure ’em poorly and the financing they get to do it is on bad terms. And when it’s ultimately done, it becomes very dilutive to earnings even after, even if it’s a creative acquisition.

[00:32:59] Ian Cassel: And so it’s hard to find a management team that knows how to put a good deal together and how to finance it correctly. I guess that’s how I would answer that. 

[00:33:07] Clay Finck: Makes sense. And part of it too is just. Managers that understand capital allocation can be more rare than some people might expect given that they’re business owners.

[00:33:16] Ian Cassel: Yeah. Yep. Yeah, a hundred percent. 

[00:33:20] Clay Finck: In your multi-bagger presentation, I believe you talked about Expel, this company was pitched in your community by Paul Andriola. And Kyle had him on our Millennial Mustang show. He is a great guy, very passionate investor also searching for multi-baggers. I had this, I pulled this quote from your presentation that you pulled up the chart of Expel and it’s it really points to that twin engines, where if you look at the, I’ll share your quote here.

[00:33:45] Clay Finck: If you look at this chart, the first two-thirds is really a misunderstood company that just kept growing revenues and growing earnings and not diluting. The last third of the chart is when everyone at the same time discovers that this is a great business, and the expelled chart is just an amazing example where that business just.

[00:34:01] Clay Finck: Totally exploded. And you and a lot of other people probably assumed that this business couldn’t scale and get, couldn’t get to the size that it did. So what are some of the other things that really stand out to you about Expel as a case study? 

[00:34:15] Ian Cassel: Expel is, so I, Paul wrote it up on the club I think at 36 cents back in 2013, I think.

[00:34:22] Ian Cassel: I went out and visited Ryan Pape, the CEO in 2013 in San Antonio. I think the stock was around 45, 50 cents. Something around there. And what was interesting about that is like I sat down with them across the table and you’re putting clear plastic film on people’s Lamborghinis or Ferraris or whatever it is and I remember thinking about like, how is this ever gonna be scalable?

[00:34:46] Ian Cassel: You’re selling $2,000 to wrap the front end of a rich person’s car. It’s hard to put on. You need a dealer to put it on. You can’t do it yourself. There’s all how’s this ever gonna scale? And like walked away. I never bought the stock and obviously I was dead wrong. And I love to rub my nose in that because I think that is a microcosm of where kind of the next 50 or a hundred backer comes from.

[00:35:09] Ian Cassel: It comes from a very misunderstood business that has been growing revenues and earnings and expels case too, not diluting, and it’s just misunderstood from the standpoint of this could scale into something much bigger than what. Anyone thinks, and it’s gonna be a unique situation like an expel where they’re now the market leader in pain protection film globally.

[00:35:34] Ian Cassel: And they had to displace 3M, which is it not a small company to do that, which is also pretty cool. And one of the main points I like to make is like whenever you just find a small company that can just. You might not even think it’s scalable, but you should take that idea seriously because you never know where that misunderstood business all of a sudden becomes understood.

[00:35:56] Ian Cassel: It all of a sudden turns into a great business in everybody’s eyes and the multiple expands three x and you have a move that happened like expel. So I, it spells a fascinating one just because Ryan became CEO of Expel in two, in February of 2009 when the stock was at 4 cents and he maxed out his personal credit cards for $25,000 to pay off some company debt.

[00:36:17] Ian Cassel: Bought stock at 4 cents and as recently as September of twenty-three, he sold a thousand shares at seventy-five dollars that his cost basis was 4 cents. That’s $40 to seventy-five thousand. 

[00:36:29] Clay Finck: And he mentioned that taking out all those loans and even with the benefit of hindsight, probably wasn’t the best idea.

[00:36:35] Ian Cassel: Yeah, exactly. So it was so it’s just fascinating just the value creation there that occurred in a situation like that. And. I guess that the point I would make is I’d just take any business seriously, that’s small, growing, profitable, and not diluting, and that last part was key to expel too.

[00:36:53] Ian Cassel: 14 years taking revenues from 3 million to 350, 400 million going from basically break even to earning 50, 60 million in earnings. I think it was 7% dilution. Across that timeframe, and that’s, that was a, at its peak, a 2000 bagger that was equivalent to what Apple’s done since IPO in 1981.

[00:37:12] Ian Cassel: And when you talk about what’s impressive with something like that too, is just the leadership I. Take a company like Brian take a company from 3 million to 400 million to be, have the same leader do that. I don’t know how many other, I bet you could only name on two hands 10, probably 10 or less, or maybe 20 or less.

[00:37:31] Ian Cassel: CEOs that took a stock up 2000%. Or I’m sorry, 200,000 Buffett did it. Steve Jobs didn’t do it. Ryan Pape did. Little Guy outta San Antonio that puts paint protection film in front of cars. And that’s just cool too. 

[00:37:45] Clay Finck: One of the tough biases with multi-baggers too is I just look up Expel right now.

[00:37:50] Clay Finck: The market cap on, it’s just shy of 1.4 billion. So people hear Expel and they hear that it’s gone. Whatever percentage it’s gone up. Some ridiculous percentage. One of the top multi-bagger stories out there, especially outta the microcap space, and it’s at a $1.4 billion valuation. It’s people will naturally assume that their run is done, the move’s been made, and it can’t do obviously near what it did before. But people just, I think we naturally assume that you can’t do well in a name like that. After it’s already gone up. I. And that’s the trick with a lot of multi-baggers is if you get in even halfway into their run, you can still end up with a fantastic result on the other side. 

[00:38:35] Ian Cassel: It’s the beauty of microcap investing too and none of what I said is an endorsement of expelled today to go out and buy the stock or whatever. I don’t own a position in it, it’s just when we’re looking, using it as a case study. But that’s the beauty of microcap investing. And you can have businesses that go up.

[00:38:48] Ian Cassel: A hundred X, like a biosign, and it’s still a 90 million market cap. That’s still too small for anybody to even buy in most of the world and you can make 50, a hundred x on stocks that just simply go from a small business to a slightly larger small business. It doesn’t have to be the next Google.

[00:39:07] Ian Cassel: In fact, the majority of ’em are companies just like that. Like I said before, take revenues from 10 million to 30 million and not dilute me. Can you do it? It’s that easy and that hard. The one thing. That. I think that, and one of the reasons I did that presentation was also to get more small business owners thinking about going public.

[00:39:24] Ian Cassel: ’cause a lot of people are thinking about why would any small business wanna be public? Have to deal with investors and shareholders and SEC and this or that. The one thing that the public markets does better than the private markets, and it always will, is overvaluing consistency of execution.

[00:39:39] Ian Cassel: You could sell. Toothpicks and if you grew revenues year over year for five straight years, grew earnings year over year for five straight years, you know you’re gonna trade at 20 times earnings, you’ll be twenty-five times earnings, selling toothpicks, private market’s like you’ll have to sell that business to Brent, B. Shore, or somebody else for three times cash flow. So that’s the reason to go public. If you believe in yourself, you think you consistently execute and create more revenues as a small business year over year and earn more money. And the other irony about the best performing stocks and small companies are the ones that shouldn’t be public.

[00:40:16] Ian Cassel: They don’t need to lean on the capital markets to raise capital. They’re producing enough internally generated cash flows to support themselves, and that’s why they’re getting the valuation they’re getting. And so that’s the other irony of it. Like the best public companies are the ones that shouldn’t be public.

[00:40:31] Clay Finck: Another interesting aspect with Expel. I think a couple of the things I’ve learned as of late is be a little bit hesitant to cut your winners entirely because you don’t know how far they might be able to run. And another interesting aspect is just the role of luck. Some companies just find themselves at the right place at the right time, with the right manager in the right market.

[00:40:55] Clay Finck: The list goes on and it’s just so difficult to obviously to find the next six spell. Each company is gonna have their own. Growing pains, their own culture, their own business model, and you can only learn so much from studying it. And it also reminds me Stig and I, We were recently talking about Nick Sleep’s letters and he’s famous for concentrating his portfolio in just three companies, Amazon, Berkshire, and Costco.

[00:41:17] Clay Finck: And it’s so easy to think, wow, like what a genius. He concentrated into three amazing businesses. Like, why don’t I go and do that? But then I can’t think of any other investors that have done that. So there’s obviously some sort of survivorship bias that’s at play there. People don’t like to admit it, but like Elon Musk and Jeff Bezos, so much of their success was due to luck.

[00:41:39] Clay Finck: That doesn’t take away from all the effort and what they’ve accomplished in their life. But luck, you can’t underestimate the the factor that played in, especially like I. Company like Expel or any other big multi-bagger too. 

[00:41:54] Ian Cassel: I asked Ryan Pape that question when he spoke at our event in September, and you can find that conversation on YouTube.

[00:41:59] Ian Cassel: Just search Ryan Pape and 1500 bagger and you’ll find it. It was a great conversation for small business owners and also investors, but just the principles he talks about. But he mentions luck ’cause Jason Hirschman asked him specifically about. Luck. And he said that for them, he thought luck was a big part of it.

[00:42:15] Ian Cassel: They were the right company with the right brand at the right time and he doesn’t think they could pull that off today. And he mentions that and I remember I. Asking him on the phone a couple of times just talking about, did you ever think that it would get this big, this quickly?

[00:42:31] Ian Cassel: And the answer was like, no. And so that here’s a guy that knows the business better than anybody that you would expect to say, oh yeah, this is, I always thought this was gonna happen, or it was gonna happen quicker, or this or that. And he was completely rational about it it ended up going much better than he thought.

[00:42:45] Ian Cassel: And luck was definitely a part of it. And I think getting back to like sleep and Sakaria and owning three companies I think. What I would say about that, I would reframe it as not to just, it’s not like they started their careers 10 years ago and decided they’re gonna buy Costco, Amazon, and Berkshire.

[00:43:03] Ian Cassel: They owned probably a hundred other companies the previous 10 years that they churned through and turned over before they found the three that were worthy of holding. And so that’s how I would frame that and it’s the same thing. That’s how I view portfolio turnover for me too. Just because it just takes time and turnover of just your watch list and even things in the portfolio to find the ones that are worthy of truly holding.

[00:43:27] Ian Cassel: And you see that happen with Berkshire Hathaway, or not Berkshire, but Warren Buffett and he’s probably the ultimate, the best investor of our time, best stock picker of our time, and it took 50 years of owning hundreds of stocks. To find a dozen, which is, I think even it’s 12 or 13 that he’s owned for 15 years or more.

[00:43:47] Ian Cassel: So it’s the best stock picker on the planet ever. That’s owned hundreds of stocks to find 12 that he’s owned for 15 years or more. Then you put Ulayer on. Now I’m trying to do that in small businesses that are more fragile than a large business and so I’m gonna have more turnover than normal because I’m trying to just turn these things over and find the ones that are, have the great management teams.

[00:44:11] Ian Cassel: I. That have the great businesses and some of these small businesses, they go through two or three or four years or two or three or four quarters where they do really well, and then something changes and you have to sell it. It doesn’t mean it was a bad decision to buy in the first place. It just means it evolved in a way that you had to sell it.

[00:44:28] Ian Cassel: And so turnover is always a part of kind of a strategy like mine. But I also think it’s wrong to characterize even Buffett’s approach as coffee can. Or that there was no turnover in his public portfolio, which during his best years, he was averaging 50% turnover in the public book, in his portfolio. And it’s not because he wanted to turn it over.

[00:44:48] Ian Cassel: It was because it just takes time and turn over to find the few that are worth holding. 

[00:44:53] Clay Finck: I also wanted to mention, another bias you opened my eyes to is attribution bias. I’m just reminded of a Morgan Housel’s book. Same as Ever. He has a chapter called Best Story Wins, and it just talks about how.

[00:45:07] Clay Finck: You can have the best idea in the world, but if you can’t sell it, if you can’t tell a great story, then no one’s gonna care or pay attention to you. And we hear things in investing, so many things that just make total sense. And it’s, it can be easy to be duped. And you talk with a lot of management teams, I’m sure there’s a lot of stories being told on where they’re going.

[00:45:26] Clay Finck: And you just have to try and figure out how anchored in reality a lot of these stories are. And it’s just something that’s so difficult to do. Many of the listeners might be surprised to learn that. For example, high Insider ownership does not correlate with better returns. And this is something we talk about all the time.

[00:45:43] Clay Finck: Look for companies with high insider ownership. And despite that being the case, we know that incentives drive behavior and incentives are more powerful than we can really wrap our heads around. And Ian, I think you and I both want to invest in companies with high insider ownership. Even if the data suggests that it might not matter all that much.

[00:46:02] Clay Finck: So maybe you could talk about insider ownership a bit and attribution bias as well. 

[00:46:08] Ian Cassel: It gets back to what you want to be true versus what is true. I. And attribution bias is when you attribute too much value to a specific thing that leads to a good outcome. And the example you gave, I had dinner with Jim O’Shaughnessy, I don’t know, this is probably going back five, six years ago.

[00:46:25] Ian Cassel: We were just chit chatting and he’s and he’s Ian, and he’s like the, you read a lot of case studies about how in high insider ownership or founder ownership, and they show these charts going up into the right and how it outperforms the normal portfolio. And he’s most of that data’s collected, flawed.

[00:46:40] Ian Cassel: And they’re putting the data together to produce that outcome because that’s what they want to believe. And for those of you that don’t know Jim, you probably know him, but he started Doshanis the asset management top tier quantitative analysis. All he did every day was look for factors and signal out of the market that he could produce quantitative strategies around.

[00:47:01] Ian Cassel: And no one would probably like it more that it would be as simple as just finding companies that have 20% insider ownership or more and just buying those and holding. And so he’s looked at all analysis and he is told me at that dinner, he is the analysis shows that it doesn’t matter. It’s, there’s no signal in high insider ownership or high founder ownership.

[00:47:18] Ian Cassel: When you look at the actual data. And it was funny ’cause it put me back in my chair and literal, literally sit. I sat back and like just sat there for a minute and I came to the conclusion for myself that even though as a whole it might not work to own all the companies that have high insider ownership or high founder ownership, I.

[00:47:39] Ian Cassel: But I do think that there’s some signal, at least for me, in how I invest, because I at least need to know that whoever’s leading that business has the lead with the consequences of their decisions. And it’s, it might not mean anything as a whole if I was developing a quantitative strategy, but for me and how I invest in how I pick stocks I need to have that and it will help me hold that business.

[00:48:01] Ian Cassel: And that’s how I reframed it to myself. But I think attribution bias as a whole is it’s interesting because I think attribution bias is actually how we naturally mature as investors. And I think as when you start out as investing, if you talk to most investors, the way they start out is as fundamental value investors.

[00:48:22] Ian Cassel: ’cause the first thing they learn is accounting and it’s the only thing they know. And they just start screening for cheap stocks and. That’s the only thing they know. And not realizing that when you are only looking at cheap stocks, you’re giving up things on the other end of cheapness, which is quality, but then as you mature and you start growing and you start looking at other things, call it the other colors of the palette. If you’re painting and you start learning maybe I should care about management. How do you find great leaders and great capital allocators? Then you start getting obsessed with books like the Outsiders.

[00:48:55] Ian Cassel: Then you start getting obsessed with, okay, I’m gonna find that frugal economy class that works out of a strip mall that produces a billion dollar business that doesn’t pay himself anything that buys stock when it’s low and uses his equity when it’s expensive. You get obsessed with that and you over attribute to that characteristic with your own portfolio because you’re learning about it and it’s just how you learn.

[00:49:15] Ian Cassel: You put too much emphasis on it and then you go to the next thing and whatever the next thing is. Maybe you focus on. More of the qualitative attributes or culture. You start diving into intelligent fanaticism, which was a couple books that I co-authored where culture was the promoted thing, and you start doing scuttlebutt, talking to customers, talking to the employees to see if they love to work there, and you start overemphasizing that. And what you realize, like over time is you mature, is that each one of those things is a puzzle piece, an equally weighted puzzle piece. And you shouldn’t be attributing too much value to each one of them.

[00:49:47] Ian Cassel: They should be taken as. The entirety of the puzzle, and it just takes years or decades to bring those puzzle pieces together for you to learn. But the only way you got there was overly attributing value to each one of them, or else you would’ve never learned it. Anyway, that’s my rambling discourse on how I think attribution bias is necessary as well in our maturation as an investor stock picker.

[00:50:08] Clay Finck: Housel has another chapter in his book titled, risk is What You Don’t See given the number of businesses you’ve invested in. I’m super curious to get your take on. This chapter, we can all see the potential risks that lead to an investment going bad. But oftentimes an investment doesn’t pan out for reasons we can’t even imagine, or reasons we think have an extremely low chance of happening.

[00:50:33] Clay Finck: And a household also points out that crazy things happen all the time just because of the amount of crazy things that can happen and you turn that out over years. Crazy things actually end up happening all the time. COVID-19 being a prime example, every. A hundred years or so, a pandemic is eventually bound to happen.

[00:50:51] Clay Finck: So from your experience, what are some of the ways in which investors can get blindsided by risks they can’t foresee? And what’s that look like from your experience? 

[00:51:00] Ian Cassel: Yeah, it’s a good question. I think when you buy a stock, you’re always betting that the situation is gonna get better, not getting worse.

[00:51:07] Ian Cassel: And I know for me even it’s easy to just start thinking about like how much better the business can get and you almost forget about that. The business can get worse and that’s the big risk. And it’s actually a risk coming. The business is going to get worse. What you don’t see coming is what causes it.

[00:51:26] Ian Cassel: And you see it a lot in micro caps where I. With the small micro cap, it’s a domino effect of small things happening that leads to this bad outcome. It could be a management overspending in a certain area, taking their time and their resources and their eye off the ball of a core business that’s profitable, and all of a sudden you see this core business start to deteriorate.

[00:51:50] Ian Cassel: Profitability declines. Investors get anxious. They sell it down, it gets worse. Management has to raise capital at a bad time. Dilution occurs, goes down another 30%. And so it’s like this domino effect of a bunch of small things happening and all of a sudden everything happens all at once and it just becomes a disaster.

[00:52:09] Ian Cassel: And so for me, what I get out of that the risk of what you don’t see coming is just being aware of those dominoes and being fully aware of when you start seeing one or two of those dominoes fall, that this could be. Lead to a very bad outcome. And it happens quite a bit in Mugger Cat, to be honest with you.

[00:52:25] Ian Cassel: ’cause these are small businesses and one thing leads to another and it happens slowly and then all at once. As this, as the saying says, 

[00:52:33] Clay Finck: plus they can be pretty illiquid. So the smallest things can impact one earnings miss, and then one investor doesn’t like it and the stock is gaps down 10, 20%.

[00:52:43] Clay Finck: Speaking of stocks being down, you, you had a recent article also on. Averaging down. We talk a lot about averaging down as value investors. It’s easy to think when a stock goes down it’s better value, but sometimes the stock, the market’s not always dumb. Sometimes the stock going down is the market’s trying to tell you something.

[00:53:03] Clay Finck: So how can we successfully average down when stock prices are heading that direction? 

[00:53:10] Ian Cassel: Yeah I think some of my biggest mistakes as investor have been averaging down. And yeah, I’d much rather average up. And you can still make mistakes doing that. But when it comes to averaging down, I forget who it was.

[00:53:22] Ian Cassel: Oh, it was John Hempton wrote an article, the famous short seller. He wrote an article about averaging down. It was really good. And he mentioned certain scenarios that it was. A poor choice to average down. And you mentioned highly levered companies with I believe, obsolescence risk. Those were the two main ones.

[00:53:40] Ian Cassel: And then I looked at those and I added two more categories to it, which was you shouldn’t average down into unprofitable businesses and also businesses that are underperforming. So after a bad quarter. And so the question is like, when should you average down? When I analyze like the best times I’ve ever averaged down, it’s actually the in inverting, those four things I.

[00:54:00] Ian Cassel: There’s four attributes of when you shouldn’t average down. When you should average down, when the business is accelerating and the stock’s just dropping. Also, when the business is profitable, there’s a combination of all these things. Business is accelerating, the business is profitable, which means they don’t need to raise money, so they’re not gonna all of a sudden dilute you.

[00:54:16] Ian Cassel: Significantly when the stock’s down. Number three, they have a sustainable growth trajectory looking out, and number four, they don’t have a lot of debt. And really you invert the reasons you shouldn’t average down and those will be the reasons what when you should. And so you should really only average down when the stock is completely mismatched from the valuation of the business and the business trajectory.

[00:54:38] Ian Cassel: And probably the biggest hurdle is if that business is accelerating. The stock’s just down, then you should buy it. And where you get into trouble is when the businesses, especially in MyHerCap, if you’re averaging down into unprofitable situations where the company is gonna raise money and dilute the heck outta you, 30% lower and the stock never recovers.

[00:54:59] Ian Cassel: And that’s where MyHerCap investors get into the. Into bad situations. 

[00:55:04] Clay Finck: Yeah. It’s so interesting with investing that oftentimes you don’t realize you made a mistake until the stock is down dramatically. And there are plenty of examples where you buy it, you think it’s trading below the intrinsic value, the stock goes down.

[00:55:20] Clay Finck: And the intrinsic value may have went down as well, but you still think it’s trading at a discount and you have a dilemma on your hands where you’re, it feels like there’s no great decision. No matter what you do, you’re gonna regret holding it. You’re gonna regret selling it too, because I realize a big loss. 

[00:55:35] Ian Cassel: It’s easy. It’s like it’s easy to. Average down sometimes. ’cause it’s easy to convince yourself that it’s cheap, it’s cheaper than it was, even though the situation probably changed. It’s a different business than what it was when you bought a 30% higher in a lot of these cases.

[00:55:49] Ian Cassel: Obviously there’s some moments in time when the macro market is pushing down equity prices. I. And that’s the time to, to decide whether you should be averaging more when it’s lower, and you should only be averaging more when it’s lower, when the markets are down, you know when that business is doing. 

[00:56:03] Clay Finck: Ian, I always appreciate you taking time to join us. It’s always a lot of fun. How can the audience learn more about you, Microcap Club, any other resources? If they haven’t checked him out already, 

[00:56:15] Ian Cassel: You can check out Microcapclub.com. You can follow me on Twitter, and my name is Myhandle. Yeah, it’s an honor to be on the program.

[00:56:23] Ian Cassel: I love talking about MicroCaps. I think it’s a, an amazing space. It’s not without its risks. And so where most people get into trouble is spending time on the eighty-five percent of them that are unprofitable. So what I like to point people to is just focus on the real businesses, the ones that are growing, earning more money, hopefully not diluting you, and that cuts out probably ninety-five percent of the risk with the space.

[00:56:44] Clay Finck: Great. Thanks so much for your time, Ian. Really appreciate it. 

[00:56:47] Ian Cassel: Thank you.

[00:56:49] Outro: Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.


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