(Ep.25) The Acquirers Podcast: Ian Cassel – Intelligent Fanatic, A Masterclass In Microcap Investing

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In this episode of The Acquirer’s Podcast Tobias chats with Ian Cassel. Ian is the Founder of MicroCapClub and Intelligent Fanatics Capital Management. He specialises in micro-cap investing, and believes that the key to outsized returns is finding great companies early, because all great companies started as small companies. Ian provided some great insights into:

– XM Satellite Radio, How Luck Initially Drew Me Towards Micro-Caps
– Investors Can Generate Outsized Returns Using The Three Buckets of Micro-Cap Investing
– Launching MicroCapClub As An Idea Generator
– Avoid Selling Too Early – Investors Need To Allow Their Stock Positions To Exceed Their Expectations
– Intelligence Fanatics – The Attributes Of A Great Business Builder
– Creating A Interactive Twitter Investing Game
– Quality Companies That Are Growing Are The First Ones To Bounce Back Following A Recession
– The Micro-Cap Universe Provides The Best Opportunities To Find Multi-Baggers
– What Is The Best Way To Assess The Management Of A Prospective Investment
– There’s A Big Difference Between Risk And Volatility Tolerance
– Let Your Winners Run, You’re Going To Be Right Five Or Six Times Out Of Ten
– Good Investors Understand Their Own Biases And Limitations

Other Studies/Papers/Books Mentioned

Other studies/papers/books mentioned in the interview are:

intelligentfanatics.com – Learning From The World’s Greatest Business Builders

Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses (Sean Iddings/Ian Cassel)

Intelligent Fanatics: Standing on the Shoulders of Giants (Sean Iddings/Ian Cassel)

Twitter – Choose Your Investment Game

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Full Transcript

Ian Cassel: I’m ready.

Tobias Carlisle: Great. I’m Tobias Carlisle, this is the Acquirers Podcast. My very special guest today is Ian Cassel of the Intelligent Fanatics Capital Management, founder of the MicroCapClub. The maestro of micro himself, I can’t wait to dive into his strategy. We’re going to be talking him right after this.

Speaker 3: Tobias Carlisle is the founder and principle of Acquirers Funds. For regulatory reasons, he will not discuss any of the Acquirers Funds on this podcast. All opinions expressed by podcast participants are solely their own and do not reflect the opinions of Acquirers Funds or affiliates. For more information, visit aquirersfunds.com.

Tobias Carlisle: Hi Ian, how are you?

Ian Cassel: I’m doing great [Tobi 00:01:02], thanks for having me on.

Tobias Carlisle: My absolute pleasure. So I’ve heard you give your background story before and it’s absolutely fascinating. How did you come to be a microcap investor?

How Ian became a microcap investor

Ian Cassel: Well, we can probably talk about that for an hour but I’ll try to give the short version. I started investing when I was a junior in high school and my parents sat me down and they told me, you know, they had saved for me approximately, $20 thousand for my college education and they said they wanted me to know that then, because that’s all I was getting. They wanted to let me know that then, so I would know where to apply. I could go to an expensive university or I could go to a local university.

Ian Cassel: This was 1997, so the technology bubble was just occurring. I was getting more interested in the markets. When they gave me that little bit of money they introduced me to their financial advisor and he introduced me to a couple small cap technology names. I just fell in love with the marketplace, just like a lot of other people did at that point in time.

Ian Cassel: I decided to take that money and invest it into small cap technology companies and then just go to a local university so I could just pay for it as I went through college because I worked part-time. Basically, I turned that 20 thousand into 120 thousand because anybody could have done that at that point in time in small cap tech. It wasn’t that I was smart or anything like that.

Ian Cassel: At the time, I was also working for a financial advisor part-time in college and I was basically a glorified receptionist. When the stock market finally burst, that bubble burst, I was the one answering the calls from the hundreds of clients that were calling in every emotional state that you can think of. My portfolio took a hit as well and I think I turned about 120 thousand into about 8. You know, from peak to trough. So that was quite a learning experience as well as a learning experience in dealing with other people’s emotions, through that time period working for a financial advisor.

Ian Cassel: I don’t know if it was because everything I was investing in was getting smaller and smaller, but I started looking at microcaps at that point in time and I actually stumbled upon one that really caught my attention. I tell this story in a couple places, but I stumbled upon a company called XM Satellite Radio and it’s probably a company that you’re well aware of. It’s a company that would later merge with Sirius Satellite Radio. It’s in all of our cars today, but back then, I was just a story.

Ian Cassel: It was the leader in a story stock and they launched a bunch of satellites into space. They had two billion in debt, they had very little customers and obviously I wasn’t drawn to the fundamentals. In fact, I think 42% of the shares were held short in that company.

Ian Cassel: So again, long story short, I saw what they presented in New York City. I’m from Lancaster, Pennsylvania, it’s probably about a three hour drive away or three hour bus ride. I called the conference organizer and I just lied. I said, “Hey, I’m Ian Cassel, I’m with Cassel Capitals.” I made that up. “Is it okay if I can come to your event and I’d like to meet the CEO?” They said, “Sure.” I went, “Okay, great.”

Ian Cassel: So I put on my suit that I wore at my senior photos, it still fit even after a couple of years of beer drinking at the university. I got a bus and went to New York City. Got a chance to meet the CEO, kind of followed him into a back room and had a 10 minute conversation with him. I left that day kind of infatuated with him and infatuated with the story and ended up taking that $8 thousand and plowing it into XM at $1.78 per share.

Ian Cassel: Ultimately, literally, I think it was the next week, they started signing GM and Ford and refinanced their debt and went on an epic short covering rally that took it from a 1.78 to $34.14. So I ended up making back the money I lost and obviously we look back at that story and we know it’s 150% luck, I know it was, but I like to tell that story because it’s really what drew me to microcaps. It was the ability to meet the management teams that drew me into this ecosystem.

Ian Cassel: It’s what I believe the true edge is, especially in the smaller microcap arena. That’s why I’m passionate, that’s what got me involved in it. I that’s what really gets other people excited about it as well because even though your famous Tobi, and I’m you know, we can get access to some people but we’re not calling up Tim Cook at Apple if want to get some information. It was really that access to management, the ability to sit down with management that got me introduced to microcaps.

Tobias Carlisle: I think it’s something that you said to me that I’ve now said a number of times as well, that microcap investing at its best is like listed venture capital or listed private equity, in the sense that they’re probably not, the financial statements don’t tell the story or don’t give you the idea of the potential of the business. You really have to do work outside of what’s written down. You can talk to the company, you go outside that and try to figure out what you’re going to do.

Why XM?

Tobias Carlisle: When you did that with XM, what was it about it that you found attractive? Was it the fact that they had spent so much money on the satellites and it was trading at a big discount to that? What drew you to it?

Ian Cassel: You’re really putting me on the spot. Obviously, it wasn’t anything fundamental because they had no revenues and they had a pile of debt and they were losing money. I think really, it was the story that drew me into it initially. Back then, I know it’s hard for people to believe, but when you’re dealing with terrestrial radio and you drive 20 minutes outside where you live and start losing signal, you have to find another radio station, tune into it, it’s just a pain in the butt. Just the thought of having 100 crystal clear channels across the country whenever you want them, was a story that I could buy into. I was honestly just drawn to the story at that point in time.

Ian Cassel: Even taking that to another level, really my first, I would say, four or five years in microcap investing and building my initial capital might surprise some people, but it was mainly in story stocks. They weren’t fundamentally driven, they were kind of momentum driven names and obviously my strategies evolved over the years, but it’s also, I’m still attracted to a good story, obviously combined with fundamentals, but I can’t really point to anything outside of just saying, “It was a great story and I was at the right place at the right time.”

Tobias Carlisle: How has it evolved? Can you describe for us your process? How you identify these stock and what sort of diligence you undertake? How you prove up the idea?

Ian Cassel: Sure. Maybe to get to that, I’ll finish out sort of the background a little bit. Out of undergrad, I then went into graduate school at Villanova, got my MBA there and really only went there because I got into an assistantship that paid my tuition. It was kind of a great way to waste some time as I kind of honed my craft with microcap investing. You probably know, you may have been in Australia at the time, but a lot of the activity in these small microcaps is on message boards, or was on message boards in the 2000s, because most of the people that owned these names are retail investors and so they just congregate on message boards, especially back then. Raging bull investors have all these places.

Ian Cassel: I kind of built up a reputation on there, built up a following, found some mentors on there as well that showed me how to interview a management team, how to go visit a management team, that type of thing and just continue to hone my craft. After I went through graduate school, I then worked for a consulting company for six months, realized I could do that on my own, kind of start my own consulting firm for three or four years. That really kind of gave me the time to build my capital in the background to where I could be a full-time investor which I did in late ’08 during the crisis, which was an interesting time obviously.

Tobias Carlisle: Well, that’s a good time to do it because there are lots of opportunities, and I did the same thing at around about the same time. I was working for a firm but it was an Australian firm so it gave me an opportunity to invest in the states which was great because I had some experience at that stage as an attorney and as a lawyer in the States. It was a very interesting time. Do you think that… it’s an interesting time but it’s a different time to what we’re confronting now. Do you that the lessons that you learn in a period like that are helpful or are they, what do you think?

Ian Cassel: Well, leading up to that point in time, I really wanted to test may strategy at the time through a bear market because it’s easy to make money when you also have a tailwind at your back. I didn’t know a bear market was right then and there and obviously, in hindsight, “Oh, that’s a great time to be a full-time investor.” But I didn’t know if the world was going to end, everybody did it.

Tobias Carlisle: It felt like that.

Ian Cassel: Yeah, it really did. Looking back it’s a little bit easy. During that time it was tough and a couple lessons that helped shape my strategy from then was, I was in about four companies, I’ve always been concentrated as an investor, you know, being up to that point, three or four, maybe five companies at any given time. A couple of the companies I was in were down 50, 60, 70%, kind of peak to trough during that economic backdrop. I was in one that was up 300% and it wasn’t because I was in a double X long, Gold ETF or something link that, because it was a company that was small, it was growing rapidly, it was growing earnings rapidly and the institutions didn’t own it.

Ian Cassel: What I realized was even a bad market, a bear market environment, larger pools of capital are attracted to companies that are growing quickly, earning more money, not diluting and that they don’t own. Even a company like that, that was growing through that economic backdrop, still went up 300% during that awful time period. So that kind of help shape me to my strategy from that point forward to let’s look at these really small microcap companies, these ones that aren’t institutionally owned. That aren’t in the Russell indices, that we can get an edge in and find those special companies in the smaller realm of microcap.

Ian Cassel: That’s some of the lessons I’ve learned. The other thing I learned too was, when you’re in quality companies like that, that are growing, they’re also the first ones to bounce back after a recession. Even the ones that were down 50, 60%, three months later they’re up to where you’re breaking even again. They bounce back really quickly, so.

Tobias Carlisle: Do you characterize yourself as a value investor? How do you think about your own process? How are you assessing the opportunity?

Ian Cassel: I wouldn’t characterize myself as a value investor. I would say it’s more of a situational type investor, this has evolved over the years. I look at things in situations, not necessarily value or growth. We haven’t talked about it yet, but the investment strategy I launched a couple months ago, the way that’s kind of structured is… I kind of look at things in buckets and I kind of look at things situational. So the three buckets are sort of, I’m looking for these good to great businesses.

Ian Cassel: These businesses that are good, that are special businesses in the small microcap ecosystem that could become great. I don’t think any business in the microcap ecosystem is great until it evolves out of the microcap ecosystem so that’s why I call it good to great. And not just those business that are kind of the best way to play a trend or an area and you run into them too, because you’re well versed. You find a company that might be the best public way to play a trend or something that you want to play, but it’s not really the best one. There’s five other private companies that are actually doing it better than that company, really just buying the sixth best company.

Ian Cassel: What’s really rare is when you can actually find a company that’s a small microcap that literally is the best in the world at what they do. There’s not many of them out there but you can find them and when you do those are kind of those really special good to great businesses and that’s kind of what is that first bucket of opportunities that I look at.

Ian Cassel: The second bucket probably fits more of a traditional value or deep value investment bent which is finding a company that’s a turnaround. Usually, you find them when it’s trading at book value or cash or whatever, and usually, maybe it was mismanaged or got diversified into too many things. And a new management team comes in and sells off the non-core assets, sells off the subsidiaries they should have never got into and refocuses on core area where they actually have a competitive advantage. Trying to play that arbitrage where it trades from a value based off a balance sheet, to a price to earning, a growth moldable, and you can get multibaggers there as you well know.

Ian Cassel: So that’s kind of the second bucket, and the third bucket, quickly is, kind of the sexiest bucket. I call it the rocket ship bucket. These are the companies that have that 10, 20, 30, exponential and kind of getting back to my story stock days, that kind of have a great story and obviously every microcap says they fit this bucket but very few of them actually do and you want to make sure that when you’re in them it’s not a zero if you’re wrong, it’s not down 90%.

Ian Cassel: You want to find them where you’re willing to risk 30 to 40% of the downside for 20 X, the upside and you’ve done the work to believe that you have better than a coin flip shot hopefully at that. All you need is one or two or three of them in your portfolio, even positioned small, and if one hits you know, it can take the whole portfolio with it. So that’s kind of how I think about at least the portfolio construction for myself and the strategy as well.

Tobias Carlisle: What sort of rates do you expect to find those various different types of stocks? Is the rocket ship something that’s very rare, that’s a 1 in 10 or 1 in 20 and the bread and butter tends to be the good to great or the… do you understand what I’m saying? Which one tends to occupy the most space in the portfolio?

Ian Cassel: Probably the turnaround and the good to greats are kind of equally weighted larger, and the rocket ships are sort of smaller, so if you can think of it as 40, 40, 20 maybe, something around there. But ironically enough, when I valuate my returns over the years, a lot of the alpha actually comes from the rocket ship bucket, a lot of it comes from there. I actually spend the most due diligence on that bucket because of that. Even though it’s smaller, you know and even the position size is per position, are smaller, maybe compared to a good to greater turnaround, a lot of the alpha comes from that smaller bucket.

Tobias Carlisle: They’re just harder to find, they’re rare-

Ian Cassel: It is.

Tobias Carlisle: … so when you find them you do more work to make sure that it is the real thing but they’ve also got to be careful because they may not be.

Ian Cassel: Right, right, exactly. And you’re hopefully buying what you are traditionally looking for in that bucket is something that has a core asset that provides an underlying floor value or a legacy business that also provides a floor value to where, you know there’s a value there, there’s something there that’s stable, that could be sold. So that’s kind of where the value line… and hopefully you’re buying it close to that price.

Tobias Carlisle: When you’re constructing a portfolio, how many positions do you like to have? How big do you size them at inception? What do you do when they go up? What do you do when they go down?

Ian Cassel: Normally, I would say a small position is sort of in that 4 to 5% at cost. Medium would be 8 to 10. I don’t get too particular, like, “Oh, it’s at 6, it should be 4.” It’s kind of in that range. A large, probably 14 to 16% at cost. The first two buckets of turnarounds and good to greats, those are traditionally more of the ones you can take up to that 15% if that fit that. The rocket ships are kind of more like, okay, you might take it up to 8, or 9, but you’re not likely going to take it up to 15, 16% at cost, you might let them run higher but not at cost. So that’s traditionally how I think about portfolio size.

Tobias Carlisle: And when they run, do you let them compound up and just keep on getting bigger and bigger as part of the portfolio? Or are you always trimming back to sort of take the capital away and put it into something else?

Ian Cassel: It’s a good question. If we’re all being honest with ourselves and you’re very well experienced in the microcap ecosystem as well. It’s unfortunate to say this, a lot of the big successes in the microcap space aren’t ones that go from $1 to 10 to 30 to 50 to 100, they’re kind of ones that go to $1 and 10 and back to $1. Because they’re either small businesses, they may have had a product or service that got caught up in fad or that did well and the management team tried to diversify into other things and couldn’t. So you just have to keep reminding yourself of that. So I do trim the position as it gets bigger.

Ian Cassel: I think under normal circumstances, letting it go up to a 30% position size, shaving it down to 25, let it go to 30, shave it down to 25, 30, 20, you know, and getting some of the gains out it as it runs is historically what I’ve done. For me personally, maybe I’ve let that, instead of 30 it would be 40, depending on the situation.

Tobias Carlisle: It is striking how often that happens. particularly because mine aren’t necessarily compounders, they’re just companies that are undervalued and even if the value is declining, if they’re at a steep enough discount to that value, I’ll buy them and they’ll sometimes just, through the turn of the market, get closer to value at which point I tip them out, don’t think about them and a year later I’m, “Oh, hello, it’s back again.” It’s lower than where it was when if first bought it but it’s cheaper or it’s as cheap.

Tobias Carlisle: So I’ve had that experience a lot of times so I’m always very interested, particularly because your strategy has that potential for those compounders that could go from being microcaps to being larger companies at which point they probably get more attention. The management team probably gets better and they get better capitalized. Are you prepared to keep on holding them through that process if they no longer sort of meet the definition of a microcap, are you still a holder?

Ian Cassel: Yes, absolutely. I’m not going to sell something just because it got bigger, you know it doesn’t make much sense. The key to… I think you can make a good income for yourself by trading, flipping things for 20, 30% and then trying to find something else. It’s a really tough way to invest and it’s a tough way to build wealth. I think you ultimately want to be holding your winners as long as possible and you’re investment strategy is different than mine. You had Peter Rabover and Erick on last time and they’re both great. I love listening to those podcasts and their strategy is different than mine and yours in different from them. I can’t stand, “Oh, my strategy is better than yours, or his is better than yours.” It’s really what fits your temperament.

Tobias Carlisle: Right.

Ian Cassel: My strategy is not going to be the best one for yours and ultimately if want to get down to the nuts and bolts of it, the best strategy for anybody is really the strategy that lets you stay in your winners the longest.

Tobias Carlisle: I couldn’t agree more.

Ian Cassel: And that can be different for any single person. My strategy works for me because I’m able to stay in my winners the longest. A big part of the strategy as well is, knowing these positions better than anybody else or at least trying to. Having a real good pulse on the things that you own, just being very aware of what’s going on so talking to management is important to me. Just being able to talk to even competitors, suppliers, making those relations. Trying to get a pulse of how that company is doing. Over the years, I can’t really say doing that has helped me make any more money, but I can certainly say, “I’m still in this game because it’s kept me from big losers.”

Tobias Carlisle: So was it about six years ago roughly, that you became, you said 2008 you became a full time-

Ian Cassel: Yeah, a little over 10 years ago.

Tobias Carlisle: … 10 years ago. So, when did you launch the MicroCap Club?

Ian Cassel: Launched that in 2011 and leading up to that I had my own personal blog where I’d just talk about the four or five names that I liked and it got a big following and every time I posted on something it would move the market and it’s great for the ego but I just didn’t like that type of exposure. It’s was getting like, I don’t like that target on my back. I kind of looked at what Value Investors Club was doing. Looked at what some other folks were doing, and said, “You know it would be great if we just had some really smart microcap investors in one place, that was private, where we could just discuss what we liked and why?”

Ian Cassel: So that’s kind of how MicroCap Club was originated and that’s the way it is today. We have about 190 members from across the world and we have some subscribers too, that pay to gain access to conversations we’re having. It’s really meant to be an idea generator, I wanted to see more ideas and that’s really why MicroCap Club exists. It’s just to get an idea flow, see what people are talking about it.

Ian Cassel: The thing about MicroCap too is, as you well know is, especially in the smaller ecosystem, a lot of retail investors. Well, in retail you’re going to have doctors, you’re going to have attorney’s, you’re going to have construction workers, you’re going to have entrepreneur, and the cool thing about that too is, in a forum, usually somebody has a background that can at least give some information and some insightful information on the companies you’re talking about because they’re actually in that industry.

Ian Cassel: If it’s a large cap forum where everybody just their MBAs at the same place and yeah, but, I don’t mean to downplay that, but it’s a very eclectic group of investors as well as companies in this smaller world, this smaller ecosystem.

Tobias Carlisle: Have you sourced ideas from other investors in there?

Ian Cassel: Oh, yeah, most definitely. We have some really, really good talent, some really good talent. I think it’s one of the… I’ve seen many people that got started on MicroCap Club now that we’ve been around for seven, eight years, that were in high school and then they launched hedge funds now. So it’s cool to see that and they’re very talented. For me and my own sourcing of ideas, MicroCap Club’s a good one. Obviously, I’m still paying attention to press releases, filings, serendipity, but also close relationships that I’ve been able to foster from MicroCap Club with people that you respect, that think and look at the world differently than you do to help you become a better investor and also to find ideas. So there’s probably a dozen investors that I talk to rather frequently, always asking, “Hey, what do you like and why?” And also sharing yourself, so.

Tobias Carlisle: There’s some phenomenally talented guys in that group. I’ve seen a few of them speak at various different microcap conferences. I can attest to that, some really, really impressive guys in there. After MicroCap Club, you’ve launched a firm but before we get to the firm, let’s just talk about Intelligent Fanatics. What is an Intelligent Fanatic and what is the site about?

Ian Cassel: Sure. So kind of through the investor match ration, I got more and more interested in what are some of the attributes of some of the great leaders that are out there, and specifically, entrepreneurs that took a business from zero to a billion? What were their characteristics that enabled them to do that? Because bringing it down to the nuts and bolts it is, is microcap investing is investing in small businesses. If you want to find great companies early, you need to find great leaders early.

Ian Cassel: I was thinking about that in 2016, and I just randomly bumped into Sean Iddings, who was also a member of MicroCap Club at the time and he was doing some work on John Patterson who’s the founder of NCR and he started writing a little bit of a report on him and he was telling me about how he found out about John Patterson, was through Charlie Munger. I was like, “Oh, that’s interesting.” He said, “Yeah, Charlie Munger said he was an intelligence fanatic and I was like, “Oh, Intelligent fanatic, that’s kind of a cool name, what does that mean?”

Ian Cassel: So we got to talking about it and the term intelligent fanatic is a term Charlie Munger used to really define who a great business builder is. He mentioned several of them in his speeches throughout the years and so we started looking at the ones that he mentioned in his speeches and some of them were sort of known and some of them were fairly unknown because they were private businesses that they ran, but you could find information on them.

Ian Cassel: Sean, he was the bulldog, he went and just really studied all these individuals and started writing about it and then we just turned it into a book called, The Intelligent Fanatics Project, which is out there on Amazon. We retell the stories of these eight intelligent fanatics that Charlie Munger mentions and kind of going their background, their personal background and their professional background of how they built their businesses. Ultimately, their stories are incredible because they not only built a dominating business, but they dominated then over decades after that. So they just didn’t become number one for a couple years and fall back down into obscurity, these are businesses that dominated the test of time. The really special ones.

Ian Cassel: So diving into what those characteristics were then, what allowed them to do that. Then we wrote another book.

Tobias Carlisle: Wait, wait, you’ve got to tell us what the characteristics are? You can’t tease like that.

Ian Cassel: Oh, okay, I’m sorry. I would say, the overall theme of it is, they were great culture builders. All the ones that we highlight in the book, they operate in different time frames, different industries, different geographies but they built these adaptive cultures that could adapt to change. That is again, a topic we could probably talk on for an hour. It was really those folks that built adaptive cultures and how they did that and how they incentivized employees to think like owners. All of these kind of… about eight to ten characteristics that made them just great leaders overall.

Ian Cassel: The ability to delegate, a whole slew of them and we talk about it in the book but then just kind of been applying that to investing. That was my full purpose leading into it, but then it just got really, really fun, kind of diving into these stories and then applying that to my own investing, and then, you know, just studying these great leaders is a lot of fun. So we ended up building a community around it, intelligentfanatics.com.

Ian Cassel: Now we have two books. We have a third book coming out, Intelligent Fanatics of India that we study intelligent fanatics in India, which is going to be coming out later this year. Sean’s just a workhorse and he’s just a very talented person. He just came out with a Twitter game that you recently-

Tobias Carlisle: Phenomenal.

Ian Cassel: … yeah. So we’re just coming out with other kind of cool tools and things like that.

Tobias Carlisle: I’ll link to this in the show notes but he created a, choose your own adventure on Twitter. The amount of effort to go into building it, I can’t even imagine because it’s so detailed and it’s so good and it’s really, really fun. Do you want to talk about it a little bit?

Ian Cassel: Yeah, no. It all originated from another brilliant piece of work that he did on Monster Beverage where, and I’ll get to what you’re… but he looks at… Monster Beverage was one of the biggest winners of all time.

Tobias Carlisle: Hansens.

Ian Cassel: Yeah, it used to be Hansen’s. And he went back through all their annual reports, all the articles that were ever written about them and basically told it as a story. What was fascinating about it is, the way he tells it. I tell it in a presentation I did, called Investing is Hard, I kind of re-tell a little part of it. You kind of follow the path in the story and you’re like, “I could never hold this thing.” It’s great, it’s up 80,000% but there’s no way. At every point in time there’s things that go against what you and I believe in with investing. At one point, 50,000% ago the founder sells 26% of his position just because, you know there’s no way you would of probably held past that point, you know what I mean?

Tobias Carlisle: That’s a signal, that’s a very strong signal.

Ian Cassel: Yeah, and in really early days, Pepsi says, “We’re going to get into that market.” They have unlimited resources going up again a $200 million market, you know, cap and Hansen. So anyway, each one of those steps in that type of story is all right, would you hold? Would you buy more? Would you sell? And this is what would happen if you did.

Ian Cassel: Getting back to the Twitter game, that’s how he architected it as well. You start off with the CEO presents a story or you’re at a conference, would you invest in A, B, or C companies and it gives different characteristics of each and if you click on A, B, or C, it takes you down different paths and you can choose whether to buy, hold, sell at each increment. It’s a really engaging way and it’s also interesting because it’s a real story, he’s not making up a story.

Ian Cassel: If he finds real stories, just like Monster Beverage that you’re actually following that path and you’ll find out which company you’re actually following at the end of it.

Tobias Carlisle: It’s very clever. On the Monster Beverage Hansen’s, do you think, is it luck that you held through that period? Is it knowing that this the path that companies like this take? Amazon, Morgan also has a, I think he talks about Amazon on a regular basis. Amazon I think has drawn down something like 90% more than once over it’s lifetime, so it’s up enormously but could you hold through that period? Is that the lesson that you’re trying to hammer into your own head when you’re looking at those return parts?

Ian Cassel: Yeah, I think there’s just a lot of luck involved and I think it’s hard for investors because you want to think of these multibaggers as kind of these linear up and to the right financials. Monster Beverage went through some tough times in those days. They had 80% drill downs a few times. It’s because the business fundamental sagged. It would have been really hard to hold that. It almost would have had to been a position size that was insignificant or you really, literally had a coffee can that thing and put it under the mattress and just hold it and forget about it.

Tobias Carlisle: Or you do something like, Lou Simpson talks about this a little bit, that even if he thinks something is expensive, he trims it way back and he just keeps a small holding in it so he can continue to watch what it does. So he talks about doing that with Nikki and with some of his other more well-known positions as well. Even when he thought they were expensive, he’d never fully exit but he would trim it back to the point that it was not really meaningful anymore in the portfolio. But at least you’ve got your eye on it, then if it falls a lot, you’ve got that opportunity. You know it really well, you’re already in it and you’ve got that behavioral physiological element which I think is something that you’ve done a lot of work on as well, right?

Ian Cassel: Yeah. I think it’s really important, at least it is for me. If you’re going to be in winners, you’re going to be in things that are going to be expensive at times. I think it’s okay to trim them but you really don’t want to trim all the positions back. A lot of… when you look at these companies that have excelled over time, they’ve constantly exceeded people expectations. You need to allow them the positions that you own to exceed your expectations.

Tobias Carlisle: Given that opportunity.

Ian Cassel: Yes.

Tobias Carlisle: Yeah that’s an interesting insight.

Ian Cassel: Yeah, and so I try. I’m kind of like Lou, and that was new to me. I didn’t realize that, thanks for telling us that story. I kind of agree with that. I think it’s important not to sell everything as it goes up because these things will constantly exceed your expectations, and the great ones do. You can find them in the microcap ecosystem. I can think of 10 stories like that just through my 15 years of companies that continue to do that and you’re like, “Well, I guess I shouldn’t have sold 60% of my holdings at this price.” You know?

Tobias Carlisle: It’s the curse of the deep value investor that we’re always selling way too soon. I’ve seen some good arguments that you should buy as a deep value investor and then perhaps sell as a momentum investor which means giving it that opportunity to run away from your valuation but still keeping an eye on it so that it still does have that kind of, that thrust behind it. So if it then eventually loses its tow and trim some at that stage. I don’t know what the solution is but it’s something that I’m still grabbling with.

Ian Cassel: Yeah, I think it’s a mental block because it is for me too. It’s tough to go from viewing something of a value to viewing it as growth. Especially, if you consider yourself as a deep value investor, it’s hard to hold something when it gets above fair value, and I get that. It’s very difficult.

Tobias Carlisle: You’ve now launched a firm to implement, so folks can invest with you. It’s Intelligent Fanatics Capital Management. Can you tell us a little bit about firm?

Ian Cassel: Sure, so launched Intelligent Fanatics Capital Management in May of this year and it’s something I started thinking about a couple of years ago. Over the last 15 years, I usually got approached by a few people every year about managing some of their capital and the strategy that I use for myself and I’ve always said, “No.” Quite honestly, because of that experience I had during the bubble crash of 2001, answering that phone call from those retail investors calling at that financial advisors’ office.

Ian Cassel: Anyhow, I kept on saying, “No.” Saying “No.” And you keep on saying, “No” because you said, “No.” I think it was maybe two, three years ago someone said something to me and then I said, “Maybe I should actually think about this.” You know, I talked to my wife about it, prayed about it, and it was kind of one of those things where, “I think this is something that I want to.” I was starting to meet people that I thought have the volatility tolerance, I don’t say risk, not saying these things are riskless, but I don’t view what I do as risky, I view it as volatile and there’s a big difference between those two words.

Ian Cassel: So for people that have a volatility tolerance, that want to invest in small business that are public, I can probably put something together. So I started putting the pieces together for it, thinking about the structure and things like that, about 18 months ago. And put a lot of time and effort into doing it the right way, getting the structure the way it needed to be and then ultimately set up a vehicle to where I’m really, truly spending a lot of effort now trying to find the right investors to invest alongside me, in it.

Tobias Carlisle: Is it managed accounts or is it a private fund structured.

Ian Cassel: It is, it’s a manged account. Unfortunately, when you’re starting small, we’re talking about a few million dollars here. It doesn’t lend itself well to doing it as a private fund because then you have to spend $50 to $100 thousand a year for audits and things like that. I just didn’t want to have that administrative burden on top of such a small portfolio or strategy to begin with. It wouldn’t make sense to start off investing a strategy with $20 million, let’s say even, in something like this because I’m investing in companies that trade $10, $20 thousand worth of stock a day. So it makes sense to start small, grow small, which goes counter to almost everything that’s institutionalized out there. Ultimately, this is a capacity constrained investment strategy here. There’s going to be a point in time that I’m just going to have to shut it down or turn it into more of a private fund structure.

Tobias Carlisle: What do you estimate the capacity constraint at?

Ian Cassel: I don’t know, to be honest with you. I think it’s probably somewhere around 15, 20 million, is my guess-

Tobias Carlisle: It may be-

Ian Cassel: … it might be a little bit more.

Tobias Carlisle: … it may be higher than you think because you may adapt and evolve as you go along and you may become a control investor, who knows.

Ian Cassel: Well, and that’s what you kind of run into because you start thinking about even at $10 million, if you have 10 positions or 15 or 8. You have to be able to file on some of these companies already, even at that size. At a certain point, it will reach capacity but right now, you’re just trying to get a few million dollars in which we’re almost there already and trying to find… but spending most of the time just trying to find the right investors and having a lot of good conversations.

Ian Cassel: I don’t view this as an institutional product offering, it’s more of an entrepreneurial product offering and I find that small business owners, venture capitalist even private equity folks, having a lot of conversations with them. They get it, you know, it’s like, “Hey, if there’s one place to be in the public market, it’s in small, illiquid microcaps.” Because it’s real, the last areas to get an edge and they understand that. So it’s been fun having those conversations and I’ve had a lot of fun since launching it as well.

Tobias Carlisle: Do your investors need to be accredited?

Ian Cassel: Yes, yeah. Because it’s an SMA, so Separately Managed Accounts, so for the audience who doesn’t know what this is, it’s simply a brokerage account that’s in your name, you own the securities in it, I would just manage it. So there’s complete transparency unlike a private fund structure which is a pool of capital, you kind of really don’t see what you’re doing until the end of the quarter. The fund manager is able to operate as a pool of capital.

Ian Cassel: The reason why for the SMA, I put some restrictions on it. I have $100 thousand minimum, $200 thousand maximum, which nobody ever puts the maximum in anything. The reason why there’s a maximum is because again, the illiquid nature of these securities. I kind of view this first round as sort of a membership ticket, this is what it is. I’ll probably let people put more in over time but I want to let people get their feet wet with it and see if this is something that they truly like. I’m trying to screen out all the wrong people the best I can which I’ve done many times already.

Ian Cassel: In a case where somebody wants to get their money out, making sure that, that 200 thousand, that maximum is an amount that I can get out without disrupting the portfolio of everybody else at the same time. So that’s why I limit the maximum that somebody can put in because it’s the right thing for the strategy, it’s the right thing for the other investors in it.

Tobias Carlisle: Do you find opportunities harder to come by in a market that is, you know, we’re 10 years into a bull market that there are many more ETFs that sort of plum these steps. Are you finding opportunities harder to come by or you at a level that you’re not seeing that because it’s just too hard for ETFs to come into that area?

Ian Cassel: I think if anything, no. I think there’s still plenty of opportunities. It’s a big pond. You’re talking about, there’s 20 thousand public companies in North America, about 9 thousand of them are microcaps so that’s some 300 million. I’m predominately looking at some 100 million, there’s still 75 hundred to 8 thousand companies, sub hundred million and that’s predominately the area that institutions can’t play in. So there’s a lot of rocks to turn over there and there’s a lot interesting situation that you can stumble upon. Believe it or not, you can still find, now that we know the buckets, you can still find good to great businesses that are trading at 10 PEs, X cash, and so, you can still find them down here.

Ian Cassel: That’s the interesting thing about this ecosystem and you know, if they continue to grow, earn more money and not dilute, and grow, the shares go up, they’ll ultimately be found by institutions and that’s whey we’re doing this. I think the opportunities that… it might get a little bit more restricted, but you can still find things down here, even in today’s market.

Tobias Carlisle: Are there any themes that you’re looking at, at the moment? Are there any sectors in particular that you like or businesses that you like? Without discussing the names.

Ian Cassel: I would say that I don’t really look at it as looking to try and find companies in the theme. There’s certainly different, you can appreciate that, there’s a mining company in the strategy, there’s some Med Tech, there some SAS names, there’s some service companies. There’s pretty much every industry represented there. Normally what happens is… ultimately with microcap, what you’re trying to find is trying to find these businesses at an inflection point. What that normally means and why I don’t use even screens as a way to find ideas is, you’re really trying to find those companies at the inflection point of profitability. You’re trying to find that company that’s losing 5 cents, losing 3 cents, earning 3 cents, earning 8, you know, and that’s how you get a multibagger.

Ian Cassel: When you find a dollar stock that all of a sudden goes from losing 5 cents to earning 5 cents, and you’re able to capture, okay, well, if things continue we have that Delta, that 20 cent Delta on the year, that’s how you can be at a 3 or $4 stock, that’s generalizing too much but that generally what you’re trying to find. So a lot of it is, just through different people trying to find these types of businesses that you can’t really find in screens, but you’re trying to find them close to the inflection point where you kind of have to dig below the financials to do the work to see these things boiling under the surface of those financials before everybody else sees them when they do.

Tobias Carlisle: Do you know what is funny? I think it was you who said it, but the sweet spot is about two quarters before profitability. Is that, possible that’s you who said that?

Ian Cassel: Yeah.

Tobias Carlisle: So I heard-

Ian Cassel: I think I may have said it but I’m not sure if it was me or not, but I’ve said that before, but somebody else could have said it too.

Tobias Carlisle: … apologies to whoever said that, if it was in fact not Ian but I heard you say that. I think it was you who said that and then everybody in that microcap ecosystem, including the companies themselves hear somebody say that, and the next microcap conference that I went to, almost every company that I spoke to, told me that they were two quarters away from profitability.

Ian Cassel: Maybe you should say that.

Tobias Carlisle: And the first time I heard that, I thought, “Oh my God, this is that thing that Ian was talking about, I’ve got to make sure that I get a little bit of this.” And the next one, and by the third or fourth company that said that, I thought, “Oh, hang on, they all heard Ian say that at the same time that I heard Ian say that, that’s very clever.”

Ian Cassel: Yeah, well, these things, all these situations always take more time. It’s like when you think about your own investing, when you lay out your thesis. How many times has the thesis actually occurred in the timeframe that you originally thought, like next to never, maybe two out of ten, one out of ten. Often times you have to give them more time but it’s also why you don’t invest in companies that have bad balance sheets, that if it takes a couple more quarters, then that’s okay. I think even in the microcap ecosystem compared to large cap, you even tend to have even more shortsightedness in the microcap ecosystem then even in large caps. So if you can really have a 12 month perspective which is not long term, I don’t think, I think you can have an edge in a lot of other investors that are kind of playing it from the next quarter or two.

Tobias Carlisle: One of the things that I always get nervous about in microcap investing, because I think of what I’d do for the most part is sort of bowling with the bumpers on. When I’m microcap because they don’t screen very well, it’s back to being a real investor again and having to kind eyeball management and work out whether what they’re telling you is the truth or not. I sometimes get the feeling that these guys are just way too smart for me as a potential small investor in their companies.

Tobias Carlisle: Really what they’ve become very good at is speaking to small investors rather than running their businesses. The opportunity does seem enticing and interesting and way to sophisticated for the level that the business is at. That’s something that always sets off alarm bells for me. How do you asses management, how do you make that decision that what they’re telling you is in fact the case and they’re not just guys who’ve been microcap promoters for decades?

Ian Cassel: Right, well it’s a good question. Ironically, after doing the Intelligent Fanatics work, one of the areas that I have evolved is, I probably put too much emphasis on the founder or CEO or him or herself. I think what you want to do to access the businesses, you want to talk to them but you really want to talk to the people right underneath them, the people that are kind of executing his or her strategy. So I know when I’m talking to a business, I try to talk to two or three people underneath the CEO and get to know them as best that I can and form some sort of an opinion. You know, get to know them, see how they talk about the CEO because obviously the CEOs tell you that everything’s great. But you’ll find out more from talking to the people underneath him or her then actually the CEO himself, what I found about what reality really is. That’s what you and I are really after as investors. Is this really as good as he or she is saying?

Ian Cassel: And then really the second part of that is, if you want to asses a culture of a business, you don’t need to talk to the CEO either, you want to talk to the kind of lowest level employee in that business. You go there and you ask, try to find one or two of those folks and see if they like working there, would they move across the street if they got a dollar an hour more? You know, by a competitor across the street or whoever. Is there a sense of a culture there?

Ian Cassel: If you want to get at pulse on the culture, you talk to employees. If you want to get a pulse on the execution and of the respect of the CEO you talk to the people underneath the CEO. And if you want to get an assessment of really the vision, you talk to the CEO. So you have to talk to multiple layers of people inside that company to try to get a better sense of reality.

Tobias Carlisle: Then you also have the situation at some of these conferences where they bring their investment banker or they bring the person who’s taking them public and who’s helping them raise capital and so you spend a lot of time talking to the banker. Do you view that as a positive or a negative that they bring them? Is that being too promotional? Or is that just that really what they’re focused on the business and they’re probably less sophisticated on the capital management side?

Ian Cassel: I think it’s okay to maybe an investor relations person there, but for me, the way I invest, I tend to not invest in companies that need to raise capital. I generally wouldn’t be investing in someone that would have a banker next to them for the most part. That would probably be my best advice to investors looking in the ecosystem. Unfortunately, they’re drawn into the space usually by something that is attached to a fad, whether it’s tripto or marijuana or cannabis or whatever it is, and then they lose all their money they never want to look at the ecosystem again. Well look at this ecosystem like you would any other investment that was large cap.

Ian Cassel: Look for something that’s growing, profitable, doesn’t need to raise money to grow, hasn’t diluted shareholders, has a management team who owns some stock, so they’re real owners. You know, just use those very simple things as a quick filter and you’ll filter out probably 95% of the issues that you might have investing in this ecosystem. Because even these small companies all, many of them still file with the SEC, they’re still audited financials, so I would just say, stick to companies with fundamentals, you won’t get burned.

Tobias Carlisle: Do you ever wonder why haven’t these guys gone a more traditional VC route? It does seem that there’s an enormous amount VC, venture capital available. I was listening to a podcast last night on the start-up, you know, the difference between growth hacking and value hacking. Value hacking is making sure that your product fits the nation, growth hacking is then supercharging that growth once you’ve got that fit. Is that something that you think about? Wouldn’t it be easier just to raise some venture capital?

Ian Cassel: This could be a podcast again, in itself. So here in the US, to kind of give a little bit of a historic backdrop, companies used to go public primarily through reverse mergers as you well know Tobi, and that sort of ended in 2010. You see a lot of statistics from other people and a lot of articles being written about how public companies are dying off, there’s not a many of them. What a lot of those folks that write the articles don’t even dive into, maybe because they don’t even know about it is, how many companies went public through reverse mergers up until 2010.

Ian Cassel: Up until 2010 there were somewhere between 700 and 800 reverse mergers done per year in the United States. That’s more than 10% of the companies that trade on the NASDAQ and NYSE combined. We’re entering the ecosystem. So after 2010 when-

Tobias Carlisle: Is that the Chinese reverse merger?

Ian Cassel: … yes, that kind of put an end, not a complete end but the amount of reverse mergers went from 800 down to 100.

Tobias Carlisle: Was it a regulatory thing or is it just the marketplace just wouldn’t bear it anymore?

Ian Cassel: It’s just the marketplace didn’t trust anything because it was a reverse merger from that point forward. So you had a lot of companies back then that would use reverse mergers, raise 1 To $5 million, go public, and yes, 80%, 90% of them shouldn’t have. They went public too soon, or they got fed a bill of goods by a banker to do it and they were tossed in the deep end of the pool to figure out how to be a public company and they drowned.

Ian Cassel: But, it’s the law of large numbers to where, hey, 5% out of the 800 or the 10% of the 800 would ultimately end up doing well up-listing to the NASDAQ and that was feeding into the larger markets and you don’t have that because now you’re having 5% of 100 instead of 800. Now you’re, at least in the US, you don’t have very many companies going public as small microcaps anymore and it’s really a shame.

Ian Cassel: Over time, it’s become more important to be sort of a worldwide microcap investor or an international one, the complete opposite of what I just said is happening in Canada. In Canada, where their private markets, their VC markets aren’t as robust as down here in the United States, a lot of companies, that’s why it’s called the venture market up there, venture exchange. They can go public, raise 5 or $10 million dollars relatively easily and go right into being public. You’re seeing a lot of, here recently, a lot of US companies going public in Canada because it’s easier for them to raise capital and go public in Canada than it is even down here in the United States which a real shame.

Tobias Carlisle: And Australia too.

Ian Cassel: And Australia.

Tobias Carlisle: One of the advantages of Australia is there’s no secondary board so there’s the Toronto TSX.V is the venture market there and then the UK has the AM which is a second board. The Australian stock exchange has no secondary board so the listing rules are lower for anybody which I think is… if you’re listing as a company then you get that ASX brand which is sufficiently well respected around the world that it does show that you can… you’re listed, you’re subject to all the rules, you’ve got a file, audited financials and so on. They got a half year filing rather than quarterly filing.

Tobias Carlisle: That’s an ecosystem that I like too because there’s a lot of self managed super funds which are the 401K equivalent in Australia. Australians like to gamble and they like to gamble on small mining companies a lot because that’s a lot of what comes to market. Basically, all they have is staked out ground, They’ve got a right to explore and they raise money to go and explore. That’s what you’re paying for. So the strike rate is low but when they hit, they hit enormously which is a little bit like buying a lottery ticket.

Tobias Carlisle: I think it’s a shame that you don’t see a lot of it in the States. There’s not enough of it in the States but you can find it. I’m just seconding what you say, “You can find it in Canada and you can find it in Australia.” It’s always fun, I think to go and look at those little companies. I always flip to see who’s getting paid and how they’re getting paid, how much are they selling down.

Ian Cassel: You have your right from Australia so I understand it, but it drives me insane because, here we have a population… and private dynamics between Canada and Australia are kind of similar. They’re kind of resource based cultures, and probably everybody grew up owning a junior mining stock in Australia or Canada and so risk is part of your profile. Here in the United States, is just like, “oh, why would you own something risky, that’s just awful?”

Ian Cassel: It really annoys me because what does Canada have, 38 million people as a population. We have 380 million down here. It’s much easier for a company to go public, raise 10 million and be a listed company under the same basically, auditing controls as they have down here. It just bothers me. Eventually, hopefully, that will change down here to where we can bring small companies public, good companies public effectively in the US again.

Tobias Carlisle: What’s the reason that it’s harder here? Is it Sarbanes-Oxley? Is that the reason?

Ian Cassel: Yeah, I think it’s Sarbanes-Oxley and quite honestly it’s, I think Bank of America, Merrill, you can no longer even buy anything sub $5 in an account.

Tobias Carlisle: Really?

Ian Cassel: I think there’s only two or three regional brokers that will even accept stocks certificates anymore in the United States which obviously puts a crimp on raising capital if you’re already public. You know, I’m not going to write you a check for $50 thousand if I can never deposit that certificate anywhere. And that’s kind of the situation it is here in the United States. So that just puts a big freeze on everything. It’s a combination of everything. I don’t want to beat it up too much but it’s hard to believe it can get worse so that means it should be getting better.

Tobias Carlisle: I worked as general counsel for a company, started out as a microcap. I was a listing lawyer at the time that it went through and I did all of the due diligence on the company and met the two guys who were, they both put in $100 thousand into this company. I think that they… in the listing, they raised, I’m going to get this wrong, but say $3 million in the listing for a $10 million market cap listing including the $3 million that they raised.

Ian Cassel: Oh, wow.

Tobias Carlisle: They sold it within four or five years for $600 million. When the business was described to me, they said, “It’s two guys from this little country town.” In the state that I was from and they have this fiber optic business. I had this vision of these two guys on this dusty little lot making fiber optic cable. What it was, it was pretty sophisticated though putting fiber optic cable, doc fiber into the central business districts so people could get off the other, the big telco’s and create their own sort of private links between data centers and so on. That business grew incredibly rapidly.

Tobias Carlisle: So that was the first time really, that I had seen that you could put these unexpectedly great business, or you could find these unexpectedly great businesses run by incredibly smart guys trading at these tiny, tiny market capitalization’s. And for doing just a little bit of work, it would have rapidly become very clear how smart the managers of these companies are. I’m a big believer in the strategy and I definitely, I can see that it works.

Tobias Carlisle: The thing always makes me nervous is that I think that you’re at such a disadvantage to the managers and outside investors. How do you get comfortable? How do you get enough information to make your decision?

Ian Cassel: You don’t do it all at once. You buy in gradually over time-

Tobias Carlisle: Look at what they say and then gauge that against what they do.

Ian Cassel: … normally, and then buy more once you see if they do anything. Normal process is more traditional at research and looking though the filings, how ever far back you want to go and really talking to as many, kind of typical Phil Fisher, talk to many suppliers, customers, given the type of company it is, as you can to formulate an investment thesis. Really try to know that the business as intimately well as you can before you even talk to management so you know which the best questions are to ask.

Ian Cassel: I agree with Phil Fisher when he said, “You really shouldn’t, by the time I talk to management, I’m basically 70% of the way to a buying decision.” I think that’s what he said, and that’s kind of the way I view it too. I think it’s important to know this company really, really well before you even pick up the phone and talk to management. You’re talking to management, you’re just trying to almost check mark off the things that you already thought were happening or maybe provide some color in some areas that you weren’t able to get on your own with outside research.

Ian Cassel: So normally what it looks like is after that process in talking to them, you buy a little bit of a position, it’s called a third of your position that you want to ultimately acquire and then you kind of wait and see, and see if they execute on anything that they have told you or the market that they were going to do. If you start seeing them as being executors of their strategy, which is rare in the microcap ecosystem, then you buy more and hopefully you’re averaging up. Some of my biggest winners are ones that were constantly averaging up, and because they kept on executing.

Ian Cassel: Then usually after I see some execution, I will make a site visit, out to go visit the company. Try to meet with them, try to meet with their management team. I try not to plan it too much. I’ll try to have some sort of time when I can meander into the, somewhere and talk to an employee or two to try and address the culture, things that we talked about earlier. Really kind of check mark that last box, okay, I’ve been there, I was able to sit across the table or boardroom from the management team, assess them, spend some time with them, go out with then that night, you know that type of thing. Get them out of there and see how they really are. Doing all that stuff, and that’s kind of when you buy maybe your last third at cost that you want to purchase.

Ian Cassel: That can take a year through that process of actually acquiring a full position. Probably, early on I would buy everything all at once and it works when it works but then it doesn’t work when it doesn’t work. What I found works is, buy a little bit, let their execution prove how big your position size should be, then go from there.

Tobias Carlisle: What’s the microcap bible? Is it, Common Stocks and Uncommon Profits, the Phil Fisher book?

Ian Cassel: I think that’s one. I think most people enjoy Peter Lynch as well. I think anything he writes is really good. You know, I think it’s interesting, I was thinking about it the other day, I never read anything from Warren Buffett until I was a full-time investor. That’s not to say I was special or anything like that but I was-

Tobias Carlisle: Was it helpful?

Ian Cassel: … yeah, no I wish I did earlier. I just didn’t, I was kind of in my own world just doing my thing and figuring it out.

Tobias Carlisle: What did you read? Or you didn’t read anything, you just sort felt your way there?

Ian Cassel: I think the first person I read was Phil Fisher and then Peter Lynch. I spent so much time in my mid 20s, early 20s, just traveling talking to people, meeting management teams, learning the soft skills of socialize and communication, getting somebody to like you. I had a couple mentors that they were just brilliant. They were guys that, five minutes you would like them. Obviously if you like somebody you’re more willing to talk them about things.

Tobias Carlisle: Just tell them too much, accidentally.

Ian Cassel: Right, right, and ultimately, hitting on that part. One of the things that you pick up on too in the microcap ecosystem is you’ll run into operators that do tell you too much. Pretty much 98% of the time, the ones that tell you too much execute too little, they’re the ones that don’t really do anything. What I found over the years is what you’re generally attracted to through your human nature, somebody’s that good at sales, someone that talks a good game, is almost the opposite of what you want to find when you’re actually finding one of the operators. It just took my four months to get a CEO on the phone, literally just yesterday, I finally did.

Tobias Carlisle: I saw the Tweet, yeah. How’s the conversation?

Ian Cassel: Oh my goodness. That was through using back channels, like reverse phycology-

Tobias Carlisle: Blackmail.

Ian Cassel: … unspeakable, trying to contact people through LinkedIn that he was associated with. It was all this stuff and finally. I thought I would have an hour with him on the phone, it was 15 minutes. So I was scrambling trying to get a few questions asked, but honestly, that’s kind of what you want to find. Probably eight, nine years ago, I would have never, I wouldn’t have pursued it anymore. I would have had the mentality of, you’re a public company, you should want to talk to me because you’re public and if you don’t it just shows that you don’t care about me as a shareholder or a potential shareholder, and that was kind of bar none.

Ian Cassel: Then you get to meet more and more CEOs and you realize, no, it’s the ones that are kind of focusing on the business. Where they realize that focusing on their employees, focusing on their customers will create a great stock which will create great shareholders. Everything’s gotten realign and that’s kind of more of the Intelligent Fanatics principals as well, that I’ve learned through that as well.

Tobias Carlisle: One of the things that I, just going back to the company that I was involved in, as general counsel. One of the things that always made me most nervous was when I’d sit in board meetings and I’d hear that the executives, the guys who were actually working in the business, describe what was happening to the directors. I always thought it’s so hard for these directors to understand what’s actually happening in this business, even though they’re meeting monthly, talking to management, getting straight from the horses mouth what’s happening and in a completely unvarnished, unpolished way, this is what’s happening.

Tobias Carlisle: We need you to understand this because we need to make these decisions. But I thought, even these directors are going to struggle to understand what’s happening. There’s a scramble at the end of every quarter to make the sales and that can be right up to 5:00 PM on the close of the quarter, which you’re not allowed to count anything beyond that point. The sales guys are out there trying to get the guy to sign on the dotted line. If it happens or it doesn’t happen, it makes a material difference to the sales over that quarter. And then at their leisure, the directors come in and read the report, “Oh, that’s great, we had a really good quarter.” Without seeing the blood, sweet and tears that had gone into getting to that point and how close it was that it wasn’t actually going to be the case.

Tobias Carlisle: As an outside investor, you’re looking at that and you’re just plotting that revenue line having no idea, that’s the thing that makes me most nervous about this type of investing that the information assymetry between the management and even if they really understand what’s happening. I don’t think that they all do, I think that some of them are too unsophisticated for the position they’re in.

Tobias Carlisle: How do you get over that? You just say, “I know that there’s some stuff that I can’t understand? And I know that there’s some stuff that I can never find out and I just have to deal with that uncertainty.”

Ian Cassel: I think the thing that frees you up as an investor is when you realize you’re not going to be right all the time, especially in microcap investing. It’s not a game of batting average, it’s slugging percentage. It’s letting your winners run, and you’re going to be right five out of five or five out of ten times or six out of ten times. You are going to be wrong. I think that kind of frees you up, it doesn’t mean you’re doing any less work, it’s just kind of frees you up mentally to know, I don’t need to be perfect, I’m not going to be perfect at this. Because quite honestly, the situations you’re investing in aren’t perfect. Some of the best opportunities, even deep value are the ones that don’t look very good.

Tobias Carlisle: Right, well that’s why they exist.

Ian Cassel: Yeah, and that’s why they exist. Like you said, most people don’t understand, they just see the financials of the quarterly results and they don’t know the knife fight that’s happening in room behind the scenes, that you got to witness too and that’s very true. I think a big part of being a successful investor is understanding your own biases and understanding your own limitations.

Ian Cassel: Through some of my experiences over the years, I know one of mine is, I’m probably too empathetic to management teams because I can’t imagine being a public CEO. It has to be the worst job on the planet, especially a small microcap CEO. It’s tough, when you think about you’re going to be the small, nibble, impressionable business and now you’re going to be analyzed by much of the people that probably don’t know it as well as you and they’re forming their own investment thesis, their own expectations on what you should be doing. And then your going to try to hit their expectations, let alone your own internal ones which you don’t share or maybe you do. It’s just a tough position.

Ian Cassel: Quick story, so this just came to mind. A company I invested in, in 2007, it was kind of a luxury experience, which did well in 2007, 2006. The CEO invited me down to their company’s Christmas party and there was probably about 200 people there, they had spouses there, they had their kids there and the company was doing well, and probably grew 30, 40%. I got a chance to sit there and hear a couple of the employees get up and talk favorably about… and he was handing out awards to the best this or the receptionist of the month and all this stuff. It was just a cool experience.

Ian Cassel: I think I owned 3 or 4% of that company, I guess I knew the CEO pretty well and then I ended up selling out of it and then 2008 occurred and their business just flat lined and I still was talking to the CEO. He invited me back to their Christmas party again and there was 40 people there. It’s the most solemn group. They were thinking they were going to have to shut-down, like declare bankruptcy.

Tobias Carlisle: That’s brutal.

Ian Cassel: Yeah, it was just brutal. I remember talking to him after that and I stayed friendly with him. I remembered him saying this thing and it really hit, he just said, “You know sometimes doing the best you can, isn’t good enough.”

Tobias Carlisle: Yeah.

Ian Cassel: You know it kind of stuck with me because I think a lot of us as investors, we look at the investments we’re in and form these investment thesis’s or we have an idea of what it should look like and it’s just not reality and when things don’t come to plan, to our plan, we think it’s somebody’s fault. We think it’s managements fault, we think it’s management’s fault. Sometimes things just don’t work out. It’s not, anybody’s blame, they didn’t take advantage of the opportunity, it’s not really anybody’s fault, it just wasn’t meant to be. So you just kind of move onto something else.

Ian Cassel: People are so quick in the investment world, they kind of poke blame at the management teams if something doesn’t work or not. One of my biases, I’m probably still too empathetic towards management teams because I really respect the position they’re in. It doesn’t mean I’m not going to cut the cord if I don’t think an investment is working. It’s still something where I probably side too much with them just because of some of my experiences like that one.

Tobias Carlisle: It’s difficult. I sometimes wonder if people like when smaller companies have a better known CEO or CO that comes in from a larger company and comes down to that. But sometimes I think that’s not an ideal situation because they have, if you come from sort of a mid cap where they’re reasonably well financed and they’ve got a lot of support around them, and they’re used to having that support, and really what the smaller companies have to do is you need to be more a jack of all trades as CEO. You need to be able to do very many things because the people who are underneath you probably weren’t quite at that level where they were. So you all of a sudden have to be, where you could have relied on, I don’t want to say the CFO, but you could have relied on somebody else to know exactly what they’re doing.

Tobias Carlisle: Now you have to be alert to, is the information that they’re giving me the right information? Do they know what they’re looking for and I have to know if they’re not quite there. Sometimes I don’t think that they’re just used to being coddled. You know?

Ian Cassel: Yes, no I agree with you 100%. I think people look too much at big company experience. These are small companies, I want to see entrepreneurial experience. A lot of people you know they want… I don’t mind seeing failure either because that usually means they learned something. So I agree with you. I liked to see entrepreneurial experience over big company experience because that usually means that they’re used to big budgets.

Tobias Carlisle: Used to scraping if you’ve got that entrepreneurial background.

Ian Cassel: Yeah, yeah, because you need to be able to operate on a shoestring and figure things out. You need to be an entrepreneur. These are small businesses just like other small businesses that are private. You have 5 employees, 10 employees, 50 employees, these are small companies. Often, people ask me about microcaps, it’s like, what’s the largest company in your small town? That could be a microcap. You know, very easily, yeah.

Tobias Carlisle: Right. We’re coming up on time. If folks want to get in contact with you or learn more about what you’re doing, where do they go for that information?

Ian Cassel: You can find me on Twitter, @iancassell on Twitter. If you’re interested in microcap investing, learning more about microcaps, you can go to microcapclub.com. It’s a great resource, it’s where I am every day if you’re looking to find some of these books that I was telling you about. We wrote a couple of them. We’re writing another one. We have a whole community around, really just trying to find these great leaders. That’s at intelligentfanatics.com and the investment strategy that I just launched is if.capital is the website for that and that’s Intelligent Fanatics Capital Management.

Tobias Carlisle: I can attest to the quality of your Twitter account. It’s got multiple tens of thousands of rabid fans and I’m happy to one of them. Ian Cassel, thank you very much.

Ian Cassel: Thanks Tobi, thanks for having me on. It’s been a lot of fun.

Tobias Carlisle: My pleasure.

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