Interview with Ian Cassel

Published on

Excerpt From Early Bird: The Power of Investing Young

Get The Full Henry Singleton Series in PDF

Get the entire 4-part series on Henry Singleton in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q4 2021 hedge fund letters, conferences and more

Ian Cassel is the founder of the MicroCapClub and Cofounder of Intelligent Fanatics. He is also the chief investment officer at Intelligent Fanatics Capital Management. Ian started investing when he was seventeen with the money in his college fund. He phased his way through different sectors such as mining and life sciences until he became a professional investor focusing on the fundamentals of businesses, not the sector. Ian specializes in microcap investing; he defines microcap as “companies with a market capitalization under $300 million,” meaning they are all very small businesses. All of his investing portfolio is in microcap companies.

One of the most important points Ian made in the following interview is that, as a beginner investor, you shouldn’t worry about finding the perfect or best stock as much as trying out ideas and strategies and learning from both your successes and failures.

Soren Peterson: How did you get started in investing?

Ian Cassel: “I started investing when I was a junior in high school. My parents sat me down and told me they had saved approximately $20,000 for my education, and they just wanted to let me know because that's all I was going to get, and then I could apply where I wanted to apply. That was 1997. This was right in the heart of the dot com bubble and greed was rampant. When I got in control of that $20,000, I opened up a brokerage account with their financial advisor and bought three small cap technology names and rode that wave. During the dot com bubble it was easy. You could have have bought any technology company and had a multibagger a year or even less, and that is what happened to me. So I turned that $20,000 into $120,000 by the time I graduated—and that was 100% luck and 0% skill—and then rode that wave the whole way back down and turned that $120,000 into $8,000. The small cap tech names I owned went down and became microcaps, so that is where I got introduced to microcaps investing.”

So were you shocked about how that kind of got your start into microcaps? How has your investing style changed since?

“My investing style has evolved quite a bit over the last 20 years. I am now forty. The first microcap company I spent time researching was a company called XM Satellite Radio, which was a company that then merged with Sirius XM radio and is in every car today, but back then it was just an idea, a story stock. They had two billion in debt, very little in revenues. They didn’t really have any OEM agreements with any of the car manufacturers. I fell in love with the story: the idea of having 100 crystal-clear radio stations as you are driving. You are probably too young to remember, but with normal radio, you would drive twenty miles out of your radius and lose connection, and you would have to find a new radio station. Just the thought of 100 crystal-clear radio channels nationwide with no commercials, was a great story.

“When I was a sophomore in college, I saw that the CEO of XM Satellite Radio was presenting in a conference in New York City. So, I called the conference organizer and lied and said that I was Ian Cassel of Cassel Capital. They thought I was a fund manager, not a college student. They let me come.

“So, I took the bus from Lancaster, Pennsylvania, to New York City. I put on the same suit from senior year that I wore for my senior photos and it still fit, thank goodness. Had some fake business cards made and made my way up there. Long story short, I was able to have a sit down conversation with the CEO, and from that point on, I took that $8,000 I had left from the dot com crash and bought XM Radio at $1.78 per share when I left that meeting.

“I got lucky again. Almost immediately the company started signing deals., The stock went from $1.78 up to $34 in fourteen months. So, I made back a lot of the money that I had lost in the dot com crash.

“I like to tell this story because it is what started my love affair with small stocks, with microcaps. The allure was that even a small time investor like me at the time had the ability to sit down with a microcap management team face-to-face. And yes, I may have used some coercive measures to do that. But it was really that ability to sit down with management that attracted me to that small-stock arena. I felt that gave me an edge.

“From that point forward, I focused on microcaps and to figure out how make a living from doing it. The first five years were really focused on story stock companies. I wasn't focused on business fundamentals; I was focused on finding great stories. Bac then much of the activity and discussion on microcap companies was on public message boards. I gravitated to those boards, and I built a reputation on those boards as someone who was able to pick winning stocks. I found a few mentors on those boards as well. These mentors helped guide me and show me the good and the bad, and what to look for.

“I started out investing in story stocks, and then moved to precious metals and junior exploration companies for a few years, and then life science companies. I became a full time private investor in 2009 and this is when I started focusing on business fundamentals. I layered on what I would call a GARP style [growth at a reasonable price] or a Peter Lynch approach. My portfolio today is 100% small equities, microcaps. Today my style is a mix of my past experiences. I like to find great stories with a great business. But I still have a mining company. I still have a couple story stocks—God forbid!—. So my strategy is like my own painting. It is unique to me and I’m not done painting. I will probably be investing a little differently in 5 years. If you aren’t evolving, you aren’t growing.

I believe those who call themselves investors have lost money in investments at some point. What are the biggest lessons you’ve learned from losing money in an investment? And what were your initial reactions or emotions during that experience?

“I am an active investor, which really means I am a stock picker. I’m never going to be right all the time. This isn’t a game of perfection. When I lose money it is because I didn’t do my research or control my emotions or a combination of both of those things. If you are a microcap investor, it is important to know what you own because the businesses are small. They are impressionable. And so their situations are evolving all the time. You can’t just buy and forget them. You have to buy and verify your thesis to make sure it hasn’t changed in a bad way. So, a lot of my mistakes have been when I have taken my eye off the ball. Quite honestly even most of the winners I’ve had eventually couldn’t sustain their growth. So you have to have your pulse on the business. The other mistakes can be more emotional.

“The emotional side of investing is something you can’t really learn in a book or a classroom. There are lessons that have to be experienced. It's kind of a test of how you can sit quietly while your emotions are screaming at you to do the wrong thing. Active investing is like navigating a ship across the ocean and the crew are sort of the company management team. The currents and the storms and the wind are the emotional component of that. Pick the right boat and the right crew and navigate the emotional side.”

What keeps you going? The potential returns?

“I just love the game. I just love investing in small equities. The key is acknowledging that you will always make mistakes. ‘I am a stock picker. I know I am only going to be right 60% of the time’ is what Peter Lynch said, which means being wrong 40% of the time.

“Successful stock picking isn’t just about picking winners but also means picking out the losers in your portfolio. I am constantly trying to identify the losers in my portfolio so I can get rid of them. Outside of that, successful investing is more about holding your winners as long as they execute.

“One winner can make up for ten or fifteen losers. So, investing in especially small stocks is a game of slugging percentage, to use a baseball term, not necessarily batting average. So, I know I am not going to be wrong all of the time, and I am really trying to hold my winners as long as possible and cut my losers as quickly as possible.

“A combination of both understanding that the power laws that you see in venture capital and what I mean by that is if a venture capital investor makes twenty investments, they know that two out of those twenty investments are going to drive the overall performance. They know they will have some that go to zero and some that go down. Those power laws are prevalent in small stocks and microcaps as well. For me I’m trying to find companies that have a lot of upside but also don’t have a lot of downside. In my early years I focused too much on, ‘Where can I make 500% in six months?’ Incidentally this is where you are going to lose money. Ironically most multi-baggers are found where you feel you aren’t going to lose over the next six months, not necessarily where you think you are going to make 500% over the next six months.

“There are 10,000 microcaps in North America. I have four main hurdles or filters for microcap companies.

  1. Is this a business that can grow through a recession? That is a very tough hurdle. Only 5% or 10% of stocks that can get through that filter.
  2. Does this business have a balance sheet that can weather a storm, that can allow that operator to act with occasional boldness to hopefully even acquire a competitor that is weak, maybe in the bad times.
  3. A third hurdle is a leader that is showing signs of intelligent fanaticism. I coauthored two books on the topic of intelligent fanatics. This is a term Charlie Munger uses in his speeches. Really trying to find those great leaders—that is a big part of what I do. If you want to find great companies early, you need to find great leaders early.
  4. Last but not least is a valuation hurdle. I am looking for an investment that I can double my money in three years based on fundamental drivers. That is a 25% compound annual growth rate over the long term. That is a benchmark that I make for myself.”

People assume that microcap investing is riskier because you’re dealing with newer, smaller businesses. Do you think this is true and what do you think about this risk? What advice would you give to a beginner investor interested in microcaps?

“I think in general there is always risk in doing something new where you don’t have experience. If you don’t have experience investing—what I usually tell new investors to microcaps is that most of the risk comes from story stocks. So if you focus on profitable businesses that are microcaps, that alleviates a lot of the pain that you could have in the future.

“Of the 10,000 microcaps in North America, around 15% of them are profitable. So I would just say to focus on the real businesses. Focus on the profitable ones. “

“In general, I feel that all great companies started as small companies. I want to make big returns. I want to find the ones that go up 5x, 10x, or 100x. I haven’t had a 100x yet. It makes sense if you want to find a 100x return you have to start with a smaller business because they have more room to go up. But there is also lot of risk there. If you are looking at North America—there are about 20,000 public companies in North America. About half of these companies are small microcap companies that most people have never heard of. Unfortunately the financial mainstream media loves to broad-brush the microcap arena or the penny stock arena as this uninvestable wasteland of insignificant small companies that don’t deserve to be public in the first place. I disagree with that, which is one of the reasons why I am on social media and Twitter: to be a shining light for this space. They don’t realize Warren Buffett, Peter Lynch, and Joel Greenblatt, started as microcap investors. Companies like Walmart, Amgen, Intuitive Surgical, Netflix, Monster Energy, Berkshire Hathaway—some of the best performing stocks of all time—started as microcap companies.

“And even beyond investing looking at the overall economy - Microcap companies as a whole employ more workers than Walmart. So this is an important piece of the economy. I think it is an area of investing that should be taken seriously. It is a validated investment class.

“Microcap investing is a place where the smaller retail investor has an edge over the institutional investors because most of these companies are so small and so illiquid that institutions aren’t able to buy them because of the illiquidity. Institutions can only buy them after they’ve executed, and their stocks go up. When their liquidity stocks go up, it allows them to deploy that capital. Institutions can only buy after these companies have gone up. Microcap is one of the few areas where the retail investor has the edge. And that is what continues to attract me to do it, and it is an incredible area for people that are willing to put forth the work to understand and invest in this area.”

What has been the biggest lesson you have learned from microcap investing?

“The biggest lesson is that it is hard. Finding great companies early is hard. I started a website called back in 2011, and it is a private forum where some of the best microcap investors in the world share ideas and exchange ideas. Basically, if a member investor likes a stock, they write up a two- to three-page thesis on that stock so it kind of gets the conversation going. So, if you ever see the internals of MicroCapClub, it is basically a stock message board and each thread is a company. Some companies have a couple comments on them, and some have a thousand comments on them. One of the interesting things we do is we track the performance of every single company that has ever been profiled by our members, and we track the stock price and where it closed at the end of every month. So, we have some of the best microcap investors in the world on this site, which have profiled over 800 microcap companies since 2011. If you actually look at 800 in a performance analysis, out of the 800, roughly half are up and half are down, which doesn’t sound that impressive. But remember, this isn’t a game of batting average; it is a game of slugging percentage or power laws. Of the 400 that are up, actually 250 of those 400 that are up have doubled or more. 100 out of the 400 are up 300% or more, and 50 are up 500% or more, and we have now had 25 ten- baggers. Not an impressive batting average, but it is a really good slugging percentage.

“The biggest lesson I have learned is that you need to study those winners. Study their businesses, their leaders, and put in the reps, studying them, not just the twenty-five out of 800 that were ten-baggers, but go out there and study all winners.

“A good friend of mine, Connor Haley, did a case study in mid-2020 called the Makings of a Multibagger, where he studied the best-performing stocks over the last five years. You can search YouTube and find the interview I did with him. What you will find when you study winners is that there are two main drivers of big winning stocks (the ones that go up and stay up):

  1. Earnings growth. You want to find businesses that can grow earnings over the long term.
  2. Multiple expansion. As a company grows and gets discovered, and investors like the long-term prospects more, the multiple expands. If a company doubles its earnings over three years from ten million to twenty million, and the multiple stays the same and you made a 100% profit in three years, and that is not bad. But if the multiple the investors are willing to pay for the company also doubles, then you made 300% over those three years. So the key here is earnings growth and multiple expansion. So, how do you find growth companies before the multiple expands? You have to find them early when they are undiscovered by others. That is another reason why I like microcaps.”

What fundamentals are similar between microcap investing and large-cap investing?

“Fundamentally if you focus on profitable companies, they obviously are similar to large cap. They have revenue, they have earnings, they have cash flow, assets and liabilities, just like large caps. Microcaps are just smaller businesses. In many ways microcaps are a lot simpler to evaluate. I remember GE had something like 109 subsidiaries. Just think, as an investor, how confusing that is to evaluate a company like that. Microcaps are normally one business with a couple products. They are much easier to understand. You also have microcaps that pay dividends. Not too many, but they exist. You can find microcaps in every industry. Well, maybe not as many utilities. Most other industries are represented in microcaps as well.”

How do you think about dividends in microcaps as opposed to dividends in large-cap investing?

“That depends on the type of microcap investor you are. I am more of a growth-oriented microcap investor. I don’t have any that are paying a dividend. It would almost be a red flag if they did because it would mean they aren’t finding enough growth avenues to deploy that capital internally. But you certainly can find dividend-paying microcaps. There are a bunch of them on MicroCapClub that are really good businesses that pay 3%–5% dividend yields. It is just that I don’t focus on that particularly.”

How do you find microcap companies to research when there might be little information on them?

“I developed a simple but thorough research process I call the FAIR research process: find, analyze, interact, and research

“I could talk this entire time on just this. I will take you through this. I will go through each one.

Find. Where do you start? It can be overwhelming. There are 20,000 public companies in North America. A half are microcaps. I think there are 70,000 companies worldwide. A half are microcaps.

“What do I do? Where do I start? Microcaps are small companies. They don’t have analysts’ coverage on most of them. They aren’t being spoon-fed to you by Wall Street, which means that you have to go out and do the work by yourself.

“The best way is just by brute force looking. That way, you aren’t missing something. Look at everything—I think Warren Buffet said that—and literally go A to Z, literally turn over all the rocks. I recently did this in Australia, with my analyst. We went A to Z in all of the microcaps in Australia. It takes a lot of work, but honestly oftentimes your edge is to look through a mountain of uninvestable ideas to find the great ones. I believe in brute force. Then there is networking. Microcap investors—at least the good ones—are independent thinkers because they have to be because they are doing this work themselves. It can be lonely. A lot of times you think you are looking at a stock, or these types of company, alone, but in reality, there are tons of microcap investors out there. There are a few physical or virtual places to connect with other microcap investors. Obviously one of these areas is

“Build relationships with a close group of investors that you exchange ideas with. I enjoy having a mix of people in my inner circle that invest differently than me. It is always interesting to me when I meet someone that invests the complete opposite of me but is successful. A lot of times, just inverting yourself, you can find out different areas that you can improve upon with your own processes. Last one for finding: screening. Screen for fundamentals that you find attractive, market cap, or whatever you want. And I find screening can be a trade-off between being very specific and comprehensive. I like being more comprehensive, and screening out less, when I am doing a screen. I like doing screens for everything under a certain market cap rather than screening for a list of specific fundamentals because a lot of times what you are left with is what everybody else is looking at. So, I I like to cast a wider net when I screen for opportunities.

Analyze. How do you analyze microcaps? First, watch out for red flags. There is fraud. Next, analyze the industry, the business, the financials, the products, the management, etc. Most US listed companies file with the SEC (, and you can pull up their financials. You can look at their 10Ks and 10Qs. Oftentimes they list their competitors and industry drivers, which you can research deeper.

Interact. This is what attracted me to microcap over twenty years ago: the ability to actually talk to the CEO. You can’t really do that with midcaps. I spend a lot of time interacting with the management teams. I usually fly out—pre-COVID—to meet with them, meet with the board, that type of thing. Oftentimes 90% of due diligence is analyzing customers and the employees and seeing if they are happy and why. Oftentimes your edge is that 90% of investors are not willing to do that kind of work. So that is the type of work that I am trying to do. Interacting can add a lot of value to investing. A lot of investors will say that it adds no value. But oftentimes that is just an excuse, because they aren’t willing to do the work.

Re-search. Stands for maintenance due diligence. We don’t buy and forget; we buy and verify. And the smaller the company, the more often you need to verify because their businesses are evolving and changing. It might be that initial research that gets you invested, but it is the ongoing research that keeps you invested. This research will be your pulse on the company and alert you to when the company is changing for the better or worse, and you can hold on or sell them before others sell. This maintenance due diligence or ongoing research is really, really important.”

That is a great framework. I learned a lot from that. Charlie Munger is a north star for many of us in the investing world and many of us use his quotes and advice to guide us in investing. What quote or advice would you personally like to be remembered for?

“I would like to be remembered for fighting to keep the microcap light lit. This place was left for dead ten years due to regulations and the rise of venture capital and private equity. I feel microcap is in a much better place now. I just want to leave microcap in a better place than when I entered it.”

For Ian, investing is a continual learning process. In order to learn more, it can be helpful to continue to research stocks even after you have bought them to make sure you still want to invest in them and that you understand the new developments and ventures of those businesses.

One way to research is to reach out to board members or the management of a business and ask them questions to better understand the company. This strategy is also mentioned by Emily McCormick for understanding banks, but it can apply to microcaps in general. This opportunity is one of Ian’s favorite things about investing in microcaps: because the companies are small and often serve local customers, you stand a higher chance that they will engage with you, as an individual investor, than you would with the CEO of Apple.

However, if you can’t meet with someone from a business, you can also learn a lot by reading the annual report, which is usually accessible on Google. In his FAIR researching framework, Ian mentioned the importance of closely studying financials.

Going back to the idea of investing in fundamentals and not necessarily by sector, Ian likes to only invest in microcaps that have strong fundamentals or will have strong fundamentals. This may seem obvious, but many investors overlook this aspect of a business.

Another reason Ian likes microcaps so much is because everyday investors can have an advantage over the professional investors on Wall Street because they can learn about a microcap company in its early stages. This may not seem all that important, but if you can understand why a company works (or doesn’t) and how it works, you can use that to inform your choice of whether or not to invest. This is especially true if the company is located geographically near you or you have talked to the management so you have a chance to understand the company well. This is a resource many investors may not have, or 95% of investors won’t try to get. When you think about it that way, it is a major advantage and one that you can use.

Excerpt From Early Bird: The Power of Investing Young