UncleWally
I'm an avid reader of all things Ian Cassel.
In this article Ian shares some of his wisest learnings from his small cap investing philosophy and covers his thoughts on having the "Conviction to Hold" while we wait for "Delayed Gratification"
https://microcapclub.com/turnarounds/?ref=newsletter
jcmleng
@UncleWally , this was brilliant, thank you for sharing. I do believe in turnarounds, but only if the right ingredients are in place.
I am going to use this as my checklist for evaluating "coming out of the doghouse" re-entry decisions, particularly for companies that I hold. The anchoring bias and the fear of throwing more good money on bad, are really tough mindsets to break when the company has slided to and has stayed stuck at ~90% underwater for some time!
CAT, EOS and EML are my most recent examples ... Fair to say, points 1 to 4 have been met by the 3, but am still patiently waiting for point 5 to fully happen, hence the red line!
edgescape
Thanks for that Ian Cassel article
I'm not sure about this part though. Is he saying that we should not take PE at face value and assess everything on its merits?
Interesting example nonetheless.
UncleWally
Yes @Slomo some real gems in there.
I love Ian Cassel's philosophy.
The one that resonates the most with me that I didn't really understand in my earlier days is, "If you want to find great companies early, you have to find great management early".
Easier said than done and probably more good luck than good judgement given they don't have a track record to go by but if you can find great management early you are halfway there.
Slomo
I just went through the Ian Cassel interview - lot's of gems.
I've picked out some that stood out to me (using the transcript).
What creates sustainable price moves in stocks? - It's really three things that make up the multi-bagger formula: 1) Increasing revenue, 2) Increasing earnings, and 3) Not diluting.
Valuation - I'm always looking three years out, whereas the business today, where do I think it's gonna be in three years? Do I think I can at least double my money based off fundamentals?
Selling - If I'm ever pulling forward, 5 or 6 years worth of where I think the company's gonna be or if it's trading today where I think it should be in 5 or 6 years time, then I'll sell some.
Conviction - I think the worst you can do is, is hold with these companies too tight. I mean, you have to hold 'em like a tube of toothpaste.
You have to give them just enough room to disappoint you and a lot of room to exceed your expectations.
It's important to always have a three year look into the business.
Position sizing - The best positions are the ones that kind of start small and then they grow into larger positions 'cause they earn the Right.
I have a 40% position right now in the portfolio. And it's gotten that way from going up. And I still think it's fundamentally cheap.
Looking out three years, it's still probably the best thing I own and the best management team I own. The reason why I'm able to sleep at night is because it started small and it grew into that.
Concentration - I've always been concentrated. So anytime I get close to like 10 positions, it just doesn't feel natural.
It's a duality of conviction and, paranoia. I'm constantly paranoid about what I am missing in a position.
So being concentrated my edge is knowing the positions better than most other investors.
I have to make sure I know my positions better than most other investors.
And it's less about conviction to hold, it's more about knowing when to sell.
Imperfection - A lot of the good situations microcap are, are imperfect situations. That's why they're trading where they are and you're waiting for the pieces to come together.
Screens - I'm mainly qualitative vs qualitative in my analysis and I don't do screens, but one of the qualitative screens we do is for large insider purchases.
Ask the Question: Do you have a history of potential success with the management team that's there. Like do they have history of winning?
Set up - The qualitative setup we'd like to see in the smaller micro cap side is, an existing businesses that are transforming into something new.
New management team comes in, provides a cash injection, new strategy, something old, becomes something new. So I'm trying to pinpoint where's management putting money in?
Ask the Question: Who is that management? Where'd they come from? Have they been here before? Have they done it before?
Insider Selling - A rule of thumb that I've always done well with is I sell down double whatever percentage insiders sell down.
It's good to have some hard tested rules for yourself to protect yourself from yourself.
Hard Rule: Never average down after a bad quarter because 90% of the time, another one's coming right behind it.
Dealing with losses - We're always gonna have losses in the portfolio, but then there's also times where I make those losses worse. And that's where it's not OK.
I think it's good to hold, hold yourself accountable. 'cause then you'll remember the next time.
Averaging up - I much prefer averaging up to averaging down.
All my biggest winners I was constantly averaging up in.
It can be a better buy higher than it was lower from, from a risk reward perspective.
UncleWally
For those of you that enjoyed listening to Ian Cassel recently, here's a collection of 16 Essays.
I don't recall where I got these from so apologies if anyone who may have previously posted them.
You may recognise some of the articles if you follow him at The Collaborative Fund but still a great resource.