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Hi, I'm Jim O'Shaughnessy and welcome to Infinite Loops.
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Sometimes we get caught up in what feel like infinite loops when trying to figure things out.
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Markets go up and down, research is presented and then refuted, and we find ourselves right back where we started.
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The goal of this podcast is to learn how we can reset our thinking on issues that hopefully leaves us with a better understanding as to why we think the way we think and how we might be able to change that to avoid going in infinite loops of thought.
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We hope to offer our listeners a fresh perspective on a variety of issues and look at them through a multifaceted lens — including history, philosophy, art, science, linguistics, and yes, also through quantitative analysis.
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And through these discussions help you not only become a better investor, but also become a more nuanced thinker.
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With each episode we hope to bring you along with us as we learn together.
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Thanks for joining us, now please enjoy this episode of Infinite Loops.
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Disclaimer: Jim O'Shaughnessy is chairman and Co-Chief Investment Officer of O'Shaughnessy Asset Management, where Jamie Catherwood is an associate.
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All opinions expressed by Jim, Jamie and podcast guests are solely their own opinions and do not reflect the opinions of O'Shaughnessy Asset Management.
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This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions.
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Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.
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Jim O'Shaughnessy: Well hello everyone, it's Jim O'Shaughnessy with another edition of Infinite Loops.
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And today I am very excited to have an old friend on.
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We share a passion and the passion is our love of tiny stocks, micro cap stocks that virtually every professional and many amateur investors simply don't even look at.
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And guess what happens when most investors don't look at an entire category?
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Lots of alpha hides down there.
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My guest is Ian Cassel, the founder of the MicroCapClub, which is a community of hundreds, thousands? Where are we at now?
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Ian Cassel: It's about a thousand.
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Jim O'Shaughnessy: Oh, that's awesome.
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Of investors where you discuss U. S.
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and Canadian micro cap stock opportunities.
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You also have a ton of educational content, which I think is always better, especially when you're talking about real stocks that have real earnings and real numbers.
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And it's not a price to magic.
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You're also the founder and CIO of Intelligent Fanatics Capital Management. I love that name. You had me at fanatics. Welcome, Ian.
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Ian Cassel: Thank you, Jim.
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It's an honor to be here.
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I think I tweeted out earlier today.
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I don't know if a lot of people realized that you're a micro cap fan.
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I don't think many people at your, the firm that you're soon to be leaving, even realize that you have a strategy as part of OSAM there.
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Jim O'Shaughnessy: Our GIPS compliance people do. They know. They know about it.
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Well, let's get into that.
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That's a really great jumping off point.
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So I have loved micro caps for a long, long time.
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And the reason that I love them, we share many of the same reasons, but for me as a quant, they're the perfect asset class for a quant, right?
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Because virtually, nobody follows them.
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Many of the stocks that we have in our micro cap portfolio have no analyst coverage at all. None. Zero.
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Nobody is looking at the numbers. Do these make sense? Et cetera.
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Almost zero institutional investors.
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And that's because, well, not to not to get, put too fine a point on it, but it's hard to make money if you're offering a micro cap fund because literally your capacity is really super constrained.
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If you want to trade decent size...
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And we'll get to liquidity in a minute, because I think for our conversation and what people are going to hear from you, it's a real advantage for an individual investor. But guys like me...
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We did a study when we first started talking aggressively about this, despite them not realizing that we have this strategy. I did.
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And I talked about it, but we looked at the liquidity and if you were trying to put $10 million, say, which is a tiny amount for an institutional investor us, but which is a significant amount for most individual investors.
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In the most liquid, you're looking at basically five basis points of impact, market impact.
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In the least liquid category where we find most micro caps, you're looking at about 220 basis points of market impact.
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Now we've gotten better at our trading strategies.
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And I know that I want to hear from you about what you've got up your sleeve there as well.
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But this is just such a great marketplace because no one's paying attention.
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We actually wrote a paper about using this strategy as a proxy for private equity, lots of significant advantages.
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But tell me a bit about how...
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First off, for people who don't know you, how did you fall in love with micro caps?
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Ian Cassel: I fell in love with micro caps back when I was a teenager.
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And to date me, that would've been the mid to late 1990s during the dot com bubble.
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And my parents had saved for me approximately $20,000 for my college education.
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They pulled me aside when I was a sophomore in high school and said, "This is all the money you're getting.
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You decide where you want to go.
6:12
If you want to go to a more expensive university, that's fine.
6:15
You fill the gap with debt or whatever you want to do, but this, we just thought at this time, we'll just let you know, and you can make that choice."
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And so this was 1997 and they introduced me to their financial advisor.
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They said, "Let's just put this 20,000 into an account with a financial advisor for the time be, and you can decide how you want to allocate it."
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And so I got to know the financial advisor, and obviously this is the dot com bubble.
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And he introduced me to a few technology, small cap names.
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And I was like, "All right."
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Well, you know, you start putting your toe in then your whole foot, and then your leg.
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And then you're just submerged in this.
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And it was, at that point in time in the market, Jim, and you're aware of where you could have stand backwards to the newspaper over your shoulder with a dart and hit a winner.
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And that's how I was too.
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And so I was in three small cap tech names.
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And by the time I graduated, I turned that 20,000 into 120,000 and fully caught the greed bug and said, "Well, what do I want to waste all this on a college education for?
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Or, at least an expensive one.
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Let's go to a less expensive university where I could work, part-time pay for it."
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And then I could just continue to invest this capital.
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And so that was right at the height.
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And I actually started working part-time for an Edward Jones office here locally.
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I worked for a financial advisor and I was more or less a glorified receptionist.
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I was kind of assistant to the branch office administrator.
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And so when the bubble crashed, my portfolio crashed.
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Not only that, was I got the first entree to managing other people's money because I was the one answering the phones from our thousand clients calling during the dot com bubble crashing.
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And so I kind of got the best or the worst of both worlds.
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Where going into that, I thought this was an easy game to play, be an investor.
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I thought I was going to be a broker.
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And coming out of that, I didn't want to manage other people's money.
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It's hard enough dealing with your own emotions, let alone other people's emotions.
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And a lot of those small cap tech companies turned into micro caps.
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And so that's kind of how I got my feet wet if you will, with micro caps.
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And then from there, kind of really the first micro cap, which was a few months later, I looked at in earnest, was XM satellite radio, which kind of was just a story stock back then. That was a micro cap.
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They launched some satellites up into space.
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They didn't have any OEM subscribers yet.
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They were soon signing up Ford and GM, and now satellite radio's in every car.
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They were later acquired by Sirius.
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But back then it was a story.
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And so I ended up lying and saying, I was with Castle Capital, which is obviously a firm I made up. I was still in college.
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And I saw the CEO, Hugh Panaro was going to be speaking up in New York City.
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I'm in Lancaster Pennsylvania, that's a three hour bus ride.
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And so I put my senior...
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Basically my suit for my senior photos back on.
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It still fit even after my sophomore year in college, and went up.
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And weaseled my way into one-on-one with Hugh Panaro, the CEO of XM satellite radio.
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And really, I just, my eyes were as big as saucers. I left there.
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The $8,000 I had left from the crash, I bought XM at a dollar . 78 per share.
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And that stock was 42% held short, float.
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They started signing OEM agreements like the next day.
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Again, a hundred percent luck. The stock rips from 1. 78 to 34 in 14 months. I made up all...
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Back all the money, and now it's 150% luck.
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And I like to point to that story as really what kind of got me interested in the micro cap and really the ability for me to sit across the table from a management team and actually, "Oh, wow.
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I can talk to the CEO of this company. Even an idiot like me."
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Yes, I used coercive means to do it, but that's really what got me started with micro caps, is that I could feel at least that I could get an edge by talking to the management of these companies.
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And then from there, being the early 2000s, a lot of the...
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And I think Med Faber talks about this, and other people too, a lot of the activity back then was on public stock message boards, especially for smaller companies.
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And so like Raging Bull and Yahoo Finance, Investors Hub.
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And that's where I gravitated.
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That's where people built reputations.
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And that's quite honestly where these types of smaller companies were discussed because they're mainly retail owned.
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And so that's where I went and kind of build up a reputation on those boards, found a couple mentors as well.
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And that's where I kind of cut my teeth and learned by losing my money over and over again, and making it back, and losing money and making it back.
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And so from the back, when I worked for the financial advisor, I know I didn't want to manage other people's money at that point in time.
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The goal, right from that point when I was still in college was to become a full-time private investor.
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Made that a goal in, it would've been like 2001, and was able to reach that goal by 2008 at the depths of the crisis of 2008, to kind of cut the cord of some consulting I was doing.
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And just became a full-time private investor, just manage my own balance sheet and investments.
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And then three years after that launched MicroCapClub. com.
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Really, I just wanted to see what other smart people in my space liked and why.
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I wanted it to be a private community, so we could feel free to discuss things little more openly.
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And so we just had our 10 year anniversary last year.
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We have probably 300, 400, I think, of the smartest micro cap investors in the planet on there discussing what they like and why.
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Continues to be a great resource for my investing today, just like it was when I started it.
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And it also is a great way to find talent because, as you well know, I mean, whether it's Peter Lynch or Joel Greenblatt or Warren Buffet, they all started micro caps, because that's where they could find an edge until they scaled down.
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And so you still see that phenomenon today where you see a lot of younger people that are wicked smart.
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They start down here in micro cap as well.
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And so now that I manage a firm, Intelligent Fanatics Capital Management, Micro Cap Club is also a way great way to scout talent and who are the best up and coming people in this niche of investing that we can help grow and facilitate and form something bigger.
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So that's a little bit of my background. Jim O'Shaughnessy: Yeah. That's fantastic. You tick all the boxes.
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Because I learned the very hard way that whom the market gods would like to destroy, they first let his first investment double in a very short period of time.
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That's what happened to me and I was trading options.
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And of course I thought that I was God's gift to investing and that I would soon be doling out largess to all my friends and start a foundation.
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And the market had a different idea.
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Ian Cassel: That's what happens.
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Jim O'Shaughnessy: I'll tell you what.
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If you don't know who you are, the market is a very expensive place to learn about yourself.
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But in hindsight, of course, that was the best thing that could have ever happened to me.
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Because picking up on, when you were dealing with the public, I had a kind of a similar experience.
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Where, we had a great run when our...
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With my first company, O'Shaughnessy Capital Management going into the dot bomb.
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And that's when I learned that, the psychology of investing.
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I'd always known it was important.
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The first paper I ever wrote was basically psychology.
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They didn't call it behavioral finance back then, but, and it led me to kind of a second rule at our firm, which is we do not call our clients when things are going great, but we absolutely spend the entire day on the phone calling clients proactively when things are going really, really shitty.
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Because anybody can pick up the phone and say, "Hey, you know the Smid Cap portfolio you're invested in?
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Yeah, that's up 99% this year."
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And, "Hey, I talk to clients."
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The rubber meets the road when things are going really badly.
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And you still have to talk to people. I look at it as you...
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That's a time when you learn more than you will learn in any sunny time.
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And that's kind of how I always looked at it from my perspective.
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But let me ask you on the, why didn't you want to initially manage other people's money?
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Was it just you were freaked out about your own reaction to how some of your investments were going?
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Or were there other things that kept you from doing that?
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And then obviously you went ahead and did it, so obviously something changed. Talk a bit about that. Ian Cassel: Yeah.
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I mean, once I went through that experience during the dot com crash, I just didn't want to deal with other people.
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I felt like I could do this if I just concentrated and build up my own personal capital.
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And listen, I don't live in Manhattan.
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I live in Lancaster, Pennsylvania, where I know I could survive on $2,000 a month.
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So I didn't need to work up to 10, $20 million where I felt like then I could...
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I could do it on a smaller amount.
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And so the target was within reach and it was a target where it's kind of like that JP Morgan quote, "Go as far as you can see, and when you can get there, you'll see further."
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I always like that quote, that's kind of how I felt with this.
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And so I just kind of kept pushing towards that goal.
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And also knowing at that point in time, I didn't really want to make that leap to becoming a private full-time investor until my strategy has been tested through a bear market.
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And I didn't know one was right around the corner, the crisis of 2008, 2009, but it just happened that it was, and being able to invest through that environment.
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And I wasn't unscathed by it, but I felt like I made it through there emotionally and mentally, and coming out of that, setting up some parameters to where, "Okay, I need an amount of capital where I know I need to be able to sustain two double digit, maybe 20, 30% down years in a row.
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I need to have enough capital to where I can withstand that type of emotional, mental pressure on me, the ability to take, to pay bills in the future and not change who I am, what my strategy is."
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And so a lot of it went into that type of decision.
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And I didn't really feel like having to explain to other investors.
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And why I decided to then do it later.
16:56
So 10 basically full-time private investor for 10 years, 2018, 37, 38 years old, always working out of the corner of my house, which is where I am right now.
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Just feeling like, "Okay, I could do this the next, the rest of my life, or I could try to create something bigger."
17:15
And, what would be the parameters for a strategy like this?
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To bring outside capital in, in a way where I feel like I could manage it, just like it was my own.
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And so just putting probably a year or two of thought into that.
17:31
And also knowing this is a capacity constrained investment arena.
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This is never going to be a $500 million fund.
17:39
I guess it could be, if I wanted to have 1400 positions like the IWC does or something like that, but I'm a rather concentrate investor.
17:47
And so deciding out of the gate with a strategy that actually put up a maximum on how much money somebody could put in, you know? I had a maximum.
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It was a hundred thousand minimum, 200,000 maximum. That's it.
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People were like, "Why won't you take more?"
18:02
Because I don't want more.
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Because I'd rather have a table with 40 legs to this rather than two, where you pull one out, the whole thing falls over.
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Because I've launched as an SMA and with an SMA you can't have restrictions or lock ups.
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So I wanted it to be the type of setup to where, listen, I'm going to educate the investor out of the gate, scare them about the volatility.
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"Hey, if we're down, if the market's down 30, we're down 45.
18:28
If you're not okay with that, don't go past Go." And then setting it up.
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Then from that, back into that, with letting people get their feet wet in a small way, let them live with the strategy for a year or two.
18:42
Then if they want to add to it, they can, but really not taking big checks.
18:47
And so that worked out well because a lot of our investors and especially the first 20 or 30 or 40 investors were mainly small business centers.
18:56
People like yourself, had started a small business.
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They understand the volatility of small business and they gravitated to a strategy like this because they're basically investing in businesses like their own.
19:06
And they understand that.
19:07
They understand the volatility of those types of businesses, especially...
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And then you layer on the stock price on top of it.
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And I find they're the best investors to have for this type of strategy.
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They're the type that, if you're down 20 or 30%, they do the right thing.
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I don't have to tell them what the right thing is, which is buy the dips, if you trust it.
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So anyway, I didn't mean to go down that rabbit trail.
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Jim O'Shaughnessy: Yeah, no, no, no.
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That's what I wanted to hear.
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I mean, I have to congratulate you, because for such a young guy, it seems to me that you already were incredibly wise when you were starting out. Most people aren't...
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Most people are kind of like me who haven't, need it beaten into them several times, "You are an idiot."
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And that kind of structure shows...
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Did you have investors in your life, in your family that you were able to learn from? Ian Cassel: No.
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Jim O'Shaughnessy: So this is de novo.
20:03
This is just you thinking about, "Huh.
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I wonder, I these stocks because of these reasons.
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I know that I probably don't want to talk to people because I'm..."
20:14
You must be incredibly self-aware.
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Ian Cassel: I feel like I am, but maybe talk to my wife, she might say something different.
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But I feel like with any type of firm, even going down to the company level from the portfolio, even with your own life, it's kind of a, I'm more geared towards survival.
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I feel like I've been a full time, private micro cap investor, which is hard enough.
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It's not because of, yes, I've had some big wins, but it's also because I didn't take big losses. So it's about survival.
20:46
And so that's how we set up the firm to where, this is a long term game I'm playing.
20:51
I'm not trying to get the next big endowment check in.
20:54
I want to build a firm that is going to always be small probably, but hopefully always, hopefully outperform over the long term.
21:02
And where the parameters that go into that decision, especially in public small companies, it's difficult. Jim O'Shaughnessy: Yeah. Anti-fragile. Ian Cassel: Yeah.
21:10
Jim O'Shaughnessy: Which is so super smart.
21:13
It's so refreshing, actually, given the last couple of years where everything was priced to magic ratios.
21:20
And if you had even a reasonable story, you could get funding.
21:27
And that's, I'm not saying people who did were stupid. They were smart, right?
21:34
If the cost of money is zero, you're going to be able to get a lot of speculative ventures off the ground that you might not have been able to.
21:43
So, for those that did and won, God bless.
21:46
But it does seem we're coming to a more introspective time with real numbers and analysis making a difference again. So that leads me...
22:00
Obviously we're very different. We're quants.
22:04
You are a hands-on fully fundamental investor.
22:08
Walk me through your process, and as you do, please highlight what you would think the biggest advantage you hinted at it earlier, but the biggest advantage that you would have say over somebody who's a mega-cap investor.
22:25
And then on the flip side, what are some of the biggest risks?
22:29
What are some of the things that happened to you that probably wouldn't have happened if you weren't in the unknown country of micro-cap stocks where nobody else is looking either?
22:41
Ian Cassel: Yeah, that's a good question, and I think...
22:45
Even maybe take a step back even further.
22:48
When you're looking at invested in small companies, you're either looking at small private equity, I think Brent Beshore.
22:55
You have small VC, or public micro-cap.
22:59
Two out those three are loved.
23:05
Private equity, everybody loves that.
23:06
Everybody wants to be the next big VC.
23:09
Everybody hates micro-cap, I think we can agree with that for whatever reason, that's just the purpose.
23:14
And I think, a lot of that has to do with the first entree a lot of folks get into micro-cap is some glossy hard mailer they get in their mailbox one day that says, "Here's X, Y, Z.
23:24
It's going to be the next Amazon. Go buy it."
23:27
And, I actually kept an Excel spreadsheet of the ones I received at my house.
23:30
I got, I think, 58 of those over the course of four years, and 100% of them were down 98% within 12 months.
23:39
And I think, unfortunately, that's the first entree that most investors get into public micro-cap stocks, and they don't want to ever look at it ever again, and I can't blame them.
23:51
Jim O'Shaughnessy: Right.
23:52
And sorry- Ian Cassel: And so- Jim O'Shaughnessy: ...
23:54
but just to interject, you also have it glorified or demonized if you will, in movies like the Wolf of Wall Street- Ian Cassel: Yes. Jim O'Shaughnessy: ...
24:01
where he goes to a bucket shop and...
24:04
A bucket shop for those who aren't familiar with the term is basically just teetering on that line of legal and illegal.
24:14
And, they're flogging stocks that they know are dog shit, and they're trying to get people to get all excited about a narrative that is probably mostly made up. So yeah, I get that.
24:25
I get that, but you wouldn't be getting that in the mail anymore now, would you?
24:28
You'd be looking at websites, right? Ian Cassel: Yeah.
24:31
It would be more on the website side of things, so what I usually tell people today if they ask me, if they want to get interested in micro caps, I just remind them that of the 8,500 micro caps in North America; Canada and the US, approximately 17% of them are profitable.
24:51
And so, if you just do that simple screen and look at those companies that analyze the real businesses out of that, you're going to save yourself not all of the risk, but you'll save yourself a lot of pain, which is, I feel like I'm talking out both sides of my mouth, because I actually got interested in micro-cap from a story stock perspective.
25:10
Even the first three or four or five years of call it, my maturation as a micro-cap investor, I was mainly a story stock investor.
25:16
I was trying to find momentum, before it would come into the market.
25:21
But, that's usually what I tell new people into this space.
25:24
"Focus on the profitable companies.
25:26
Focus on the real companies," and what you'll find when you talk to different micro-cap investors is just it's just like talking to mid-cap or large-cap investors.
25:36
You have different flavors.
25:38
One micro-cap club, you'll find deep value of micro-cap investors that do screens for book value and that's how they find ideas, or things that aren't reflected properly in the balance sheets.
25:49
You'll find investors that focus on life science companies.
25:52
You'll people that focus on oil and gas.
25:55
I mean, it's the same thing in mid-March cap.
25:57
You can find those same flavors down in micro-cap.
26:02
And so when I get asked, "How do you invest," I'll tell you about the flavor that tastes good to me.
26:08
It's kind of pain that I'm painting.
26:09
It's happened over a 20 year kind of career, but mainly, it's kind of a combination of what I look for is kind of a top down and a bottom up framework.
26:21
And the top down part of it is I'm looking for a business that's in a tailwind, that's in that industry tailwind.
26:29
I think Josh Wolf talks about it as when it's undeniable, hours of progress he likes to talk about.
26:35
I like to find them as well. It's a lot easier.
26:38
It's like riding the jet stream from the West coast to the East coast.
26:40
It's a lot easier when you're up in the air with a 200 mile per hour....
26:43
It takes an hour and a half off that flight, same thing.
26:46
The next thing that I'm a really, really big fan of is scarcity.
26:51
I love scarcity of all forms.
26:53
I'm not interested in finding a business where there's another thousand other public companies that are just marketing the same product or service a little bit differently trying to gain share.
27:03
I'm going to find one of ones or one of twos, especially in the public ecosystem to where there's the scarcity value of a gross situation, to where you have a fire hose pointed at one thing.
27:16
It's just going to push it.
27:17
The biggest, I think, propellant of price is just scarcity when the market comes after it, and that's why I want to find in the form of a great business.
27:27
The next is, Morgan Housel had talked about this too, is I like great stories.
27:31
My first five years was focused on story stocks and I love great stories.
27:37
Great stories move products, great stories move employees, they move cultures, they move stocks.
27:43
I love to find a great story.
27:45
And lastly, obviously I would say have a micro-cap investor undiscovered.
27:48
And for me, what that means is, as micro-cap, yeah, it's undiscovered from 98% of the normal investment public.
27:57
But, I like to find things that are 98% undiscovered from even the folks inside micro-cap that focus on micro-caps.
28:05
I love to be the first wave of discovery.
28:09
I don't like to be the second, or third, or fourth wave finding out about something.
28:13
I like to be the first, and that's something that I wake up even every day to this day.
28:17
I just want to find the next one first, and even in this environment we're in today quite honestly, Jim, there's a lot of micro-caps that are down significantly 30%, 40%, 50%, 70% that were small-caps. They're now micro-caps.
28:32
And I have this bias-ness that's almost against them because yeah, but they're already covered by five analysts.
28:36
The institutions already know them.
28:38
I can mention them to 10 of my friends, and they give me excuses why not to own them.
28:42
And yeah, they might be cheaper, but they're already known stories.
28:46
I want to find an undiscovered one where every new incremental person that finds out about that story or business is an incremental buyer.
28:54
They don't give me excuses why they aren't going to, or they have an experience with it five years ago as the previous CEO.
29:00
I like that first wave of discovery.
29:02
So, that's the top down framework if you will.
29:09
The bottom up, four factors I look for is, a business that can grow through a recessionary period, and that is very difficult to do.
29:21
A business that can grow through a COVID environment can go through or grow through maybe what we're going to be going through over the next one or two years.
29:28
And yes, that screens out 95% of the businesses you'll be looking for.
29:33
So that's the point, that's the great thing about it being a retail investor, you can be choosy.
29:38
The next part of that is a balance sheet that can endure, that hopefully they can be aggressive when their competitors are not aggressive, a balance sheet that you basically endure and survive.
29:51
The third is kind of to the point of the firm, a management team that shows signs of intelligent fanaticism.
29:58
And we co-authored a couple books on that subject actually, from 2016 to 2019 co-authored two books, and really I was just obsessed with trying to overlay a qualitative framework on management because the smaller the company, the more important management becomes.
30:16
And so, let's go analyze some great leaders and how they built great businesses and see if we can learn some things.
30:22
It's basically what it was, which was trying to find those intelligent fanatic attributes.
30:26
And lastly, down to the valuation level, trying to find things that I think can fundamentally, not wish or hope, but fundamentally double in three years, so 25% KRS, long term.
30:39
That's sort of the bogie, if you will.
30:41
Hopefully more than that, maybe won't hit it, but that's what we're looking for, 25%.
30:46
Jim O'Shaughnessy: You know what's so funny? A couple of things.
30:49
Your first comment about the quality of micro-cap, that's one of our lead-ins.
30:54
We're like, "Do you know why we love this market?
30:57
Because most of the stocks in it are dog shit, and we have the ability to screen out those horrible companies and look at some real gems, diamonds in the rough, all those stories.
31:12
I can't help myself as a quant of 25 years, as you're going through your points of what you're looking for, I am building an algorithm in my head.
31:21
Ian Cassel: So, one of the reasons you were so insightful too, I remember when you came out and spoke at our event, and that was several years back. That was a great lineup.
31:30
I was reflecting on that, Jim. What was it?
31:32
It was you, Brent Beshore, Morgan Housel, Josh [inaudible]- Jim O'Shaughnessy: Yeah.
31:36
Ian Cassel: I was just thinking, "Wow-" Jim O'Shaughnessy: That was a- [inaudible]... and it was fun too.
31:41
Ian Cassel: Yeah, and I know one of the enlightening things just from our conversation several years ago and it's something that's impacted me even today was, and some of the quantitative work that you've done.
31:52
I think Dan Rasmussen has done some work too, just about does insider ownership matter?
31:57
Does all of these things that I want to matter, but it doesn't mean that it does matter if you look at the full basket of companies.
32:05
Jim O'Shaughnessy: Right.
32:06
Ian Cassel: And, I appreciate that part of your talk.
32:07
And that's something that I think about quite a lot, even to this day because I want that 30% owner that gets paid next to nothing, that Insider buys the crap out of the stock to be the successful one.
32:20
But, it doesn't mean that it will be.
32:22
Jim O'Shaughnessy: Right, right.
32:24
Well, I will advise our listeners, "Pause here, rewind, read the transcript.
32:31
Ian just gave you some golden points on how you should look for a small company stock."
32:38
Because the other thing I was going to say is what's interesting is even though that we are quants and you are not, you're very hands on.
32:47
Our approach here is pretty similar in that we build a balanced portfolio by first, as I mentioned, getting rid of all the dog shit companies, which is the majority of the companies there.
33:02
Then focusing on valuations, financial strength, things like that.
33:06
But, half of the portfolio is screened by our value composite, so these are the cheapest of cheap micro-cap stocks, after having made it through all of the other hurdles.
33:18
So in other words, they have to have financial strength.
33:20
They have to have good earnings, quality, et cetera.
33:24
And then, we do the cheapest.
33:26
The other half of the portfolio is momentum based.
33:30
This has always amused me when people who maybe don't look at how we actually invest, always call me a deep value investor. I'm not even close. Right?
33:44
Momentum works and it works really, really well, but you've got to have it combined with other things.
33:52
And so that half, the same universe.
33:54
In other words, we get rid of all the bad stocks.
33:57
We have focus on those with good value characteristics, those with excellent financial strength and earnings quality, but then we buy that half of the portfolio based on a multifactor momentum screen.
34:12
We like it because essentially it leads us to places.
34:17
My ear picked up when you said you want to be first, and due respect, being a quant can get you first really often because I would sometimes have a trader come to me and they would show me the name that I was telling them to buy. Right? Ian Cassel: Yeah.
34:38
Jim O'Shaughnessy: And he would say, "Jim, have you ever even heard of this company?"
34:42
And I'm like, "Of course not, I'm a quant."
34:45
I said, "I can tell you the factors of that company," and he's like, "Dude, nobody that we're putting these trades out to the big brokers and they're like, 'What, ticker is this?
34:57
No one knows about it,'" which I love, honestly.
35:01
Because like you, man, if I wasn't a quant, I would be like you.
35:06
I would say, find a scarce resource, really scarce.
35:12
Do lots of due diligence, separate the wheat from the chaff, and you can do...
35:19
I call this the undiscovered market. I wrote this in 2016.
35:24
My original, we started our micro-cap strategy in 2006, and it's still not closed.
35:31
And, I'm just like, "I can't believe it," because it's- Ian Cassel: Is it still just your money, Jim?
35:38
Jim O'Shaughnessy: Mostly.
35:39
Ian Cassel: I think it was a few years ago.
35:43
Jim O'Shaughnessy: Yeah, mostly.
35:45
Honestly, I just put a little extra money into the market a little bit ago because things were getting extreme, and I'm never at the bottom or I'm never at the top.
35:57
But where I put it, I bet you can guess, I put it in micro-caps mostly.
36:01
And then I put a little bit in small value, because again, these are things from my point of view...
36:11
It's like you said, we're looking for a [inaudible] of 25%.
36:15
People who are up in big-cap land, it's almost like they can't process that- Ian Cassel: Yeah. Jim O'Shaughnessy: ...
36:20
but the fact is all large companies at some point...
36:24
We're small companies, right? Ian Cassel: Yep.
36:26
Jim O'Shaughnessy: And somebody started them in a garage, or a shared rental office, or whatever.
36:34
And so, when we look at the micro-cap universe, about 25% of it is new ventures.
36:41
So, it's brand new, right?
36:45
There's where you would have an edge over us, because if they don't have enough numbers, they just don't even show up for us and 60% are steady state.
36:57
In other words, we go between $500 million and $250 million just because...
37:03
I mean, honestly, and listeners, this is not investment advice, but if you are interested in an area where even a small fund can't go, look at things under $50 million.
37:23
What's your minimum on market cap?
37:26
Ian Cassel: We don't really have one.
37:29
We actually bought something recently that was seven. Jim O'Shaughnessy: Wow.
37:34
Ian Cassel: Yeah, because it gets back to you want to be first and you mentioned that a couple minutes ago, and it gets back to position sizing.
37:45
You might be first, but you might be small, and that's one of the things I learned over the last 20 years is a lot of times I bet big out of the gate and I got lucky because I was right and I was lucky.
37:59
And, over time you realize you don't have to do that.
38:01
You can bet a little bit, watch, manage, and execute, and buy more.
38:05
And quite honestly, all my biggest winners were things I was constantly averaging up in and not averaging down.
38:12
And so, that's sort of the process we take with our portfolios too, is yeah, it's a very small company like I just described, $7 million.
38:22
But, I don't ever want to be at a size where I can't buy almost anything, and if something's that small and I'm buying it, there has to have the amount of upside that it could potentially be a decent size position if it works. Jim O'Shaughnessy: Yeah.
38:37
Ian Cassel: So, that's another kind of filter or hurdle for something that small to get in the portfolio.
38:41
I'm not going to add something that small, if I think it's just going to be a 20% KR over the course.
38:46
Yeah, it has to have a significant upside.
38:48
So yeah, we like to be first, but sometimes we kind of inch into positions and wait for management to execute.
38:56
I mean, we're very concentrated.
38:58
Quite honestly, we're in the six and 10 positions, but we're very hands on.
39:04
We probably had 300 points of contact with our portfolio companies so far this year, just trying to understand them better than most.
39:12
And that's another thing that I learned just from doing this for a long time is I want to know these businesses as much as I can so I can hold for the upside, but also, so I can spot things when they start to turn to the negative.
39:26
Because if I'm being honest with you, Jim, when I look at what I owned five, six years ago, and let's say I have 50% turnover in a portfolio, pulling a number like that over five years.
39:39
Let's say I've owned 50 or 60 companies, 70 companies over the last four or five years.
39:45
How many of them do I still own today? Maybe just three, four. Yeah, this is tough.
39:50
This is not something we're out marketing only 10% turnover.
39:55
We want to continuously try to find the best companies we can find, and probably more often than not, they're going to disappoint us eventually, and filter out and filter in the next batch of companies.
40:09
And hopefully another five years of the 10 companies, we own, two or three would have went from micro-cap to small-cap and we continue to hold them.
40:17
They're veterans of the baseball team, and you're constantly trying to find the new rookies that can become those next great players.
40:25
And so, there is turnover in a portfolio like this. Jim O'Shaughnessy: Yeah.
40:29
One of the things that I think is really cool is it's fun if you go in.
40:34
I don't talk to end investors much anymore, because our clients are registered investment advisors.
40:41
But, when I did, I always really enjoyed going in and just leading with all of the downsides- Ian Cassel: Yeah. Jim O'Shaughnessy: ...
40:49
and some of them are share over in small-cap, right?
40:53
Not to the extent they are in micro-cap, but I remember one guy saying to me, " Are you telling me you don't want me to buy and you don't want me to invest it?"
41:05
And I'm like, "No, hell no.
41:07
I invest very much in micro-cap.
41:10
I'm just telling you all of the things you're going to have to accept and get over." Ian Cassel: Yeah.
41:15
Jim O'Shaughnessy: But, your point about the $7 million leads to the other question.
41:20
In our portfolio, in our micro-cap portfolio, the number of stocks that end up being taken over, often by a private equity firm, is huge.
41:30
It's much bigger than it is in any of our other stuff, including our small-cap stuff. Do you find the same?
41:36
Have you lost a lot of names to take over? Ian Cassel: Yeah. I mean, it's happened.
41:40
It's probably going to happen more frequently now with valuations coming down too.
41:43
And, I think I remember you even commenting on a tweet I made.
41:46
I think a better kind of statistic to use is when the MicroCapClub launched 2011, since 2011, our members have profiled I think it's around 850 micro-cap companies since 2011.
41:59
And, we track the performance of all of those companies the day they were profiled to the end of last month.
42:06
So, we just have this running tally.
42:08
We actually have a membership ranking based on their performance.
42:11
So, if I profiled a company that I like at a dollar and it goes to $2, that's up a 100%, that's a 100 points.
42:18
Similar if it goes down, it's a detractor.
42:20
But anyway, getting to the point of your question, of the 850, I believe it's something like 17% maybe have been acquired since the Club was started in 2011.
42:36
So it's a significant chunk of those companies, which is getting more and more interesting. Jim O'Shaughnessy: Yeah.
42:43
And, that percentage is actually pretty consistent with what we see in our strategy.
42:49
It depends on the year, but ours might even be a little bit higher and I look at that as a great thing.
42:56
I personally, again, not investment advice listeners, but I personally use our micro-cap as a proxy in my own portfolio for private equity.
43:09
We do have an investment with Brent Beshore, but I look at that, as his name implies, permanent equity.
43:19
He plays that game very differently than other private equity investors, and I think very highly of Brent and his team.
43:25
But, I like this idea that they're not there to flip a company.
43:29
They're there to- Ian Cassel: Yes. Jim O'Shaughnessy: Yeah.
43:32
They are long term partners, which leads me to the next question.
43:37
One of the things I find so cool about you, Ian, is you are really an early adopter, in my opinion at least.
43:44
Now we have the rage for learn in public, transparency, all these things that I bang on about a lot, but you did it, right?
43:54
So, your community's over 10 years old in the MicroCapClub, and you did this all in public.
44:03
What did you learn first off?
44:06
Because I'm always urging people to do this, to learn in public, especially now that you can be anywhere in the world and you can participate with people like you and your club members.
44:20
So, there's no excuses left.
44:22
It's not like you have to go to a club meeting in downtown Manhattan.
44:27
You can do this all virtually, and so I think doing so in public, learning in public, being transparent, but what were some of the lessons that you learned as this process unfolded?
44:41
And again, congratulations on being one of the first great examples of this.
44:45
Ian Cassel: Well, I think I was probably one of the first, because I just got lucky.
44:50
I remember, was it John Maxwell, the leadership author and speaker, he was asked how he became such a successful author selling millions of books, and he made a comment like, "Well, I've written 41 books.
45:02
One of them has to be good," or something like that.
45:04
It's like, "I've just been around for so long," it's kind of the same with being on Twitter.
45:10
It's like, "Well, I was on there since 2009, so," but no.
45:17
I've always enjoyed writing in public, and it probably gets back to when I started posting on stock message boards, in early 2000's where everything was just public.
45:26
And not being afraid to look dumb, because we all look dumb constantly.
45:30
So I think it's important because I think the key is just trying to create that flywheel of serendipity in your life.
45:42
And the way to do that is put yourself in uncomfortable situations where people can see your potential.
45:48
Whether that's speaking at an event, or writing on a Substack, or whatever the case may be.
45:56
But it's all about just trying to increase that flywheel of serendipity so good people can enter your life.
46:02
Jim O'Shaughnessy: I love that.
46:04
I think that again, the many pearls of wisdom you are giving to our listeners, you really have to pay attention.
46:13
I would take notes gang, and read our transcript, we have transcripts.
46:17
What you just said just resonates so strongly with me.
46:23
I sometimes joke about people who say everything is luck, right?
46:28
And I'll put up a GIF or a meme that says, "Everything is due to luck said the most unlucky person in the world".
46:38
Of course there are things that are due to luck, absolutely.
46:42
Trying to do the opposite, trying to invert that in saying that everything is skill is bullshit, right?
46:50
It is a continuum, but I do believe fairly passionately, that if you put yourself in situations that might be uncomfortable for you as a person, your opportunity for luck increases, sometimes dramatically.
47:10
If for no other reason, is because there are so few people willing to put themselves in that situation, right?
47:16
Ian Cassel: Mm-hmm (affirmative). Yeah.
47:18
Jim O'Shaughnessy: And there are so few people willing to look dumb or willing to say, "Ah, I really fucked that one up".
47:25
The more that you can look at that as an opportunity, as opposed to a stumbling block, it's a building block in my opinion. Because you're there.
47:36
No one else is there because they're like, "No way, man.
47:39
What would people think?" .
47:41
And time and again, I've had that luck, right?
47:45
By just being willing to be open to first off my own errors, I make mistakes all the time.
47:54
And the only way that you can actually get any better is through error correction, and you're not going to know about that, or if you try to hide them, or you try to say, "Yeah, well."
48:10
I love the term, "The virtuous flywheel", because it depends not only on that, right?
48:14
Not only on being willing to put yourself in uncomfortable situations, you got to be aware, you've got to survey your surroundings, you have to have situational awareness, but then you also have to be willing to be wrong and retain the agency.
48:33
It's one of my litmus tests with people, is when things go wrong, are they pointing fingers?
48:39
"Oh, it was his fault", or "her fault", or "it was the situation", or "the market was wrong". Wrong, wrong, wrong. You were wrong.
48:48
And I don't care what the situation was, maybe a lot of other people were wrong too, right?
48:55
Maybe you were the only one who was wrong.
48:57
The fact is though, that if you retain that agency, it's what I like about you, and why I've always been interested in following your career, is you personify, at least for me, a lot of these characteristics in a person.
49:12
And you can make your own luck, but first off, you got to be aware that's possible, right? Ian Cassel: Yeah. Yeah.
49:21
You just have to put yourself out there.
49:22
I remember the first time I really got asked to speak somewhere was back in, maybe it was 2015 now?
49:29
Asked to speak out at Google, and I was honored that anybody even would care.
49:36
But it really scared me because it was like, "I've got to go out there and speak."
49:40
And I'm not like you Jim, where, okay, so another sidetrack story.
49:43
Jim comes out and speaks at our event, I think it was five minutes before he was going on stage at our summit, and he was like, "So what do you want me to talk about?" .
49:52
He just gets up there and gives a brilliant presentation off the whim for about an hour straight.
49:57
And I just remember looking at Mike and my partner [inaudible].
49:59
I'm like, "Did he just do that?"
50:01
I was like, "I could not do that". So anyway.
50:03
But I remember when I was speaking out of Google, I mean, I bet you I practiced that presentation 150 times.
50:10
It's kind of like, why does Roger Federer's backhand look effortless?
50:14
Because he practices it a thousand times a day.
50:17
And so everything that looks smooth and natural or whatever, usually there's a ton of preparation behind that.
50:23
And so the way you get over putting yourself out there is just over preparation, over preparation and just doing it more, more, more.
50:32
Jim O'Shaughnessy: So how do you respond, what happens if somebody comes up after your Google talk, right?
50:40
And they come up and they say, "I just think that's all bullshit man.
50:45
I just think that you're wrong here, you're wrong here, you're wrong here."
50:49
How do you handle very negative people like that?
50:53
Ian Cassel: I'm very passive aggressive.
50:59
So I normally would just say, "That's fine.
51:02
This isn't for everybody," and move on to the next.
51:05
That's usually how I react to things.
51:07
I'm not interested in getting into arguments with people that've already made up their minds.
51:11
Jim O'Shaughnessy: Exactly.
51:12
And again, we could do a commandment list from this thing because it's like I will talk to people who I see fighting with people who are...
51:23
I already passionately believe that I cannot change another single human being.
51:28
I can help them if they want to change.
51:31
But I, Jim, can't change you, Ian.
51:34
You, Ian, have to want to have some kind of change or not want it or whatever.
51:41
If you don't want it's never going to happen. Can't be forced on you.
51:45
We can compel you if we have guns and authority. Yes.
51:50
We can compel you to do a certain thing, but it's not you changing, it's you complying.
51:56
And that was a hard lesson for me to learn as a young person.
51:59
Because when I was younger, I was a real proselytizer.
52:03
And when I found something that I thought was really like, "Oh man, this is really cool.
52:10
I got to tell everybody about this," right? And so I did, right?
52:14
I was just proselytized, proselytized and I realized I still think there's a place for being a voice for a certain set of principles, being a voice for a certain set of ways to invest like we're talking about right now.
52:29
But I waste zero time on anyone who has just clearly made up their mind and I'm just, "God, good luck."
52:39
And so luckily over time, that ability to be incredibly dispassionate about most things is and yet still driven by this passionate obsession with... how did that work?
52:57
I really want to figure out how that works.
53:01
And so I just think if somebody who's listening is not an investor and you're still listening anyway, you just got a fantastic lesson from Ian.
53:11
Which is, somebody comes up to you and says, "You're wrong and I'm right," you just say, "Oh yeah, you're probably right. See ya." Ian Cassel: Yeah.
53:19
Jim O'Shaughnessy: I even think that's- Ian Cassel: And most- Jim O'Shaughnessy: Go.
53:22
Ian Cassel: And most people, I mean, especially in investing, if you take a logical approach and we've kind of hit on a few things already.
53:27
But even when it comes to Microcap investing, the investors I talk to, it's not like I want...
53:33
Nobody should be putting, except for me, way back when should be putting a hundred percent of their money in Microcap stocks.
53:38
Jim O'Shaughnessy: Right.
53:39
Ian Cassel: And same thing with people that are investing with me today, I'm like, "This should be like 5% of your portfolio or less so that you could stomach the volatility that's inherent in these securities."
53:49
And so I think as long as you're just honest and forthright about your investment approach, I know this goes over and above investing, but it was just something I was thinking about as you were talking.
54:00
I think all you're left with, with people that just want to disagree with you are people that have other motivations, so.
54:06
Jim O'Shaughnessy: Absolutely.
54:08
And I call them psychic vampires and if you just don't respond, they go elsewhere, right? Ian Cassel: Yeah.
54:16
Jim O'Shaughnessy: It's like trolls are being trolls for very different reasons.
54:21
Usually unfortunate and sad reasons, honestly.
54:24
Another thing that I've learned as I've gotten older in life is I have become far more forgiving of human fragility.
54:33
And listen, man, we're all running the same human operating system here.
54:37
There's a bingo point for the nice lady who did the infinite loops, bingo.
54:43
And like we all are, and you don't know what some...
54:49
People on Twitter say to me, "Why do you mute instead of block people?"
54:52
And I'm like, "The reason I do that is because maybe 20% of those people were just having a bad day and to ban them and banish them from ever darkening your doorstep again, just seems to me to be limiting your own ability to learn from other people," right?
55:10
I've had lots of bad days and said lots of stupid things.
55:14
And that's part of being a human being.
55:18
And so I just tend to focus on this idea, if somebody's being a real asshole, it's just like, "They're probably in pain from something that I don't know anything about."
55:30
And so I'm not going to wish them ill.
55:32
I'm just going to just say, "I can't help you. Sorry."
55:36
And hope that- Ian Cassel: Yeah.
55:38
Jim O'Shaughnessy: Yeah, right?
55:39
Hope that they come along.
55:40
Let's go back- Ian Cassel: No, I'm a big fan of mute button, mute button in life, mute button on the TV, as a way to focus and just cut out distraction.
55:47
And I think you've said it perfectly, a lot of times, if you were going to react, it would've been probably in such a negative way.
55:52
You never know if that would've influenced them in a negative way that you don't want that on your conscious either.
55:56
So it's just easier just to say, "That's fine," just move on. Jim O'Shaughnessy: Yeah.
56:00
I mean I'm not a religious person, but I really do believe in karma.
56:05
And I believe that the more good karma you put out it'll come back.
56:11
Probably not from even the same people.
56:14
It's not specific, but vibes, I think we're a social creature, we human beings.
56:21
I mean, just look at this lockdown and all of the problems that happen from that.
56:27
So just because we're social and we need other people, we need to actually be able to be engaged with other human beings.
56:34
And- Ian Cassel: We weren't meant to do life alone. Let's put it that way.
56:38
Jim O'Shaughnessy: No, we absolutely were not. We absolutely were not.
56:43
Let's bring it back to the investment process.
56:47
So do you have a kill switch?
56:50
Is there anything in your process that, let's say you found the company, it meets all the criteria that you've just previously explained.
57:00
Do you have either a quantitative or a qualitative thing that is like, "Yep, Nope.
57:06
We're selling that today?"
57:08
Ian Cassel: Management line to me or management integrity, anything on the management side.
57:15
Whether it's a public or private business, management is so important.
57:20
And what I've found over the years is Grade B, Grade C, God forbid, Grade D Management.
57:25
They're not going to be able to put all those pieces together.
57:27
And that's what these businesses are.
57:29
They're putting pieces together and putting the right people, processes, culture in a way that can hopefully scale and B, C, D Management can't do it.
57:40
You got to focus on the A and doesn't mean you're going to be right all the time if you have A management.
57:44
But when I sit down at the poker table I like to get a full house and play that full house, not play it off suite.
57:52
So you're just trying to stack the odds in your favor.
57:55
So for me, when I see management integrity or self-dealing, or if they do a deal and they personally take 5% of it, or even, I don't even like to see where the owner owns the building the businesses operate and they lease it or rent it back to themselves.
58:10
Just little stuff like that kind of trigger, just put the alert up.
58:15
And so a lot of times it's more to do in the management integrity, honesty, fair dealing.
58:20
You just want to see good people, people that...
58:24
And a lot of times what triggers us to an idea, is kind of the opposite of that.
58:30
Seeing a management team, insider buying, investing directly into the business, you see a transformation, a rights offering, which is basically a management or shareholders reinvesting into the company.
58:43
Trying to spot those transformations before other investors.
58:46
Where it was an older business, now it's being transformed.
58:49
Maybe they sold off subsidiary refocusing on a growth area.
58:52
Those are the things that get us interested.
58:54
Kind of the opposite of that question. Jim O'Shaughnessy: Yeah.
58:58
And so have you had any experiences?
59:03
Because I know you're a very hands on guy where, where you went and then you later discovered that they were just lying through their TQ? Ian Cassel: Oh yeah. All the time.
59:11
Even as recently as the last six months, there was one of our positions that was saying one thing and doing another.
59:17
And it's really hard because I'm a big fan of journaling like you are because I like to write down what I'm thinking, feeling, what I'm thinking about doing.
59:27
And sometimes it's hard to pull out the lessons from those because it ticked all the boxes, except I didn't realize I was dealing with a liar. Yeah. It's difficult.
59:39
But yeah, it still occurs, but it's a game of batting average, even I'm not right all the time. And I know that.
59:47
It's just- Jim O'Shaughnessy: Yeah. Ian Cassel: Yeah.
59:50
Jim O'Shaughnessy: Well, yeah, I agree.
59:51
And that's why I'm such a huge fan of base rates, right?
59:54
Because you should never look, in my opinion, you don't have to be a quant to think like this, you should never look at the outcome of a single investment.
1:00:05
And my friend, Annie Duke calls that resulting and.
1:00:09
It's like, you could have had a bad reason for making that investment and it could have worked out in your favor.
1:00:15
Then, you've doubly compounded your problem because you're saying, "Oh, look at me.
1:00:20
I'm so smart, I invested in this.
1:00:22
And you don't know this, but the reason I did was wrong and yet I had a good outcome."
1:00:30
Whereas it's like, "I don't know, would you be satisfied with a single snapshot of a business or would you want to see a movie of that business?"
1:00:42
That's what a base rate is, right?
1:00:44
It's that business going up and down over different market cycles or strategy rather, better way to look at it.
1:00:52
That investment strategy and you're going to see some real divots, right?
1:00:57
It's like people on Twitter.
1:01:00
It seems like it's almost a trope, but it's like, "You will never see a bad backtest."
1:01:05
And I'm like, "I can show you thousands of bad backtests," right?
1:01:10
And even on ones that we use there are a lot of really, edge-of-your-seats-people-are--throwing-up, the scary volatility.
1:01:22
So I look at that as a real advantage in terms of, "What's my batting average."
1:01:29
Because if I hit a home run and then point to that and you videotape me hitting a home run, by the way, in my case, you would never get that on videotape because I would never be able to hit home run.
1:01:41
But let's just say I did.
1:01:43
And I walked around showing it to everyone at a party and said, "Look, this is me.
1:01:47
This is how I bat," right?
1:01:49
It seems so obvious when you put it in that regard.
1:01:53
One of the things that I've found is very helpful is that when you can make it relatable to another human being, numbers are like...
1:02:01
Even I said, "Basis points," earlier and I my bad, I probably shouldn't do that.
1:02:08
And I think that one of the things, now, granted, most of the people who are going to be listening to this are people who are really interested in investing and they know what basis points are and they know all of that.
1:02:20
You know who's really good at this?
1:02:22
Morgan Housel, The Psychology of Money.
1:02:26
I always say, "Price follows narrative," and I know that bothers Morgan, but it's true for the most part.
1:02:33
And yet if you're trying to teach somebody about... What are the basics?
1:02:38
You do a very good job of it, even though your specialty is with micro.
1:02:43
But tell stories that people can relate to, right.
1:02:47
And they're like, "Yeah, I get that. I understand that."
1:02:50
Do you see yourself as...
1:02:50
is there part of your career unfolding because you're still young?
1:02:59
Is there part of it where you would like to teach to explain to people who really need the help?
1:03:09
How to- Ian Cassel: I definitely see that it would probably still stick to my niche of investing.
1:03:14
I mean, one of the things why I put so much effort, especially in the early years in the Microcap club on the education side, was especially back then, it was a lot worse than it was today.
1:03:25
Just the negativity, that negativity light that was shining on Microcap at that point in time.
1:03:30
Because that was 2011, 2012.
1:03:32
And that was right when the reverse mergers ended.
1:03:37
That was right when some China reverse merger frauds came out, I could go back even further.
1:03:42
So previously to 2011, we had about 500 reverse mergers a year that were done.
1:03:47
And a lot of people don't talk about that much, even in any papers when they talk about the amount of public companies going down over the last 15 or 20 years.
1:03:57
Well, that funneling of 500 new companies a year ended in 2010, 2011.
1:04:01
And that's a big amount of companies to be added to the public ecosystem just in the U. S that just stopped.
1:04:08
That went from, I think at it's peak 800 reverse mergers and I think it's still you might get a hundred a year, so that's a big gap to fill.
1:04:15
And so there was a lot of negativity around that because of the amount of China frauds that were going public through reverse mergers.
1:04:20
So we put a lot of emphasis on just trying to be a positive shining light to the ecosystem of Microcap because I love the space.
1:04:29
A lot of other people love the space, but you never heard anybody say anything good about it.
1:04:33
And so a lot of the time was just as kind of leading Microcap club, just trying to create a brand that was a positive force.
1:04:44
And also trying to expand Microcap out, even through our events, through our networking, like bringing somebody like you to speak, bringing somebody like Morgan Housel or Brent Beshore.
1:04:55
The types of folks where people looking at it and be like, "What are these guys speaking at a microcap event for?
1:05:01
A crappy little Microcap event?"
1:05:03
That's the reaction I want when people come to the event, bring people in like, "What's going on over there?"
1:05:10
Bring quality, attract quality of all forms into the ecosystem.
1:05:13
So that's definitely a top one or two thing that gets me going every morning.
1:05:18
It's just trying to continue to push that even after 10 years and obviously education is a big part of that and just doing great podcasts like yours, just trying to continue to do that.
1:05:31
Luckily today, I mean, it's not as bad as it was, but yeah. Jim O'Shaughnessy: Yeah.
1:05:38
That's another thing that is one of my kind of rules, which is, I would much rather root for something than root against something.
1:05:47
I mean, there's just so many people who are going to root against things.
1:05:52
Again, here we are, we're over here on the scarcity side of things saying, "Hey, look at how cool this is."
1:05:59
And it just seems that, I think pessimism often sounds smart and optimist make money, right?
1:06:05
Like I, myself, don't quite understand the mindset of a pessimist.
1:06:12
To me, these are people who don't understand human history.
1:06:14
Look, human history's got a lot of horrible things that happened in it, but they don't dominate really.
1:06:23
If you look, yes, horrible 100 year wars, horrible targeting civilians using mustard gas.
1:06:34
The list is endless, but we continue to dust ourselves off and things continue to get better.
1:06:44
Most people don't know this, something like a billion people emerged from poverty over the last 15 years.
1:06:48
I mean, that is unbelievably cool. Ian Cassel: Insane. Yeah. It is.
1:06:54
Yeah, you don't see that in the news headlines. I mean, and that's yeah.
1:06:56
To say it as you know, 98% of news headlines are negative and that's why if there's any news junkies out there, they're usually miserable people because 98% of news is negative, but no, I agree.
1:07:07
Jim O'Shaughnessy: Yeah, absolutely.
1:07:09
I want to ask you about a tweet that you actually had pinned.
1:07:11
I don't know if you still do, because I didn't look today, but you tweeted it on May 11th and you were talking about micro and macroeconomic factors.
1:07:21
And you said they look troublesome.
1:07:25
And so I don't really look at macro at all.
1:07:30
Do you bring that into your process? Ian Cassel: Yes. Yeah.
1:07:34
I posted that to MicroCapClub.
1:07:35
I sent it out to our, all our members that are part of the community.
1:07:38
Just because MicroCap space has been going through a drawdown and just trying to create an anti-fragile mindset as well as a portfolio.
1:07:50
And I kind of wrote that in a journal and then I sent it out to everybody and I got a pretty good response from it.
1:07:57
But it was mainly centered around...
1:07:59
If you read through the whole thing, it's basically the fact that I really don't pay attention to macro factors, but it's hard not to during a draw down because you're always going to be looking for excuses of why you're down so much.
1:08:12
And I could find myself even thinking over the last six months, there's probably no other time I can think of where I've thought more about interest rates, more about inflation...
1:08:24
Not I actually thought about it, but just kind of front and center of my mind, more about inflation, more about Elon Musk, more about a bunch of other things that really aren't going to matter in the end.
1:08:34
And instead of that, invert that and find companies where all that stuff doesn't really matter.
1:08:41
And what I find is what I think more and more about macro, I get more and more short term minded.
1:08:46
And that's one of the big, I think negatives about drawdowns is when you see your portfolio going down every day, you don't want to lose any more money.
1:08:56
So you start making irrational decisions.
1:09:00
If you're a concentrated stock picker me, you start micro imagining your positions too much.
1:09:05
I kind of figure, as a concentrated investor, you're your positions, you should hold them like a tube of toothpaste.
1:09:10
You can't squeeze them too tight.
1:09:13
You got to let them breathe a little bit, because these aren't perfect companies either.
1:09:16
And so a lot of times you're like, what do I think they can earn next quarter?
1:09:20
That's not how I invest, but that's what you start thinking, because you don't want to be down another 20% if they report a bad quarter, because you're already down 20%.
1:09:28
So I mainly wrote that just to kind of frame up a scenario just to get people to think clearer, always think out two, three years, not to the next quarter. Jim O'Shaughnessy: Yeah.
1:09:38
Well that's great advice. I agree.
1:09:40
And I think that temporal arbitrage is a real thing.
1:09:45
And day to day in the market, even when we were all still going to the office, I didn't never had a Bloomberg in my office.
1:09:55
I never had a TV in my office.
1:09:58
I had [inaudible] all day long.
1:10:00
And it's so much better for you.
1:10:03
Actually, in my opinion, it centers you far better because you're not overreacting.
1:10:09
Because mostly in my opinion, if you're reacting to something that happened today, that's pure noise, and over five, 10 years, that noise might turn into a signal that's right, of course. But it might not. Most noise doesn't.
1:10:26
And so temporal arbitrage is really simple. You're arbitraging time.
1:10:31
I always say to young people, you are time billionaires and you should take advantage of it.
1:10:39
This is such a precious gift you have right now.
1:10:42
And a lot of people didn't do it and they're hurting now and you can do that. So I love the idea.
1:10:49
I'm also reminded of what PJ O'Rourke, who died recently, sadly said.
1:10:55
The quote was something this, "Microeconomics is what economists are specifically wrong about.
1:11:03
Whereas macroeconomics is what economists are wrong about in general." Ian Cassel: Yes. Yeah.
1:11:11
It's so true and that's where you get into trouble because as a stock picker, which is what I am, when I start turning myself into a market strategist, it's just not beneficial because even professional market strategists are wrong more than half the time.
1:11:24
So what am I going to do about it?
1:11:26
So that's why I to just boil it down to keeping a two or three year timeframe in a drawdown.
1:11:31
If I think my businesses can grow, earn more money and not dilute me over two years, there's nothing to do.
1:11:39
Jim O'Shaughnessy: Bingo.
1:11:40
And it's people, as Ben Goodspeed, who wrote The Tao T-A-O, that I talk about a lot.
1:11:50
The Tao Jones Averages is way back in the dark ages I think of the late seventies.
1:11:55
They had this great quote, which is, "Don't confuse activity with effectiveness."
1:12:01
And some of the most effective people that I know are not running around with their hair on fire.
1:12:06
As a matter of fact, everyone that I would put into the category of super effective people that I've had the pleasure of meeting or working with are the opposite of that.
1:12:15
It's just like, okay, we'll see the Dallas farmer, right. We'll see, we'll see.
1:12:21
It's just a better way in my opinion, to lead your life.
1:12:27
I can't believe it, but we are bumping up against some of our time constraints.
1:12:31
I wanted to get a chance to ask you about the article that you wrote, which you titled, What is Chasing You?
1:12:39
And you said in it that, "Fear continues to chase you." Talk to us about that.
1:12:46
I found that really interesting. Ian Cassel: Yeah.
1:12:48
I wrote that article, I think a couple years ago now, I'm trying to remember. It was one of those...
1:12:53
You write quite a bit, there's certain things that just kind of fall off your pen or keyboard very easily.
1:12:58
And that was one that just kind of streamed out of me.
1:13:00
It was just one of those posts that I was reflecting on kind of my, not only career, my life up to this point and just thinking about the ebbs and flows of that and just how things change from where you just want to be successful, to where you want to be a good husband, to now even, I think the stage where that ended was be a great father.
1:13:24
And that last stage where I was at, where I ended that article was, as human beings and me personally, I'm definitely inadequate in certain ways.
1:13:33
I know areas where I need to get better and I have young kids, six and four.
1:13:37
And so what chases me is just I still have time to change who I am before they know who I really am.
1:13:43
It's kind of one of those things I can still change, which areas because they're not old enough to know where I'm delinquent yet.
1:13:49
And so that's kind of how I left it off.
1:13:53
We all have those vices where all right, soon enough, they're going to be old enough to see that dad's this way.
1:13:58
And I got to change that.
1:14:00
I'm self-aware about that. So that was that fear.
1:14:03
Jim O'Shaughnessy: I love that. Sadly.
1:14:06
I'm at the stage where I'm trying to hide those things from my grandchildren now [inaudible] in my children.
1:14:16
But I find that oftentimes that's what my grandchildren like about me. Ian Cassel: Yes. Jim O'Shaughnessy: Papa.
1:14:22
You just laugh all the time. And you're so funny.
1:14:25
Ian Cassel: I think you and I are a lot that way.
1:14:31
And you don't see yourself... I think you're 62. I'm 41.
1:14:36
And I still think of myself as that 23 year old.
1:14:39
And I only see myself older is when you see your kids or in your case, your grandkids getting older.
1:14:44
That's only time I really acknowledge father time is by seeing them, and not myself. Jim O'Shaughnessy: Yeah. Yeah. Yeah. Well, it was funny.
1:14:53
My wife and I were talking about it the other night and I said Patrick who...
1:14:56
I was 24 when Patrick was born my oldest.
1:15:00
And when he turns 40 in three years, that will freak me out more than him.
1:15:05
Ian Cassel: Because- Jim O'Shaughnessy: Like, I'll have a 40 year old son.
1:15:10
I remember when I was 40 and it doesn't seem like that long ago. Right? Ian Cassel: It doesn't.
1:15:18
Jim O'Shaughnessy: But my wife being the voice of reason said, "But the upside we're the same age."
1:15:24
She said, "But the upside is, we'll only be 64.
1:15:28
So when you get up into this area of age, 62, 64, 0 difference. No difference at all. Ian Cassel: Yes. Yeah.
1:15:36
Yeah, and all of a sudden it's like, even me, when you were 20, you thought somebody was 40, oh, they're old.
1:15:42
Now that you're 40 or even 60, it's like, eighty's not old.
1:15:46
What are you talking about?
1:15:47
Jim O'Shaughnessy: My mother used to say that old is always whoever is 10 years older than you. Ian Cassel: Yeah. Truth.
1:15:57
Jim O'Shaughnessy: Oh, man. Okay.
1:16:00
So this has been fantastic.
1:16:02
Thank you for sharing all.
1:16:04
I mean, this is one where I bet the transcript gets a lot of reads because you gave a really clear, concise and intelligent way to...
1:16:15
I think will help investors who are not a quant like me and saying, "You can't handle the algorithms and you don't have to."
1:16:23
That's another thing I've changed in my mind about it's there are a million paths to heaven.
1:16:28
And the important thing that you've got to do in my opinion is find what's right for you.
1:16:34
And read a lot, listen to podcasts like this.
1:16:40
Note what resonates with you, write it down, get a process that's important I think, but make that process something that's right for you.
1:16:54
And that's your way to succeed in my opinion, you're not going to succeed by aping somebody else.
1:17:00
I don't think, because it's just, you're inauthentic to yourself. Ian Cassel: Yeah. And I do understand.
1:17:07
It's great to hear you say that, because you're a quant.
1:17:09
I view it very much an art form, especially if you're getting into stock picking too.
1:17:14
I view my [match] racing as an investor like a canvas.
1:17:19
When I started out with investing, I was a story stock investor.
1:17:22
So that was one shade of paint.
1:17:24
And then I actually got into precious metals and junior exploration stocks for three or four years.
1:17:29
And I kind of learned how to do that.
1:17:30
And really in 2008, nine, I started focusing on GARP type of scenarios and then life sciences and today the portfolio's and eclectic mix of all those things.
1:17:42
It's all these colors dispersed and my opinion's not done yet.
1:17:46
I really hope that I'm not investing the same way five years from now, but it's going to have shades of color from the past, all intertwined in that painting, but it's mine, it's my painting.
1:17:57
It's not for somebody else.
1:17:59
And I think everybody else's investment journey, it's similar to that. Jim O'Shaughnessy: Yeah.
1:18:05
I love that metaphor too.
1:18:07
We did pretty well with a thing called canvas.
1:18:10
Ian Cassel: Yeah, exactly. Yeah.
1:18:12
And I'm not being paid to say canvas.
1:18:15
Jim O'Shaughnessy: But actually that's true even for quants, right?
1:18:20
I mean, if you looked at the first version of my book and you look at the current version of the book, they're very different.
1:18:25
Same foundational things, yeah, but we found better and better ways to get at things like value.
1:18:33
To get at things like financial strength.
1:18:35
So we're continually evolving as well.
1:18:37
We just paint in a different kind of painting.
1:18:41
And that was always one of the little things that I always wanted to do was commission a mural or a group of canvases with the theme being the history of the ideas of progress.
1:18:55
And if you did it, I think it's like one of those things like you said, "If you were looking at your painting, you can see how you grew and changed as an investor."
1:19:05
And I love the metaphor because yeah, that's what we do. All of us do that.
1:19:12
And to be aware again, self-awareness and you are very self-aware, which kudos, is like, don't be...
1:19:22
You say fear is always chasing me, but you're aware of that, right?
1:19:26
And it's the people who go, "Afraid I'm not afraid, come on, man."
1:19:31
Human beings are emotionally based creatures.
1:19:34
And the emotion at the core level of our programming is fear.
1:19:41
And so unless you understand and can deal with that, it's always going to keep biting you. And so look at you, Mr.
1:19:47
Self-aware my God, you're going to ascend.
1:19:51
You're going to be a kind of lighting- Ian Cassel: I don't think so.
1:19:55
Jim O'Shaughnessy: And that's going to be your final thing.
1:19:56
Your kids will be waving and saying, "Daddy, come on. Light."
1:20:00
Ian Cassel: I doubt not that.
1:20:01
Like I said, you talk to my wife, she might give you a different perspective.
1:20:06
[inaudible] Jim O'Shaughnessy: No.
1:20:08
Whenever anyone gives me a very puffery introduction, I'm like, will you come and introduce me to my wife of 40 years please?
1:20:16
Because she doesn't see things that way. Ian Cassel: Exactly.
1:20:21
Jim O'Shaughnessy: All right my friend, we have a standard question we give everyone at the end of this, where we're going to wave a wand, make you the emperor of the world, just for a date, can't kill anyone. So [inaudible] on that.
1:20:35
You also can't put anyone in a reeducation camp, so that can't happen either.
1:20:39
But what you can do is we're going to give you a magic microphone that you're going to speak two things into it.
1:20:46
And you're going to incept those ideas in the minds of every human on this planet.
1:20:52
They're going to wake up the next day, whenever their next day is.
1:20:55
And these two things are going to be at the top of their mind and they're going to think they thought of it.
1:21:01
And they're going to go and start doing that. What do you got for me?
1:21:05
Ian Cassel: I knew this question was coming because I've listened to enough of your podcast to know that this question was coming.
1:21:11
I thought of one thing and I hate to make it be one instead of two, because you're the boss of this podcast.
1:21:16
But I couldn't think of anything after I thought of this one, because I think it's definitely number one front center right now, for me just thinking about and reflecting on it. And it's pretty simple.
1:21:27
It might sound corny, but whenever you think something good or positive to say it. That's it.
1:21:36
And I know again, getting back to negativity.
1:21:40
It's there's so many negative things all around us.
1:21:43
You're thinking negative thoughts and you're so prone to just let that come out of your mouth.
1:21:48
And so there's very few times I find where I think a lot of positive things, but I just don't say it or I don't tell the person.
1:21:55
And that could be when you think about, wow, my wife is beautiful today or my kids, they're great.
1:22:02
I should tell them I love them.
1:22:04
But you just don't actually say it to even whether it's colleagues or your boss that did a great job on something where you were thinking of it, but you didn't say it.
1:22:12
And it's something I've been trying to do over the last year or two, is every time I think something good to actually say it.
1:22:19
And I fail at that every day, but I think if people would do that and if I would continue to do that and do it more, I think it would be amazing just how that would impact the relationships in your life, from business to family, to everything.
1:22:32
Just that momentum that would create in your life, just by being more positive and letting people know those positive thoughts, as soon as they just spark into your head to let them know that.
1:22:44
Jim O'Shaughnessy: You know what, I'm going to give you a buy because I love that one.
1:22:48
That one alone, if everyone could...
1:22:51
Because again, I am absolutely in the same corner as you are.
1:22:56
You forget that sometimes you don't have enough time, and sometimes people that you love die.
1:23:05
And you're just bereft of the fact that you didn't get a chance to tell them that you love them, to tell them how much they meant to you.
1:23:14
And like that, I got on that kick a while ago too.
1:23:16
And it's really is kind of transformational because a lot of people think, well, you know I feel that way.
1:23:24
No, they actually don't and- Ian Cassel: Yeah, right, exactly.
1:23:28
Jim O'Shaughnessy: And hearing it, is just like, man, thank you.
1:23:33
Like, wow, where did that come from?
1:23:35
And people are so used to maybe somebody's trying to get an edge on them or something.
1:23:43
That's so awful that people recoil a little bit, when you say something really nice that was not asked for, was not anticipated.
1:23:53
Makes people feel really absolutely great. Ian Cassel: Yeah. Yeah.
1:23:57
I think it's just a powerful concept.
1:23:59
I know it's one of the things that I need to work on is, it kind of reflects from investment to life is I'm a very concentrated investor.
1:24:09
If there's turnover in a portfolio, I know that I'm probably going to sell some stocks that I own today, which is hard because I'm building relationships with the management team.
1:24:18
So those companies, so it feels very transactional.
1:24:21
And I know I'm marrying these companies and 80% of the time it's going to end in divorce.
1:24:25
And it's just a negative mindset to go into it.
1:24:28
And so I have to make sure that type of call it ruthlessness to some extent, that doesn't destroy empathy in my normal life, to where everything's just black or white, black or white, black or white.
1:24:40
And so I have to create these things in my life to where, hey every time I think my wife's awesome, I got to tell her I love her.
1:24:47
Not just me thinking it or I should have said it.
1:24:50
I know I'm lacking in that and I need to express that more.
1:24:52
Jim O'Shaughnessy: I think that's great.
1:24:55
I mean, we all my friend, our works in progress and the illusion of, or the metaphor of the canvas is the right one and just a little bit better every day. Right? Ian Cassel: Yeah.
1:25:12
Jim O'Shaughnessy: And all of a sudden wow, how did that happen? Ian Cassel: Yeah. Exactly.
1:25:17
Jim O'Shaughnessy: That is how that happened. You're on Twitter.
1:25:20
How do folks find the rest of your stuff?
1:25:22
We'll put it all in the show notes. Ian Cassel: Yeah.
1:25:24
You can find me on Twitter.
1:25:26
My name is the handle, Ian Cassel.
1:25:28
You can find me on microcapclub. com.
1:25:32
The website for the Capital Management firm is if. capital.
1:25:38
That's the name of the website there.
1:25:40
And just you said, Jim, I always had to close the new investors in there, just so the right people would self-select in.
1:25:45
So I was like, [inaudible].
1:25:47
Jim O'Shaughnessy: I love it.
1:25:49
All right- Ian Cassel: But yeah, that's how you get in contact with me.
1:25:52
Jim O'Shaughnessy: Thank you so much.