We Study Billionaires - The Investor’s Podcast Network - TIP606: Multi-Bagger First Principles w/ Ian Cassel

Starting point is 00:00:00 You're listening to TIP. On today's episode, I'm joined by Ian Castle to discuss multi-bagger first principles. Ian Castle is a full-time microcap investor and CIO of Intelligent Fanatics Capital Management. He's also the founder of microcapclub.com. In this episode, we cover Ian's investment journaling and reflection process, how we can discover who we are as an investor, what Ian learned from investor Tony Deiden, multi-bagger first principles, and a few case studies on multi-baggers? How high inside her ownership doesn't necessarily correlate with stocks that outperform the market,

Starting point is 00:00:36 how to effectively average down in a position and so much more. It's always great bringing Ian on the show, and I've really appreciated the opportunity to chat with him about multi-baggers. With that, I bring you today's episode with Ian Castle. Celebrating 10 years, you're listening to the Investors Podcast Network. Since 2014, we studied the financial markets and read the books that, influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Clay Fink. Welcome to the Investors podcast. I'm your host, Clay Fink, and today I am

Starting point is 00:01:23 thrilled to bring back Ian Castle, Ian, it's such an honor to have you back on the show. It's awesome to be back. I appreciate the opportunity. Well, Ian, one of the things I just really admire about you is how thoughtful you are and how intentional you are and everything you do. It's made it's such a pleasure for me in getting to know you over the past year or so. So with that said, during our previous chat, we touched a bit on journaling. And I'm sure you've thought about 2023 and done quite a bit of reflection on that front. So talk to us about what that process looks like and what sort of questions you ask yourself to improve as an investor. Yeah, well, thank you. I appreciate that. I mean, you should probably talk to my wife

Starting point is 00:02:02 first before you proclaim me as thoughtful. But I appreciate the compliment. And I'll take it. One of the main things I do at year end is I try to analyze my mistakes versus my losses. As microcap investors, you're investing in small emerging businesses. And you're just not going to be right all the time. You know, the batting average was probably going to be 50%. And so that means that you're going to be wrong, you know, more than half the time or around half the time. And you're going to have to accept losses as part of this strategy.

Starting point is 00:02:34 And I'm okay taking small losses and positions where I'm not okay with our mistakes. And what I would define as a mistake is when a loss turns into a bigger loss due to my action or inaction to react quick enough to a circumstance. And so what I try to do and be self-aware about is, okay, what were the losses in the portfolio during the previous year? And how much did my action or inaction create a bigger loss out of that? And so even last year in 20, I guess, I would have been 2022.

Starting point is 00:03:05 I had it outlined that, you know, and I forget what the numbers were, but let's just say, overall, there was a loss of 5%. Well, my mistakes added another 5%. And what exactly did I do or don't do that I can rectify in the next years and rub my nose in it now? So I'm aware of it. So I don't make those same mistakes. So that's kind of how I do it year to year. I'm also starting to do that I kind of did it passively.

Starting point is 00:03:28 I'd like to start doing more actively is sort of that inertia analysis, which I think we'll get into maybe later to where you take your January 1st portfolio as it sits January 1 and you just hold it there, keep that to the side and compare that against what your actual portfolio does through the year, basically taking, okay, if you coffee canned your portfolio January 1 for the next 12 months, you had that compare against all of the actions that you made during the year with that portfolio. And that's another way to compare what types of actions you're doing and how that impacts or hurts your returns, which I think is really interesting. Who was it again that shared that January 1st practice? Was it Nikolai Tangian? Yes, it was Nikolai, yes. I had a quote from here

Starting point is 00:04:14 I wanted to mention from him. You actually just joined our mastermind community for a Q&A, and you mentioned how very few companies end up sticking in your portfolio of, say, three to five years out. You know, you want to hang on to them, but oftentimes they don't earn the right to stay in your portfolio. And there's actually a lot of research that shows that the more we tinker with our portfolios, the more we actually end up hurting our investment returns. So it's such a tricky balancing act. The quote I wanted to share from Tangent is the fewer decisions you make, the better they become. And I just think that's such a powerful quote when thinking about making changes to our portfolio. And once you get in the habit of tinkering, it's so easy to keep tinkering. And it really doesn't feel like a big deal. But yeah,

Starting point is 00:04:58 That's such an interesting balancing act to consider here. And there's always two sides of it, right? There's how much of your tinkering is hurting your returns, but not all your tinkering will hurt your returns. You have people like Andrew from Turtle Creek that they do a lot of tinkering. You know, they're constantly, you know, assessing what intrinsic value is. When it's below intrinsic value, they're buying more.

Starting point is 00:05:18 When it's getting closer to intrinsic value, they're taking it off. So there's lots of tinkering there in that portfolio and that's created alpha for them. So a lot of this is, and I love that quote as well, well, you know, it's just trying to figure out like what part of your tinkering is hurting your returns. And I think that's where journaling can really help every investor is when you make a decision to really journal about it. And you might find that and it might take years for you to actually find this signal in the noise of your past experiences. But if you start journaling now, maybe in two or three years, you'll find that, hey, you know what, I'm really bad at averaging

Starting point is 00:05:50 down or I'm really bad at averaging up or I'm really bad with position sizing, or I'm really bad with X, Y, or Z. And then you can be self-aware about the next time you do that to remember, you know, that this was a mistake you made previous years. And it's one you've made consistently. And that's how you grow and evolve as an investor is doing that. So it was in 2018, you launched your fund, Intelligent Fanatics Capital Management. And of course, you've been investing for much longer than that. But I'm sure the fund itself has been quite a learning experience. And I think after five or six years, you sort of get a sense of what you've got yourself into, the types of investors you want to try and attract. And yeah, it just

Starting point is 00:06:31 seems like a whole different beast. So I'm curious to get your take on what you've learned about managing a fund for this long and maybe what you've learned about yourself in the process. It's been a fun process. I mean, before managing the fund, I was a full-time private investor, just living off my own balance sheet in my portfolio for the previous 10 years. And then the previous 10 years up to that, I was building the portfolio. And, and I, and I, and I was, and, and, I was, I was in school or a student or I did some consulting for a couple years as well. And so to make kind of the leap to managing other people's money was an important one. It's one that I put a couple years of thought into and how to structurally do it because

Starting point is 00:07:10 of my type of investing strategy. It's concentrated. It's a liquid. And just trying to find the right investors. Everybody says that. But I feel like for me, it's really important. And so putting a lot of time and effort into thinking, who are the right investors for me to have alongside me that have the volatility, tolerance.

Starting point is 00:07:26 learns to be able to get through a business cycle, you know, a five to seven year period. And so putting a lot of time into that and really was blessed to find some really good investors, letting the right investors self-select in, which is basically a nice way of saying, scaring people right out the gate with the volatility and how volatile it can be, you know, and then letting the people that are inquisitive after that kind of reach back out and want more information. And so what that looks like for us, I mean, again, we're microcat portfolio investing small businesses that just happened to have a ticker symbol. And what I found is probably 90%

Starting point is 00:08:01 of the investors that are with me today are small business owners or high net worth individuals, you know, and what I found through the years is they understand small business better than financial professionals do. They naturally do the right thing when they should instead of the wrong thing. You know, when we have a COVID trough from the portfolios down, no one's calling, wondering what's going on. Why are we down? They're saying, should we put more in? You know, because they understand kind of business cycles better than financial professionals do. And so we've been blessed to find those types of investors. I mean, we're not an institutional product.

Starting point is 00:08:33 You know, we can't take $20 million of capital from an endowment or things like that. I mean, we're just, you know, it's just not how we're set up. And so we've been blessed with the right investors. And, you know, we've beaten our benchmarks since inception in late 2018. So I'm somewhat happy with our performance, but I think it's really getting started. and I plan to do this for decades to come. And I'm really excited about what the future holds for us. Since we talked about 2023, I know we can't really paint the microcap space with a broad brush just because there's a wide range.

Starting point is 00:09:07 You mentioned $50 million market cap and below and then it goes up to say $500 million or so. So it's a very different type of business. But you're pretty plugged into the space. I'm curious, just the microcap space overall, if there's any sort of themes that stick out in 2020, the impact of higher interest rates, industries that have sort of emerged in the space or have gotten more attention in your network and your community. I'll let you take that in whatever direction you'd like. I mean, it was really a, 2023 was interesting because it was almost like two different years. You know, you like the first part of the year, which was negative inflation was rising

Starting point is 00:09:45 and small caps, microcaps were getting smashed. And you had the nail on the head with your question, And it was really an interest rate thing. When interest rates go up, cost of capital increases, risk comes off. You saw it impact the VC space. Anything small business-wise got killed. And, you know, microcaps were suffering along with that. And then call it October, November, whenever the Fed pivoted, you probably know exactly when that time frame was. Things snapped back the other direction.

Starting point is 00:10:12 All of a sudden, it was risk on. And we've seen a pretty big rally in microcap as a whole starting November into December, where things were probably up 30, 40% from their trough in late October as a whole. Now, when somebody asked me about microcaps as a whole, it's kind of difficult for me to do it with a straight face because I do think the worst way to own microcaps is to own all of them. And so you can you can own the I shares Russell Micro Cap Index, which is, I don't know, 1,500 microcaps stocks and 78% of them are unprofitable. And quite honestly, probably 100 of them are billion dollar plus market caps, even though it's marketed

Starting point is 00:10:48 as microcap. But I think it's the wrong way to invest in microcap is to own all of them. Microcap is the ultimate stock pickers kind of market. You know, you want to be picking stocks in this market, not owning all of them. Let's dive into some of your content here. I read your article titled Active Patience. How about you talk about this concept of active patience and then we can dive into some of the interesting pieces here that I want to, that I took away from it. I wrote an article called Active Patience, and it was one that I started writing a couple months ago. And it's an idea that kind of sparked into my head. I wrote about Active Patience in another blog, maybe five years ago.

Starting point is 00:11:30 And I could tell it connected with people and it connected with me. And I wanted to kind of just expound more on the topic. So it was fun to just spend some time and put together a article that I knew that would probably connect with a lot of different types of stock pickers and active investors out there. And really what Active Patience is is it means knowing what you're looking at. for and doing nothing until you find it. You know, and it's that simple. And really active patience is kind of the end goal for any successful stock pickers to know exactly what you're looking for and have the patience to wait for it. And I think another good way to describe it is actually by inverting it a bit.

Starting point is 00:12:08 You know, I get asked quite a bit by new microcap investors, you know, how to find microcap stocks to invest in. And my answer is probably really annoying because I never, I really usually answered that. question with another question, which is, you know, what type of investor are you? You know, and what are you trying to find? Because if you're a deep value investor or if you're a growth investor, if you're a quality investor, or if you're an oil and gas investor, or a life science investor or a special situations investor, you know, depending on what your time horizon is, your stomach for volatility is, especially the new ones, what I find, new investors, they just don't even know what they're looking for. So it's hard to answer the question on how to find it.

Starting point is 00:12:47 And it sounds like a Yogi Berra quote or something like that. But it's really hard to answer that question. So I think a lot of people go through years or even decades where they don't even know really what they're looking for. They're just kind of just bouncing around from this theme to that theme or this flavor investing to that flavor investing. And so really the idea of around active patience is going through that maturation to figure out who you are, find out what you believe, and then living that out through the portfolio. You essentially just list three stages. Every investor must go through. And it goes to what you're saying there of, what are you looking for? So you have a developing your temperament, which is finding out who you are, finding your principles, finding out what you believe, and then committing to your principles, living out what you believe. So talk to us about these three stages. Active patience isn't something that you're as an inborn skill. You're not born with it. It's something you have to take time and reps and figure out what, it is. And so, you know, developing your temperament, kind of what you said, it's finding out

Starting point is 00:13:47 who you are. And what temperament means is developing kind of your views on risk, time horizons, volatility, position sizing. And it really just means determining the type of investor and flavor of investing you're going to do that kind of fit your natural temperament. So you can consistently and repeatedly have a edge over time, you know, and so it's kind of exactly figuring out, like, are you a value investor? Are you a good? growth investor. Like, what are you? You know, or a combination of both. It doesn't mean you have to label yourself. It just means trying to figure out what area of investing fits your temperament where you can naturally take advantage of other people and the marketplace when your emotions are screaming

Starting point is 00:14:29 at you do the opposite of it, that you know that and realize that. And so I know for me, it's like when you're beginning to investing, it's almost like if you were sitting down at a restaurant for the very first time and you've never eaten food before, which I know is a the stupid analogy because we've all eaten food. But it's kind of a picture of you went into a restaurant, you never ate food before and you're looking at a menu and you have no idea what you're doing. What would you do? You would just start ordering stuff.

Starting point is 00:14:53 And it would probably take 30 or 40 trips to that restaurant before you had everything on that menu. And it would take 30 or 40 trips before you figure out what you like. And then all of a sudden, by the 40th or 50th of time, you know you only like these two things on a menu with 200 things on it. And that's kind of what developing your temperament looks like. You just have to put those reps in and try things. overreach, go too big into a position, get hurt.

Starting point is 00:15:17 Over trust management, get hurt. Accepting some losses as the price of education. And that's kind of what figure out your temperament is. And then once you kind of realize kind of the flavor investing that you fit into, then it's all about kind of developing your principles and, you know, really trying to, and how I would define principles in this case is figuring out the characteristics of business and of people that are mandatory for you to make an investment. And, you know, this can take, again, years or a decade to figure out.

Starting point is 00:15:50 But, you know, the types of businesses, situations that are attractive to you, the types of people that you know that are mandatory for you to trust them and to stick with them over the long term. And I made some references in that article. You know, it took Buffett, you know, 20 years to go from deep value to quality. You know, it took sleep in Sicario, almost a decade to go from searching. everywhere in the world for deep value to finally realizing that it was all about this business model called Scale Economic Shared. It took Reese Dukkah, he mentions taking two decades

Starting point is 00:16:22 where they were investing everywhere. And he's from IGSP. It took him two decades to go from kind of investing in everything to only investing in vertical software companies. You know, it took managers like Turtle Creek, who you interviewed. It took them probably a decade to fine tune the type of business and the type of leader they're looking for before they felt comfortable going from Canada down to the U.S. So it's really about defining what those principles are. And like the last part is really just then kind of committing to those principles and living them out every day. And what I think happens when you start to kind of live out those principles, once you figure out who you are is the world starts to work in your favor. You know, the world starts bringing the

Starting point is 00:17:03 opportunities to you. Your network starts growing. And they know, exactly and they you know people want you involved in their situations or their deals and everything just kind of works in your favor and you know Anthony Deden he I talked to him he's become a friend of mine you know I mentioned active patience to him and he just said yeah it's just like a just like an art collector you know or you're just kind of thumbing through art catalogs and you know exactly what you're looking for then you're going to thumb through these art catalogs month after month year after year until you find that piece of artwork that you want or you find a couple piece of artwork that you want, that you feel you want to add and keep and hold as prized possessions,

Starting point is 00:17:43 as prized assets in your collection. I think that's a good way to think about active patience as well to get to that point to where you know exactly what you're looking for. The food analogy I really, really liked. And it's just tying all these ideas together that we've talked about in our previous chat, the start of this one, thinking about the maturation of an investor, thinking about reflecting on 2023 and and the mistakes we've made. And it really resonates with me. You know, like say I've been investing seriously for five years or so.

Starting point is 00:18:15 And each year you sort of pick up these really major lessons and it really changes you when you make mistakes and you reflect on those mistakes and you really just kind of hone in, narrow down what it is exactly you're looking for and what actually works in markets, given your temperament, what works for you, given your temperament and your skill set too. Yeah, it's like you just have to, and you can't like force it too much. I mean, all you can do is put tools around you like journaling to learn from your own mistakes, whether that's the inertia analysis we talked about. And, you know, just try to, try to push it as fast as you can.

Starting point is 00:18:51 But some of these lessons, you know, they can only be learned over time. You can only figure out who you are over time. You can only figure out your principles. I mean, it took me, I think I mentioned that article too. I mean, it took me like 15 years to develop kind of like my top down strategy of of what I'm looking for with scarcity and tailwinds and undiscovered and intelligent fanaticism. It took 15 years to come up with like a bottom up formula that I use around, okay, I want to find businesses that can grow through a recession.

Starting point is 00:19:18 I want to find businesses with a good balance sheet that can endure through a bad time. You know, I want to find things that are at evaluation that I think can double over three years. You know, it just took 15 years to kind of figure out like what those principles for me should be. And I think it's a mistake to try to push too hard. It's just going to happen when it happens. And as long as you keep at it, like a lot of people are listening to this, you know, it'll take five years. It can take 20 years. But I think once you're at a point where you know what you're looking for, patience becomes an asset because you know it's only a matter of time until you find something.

Starting point is 00:19:51 And it doesn't matter if that's three months from now or three years from now when you find the next thing. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using.

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Starting point is 00:23:54 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. be. All right, back to the show. Bill Miller calls the mistakes in the markets, tuition payments, and oftentimes they're very expensive, but I think if you learn from them, they're usually worth it. You mentioned Anthony Deedon or Tony Deedon. I'm curious to get more insights. It's interesting running into someone like you who are some of your mentors that you've learned from. So what have you learned from, Tony? Yeah, I mean, he's, I think he's done one or two public interviews ever. You can find it on YouTube.

Starting point is 00:24:33 He did one with Real Vision. Maybe he's going back four years and it has like 1.7 million views. And it's an incredible, it's an incredible interview because it lasts two and a half hours. And just the stories he tells and how he thinks about investing. And this is a gentleman that I don't invest like him. He's a different type of investor than most of the people that are probably going to be listening to it. But I think there's, you learn the most by listening to investors that invest successfully that invests differently than you. because it shows you your own holes in your own process or things that you could add to your process that can create alpha for you.

Starting point is 00:25:09 So I think a lot of people just resonated to what he was saying, even though a lot of people don't invest like him. And one of the areas that we did connect on that we both agree 100% on is this idea of scarcity. You know, in trying to find these businesses, these one-of-one businesses that just happen to be publicly traded that have a good business that have great management where there's not, it's not one of 100 U-Cass. companies that are, you know, selling the same product or service, just marketing a little bit differently or better. Trying to find these really unique businesses. And that's what I try to find in the microcap space. And that's kind of the first area that we really connected with. And it's not like I talk to them every day, but, you know, it might be once a quarter we get on a Zoom and we just chit chat for a couple hours about investing and that type of thing. It's been a good relationship.

Starting point is 00:25:52 Is there a difference between a monopoly and a one-of-one business? I think that a one-of-one business, it doesn't mean it's like the only one-one business. It doesn't mean it's like the only one doing what it's doing, but it might be the only one doing how they're doing it. If that makes any sense. And I think another key part of that potentially, I think, I don't know if it was you or someone else,

Starting point is 00:26:13 you know, when Facebook went public, they were the only public social media company, but there are probably other social media companies that aren't public. So institutions, they want to get exposure. So I think that might be one of the big differences is one of one business that is the only one that's public,

Starting point is 00:26:29 might be one of the distinctions. Yeah, I told you that story. That was a big winner I had back in, when was that? That was like 2010, 11. K Pasa was the name of the company. It was the only public social network that was out there. And the stock went from one to 12 just because it was the only one. And institutions had to have exposure to it.

Starting point is 00:26:47 And it wasn't as easy to get exposure in private companies as it is today. But yeah, no, I'm trying to find these scarce businesses that are run by exceptional people. you know, and I really love it if you can find something where it's in a trend, it's in a theme that's growing, has a tailwind, where it's not only the only public company in it. And a lot of times you find situations where it might be the only publicly public company in this area. But in reality, it's the eighth best company in that area because there's seven private companies doing it better than they are.

Starting point is 00:27:23 You know, you want to find like the one that's public and the best, which is really a hard hurdle. fine. But if you can, you know, that's really where you can find exceptional businesses, high quality, small businesses. Let's transition here to talk about multi-baggers. You recently did a presentation on this, and many people are interested in multi-bagger stocks because if they're going to be spending a lot of time researching companies, researching management, then multi-baggers help make it worth their time if they're able to find one, two, or three. And you shared in that presentation that 87% of all global equities that went up by 10x or more, a thousand percent or more over the past 10 years were actually microcaps.

Starting point is 00:28:06 And it's definitely this niche space that I think people can naturally sort of shy away from for various reasons. What have you learned in studying multi-baggers? And what do you take away from that stat on 87% of global equities emerged out of the microcap space? In full disclosure, what people would say, well, how many, what percentage of public companies are microcaps? Well, the answer to that is 65%. So you would hope that it's at least 65% of multi-baggers are microcap stocks. But the fact that it's 87, it means that there's a lot more as a percentage. So, yeah, so that was a report that was put out by, and it's free and accessible and downloadable,

Starting point is 00:28:46 Jenga Investment Partners, which is an investment firm out of the UK, did that study. And they found that, yes, 87% of all global equities across all global markets that went up 10x or more over the last 10 years. And that last 10 years would be, I think it was May 2012 to May 22. 87% of those companies were originated out of the microcap and nanocap arena. And I think that's interesting, not only because I'm a microcap investor. I love an opponent of the space. But I think if you talk to most investors about multi-backer. And multi-baggers is a term that Peter Lynch wrote about and his book went up on Wall Street,

Starting point is 00:29:26 you know, and he was talking about how each bag, it was kind of a baseball term. Each bag represents a base and, you know, a 10-baggers, a stock goes up 1,000 percent. So that's kind of where the term multi-bagger came from. But I think when most investors think about multi-baggers, they think of companies like Google or Apple or Nvidia or Netflix or meta. And yes, all those companies have been multi-baggers. I think Google is a 65-baggers since IPO. Meta is an eight or nine bagger since IPO, Netflix, a 200 bagger, Apple, 1,700 bagger,

Starting point is 00:29:57 Nvidia. Now it's probably up to like a 2,100 bagger. That's a 210,000 percent return since 1999. And yes, those companies are multi-baggers. And they're the most, the largest companies in the world, the most own companies in the world. And I think for a lot of people, when they look at companies like that, especially small business owners, which I know there's a lot of people listening to this that own small businesses. You look at companies like Google or meta or Microsoft and it's like you're staring out of business on another planet. It's like these companies are doing 100 billion revenues. They have 100,000, 500,000 employees. It's like the size, the scale, the reach, the global footprint, the profitability. It's like you're looking out of business on Mars, you know,

Starting point is 00:30:42 compared to the type of business that you run, that you manage. And what I think is interesting is, Yes, those companies are multi-baggers, but a majority of the multi-baggers that occur in the public marketplaces don't look like NVIDIA and Apple and Google. They look like businesses that are probably a lot like yours, the businesses that you run, that you manage. They're a $5 or $10 million revenue business that's slightly profitable, that they can turn into a $30 or $40 million business and make more money. That's what the real multibaggers in the public marketplace look like. They're these small companies that can just grow revenues, grow earnings, and not dilute. And, you know, that's really kind of the first principles of finding multi-backers is just find a small business that's undiscovered that can grow revenues and earnings and not dilute you.

Starting point is 00:31:32 And in that presentation, I gave a few examples. And I'll just give one just because it's fun to talk about one or two. And I don't own any of these companies. I'm not endorsing any of these companies. I'm just using these as examples of representations of, of the types of companies that are actual multi-baggers. But it's companies like an Arminino Foods. And this is a AMNF.

Starting point is 00:31:52 It's an OTC company. It's probably a 180 million market cap. It's still a microcap stock. And over the last 14 years, it went from a 10 million market cap to 140 million market cap. You know, it's basically a 14 bagger, 15 bagger. And so what did they do? You know, they didn't grow revenues from one to a billion, like the type of stories you read about in articles of the Wall Street Journal. Well, they took revenues from in 14 years from

Starting point is 00:32:19 21 million to 66 million. Well, that's kind of believable, you know, that you could see that happening. They took earnings from in 14 years from 1 million to 7 million. Well, that's not extreme, you know, dilution, 8%. So in 14 years, they took the business from 21 million in sales to 60, earnings from 1 to 7, 8% dilution. And that's a 14 bagger. That's a 1400% return in 14 years and that company is actually the U.S. market share leader in Pesto sauce. So they have 65% market share and producing Pesto sauce in the United States, you know, and that's not some AI play. That's not some huge story stock. But that's just another example. Another funny example is a company like Bioscience, which is up in Canada. So in 14 years, that company was a 14 years ago,

Starting point is 00:33:08 that was a 700,000 market cap. That's not millions of market cap. It's a 7,000 market cap. It's a 700,000 and now it's 90 million. So it's still probably like a nano cap. And what they did was they enlicensed a product up in Canada for iron deficiency that they now sell in Canada. And revenues over 14 years went from 1 million to 28 million, not one to a billion, but just 1 to 28 million. earnings from 0 to 6 million, zero dilution. And that's 130 bagger stock. It's 130 bagger stock in 14 years.

Starting point is 00:33:40 And it's still a 90 million market cap. that no one's ever heard of. And again, this is just a representation of what, like, kind of what real multi-baggers look like in the public market space. And so that's what I like to remind people is like a lot of the, a lot of these companies that multi-baggers simply a company that can go from 10 million to 30 million in sales and go from $2 million in earnings to $5 million and just not dilute me. Many in the audience are going to be aware of Chris Mayer's book, Hunter Baggers.

Starting point is 00:34:08 And one of my biggest takeaways from that book is understanding the twin engines where If you're looking at a quality business that's well known, oftentimes it's going to have a high multiple and you're not going to get any expansion. But the magic sort of happens when it goes from what you're looking for undiscovered. So it's trading at a pretty low multiple. They expand earnings. They become discovered. So you're getting that tailwind of the earnings growth is when you get that twin engines. And when the multi-baggers, a lot of them are coming out of that. You want to find growth and value. You know, that's how you get rich. You want to find the companies when their value transitioning to growth. And so it's the double lever of multiple expansion on earnings power. I just recorded an episode on Willis Johnson's book. It's called Junk to Gold. It's on the growth story of Copart.

Starting point is 00:34:59 Such a fascinating story. I looked at their IPO. They IPO to 94 at around a $75 million valuation. Today, the value of the company is $45 billion. and it's just been a slow and steady year in and year out. They grow revenues. They grow earnings. Obviously,

Starting point is 00:35:16 you've become more discovered over the years as their consistency is being appreciated. And a couple things are interesting about this sort of case study of a multi-bagger that's played out over decades and just been a consistent winner. And if you would have bought it at any point, you would have found yourself with handsome returns over time with patience. So one of the first things that stands out to be about Copart is this is not a sexy business. They own a bunch of junkyards. They help people sell beaten up cars and, you know, it's not an AI play like you mentioned there.

Starting point is 00:35:46 And another thing that was interesting to me about this story was they obviously definitely understood capital allocation, the value of a dollar and minimizing expenses, just all the things you like to see in a management team. But when they find that great opportunity, they were actually willing to issue equity, which I found quite interesting because you put, obviously you said three points there, grow revenues, grow earnings, not dilute me. Copart along the way, it's tough to find data on this without looking up every single filing, but it seems that they did do at least a decent amount of dilution relative to a lot of the

Starting point is 00:36:21 multi-bagger case studies you'll find. So talk more about dilution and how this can be a tricky thing to play when you're investing in a company that is diluting. Well, I think the tricky part, and it works in coparts and other circumstances when it's accretive dilution, if you want to call it that, you know, a situation where the earnings are increasing faster than the dilution. So earnings power is still, earnings per share is still going up. And the hard part with small microcap companies comparing it is most of the managers just don't know how to do those deals. And they structure them poorly. And the financing they get to do it

Starting point is 00:37:03 is on bad terms. And when it's ultimately done, it becomes very dilutive to earnings, you know, even after, even if it's a creative acquisition. And so it's hard to find, you know, a management team that knows how to put a good deal together and how to finance it correctly. I guess that's how I would answer that. Makes sense. And part of it, too, is just managers that understand capital allocation can be more

Starting point is 00:37:26 rare than some people might expect, given that they're business owners. Yep. Yeah, 100%. In your multi-bagger presentation, I believe you talked about Expell. This company was pitched in your community by Paul Andriola. And Kyle had him on our Millennial Messing Show. It's a great guy, very passionate investor, also searching for multi-baggers. And I had this, I pulled this quote from your presentation that you pulled up the chart of Expell.

Starting point is 00:37:54 And it really points to that twin engines where if you look at the, I'll share your quote here. If you look at this chart, the first two-thirds is really a misunderstood company that just kept growing revenues and growing earnings and not diluting. The last third of the chart is when everyone at the same time discovers that this is a great business. And the Expell chart is just an amazing example where that business just totally exploded. And you and a lot of other people probably assumed that this business couldn't scale and couldn't get to the size that it did.

Starting point is 00:38:23 So what are some of the other things that really stand out to you about Expell as a case study? You know, Expell is so, Paul wrote it up on the club. at 36 cents back in 2013. I think I went out and visited Ryan, paid the CEO in 2013 in San Antonio. I think the stock was around 45, 50 cents, something around there. And what was interesting about that is like I sat down with them across the table. And, you know, you're putting clear plastic film on, you know, people's Lamborghinis or Ferraris or whatever it is, you know.

Starting point is 00:38:56 And I remember thinking about like, how is this ever going to be scalable? You're selling $2,000 to wrap. the front end of a rich person's car. It's hard to put on. You need a dealer to put it on. You can't do it yourself. You know, how's this ever going to scale? I kind of walked away.

Starting point is 00:39:12 I never bought the stock. And obviously, I was dead wrong. And I love to rub my nose in that because I think that is kind of a microcosm of where kind of the next 50 or 100 backer comes from. It comes from a very misunderstood business that has been growing revenues and earnings. And an expels case, too, not diluting. and it's just misunderstood from the standpoint of this could scale to something much bigger than what anyone thinks.

Starting point is 00:39:39 And it's going to be a unique situation like an expel where they're now the market leader, you know, in pain protection film, you know, globally. And they had to displace 3M, which is not a small company to do that, which is also pretty cool. And, you know, one of the main points I like to make is like whenever you just find a small company that can just, you might not even think it's scalable, but you should take that idea seriously because you never know where that misunderstood business all of a sudden becomes understood. It all of a sudden turns into a great business in everybody's eyes and the multiple expands 3x.

Starting point is 00:40:14 And you have a move that happened like Expell. So it expel is a fascinating one just because Ryan became CEO of Expell in February of 2009 when the stock was at $4. And he maxed out his personal credit cards for $25,000 to pay off some, company debt, bought stock at four cents. And as recently as September of 23, he sold a thousand shares at $75 that his cost basis was $0.40 to $75,000. And he mentioned that taking out all those loans, and even with the benefit of hindsight, probably wasn't the best idea. Yeah, exactly. So it's just fascinating just the value creation there that occurred in a situation like that.

Starting point is 00:40:55 And I guess the point I would make is I'd just take any business seriously that small, growing, profitable, and not diluting. And that last part was key to expel, too. I mean, 14 years taking revenues from $3 million to $350, $400 million, going from basically break-even to earning 50, $60 million in earnings. I think it was 7% dilution across that time frame. You know, and that's, that was a, at its peak, a 2000 bagger. That was equivalent to what Apple's done since IPO in 1981.

Starting point is 00:41:25 And when you talk about what's impressive with something like that, too, is just the leadership. You know, take a company, like Brian, take a company from $3 million to $400 million to have the same leader do that. Like, I don't know how many other, I bet you could only name on two hands, you know, 10, probably 10 or less or maybe 20 or less, CEOs that took a stock up 2,000 percent. I'm sorry, 200,000. Buffett did it. Steve Jobs didn't do it. Ryan Pape did, a little guy out of San Antonio that puts paint protection film on the first. front of cars. You know, and that's just cool, too. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:45:27 it's just shy of $1.4 billion. So people hear Expell and they hear that it's gone, whatever percentage it's gone up, some ridiculous percentage. One of the top multi-bagger stories sort of out there, especially out of the microcaf space. And it's out of $1.4 billion valuation. It's like people will naturally assume that their run is done. The move's been made. And it can't do, obviously, near what it did before, but people just, I think we naturally assume that you can't do well in a name like that after it's already gone up. And that's kind of the trick with a lot of multi-baggers is if you get in, even halfway into their run, you can still end up with a fantastic result on the other side. Well, it's the beauty of microcap investing too. And none of what

Starting point is 00:46:13 I said is an endorsement of expelled today to go out and buy the stock. I don't own a position in it. It's just when we're using as a case study. But that's the beauty of microcap investing. cap investing. You can have businesses that go up 100x, like a biosign, and it's still a 90 million market cap. I mean, that's still too small for anybody to even buy in most of the world, you know. And you can make 50, 100x on stocks that just simply go from a small business to a slightly larger small business. It doesn't have to be the next Google. In fact, the majority of one are companies just like that, like I said before, take revenues from 10 million to 30 million and not dilute me. Can you do it? It's that easy?

Starting point is 00:46:51 you that hard. The one thing that I think that, and one of the reasons I did that presentation was also to get more small business owners thinking about going public because a lot of people are thinking about like, well, why would any small business want to be public? You know, I have to deal with investors and shareholders and SEC and this or that. Well, the one thing that the public markets does better than the private markets and it always will is overvaluing consistency of execution. You know, you could sell toothpicks, you know, and if you grew revenues, year every year for five straight years, grew earnings year every year for five straight years, you're going to trade it 20 times earnings, you're going to be 25 times earnings, selling

Starting point is 00:47:28 toothpicks. The private market's like you'll have to sell that business to Brent Bish or somebody else for three times cash flow. So that's the reason to go public. If you believe in yourself, you think you consistently execute and create more revenues as a small business year over year and earn more money. And the other irony about the best performing stocks and small companies are the ones that shouldn't be public.

Starting point is 00:47:52 They don't need to lean on the capital markets to raise capital. They're producing enough internally generated cash flows to support themselves, and that's why they're getting the valuation they're getting. And so that's the other irony of it. The best public companies are the ones that shouldn't be public. Another interesting aspect with Expell, I think a couple of the things I've learned as of late is be a little bit hesitant to cut your winners entirely

Starting point is 00:48:18 because you don't know how far they might be able to run. And another interesting aspect is just the role of luck. Some companies just find themselves at the right place, at the right time, with the right manager, in the right market. The list goes on. And it's just so difficult to, obviously, to find the next expel. You know, each company is going to have their own growing pains, their own culture, their own business model.

Starting point is 00:48:40 And you can only learn so much from studying it. And it also reminds me, Stig and I, we were recently talking about Nick Sleeps letters, and he's famous for concentrating his portfolio. and just three companies, Amazon, Berkshire, and Costco. And it's so easy to think, wow, like, what a genius. He concentrated into three amazing businesses. Like, why don't I go and go and do that? But then I can't think of any other investors that have done that.

Starting point is 00:49:04 So there's obviously some sort of survivorship bias that's at play there. People don't like to admit it, but like Elon Musk and Jeff Bezos, so much of their success was due to luck. You know, that doesn't take away from all the effort and what they've accomplished in their life. But luck, you can't underestimate the, the factor that played in, especially like company like Expell or any other big multi-bagger too. I asked Ryan Pape that question when he spoke at our event in September. You can find that conversation on YouTube. Just search Ryan Pape and 1500 bagger and you'll find it. It was a great conversation for small business

Starting point is 00:49:40 owners and also investors, but just the principles he talks about. But he mentions luck because Jason Hirschman asked him specifically about luck. And he said that, For them, you thought luck was a big part of it. You know, they were the right company with the right brand at the right time, you know, and he doesn't think they could pull that off today. And so, you know, he mentions that. And I remember asking him on the phone a couple of times just talking about, did you ever think that it would get this big this quickly?

Starting point is 00:50:08 And the answer was like, no. And so here's a guy that knows a business better than anybody that you would expect to say, oh, yeah, this is, I always thought this is going to happen or it's going to happen quicker or this or that. And he was completely rational about it, you know, it ended up. going much better than he thought. And luck was definitely a part of it. And I think getting back to like sleep and Zakaria and owning three companies,

Starting point is 00:50:28 you know, I think what I would say about that, I would reframe it as not to just, it's not like they started their careers 10 years ago and decided they're going to buy Costco, Amazon, and Berkshire. They owned probably 100 other companies, the previous 10 years that they churned through and turned over before they found the three that were worthy of holding.

Starting point is 00:50:49 And so that's how I would frame that. And it's the same thing. That's how I view portfolio turnover for me, too, just because it just takes time and turnover of just your watch list and even things in the portfolio to find the ones that are worthy of truly holding. And you see that happen with Berkshire Hathaway or not Berkshire, but Warren Buffett. And he's probably the ultimate, well, the best investor of our time, best stock picker of our time.

Starting point is 00:51:14 And it took 50 years of owning hundreds of stocks to find. a dozen, which is, I think he owns 12 or 13 that he's owned for 15 years or more. So it's the best stock picker on the planet ever that's owned hundreds of stocks to find 12 that he's owned for 15 years or more. Then you put, you layer on, now I'm trying to do that in small businesses that are more fragile than a large business, you know, and so I'm going to have more turnover than normal because I'm trying to just turn these things over and find the ones that are, have the great management teams that have the great businesses. And some of these small businesses, they go through two or three or four years or two or three or four quarters where they do really well. And then

Starting point is 00:51:56 something changes and you have to sell it. It doesn't mean it was a bad decision to buy in the first place. It just means it evolved in a way that you had to sell it. And so turnover is always a part of kind of a strategy like mine. But I also think it's wrong to characterize even Buffett's approach as coffee can or that there was no turnover in his public portfolio. which during his best years, he was averaging 50% turnover in the public book in his portfolio. And it's not because he wanted to turn it over. It was because it just takes time and turnover to find the few that are worth holding. I also wanted to mention another bias.

Starting point is 00:52:31 He sort of opened my eyes to his attribution bias. I'm just reminded of a Morgan Housel's book, same as ever. He has a chapter called Best Story Wends, and it just talks about how you can have the best idea in the world. but if you can't sell it, if you can't tell a great story, then no one, no one's going to care or pay attention to you. And we hear things in investing, so many things that just make total sense. And it's, it can be easy to sort of be duped. And, you know, you talk with a lot of management teams. I'm sure there's a lot of stories being told on where they're going. And you just have to try and figure out how anchored in reality a lot of these stories are. And it's just something that's so

Starting point is 00:53:09 difficult to do. Many of the listeners might be surprised to learn that, for example, high insider ownership does not correlate with better returns. And this is something we talk about all the time. Look for companies with high insider ownership. And despite that being the case, we know that incentives drive behavior. And incentives are more powerful than we can really wrap our heads around. And Ian, I think you and I both want to invest in companies with high insider ownership, even if the data suggests that it might not matter all that much. So maybe you could talk about insider ownership a bit and attribution bias as well. It sort of gets back to, you know, what you want to be true versus what is true.

Starting point is 00:53:50 And attribution bias is when you attribute too much value to a specific thing that leads to a good outcome. And the example you gave, I had dinner with Jim O'Shaughnessy. I don't know. This is probably going back five, six years ago. We were just chit chatting and he's like, you know, Ian, he's like, you'll read a lot of case studies about how high insider ownership or founder ownership. And they show these charts going up into the right and how it outperforms the normal portfolio. And he's like, most of that data is collected flawed. And they're putting the data together to produce that outcome because that's what they want to believe.

Starting point is 00:54:22 And, you know, for those of you don't know Jim, you probably know him. But, I mean, he started O'Shaughnessy asset management. Top tier quantitative analysis. I mean, all he did every day was look for factors and signal out of the market that he could produce quantitative strategies around. And no one would probably like it more that it would be as simple as just finding companies that have 20% insider ownership or more and just buying those and holding. And so he's looked at all analysis and he told me at that dinner.

Starting point is 00:54:47 He's like, the analysis shows that it doesn't matter. There's no signal in high insider ownership or high founder ownership, you know, when you look at at the actual data. And it was funny because it kind of put me back in my chair and literally like sit. I sat back and like just sat there for a minute. And, you know, I kind of came to the conclusion for myself that even though as a whole, it might not work to own, you know, all of the. the companies that have high insider ownership or high founder ownership.

Starting point is 00:55:15 But I do think that there's some signal, at least for me and how I invest, because I at least need to know that whoever's leading that business has the lead with the consequences of their decisions. And it might not mean anything as a whole if I was developing a quantitative strategy, but for me and how I invest and how I pick stocks, I need to have that and it will help me hold that business. And that's how I kind of reframed it to myself. But I think attribution bias as a whole is kind of, it's interesting because I think attribution bias is actually how we naturally mature as investors. And I think as when you start out as investing, if you talk to most investors, the way they start out is as fundamental value investors. Because the first thing

Starting point is 00:55:58 they learn is accounting. And it's the only thing they know and they just start screen for cheap stocks. And that's the only thing they know. And not realizing that when you are only looking at cheap stocks, you're giving up things on the other end of cheapness, which is quality. But then as you mature and you start growing and you start looking at other things called the other colors of the palette if you're painting, and you start learning, you know, maybe I should care about management. How do you find great leaders and great capital allocators? Then you start getting obsessed with books like the outsiders. Then you start getting obsessed with, okay, I want to find that frugal economy class that works out of, of a strip mall that produces a billion dollar business that doesn't pay himself anything that

Starting point is 00:56:40 buys stock when it's low and uses his equity when it's expensive. You get obsessed with that. And you over-attribute to that characteristic with your own portfolio because you're learning about it. And it's just how you learn. You kind of put too much emphasis on it. And then you go to the next thing and whatever the next thing is, maybe you focus on more of the qualitative attributes or culture.

Starting point is 00:57:01 You start diving into intelligent fanaticism, which was a couple of books that I co-authored, where culture was the promote a thing, you know, and you start doing scuttlebutt, talking to customers, talking to the employees to see if they love to work there. You know, and you start overemphasizing that. And what do you realize, like, over time as you mature is that each one of those things is a puzzle piece, an equally weighted puzzle piece. And you shouldn't be attributing too much value to each one of them. They should be taken as the entirety of the puzzle.

Starting point is 00:57:26 And it just takes years or decades to bring those puzzle pieces together for you to learn. But the only way you got there was overly attributing value to each one of them or else you would never learned it. Anyway, that's my rambling discourse on how I think attribution bias is necessary as well in our maturation as an investor is stock bigger. Howsell has another chapter in his book titled, Risk is What You Don't See, given the number of businesses you've invested in, I'm super curious to get your take on this chapter. We can all see the potential risks that lead to an investment going bad, but oftentimes an investment doesn't pan out for reasons we can't even imagine or reasons we think have an extremely low chance of happening. And Houssel also points out

Starting point is 00:58:10 that crazy things happen all the time just because of the amount of crazy things that can happen. And you turn that out over years, crazy things actually end up happening all the time. COVID-19 being a prime example every 100 years or so, a pandemic is eventually bound to happen. So from your experience, what are some of the ways in which investors can get blindsided by risks they can't foresee? And what's that look like from your experience? Yeah, it's a good question. I mean, I think when you buy a stock, you're always betting that the situation is going to get better, not getting worse.

Starting point is 00:58:43 And I know for me, even, it's easy to just start thinking about like how much better the business can get. And you almost forget about that, you know, the business can get worse. And that's the big risk. And it's actually a risk you see coming, you know, the business is going to get worse. What you don't see coming is what causes it. And you see it a lot. in microcaps where, you know, with a small microcap, it's a domino effect of small things happening

Starting point is 00:59:10 that leads to this bad outcome. You know, it could be a management overspending in a certain area, taking their time and their resources and their eye off the ball of a core business that's profitable. And all of a sudden, you see this core business start to deteriorate. Profitability declines. Investors get anxious. They sell it down. It gets worse. Management has to raise capital at a bad time, dilution occurs, goes out another 30%. And so it's like this domino effect of a bunch of small things happening and all of a sudden, everything happens all at once, and it just becomes a disaster.

Starting point is 00:59:45 And so for me, what I get out of that, you know, the risk of what you don't see coming is just being aware of those dominoes and being fully aware of when you start seeing one or two of those dominoes fall, that this could lead to a very bad outcome. And it happens quite a bit in Microwcat, to be honest with you, because these are small businesses and one thing leads to another. And it happens slowly and then all at once is as the saying says. Plus, they can be pretty illiquid.

Starting point is 01:00:11 So the smallest things can impact one earnings miss. And then one investor doesn't like it. And the stock is gaps down 10, 20%. Speaking of stocks being down, you had a recent article also on averaging down. We talk a lot about averaging down as value investors. You know, it's easy to think when a stock goes down. its better value. But sometimes the stock, the market's not always dumb. Sometimes the stock going down is the market's trying to tell you something. So how can we successfully average down

Starting point is 01:00:42 when stock prices are heading that direction? Yeah, I mean, I think some of my biggest mistakes is investor have been averaging down. And I'd much rather average up. And you can still make mistakes doing that. But when it comes to averaging down, I forget who it was. Oh, is John Hempton wrote an article, the famous short seller. You wrote an article about averaging down. It was really good. And he mentioned certain scenarios that it was a poor choice to average down. And he mentioned highly levered companies, companies with, I believe, obsolescence risk. Those are the two main ones. And then I looked at those and I added two more categories to it, which was you shouldn't average down into unprofitable businesses and also businesses that are

Starting point is 01:01:24 underperforming. So after like a bad quarter. And so the question is like, when should you average down. Well, when I analyze like the best times I've ever averaged down, it's actually the inverting those four things, those four attributes of when you shouldn't average down. So when you should average down when the business is accelerating and the stock's just dropping. Also, when the business is profitable, there's a combination of all these things. Business is accelerating, the business is profitable, which means they don't need to raise money. So they're not going to all of a sudden dilute you significantly when the stock's down. Number three, they have a sustainable growth trajectory looking out. And number four, they don't have a lot of

Starting point is 01:01:59 lot of debt. And so you really kind of invert the reasons you shouldn't average down. And those will be the reasons when you should. And so you should really only average down when the stock is completely mismatched from the valuation of the business and the business trajectory. And probably the biggest hurdle is, you know, if that business is accelerating and the stock's just down, then you should buy it. You know, and where you get into trouble is when the business is, especially in my hair cap, if you're averaging down into unprofitable situations where the company, is going to raise money and dilute the heck out of you, 30% lower. And the stock never recovers.

Starting point is 01:02:35 And that's where microcap investors get into the, into bad situations. Yeah, it's so interesting with investing that oftentimes you don't realize you made a mistake until the stock is down dramatically. And there are plenty of examples where you buy it, you think it's trading below the intrinsic value, the stock goes down and the intrinsic value may have went down as well. but you still think it's trading at a discount. You have a dilemma on your hands where you're, it feels like there's no great decision no matter what you do.

Starting point is 01:03:05 You're going to regret holding you. You're going to regret selling it too because I realize a big loss. Well, it's easy. It's sort of like it's easy to average down sometimes because it's easy to convince yourself that it's cheap. It's cheaper than it was, even though the situation probably changed. It's a different business than what it was when you bought a 30% higher in a lot of these cases.

Starting point is 01:03:25 Obviously, there's some moments in time when the macro market is pushing down equity prices. And that's the time to decide whether you should be averaging more when it's lower. And you should only be averaging more when it's lower when the markets are down, when that business is doing well. Ian, I always appreciate you taking time to join us. It's always a lot of fun. How can the audience learn more about you, Microcap Club, any other resources if they haven't checked them out already? You can check out microcapclub.com. You can follow me on Twitter. My name is my handle. And yeah, it's an honor to be on the program. I love talking about microcaps. You know, I think it's an amazing space. It's not without its risks. And so where most

Starting point is 01:04:05 people get into trouble is spending time on the 85% of them that are unprofitable. So what I like to point people to is just focus on the real businesses, the ones that are growing, earning more money, hopefully not diluting you. And that cuts out probably 95% of the risk with the space. Great. Thanks so much for your time, Ian, really, really appreciate it. Thank you. Thank you for listening to TIP. To access our show notes and courses, go to the investorspodcast.com. Follow us on TikTok at the investors podcast, on Instagram and LinkedIn, at the Investors Podcast Network, and X at TIP underscore Network. This show is for entertainment purposes only, before making any decisions, consult a professional.

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We Study Billionaires - The Investor’s Podcast Network - TIP606: Multi-Bagger First Principles w/ Ian Cassel

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