Idea Brunch with Ian Cassel of Intelligent Fanatics Capital Management
Ian Cassel on Microcaps, Meeting Management Teams, and Becoming an Intelligent Fanatic
Welcome to Sunday’s Idea Brunch, your weekly interview series with underfollowed investors and emerging managers. If you’ve been enjoying Idea Brunch interviews please follow us on our new Twitter @IdeaBrunchEmail to show your support:) This week, we are very excited to interview Ian Cassel!
Ian is a professional microcap investor and chief investment officer of Intelligent Fanatics Capital Management, a microcap fund he founded in 2018. Prior to starting the fund, he was a private full-time investor for 10 years. In 2011, he founded MicroCapClub.com, a private online community for experienced microcap investors to find new ideas, collaborate on due diligence, and network with their peers. Ian has also co-authored two books: Intelligent Fanatics Project – How Great Leaders Build Sustainable Businesses and Intelligent Fanatics – Standing on the Shoulders of Giants.
Ian, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and your love for microcaps?
I’m 41, married with two kids, and live in Lancaster, PA (the heart of Amish Country). I became focused on microcaps when a handful of tech companies I purchased during the dot-com bubble went straight down during the crash and turned into microcaps. Around this same time while I was in college I worked for a financial advisor. I had to answer the phones when the markets were crashing. That experience taught me I didn’t want bosses and I didn’t want clients. During the dot-com bubble and crash, I turned $20k into $120k and back to $8k. I think this experience either motivates you or demotivates you. I became obsessed with microcaps. Since microcaps are mainly owned by retail investors most discussion in the early 2000s occurred on public stock message boards like RagingBull, InvestorsHub, and Yahoo Finance. I started to build a reputation on these message boards. I also met a few mentors on these boards that helped shape my investment process. One of these mentors allowed me to travel with him to visit companies while I was still in college. When I started traveling and meeting companies, I really fell in love with microcaps. I couldn’t believe an idiot like me could gain access to the decision-makers of a business. When I was a senior in college, I realized I wasn’t employable because I didn’t want to be employed by anyone. I made it a goal to become financially independent as quickly as possible. I got lucky and received an assistantship (free tuition) to go right into graduate school. My real education was the stock market and I just kept learning by losing money and making it back and losing money and making it back. In 2008, I reached the goal of becoming a full-time private investor and over the next 10 years launched MicroCapClub.com, got married, had kids, and lived off my portfolio and balance sheet.
In 2011, I launched MicroCapClub.com because I wanted to see what other smart microcap investors liked and why. Today, it’s a small but active global community focused on finding great companies early. We just had our 10-year anniversary and over this period our membership has profiled 241 companies that have doubled or more since they were profiled on our forum. This means our membership has found and discussed two new companies per month that have doubled or more since MicroCapClub was founded. Today MicroCapClub remains a great source for idea generation and networking, and it is also a phenomenal place to spot up-and-coming talent.
In 2016, I partnered up with Sean Iddings to write two books on Intelligent Fanatics. The term Intelligent Fanatic was first used by Charlie Munger to describe extremely talented entrepreneurs who start a company that grows it into a business that dominates their niche, geography and/or industry. We spent a few years studying intelligent fanatics and wrote a couple of books about them. It impacted my investing process. The smaller the company the more important the CEO, management, and board become. If you want to find great companies early you need to be able to identify great leaders early. This was a fun project that helped fine-tune my qualitative lens.
In 2018, I launched Intelligent Fanatics Capital Management (IFCM). We now work with over 60 families that want unique exposure to the smallest public companies in the world. I’m the largest investor in the strategy. Most of our investors are entrepreneurs and small business owners. I find that these types of investors really understand our approach while also having the volatility tolerance necessary to see it through. Given our capacity constraints, we are not an institutional or endowment-focused fund. Michael Liu works with me full-time at IFCM. He is extremely talented and was the youngest investor to ever get into MicroCapClub.
Can you tell us a little more about your strategy?
We invest in 6-10 businesses and focus on the United States, Canada, UK, and Australian markets. We are looking for undervalued situations that we believe will get overvalued. The way we achieve this is by identifying unique desirable businesses that can sustain high organic growth rates with superior operating margins that institutions don’t own. We want to be the first wave of discovery.
At a top-down level we are looking for the following characteristics:
Tailwinds: They might be geopolitical tailwinds or industry-focused tailwinds or technological tailwinds or a combination of all of them. When you find a tailwind that is hard to stop, and you combine this with a best-of-breed business, idea, or technology, you find an investment that is hard to stop. The tailwind helps us get to our destination quicker with less effort.
Scarcity: The business is a one of one – not a one of a million other companies selling a similar product or service. Great companies always trade at a premium because there are so few of them. Illiquidity is the scarcity of shares. Illiquidity is a powerful driver of price when it’s combined with a great business. Investors are forced to pay up to own shares.
Story: Great stories not only sell books and films, but they also move people. Great leaders are often great story tellers. They use stories to motivate. They use stories to sell their mission and vision. Employees like to work for companies that are making an impact. Customers like to support companies that are doing more than just selling them something. We love to find companies with a great story. Great stories move companies. Great stories move products. Great stories move stocks.
Undiscovered: We invest in microcaps so by definition they are undiscovered. When you invest in undiscovered companies it reduces the downside and increases the upside because every new investor that hears the story can be an incremental buyer.
At a bottom-up business level we are looking for the following characteristics:
A business that can grow through a recession.
A balance sheet that can weather a storm and act with occasional boldness.
A leadership team and organization that show signs of intelligent fanaticism.
A valuation that can conservatively double in three years.
What is the most important quality of a business?
The thing I would highlight is even though we are growth-oriented, the four business qualities above are even more focused on “survival”. When you look at the Fortune 500 list from 1955, less than 60 companies remain on the list today. Ian Davis, former managing director of McKinsey & Company said, “In a very real sense, survival is the ultimate performance measure of a business.” A great book (only 100 pages) is Lessons From Century Club Companies. I think combining growth and survival as a framework is a great way to think about investing in emerging small companies.
In your excellent interview with The Acquirers Podcast, you said the ability to meet with management teams and ask questions is what attracted you to microcaps. What do you look for when meeting microcap CEOs?
We could spend a lot of time on this question, but I’ll try to hit on some high points. Twenty years ago, I fell in love with the microcap space because even a small investor like me could gain access to management. Even today talking to management is the most important thing I do as a microcap investor. Businesses aren't spreadsheets. Businesses are people. I want to meet them.
We love to find CEOs and management teams that have had past success — who have the knowledge and personal resources to backstop their vision. This reduces execution and financing risk moving forward. We prefer the management and board own significant pieces of the business. We want the people navigating the company to have to live with the consequences (good or bad) of their decisions.
Microcap is filled with “hustles” (Brent Beshore term). These are mediocre or even good businesses that aren’t scalable. They either don’t have the talent, processes, or culture to scale – or all three. Great leaders put great people around them. Great teams build companies that can scale. One of the most important things we do is analyze the management team and culture. We do a lot of work into the “team,” not just the CEO. We talk to current and past employees to assess the culture.
We are extremely hands-on with management. In 2021, we had 381 points of contact (email, phone, or zoom) with our portfolio positions. We do this work so we can hold our winners longer and sell our losers quicker.
In your community, there is a big focus on “100-baggers.” What are the necessary ingredients for a microcap investment to go up 100x?
A company that can consistently grow revenues and earnings over a long period of time without diluting you. It’s that easy and that hard.
What is an interesting idea on your radar now?
We own a $200 million market cap company called Cogstate (CGS.AU / OTC: COGZF). I’ll give you the quick pitch.