5 lessons for full-time investors

By Morningstar |  06-01-21 | 
 

Full-time investor Ian Cassel has some amazing insights for those who want to follow this path. He explains it as he narrates his experiences.

1997 

On my 16th birthday, my parents presented me with a choice. They presented me with $20,000. It could be for my college education. They had also co-signed paperwork so that I could open an account with their financial adviser. The choice was mine.

I had always been interested in money and the stock market. Technology stocks were starting to make daily headlines in the business section of newspapers. I called the financial adviser and he sent me a few analyst reports to review. I bought $5,000 worth of one technology stock. It doubled in two months.

I was hooked.

I filled out applications to a few private and public colleges. I realised I could spend all my money on one semester at a private college or attend a less expensive public university, live at home and commute, work part time, and continue to invest. I chose the latter path.

I was in love with investing.  

2000

I was a sophomore in college and working part time for a financial adviser with over 1,000 clients. My job was that of a glorified secretary who worked on marketing materials and answered the phone. The money I earned was sufficient to pay for my college tuition.

I enjoyed working for the financial adviser. It kept me close to the markets. By my second year on the job, I was having discussions with him about becoming a financial adviser upon graduation. He even agreed to give me some of his clients to get started.  

2000 and 2001

The $20,000 from my parents turned into $120,000 by riding the technology bubble.

It never dawned on me that I was not skilled, just plain lucky. A monkey could have picked winning stocks in that environment. When the technology bubble burst, so did my portfolio. By 2001, my portfolio of mid and small cap technology companies fell so much they turned into microcaps.

The $120,000 was now $8,000.

I was financially and emotionally bruised. Adding insult to injury, my day job consisted of answering calls from emotional clients and calming them down before sending them to my boss. But it is not the mountain-top experiences that dictate our direction, it is how we navigate the valleys in our lives. I made three decisions.

1. I decided to solely focus on microcap stocks.

2. I no longer wanted to be a financial adviser. It is hard enough navigating your own emotions when investing, let alone the emotions of others.

3. My goal from that point forward was to become a full-time private investor. I achieved that in 2008. 

Here are my learnings. 

  • Money is about freedom, not consumption.

A lot of people incorrectly assume that they need enough money to do nothing. You just need enough to do whatever you want. The power is having a choice. The choice might be to work less to spend more time with family, or go back to school, or start your own business, or perhaps even take a job that pays you less but gives you purpose when you wake up in the morning.

One of my mentors is a successful private investor. He works his day job not because he has to, but because he likes it. His non-financial job offers him lots of autonomy, so he can focus on his investing when he needs to. His job also shields him from questions from family and friends if he were to quit his job and ‘retire’. What most don’t know about him is he has grown his portfolio from $100,000 to over $50 million over 20 years. You would never know it. He still lives in the same house, still has the same friends, still has the same life. One of his biggest worries is people finding out what he’s done and looking at him differently.

As you grow your capital you will reach a pivot point when you feel you finally have a choice to do what you want in life. Some of you will choose to keep your day jobs because you love them. But some of you will choose to finally break free from a job and routine that have been holding you back. Either way, you will know what it truly means to have free capital.

  • You achieve financial independence by saving more than you spend, and investing those savings in an area where you have an advantage.

For me, the advantage was microcap stocks, the smallest public companies in the world. For you, it might be another area of the public markets or maybe even real estate, or some other area of expertise. Through skill and prudence, you get to a point where you finally have a choice.

There is a reason why I exclusively invest in the microcap arena. It’s one of the only places in the public markets where a small, astute investor has a clear structural advantage. It is impossible for larger institutions to invest in these small companies until these stocks rise and become more liquid. Great investors don’t follow the institutions; they invest where they are going to go.

  • The true financial test is turning a small amount of money into a larger amount and then supporting yourself on that capital over the long term.

I first read Free Capital in 2014 and immediately connected with it. I could see pieces of my own story scattered throughout the book. It was the first book written for me. I loved how each investor’s journey and strategies were unique. At its core, Free Capital is a book about financial independence and doing it your own way.

Financial independence can be achieved by anyone. The great thing about investing is you can reach your goals in a variety of different ways. Some of the greatest investors ever had almost opposing strategies. Don’t be afraid to be unique. Don’t be afraid to be different. I guarantee your journey won’t be a smooth one. Learn from your losers and draw strength from your winners.

  • Learning and evolving is a big driver of long-term success as a full-time private investor.

If you are investing exactly the same way you did a decade ago, you aren’t growing. Challenge your convictions. Surround yourself with people who share your values but think differently. I run into a lot of investors still talking about the wins they had 15 years ago. Keep learning and evolving.

Several full-time private investors from Free Capital – including Vince, Peter, Eric, Vernon, Taylor, Sushil, and John Lee – focus on U.K. small and micro caps. A few of the investors in Free Capital had to change how they invested as their capital grew. Managing $10,000 is different than managing $1 million, is different than managing $10 million, is different than managing $50 million. Sushil, for instance, only held 10 U.K. small caps when he was younger. As his capital grew, he had to expand the number of companies to 60.

(Did you know that Warren Buffett, Peter Lynch, and many other great investors started in micro and small cap stocks as well?)

I used to invest in six companies, and now I’m in 12–15 companies. If you were to tell me 10 years ago that I would be investing in 15 companies I would have told you that would be impossible. I would have said, “How could someone keep track of that many companies and know them well?” What I would tell my younger self is: As you gain experience you realize knowing every detail about your investments isn’t the advantage. The advantage is knowing what is important and what isn’t.

I own more companies today because I’ve gotten better at focusing on what is important. I can get similar returns without the risks I was taking a decade ago.

  • To be successful as a full-time private investor your strategy and lifestyle need to be in harmony.

Here is a fact that few in the financial world want you to know. Individual investors have an edge over investment managers, advisers, analysts, or anyone forced to prove how smart they are to others. You don’t need to have an opinion on everything. You don’t have distractions. All you have to do is focus on making a few good investment decisions per year and living a great life.

But when you support your family by managing your own capital, it’s a different mental game. If you take a big loss managing other people’s money it hurts your bonus. If you take a big loss when you’re a private investor, your family bears the brunt.

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