4 things you must come to terms with as an equity investor

Nov 13, 2023

Ian Cassel is a microcap investor and founder of MicroCapClub. Here he shares some insights on what it is to be a full-time equity investor. There are learnings for everyone here.  

Watch the entire video here

Investing carries its own share of emotional pressure.

It's easier being a full-time private investor when you're young and single, and your cost of living is next to nothing. I don't know how it is in India, but here in the US, when you get married, wives don't want you to rent. They want you to own the house to raise a family in. It's not cheap to have children. So expenses keep increasing.

Then there are the time constraints. Relationships take time – if you want to be a good father and a good husband. So instead of having 24 hours a day to research stocks, you then have 15 hours a day, and then 9 hours.

Everything kind of just gets constrained. Pressures come from everywhere. Time. Expenses. Your ability or inability to pay short-term bills while keeping a long-term investment focus. I'm a long-only concentrated microcap investor, which sounds like I juggle dynamite for a living, to most people. It's a very volatile portfolio, as you can imagine, but I’m used to it.

I think what helped me deal with the pressures was living in a calm place. I live in Lancaster, Pennsylvania. A pretty-low key, rural type of environment, with a lot of farms around this area. What I do for a living is volatile enough, so the lifestyle matters. It's important who you surround yourself with – be it spouse or friends or folks around. Also, having a calm demeanour.

Losses are a part of the investment process.

You can't be an investor and play for perfect, or you'll never pull the trigger on anything. And in fact, most big winners in microcaps aren't perfect looking when you first buy them. That's the reason they're inefficiently priced or cheaply priced. And that's obviously where the opportunity is.

I'm right on my investments for the right reasons, probably less than half the time.

I’m probably right for the wrong reasons maybe another 10% or 20% of the time.

Then I'm just plain wrong for the other times.

The key distinction to make is that losses and mistakes are two different things. If you invest in small emerging companies, you'll always have losses. In fact, if you aren't taking enough small losses over time, it means you're not taking enough risk.

So just because you lost money on something also doesn't mean that you were wrong for making the investment. The real issue is when we turn losses into mistakes. That happens when you don’t do enough of the work, you don’t do enough maintenance due diligence. Mistakes are sort of like unforced errors in tennis, where you know your actions or inactions turn small losses into larger losses. Those are the types of things that I like to rub my nose in and remind myself because I keep making mistakes, even though I've been doing this for 20 years.

Obsess over the right things. 

Obsession can be a good thing, but it can also be bad when you start obsessing over every little detail about a business. About the things that don't matter. Every business has of 2 or 3 main things to pay attention to.

I think the risk to concentrated investors, which I am - I hold 10 stocks in my portfolio, is overthinking your positions, and this can make you more short term. You start thinking that obsessing about positions equals precision. It doesn't work that way. The only thing you should be obsessing over are the key drivers of the business and what could kill your thesis.

In micro and small cap investing, reaction time is important. So what you should be doing is continuously having maintenance due diligence.

A lot of times when stocks are dropping, you start over analyzing every little single detail, and it of steals your courage to act on obvious opportunities that if the stock wasn't dropping, you would have been buying 5 days ago. It's important to be self-aware about where you sit on the emotional spectrum and not let the stock price pull the leash, to kind of use a person-dog analogy.

Luck is a key component to investing.

It doesn’t matter what your strategy is, but as investors, you'll ultimately over a lifetime pass on more winners than you ever let into the portfolio. The longer I invest, the more I realize that only a fraction of stocks out there, and only a fraction of winning stocks, are really meant for you. Your past experience, your diligence, your temperament, your timing, and yes luck, all collide and create a situation where you can build conviction at that point in time. I think that's the interesting thing about luck when it comes to investing in stock picking.

But I think we all suffer from survivorship bias too. We look at folks that have built something big, that are in the top 1% of their field, be it Michael Jordan or Tiger Woods or Jeff Bezos or Warren Buffett, or whatever. We look at what they've done in life, and how they did it and then extrapolate forward. And believe that that's all it takes to succeed. When in reality, there were 10 million other people that probably had the same work ethic and the same skills, but where luck and timing just didn't fall into place for them.

Watch the entire video here

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