2/2/2017 6smarttipsformicrocapinvestors

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ByLarissaFernand|300117| HousingFinance.Thelasthurrah Feb01

RadhikaGuptatakeschargeastheCEOofEdelweiss Jan31
AMC
Ian Cassel is a wellknown, fulltime, private investor. His hunting ground is
Morewomenwillbecomefinancialadvisersinthe Jan31
dedicated solely to micro and nano caps. In fact, in 2011, he founded comingyears
MicroCapClub, an exclusive forum for experienced microcap investors to exchange CanaraRobecoandLICMFannouncechangeinexit Jan31
loads
ideas, collaborate on due
Jan30
diligence, and learn from each 6smarttipsformicrocapinvestors

other.
AbouttheAuthor
LarissaFernandisWebsiteEditorfor
Morningstar.in.Shewouldliketohearfromyou
andwelcomesyourfeedback.
ContactAuthor|ViewarticlesbythisAuthor
(Last3months)
Thislongonly,qualityfocused MostPopularArticles
investor will hold on to his Thepotentialimpactofdemonetizationonresidential
Nov15
realestate
position as long as he is
convinced about his thesis. ShouldyouinvestinPPForNSC? Feb25
Being an inherently risky area 5goodlargecapfunds Dec14

in the field of investing, Cassel believes in deep qualitative analysis and constant 3habitsstoppingyoufrombecomingrich Nov23
duediligencesoheisalwaysawareofwhatheowns. ShouldyouinvestinPPForELSS? Jan05

Hedispensessomelearningsforinvestorsinsmallerfare.
RecentfromthisAuthor
1)Whenitcomestoinvesting,dontbeachicken,beahawk. 3wrongretirementassumptions Jan25

Dont be afraid to say no to 99.9% of investment opportunities. You only need to 3lessonsfrominvestmentgurus Jan17

find one great company, before others, to change your life. Extraordinary returns WilllongtermcapitalgainsbehitintheBudget? Jan03
followextraordinarydiscipline.Aninvestorsgoalshouldalwaysbetomakeasfew
Thebestfundsof2016 Jan02
investmentdecisionsaspossible.Keepyourhurdleratehighandembraceinaction.
Howtogetsmartaboutfinancialplanning Dec30
Chickens will eat anything you put in front of them. They will eat insects, bugs,
meat,fruit,vegetables,fish,and,yes,evenchicken.Theyhavenoselfcontroland
willeveneattheirowneggsandfaeces.

A hawk can see up to 8x more clearly than the sharpest human eye. To put in
comparison,ifyouhadahawksvisionyoucouldseeanantonthegroundfromon
top a 10storey building. A hawks eye is so large that it occupies a big portion of
itsskull.Thehawkknowswhatitslookingfor.

The visual capabilities let the hawk distinguish the size, shape, and speed of the
potentialpreysoitcanrecognize,target,andcaptureitquickly.

Dontbeachicken,beahawk.

Bepicky.

As you fly above the investment world looking for opportunities, develop tools,
strategies, even statements, that you can apply quickly to evaluate opportunities.
Know what you are looking for so you can develop the vision to recognize an
opportunityquicker.

2)Dontbotherfindingthenextmultibaggerifyouarenotgoingtodevelop
theconvictiontoholdit.

Stocksrarelyperforminthetimeframeswepredict,anditswhythemarketonly
works for investors that have a longterm portfolio focus. Performance is never
linear, up and to the right, year after year. You sometimes have to hold onto a
positionforafewyearsbeforeitgoesup100%in3months.

Every multibagger will have long periods (even years) of stagnation as

fundamentalsbackfill,oldshareholdersgetbored,andnewshareholdersenter.Just
like a fine wine, sustainable multibaggers often take their time to ascend and
develop.Ifyoureinvestedingreatbusinessesthatcontinuetogrowandearnmore
money,dontletlullsinstockpriceandboredomscareyououtofthem.

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2/2/2017 6smarttipsformicrocapinvestors
LeeFreemanShorwritesinhisbookTheArtofExecution:

One of the key requirements of staying invested in a big winner is to have (or
cultivate)ahighboredomthreshold.

It is very hard to do nothing but focus on the same handful of companies every
yearonlyresearchingnewideasontheside.

Many of us, seeing we have made a profit of 40% in one of our stocks, start
activelylookingforanothercompanytoinvestthemoneyintoinsteadofleaving
itinvested.Thisispreciselywhylotsofinvestorsneverbecomeverysuccessful.

As human beings, we are very impatient. The hardest part of maturing as an

investorisallowingourselvesthetime.Youcantforceit.Manyinvestorsforceit
bybeingactiveforactivityssake.AsEdBorgatosays:WhatWallStreetperceives
asproductiveactivityisneedlesscomplexity.

Investors tend to overanalyze when stocks are going down (fear) and under
analyzewhenstocksaregoingup(greed).Thehardestpartofinvestingisholding
through these times, embracing boredom and inactivity, and distancing human
natureemotionfrominvestmentdecisions.

3) Learn to differentiate between business performance and stock

performance.

Sustainable multibaggers have certain characteristics: Longterm revenue and

earningsgrowthwithlittletonodilution.Whenyouareholdingontoapositionask
yourselfIsthisbusinessgrowingandmakingmoremoneypersharethanitdida
yearago,twoyearsago?

Istartedbuyingacompanyearly2012whenitwasat$0.350.40pershare.Asmy
convictiongrew,Iboughtmore.WeareinJanuary2017andthestockisstillat$2
per share. On the face of it, this has been dead a dead investment money for 2.5
years.Years!

But, the companys business is almost double the size it was 2.5 years ago. The
stockhasntgoneanywherebutthebusinessisdoingreallywell.Ihavenoproblem
holdingthisstock.Ifthebusinesswasntperforming,Iwouldsell.

Successful investors can differentiate business performance from stock

performanceandcantakeadvantageofthoseinvestorswhocant.

Great businesses have great stocks. Great businesses always get overvalued. Its
important to make investing decisions based on business performance, not stock
performance. Its also important to know the distinction between external stock
market forces driving a stock price lower (buying opportunity) versus business
reasonsyouarenotawareof(youshouldbeselling).

4)Avoidpilingintoapositionatonego.

All my winners had one thing in common, I was always averaging up. Most of my
losershadonethingincommon,Iwasalwaysaveragingdown.

Mybuyingstrategyhasevolvedovertheyears.EarlyonIwouldpileintopositions
too quickly after naively believing what management would tell me. Overtime I
realized giving up a small amount of upside to derisk the investment was well
worth it. I normally buy my positions in thirds as my conviction grows. If
somethingdoesntcheckoutalongthewayImnotstuckinahugeposition.

Ibuymyfirstthirdafterextensiveduediligenceandaftertalkingtomanagement.
I dig through all the filings, industry journals, place some calls into customers,
suppliers etc. Think of this as passing the smell test. Im also making sure I have
amplemarginofsafety.

I buy my second third after traveling and meeting management at their head
quarters. I want to see what their offices look like, the interaction between
management. Is it a dictatorship or a democracy at the management level? Can I
findanemployeewhohasntbeentoldtobenicetomeandaskthemquestions?
Does the company do the little things well? Do they pay attention to detail? What
dotheydrive?Whataretheirmotivations?etc.

I buy my lastthird after the management team does 25% of what they say. The
majority of microcaps over promise and under deliver. You make money on the
ones that under promise and over deliver. It takes time to make sure you are

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2/2/2017 6smarttipsformicrocapinvestors
bettingontherightjockey.Theyneedtoprovethistoyoubyexecuting,sobuying
thislastthirdmightnothappenformonths.Withmostofmywinners,Iboughtthis
finalthird100%+higherthanmyfirstthird.

MypersonalinvestmentphilosophyistobuymicrocapsthatIthinkcanbe510xin
afewyears.Itmightsoundinsane,butIdontbuystockswherethepeakpotential
return is less than 100%. Im look for and buy undervalued companies that have
thepotentialtogetveryovervalued.IfIminitiallybuyinga$0.50persharestock,
ImlikelybuyingitbecauseIthinkitcanbea$5.00stockinafewyears.Sowho
caresifImbuyingmylastthirdat$1.10aftertheinvestmenthasbeengreatlyde
risked by management execution? Even after these small microcaps double, lets
say from $10 million market cap to $20 million, they are still very under followed
andnotevenoninstitutionalradars.

Inallmybigwinners,Iwasconstantlyaveragingup.

5)Successfulinvestingisntaboutbeingrightallthetimeitsmoreaboutthe
abilitytoidentifywhenyouarewrongquicker.

Investing is tough because you have to constantly anticipate how the thinking of
other people is going to change before they know it themselves. This means you
have to buy investments early, before the investment is obvious. But, there is a
thin line between being early and being wrong. If you are constantly buying the
stockloweritislikelythelatter.Ifyoufindandbuygreatinvestments,youlllikely
bemakingsubsequentpurchasesathigherlevels.

Always keep your ego to the minimum. The market loves to humble boastful
investors.

When you find yourself constantly averaging down its normally a sign that your
egohastakenover.Youveconvincedyourselfyouhavetoberight,butyouforget
thatbeingbrokeandrightisthesamethingasbeingwrong.Youregocloudsyour
judgmentandslowsyourthinking.Manyinvestorshavegonebroketryingtoprove
the market wrong, and you certainly arent going to prove yourself right by
throwinggoodmoneyafterbad.

6)Themanagementmakesthedifference.

The smaller the company, the more should be the focus on management and
qualitative analysis. CEOs of small microcap companies tend to wear a bunch of
hats, so their influence is much greater than larger companies. Founders are the
differencemakers.

Microcapinvestingisreallyentrepreneurialinvesting,whichmeansyoureallyneed
to talk to management. Im cautious in saying this because not every small
investorshouldexpecttobeabletocallupandtalktomanagement.ThepointIm
makingisonquarterlyconferencescalls,etc.takeadvantageoftheopportunityto
askgoodquestions.

A qualitative attribute in most of my winners was a CEO that figured out how to
swim on his/her own. They grinded it out and dug their way out of the hole. Most
importantlytheydiditwithoutdilutingshareholders.Whenmanagementdoesright
by shareholders in the worst of times, its much easier to fully trust them in the
bestoftimes.

Investinmanagementteamsthatfocusonthelongtermandlettheirexecutiondo
the talking: 90% of microcap management teams say too much and do too little.
This rare breed is called intelligent fanatics. I want to invest in owneroperators
thathaveanintensefocus,integrity,energy,andintelligence.

Once I find an intelligent fanatic running a potentially great business I start the
duediligenceprocess.Ifeverythingchecksout,Iinvest.Asmanagementexecutes,
Ibuymoreathigherprices.

Intelligent Fanatic = (Long Term Vision + Focus + Energy + Integrity +

Intelligence)xExecution

The combination of all these traits multiplied by execution is what makes an

intelligent fanatic. Many investors mistake an executive with charisma for being
an intelligent fanatic. The microcap space in particular is filled with snake oil
salesmanandexecutivesthattalktoomuchanddotoolittle.Dontmistakeastory
telling, charismatic CEO as an intelligent fanatic. In fact, many intelligent fanatics
arenotcharismatic.Intelligentfanaticslettheirexecutiondothetalking.

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2/2/2017 6smarttipsformicrocapinvestors
Inconclusion,keepthisinmind:

I like companies with no debt, or at least low debt. Small companies and
debtjustdontgowelltogether.Travellight,travelfar.
Cash flow, not reported earnings, is what determines longterm value.
Undiscovered companies that can sustain 3040+% growth rates from
internallygeneratedcashflowsarehardtofind.
Look forowneroperators with intense Focus, Integrity, Energy, and
Intelligence.
For a small microcap company to be a market leader, it must dominate a
smallmarket.Iwanttoownbusinessesthatdominateasmallmarketthatis
expanding.Thisnormallypushesqualityattributesdowntothefinancials.
Look for a clean capital structure. I look for low outstanding shares, all
common shares, and low amount of warrants/options as a percentage of
outstanding shares. You want to invest in a management that treats its
shareslikegold.
I prefer no institutional ownership. When you find and invest in great
businesses that bigger money doesnt own, the stock has nowhere to go but
up.
Findrepeatable,sustainable,profitablegrowth.Mybiggestriskasamicrocap
investor is dilution. I want to find companies that are selffunding their
growth.
Buywhenthebusinessisfundamentallyundervaluedtolimitriskandtofully
leveragemultipleexpansion.Yourmarginofsafetyisbuyinganundervalued
businessthatcangetovervalued.
What counts in the long run is the increase in per share value, not overall
growthorsize.

AlltheaboveinformationhasbeentakenfromIanCasselsblog.

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KKSingh Extremelywellarticulatedarticlesoninvesting.Readingthisarticleappears
Jan312017 tobereadingthemindofaveryseasonedinvestor.IwishIcouldgetto
04:07PM readsomethingfromtheauthoronhowtocreateconvictionasaninvestor
eventhoughoneisabletoscreenoutthecompaniesandmaintainsthem
inwatchlistbutnotabletobringthemintoportfolio.Thisisincontextof
Indianequitymarket.

GanesanT AllthepointsareVerytrue,guessambecomingabetterinvestor
Jan312017
03:19PM

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