TIP846: Stock Picker: How to Live Off Your Portfolio w/ Ian Cassel

25:46He got there differently than me, but he was kind of living and breathing and paying bills off his portfolio in microcap stocks. So I kind of believe in those two things. I can only follow people that are happy people and only really take advice from people that already did what you're trying to do. I could ask for advice, like what kind of advice you give to young people who want a stock investing mentor. And I listened to a lot of podcasts, probably like so many others listening to this podcast. And that question is often floated around. But I wanted to turn the tables just because I can't help myself.

26:22And so if you want to know Ian's response to that, you can pick up the book. That's going to be my pits here. But let me do it the other way around, because I think that there's something stepping in the shoes of Skip here. Whenever you wrote about him, I was thinking, I think he really enjoyed teaching to a young man some of his life philosophies, but he also works with scarcity. We all have scarce resources, whether it's time or money or whatnot. And so I'm sure he wanted to make sure it was the right person, in this case you, that he was mentoring. And so I'm sure hundreds of young typically men are asking you to be the mentor and you just can't do that.

27:04But you also probably don't want to attract a lot of young men who are basically asking for a shortcut to where you are today. just faster and with not as much work. And that's probably not. But assuming that you actually want to pass on knowledge to the next generation, perhaps have that personal relationship, what kind of advice would you have for experienced stock investors who want the right mentee in whatever kind of way you want to define right? Robert Leonard Well, I think that's an interesting way to invert or reframe that. I don't think I've ever thought I could really use a mentee. I need to go find one.

27:39I think if you're somewhat accomplished, whether that's in business or investing or stock picking, I think eventually younger people will be pulled into your orbit. And it happens naturally. And eventually, a younger person goes out of the way to... Just like I did to Skip, how I got his attention. Eventually, some younger person goes out of their way to add value to you. And you take notice. And they do it again and again. And you just can't help but reciprocate because you almost feel bad if you don't, because they've added so much value to your life. And I think the whole thing of the whole mentor-mentee thing just happens naturally.

28:13And it's a normal reciprocal relationship that doesn't necessarily have the label of mentor-mentee. It's not like you wake up and you're like, you're my mentee now. It's just a normal relationship that could be put under that umbrella of mentor-mentee that you both know. But it's not rigid. And bringing it back again, I do think a lot of younger people approach this the wrong way. I think a lot of younger people, they look to somebody like you, Stig, or maybe me or whoever it is. And they kind of look at it as a way to extract information from an accomplished person. They kind of look at you like a piece of software.

28:48They can just download your brain and then learn whatever you've done. And then they can apply that to their life. And more of a take. And that's not attractive to a person like you or a person like me, which I'm sure you get emails just like I do about this type of thing. You know, what is attractive and it happens subtly is kind of the way I described it. I think eventually some younger person adds value to you and they do it time and time again, and then you just start reciprocating. And then that's just how it blossoms from there. I think you've done what a lot of young people and perhaps also older people are dreaming of, you know, living off your portfolio as a private investor.

29:30And for you, the number was$2 million. Of course, everyone listening to this now or in the future, they also have to understand which time this was in,$2 million. Today is different than it was 20 years ago, or it would be 20 years from now. But please tell us, how did you come up with that number? And also perhaps talk about some of the pains and pleasures of living off your portfolio, especially about the surprises. Yeah. When you're talking about full-time private investing, at least the way I've experienced it, I view it as a goal that one makes. And you usually make the decision to do it before you probably should, which means that you really need to achieve above market returns so that you can still get above market returns minus your expenses.

30:18Because the goal isn't just to take all your gains and plow it into your consumption. The point is to support yourself and still grow your capital minus those expenses at a greater rate than the S &P. That's the goal. I do believe that being a full-time private investor is the pinnacle of financial success and achievement because you have autonomy. You have no bosses, you have no clients, no investors, but you also have no 401k match or no healthcare, at least here in the US, that is paid for. So you have no safety net when you make that decision. your success and failure is sort of 100 % kind of what you eat is what you kill.

30:57And so I don't want to downplay how hard it is mentally and emotionally, especially, you know, to make that decision. And, you know, I was, I never really had a paycheck per se, you know, I never had my healthcare paid for by an employer. So I was never anchored to a safety net. So I think that made the decision a little bit easier for me. If I was, it would probably be a harder, just emotional, let alone financial indecision. The other funny thing about being a full-time private investor, and I remember reflecting on this when I was, was people talking about saving. It's important to save and invest.

31:33And like, well, when you're a full-time private investor, there's no such thing as savings. It's just different degrees of spending. It's just flexing up or down. And so when I did it, I was single. I was very frugal. I could live off$2 ,000 per month. I kept my fixed costs low, my variable cost variable. I did buy nice things from time to time, like the story of the Porsche that I bought, but I also got rid of it in another 12 months after that. I was never anchored to those nice things. Because full-time private investing, if it's really your goal, the goal is independence, not consumption. Independence comes first.

32:12I mentioned a bunch of things, I think, in the book about different areas about full-time investing. But I think it is easier for those that are shorter-term traders just to make the mental and emotional leap. Because if your average hold period is days or weeks, that win can mimic getting a paycheck in the mail or every other week or month. So I think it's easier in that. But if you're longer-term like I was, with a typical hold period of 6 months or 12 months or 24 months, a longer term investor where the stock could easily go down before I make money, it could easily go nowhere for a year or two, that puts another emotional and financial constraint on yourself.

32:56And so you have to just set up these safeguards in your portfolio, depending on the type of investor that you are. I think a lot of people, they look at it during a bull market and they think it's easy because everyone's taking their Excel spreadsheet and taking last year's 25 % performance and just mimicking that for the next 5 years. And I can just shave 4 % or 5 % off this and pay for my bills. And that seems easy. But the first year that you're down 25 % and you have to sell 5%. And then guess what? When you're down 25 % and you sell 5%, you're already thinking about, what if this happens again?

33:31What if I'm down 25 % more next year? And that's where you crack. So that's where I feel like making the decision right after the GFC, in my case, was very beneficial to me just because it already proved that I could make it through a 50 % drawdown. And for me, coming up with the figure of 2 million in my case was more a reflection of not what I expected my returns to be for the next 5 years. It was what was the pain I was willing to endure? What was the amount of money where I can sustain a 50 % drawdown and doesn't change the type of investor or my strategy? And so that's really where the$2 million came from for me.

34:12So how did you explain this to your future wife the first time you met each other? It's a little bit easier to be like, I'm a carpenter. Okay. I have so much an idea why that is. What does she say whenever you're like, so what do you do for a living? I'm a full-time private microcap investor. Was she like, what, what, and what is microcap? Yes. That's a lot of what. That was how it started. No. And the reason why I also asked, and I met my wife whenever we were students. So at least that, I had sort of like that going forward, but I paid my way playing poker. And I remember a few dates in talking about the number of big blinds per hour I was budgeting for.

34:54And it was not the typical date talk, apparently, or so I hear. So how did you meet your wife and how do you tell someone you really care for that that's how you provide for yourself and hope to provide for her, perhaps? Yeah. I mean, how I explained to her was probably different than other people that I would run into. I found the most excruciating thing to have a conversation about with new people was telling what i did for a living you know but obviously my you know my wife's a little bit different because she probably doesn't think i was a drug dealer or something like that just sitting and isn't that just better than being a full-time private microsoft investor well i mean that's what i would tell her like we would go to to events where i would meet new people um that type of thing i'd be like listen just tell just tell people i'm unemployed i don't want to have to have an hour-long discussion about this you know we're out meeting new people and she would laugh and she would literally say that sometimes we'd both smirk back and forth to each other.

35:51But I think she was pretty smart. I think she understood what I was doing. I think it took a couple of years for her to get used to the volatility in our personal finances, how that gets reflected. Because my returns have been consistently inconsistent. So you might lose a couple of hundred thousand one year, you break even the next year, and then you make a million dollars your third year. That's what it looked like. And so you just need to, again, have those safeguards in place. For me, it was always having 2 years of cash in my personal bank account. So I would not have to sell stocks down at a bad time.

36:29Just setting up those... Even our bank accounts, I would cover the fixed costs, she would cover the variable. And that's how I would partition off. Okay, we can flex this up or flex this down. So I had all these mental safeguards set up and literal ones. But she got used to it. She met a lot. She met Skip and his girlfriend at the time. Of course, Skip was probably 75 at the time and he had a 32-year-old blonde bombshell on his arm at her wedding. Again, just a character. She got a chance to meet him and it took a while. But again, getting back to the savings part too, as you're a young married couple, everyone's like, well, I'm saving for this or saving for that.

37:11And she's like, shouldn't we be saving? I'm like, there's no such thing as saving. It's just about how much are we going to spend? That's what it is. Because what I do for a living is build our portfolio. So it's like, there's no such thing as savings. I love that. All right. So Ian, you put a warning label on this sentence here in your book, whenever you wrote, most microcaps you buy must be sold within 36 months, even the winners. And I just found that to be so fascinating. And perhaps the audience who are tuning in thinks the same thing because they are raised in the church of Buffett and Munger, right?

37:51And you're supposed to buy and hold, and typically also invest in larger companies, many of our listeners. So whenever they hear a sentence like that, perhaps they're like, he's saying, what now? So could you please paint some color around that? Yeah. I mean, I think the first thing is investing in a small business versus a large one is apples and oranges. So investing in large caps versus micro caps is two completely beasts. They're completely different. Micro caps are small businesses. And because they're small businesses, they're filled with different varieties of concentration risk. And what I mean by that is on the management level, the CEO, a key person risk.

38:33Because the CEO or the founder, they wear so many different hats and they're making so many more decisions themselves. That's a risk. What if they get hit by a bread truck or whatever? There's also with small businesses, customer concentration risk. Every small business probably has one large customer, or maybe it's a customer that kind of buoyed them that got things kickstarted. And so there's always this customer concentration risk that you're dealing with. And small micro caps as well. There's also kind of geographical or jurisdictional risk. Maybe they only sell their products or services into one type of end market.

39:10And what happens if that end market something happens there? And so with micro cap companies, you're dealing with all this concentration risk coming from all different angles, And it just leads to a high percentage of bad outcomes because of that, because they are fragile, not anti-fragile in most cases on the average. And so because of that, they just have shorter shelf lives. And when they do have a winning season, it's usually a shorter winning season than what you would think. They get a large contract from one large customer and the next quarter they grow 30%. Well, they can put up 30 % growth for the next four quarters as they surpass their old comps.

39:52And then what happens after that? To replace that or get an additional large win to make sure that growth continues. That's a winning season. That's four quarters. And there's a whole bunch of examples of that. So most microcap winners have this 6 to 24 month, 36 month winning season. And so a lot of times when you're looking at a microcap business that maybe just had a good quarter, the most important question to ask yourself is how long will this last? And be honest with yourself about that. And in most cases, it's shorter than you think, not longer than you think. There's always going to be those outliers that have great management, that do all the right things, that can compound that growth past one, two, three years onto five or 10.

40:34But that is very, very few. So it's important to live in the reality and not overlay some belief that you hear in the media or on podcasts about coffee canning or things like that, and put that on top of this asset class of my or cap investing because it doesn't work. The goal is to find those that can compound for 10 or 20 years. But just like Buffett did across his career of owning hundreds of stocks in their public portfolio, today he only holds 10 that he's held for 10 years. So 10 out of hundreds that he's owned over decades. It takes the greatest stock pickers in the world, even those that invest in mega caps like him, 50 years of investing in hundreds of stocks to find a handful that are worthy of holding long-term.

41:22And so when you're looking at micro caps, just think about how much more turnover it would take to find them. Yeah, well put. I want to double down on one of the things you said there about the high turnover strategy, because perhaps that lends itself better to be a full-time private investor, because these small, more frequent gains could resemble getting a paycheck. But then whenever you also alluded to that, I was also a bit surprised in the sense that I probably played too much poker, like I already mentioned here. But I remember from my poker days, I generally wanted to have as many winning sessions, obviously, as I could.

41:59And one of the reasons why, especially whenever I met my now wife, was that she always asked, so how did it go? And we weren't necessarily talking about big blinds per hour or whatnot, but I would be like, I won or I lost. And it just feels better to be like, I won. And so what happens, especially if you have such a bad temperament as me in the world of poker, is that you take a lot of winning sessions. And what I mean by that is, even if you beat the game, there's a lot of volatility. So you can take winning sessions in the sense of you can cut them shorter. There are a lot of risks that you don't take because you want to win.

42:31So in that case, you might be winning, I don't know, a thousand bucks. But your expected value, if you actually played the way you should, was$3 ,000. But then they came with a lot more volatility. And so if you continue to do the same thing over and over again, you probably don't want to have winning sessions. You want to have the highest expected value as long as you size your position accordingly. And positions could be your bets, but in the stock market or at the poker table. So anyways, I'm going to a long way around this, but how do you think about that in terms of getting that paycheck?

43:06Or perhaps some of our listeners would be thinking, well, just buy those quality compounders, and then, I don't know, sell down 4 % or whatever of your portfolio, and that's the way to get paid. Yeah. I mean, I don't think there's one way to do it. And like I said, I'm particularly giving people my thoughts of microcap investing. I think you can certainly take a longer term approach when you're looking at larger, more robust businesses. When you're looking at even larger small caps or mid caps or large caps. I think you can have more of a buy and hold philosophy. There's no one way you can do this.

43:41I mean, that's what the greats have taught us. But I think the other thing the greats have taught us, even looking at Buffett and Greenblatt and all these people that everybody looks up to, including myself, is it's hard to get around this. like their peak return years were also the years they had the highest turnover, which counters what a lot of people do. And I think even in today's culture, I think even some active managers, they point to their turnover rate. It's 10 % or 5 % or whatever, almost like a badge of honor. It's even better than what their performance is. And so I just like to make sure that people understand what the greats were doing, even those that today might look like buy and hold investors, how they got there was a little bit different than what you think.

44:24And I think for anybody, I think as long as your temperament fits your strategy, whether that's day trading or coffee canning large caps, there's more than one way to do this. And you just have to figure out the way for yourself that fits your personality and your temperament. Yeah. I love that you say that the best returns came with the highest turnover. And I think there's probably a lot of different reasons for that. Part of it is pure chance. you know, that's one of them. But people generally follow incentives. And as a fund manager, it makes a lot of sense to tell people to buy and hold. Because whenever you're going to have a down year, and all fund managers have down years, then you can point back and say, I told you to keep your money in my fund.

45:06And so it's like, it sort of makes sense. Or one of the classics are, you know, whenever people get asked about their mistakes, they're like, oh, I sold this 100 backer, I only made 8x on it. Now you're actually just bragging. You're like, oh, but it was an area of omission. So even my mistakes actually shows like, it's like whenever you go to this job, you're like, oh, my biggest mistake is that I work too hard and I care too much. Yeah. Okay. So anyways, but I guess my point of that question was also that there are the facts and then there are the stories. And sometimes it's easier to fall in off with the stories.

45:42Yeah. And I think it's easier for all of us. We look at reality as different than our perception of it. We would have put our own beliefs and thoughts, whatever we're going through right now, our belief system around what investing should be on top of everything. And it just doesn't work that way. It's like every kind of way of investing is somewhat in small or big ways, completely different from another one. And you shouldn't be taking a coffee can lens and applying that to microcap per se. I mean, not saying you can't hold them, but I think that's where people get into trouble is trying to say, well, Buffett did it this way at the end of his career, and I'm going to apply this to my path and my investing style and strategy.

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49:28If your revenues are at least in the seven figures, get our free business guide aligning for the agentic era, how AI is changing everyday work at netsuite.com slash TIP. The guide is free to you at netsuite.com slash TIP. All right, back to the show. Yeah. And it also takes me to the next question here, because I found this next paragraph where you talk about cash positions to be very insightful. So you don't believe in large cash positions because it basically means that you're a market timer who wakes up hoping for a crash. And for someone who tried that approach, it's a very stressful way of living your life.

50:12But you talk about holding enough cash to buy half of a new position, and then you had to fund the other half to, and it forces you out of your weakest conviction. And I kind of felt that was such an interesting framing. I haven't seen it like that before. And it also goes to the point you had here before where we just have different temperament. The first thing I thought to myself was like, I wish I was wired the same way as Ian. I would get so stressed. I wouldn't be able to sleep at night if that was the way I did it. But then I was like, intellectually, it makes a lot more sense when Ian is doing, and I mean stress in a good way, because it forces you to strike the balance between being active and inactive.

50:53So anyways, please walk us through that mechanic. Well, and maybe to parlay that a little bit, and then I'll get to your actual question, is like even getting back to that point about the best stock pickers in their world, their best returns normally occurred when they had the highest turnover. I think that a stock picker is almost in their best mindset when you're winning. I know I am. It's like when you're winning, it actually frees you up to sell your losers easier in the portfolio because they become smaller. Your P &L is up on the year. It's easier just to shave off your mistakes and kill them.

51:27And it's easier to do that in up years. In down years, you're more tending to hold on to them longer, wait for another quarter, justify holding on to them because they're cheap, doing all these things that string you out. So it's such an emotional and mental game, stock picking and portfolio management. You're so right though, especially if you've gone through the motions. It's so painful and you're absolutely right. That is the way one should be doing it. Sorry for interrupting you just by telling you how right you are here, but you are absolutely right about that. Well, it's actually a mental hack I use in myself sometimes to kind of, again, stay true to the portfolio.

52:01It's like, hey, if I was up 30 % this year, year to date, instead of down 10, how would I position myself differently? Being honest with myself and genuine with the portfolio. Well, the truth is I would probably cut this thing immediately. And so it's a good way to reframe the lens. But on the cash position side, I talk about the 5 skills of stock picking in the book. And the first skill is identifying, which means finding actionable ideas before others. And I think good stock pickers always find actionable ideas, whether you're in a bull market or bear market. And so I've always disliked this notion of holding a large cash position because I do think in general, you're making a macro bet if you're holding a large cash position, or you're admitting that you can't find good ideas.

52:45And neither of those are good in my eyes. The reality is you just aren't looking hard enough. You haven't developed that skill. There are great ideas all around us at all the times, it doesn't matter what type of market we're in. And I think the really good stock pickers find them. And so I've never believed in holding 20 % plus cash as a position in the portfolio. Because for me, it's like, if I would do that, it's basically me because I can always just invest more into my best ideas that are already in the portfolio. So if I'm holding 20 % cash, I'm basically saying my best ideas can't outperform cash over the next one or two years.

53:20So I just philosophically disagree with that type of mindset. At the same time, you can't hold zero cash. And so I found the right mix is this 3 % to 5 % cash. It's enough that allows me to buy half of a large new position or all of a small new position. It allows me the freedom to be able to pull the trigger. Because as a stock picker, you just don't want to be in a place where you can't execute on a new idea. and that's just not a good mental spot to be in. It's like cutting off a bulls, you know what? It's just not good. So I always want to have enough cash that I can execute at least on a new idea.

54:02And if I want to add more to it, I'm forced to sell my least convicted idea. I found over the years that that's a great way to keep my portfolio honest because I'm not just adding positions to the portfolio for the sake of adding them. It's forcing me to make a decision, to make a choice. And the other thing about having just at least a little bit of cash on the sidelines, and I experienced this through many of the drawdowns, is you just feel helpless if you don't have cash to be able to execute and take advantage of the drawdown. If we're all being honest with ourselves, if you at least had some cash when the market's going down, it doesn't feel that bad because you're able to execute and take advantage of that drawdown, where it becomes just really disheartening is when you can't buy any more of the things you love lower.

54:52And what I found too, is it doesn't even need to be quite honestly a material amount where it's needle moving in the end. It's just more of a mental trigger. Like even if it's just buying a hundred shares of something when it was down 20 % from two weeks ago, it just feels good. At least feels like you're taking advantage of the situation. And that's what I mean by kind of safeguarding your emotions. Trey Lockerbie Yeah, it's just a mental game. It's absolutely fascinating. You know, Ian, let me offer you a deal here. Let's say that I would guarantee that on your portfolio, you'll be getting 20 % the rest of your life.

55:29But here's the problem. It's going to be 20 % the rest of your life. We're not talking about inflation. We're not talking about all of a sudden there's hyperinflation, then 20%. No, no, no. You can get 20 % the rest of your life. And of course, you would be obscenely rich if you took that offer. But on the other hand, you would never get the thrill of the chase because it's not fun. You already know, next year you're going to get 20%. So would you take that deal? It's a fascinating question. It's quite a philosophical one too. I appreciate that one. I'm a competitive person. And so what people might want me to say is, I wouldn't be satisfied with 20%.

56:06I can beat that. I can beat 20%. But the truth and the reality, as you and I both know, is like, if you make 20 % for the rest of your life, you're up there with Buffett, if you live long enough. So I think also as you get older, time becomes your most important asset. And so if 20 % was guaranteed for life, it's sort of like the challenge of spending my time differently. I'd probably focus it more on impact and less on buy and sell decisions. Trey Lockerbie Yeah, because in a way, it would be like telling Messi, you can win the rest of the World Cup, so the rest of your life, you don't even have to be on the pitch.

56:41You just got to give it to you. It's like, that kind of sucks. But then, on the other hand, it's not the same at all. So that's amazing too. Anyways, I wanted to go full circle back to the first question here. So we're back at this cocktail party here back in 2009, and someone said you weren't good enough to keep a job. And you also replied that he probably wasn't skilled enough to support himself with his own capital. And you also mentioned in your book that 99.9 % of fund managers could never live off their own strategy. I love that statement. Who's here to make friends? Anyways. So Ian, you launched a fund back in 2019.

57:21I'm telling you, Fanatics Capital Management, and by your own book, you climbed down from the pinnacle. So what did the 28-year-old not understand? What did the 38-year-old give up? Well, first, probably just having that conversation at that cocktail party, probably push back my decision to become a fund manager for an extra 5 years. Just because I didn't want to be like that guy. But I think a few different reasons. I mean, first, I would say I was a full-time private investor for 10 years. And after 10 years, I was in my late 30s. So I was still relatively young. I just co-authored a couple books on intelligent fanatics.

57:59I'd been saying no to outside capital for 15 years. And I think one of the big things is just I was up for a new challenge. And I think that coincided around me realizing what type of investor would be right for my fund, which I realized it would be small business owners or those that own small businesses. And just because what I found was small businesses still do. Most of the investors in my fund today are small business owners or they owned one before. They have an affinity to my type of investing because I'm just a small business investor. My small business have ticker symbols that you can buy in your Schwab account.

58:38And so they have an affinity to that. They understand that. They also know the volatility of small business. And so once I realized that, then I just closed the loop and said, okay, maybe I can do this. And I think also my strategy was evolving over time too. And your legacy starts to chase you as well. And I realized I can make a bigger impact if I just had more capital. So let me put you on the spot, because I can't help myself, Ian. Because I - Go for it. I pulled up your public filings. And so you charge a 1 % management fee plus 20 % of gains above a high watermark for qualified clients. Then you have the other class that's 2.5 % for everyone else.

59:24Walk us through that fee philosophy. Yeah. I mean, the fees are kind of a function of how we got started. So I started the fund as an SMA, Separately Managed Account. It wasn't a partnership. And so the tax treatment on performance fees is less desirable at a separately managed account structure. For example, the performance fee in an SMA is paid in cash, not as allocation. And then it's taxed at the income tax level, not capital gains level, whenever you would end up selling that allocation like it is in a fund. So for those 2 reasons, I decided when we started with an SMA, just to charge a flat 2.5 % management fee, no performance fee, until we would reach a scale to then be able to launch the partnership.

1:00:05And then I could layer on the 1 in 20. And so today, once I launched the fund, I brought in the SMA investors into the fund under that same fee class of flat 2.5. And so the fund today is a mixture of flat 2.5 and 1 in 20. Now, we don't offer the 2.5 to anybody anymore because we only take qualified clients. But that's the reason why there's this mixture there. So the 1 in 20, there's obviously a high watermark associated with that. And we don't have a hurdle rate or anything like that, like some fund managers have. I've always believed that if somebody is that angry about paying me 20 % in the first six, they shouldn't be the investor in the fund.

1:00:43They're not the right type. So I kind of let that be a self-select in based on that as well. But my overall view kind of on fees in general is I think you can charge whatever you want as long as you outperform over net of fees. How do you think about fees as you're scaling up? Some fund managers would say then at this OM, these are the fees. And then at this AOM, the fees would look different, and then we sort of grow together. Perhaps you're going to have different constraints also because you're a microcap. So it's sort of tricky above a certain threshold, which is not the case for other managers who might be investing in mega caps or whatnot.

1:01:18But how do you think about that? I don't know. I just like to keep things simple. I like the one in 20 kind of bland, and I don't really see a need to ever change that. It just probably provides more headaches. Trey Lockerbie, Ph.D.: You know, the reason why you ask, and here comes all my biases. So I speak with quite a few fund managers, and I've heard quite a few say that they're going to lower the fees the higher their AOM, just because that's the way the numbers work. And I can't help but think back on one of the things you talked about with Skip and being the old timers, and then the newer touchy feeling we all have to win together.

1:01:57And I don't necessarily know what to ride a wrong way. But as an investor, this doesn't sound nice, but I don't really care about the other investors. You know, it's like, no, no, no. I want the other investors to win. And I can understand if you're a fund manager, you feel like everyone is your partner and then you grow together and then you lower your fees. I understand that. But as an LP myself, in this case, it's in PAPRI funds. I just want to pay the lowest fees for the best performance. It's not a goal for me that now the AOM is this or now the AOM. And I kind of feel it's nice as an LP to see what the AOM is at the fund just in terms of what size of company can invest it in.

1:02:40But it's not like, I don't know, I think it's a bat of honor for a lot of fund managers what their AOM is and they sort of want to show it to the world. It's almost like whenever you go to the bank and then they're showering you with champagne or whatever, and they have the most marvelous marbled whatever. And you're like, I wonder who's paying for that? Oh, wait. Oh, wait, that's me as a customer in this bank. I'm paying for that. So I'm actually not much of a big shot as I thought it was. So anyways, I sort of tried to put you on the spot there, but I found it to be interesting. And I don't say that to batch fund managers, because I understand why it's very sympathetic and why it's like, oh, you treat everyone as a part.

1:03:21But as an LP, you're pretty isolated. And yes, you have all of these events and you can meet up with the other LPs and all that's good and well, but most LPs just want the lowest fees for the best performance. So anyways, I don't know if there was any question there, but I just want to throw it to you. Preston Pysh I mean, I know a lot of fund managers that regret starting off so low. And then they end up raising it later, you know, because they realize it's just hard to... And again, I think... I don't know. I think it's a mistake to lower them just because, you know, I don't know what the future holds for me, not in regards to performance, but it's more so like I could see building somewhat of a team and I need to have the wherewithal to be able to bring in the right team members.

1:04:08you know so you know that's kind of what all the greats did like they started as a solo shop you know then they expanded i'm not talking about adding 100 people but you know if you're imagining a billion dollars you probably have 10 other people with you at least you know so eventually you're going to have to build a team that will allow you to scale evolve you know push out your circle of competence you know that's why buffett wasn't just doing cigar button investing now he's doing a bunch of other things almost every type of investing there is like you have to allow yourself the capability to expand that circle of competence.

1:04:39And it's difficult, I think, if you're cramming down kind of that. And like I said, I mean, everybody wants to pay the lowest fees possible, but what they really want is the best performance possible. So I think there's two levers there. And for me, I'm concentrating on the latter. We once had a team member who said something along the lines of, it sucks selling to value investors. They're just so cheap. I was like, well, that's probably true. But one thing I also wanted to mention, Ian, is that I really like how you benchmark yourself to the S &P 500. A lot of small cap managers are not doing that.

1:05:14And I don't fault them. I know how tough it is to run a small business. But usually, I'm just saying this to the listeners, generally, you should be skeptical if someone is not benchmarking to the S &P 500. They're very often trying to find a benchmark they can beat. And of course they are. I'm not saying they're unethical people if they send out their letter and then they're benchmarking to whatever kind of benchmark of small-cap stocks, because you could say, hey, this is a small-cap fund, so why wouldn't I? Well, perhaps the reason is everyone's going to compare it to the S &P 500 in any case, because it's a recognized index and you can pay low fees and everyone has access to it.

1:05:54So it's not crazy for you to be compared, regardless if you only invest in Indian small caps or whatever. It sort of makes sense still to be looking at the dollar performance of the S &P 500. Yeah, I talk about that in the book, as you know. It's just like my competitor is the S &P 500. And so many people want to compare themselves against something that more reflects the type of businesses they invest in, whether that's small cap, comparing to the Russell or the funniest one I've seen, Stig, you love this. I saw a couple of managers actually having the... Now they're Canadian investors, but they have the TSX Venture Exchange as a benchmark.

1:06:29Well, the TSX Venture Exchange is actually down 15 % over the last 20 years. Wow. So you see this like, well, compared to the TSX Venture, which is down 20 % the last 10 years. But for me, I have a chip on my shoulder. I'm a competitor. It doesn't matter that I invest in microcaps. I don't invest in anything that looks like the S &P 500. I want to be compared against the most formidable competitor I have, which is the lowest cost, best performing asset for vehicle in the world. And that's the S &P 500. And I compare it to... I want to go against the 1992 Dream Team, the US team, which had Jordan, Bird, all the great players.

1:07:12And that's the same thing. But for stocks would be like Nvidia, Tesla, all these great stocks that are in that thing. I want my team of no-name players to beat the dream team. And that's my goal over the long term. And I think we're going to do it. But that's what I want to compare myself against, not some lesser thing. That doesn't excite me. Yeah, I love that. Because speaking of the 92 team, I don't know, probably a lot of listeners are going to absolutely hate that I say this, but the team had zero strategy. They had zero tactics, but they were just so awesome that it didn't matter. At least that's how I remember the team.

1:07:49So you can use that as a metaphor for Ian if you want to. Yeah, there you go. That's a good one too. No tactics, just being awesome. It's a good start to a fun letter. So what's the strategy? Dude, no strategy, but I'm awesome. But I'm awesome. Right. So anyways, Ian, I don't know if you encounter as many young investors as I do. I'm sure you do and probably way more. I want to ask you about your start. You started with 25 investors. What would you tell aspiring fund managers who ask for your advice? It's a good question. I think my investing career has been backwards when you look at fund management.

1:08:32I became a full-time private investor first. I built my reputation first. Then I decided to launch something. So the advantage for me was I already had a reputation. I already had somewhat of a waiting list for people that I knew would probably want to come in right away. And that was just due to the previous 10 or 15 years of being out there in the public sphere. And so that was definitely an advantage. The nice thing, like most investors or managers here in the United States, they start with an SMA structure because it's just a much cheaper, more inexpensive way to get started managing capital.

1:09:08I mean, it's pretty much... There's really not that much associated with it, other than like 10 ,000 to get it set up and probably 5 ,000 attorney fees a year. That's really about it. And so your break-even point can be pretty low if you start out with an SMA. You're not talking about tens of millions. You can probably make a go at it with a few million. But most of the emerging managers that I talk to, you still want to have that 3, 4, 5-year track record of beating the market. And yeah, it'd be great to have a 10-year track record. But listen, it's just like investing. There's no one way to start a fund.

1:09:44I did it my way. There's other ways to do it. And I'm certainly never going to tell someone that they can't do something because they're too young or too experienced. I mean, people told me that a lot back in my 20s about full-time private investing. I'm certainly not going to tell somebody young that wants to go for it, they can't do something. I'm trying to say, prove them wrong and go after it. I love to see investors crush it, especially young ones. And that's the beauty of being human is just your willingness to reach further than you should and expand out and do that. And a lot of people will fail and other people will crush it.

1:10:21So it's just part of it. Let me, I continue to put you on the spot and go completely off script, Ian, because now I have to speak with you. So what AOM would you have to cross? And perhaps you already did that before you would shape 1 % CAGR off your future track record. How do you think about that? Preston Pysh, MD, PhD. Reframe that. Do you mean how? Preston Pysh, MD, PhD. Yeah. You mentioned 35 to 40 million is what you're at right now. You probably couldn't do the existing strategy with 10 billion. It would be too illiquid to do that. And I guess where I'm coming from is that I read so many shareholder letters and I, oh my God, I'm so grumpy today.

1:11:02But I read so many, and they always say, we have our incentives aligned. And I'm like, no, not really. And I'm okay with that. I just need to know what the incentives are. I understand why you would rather have$10 billion and do 17 % than having$10 million and do 18%. I understand that we have different incentives, and that's okay, but I would like to know what the incentives are. Anyways, so being a, let's say, potential LP in your fund, I can easily understand if you want a significant higher AOM, that's how you make money and doesn't take you 10 times as much time to manage 400 million as it would be to minus 400 million.

1:11:44When would you pass that threshold where you're saying, this amount of money means I cannot apply the existing strategy. And of course, you can then say, well, then I have to learn new skills, and then I can make the same kind of return just with a larger amount. Or yeah, I guess that's sort of like where I'm coming from. How do you think about that? Yeah. No, it's a fair question. It's a good one. Especially when you're investing in a capacity constrained area like microcap, there's only so much capital you can shovel down a handful of illiquid small companies. And I think if you're successful, and your capital grows, and you want to stay invested, especially in the small microcap.

1:12:21So the sub 100 million, the microcap goes up to 500 million, but I'm saying like my bread and butter is the small stuff, the sub 100 million. And obviously that puts an even more constraint on the amount of capital. And so what happens is every successful microcap investor is forced with a decision as their capital grows. You either get more diversified or you increase your duration, your hold time on these companies or both. And so as the amount of capitals progress for us, we've added a few more positions. Where when we started, we were probably in 10 and now it's 15, 16. But I've also evolved along the way, not forced because of the capital, but more of my investing strategy is...

1:13:07I was used to taking 25 % at cost positions when I was a full-time private investor. And what I've realized is just looking at the data of my own trades and everything is, I would have been better off probably having more positions. And I frame that as more chances to win in the portfolio rather than oversizing a single position. And so when we started in the fund, there's 10 % or 15 % at-cost positions have now turned into 3 % to 5%. And it's less of a position constraint than it is, I realized adding three or four other positions that fit my framework, which I can find, will benefit the portfolio over the long term.

1:13:47And quite honestly, if I find something that's a winning stock, and as you know, in microcab, so a winning stock isn't something that's going to go up 13 % instead of 12. You're talking about something that could hopefully double, triple, quadruple over a few years. If you find those, it doesn't matter if you position size at 5 % or 10. A winning stock's really just going to go. It is going to become the largest position in your portfolio. The other way that we've evolved is through that hybrid approach. We still have 20 million market cap companies in our fund, even though our fund is a$40 million fund.

1:14:21And so when I'm making those into a smaller microcap, a direct investment, which is completely illiquid, probably for 12 months, it's position sized accordingly. But it gives me a foot in the door to be able to add in the open market later as that company performs over time. So just in the last seven years, you can see how just the increase in capital, which is less to do about new investors coming in. It's just as you perform as a fund, you're just going to get bigger, has helped me evolve as an investor too. And I think where we're at, I can definitely see 40 million getting to 100. But I don't look past that.

1:15:00I don't think like, how's this going to become a billion dollar fund? I'm not concerned about that. I think as long as the fund grows naturally, I will grow naturally as a human being and as a stock picker along with it. It's when I force it by taking in$50 million into that fund, that's where I would make a mistake. But if I let it naturally blossom with the portfolio performance, my goal is to cager myself and my abilities and my circle of competence along with the progression of the portfolio. I don't know if that makes any sense. It might be too philosophical. But that's why I barely ever talk about the fund.

1:15:34This is probably the most I ever talk about fund on any podcast, just because I don't lead with it. I just let people naturally come into it and inquire about it. I'm not marketing it. I'm not looking for$10 million. Yeah. So do you think, I know this is an unreasonable question, but do you think you could say no to a$50 million check from an institutional investor and just be like, you're just not the right profile. I don't think I would fault you by any means. And I should mention for the third time, I'm not an investor in your fund, but I can easily understand you're like, this is my strategy.

1:16:05But then someone comes in with a$50 million check. I'm like, that's a lot of money. And you have a lot of great ideas of what to invest in. But they also sort of want you to do things in a sort of way, and you're not really sure, but it's a lot of money. Are you just a better person than the rest of us? Or how do you think about this? Well, I think I would never say never, but it would probably have to be in a different kind of structure, a different fund. I don't know what it would be, just because I don't want to take on that much risk in the fund. I'm the largest investor in my fund. It's going to stay that way.

1:16:41I don't want anybody putting more money than what I have already in there. Just because I don't... It might sound strange, but I just don't want some person to try to manipulate me in whatever way they can, or even if they do decide to pull their capital, really hurt everybody else in there as I try to liquidate that huge position. So I've always viewed the fun, again, the opposite of most fund managers where they're looking for a big check. I'd rather have a table with 40 legs on it, where if one gets pulled out, it's just as stable. I don't want one with four legs on it or three legs on it, where you pull one out and the whole thing topples over.

1:17:16Wonderful. Ian, the name of the book, Stock Picker. Where can people find you and perhaps talk a bit more about the book here at the very end? Sure. Yeah. I mean, you can find the book on Amazon, Barnes & Noble, wherever books are sold. You can find me on X, which is just my name, Ian Castle. You can find me on microcapclub.com, which is a community I founded 15 years ago for wackos like me that invest in these companies. And then you can also find me or attend one of our events at planetmikercap.com to meet me in person. Fantastic. Well, Ian, thank you so much for joining. And I'm very happy that you sent me an early copy.

1:17:55I absolutely loved every page of this book. So thank you so much for your time, Ian. Thank you, Stig. I really appreciate it.

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