Ian Cassel is a micro-cap investor, the founder of MicroCapClub, and the author of two books. In this podcast, Motley Fool senior analyst Buck Hartzell caught up with Cassel for a conversation about investing in the smallest kinds of public companies.
They also discuss:
- How to evaluate companies with market caps less than $500 million.
- What makes an "intelligent fanatic."
- Why growing a stock position is like cultivating a relationship.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. When you're ready to invest, check out this top 10 list of stocks to buy.
A full transcript follows the video.
This video was recorded on March 15, 2025
Ian Cassel: You need to define micro cap as sub 500 million market cap. I'm really looking to initially invest in something sub 100 million, which is really where there's no institutional ownership. There's no analyst coverage. There's nothing. Is it a dangerous place to invest? Yes, but it's a great place to invest to learn stock picking because you're forced to do the work. There's no analyst there that you can lean on. You got to do the work yourself. It's that independent mindset that is crucial to becoming a better stock picker. It's not a surprise that the best stock pickers ever came out of the micro cap ecosystem.
Mary Long: I'm Mary Long, and that's Ian Cassel. He's a micro cap investor, the founder of MicroCapClub, and the author of two books. In joined Motley Fool senior analyst Buck Hartzell for a conversation on micro cap investing. They talk about intelligent fanaticism, a pesto sauce maker that became a 28 bagger, and why micro caps are like four-year-olds.
Buck Hartzell: I've been at the fool for over a quarter of a century, and we fielded a lot of questions from investors that are excited about investing in this space. What I've seen is a lot of them get off on the wrong track, and it sets them up from failure, but this is an exciting part of the market, and I think you do things the right way, and we're going to learn some great lessons today about how you can be successful in micro cap investing. But first, I want to just start it off simply, can you define what we're talking about here when we talk about micro caps?
Ian Cassel: Sure. When I'm talking about micro caps and talking about companies with market capitalization lower than 500 million. I know it can vary based on your geography or where you're investing, but in general, I think most people use the definition of sub 500 million marker cap. When you're sizing up the space in particular, if you're just looking at in North America, the United States and Canada, there's approximately 23,000 total stocks that trade in the United States and Canada. Around 56% or 13,000 are micro cap companies. They make up a majority of the public companies that trade are these small, obscure micro cap companies that don't have analyst coverage, that a lot of them don't have any institutional ownership. They're mainly owned by retail investors, and that's also the opportunity of micro cap.
Buck Hartzell: That's interesting. If we go back, several decades, the entire stock market was ruled by retail investors. Today, as you say, it's all institutional. It's a institutional game. Most of the investing and trading that goes on happens by big companies, whether they be for passive indexes or actively traded funds. Now, when you look at them, a lot of people will say, hey, there's a lot of junk in some of those small cap companies. Now, how do you go about weeding? What's your process for weeding through that and getting the cream to rise to the top?
Ian Cassel: Well, I think to your first point, if I can digress a little bit, I think a lot of people when they do think about micro caps, they do think about penny stocks, and I do think it's a derogatory term that's used in the space. A lot of times, people's entree into small stocks is through some hardmill or glossy marketing thing they get in their email or their snail mail, and it's usually just some paid advertisement for a company that has zero fundamentals but claims to be the next Amazon. You buy that stock and the stock goes down, and nobody wants to invest in these companies ever again. That's probably 80% of people, they get their entree into micro cap investing that way, and they then think that this is just an awful ecosystem to invest in. It's just not the case, especially when you look at the fact that most of the best stock pickers ever started their careers, investing in micro cap stocks from Warren Buffett to Peter Lynch to Joel Greenblatt, they all started their careers, investing in small, obscure micro cap companies that had fundamentals.
This is where they found their edge because of the inefficiency that lies in these small obscure companies. When you look at the best performing stocks ever, they all were basically micro caps when they started. When you look at the best performing stocks, literally in the last 10 years, when you look at size up the global equity market, you screen out the companies that are up 1,000% or more, 87% originated out of the micro cap ecosystem, and guess what, 91% of those companies that went up 1,000% or more were profitable. Not profitable story stocks. When we think about investing in micro caps, a lot of people go invest in story stocks. But when you actually look at the facts, the evidence based research that's done in this space, a majority of them are just simply a small business that can grow into a larger small business and do it profitably.
Buck Hartzell: I think that profitability is key because that weeds out a lot of those thousands of stock. Like you said, you call them story stocks. I'm always a little bit hesitant when I see a small company and they say, I want to be the next Microsoft or the next big, whatever, and you're like, wait a second. You're only 100 million market cap. Those companies that overpromise tend to underdeliver, I see in a lot of these really good companies, is they tend to be run by really smart but pretty humble people. They aren't out there saying, I'm going to be the next, whatever else. They're just daily doing their job and growing the business.
I want to talk about some buckets of those stocks. I think so some stocks that end in the micro cap Land, what types of businesses are these? If we had to bucket them, are these just new companies that are IPOing, or these companies that have been around for a while, and maybe had some hard time, and now in a turnaround situation, what type of companies do you tend to focus on, if you have any bucket?
Ian Cassel: I think in general, the companies that do really well are companies that dominate a small niche market that is expanding. I think if an investor can find a small public company that dominates a niche that is expanding, it proves out really, the most important thing that management is competent because they either created that market or they took market share, and they're most likely profitable, and they did so. If some of these companies, fewer of them in the United States, I would I would call rising stars. New companies, a new management team, doing something new in a new company. There are fewer high-quality companies going public, small in the United States. We still see higher quality companies going public in places like Canada and places like Australia.
But here in the United States, probably the biggest bucket would be a transformation type of situation where it's an existing micro cap company that maybe was mismanaged. A new management team comes into that business, they inject capital. Hopefully they get skin in the game that way, and then something old becomes something new. In the United States, which still represents probably 80% of my personal investing, a lot of what I'm looking for is transformations.
When a new management team takes over another company, and you can look into that management past history and see that this isn't their first go at it. They built up companies before and sold them or IPOed them or whatever, and you see these repeat winners taking over this small obscure company, and just leads you to wonder, well, they're not doing this to lose money. They're doing this because they think they can make money, and they're bringing the gang back together again to do it again one more time. That's the type of qualitative setup that I like to find in a micro cap company. I love that.
Buck Hartzell: We got two buckets right there. You talked about rising stars, and I think we see that here. Companies that are new and exciting in areas are tend to stay private longer because there's so much venture capital out there. Then by the time they do come public, they call them unicorns, there's over $1 billion, and very large. You're saying we're seeing less companies here now like that, but more of transformational companies that may have had some difficulties, likely due to mismanagement, that have somebody that comes in and can really turn things around. I want to talk about management a little bit, because that's something that's near and dear to our hearts here at the Motley Fool. We love founder-run businesses, but we also just love and appreciate great operators and use the word term intelligent fanatics. I don't know if that captures what you're looking for, but can you describe that?
Ian Cassel: Sure. No, I co-authored two books on the subject of intelligent fanaticism. Intelligent fanatics is a term Charlie Munger used to basically describe a great business builder, somebody that created a business from scratch, grew it up to a point where it dominated its niche, its geography, its industry, and did so over a period of decades, not just one or two years. Me and my co-author, Shaw Eddings, we went back and looked at some of these entrepreneurs that are intelligent fanatics that Charlie Munger mentioned, and we wrote two books on them and pulled out some valuable insights and tried to come up with a framework or blueprint that you look for. My main goal in that whole project, which lasted, I guess, four years, was really to fine-tune my lens for finding these great leaders in small obscure micro cap companies, because if you want to find great companies early, you've got to find great leadership early.
If I hit on one, you want to find founders, but getting back to the transformation stuff we just talked about before, they're not always founders. Sometimes it's simply a new management team taking over. I guess we could say that they are the founders, if it's a new strategy. But oftentimes we find them where they do own like four or five or 6% of the company, not 25%, which is what we all like to find, but maybe it's the number 2 in the organization that comes up and steps up to be number 1 in the organization, he was overlooked for many years, and he has just as much fire in his belly or her belly as the founder of the company did, and they have something to prove, and you find that bucket of an individual that can also be defined as an intelligent fanatic, as well. Really, I guess I should start off by saying if it's a micro cap company, I don't call the person a intelligent fanatic until they grow the company up and out of the micro cap ecosystem? I'm trying to find potential intelligent fanatic.
Buck Hartzell: Potential. Does it have to be a five bagger? Once it's a five bagger, they're an intelligent fanatic I can do that?
Ian Cassel: I like to say once they reach escape velocity out of micro cap, so out of, 500 million Bar Cap, that's usually what I'll define them as an intelligent fanatic. Where it's a sustainable move built on fundamentals. You see them in all walks of life, to give an example of what I would say a traditional multi bagger looks like in micro cap, it's not the next Google. It is a company and I'll mention one. I don't own it, and you shouldn't go out and buy it, but a company like Armanino Foods, which symbols AMNF. It trades on the OTC markets. It's not even on the NASDAQ, and they're the market leader in pesto sauce in the United States. All that company did was go from 30 million in sales to 60 million in sales over 14 years. They went from earning two million to earning 10 million over 15 years. That's a 28 bagger.
There's nothing sexy about making pesto sauce, but they did that without diluting, and so earnings per share continued to increase. That's really what drives sustainable multi baggers, which is what I'm looking for, because in the micrograph space, you can find a lot of flash in the pan successes that work out for one or two a quarter because they have the right product or service that hits a fat or theme in the market at a specific period of time, but come right back down. You want to find these real high-quality businesses that can sustain that trajectory. Here in the United States, out of those 13,000 micro caps in North America, 7,500 of them are on OTC markets. It's a significant amount of companies.
That's more companies than that trade when the NASDAQ and New York Stock Exchange combined. The sandbox, if you will, micro cap companies, it's a lot of them to sift through. Yes, there's a lot of them that no one should buy, but you could say the same thing about any small business universe, whether it's small private equity or venture capital. They have just as much failures as we have in small public companies. They're just private, their failures aren't public. Ours are, and that's why we get a bad rap, too, as micro cap.
Buck Hartzell: Yes, absolutely. So far, we said, hey, start with profitability. Let's look for profitable companies that are run by really good people. It could be a change of management, bringing in people with a track record that also have some skin in the game. Maybe they own 3, 4, 5, or 6% of the business, and then you want a sustainable growth in earnings, so you can get that exit velocity, like you said, so they can compound those earnings and you can get really good results. Are there any other quantitative factors that you might look at that says, this is a really good candidate to be a good micro cap stock?
Ian Cassel: I would say it's just a combination of profitability, growth, and leadership, and the potential intelligent fanatics history in business. Did they do this before, they repeat winner, those combinations. When you add all those things together, it doesn't mean you're going to have 1,000% batting percentage, but it takes your batting percentage from 20%, to 40 or 50 or 70.
Buck Hartzell: That's better than the Hall of Fame.
Ian Cassel: Exactly. The difference between getting a hit 25% and 30% is about $10 million a year.
Buck Hartzell: That's a big difference. I want to move on to some qualitative things. We call those intangibles, here at The Motley Fool. If everybody listen, those are just things that don't show up on the balance sheet. It could be, hey, this is a brand, and we think it pretty good, but it's been mismanaged, or it could be other things. Are there intangibles that you may look at besides leadership, you've already talked about looking for somebody who's competent, that's leading the business? Are there other intangibles that get you excited when you look across the micro cap universe?
Ian Cassel: It's a good question. One of the things that I do look for, and, again, the way I invest probably shouldn't be the way you invest because we're all different. We're all kind of like fingerprints where we look the same, but when you zoom in, we're all different. It's the same thing for every stock picker. But for my strategy, I am looking for high organic growth businesses because I do think about who is going to buy this stock from me 3, 5, 7 years from now, hopefully 10X higher. The one thing that everyone is attracted to, whether you're a value investor or hypergrowth, is growth.
It's why Ben Graham himself throughout his career, went from cigar butt investing. By the time he died, he was basically a growth investor because he realized like, this is just a better way to invest when there's some organic growth attached to it. You don't have to worry about some value investor that thinks it's worth 2% more than you to reversion of the mean. I want to talk about also some other important things for people here. They're managing their own portfolios out there. micro caps are a little bit different. What do you do as far as position sizing and holding period for these stocks? Is it the same? It's going to be different, I would assume, than buying an index fund and just averaging into it, your 401(k) over three decades? You probably treat micro caps a little bit differently.
I wish I could just come on and say just find some 10 great stocks, Coffee Cam in the portfolio and wake up in 20 years, and you'll be rich. That'd be a lot easier. But these are small evolving businesses. They're small businesses. They evolve in good ways and bad ways. It's similar to where I don't let my four-year-old stay at home by themselves or else they're going to burn my house down. I got to watch them. I got to watch what they're doing. It's the same thing with a portfolio of micro caps is maintenance due diligence, meaning the diligence you do after your initial purchase is crucial because that's going to decide if you're buying more holding or selling, and I would say the normal shelf life of a position, even in my portfolio, and I've been doing this since I was 19, now 44. I'm getting old. Has been around two years, probably the average shelf life in a portfolio of mine. When you think about that, it's like, I'm usually in about a dozen companies at one time, and I've probably owned, let's say, 60 or 70 companies over the last six or seven years. What I think about how many of those 60 or 70 companies over the last six or seven years that I still own today? It's about three or four.
A lot of times people get turned off by that, but it actually aligns with the greatest stock pickers and investors of our generation like Warren Buffett, when you look at his public portfolio, I think he's owned about 300 stocks over his career, and he has about a dozen companies that are there that he's owned for 12 years or more. The greatest investor ever had to own hundreds of stocks to find a handful that are worthy of holding. And just think about Larry. Now I'm investing in small businesses. Of course, there's going to be turnover there. I would say the average hold time for me is around two years. There's some I've owned for 10 years, and there's some I'll own for three months. My intention with every purchase is to hold forever, but very few will earn that right.
Buck Hartzell: You mentioned the buy sell or hold. It determines, can you give us some examples? Like, what is the situation where you're like, Okay, I need to cut ties with this company? What is to maybe help our investors at home make that decision if you're actively monitoring the position?
Ian Cassel: I would say that there's four main reasons why you would sell. The first two are good reasons. I would just say that the first one would be you find something better than your worst idea in the portfolio. I say that's a good reason. The second good reason is something goes up too far too fast, and usually I define that as pulling forward five years' worth of returns into a single year. What I found in those circumstances just through my experiences, 95% of the time that situation happens. Because a lot of people will say, Well, you should still hold it because it's still have room to run.
Ninety-five percent the time where I've experienced that type of huge win in a single year where something goes from 10 times earnings to 100 times earnings is 95% of the time. They're going to stub their toe in an upcoming quarter, and the stock's going to get cut in half or more. Then it's going to spend the next five years backfilling fundamentals. Or not, before it reaches new highs again. It does make sense to take some off the table in those circumstances. The last two reasons are obviously more bad where something bad happens with the business, either the business evolves in a bad way, you need to sell, or the fourth reason would be I've just found management to be untrustworthy or incompetent. I don't care what the valuation is, I'm going to sell it immediately.
Buck Hartzell: That's great. We all make mistakes. We get excited. Somebody news in here, they have a great track record. I think what's important for folks at home and maybe you agree with this or not, I have an idea in my head what I'd like to see management do. Like, this is what they should do. Usually they'll say the right things, and you're on board, and then you start to see them deviating from that course, and it's like, Oh, what are we doing here? You do have to hold them accountable, and so maybe that happens for you as well to make sure that not only they're saying the right things, but they also have to do the right thing.
Ian Cassel: It relates back to your position sizing question. I think one place where I've evolved the most, 10 years ago, if we were having this conversation, I'd be telling you if I'm not putting 10% of my money into something initially, then I don't have the conviction to own that. Where today, it's more like, I'm OK taking on a smaller position size and averaging up even less times when you're actually averaging up in something. You grow with the position. You grow with the company, and it's a more natural way to grow a position because that's how we all grow relationships. I think building conviction is like building a relationship where it just it goes better over time.
Buck Hartzell: I love that.
Ian Cassel: We say buy in thirds, and sometimes I joke, buy in 15th or 20th, because we love to add the winners at The Motley Fool, and we also realize that maybe the day that we bought the stock or recommended, we did a lot of research. We may have put months of research into it. But after we own it for a year or two or three, we know it a lot better than we did that day. Sometimes even though the stock has gone up, we think the business value has gone up even more because it hasn't been recognized yet. As you know, once institutional gets large enough where that market cap is where institutional investors can get into it, that can push the stock quite a bit higher as well.
Buck Hartzell: That discovery move when institutions discover something is what I'm trying to get on the left side of especially in my type of investing, and we define micro cap as sub 500 million micro cap. I'm really looking to initially invest in something sub 100 million, which is really where there's no institutional ownership. There's no analyst coverage. There's nothing. I think, is it a dangerous place to invest? Yes, but it's a great place to invest to learn stock picking because you're forced to do the work. There's no analysts there that you can lean on. Like, you got to do the work yourself. It's that independent mindset that is crucial to becoming a better stock picker. It's not a surprise that the best stock pickers ever came out of the micro cap ecosystem.
Ian Cassel: I want to talk a little bit about valuation because you said when something runs too much and it gets a little bit too excited, 95% of the time, you see that come back down there's stubblet. I want to know how big of a role does valuation play in the work you do? I have a colleague, Bill Mann, and I love his analogy, so I'll take it. He calls it the awesome, this continuum. I think this applies to Ben Graham and certainly Warren Buffett and Charlie Munger, as well. Munger talked Buffett into saying, Hey, it's better to pay a fair price for a wonderful business than a great price for a below average business. How important is valuation for you? And is it a sliding scale? Are you willing to pay more for some businesses and less for others?
Buck Hartzell: I would say that I'm very valuation focused with my initial purchases, and after that, I'm very execution focused on my subsequent purchases. I'm really trying to find these management teams that can consistently execute over quarters and over years. When you find them, you can't be afraid to average up because these are small businesses, they continue to execute, these things can go up, 1,000, 2,000, 5,000% so whether I'm buying at 50% higher, it's not that big of a deal to me. I'm really just trying to find these management teams that can execute. Price is my due diligence, as Buffett would say, on the initial purchase, more so. Then it's more execution focused thereafter. In a perfect world, we would all find deep value stocks that turn into growth stocks. You're finding them at five PEs, and they turn into 30 PEs, and that's where you get the double lever of multiple expansion and earnings power, and that's create these monster winners. I do think your initial purchase price matters.
Ian Cassel: Ironically probably the most profitable investment ever was Warren Buffet's purchase of Apple, which he made at about 10 times earnings, originally. Then this past year, he sold about 600 million shares of that. They were over 30 and close to 40 times earnings. He had the benefit of the growing earnings, plus buybacks, plus the expansion of the multiple. But he said, Hey, this is better than any business we own at Berkshire Hathaway, but yet he sold a lot because he realized, hey, at some price, even the best business maybe in the world is not a great investment, and he's willing to cut ties and pay some taxes, and now he has 325 billion in cash on his balance.
Buck Hartzell: It's funny, too, when you think about the maturation of multidecade winning stocks. Every single one of them was a deep value stock and a gross stock at one point in time and probably multiple times during the journey, and at any one point in time it attracts different types of investors that are deep value or value or growth or gap or whatever you want to call it. We all sometimes silo ourselves into a valuation like I'm a value investor, and yet, the companies themselves transcend. They go up and down. They're loved and hated. They're shorted. There's activists involved. It's interesting when you look back at the journey.
Ian Cassel: That's absolutely true. I remember looking at one time with Apple. It was listed in a ton of growth ETFs. Then it was also listed in all the value ETFs. The Motley Fool, we don't even really like the value growth dichotomy. We're investors. Like, people put names on things, but that was funny to look over across all those ETFs. Basically, they all had Apple. Didn't matter what they called themselves. Apple was in there.
Buck Hartzell: Can you talk about a mistake that maybe you made in the past to help some of those that are just getting started today? Maybe there is a 19-year-old listening like you were, and they would like to benefit from some of your pain in the past. Maybe you can share a mistake that you made that now you're cognizant of more than you were when you started.
Ian Cassel: I was a little bit different in that. I find that people get into investing in one of two cams. You either get into investing as a story stock investor or you get into investing as buying cheap stocks. The difference is, whether you got into investing before or after you took an accounting course. I started as a story stock investor, which is odd and then I build up capital. Is a higher turnover momentum type strategy through my 20s, and then I became a full time private investor for 10 years. I'm just living off my portfolio and I've evolved and growing and matured. I'm nowhere near the type of investor I was 10 years ago, and I hope I'm different than I am today in 10 more years because I think that's a key to anybody's investing. Is just evolving and growing.
I think one of the things that I would say, and we hit on it already, but I'll hammer it home again is stick to the profitable companies. There's 17% of micro cap companies are profitable. You will get rid of 98% of the pain and frustration if you just stick to that bucket of companies. Once you learn from there, then you can be free to move up and down the risk spectrum. Maybe you want to try to get them right before they get to the inflection point of profitability. and that's what I do too now. But I would start just doing a screen for trailing 12 month profitability on things sub 500 million. Pick an area that you're interested in. Maybe it's an area where you work, where you have some inside knowledge in that industry. That's a good place to start and stick to the profitable part of that. And I think you'll learn and learn the right way, and then you'll evolve from there.
Buck Hartzell: The fun part about that is it'll make you better at your job. One of my children is into technology and that kind of stuff, software engineer. I'm like, Look in those places, because if you understand business and the technology, that's a great thing to bring. Everybody, as you said, we're all individuals, so everybody has their own strengths out there. I want to give one more ideas. If there's resources, do you recommend any resources for people who want to learn? You mentioned some books that you have written, any other things where people that want to take this to the next level can get more information?
Ian Cassel: We actually have a free YouTube video. It's up on YouTube. Just talks about how to research a micro cap stock and it's free up there. There's no call to action to come join us or anything like that. But I think that's a great resource because researching a small micro cap company is different than researching Apple. Probably the half of the way it's different is just looking out for red flags things like that when you're analyzing businesses. I think that's just a really simple free resource I'd point people to.
Obviously MicroCapClub is a great resource, too. But I think that's a good one. I don't think I can even think of any type of specific book, and I'd be hesitant to just because I do think it gets back to the type of investor you are. My type of investing, being concentrated, even the types of companies I look for and invest in are going to be different than somebody else. I don't think it's right to push people into investing exactly like me because I think the journey of investing is trying to find out how to invest like you.
Buck Hartzell: That's just great advice. Once again, this is an exciting space for people to enjoy. It's an area where they don't have to compete with the big institutional players. But you have to do your work. Just like Ian Cassel has, once again, founder of MicroCapClub and Intelligent Fanatics, thank you very much today for enlightening us and sharing some of tips to make us better investors. We appreciate it. Thank you.
Mary Long: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool Editorial Standards and are not approved by advertisers. The Motley Fool only picks products that it would personally recommend to friends like you. For Buck Hartzell and Ian Cassel, I'm Mary Long. Thanks for listening Fools, and we'll see on Monday.
