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Why We Keep Micro-Managing Our Stock Positions When Market Collapses (and what Ian Cassel thinks might help us)

Ian Cassel, micro-cap investor and founder of MicroCap Club, join Acquirers fund’s Tobias Carlisle and Jake Taylor in last week’s Value After Hours and shared with us some of the things he struggled with managing money and investing for the past 20 years.

I thought that with the heightened volatility we are facing some of what he shared is quite timely.

It may help some of you navigate through this period better.

What he shared is more applicable to investors trying to be their own portfolio managers by investing in individual stocks.

To invest well in a sustainable manner in the micro-cap space, you need to be really sharp and conscientious in your work, not to mention that you may need to find your own means to assess the integrity of the management.

If you can do it well, the skillset can be easily translated to investing in larger capitalization companies because there is more room for error.

Ian first asked the two co-hosts this question:

During a drawdown, when you are staring at your own positions going down, would you add more new prospects or would you buy more of the things that you trust?

When the magnitude of the drawdown is larger, we might find it challenging to add on to a new position.

Our outlook will become shorter term because when the market beats you up, you will fall into the mood that you don’t wish to lose more money.

You are likely to start thinking about when the earnings announcements of your current positions will take place, and would dread seeing the earnings because the results are likely not going to be good and the stock will take another leg down.

That would influence you to start micro-managing your positions because you do not want to take another leg down.

Usually, when we try to do that, we ended up making more mistakes.

Jake Taylor adds that the opposite is true in that the industry or economic data might tell you that one of your companies is going to kill it next quarter, and you looked forward to it.

Ian has been managing money for 20 years and he admitted that things like this still affect him.

One of the things that he felt worked for him was to question whether his company can continue to do well in a two-year timeframe.

If the answer to that question is yes, then there is nothing much to do but to buy more of the existing positions you own and trust, versus adding to that possibly new position that you do not trust that much yet.

This way of thinking is especially applicable in a concentrated portfolio (under 20 or under 10 positions).

When you run a concentrated portfolio, it is as if you have a relationship with these companies. You really don’t know the companies in your portfolio that well, unless you own them for a period to see how they would react to a macro or micro circumstance.

In times like this, when stocks are dropping, we tend to get more macro-centred. For many of us, we might not have thought that much about inflation and interest rate in the past 60 days.

The more we listen to this news, the more we turned into a more macro than a micro strategists, which you are not that good as. It paralyzes and prevents you from making good decisions.

Ian tries to think micro and focus on the companies he invests in, and on the things, he has control over.

If you wish to be macro, recognize that perhaps for the next few quarters, something bad happens to your company and assess if the companies you invest in can survive the period.

Hope this is useful for you and you can listen to the rest of the episode here:

You should really check out Jake’s lesson on what dopamine does to us.

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