6 lessons from a 1000-bagger
Yep, a THOUsand
To set the tone for why I love reading about this super investor. Jason Hirschman’s comment on getting out of a failed illiquid stock position:
It’s like being a fat man, squeezing himself through a narrow door: it’s awkward, silly-looking, and downright painful.
A quick reminder if you haven’t read last week’s article. This is Jason’s X profile:
We’re diving deep into the outside investor who made a killing on a single trade. Someone like us, who hunts for great opportunities, and was able to buy and hold sufficiently long.
Jason Hirschman has grown his small portfolio to a nine-figure family office (hudson215capita), and he now runs it with his family. I consider him a superinvestor just like Buffett and therefore, it’s interesting to break down his process and learn from him.
Jason is unique as you’ll see, some insights go against what you would learn in an investing book. His bio is simple and powerful.
“Seeking undiscovered future high ROIC companies”
Let’s see what we can learn ⬇️
XPEL in a nutshell
XPEL is a company that originally sold paint protection film. The film protects your car from the environment.
Jason’s first reaction when he heard about the company:
I thought it was the stupidest idea in the world. An expensive glorified car condom for big eagle men, these kinds of guys with 7 Ferraris…
XPEL went from 0.04 USD and currently trades above 40 USD. The CEO, Ryan Pape maxed out his credit cards to keep the company going when it was only worth 1 million USD. He still manages the company today. But we’re not here to dive deep into XPEL or its CEO. We want to know how Jason handled this investment.
Here’s a broad overview:
At the start, he did not think this company would be a 100-bagger. He built his position gradually. We talked about this in our annual review.
Takeaway n°1: It’s better to treat position sizing as a process instead of 1 or 2 discrete steps. Build gradually as conviction increases.Let’s zoom in a little on 2016 ⬇️
The stock crashed hard at the end of 2015 when 3M filed a lawsuit for product infringement. Collaborating with other microcap investors, going deep into the filings of the lawsuit, patent analysis and even sending a film sample to a lab for chemical analysis, Jason built conviction that 3M would not outright win the lawsuit. In March 2017, a settlement was reached between 3M and XPEL, where XPEL took a license in a 3M patent. The settlement did not have a material impact on the business. We’ll talk about it some more when we discuss drawdowns.
At this moment Hudson Capital still owns 1.3 Million shares, 12 years after the initial investment.
Small business owner vs analyst
Jason grew up in Long Island within a family of small business owners. They manufactured and distributed eyewear frames. Some of the table discussions he grew up with:
IRS audits
Corrupt unions
Employee theft
Bankruptcy risk
Success and failures
“You have to be tough, expect volatility and pain in life”
His high school graduation speaker was no other than Peter Lynch which infused even more his fascination with investing in the stock market.
In 1995, he graduated with an economics degree from the University of Chicago and went on to take over the family business.
Similar to Buffett but on a smaller scale, recognizing that their small business was in a dying market, he decided to reinvest all excess returns back in the stock market. At that time he:
Patented some products
Moved the business to Las Vegas (cheaper)
Was able to increase gross margins from 30 to 50%
Reduced working capital to a minimum to maximize free cash flow
His “small business” experience had a profound impact on how he invests. He loves it when he finds a CEO who doesn’t want or doesn’t talk finance. There might be opportunities in these weird situations.
Takeaway n°2: A small business owner doesn’t think about the P/E of his company or even the ROIC. He thinks about sales, cost structure, inventory, and working capital. As an outside investor, do both: Think about the business operations AND the financial performance. Not everyone speaks finance. Get giddy when the CEO does not.On position sizing
Jason now holds about 70 stocks. However, 20 of them account for the bulk of his portfolio. He takes an initial position to get his brain to care more about the company.
Position sizing is personal. But even when he had built maximum conviction in XPEL, it was 15% of his portfolio on a cost basis. He did not go all in.
Since Jason is a microcap investor, he comes across illiquid stocks. This creates other problems. I’ll let him explain it. On taking positions in an illiquid stock when managing more capital:
It’s like an old man lowering himself into a warm bath: It isn’t quick, and it isn’t pretty.
Takeaway n° 3: Position sizing is very personal. The right position for a winner is always more. Take initial positions if you’re interested in a company and build them up if conviction grows stronger. Always reevaluate your strategy based on experience and knowing yourself.How to hold on and when to sell?
Getting to a multi-bagger requires a substantial percentage of drawdowns. A 100-bagger means doubling about 6 to 7 times. On average it takes 26 years. (see Chris Mayer’s book on 100-baggers)
Here are the historical drawdowns for XPEL since 2013:
The word you’re looking for is brutal.
These are the drawdowns that Jason experienced and there is no easy answer to how to manage them. Here are some of the insights I captured from Jason:
Extreme due diligence: As I mentioned before, the research he and fellow investors performed on the 3M lawsuit went way beyond what you would expect.
Some investors sold at sometimes arbitrary prices, usually a round number like 5 dollars or 10. That does not make a lot of sense
A portfolio with other winners helps to avoid selling outright
Trim trim trim instead of sell, sell, sell
Drawdowns are a privilege, it only comes to those who earn it.
Takeaway n° 4: Do the work. Do more work. Know the company better than anyone. Only then decide what to do. Trimming instead of outright selling.The perfect blueprint
Jason’s biggest win was XPEL, and it seems that imprinted kind of a blueprint for the perfect setup. He has had other successes of course.
Here’s what he looks for in an investment case:
The stock price is depressed because of reasons outside of operational issues. (legal problems, sector problems, etc.)
It’s easier. Because operational issues are difficult to solve. In the case of XPEL, the price was depressed because of a lawsuit with 3M. By doing extreme due diligence (taking some of the film and sending it to a lab for chemical analysis), he was able to gain confidence in a good outcome for the lawsuit and increase his position.
Sales are generated with very low marketing and sales costs
If customers actively look for the product or service, without the company needing to make a lot of effort, you might have a winner. At the start, this can be local, in 1 city.
The CEO doesn’t speak finance lingo
He is the first outside investor to visit the company
Remember our article on the discovery cycle. If you’re the first, and you’re right…
There is no institutional investment holding
The investment case is peculiar, weird, and unique
To explain, let’s invert this: If it’s a clear-cut obvious pitch, why would the market not have recognized it?
The investment pitch is tough and gets easier when the business starts performing
A tough investment pitch usually means the market has a hard time figuring out the value of the business. Once the business operation starts performing, the pitch gets easier.
Takeaway n°5: If an investment pitch is easy, why would the market not have noticed? Don’t shy away from the bizarre.How to look for these ideas?
There is no clear-cut answer.
Screens are difficult. If you run a quality screen, 99.9% of the time, the market has already caught up. You could use a reverse screen, looking for bad metrics, that are depressed or maybe slightly improving.
Set Google alerts for changes, special events, lawsuits, and changes in management
Build an investing network, with other smart investors (like microcapclub.com)
Takeaway n°6: There are different ways to source ideas, but the best is still to build a network of investors.Summary
Here’s a recap of the 6 main takeaways:
Build positions slowly
Talk business operations, not just finance
Position sizing is personal, always reevaluate
Doing the work can help you suffer the drawdowns
A tough investing pitch provides more opportunity
Sources ideas by building a network of smart investors
I had a blast researching this. I want to end this article with one last quote from Jason which I think is very powerful:
If you can’t make your own decisions about any given stock, then don’t own it.
May the markets be with you, always!
Kevin
Further reading
This article was based on an interview with Jason and Ian Cassel from the Microcapclub.
I also watched this great presentation by Jason on his investing philosophy
You’ll find others on the Microcapclub YouTube channel.
You never mentioned luck, which is a very important factor that most investors or investment writers never mention. Why am I saying this? If this is only about research, technique and skill, then the person who found a 100 bagger can easily find many more with research and skill, right?
Does Jason ever sell?