35 minutes | Apr 22nd 2019

Ian Beattie – Follow a Structure, Not Emotions  

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Ian Beattie is currently the co-chief investment officer of NS Partners London, an investment management boutique. He holds a B.Sc. degree in economics from City University of London and started in the investing business in the early days of January 1992 as an Asian equitist. Since then he has been involved in East Asian and Asian emerging markets. Ian joined NS Partners in 1996, and just a year laterhe became head of Asia and has since been focusing on the products closest to his heart, emerging markets, and Asian equity investments in the region. 


“I think we’ve got to learn from our mistakes … and to learn from them, you need to know what you got wrong. And some of those are un-forecastable genuinely exogenous events. That’s why you have a diversified portfolio, right?”  

- Ian Beattie



Investment journey 

Ian started investing CAR Inc., a car rental company based in Beijing, despite the fact that there existed a handful of popular and booming ride-sharing companies in the continent, such as Uber and local operators that posed a threatThe balance sheet looked great and it had a good foundation for its name, with training by Hertz managers who helped to set it up. 


“There’s nothing like a globally significant crisis to really test your knowledge of markets, whether it’s how our company works, how an economy works, and how those two are joined up. Pretty exciting learning experiences are not always a pleasant one.” 

– Ian Beattie 


But after a while, his investment started to fall. What caused it? Ian cites his initial positive assessment about the company’s management proved wrong, but on top of that, he underestimated the threat of the competition. Ian failed to see the bigger picture and the impact that the bigger companies would bring to his stock in the long run.


Emotional attachment was misplaced 

As part of the peer review process, younger members of the team had been asking him early on what he was doing and why he wasn’t seeing the risk of car-rent apps such as Uber and their China equivalents and why the company was not getting more cash out of its operations (free cash flow (FCF)the cash a company produces through its operations, less the cost of expenditures on assets. FCF is the cash left over after a company pays for its operating expenses and capital expenditures, also known as CAPEX).  


I’m getting hit with this (strong feedback). And I realized I cannot defend it … If you bought a stock – or a valid investment  for a valid reason, that should still be the reason why you hold onto it. And if that story is broken, then you should sell. 

– Ian Beattie 


There have been many cases such as this, wherein an investors reason for buying a stock suddenly changes midway through ownership. This happens mostly when the stock starts to depreciate, and when it does, it should be a clear red flag that it is no longer profitable and actions should be taken to prevent further damage. Ian, however, failed to see this flag sufficiently early on in the game. 


Reassessing the situation 

Ian is reminded of the OODA Loop, a discipline he has used to reset his mindset and that of his team to what is really happening. Created by US fighter pilot John Boyd during the Korean War, the OODA loop is a strategic tool used for analyzing situations for re-orientating in the heat of the moment. Part of it came from a theory to achieve success in air-to-air combat developed out of Boyd’s observations of dog fights between MiG-15s and North American F-86 Sabres in Korea. It is a disciplinary method that helps people remain calm and properly gauge what is being faced and because it’s a loop, it allows for constant re-assessment amid changing conditions.


OODA loop as applied to investing  
  • Observe – the situation, whats going on with the stock. Ithe business of investing, it’s more like to observe and identify. 
  • Orient – yourself, if youre a fighter pilot, but for people in investing, analyze the situation. 
  • Decide – Plan what action should be taken according to the situation 
  • Act – Take the necessary action.  


Then go straight back into the loop as conditions change 

Ian suggests to observe whats happening now to see if you have made the right change. For fund managers, that would involve risk control and re-forecasting, which is very important. Look at the new data, because usually if the share price has gone wrong, theres some new information upon which an investor needs to redo their forecast, and he suggests being honest to the point of being brutal.  


Peer review helps with that honesty  

The great advantage of institutional investors is information on costs and the presence of a team, which Ian’s firm uses to employ a peer review mechanism. He says it does not matter whether investors have been in the business a few years or 30, it is wise for all team members to subject their decisions to assessment by the team, members of which might have power to veto a decision. This process is applied not just when deciding about buying a stock, but when reviewing its progress. Ian says the veto is used to empower and encourage dialogue rather than to score points. He says this process keeps everyone grounded when stocks are going up and the team presenting their idea sees their stock going up, and by doing so, also catches problems before the investment goes “horribly wrong”.


“I know the theme for your series here is how the emotion gets involved. This is an emotional business. So the peer review, as well as obviously … more information,  its most powerful tool is as an emotional check.”

– Ian Beattie 



Teams always contain people with varying talents  

As Ian finished the main part of his interview with the story of the hedgehog and the fox and relates it to todays market analysts. Hedgehogs make the best out of what nature has given them and use it to their advantage. They were given spikes and they use them for self-defense. They excel at one thing  their specialization. Foxes, however, do not have spikes but are eclectic and use whatever skills they can find to be able to fend for themselves. They take risks and adapt their skills to the kind of environment they are in. 

In terms of approach, fund managers must liken themselves to a fox in need of hedgehogs, because nobody knows that subject better than a hedgehog. A good team must consist of a diverse group of people with different specializations, and led by someone who can become a good listener and has the ability to make decisions not based on what is for his own betterment, but for the good of all involved. 


I think thats the thing about our business and about the markets in general, people who are good at it, people who last a long time … have to have an unusual balance of arrogance, because you have to believe you can beat the market, when a lot of academics out there will tell you that you cant. But at the same time, you need to be need to have a huge  amount of humility. 

– Ian Beattie 



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