The Beaver

My first encounter with the beaver was as a 10-year-old child. I stood behind the goal of our local football team yelling ‘up the beavers!’ before trudging home, cold bag of chips in hand, resigned to my team spending another year in the second division of the Isthmian League.

Today, the curious beaver represents the three critical aspects that have underpinned my lifelong practice of investment management. And they’re present in everything we do at Inthallo.

The first observation relates to the peculiar dictum, ‘beavering away.’ The second to its remarkably fat tail. And the third, an incredible ability to be irritating.

Most decision making processes can be broken down into four parts:

1. Data capture
2. Data processing
3. Data interpretation
4. Decision making

The world of investment, like many others, has seen radical change in each of these areas.

The sheer amount of data available today is much greater than 30 years ago. For example, an average annual report today vies with the Argos catalogue in length, whereas the 28 pages of financial accounts and one-page statement on business operations you’d receive in 1993 left a lot more to the imagination.

This doesn’t even take into account the plethora of other avenues — like the huge number of publicly listed companies in emerging markets, China in particular — that have opened up for the first time.

It feels almost trite to comment on the advances in today’s data-processing capabilities. Consider the power of Excel spreadsheets compared with early-stage accounting and statistical tools. How long before visual behavioural dynamics — the CEO’s words and non-verbal indicators — are gathered by bespectacled investment analysts and processed by AI technology?

Within the realms of interpretation, there has been a drift of models and managers toward thinking in line with the traditional confines of the gospel of CFA. At Inthallo, we’re moving away from its obsession with the past, and embracing future possibilities, drawing on analogues from history, geography, biology and other disciplines in a great cross-fertilisation of ideas.

Each of these changes has shattered an industry that’s drawn to the status quo, possibly on account of its egregious revenue generation. As such, beavering away at productive endeavours, in small teams, has taken on a particular importance. It’s something we couldn’t do without the inspiration of internal and external researchers, peers and partners.

We’re able to commit significant time and targeted effort to investment analysis because we spend relatively little time externally talking about what we do, or bothering with industry norms. This article is an exception that proves the rule.

The fat tail is a statistical construct where extreme events tend to occur more often than one might expect. Think about three buses turning up at the same time — it’s unlikely, but you should always be prepared to expect it.

As a natural consequence of human bias, this rare occurrence has a tendency to generate outsized returns (with the exception of investing during a period of irrational hubris, or a bubble).

Of course, it’s impossible to know before the event whether you’re in a bubble, or how long the bubble might last. But we’ve developed tools that have guided us well over the past 30 years of Asian, dot-com, housing and Covid bubbles.

More constructively, we seek out smaller companies with the opportunity to deliver 3-5× returns over the next five years. One driver of these returns will come from a change in perception about the investment case. The more important one is likely to be the catalytic impact of a small change in something, somewhere.

We beaver away looking for these fat tail events — across geographies, industries, and the market capitalisation scale.

Beavers are divisive creatures. To quote Jeremy Clarkson, they’re “almost incomprehensibly destructive.” Beavers can bring down a foot-wide tree in just over an hour, and create ponds and wetland in places of fast-moving water.

Companies like Moderna, with the potential to create a new way of treating cancer, may cause a lot of ‘destruction’ within the cancer treatment industry if they’re successful.

Nio’s focus on replacing the market for the worst category of passenger vehicles, the gas-guzzling SUV, with a near-silent, serene range of EV-SUVs is arguably the most significant of any EV maker in the world. The demise of Audi, BMW or Mercedes would be a surprise, but it’s sensible to prepare for any outcome.

Throughout my career, I’ve practised my skills of beavering away, investing in fat-tailed investment opportunities, and challenging the status quo. In doing so, I’ve experienced more 1-in-100-year events than one could conceive.

In times like these, I’ve often thought of the beaver and its eponymous scout’s motto. As such, in the face of uncertainty, it’s always best to ‘Be Prepared.’