“What I Learned About Investing from Darwin” is an exceptional book authored by the illustrious investor, Pluck Prasad. With a brilliant track record in the Indian equity market and at the helm of the highly successful Nalanda fund, Prasad has managed an impressive portfolio worth approximately $1.5 billion USD. His astute investment strategies have consistently outperformed market indices, making this book an invaluable resource for anyone seeking to enhance their investment knowledge and prowess.
He is big believer in better returns of equity markets over a long period of time. There are some fundamental principles of natural world which dictates his investing philosophy.He spends most of his time in reading biology and about natural world.He is biggest cheerleader of charles Darwin.He has taken lot of inspiration from research of darwin and other scientists to perfect his investing thesis.
The three broad pillars on which his investing stands on are
1.Avoid big risks
2.buy high quality at fair price
3.don’t be lazy, be very lazy
Going ahead he again takes us into animal world and takes us into the realm of evolution where the fittest survive. There is clear lesson of investing from darwin here.
if we analyse the life or investing we will come to the conclusion that basically
we make two mistakes
type 1 error -when i make a bad investment error of commission
type 2 error- when i reject a good investment error of omission
There is a dichotomy where when we try to minimise type 1 error type 2 error increases.But to become a survivor in animal world or in investing world it is imperative to minimise error 1.The below table gives a statistical proof ,how it helps .If i am keeping both the errors at 20 percent success rate of survival is 57 percent.if i am reducing the error 1 to 10 percent, the success rate increases to 73 percent. But reducing the error 2 to 10 percent does not result in much difference from the earlier errors of 20% .
type 1 error type II error success rate
20 20 57
10 20 73
20 10 60
HOW TO AVOID BIG RISKS
a)being wary of criminals, crooks and cheats
b)avoiding turnarounds
example jc penny filed for bankruptcy in 2020
ibm is a successful turnaround story
c)detesting debt
d)ignoring m& a junkies
times warner and AOL
e)not predicting where the puck will be
f)not aligning with unaligned owners
g)PSUs and indian subsidiaries of global MNCs
BUY HIGH QUALTY AT FAIR PRICE
a)one characteristic is historical return on capital employed (ROCE)
ROCE : EBIT /(Net working capital +net fixed assets)
nalanda owned businesses have median ROCE is of 42 percent
a consistently high ROCE business is likely to be run by an excellent management team
a consistently high ROCE business is likely to have a strong competitive advantage
a consistently high ROCE business allocates capital well
a consistently high ROCE business allows companies to take business risk without taking financial risk, which increases the chance of business success
b)Business must be robust to evolve
c)has delivered high historical; ROCE over a long period
d)has a fragmented customer base
e)has no debt and has excess cash
f)has built high competitive barriers
g)has a fragmented supplier base
h)has a stable management team
The industry changes slowly.
j)highly robust business evolve by taking calculated risks
The only way to protect against loss of robustness is entry valuation that is margin of safety
median TTM pe for nalanda is 14.9 25-30% discount on the index of TTM 19.7
A crucial reason for underperformance of fund managers is their focus on future rewards while ignoring the treasures of the past
for nalanda
we interpret the present only in the contexts of history
we see the same set of historical facts as everyone
we have no interest in forecasting the future
some questions we ask
why revenue growth declined, what could be high margin for third year in row, has the company started spending less than usual on sales and marketing, is capex higher than usual, what has driven the increase in ROCE over the last two years vs five years
success of a species is not dependent on its being best but simply being better than the competition.
we invest in convergent patterns
classic network effect
nakuri converged with many of the various traits of leading yellow page business
second convergent pattern was the performance of leading internet job boards
convergence is the dominant pattern in the business world, on rare occasions it isnt
lend credence only to those signals from companies that are costly to produce
dishonest signals
press release,management interviews in the media, investor conference and road shows, earning guidance, face to face meetings with management
when we find high quality business that do not fundamentally alter their character over long term, we should exploit the inevitable short term fluctuations in their business for buying and not selling
High quality business
stellar operating and financial track records, a stable industry, a high governance standard,a defensible moat, increasing market share and low business and financial risk.
when and why we sell
a)a decline in governance standards
b)Wrong capital allocation
c)irreparable damage to the business
d)in business world as in the organic world Stasis is the default
e)great businesses stay great, bad business remain bad
There are a few large and successful firms in most industries
the successful companies are becoming more successful
weak companies are getting weaker
do we want to own this forever
Why we don’t sell
who are the richest the one who never sell
empirical evidence shows that owning great business works
if there is an unbeatable formula, why not copy it
how else do i play for my mistakes
the only way to benefit from compounding is to stay invested
not selling makes us better buyers
i love our entrepreneurs
we avoid many categories of risks because of the wide range of possible outcomes in these situations
we invest only in exceptional businesses because most businesses fail and we want to reduce uncertainty
we buy at an attractive valuation because while we don’t know what will go wrong ,we assume that something will
we rarely buy and sell even more rarely because every activity may have unintended consequences we can’t foresee.
Eliminate significant risk
invest only in stellar businesss at fair price
own them forever
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