What i learned about investing from Darwin ,a book by pulak prasad

“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

investing from darwin


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


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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