Gauri Pande's Reviews > What I Learned About Investing from Darwin

I wish I could rate this book over 5 stars . I’ve rarely been blown away by an investment book , because the bulk of them are plain and simple boring . Most investors come across as dry and joyless, unidimensional people . People who change the world have range - they are able to dive deep into multiple disciplines and synthesise these unique cocktails in their brains to come up with radical approaches to change the world . Jobs was right . Boring people don’t build great businesses .
Pulak’s mastery of evolution and his genius in marrying its lessons with investing is unputdownable. It’s not a wonder that Nalanda is unique . What I love more is that he seems to have a life, has a philosophy to investing that doesn’t hinge on esoteric spreadsheets but a hunger to read and know , that only people who change the world do . And the courage of conviction in his process that those in the business know , is the hardest to hold on to with the daily barrage of information. For investors , there is a very fine line between courage of conviction and hubris , and many of the best stumble towards hubris . In that context the underlying humility of Nalanda ( we know very little , we will take no risks , we do the best we can ) is laudable . I have worked with some great investors in the public markets business , and I picked up the book with the deepest scepticism , but I put it down a believer .


Lessons

1. Minimise the risk of committing type I errors (commission ) to curtail risk injury or death and learn to live with type II errors ( omission ) or foregone benefits. Like in the case of deer in the wild , type I errors could be fatal . Improving performance in type II errors doesn’t materially improve an investment track record but is dramatically improved when errors of making bad investments is reduced . Risk is not deviation from benchmark . Risk is about losing money . Think first about not losing money . Not return . Hence the Nalanda approach is to focus on industries where losers and winners have been largely sorted out and the rules of the game are apparent to everyone .


2. Selecting for just tame ness got Dmitri and Lyudmila transformations in body structure , tail wagging and piebald fur in silver foxes since behaviour and physiology of animals is intimately connected . Similarly focusing on ROCE is measurable , rejects businesses of poor quality and selects most high quality businesses

4. living things are highly resistant to internal and external changes while simultaneously having the ability to evolve , aka robustness . It is a delicate balance . When genes mutate , they continue to perform their primary functions but may develop secondary functions that can be used for a completely new use , making the genetic code robust as well as permitting evolution for free !businesses are robust if they have high past roce , fragmented customer and supplier bases , no debt and excess cash , competitive barriers , stable management team and a slow changing industry. Such companies can take calculated risks , equivalent to neutral mutations in nature to grow and evolve

5. Proximate causes explain immediate influences on a trait while ultimate cause explains the organisms ultimate success or failure . Proximate causes of share price changes coming from macro economy , markets , events should largely be ignored to focus on business fundamentals

6. Darwin proposed natural selection ( random variation in an organism with favourable ones being preserved and heritable which gave the organism a better chance to succeed ) , sexual selection ( trait which helps an animal to produce more offspring ) and common ancestor ( descent with modification ) . Like Darwin , Nalanda interpret the past of companies only in the context of history and do not believe in forecasting the future through spreadsheets .

7. Convergence ( unrelated organisms developing the same solutions to similar problems ) in nature and businesses symbolises that there is a pattern to success and failure .a popular question to ask while evaluating a business is , where else has this worked ( Infoedge resembled the network effect of the yellow pages ) , and taking the outside view of an industry ( airline retailing telecom and commodity chemicals have never made any money ) ala Kahneman . Also a reason to avoid new industries , as convergence only kicks in once the pace of change has declined . There will be an odd case where it doesn’t work - like Amazon , a conglomerate succeeding .

8. Lend credence to only those signals from companies that are honest I.e costly to produce ( a finch being brightly coloured helps it reproduce but endangers it to predators ) . Don’t trust management speak , interviews or earnings guidance , trust only their historical performance and their reputation in their ecosystem ( both expensive to produce )

9. Stasis is normal in nature with sudden evolutionary change ( punctuated equilibrium where new species emerge ) . Similarly The daily , weekly change in great businesses seems much greater than changes over decades . But it matters little to the long term trajectory of the business and is noise . Great businesses remain great bad businesses remain bad . Stock price fluctuations don’t mean business fluctuations. Hence inevitable fluctuations due to short term events should be exploited to buy ( create new portfolio species) not sell high quality businesses . Selling should only happen because of governance issues , capital allocation gone wrong and irreparable damage to the business .

10. Compounding is not understood , because its impact stays hidden in the initial period for long periods of time ( 4 rabbits let loose in Australia led to 10 bn ). Biggest surprise is that they were under a million in 1895 but went to 10 bb in 1920 . Nothing happened for a long time initially . Investors underperform because they sell early thinking they have made enough and tire of slow progress . The richest lists are all dominated by people who didn’t sell , that’s just the law of compounding . A handful of compounders in the portfolio growing a little more than the rest similarly will overwhelm the rest of the portfolio given time ( as a favourable trait given time overwhelms the entire population ) .