What I learned about investing from “What I learned about investing from Darwin”

I am a voracious reader, and I have developed a pet theory – most non-fiction books would be better if they had been written as articles instead. Punchy and to the point! Typically, the author has one or two big ideas which are spelt out in the first few chapters, with the remaining 300-plus pages dedicated to providing endless examples to ‘bulk up’ the book. Since I value my time, if I think a book’s subject sounds interesting, I will often just listen to an interview with the author, who usually explains the key concepts well in under half an hour. If my interest is sufficiently piqued, I will buy the book. I often stop reading before the halfway mark, having absorbed the author’s main messages.

Occasionally, there are books that are so rich that I finish them completely and re-read them every few years. I also make notes and highlights on my Kindle and revisit those more frequently. There are countless books about investing and trading, with the majority adding little to the corpus. Recently, however, I found a gem called “What I learned about investing from Darwin” by Pulak Prasad, a fund manager working for Nalanda Capital, which focuses solely on Indian equities. Prasad has a passion for biology and evolution, which, as the name of the book implies, has given him unique insights into the parallels between the worlds of nature, business, and markets. Nalanda’s long-term record is outstanding, adding credence to Prasad’s perspectives.

Finches and foxes: Lessons from the natural world

Before you rush off to buy the book, I probably would not recommend it unless you are a full-time investor (or biologist, for that matter). Prasad dives into the topic of evolution in surprising depth, citing case studies on subjects ranging from Siberian foxes to Galapagos Island finches. While I found these fascinating, I nevertheless caught myself thinking, “This is all well and good Prasad, just get to the point about how this relates to investing!”. In service of my pet theory, my goal with this article is to share the book’s big ideas. Just be thankful I do not go through all 56 highlights and 13 notes from my Kindle!

Some of Prasad’s observations and lessons might appear blindingly simple and obvious, but that does not mean implementation is easy. As the late (and ever forthright) Charlie Munger said, “It’s not supposed to be easy. Anyone who finds it easy is stupid.” Regardless, a number are profound and worth pondering:

1. There are very few good investments in the market.
2. It is far more important to reduce errors of commission (i.e., buying a bad stock) than to reduce errors of omission (i.e., not buying a good stock, e.g., Apple). I will not go into the mathematics and probabilities, but Prasad’s logic is compelling. While academia and the investing profession concentrate on making good investments, we would be better off focusing on avoiding bad investments. Prasad contends that Warren Buffett is the best investor in the world because he is also the best rejector in the world.
3. The more robust the company, the greater its ability to evolve. This observation is relevant over longer periods; while smaller companies are often credited with being nimbler, the strong balance sheets and cash flows of larger, slower-moving companies allow them to survive first and then adapt and evolve through a range of environments.
4. There is a treasure trove to be found in analysing the past. The investment industry spends an inordinate amount of time attempting to predict the future. One can understand the temptation, given the potential rewards on offer. The future is unknowable; even if we could predict the exact path of the economy and individual businesses (we cannot), we still would not know how share prices would react. By spending our time analysing facts (rather than forecasts) like the company’s financial statements and capital allocation history, we can gain greater insights than by peering into murky crystal balls.
5. When evaluating a business, risk comes first, quality second, and valuation last.
6. Invest in convergent patterns (i.e., patterns that repeat). ‘Convergence’ is a phenomenon in the natural world in which unrelated organisms develop similar solutions to similar problems. For example, eighteen types of plants have developed red flowers to attract hummingbirds for pollination. Applied to the business world, Nalanda has found that business models that are successful in the US are more likely to be successful in India. Conversely, traditionally challenging industries, like airlines, are more likely to fail, even in nascent growth markets like India. Prasad notes a big difference between asserting “I love this business” and “I love this business construct”. Nalanda does not care about a business; it is deeply attached to a business template. For example, it would have been more beneficial to note the patterns Apple shares with branded consumer staples and luxury goods companies rather than getting lost in the weeds on its hardware business.
7. Convergence is the dominant pattern in the business world. There are definitive patterns to the success and failure of companies. It makes sense to ask where one might have seen a business template before and what the outcome was.
8. When you find high-quality businesses that do not fundamentally change their character over the long term, one should exploit short-term fluctuations for buying rather than selling. The critical phrases are ‘high-quality’ and ‘that do not change’; bending these criteria even slightly to average down in average quality businesses can be disastrous.
9. Business stasis is the default (i.e., good companies tend to stay good and bad companies stay bad), so it does not make sense to be highly active if you hold a good company.
10. Given this logic, Prasad advocates for being a ‘lazy’ buyer and a ‘very lazy’ seller (only in the context of the highest-quality companies).Nalanda has taken this ideology to an extreme, only buying during the global financial crisis, the European crisis, and the COVID-19 pandemic.
11. One of the mysteries of compounding is that it leads to large numbers but does not do so for a long time. Patience is everything in investing; unsurprisingly, it is also arguably the hardest thing.
12. Perhaps surprisingly, Nalanda has no interest in finding the ‘best investment’. Rather, it is focused on executing a sound investment process which is simple and repeatable. The real challenge is discipline: tuning out the incessant noise and turning the theory of investment management into practice day after day, year after year.

These tenets are not intended as a to-do list or template for success. There is no ‘one true path’ to win in the market. Certain investors have a multi-decade horizon, while others (traders) could have a holding period ranging from seconds to days. Legendary trader Steve Cohen would be hopeless trying to emulate Warren Buffett, and vice versa. Regardless, as Prasad reveals, certain fundamental truths and processes operate within nature, business, and markets. As investors, we need to be aligned with those truths, or we are doomed to fail. If you repeatedly buy the shares of bad businesses in the hope that they will improve, you cannot expect to succeed.

In a world of ceaseless change, “What I learned about investing” is a timely and comforting reminder that some things (like outstanding businesses) only change gradually. It is also reassuring that, in a noisy era of instant gratification, quieter attributes like discipline and patience can still be highly rewarding. Finally, the revelation that extreme laziness is the greatest of virtues must be the most counterintuitive and gratifying conclusion in anyone’s book.