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Munger recommended The Selfish Gene
Well, if you are so angry, answer this question for me: Would you bet your life on your next investment?
Minimize the risk of committing type I errors to curtail the risk of injury or death, and learn to live with type II errors or foregone benefits.
Avoid big risks. Don’t make type I errors. Don’t commit to an investment in which the probability of losing money is higher than the probability of making money. Think about risk first, not return.
Let me repeat this statement, which is the bedrock of our philosophy and that of the rest of this book: There are very few good investments in the market.
Buffett is the best investor in the world because he is the best rejector in the world.
Being Wary of Criminals, Crooks, and Cheats
Looking for the proverbial needle in a haystack would be a cakewalk compared to finding infrastructure and real estate entrepreneurs who don’t mistreat minority shareholders. We have chosen to avoid these industries completely.
According to a McKinsey report, from 2005 to 2008, real estate absorbed almost a quarter of all PE investments, and infrastructure’s share was nearly 30 percent.
Real estate returns on exit were only 2 percent, and only 9 percent of energy segment investments could get an exit.
Avoiding Turnarounds
If you want to learn more about Gerstner’s miracles, I urge you to read his book Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround.
Even the best companies have to run hard just to stay in the same place. How could the probability of success at a troubled company be anything but minuscule?
Debt diminishes strategic flexibility and hence long-term value creation. For a day trader or even an investor whose holding period ranges from three to five years, a reasonable amount of leverage may not matter.
finance theorists, is not just wrong but dangerous. A strong balance sheet is not the one that maximizes debt to minimize the cost of capital but the one that minimizes debt to maximize the safety of capital.
Many investors are slaves to the famous quote of the hockey legend Wayne Gretzky: “I skate to where the puck is going to be, not where it has been.”27 I am not one of them. I am just not that smart.
We at Nalanda love stable, predictable, boring industries. Give us electric fans over electric vehicles, boilers over biotech, sanitaryware over semiconductors, and enzymes over e-commerce. We like industries in which the winners and losers have been largely sorted out and the rules of the game are apparent to everyone.
We don’t invest in businesses run by crooks, we detest turnarounds, we stay as far away from leverage as possible, we refuse to engage with M&A addicts, we can’t figure out fast-changing industries, and we don’t align ourselves with unaligned owners. Are there any businesses left for us to invest in? In India, not many.
Except for filial love, nothing in life comes free.
Everyone seems to spout the exact same philosophy as this section’s topic: Buy high quality at a fair price. I challenge you to find me a fund manager who professes to buy poor-quality businesses at high prices.
Darwin, with his acute powers of observation, knew this. His statement at the beginning of this chapter asserts that hairless dogs have imperfect teeth and pigeons with feathered feet have skin between their outer toes. He predicted that if humans choose to select for one characteristic, they will surely also cause transformations in other characteristics owing to what he called the “mysterious laws of the correlation of growth.”
At Nalanda, here is what we begin with while short-listing businesses: historical return on capital employed (ROCE).
lucre
This dual trick—of changing while remaining unchanged—results from two separate but intimately linked phenomena. First, living systems are robust at multiple levels. Second, this robustness helps neutral mutations become the source of future innovations.
Robustness concept outlined here is very similar to resilience concept outlined by Meadows
Living things are built to be resilient and resistant to change.
The short and incredible answer is that robustness itself leads to evolvability!
But at some fundamental level of culture, oneness, problem-solving, and working with CXOs, the firm has remained stubbornly Boweresque. It has changed without changing. This is what we seek as owners in our businesses: the ability to keep evolving while staying robust.
We Assess Evolvability Indirectly by Measuring Robustness Directly
The cataclysmic aftermath of an asteroid strike in the Yucatan peninsula 65 million years ago wiped out the dinosaurs. But the mammals survived. No one is sure why. The
Does no one know why mammals survived?
This is the best advice for investors in the best chapter of the best investing book ever written: The Intelligent Investor by Benjamin Graham,
Dont know why I wasnt able to read it?
The market is not an idiot; it is almost always efficient. Almost always. Not always. We
How to think about this? As an investor professional
Their weightage in our investment decision is a big zero.
Thematic investing.
Like almost every proximate theme before and since, the automotive tech theme has three properties. It hypes up total addressable market (TAM), is simple to understand, and is actionable.
Investment banking summarized:-)
No wonder it is usually the most salient proximate cause of a theme gone wild.
is pointless because it does not tell us whether any profits will be made, and even if a business can be profitable, TAM is silent on who will make that moolah.
Other industries like airlines, restaurants, infrastructure, banking, and retailing are the same. Their TAMs are quite high, but most industry players don’t make any money. So what use is TAM to a long-term investor?
Banking dont make money? Seriously?
The Indian market is no different. At various times since the start of my investing career in 1998, I have witnessed the following themes create and then destroy billions of dollars of value in the capital markets: real estate, infrastructure, education, microfinance, consumer lending, and technology services.
In my experience, developing a method and an instinct to separate proximate and ultimate causes of failure or success when they relate to a company event is invaluable for a long-term investor.
At least one thing fund managers have learned from herbivores in the wild is that there is safety in numbers.
As a result of his interest in and exposure to geology, Darwin was preprogrammed to conceptualize very long periods unimaginable to most humans.
Natural selection requires three key ingredients.9 First, there needs to be random variation among the progeny of an organism. Note the word “random.” Variation does not seek any goal. Second, there needs to be differential fitness among these variants such that injurious variations get rejected and favorable ones are preserved. Last, the favorable traits must be heritable so that they are passed on to the next generation.
“This preservation of favorable individual differences and variations, and the destruction of those which are injurious, I have called natural selection.”
Many Victorians did not even accept that Black and White humans descended from a common stock, and here was Darwin claiming unity across disparate species.
Linnaeus was a highly devout man and believed that nature’s hierarchical system resulted from God’s plan. Amazingly, the modern organization of the living world follows Linnaeus’s system with only a few modifications.
He credited God for this natural order; Darwin concluded that it could be so only if all organisms had one or just a few common ancestors.
Darwin and his theories are incomparable. In my view, no scientist comes close to him in greatness; maybe only Einstein, but probably not even him.
In the broad scheme of things, I think we financial investors are irrelevant to this world. Darwin wasn’t.
Whichever way you evaluate the probability of guessing the next year’s financials correctly, it is probably worse than guessing heads or tails after tossing a coin.
As you can see, in every case, Darwin had the same historical facts as everyone else. It was only his interpretations that were radically new and different. I would like to believe our approach is no different.
