What I Learned About Investing from Darwin

by Pulak Prasad

An honest signal is not “our margin will be 15 percent next year” but “our average margin was 12 percent over the last ten years”; an honest signal is not “we will have robust free cash flows starting two years from now” but “we generated free cash flow only one year in the last decade”; an honest signal is

not “we will launch six new products next year” but “in our recent history, we have launched an average of one product every two years.” No stories, no projections, just facts about the past.

However, suppose you are a long-term investor or desire to be one. In that case, I am assuming we agree directionally—taking on avoidable risks is bad, and investing in great businesses is good.

Remember that the maximum we can lose is our investment amount, but there is no limit to how high a share price can climb. Given the quality of businesses in our portfolio, we prefer to run the risk of selling late and losing some capital than selling early and forgoing substantial gain.

long-term character of

high-quality businesses remains unaffected by short-term fluctuations in the economy, the industry, and even the business.

In the business world, as in the organic world, stasis is the default. Great businesses stay great. Bad businesses remain bad.

Similarly, my three-decade-long journey in the corporate world has led me to believe that great businesses stay great and that, more often than not, bad businesses stay bad.

As a reminder, GKPI says the following: When we find high-quality businesses that do not fundamentally alter their character over the long term, we should exploit the inevitable short-term fluctuations in their businesses for buying and not selling.

My wife has a sweet tooth but is also very health conscious. Over more than two decades, she has followed a simple yet powerful way of avoiding the enticement of desserts. Our fridge just doesn’t have any.

Real estate businesses in India aren’t known for Gandhian governance, to put it mildly.

Stasis is the default in the business world, too. Great businesses generally stay great, and bad businesses generally remain bad.

The first is that compounding does not lead to significant numbers for a very long time. The second is that investing would be easy if companies could compound predictably. But, alas, they don’t. The real world is quite messy, and the path to long-term success is treacherous, unpredictable, and full of disappointments.

Because, on average, over the long run, great businesses have a way of making us more prosperous than we ever thought possible.

One of the most famous questions posed by Yaksha is, “What is the greatest wonder in this world?” Yudhishthir’s reply is, “Everyone sees countless people dying every day, but they act and think as if they will live forever.” Yudhishthir’s insight was that we are strangely blind to a fact that is blindingly obvious.