What I Learned About Investing from Darwin

by Pulak Prasad

thirsty deer may not be able to run quickly enough to escape a predator, and an overcautious stag may not get to pass his genes on to the next generation. But on average, making this trade-off in favor of reducing the number of errors of self-harm while tolerating a higher number of errors of rejecting potential benefit has worked quite well for the species.

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.

Which brings me to the second reason I detest any debt. This answer is often underappreciated and even ignored by investors and management. It is this: Debt diminishes strategic flexibility and hence long-term value creation.

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.

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.

Our view on Page and seven other businesses we bought during the financial crisis was that global events may affect the stock prices of high-quality companies but not their business strength; the fact that investors were dumping stocks was not a problem but an opportunity; businesses’ market valuations may take a hit but not their intrinsic value; the opportunity cost of not investing in troubled times far exceeds any near-term pain owing to notional losses.

on the definition of “tactics” versus “strategy.” Let them. As folks investing real money, we can move on to

I could go on and on to fill this book with examples of convergent evolution in the natural world. But scientists now agree that convergence is the rule, not an exception, in nature. This sentiment is best expressed by the most famous advocate of convergence, the Cambridge paleontologist Simon Conway Morris, who has written two books on the subject. He has explained convergence by saying, “Certainly it’s not the case that every Earth-like planet will have life let alone humanoids. But if you want a sophisticated plant, it will look awfully like a flower. If you want a fly, there are only a few ways you can do that. If you want to swim, like a shark, there are only a few ways you can do that. If you want to invent warm-bloodedness, like birds and mammals, there are only a few ways to do that.” Convergence in nature symbolizes a profound fact: There is a pattern to success and failure. What can the Caribbean anole, the crest-tailed marsupial mouse, and caffeine teach us about investing? Convergence in business symbolizes a profound fact: There is a pattern to success and failure.

It does not seem to matter if the measurement period is thousands of years (bears) or just a few decades (finches). The pace of evolution speeds up over shorter periods and slows down over more extended periods.

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.

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.

Let’s return to investing. Here are my main investing lessons from the theory of punctuated equilibrium: 1. Business stasis is the default, so why be active? 2. Stock price fluctuation is not business punctuation. 3. Take advantage of the rare stock price punctuations to create a new “species.”