The book “What I Learned About Investing from Darwin” by Pulak Prasad stands out in the vast ocean of investing literature. Despite Pulak’s quieter approach to promotion, this book stands out for its insight and practical advice, as our recent Zoom session illuminated the book’s depth, drawing from the diverse experiences of investors who joined the discussion.
Some key lessons from Pulak’s book:
1. Embrace Strategic Laziness
Nalanda’s investment strategy is elegantly simple yet profoundly effective, encapsulating three core principles:
- Avoid significant risks: Steer clear of companies burdened by excessive debt, as leverage can severely limit strategic flexibility and long-term value creation.
- Seek quality at a fair price: Be judicious in calling for capital, deploying it only when truly compelling opportunities present themselves.
- Adopt a ‘very lazy’ approach: Commit to being permanent owners of the businesses you invest in, selling only if the business’s fundamentals are irreversibly damaged.
Apart from avoiding risks, there’s another strong reason why Pulak avoids companies with excessive leverage, “Debt diminishes strategic flexibility and hence long-term value creation.”
2. Fast growth is meaningless without looking at the capital used to achieved it
Pulak challenges the seductive narrative of rapid growth, emphasizing that without considering the capital employed to achieve it, such growth can be misleading, “In my experience, high-growth businesses can hide myriad problems, ranging from issues of product or service quality, employee culture, and accounting to a bloated balance sheet.”
The period between 2020 to 2022 saw companies aggressively chasing growth in pursuit of capturing a large total addressable market (TAM). However, Pulak criticizes this approach, stating, “In my experience, there is only one problem with chasing a proximate theme based on TAM. It’s useless. It makes astrology-based forecasts look respectable. TAM 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.”
3. Rules for selling
The conundrum of when to sell is addressed through the lens of historical examples like Coca-Cola’s overvaluation in the late 1990s. Warren Buffett’s reluctance to sell, despite acknowledging its high valuation (trading over 60x PE), underscores a broader principle shared by other great investors like Nick Sleep with Amazon and Tom Russo with Mastercard.
They allow their investments to flourish, accepting the fact that valuation corrections are not predictable, and sometimes, watching their investments undergo a correction or go through a period of share prices going sideways may be painful. But they understood that timing the market can be difficult for great businesses. Instead, they simply hold on through and ignore the gyrations along the way.
Similarly, Shelby Davis who started investing in his late thirties, grew his portfolio to over US$800 million and he made all his wealth by investing in a few high-quality insurers and then refusing to sell them. Pulak highlights, “We don’t sell on valuation, a key reason many investors throw up their hands and exit. That is because we have no target price for selling in our portfolio.”
On selling when the company is in trouble, Pulak’s insights on selling resonate deeply: “Being a permanent owner, we are tolerant of declining sales or margins or market share. But we will not risk survivability.” Many arm chair investors often think that businesses go up in a straight line, but that only happens in dreamland. In reality, it’s going to be turbulent, and for great businesses, we need to give them the space to work things out. In recent years, we see that playing out with Meta and Netflix.
He further elaborates, “We have sold only when there had been an egregiously bad capital allocation or irreparable damage to a business,” emphasizing the focus on long-term business viability. Again, no approach is perfect, but by being slow to selling, he’s circumventing the knee jerk responses that prevents most investors from holding on to big winners.
Because underlying these approaches, is the asymmetric risk that comes from owning quality businesses, “Remember that the maximum we can lose is our investment amount, but there is no limit to how high a share price can climb.”
I hope my notes and the book club discussion have helped you shape your own investing strategy. If you haven’t already, you can watch the recording of our Zoom book club discussion here: https://youtu.be/6dbuW0-XTLU
Invest wisely,
Thomas