What I Learned About Investing from Darwin by Pulak Prasad
Pulak Prasad is the founder of Nalanda Capital, which has managed USD 5 billion since 2007 with an annualized return of 20.3% post fees. They follow a simple Buffett-like strategy:
- Avoid Big Risks
- Buy High-Quality at a Fair Price
- Be Very Lazy
Avoid Big Risks:
- Minimize errors of commission (Type 1 errors) rather than errors of omission (Type 2 errors).
- Avoid big risks such as:
- Dishonest companies
- Turnaround
- High-debt companies
- Serial acquirers
- New trends like AI, microfinance, food delivery, and e-commerce
- Government-type businesses or overseas global MNCs where the founder’s interests are not aligned
Buy High-Quality at a Fair Price:
- High-quality means:
- High Return on Capital Employed (ROCE)
- No debt
- Competitive barriers
- Fragmented customer and supplier base
- Stable management
- Slow-changing industries
- Be cautious of Total Addressable Market (TAM) as it doesn’t capture profits and competition. E.g. GAP despite high TAM revenue flat since 2007 whereas income picked in 2014, this is due to competition.
Risk Comes First, Quality Second, Valuation Last:
- Study global proximities. For instance, if global top 10 airlines don’t make money, chances are airlines in India or China won’t either.
- Be wary of industries with inherently low profitability, like garment manufacturing, telecom towers, and commodity chemicals.
Identify Honest and Dishonest Signals:
- Avoid dishonest signals like press releases, management interviews, earnings guidance, and face-to-face meetings.
- Focus on honest signals, such as past operating and financial performance.
As per author after buffet, he thinks second best is Anthony Bolton – annualized return is 19.5% from 1979 to 2007 in UK. Post retirement Bolton is back in 2010 with Pound 460 M China fund where he failed measurably as he failed to discount risk of small Chinese co vs UK companies.
Be Very Lazy:
- Hold investments for the long term. For example, Nalanda added to their WNS investment 12 years after their initial purchase in May 2020.
- They have investment in 10 businesses since 2007.
Survival of Fortune 500 Firms:
- Only 12% of Fortune 500 companies from 1955 survived until 2015. However, that is faulty as many companies merged (15%) and 12-15% doing well despite out of fortune 500.
- About 55-60% failed over this period. Great businesses tend to remain great, and bad ones tend to remain bad for long periods.
Compounding Returns:
- Compounding is powerful but often misunderstood. Their investments in companies like Berger, Mindtree, Page, Ratnamani, and Supreme yielded 8 to 82 times returns.
Returns of their single company can compensate combine loss of their laggards like Ahluwalia, DB Corp, Triveni and Voltamp.
Sell Criteria:
- Sell only when governance standards decline, there’s wrong capital allocation, or the business faces irreparable damage.
Overall:
- I rate it 9 out of 10. However, the challenge of waiting for significant market corrections like COVID, as staying on the sidelines can also result in missed opportunities. It is a must-read for long-term investors.