What I Learned About Investing From Darwin

Here are my notes and highlights:

Pulak Prasad invests in businesses run by entrepreneurs, of which the entrepreneur is typically the largest shareholder.

There are three rules they follow in investing:

• Avoid big risks
• Buy high quality business at fair price
• Be very lazy

Avoid Type I Error

Pulak pulls an idea of evolutionary theory where species usually choose staying hungry compared to making mistakes that can take their lives. He says that the same thing can be applied to the investing world. You need to avoid mistakes that can result in a loss of capital.

What it means is that we need to reject a lot of opportunities and swing only when we are absolutely sure. He gives the example that Buffet is the best investor because he is the best rejector.

What To Avoid

Pulak keeps a long list of risks he wants to avoid. This is the core element of his investment strategy. Here is a list of what he avoids:

1. They don’t invest in businesses run by crooks
2. They don’t invest in turnaround
3. They stay far away from leverage (Pulak’s highest tolerance for debt/equity is 0.3)
4. They don’t engage with M&A addicts
5. They can’t figure out fast changing industries, so they stay away (Prefers electric fan company over electric car company)
6. They don’t invest in companies where the owner’s interest is not aligned with the company’s success.

ROCE As The Main Criteria For Selecting Business

Pulak likes to invest in companies with high cash reserves, and companies usually have high cash reserves because they have high ROCE.

Pulak looks for high ROCE companies. He assesses a company purely on its historically delivered ROCE.

Fragmented Customer Base

Pulak looks for fragmented customer base, as a concentrated customer base, can present risk and for Pulak, survivability is more important the the growth factor.