What I Learned About Investing from Darwin

Categories : Finance Investing

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🎯 The Book in 3 Sentences

Avoid big risks: Stay away from fraudsters and highly leveraged businesses.
Buy high quality: Focus on historical Return on Capital Employed (ROCE).
Seek robustness: Look for strong competitive advantage, minimal debt, and stable management.
Ignore short-term fluctuations: Focus on long-term success, and seize opportunities during market panics.
Study historical data: Assess a business’s strategy, competitive position, and market share.
Follow convergent patterns: Consider industry data and proven investment patterns.
Be cautious of misleading signals: Press releases and management interviews can deceive.
Be patient and hold: Long-term ownership and compounding yield better results.

We can be better investors only if we are better “rejectors.”

About 40 to 45 percent of the Fortune 500 businesses of 1955 continued to be successful for the next sixty years.

An essential prerequisite for making money is the ability not to lose money.
Investors make two types of mistakes: committing self-harm (type I error) or rejecting good opportunities (type II error).
Warren Buffett’s investment philosophy emphasizes avoiding big risks and minimizing the probability of losing money.

How to avoid big risks.

People don’t change. Avoid investing in businesses owned or run by individuals who have a history of defrauding customers, suppliers, employees, or shareholders.
Avoid turnarounds. Investing in businesses that have underperformed for a long time and are promising a turnaround is risky.
Leverage. Stay as far away from leverage as possible.
Detesting debt. Prioritize strong balance sheets, and focus on long-term value creation.
Ignoring M&A (company mergers and acquisitions) junkies. There is a high failure rate and opportunity cost associated with such deals.
Not predicting where the puck will be. Investing in rapidly evolving industries, such as railways in the 19th century and dot-coms in the 20th century, can be highly risky and prone to value destruction.
Not aligning with unaligned owners. Avoid investing in government-owned businesses and listed subsidiaries of global giants.

Assessing a company’s quality requires more than just management, revenue growth, or margins as criteria.
When selecting businesses for investment, focus on historical Return on Capital Employed (ROCE) rather than future projections or other financial measures.
High ROCE indicates a business's ability to generate significant returns on its investments, reflecting effective capital utilization.
Consistently high ROCE is likely an indicator of an excellent management team, strong competitive advantage, and effective capital allocation in a business.
However, not all businesses with high historical ROCE will necessarily continue to be considered good businesses. There are no guarantees in investing.

In order for a species or a company to evolve, it needs to be strong and adaptable.
Robustness across factors like ROCE, customer base, leverage, and competitive advantage is crucial for permanent ownership.
A robust business has high ROCE, minimal or zero debt, a strong competitive advantage, fragmented customer and supplier bases, a stable management team, and is in a slow-changing industry.
Calculated risks, akin to neutral mutations in biology, enable business evolution.

Focusing on proximate causes, such as macroeconomic factors, when analyzing investments can be misleading and unhelpful.
Thematic investing and market speculation often lead to overvalued stocks.
Focus on long-term success, ignore short-term fluctuations, and seize opportunities during market panics.

Investing as a historical discipline involves studying a business’s historical financials and performance, assessing its strategies and competitive position, and assigning value based on historical data rather than trying to forecast the future.
Assessing a business’s strategy involves evaluating its historical actions, target customers, differentiation from competitors, capital allocation, capital structure, risk, and quality.
The competitive position is determined by consistently outperforming competitors in terms of measurable parameters like ROCE, market share, free cash flow, and financial consistency.
Market share is a crucial indicator of competitive advantage, and long-term trends should be considered over short-term fluctuations.

Convergent patterns are recurring patterns observed across different companies and industries.
Investment strategy should focus on convergent patterns across industries.
Considering the outside view and industry data is crucial for informed investment decisions.
When investing in a company, it’s important to consider the industry it operates in and the convergent outcomes of other businesses in that industry.
While it's generally a good idea to invest in businesses that align with proven patterns, it’s also important to be open to the possibility of exceptional companies that deviate from those norms.

Press releases and management interviews can be misleading signals in business evaluations and should be approached with caution.
Investor conferences & road shows can be marketing events.
Focus on long-term factors, not short-term forecasts.
Face-to-face meetings with management can be deceptive as they often provide cheap signals. Past performance and scuttlebutt signals are more reliable indicators for investors.

Being lazy in the sense of not reacting impulsively to every news item can be a more effective approach for long-term investors.
The Grant-Kurten principle of investing (GKPI): Buy high-quality businesses, exploit short-term market fluctuations, and sell only if governance declines or irreparable damage occurs.
Lazy investing, successful outcomes.

Economic conditions can change rapidly, and it is crucial to be prepared to adjust your financial plans and strategies accordingly.
Be patient: Avoid frequent buying and selling. Patience and holding onto investments for extended periods can yield better results.
Approach every investment with the mindset of being a permanent owner of the business.
By focusing on long-term commitments and avoiding short-term speculations, investors can gain a competitive advantage.

Compounding takes time to reveal its impact and many investors sell too soon.
The wealthiest individuals in the world are those who never sold their businesses.
Empirical evidence also shows that a select few companies create the majority of wealth, and holding businesses for longer periods increases the chances of generating incredible returns.
The only way to benefit from compounding is to remain invested.
Investors often get tempted to sell their holdings when they see a sudden rise in stock prices. They may believe that they have made a quick profit and want to cash in. However, by doing so, they may miss out on the long-term growth potential of the business.