[00:03:09] Stig Brodersen: Kyle, I think that I don’t only speak for myself, but also for many of the listeners that whenever they meet fellow investors, they talk about what they have in their portfolio and I think that’s quite interesting and of course it’s always nice to get a really good stock idea, but it’s also, I think it’s kind of like a way of putting a person into a box. It’s almost like, tell me your story, it’s like, tell me, show me your portfolio and because, there was something to be said about, you meet up with an investor who says he just bought Tesla and there’s going to be earnings call tomorrow.

[00:03:40] Stig Brodersen: And then he wants to sell afterwards, whatever. Like, I’m not saying there’s anything wrong with that but it takes a certain type of personality with a certain type of investment strategy to do investing like that and then you also have other people you meet and then have this obscure micro-cap stock from whatever.

[00:03:56] Stig Brodersen: And they’ve, been holding on for that for, I don’t know, two decades and whatever, so you put people into different boxes consciously or subconsciously, I guess, but all of that is my disclaimer. I don’t know if the audience or I’m going to put you in a box here because I wanted to learn a bit more about your positions and your investment strategy.

[00:04:15] Kyle Grieve: Yeah, I completely agree with that, Stig. You definitely learn a lot. So I think what you can learn the most from is someone’s largest position. So I’ll just tell you my top three to five largest positions right now are Evolution, which is 20% of my portfolio, Teqnion 15%, Topicus is 12% and then Thermal Energy International and Ritzy are 10%.

[00:04:33] Kyle Grieve: So these are names that I think, I guess, depending on how deep people go are kind of obscure. I’m not someone who invests in Amazon and Microsoft or well-known names and actually prefer names that aren’t well, well known or aren’t talked about extensively. So those are kind of some of the names that I own.

[00:04:49] Kyle Grieve: And then, just a little bit about my investment strategy. I really got a lot out of Chris Mayer and his twin engines of earnings and multiple expansion over long time periods and I am willing to forego a little bit of that multiple expansion, just looking for high quality businesses, if I can find a business that has durability and its earnings power.

[00:05:06] Kyle Grieve: So businesses such as like Topicus, Technion, and Dino Polska, I think are good examples of this, and now I’ve been looking for where I can find businesses that I think have a lot more potential, both in earnings power, but also in multiple expansion as well. I do look a lot at micro-cap and nano-cap world because I think that there are insanely high amount of mispricing’s and I want to take advantage of that.

[00:05:30] Kyle Grieve: So yes, they are smaller businesses. Yes, they are earlier in their growth cycle, but the margin of safety that you get from investing in these like little known businesses is very high because you just simply can buy them for a very cheap price. And there’s actually quite a bit of quality there. And then back to you, what you were talking about when you look at someone’s portfolio and they tell you, they own 50 names.

[00:05:50] Kyle Grieve: Well, that’s different than if someone owns five names. So for me I, right now I own 11 stocks. I try to stick basically to around 10 stock and I basically want to find and invest in ideas that I can put, 10 percent of my portfolio into. So, yeah, a little, a couple other specific attributes that I look for in businesses, growing businesses.

[00:06:09] Kyle Grieve: I want businesses that are growing top and bottom lines and free cash flows at hopefully around 15% or higher. I want higher insider ownership, hopefully 10% or higher. Great management teams, that’s all qualitative, but you know, talent, integrity, all the things that Buffet always talks about.

[00:06:24] Kyle Grieve: High and sustainable returns on invested capital. I want businesses that can hopefully have also high reinvestment rates so that they can reinvest that capital at high rates of return.

[00:06:33] Stig Brodersen: We are recording this episode sometime after Charlie Munger passed away and Charlie had an enormous impact on TIP.

[00:06:42] Stig Brodersen: We started this show in 2014 and the time it was only with the intention of speaking about Warren Buffett, which After a few episodes, you also realize if you want to do this like every week, forever, like that, it’s going to be a bit troublesome, but of course, whenever you learn about Warren Buffett, you also learn about Charlie Munger, who is just, such an amazing person. I was, I should say now I’m still trying to get used to it. And I would say that even though we branched into a lot of other topics here on the show, at its very core, it’s always been about Buffett and Munger. I think I want to use that as a segue into asking you, Kyle, what Charlie Munger meant to you.

[00:07:22] Kyle Grieve: Yeah, Charlie Munger meant a hell of a lot to me, as I’m sure he did for you and I think he did for a lot of the investment community. For me, the only people that really come close in terms of being what I consider a mentor, even though they never knew me was Buffett and Mohnish Pabrai but Charlie spread so much wisdom to the investing community and not just necessarily with how to invest well, but also just how to be a really good person and live a really good fulfilling life.

[00:07:46] Kyle Grieve: And I think that means a lot because, there aren’t a lot of people that go through their life of being 99 years old and not having very many enemies. And it seems like that’s how he lived his life. And I think that’s really a rare characteristic in business. So Charlie showed me a lot, obviously I could probably speak for hours about all the things he’s taught me, but I won’t do that but one thing I think that really had the biggest impact on me was his mental model of inversion that he imparted on us from Jacoby and that model alone has helped me in all walks of life, not just necessarily investing, but it’s really helped me make better decisions and pay more attention to the risks and the downside of any of the decisions that I make.

[00:08:24] Kyle Grieve: So it also helped me identify a lot of common problems that other investors make and that I know I make on my own and really helps you self-reflect and improve yourself. And so with that mental model, I’m always trying to poke holes in my thesis and find weaknesses in my thinking or overlook cracks in the fundamentals of the businesses that I own.

[00:08:44] Kyle Grieve: And this has helped me let go of a lot of the ideas that I’ve had that are no longer attractive, but, like Charlie Munger and his psychological misjudgments say, we make a lot of mistakes, so I think inversion has helped me minimize the effects of things like, the liking tendency that he likes to go on and talk about, anchoring bias, doubt avoidance, and consistency bias, and inverting has helped me minimize the effects of a lot of these misjudgments to a certain degree. Obviously, you can never be perfect but yeah, I’ve learned so much from him and it’s too bad that he’s gone but he lived a very good life.

[00:09:16] Stig Brodersen: I think for me, the most important thing that I learned from Charlie Munger is to be deserving of your relationships. I think it’s deeply profound.

[00:09:24] Stig Brodersen: If you want a good spouse, be a good spouse. If you want to have a good friend, be a good friend. And there was something about a very simple idea and take that very serious. And I also think it works in all walks of life, not just in business. Charlie Munger said that the world doesn’t run on money, but on envy.

[00:09:42] Stig Brodersen: That might be true, but I think what makes you happiest and saddest, that’s often the quality of your relationships. And I can’t say that I’m always successful in the heat of the moment, but whenever I incur problems in any of my relationships, I always consider whether or not I deserve what just happened.

[00:10:02] Stig Brodersen: And often I am, and of course I’m terribly biased whenever I’m evaluating myself in my relationships. But I think that zooming out has been tremendously Helpful, just the idea of if you don’t feel that you get repaid in kind, whenever you extend trust to other people, you should probably seriously consider whether or not you should walk away from that relationship.

[00:10:23] Stig Brodersen: And yeah, to your point before Kyle about invert, always invert, which is what a lot of people associate Munger with. If I can use that framework, it’s very much that it can be difficult to identify what makes you happy. Happiness is often fleeting, but perhaps you should start with what makes you sad and then avoid that.

[00:10:43] Stig Brodersen: So that’s a way to choose that mental model. I think I want to say all of this to use that as a segue into saying to the listeners that they will be very much in safe hands with you. And Kyle, I’ve been very impressed by your skills as an investor. I’ve seen already seen that multiple times. So you have a great track record, but also the quality of episodes that you already hosted on our show, Millennial Investing.

[00:11:05] Stig Brodersen: I’ll make sure to link to episodes with Robert Hagstrom and Lawrence Cunningham. And they’re already among my favorite episodes of Millennial Investing. But Kyle, I know that you carefully handpicked your very first episode that we’re going to play here very soon, especially because this episode will be published January 1st and Charlie Munger would have celebrated his 100th birthday today. So I want to throw that over to you now, Kyle.

[00:11:30] Kyle Grieve: Thank you, Stig. Yeah. So my first episode on We Study Billionaires will be an episode on a book that has impacted me the most in 2023. The book is called What I Learned About Investing from Darwin by Pulak Prasad. I think this is a fitting episode as it talks about one of Charlie’s biggest influences, Charles Darwin, who helped Charlie Munger learn things about investing like ecosystems, adaptability, survivability, dominance, and challenging your own cherished beliefs.

[00:11:53] Kyle Grieve: My colleagues at The Investor’s Podcast have done some incredible tributes to Charlie Munger already. So William Green did a wonderful episode discussing a number of his favorite Munger moments and lessons on Richer, Wiser, Happier, episode 37. Additionally, he shared some of his best insights from Charlie that investors like Mohnish Pabrai, Tom Gayner, Joel Greenblatt, and Chris Davis have shared with him on the show.

[00:12:13] Kyle Grieve: And Clay will be having an episode in the next few days where he’ll be discussing his main takeaways from Charlie Munger as well. So a few of my upcoming guests for We Study Billionaires podcast include Hamilton Helmer, the author of Seven Powers, one of my favorite books on moats and he’s also the chief investment officer of Strategy Capital and Dede Eyesan, the chief investment officer of Jenga Investment Partnership and author of Global Outperformers, which is an incredible research paper that looks at the best performing stocks between 2012 and 2022.

[00:12:43] Stig Brodersen: What I will quickly say about the book that you’re going to talk about here shortly is a great book, and I won’t go through all my points here. I kind of feel I would defeat the purpose, but I really like what he, whenever he talked about the most important key ratio, which is I don’t know if there is such a thing as the most important key ratio.

[00:13:02] Stig Brodersen: I kind of feel like mentally there, there’s something exciting about, talking about which one it would be if you had to choose one. You go in, or at least I went into the, to the world of stock investing more than a decade ago and thought like, there must be some kind of equation I can type up or, but I think there is something to be said about if you really had to focus on one key ratio, which one it would be.

[00:13:22] Stig Brodersen: So I’m not going to tell anyone what key ratio that would be. I’m sure you’re going to call that later in the episode, but then the author also talks about this concept of no snacking. And I absolutely love that point. And so whenever he talks about snacking, it was like the snacking of investing, which if you were as much of a nerd as me, whenever it comes to stock investing, you love investing snacking.

[00:13:44] Stig Brodersen: And so you and I, Kyle we like to say, and we also invest accordingly to, the compounders, high quality companies. And then sometimes something fantastic comes along, a special situation, turn around the spin off, probably something with, a lot of debt or something, but something that looks like really cheap.

[00:14:02] Stig Brodersen: And there’s like a really great catalyst behind it. And you really want to snack because it’s so interesting and you just see something there and the author, he talks about, no, don’t do that. No snacking. Keep your head down, do your homework, only invest in the highest quality companies.

[00:14:18] Stig Brodersen: And ironically, if you love the world of investing and can’t get enough of Ks, it’s so hard not to snack and really stick with your strategy. So that was just something that really resonated with me. I can say, for example I’m looking at a local company here in Denmark and it’s a not so well run company to be frank.

[00:14:37] Stig Brodersen: And it was the company is called North Media and it was my very first employer, when I was 13 years old and I was a paper boy. And so I want to say that I have a bit of a history with a company, know it pretty well. And I won’t go through this stock thesis here, but like, it’s really cheap, but it’s also a bit of a dying business and not that well run, like it’s not Berkshire Hathaway, like 1965, but I’m inclined to like to compare it to like something that’s really cheap.

[00:15:01] Stig Brodersen: It has some really valuable assets, but it’s all in decline and it’s just hard not to snack. So anyways, with all of that said, Kyle, please take it from here, your very first episode as a host of We Study Billionaires.

[00:15:13] Kyle Grieve: Thanks for the great introduction, Stig. I hope you enjoy my first episode of We Study Billionaires, discussing my key takeaways from what I learned about investing from Darwin.

[00:15:21] Kyle Grieve: In today’s episode, I’m sharing the lessons I learned from reading What I learned about Investing from Darwin. The book is authored by Pulak Prasad, an investor out of India who founded his hedge fund, Nalanda Capital from 2007 to 2022. They compounded their capital at 19% per annum, turning one rupee into 13.8 rupees during that time sample.

[00:15:42] Kyle Grieve: But more important than their track record is the unique ways they run their fund. The book illuminates three principles that Atlanta uses for its investing framework. 1. Avoid big risks 2. Buy high quality at a fair price 3. Don’t be lazy, be very lazy to help readers understand why he invests this way, he dives deep into many of Darwin’s principles to help you understand their potential power in investing.

[00:16:06] Kyle Grieve: During this episode, I will touch on what a cheetah can teach us about risk, why you should be more focused on risk than returns, how things in nature and investing mostly stay the same, what a Russian scientist can teach us about the power of focusing on one investing metric to help identify wonderful businesses, the importance of robustness in nature and why you should search for the same attribute in business, how to identify businesses that can evolve in a fast changing world and remain on top, why we should prioritize the past over making bold predictions of the future, how to use the presence of noise as an opportunity to outperform, and so much more.

[00:16:42] Kyle Grieve: I had a great time discussing these concepts with members of the TIP mastermind community recently as well. Now, without further delay, I hope you enjoy today’s episode covering Pulak Prasad’s book What I Learned About Investing from Darwin.

[00:16:58] Intro: You are listening to The Investor’s Podcast. Since 2014, we’ve studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Kyle Grieve.

[00:17:22] Kyle Grieve: If you follow the investing greats long enough, you’ll notice many of them have striking similarities in how they think. One of these similarities is the use of multiple mental models. Charlie Munger says you must know the big ideas in the big disciplines and use them routinely all of them Not just a few most of them are trained in one model Economics for example and try to solve all the problems in one way You know the old saying to a man with a hammer the world looks like a nail This is a dumb way of handling problems unquote In this episode, I want to discuss a book that dives into the mental models of one of the greatest minds in history, Charles Darwin.

[00:18:01] Kyle Grieve: An investor named Pulak Prasad, who helps run Nalanda Capital out of India, wrote the book. The question you might be asking, is why should I listen to this investor that I’ve never heard of, about a subject that is completely unrelated to investing? The answer to that question is track record. Nalanda Capital turned one rupee in June 2007 into 13.

[00:18:21] Kyle Grieve: 8 rupees as of September 2022, a 19.1% compounded annual growth rate. Many of the concepts that Pulak uses for his investing process have been adopted from what he’s learned from Darwin. He’s clearly studied Darwin, biology, evolution, and a host of other related topics in a lot of detail. Pulak approaches the book as sort of a guide for investors who want to improve at investing through the use of many of Darwin’s principles.

[00:18:47] Kyle Grieve: But first, he discusses how evolutionary biologists have a leg up on the professional investors in terms of improving their respective industries. Evolutionary biologists continue to improve their abilities through the use of the scientific method, but investors are simply continuing to get worse. He uses the example of hedge funds in the U.S.

[00:19:07] Kyle Grieve: In a 2021 S&P report called SPIVA U.S. Scorecard, the result is clear. The funds are doing terribly. Whether you look at 5, 10, or 20 year samples, 75, 90% of U.S. domestic funds underperformed the market. Pulak goes on to say that these funds are run by some of the most intelligent people from the best schools with trillions of dollars in funding to draw from.

[00:19:33] Kyle Grieve: And yet, they still can’t beat the market. Pulak’s Nalanda Capital has a 3 step process for investing that has beat the market. 1. Avoid big risks 2. Buy high quality at a fair price 3. Don’t be lazy, be very lazy. The rest of this episode will discuss these three core concepts in a lot more detail. To kick off the first chapter, Pulak proposes a very good question.

[00:19:59] Kyle Grieve: Quote, would you bet your life on your next investment? Unquote. It’s a good question, and one that might cause investors to be a lot more picky with what they allow into their portfolios. I know it would force me to be even pickier than I already am. From my observations, too many investors treat the market like they’re shopping for fresh fruit and vegetables.

[00:20:19] Kyle Grieve: They grab some apples, then they grab some oranges, then they find some raspberries. But as they are looking through each of these, they see small imperfections. They pick up an apple and then put it down. They may do this for a while before finally making up their mind. Investors do the same things with stocks.

[00:20:36] Kyle Grieve: They find one they like and buy it and then when the price comes down, they find a reason they dislike it and they sell it. Just like picking up an apple and then putting it back after you realize it’s bruised. But with this mental model, you might think of looking at investing a little bit differently.

[00:20:51] Kyle Grieve: If you were willing to bet your life that an investment would succeed, what would you look for? First, you’d want a business that has profits that are very likely to continue for a long time into the future. You would probably want a business with a mode of some kind so competitors couldn’t erode their profits in the future.

[00:21:07] Kyle Grieve: You might look at a business that can easily pay off interest payments. You might look for a business that doesn’t require debt or minimal use of debt in order to operate. You’d look at management with a fine tooth comb to ensure that they are honest and won’t try and screw you over at some point, making your investment worthless.

[00:21:24] Kyle Grieve: Basically, you look for a business that is very hard to destroy. Note how we didn’t highlight looking for a business that would be a 100 times in the next two years. No, we know that an investment like that probably has a higher probability of going to zero than going up 100 fold. We would skip that for something that is a lot more secure.

[00:21:44] Kyle Grieve: We want a business that will survive and thrive. Pulak says there are two primary mistakes that investors make. Quote, we do things we are not supposed to, and we don’t do things we are supposed to. Unquote. Statisticians point out that there are two kinds of errors that they’ve named Type 1 errors and Type 2 errors.

[00:22:04] Kyle Grieve: The simple way to think about this is that Type 1 errors are errors of commission. Whereas type 2 errors are errors of omission. A simple example will easily show the distinction between the two errors. During the tech bubble of the late 1990s and 2000, investors thought they could make money by piling into dot com businesses that were exploding in price, often with no revenue to speak of.

[00:22:27] Kyle Grieve: Then, when the bubble burst, many investors lost their life fortunes. This is a type 1 error, because the investor made the investment, but made mistakes in the analytical process, leading them to lose their investment. Now let’s look at a business everyone has heard of. Amazon. During the exact same tech bubble, investors bid up the price of Amazon.

[00:22:48] Kyle Grieve: And intelligent investors sat on the sidelines. Let’s say you used Amazon back in 2000 to buy some products. You also followed the market closely. You saw Amazon’s stock price crash by over 90%. But you just didn’t understand the business well enough to buy it at depressed levels. Fast forward today, and you kick yourself for not seeing how obvious Amazon was to buy back then.

[00:23:09] Kyle Grieve: That’s a type 2 error. You didn’t do anything, and the fact that nothing was done was the error. The difference between the two is that committing a type 1 error destroys your capital. A type 2 error just causes you to shake your head in disbelief at how rich you would have gotten had you not made the error.

[00:23:26] Kyle Grieve: When we look at nature, we realize that many of the animals, plants, sea life, bugs, etc. have been around a lot longer than us. The reason all this life has managed to stick around for so long is that natural selection minimized type 1 errors and is willing to live with type 2 errors. Let’s look at errors a cheetah might make when looking for its next meal.

[00:23:48] Kyle Grieve: The cheetah has two decisions. One, try and chase a gazelle down and try to eat it. Or two, Ignore the prey because this particular one looks way too fast, big, or strong. In terms of survival, the cheetah needs to eat eventually. So if it is hungry, it will chase the prey down and hopefully get a meal out of it.

[00:24:07] Kyle Grieve: However, it has to run around, getting itself tired, and draining its energy. Additionally, some of its prey have deadly defense mechanisms. A type 1 error would be to chase the prey. Sure, it could get a meal out of it, but it could also mean the cheetah loses its life in pursuit of the prey. If the cheetah ignores the prey because they realize it’s too much work, this is a type 2 error.

[00:24:29] Kyle Grieve: It doesn’t get to eat, but it can go out tomorrow and try its luck again. Warren Buffett has said he has two rules for investing. Rule number one don’t lose money, and rule number two, don’t forget rule number one. Pulak discusses his interpretation of this statement in a little more detail. He thinks that these rules do a perfect job of explaining what types of errors we should expect to make.

[00:24:52] Kyle Grieve: By emphasizing the not losing money point, he 1 errors that investors make. Pulak summarizes it as quote, think about risk first, not return, unquote. I think this is a great approach to investing and risk. Mr. Prasad goes through multiple ways he tries to avoid big mistakes. They are, be wary of criminals, crooks, and cheats.

[00:25:17] Kyle Grieve: No aligning with unaligned owners. Avoid fast changing industries. Ignore M&A junkies, avoid turnarounds, and detest debt. Let’s go over each of these in a little more detail. In order to stay clear of criminals, crooks, and cheats, you must do the correct work to ensure that you aren’t trusting your money to the wrong types of people.

[00:25:40] Kyle Grieve: Pulak employs a method that most retail investors do not have access to, employing a forensic diligence expert to assess the past of management. I think this is a great idea. And if I had the funds available, I’d probably do the exact same thing. However, as a retail investor with constrained resources, I don’t have access to this.

[00:25:58] Kyle Grieve: I think the best way to approach this is to try and actively find any negative buzz around the business. If you catch wind of something that doesn’t smell right, then skip the investment. It’s that simple. Not aligning with unaligned owners is another great attribute to avoid. Pulak gives examples of three types of owners they refuse to invest in.

[00:26:16] Kyle Grieve: One, government run businesses Two, the listed subsidiaries of Global Giants, and three, Indian Conglomerates. A few of these are more geographically specific. You will need to determine if you think owning businesses like this will ensure that management is misaligned with shareholders. To be fair, I think most government run businesses are a bad idea and I have zero interest in investing in them myself.

[00:26:42] Kyle Grieve: Avoiding fast changing industries is pretty straightforward. If you invest in industries with high exposure to changes, you run the risk that your business will run the risk of obsolescence. Simple, boring, predictable industries that sell products that everyone must have for the future will protect your downside more than investing in the next big thing that is yet to be validated by the market.

[00:27:04] Kyle Grieve: Avoiding turnarounds is a simple rule that will keep you from being swayed by professional salespeople. Like Buffett says, turnarounds seldom turn around. While salesperson may be highly talented at creating the illusion that a turnaround has some power behind it, the business’s poor operating history paints a much different and more accurate picture.

[00:27:24] Kyle Grieve: Detesting debt is one of my favorite things to avoid. Debt, in the right hands, is like rocket fuel that can help fuel the returns of a business, but it must be used conservatively. All things being equal, I take a business that can get similar returns with zero use of debt. Pulak says, quote, If I were to list the 20 biggest bankruptcies in the United States, you would notice that all, with Lehman at the top and Lyondell Basil at number 20, were heavily indebted, unquote.

[00:27:54] Kyle Grieve: Staying away from bankruptcy risk is an intelligent decision. I think any investor can decide on which businesses and characteristics will burn them the most and then do everything to stay away from them as much as possible. I have no problem investing in a serial acquirer with the right track record, but I can see how another investor might want to stay away from this area like the PLEC.

[00:28:17] Kyle Grieve: Because they avoid businesses with these characteristics, they are highly aware that many great opportunities will be missed. But like nature, they are willing to live with committing type 2 errors rather than making the mistake of type 1 errors.

[00:28:29] Kyle Grieve: Next, we discuss buying high quality businesses at fair prices. Prasad’s first example is looking at a decades long experiment that uses foxes to get a better understanding of genetics. The founder of the study, Dimitri Belyaev, wanted to answer two primary questions. One, how did domestication start for animals and two, why did domesticated animals share similar features?

[00:28:53] Kyle Grieve: Floppy ears, curled tails, babyish faces, etc. After only four decades, quote, Dimitri’s experiment had essentially converted a population of wild foxes who avoided humans. into dog like creatures that could be kept as pets in any of our homes. These foxes were very docile, competed for human attention, and formed deep emotional bonds with their handlers.

[00:29:16] Kyle Grieve: It had become hard to distinguish their behavior from that of dogs. Lyudmila, Dimitri’s assistant, and her team had erased their wildness almost completely. Here’s where things get interesting. Dimitri and his team selected for a single trait, the tameness of foxes. They didn’t select for any other quality other than that.

[00:29:38] Kyle Grieve: And yet, selecting for this one behavior triggered a number of physical changes in the animals over many generations. Their coat started changing colors to piebald patterns, black and white spots on an animal’s skin, which is similar to domesticated cows, pigs, sheep, and horses. They got floppy ears, rolled tails, developed guard dog like behavior, and baby like appearances.

[00:29:59] Kyle Grieve: Let’s connect this back to the world of investing. Pulak poses a question. If we can search for a single trait in a business that will offer additional benefits for free, would that interest you? I think the answer to that is a resounding yes. His metric of choice is returns on capital employed, ROCE.

[00:30:16] Kyle Grieve: ROCE is earnings before interest in taxes divided by the sum of networking capital and net fixed assets. He prefers to remove cash from the networking capital number as he prefers high cash flow generating businesses. Including that number in the denominator will unnecessarily punish the ROCE and make a lower number.

[00:30:37] Kyle Grieve: Whatever you use here, just make sure you are consistent. Pulak mentions that a consistently high ROCE business will offer a few additional benefits. One, it’s likely to be run by great management. Two, it’s likely to have a strong competitive advantage. Three, it likely allocates capital well. And four, it allows a business to take calculated risks without risking financial risk.

[00:31:01] Kyle Grieve: Notice how he uses the word likely here. This shows that although there is a good chance that these businesses are of high quality, there is no guarantee in investing. Investors will have their own capital efficiency metrics they like to use. I personally prefer return on invested capital, which are net operating profits after tax, divided by the sum of total shareholders’ equity and liabilities.

[00:31:21] Kyle Grieve: I too will remove cash from the denominator to better represent this number. I’ve come to the exact same conclusion that Pulak came across through Convergence. Nearly all wonderful businesses seem to have a high ROCE or ROIC, and when you find a business with that high and sustainable number, you’ll often see a number of great attributes that come along with it.

[00:31:41] Kyle Grieve: A good example of this that most would be familiar with is Visa. This business has consistently had an ROC in the mid-20s to early 30s in the past decade. It has been a five bagger over the past decade, compounding around 19 percent excluding dividends, showing that management has been adept at creating shareholder value.

[00:32:00] Kyle Grieve: The sustainably high ROIC has highlighted their competitive advantages in their consistently high margins, with current gross profit margins of 97 percent and net profit margins of 53% and free cash flow margins of 60%. The sustainably high ROIC has highlighted their competitive advantage in their consistently high margins.

[00:32:19] Kyle Grieve: With current gross profit margins of 97%, net profit margins of 53%, and free cash flow margins of 60%. They have clearly allocated capital very well given their high returns on invested capital and have used excess cash to provide further value to shareholders via dividends and buybacks. The business uses debt conservatively with a near 1x free cash flow to debt ratio.

[00:32:40] Kyle Grieve: If you make sure every business you buy has a consistently high and sustainable ROCE, ROIC, or ROE return on equity, I think you will do very well with your investments deep into the future. Now that we’ve discussed the importance of ROCE, let’s move to some of the other traits Pulak looks for in a business.

[00:32:57] Kyle Grieve: But first, Pulak asks another very good question. He says too many business leaders and investors spend too much time asking the wrong question. The question they are asking is, quote, how can we change faster, better, and easier? Pulak thinks the correct question the same people should ask is How do you change without changing?

[00:33:18] Kyle Grieve: Why does he pose a question this way? Because he believes that biological environments are analogous to the world of business. Organisms, from plants to algae, have thrived for hundreds of millions of years. And in the case of bacteria, billions of years. This means that nature is incredibly robust, even in the face of changing external environments.

[00:33:38] Kyle Grieve: When you look internally, living things are also going through turbulence via constant mutations. So yes, nature is very robust and has thrived through the years to create all the living things we see today. The robustness shows itself in multiple ways. One, the genetic code. Two, proteins. And three, our bodies.

[00:33:57] Kyle Grieve: Here is a quick breakdown of how this robustness works. An accidental change in the DNA sequence does not affect which amino acids are made. A change in the amino acids or their sequence does not impact the synthesis of proteins. And a change in proteins does not affect the body plan of an organism, unquote.

[00:34:16] Kyle Grieve: What he’s saying here is that living things have neutral mutations which allow for, quote, new function and adaptations to arise without disrupting current functioning, unquote. Now let’s tie this back to the world of investing in business. If nature can show that an organism can stay robust all while being exposed to a multitude of external and internal shocks, then a business should be able to do the same.

[00:34:39] Kyle Grieve: We already started our filtering of great businesses by using ROCE. Now we must look at robustness. Pulak admits that robustness is not objective. A lot of subjectivity goes into coming to a conclusion of the robustness of a business. He prefers to contrast the characteristics of a robust business with the characteristics of a non-robust business.

[00:35:01] Kyle Grieve: A robust business has the following characteristics. Has delivered a high historical ROCE over time, has a fragmented customer base, has no debt and has excess cash, has built highly competitive barriers, has a fragmented supplier base, has a stable management team, and is in an industry that is slowly changing.

[00:35:21] Kyle Grieve: Now a non-robust business has the following characteristics. Has made operating losses for most or all of its history. It is highly dependent on very few customers, it is highly leveraged, has been unable to keep competition away, it is dependent on very few suppliers, management turnover is high and the industry is evolving very fast.

[00:35:44] Kyle Grieve: You can use this table to weigh certain characteristics higher or lower depending on your preferences. One example I’d like to discuss after talking with a lot of other great portfolio managers and analysts on millennial investing is the role of debt in the robustness of a business. A business might tick off many boxes of being robust.

[00:36:01] Kyle Grieve: It might have a high ROCE, a fragmented customer and supplier base, a durable competitive advantage, and be in a slow changing industry. However, the debt and cash situation might force me to pause my bullishness on an investment. Many analysts and managers think this way, and it doesn’t mean a company is done for.

[00:36:18] Kyle Grieve: Far from it. What a lot of professionals would do in a situation like this is to monitor the business’s debt and cash situation in the upcoming quarters. Yes, some businesses may never become safe enough to own due to excessive amounts of leverage. And that’s perfectly fine. But you will find some businesses, especially ones that do have many of the robust categories we listed, will be able to get into a situation where debt load is no longer as big of a concern for you.

[00:36:43] Kyle Grieve: Now that we know the business is robust, we have to see if we can come up with some form of method for analyzing its evolvability. After all, the business environment is constantly changing and being left behind usually means very bad things if you are an owner of equity. And this is where evolvability comes into play.

[00:37:00] Kyle Grieve: Pulak says, quote, in a robust business, just as in a living organism, evolvability comes free, unquote. This is a powerful statement. It means that if we find a robust business, their ability to evolve with the changing economic landscapes becomes a strength of the business. Mr. Prasad had a wonderful example of this in action, a business Nalanda owns called Page Industries.

[00:37:23] Kyle Grieve: The business is an innerwear business with only three other competitors. During the onset of COVID 19, Page was able to evolve to the situation and took its market share from 66 percent in 2018. All the way up to 70 percent by the end of 2020. When Pulak looked at this business through the areas of robustness, he noted the following.

[00:37:42] Kyle Grieve: ROCE of 63%, debt free, highly fragmented customer and supplier base, a deep and wide moat in brand and distribution that has been built over 25 years. The same owner since 1995 and it’s an industry that’s changing at very slow rates. The interesting thing about robustness is that it’s never guaranteed into the future indefinitely.

[00:38:01] Kyle Grieve: Pulak’s weapon to protect himself from this fact is in the price he pays for the investment. If you aren’t overpaying and are buying a wonderful business, chances are you won’t lose everything when you are wrong. He notes in this chapter that the median trailing 12 month entry price to earnings ratio for Nalanda between 2005 and 2020 was 14.9.

[00:38:21] Kyle Grieve: During this time, India’s primary index, Sensex, had a PE of 19.7, while the mid cap index was 23.8. This means he is paying a 25% or so discount for exceptional businesses. The next idea in this book I want to discuss is how Pulak thinks about forecasting the future. In brief, he places a much bigger emphasis on the past than he does on the future.

[00:38:44] Kyle Grieve: Quote, the investment world is obsessed with the future. Studying history has taken a backseat to making bold forecasts. Unquote. Instead of attempting to predict an unknowable future, Pulak takes, quote, a leaf out of evolutionary biology. We focus exclusively on widely and openly available historical information to analyze businesses.

[00:39:04] Kyle Grieve: We spend no time building projections and forecasts. Unquote. That’s right, no time for projections and forecasts. Nalanda Capital does not do discounted cash flow analysis and never will.

[00:39:16] Kyle Grieve: But before we get into what he does instead, let’s go over some of Darwin’s key lessons that can justify why Pulak has had such good success without ever running a discounted cash flow analysis.

[00:39:27] Kyle Grieve: Pulak believes that Darwin’s crowning achievement was his theory of natural selection. He outlines the three key ingredients of natural selection. 1. Random variation among the progeny of an organism. 2. Differential fitness between the variants of an organism so that the poor variations will be rejected and favorable variations will be preserved for future generations and 3. the favorable traits must be able to be passed on to the next generation. The key lesson here is that natural selection, like investing, is a historical discipline. Natural selection does not require the ability to look into the future in order to understand that some sort of life will be alive in that future.

[00:40:06] Kyle Grieve: Pulak takes three lessons from how Darwin utilized history to develop his hypothesis. Like Darwin, we interpret the present only in the context of history, we see the same set of historical facts as everyone else, and we have no interest in forecasting the future, unquote. His point here is that evolutionary biology does not make predictions.

[00:40:28] Kyle Grieve: Quote, rather than answering the question, what will happen to humans, it ponders over the conundrum, how did bipedal humans evolve from ancestral quadruped apes, unquote. Let’s bring that back into the investing realm now. Prasad is looking at businesses from the perspective of what has already happened in the past.

[00:40:46] Kyle Grieve: This means he doesn’t have to have faith that a business will go through some epic turnaround in order to become great. It probably already is. When you know the history of the business, there is a very good chance, but never a 100 percent chance, that excellence will continue into the future. It’s important here to point out that investing this way does have downsides.

[00:41:06] Kyle Grieve: Pulak points out two of them. One, there is no guarantee that a historically successful business will continue being successful in the future. And two, a historically unsuccessful business may not continue to be unsuccessful in the future. Pulak’s other great point about forecasting is that it’s usually wrong.

[00:41:22] Kyle Grieve: Analysts are wrong. Economists are wrong. Management is wrong. Portfolio managers are wrong. Everyone in investing is wrong, much of the time. So what makes you think that you’d be any different? Instead of predicting the future, Pulak spends time looking at two historical analysis, absolute and relative. If a business you are researching is going through a headwind where its net income has gone down to 10 percent growth versus historical 15%, you must understand why this is happening.

[00:41:49] Kyle Grieve: You can compare it to industry peers or examine the different expenses on the income statement. Doing this analysis will help you determine if a business can get back to its historical norms or if the fundamentals are in a secular decline. So if he doesn’t use a discounted cash flow, then how does he know what to buy a business at, you’re asking?

[00:42:09] Kyle Grieve: Here is his preferred method for valuing non-cyclical businesses growing at a moderate pace. Quote, we pay a multiple at or below the market for an exceptional business with a high ROCE, a wide moat, and a low business and financial risk. Occasionally, we stretch a bit by paying a trailing multiple in the high teens or low 20s for a truly unique business, but these occasions are few and far between.

[00:42:35] Kyle Grieve: The median trailing P multiple for our portfolio when we bought companies is 14.9. So he’s looking for businesses that have characteristics from its history that would show it’s a far superior business to the market. Yet, he wants the business to be priced similarly to market multiples. If history has taught us anything, it’s that a business that is higher quality than the market usually is valued above market multiples given enough time.

[00:43:01] Kyle Grieve: Now, what do green frogs and guppies have in common? They both give off signals. The difference is that the green frog signal can be seen as a dishonest signal. While the guppy signal is an honest signal. Are you confused? Pulak says in nature there are creatures that give off dishonest and honest signals.

[00:43:18] Kyle Grieve: In this example, the green frog can mimic the low frequency croak of a larger rival. They do this for a simple reason. Access to mates. The low frequency croak that a green frog makes is generally associated with the size of a green frog. A green frog that hears a low frequency croak will be signaled that a larger rival is nearby, and that it should move elsewhere or risk having to fight a losing fight.

[00:43:42] Kyle Grieve: As a response, smaller green frogs have developed the ability to create this low frequency croak. to trick other males in the area into moving elsewhere to find a mate. An honest signal would be one from a guppy. Females prefer to mate with guppies that have the brightest possible red coloring and with the greatest concentration of carotenoids.

[00:44:02] Kyle Grieve: So male guppies that can flaunt their colors to females the easiest also get the right to mate with females. This is an honest signal, as the signaling that the male guppies are displaying signals of both health and virility. Unfortunately, this honest signal comes at a big price to these attractive males.

[00:44:19] Kyle Grieve: The fact they are more colorful means they become easier to identify by prey. Signaling is huge in the world of investing. All public businesses are constantly giving off signals to display their strengths and hide their weaknesses. Our job as investors is to filter the fluff pieces and make sure we triage information and prioritize only the most important pieces of data we can access which tends to be the honest signals. Pulak gives numerous examples of dishonest and honest signals in investing. His dishonest signals include press releases, management interviews in the media, investor conferences and roadshows, earnings guidance, and face to face meetings with management. He makes a point that a dishonest signal does not mean the business is dishonest, just that the signal it’s displaying may not be communicating what it’s supposed to be.

[00:45:08] Kyle Grieve: Honest signals do communicate what they are intended to. These signals include past operating and financial performance, and a positive reputation with employees, both past and present, customers and suppliers. An observation I had here was that there are many more dishonest signals that businesses give off than compared to honest signals, but I think this is why honest signals are so important.

[00:45:32] Kyle Grieve: The honest signals do not hide the facts. If a business has a history of business excellence, that will show up on their financial statements. If a business has a positive culture and fosters good relationships with employees, customers, and suppliers, they will all tell you how much they enjoy engaging with the business.

[00:45:49] Kyle Grieve: The dishonest signals from one business can easily signal that everything is good, while the honest signals by the same business might be telling a completely different story. Nalanda Capital takes being lazy to a whole new level. Their strategy reminds me of a Warren Buffett quote many of you will probably be familiar with.

[00:46:06] Kyle Grieve: Inactivity strikes us as intelligent behavior. Pulak takes this Buffett tenet as far as possible. To help us understand why being very lazy is such a key to a strategy, we need to understand a less intuitive part of evolution. When we think of evolution, we think of long, slow changes that happen gradually over long periods of time.

[00:46:28] Kyle Grieve: But this notion was thrown on its head in 1959 by a Finnish scientist named Bjorn Curtin. For his experiment, he looked at brown bears and the size of their teeth. He looked at samples dating back between 2.6 million and 12,000 years ago. Using the assumptions above, we would think that over long measurement periods, the rates of change would be higher but the opposite was the case.

[00:46:50] Kyle Grieve: Over shorter periods, the rates of change were much higher than over longer periods of time. What this means is that evolution moves slowly over longer measurement periods and more quickly in shorter measurement periods. In another example of the quickening pace of natural selection over shorter timing periods, we can look at an example from Peter and Rosemary Grant.

[00:47:10] Kyle Grieve: This couple spent 6 months out of each year for a total of 40 consecutive years living on Daphne Major. which is one of the islands that makes up the Galapagos. The reason for this? The Grants realized this island undergoes severe climate changes very regularly and would therefore be in a great place to witness evolution in a short period of time.

[00:47:31] Kyle Grieve: They tagged 20,000 birds between 1973 and 2012 and researched them very closely. Due to changes in the climate, some very interesting things happened in a very short period of time. In the first four years of the study, the climate was pretty average, but after that, the island experienced a large drought that killed much of the island’s greenery.

[00:47:51] Kyle Grieve: As a result of this, many species of birds died, but a small amount survived. The species with larger beaks that could open certain seeds survived, the ones with medium and small sized beaks died. When the grants looked at the research over the decades they were there, they noticed that over a 10 year time period, not much change in terms of the beak size of these finches.

[00:48:11] Kyle Grieve: But when they looked at the changes on a year to year basis, the changes were actually much faster than the longer measurement periods. Pulak writes. Quote, there is a lovely fractal like property to this phenomenon. It does not seem to matter if the measurement period is a thousand years with the bears or just a few decades with the finches.

[00:48:29] Kyle Grieve: The pace of evolution speeds up over shorter periods and slows down over extended periods. Unquote. When we look at the wide world of investing, it’s easy to get caught up in the short term events that are happening from the macroeconomic perspective all the way down to individual businesses. What this mental shows us is that over a long period of time, things don’t change much, but over shorter periods, they give the appearance of changing very fast.

[00:48:56] Kyle Grieve: From his research on Curtin and the grants, he came up with the Grant Curtin Principle of Investing, GKPI, which is, If we identify top notch businesses that maintain their core qualities over time, we should use the short term ups and downs in their fundamental performance to buy instead of sell. The GKPI requires that you own high quality businesses that don’t fundamentally alter their characteristics over time.

[00:49:21] Kyle Grieve: If you hold these types of businesses, you can withstand the inevitable fluctuation in the business operation. Because in the long term, the business will remain high quality and continue to outperform. Pulak says GKPI is their religion. It has a major influence on how they do their work and what information they allow into their workspace.

[00:49:40] Kyle Grieve: For instance, they don’t have a TV, just a screen for conferencing. They keep their Bloomberg terminal off to the side in the office pantry. They don’t discuss recent company news or share prices at team meetings, and they have never bought or sold based on news flow. This brings me to a big area of focus that I have tried to create for my own investing environment.

[00:49:58] Kyle Grieve: I try to keep things that make me think short term as far away from myself as possible. This means I don’t check my portfolio value every day, I don’t need to stay up to the minute with news releases for my businesses, I rarely read analyst reports, I don’t compare my results with others, and I judge my performance based on improving operating results of my businesses, not their changes in stock prices.

[00:50:20] Kyle Grieve: If you follow the GKPI, you hopefully won’t have to sell very often, but you will still need to sell at some point. Prasad shows the data for how often Nalanda has sold over the years. Since 2007, they’ve sold 10 businesses, which is an average of exiting every 1.5 years. A final point on selling that he discusses is a primary reason for selling.

[00:50:40] Kyle Grieve: They remind me a lot of one of Thomas Felt’s axioms from 100 to 1 in the stock market. Any sale should be seen as a confession of error. You should strive to make as few of these errors as possible. Pulak has a few very important quotes. We never sell on valuation, and We have sold only when there had been an egregiously bad capital allocation or irreparable damage to a business. Very lazy indeed.

[00:51:05] Kyle Grieve: The final chapter of the book deals with the power of stasis in nature and investing. One of the biggest problems that Darwin came upon was outlined in chapter 6 of The Origin of Species. Pulak wrote, quote, He argues that since natural selection gradually eliminates minor well adapted forms, Extinction and natural selection must operate simultaneously.

[00:51:27] Kyle Grieve: Hence, logic dictates that innumerable transitional forms that were unable to adapt to their surroundings should have existed. But, as Darwin himself points out, transitional fossils have rarely been found. He admits that the incomplete fossil record poses a significant hurdle to anyone trying to prove that species evolve gradually, unquote.

[00:51:47] Kyle Grieve: But two scientists, Niles Eldridge and Stephen Jay Gould, came up with the idea of punctuated equilibria that seemed to make sense of Darwin’s original thesis by looking at the problem in a different way. The simple definition of punctuated equilibrium is that most species stay in stasis for long durations and are interrupted periodically by punctuations in this stasis.

[00:52:10] Kyle Grieve: So when paleontologists found larger changes in the morphology of a species, they should assume these changes happened rather suddenly rather than slowly over time. Prasad came up with this framework for investing from the concept of punctuated equilibrium. 1. Business stasis is the default, so why be active?

[00:52:29] Kyle Grieve: 2. Stock price fluctuation is not business punctuation and 3. Take advantage of the rare stock price punctuation to create a new species. Let’s dive into these three frameworks in some detail to find out how we can use them to be better investors. If we assume that most businesses are in stasis by default, it means that what has happened in the past should largely stay intact into the future.

[00:52:54] Kyle Grieve: If this is true, then simply finding wonderful businesses with a long history of excellence means that they should continue being wonderful into the future. A great example of this is how infrequent great buying opportunities occur. Pulak uses the example of a business he has firsthand knowledge of Unilever.

[00:53:11] Kyle Grieve: It was his first job, and when he started, he could see the business was truly exceptional. He discusses how he went out with a sales manager one day and was in awe of how much respect this sales manager had from customers. Their product was so in demand that Unilever had to ration its orders to different clients.

[00:53:27] Kyle Grieve: His point is that exceptional businesses have a way of staying exceptional for a long time. So when the opportunity comes to acquire one at a great price, you need to be highly active. But in those periods in between, your default activity should be to do as little as humanly possible. A great example I noted of punctuated equilibrium in real life was how infrequently Nalanda buys stocks.

[00:53:48] Kyle Grieve: Page, Havells, and TTK Prestige are three exceptional businesses that Nalanda holds. Pulak notes that since 2007, there were only three months of time where they could buy these businesses at prices, they deemed worthy. This comes out to only 1 2 percent of the time period. I think many of the great investors follow this strategy of understanding a business very well, but rarely taking action.

[00:54:10] Kyle Grieve: During the times of major market depression, you can get access to these businesses at mouthwatering prices. But it’s only when the market is truly depressed, fearful, and gloomy that the business will be sold off enough to offer cheap prices for high quality businesses. Usually these periods only make up a short period of time, so you must act quickly before the market comes back to its senses and sees that the sell off did not make any sense.

[00:54:33] Kyle Grieve: A great example would be the tech bubble, the great financial crisis, and the onset of the COVID pandemic. Critics of the Great Businesses Stay Great concept will cite research such as a Fortune 500 article published in 2015, stating that only 12 percent of businesses in the Fortune 500 in 1955 stayed there until 2015.

[00:54:53] Kyle Grieve: Pulak does a great job looking through the research, and his own conclusions were that 40 45 percent was the more likely number. He points out that the author missed a few businesses, and many dropped businesses were eliminated because they were acquired, and yet are still fully functional subsidiaries of its parent company.

[00:55:10] Kyle Grieve: And, many dropped out of the Fortune 500, but are still fully functional businesses as of 2015. With this said, 55 60 percent of businesses did fail. Pulak then goes on to explain how hard it is to make it into the Fortune 500. He says quote. Of these 10, that could have made it into the 2015 Fortune 500 list, only 300 did.

[00:55:33] Kyle Grieve: The remaining 200 had stayed in the list for 60 years. An apparent 3 percent success rate. The actual number is probably closer to 1 2 percent or even lower. Thus, 97 99 percent of the not so great businesses could not succeed over 60 years. Stasis is the default. The point here is that good businesses are probably more likely to remain good, and average and below average businesses are more likely to remain average or below average.

[00:56:02] Kyle Grieve: In 2018, Henrik Bessembinder published an article called Do Stocks Outperform Treasury Bills? His research focused on 26,000 stocks from various US stock exchanges between 1926 and 2016. 51% of these stocks lost their value over that time period. But how about the good ones? A full 31 percent of this sample, or about 8,000 stocks, beat the market during this time.

[00:56:26] Kyle Grieve: This is a lot higher than I would have thought. This shows how powerful stasis is in the market. Below average businesses tend to stay below average or disappear altogether. Great businesses tend to stay great for long periods of time. The second principle is probably the most important and least understood by the market.

[00:56:43] Kyle Grieve: Stock price fluctuations are not the same as business punctuation. It’s easy to confuse the two, and even if you understand this very well, many investors who own a stock that just won’t move or the price value gap just won’t close, will end up mistakenly selling because they confuse price fluctuation with business punctuation.

[00:57:02] Kyle Grieve: A great example of this today is one of my holdings, Evolution AB. The stock in the past 6 months has gone down 23 percent as of November 20th, 2023. However, the fundamentals of this business have improved at 25 percent or higher each quarter on a year over year basis in terms of revenues, net income, earnings per share, and free cash flow.

[00:57:22] Kyle Grieve: It’s important not to sell just because the stock price is being punished. A far higher degree of importance should be placed on looking at whether or not the business is still in a good place. That piece of information alone is what 99% of your focus should be on if you are a long term oriented investor.

[00:57:39] Kyle Grieve: When you look at a business through this light, you’re able to disassociate the share price from the underlying fundamentals of the business. Sure, you may have some pain when you look at the share price, but over the long run, price tracks value and you will be rewarded for holding on. Another important point that Mr.

[00:57:55] Kyle Grieve: Prasad points out here is that investors will apply positive business punctuations to a business that doesn’t deserve it. This is most apparent during speculative manias. Investors flock to a given industry or stock because the stock price fluctuations are going upward. They will mistakenly attribute this to a strengthening business punctuation when in reality one does not exist.

[00:58:16] Kyle Grieve: Look at Yahoo during the tech bubble. It traded at a price to sales multiple of up to 105 times. I assume many investors thought this growth and the story of the business would be sustained over a long period of time. They assumed a positive business punctuation. Unfortunately, that mistake would have cost them a hell of a lot of money.

[00:58:34] Kyle Grieve: Investors like Buffett had to be the butt of jokes, saying that he was done because he didn’t want to partake in these manias. But in the end, his ability to not confuse stock price fluctuations with business punctuation is one of his biggest strengths that he’s consistently shown over the decades. The third principle really ties into the first one, which is that we should take advantage of rare stock price punctuations to create a new species.

[00:58:59] Kyle Grieve: In this case, a new species is just a new stock that we put into our portfolio. Pulak shows some excellent data on how much capital he’s invested during these massive punctuations. For instance, during COVID 19, Nalanda invested 22% of its total capital during only 2 percent of its existence. This means that they rarely invest, and when they do, they invest big.

[00:59:22] Kyle Grieve: What I learned about investing from Darwin is a good look into Pulak Prasad’s investing process. His track record is very good. A table from the book shows data for six names in his portfolio, the number of years he’s held an investment, and his multiple uninvested capital up to June 30th of 2022.

[00:59:41] Kyle Grieve: Mine tree, 9.6 years held, 8.2 times. WNS, 13 years held, 10.6 times. Supreme, 11.6 years held, 13.6 times, Ratnamani, 11.7 years held, 16.2 times, Berger, 13.3 years held, 32.2 times, and Page, 13.7 years held, 82.2 times. I’m not sure I’ve seen a portfolio with this many multi-baggers in one place. I thoroughly enjoyed learning all the lessons he took from Darwin and biology and how he’s applied them to investing. His three step strategy is both simple and repeatable. One, eliminate significant risks. Two, invest only in seller businesses at fair prices. And three, own them forever. Pulak’s main goal is to own a business forever. Throughout the book, he shows that he truly searches for these types of businesses.

[01:00:36] Kyle Grieve: He knows he will be wrong, which is why he does have to sometimes sell. However, his primary goal is to use many of the lessons from Darwin to help identify exceptional business that he doesn’t have to sell. My favorite lesson in this book in regard to identifying seller businesses that reduce risk was looking for a single metric that gives you several favorable qualities along with it.

[01:00:56] Kyle Grieve: In his case, he uses returns on capital employed. I’ve always used this single metric. I used ROIC personally. I’ve always thought that this single metric is the most important metric to use. Pulak’s book helped explain why this capital efficiency metric is so important and why we should use it as a starting point for all future investments.

[01:01:14] Kyle Grieve: This one metric does so much in terms of showing us information on the quality of management, their capital allocation skills, their competitive advantages and their abilities to innovate and adapt. Once he deems a business as exceptional and eliminates significant risks, the next step is to acquire it at fair prices.

[01:01:30] Kyle Grieve: Here, his job is to take advantage of the price fluctuations that the market offers. For him, that means getting about a 30 percent discount to the Sensex Index. He’s looking for a price to earnings ratio of around 15. This is a very fair price. He also stated that he will sometimes go up to the high teens or even the low 20s if it makes sense.

[01:01:49] Kyle Grieve: The last step might be the hardest, owning your businesses forever. If you do the right work in step 1 and don’t overpay in step 2, then step 3 should theoretically be the easiest step to execute. But easy isn’t a word that many investors would use to describe what they are doing. Since nature tends to be in stasis, Pulak prefers to echo his sentiments into the investing world.

[01:02:10] Kyle Grieve: Monitor the fundamentals of the business to make sure it’s continuing to be exceptional and do as little as possible. So far, this strategy has worked incredibly well for Nalanda and its partners.

[01:02:22] Kyle Grieve: If you enjoyed this episode of this book and enjoy discussing great investment books with other passionate value investors, you’re going to love TIP’s Mastermind Community. You can find out more about it at theinvestorspodcast.com/mastermind.

[01:02:35] Kyle Grieve: If you want to learn more about Pulak Prasad, check out his book, What I Learned About Investing from Darwin and his fun site. At www.nalandacapital.com.

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