What I Learned About investing From Darwin Flashcards
What are the 3 theories Darwin gave about evolution?
Natural selection - Traits nature select for survival. Slight change in DNA.
Sexual selection - Traits opposite sex select for reproduction (peacocks)
Common Ancestry - Derived from common ancesters. All of us. Embryo of turtle, snake and human are all same.
Why is it hard to predict future of investment? Why to rely on historical context?
It is damn difficult to predict the future as it is speculative but history is more factual. Off course it hides certain failures(Nokia after 2000 when they lost 90% market share) and opportunities(Starbucks after 2008 when the founder Schultz returned) of the future when you only rely historical facts but it gives you the best chance without risk.
Off course you need to go deeper and check the context of things. If ROCE is 40% for two consecutive years. Why? Is that even after fierce competition with unique USP or no new entrants have explored it yet.?
What is the formulae to calculate the P/E ratio?
Market valuation / last 12 months PAT= P/E ration (Trailing)
The above can be calculated for future years too.
What is ROCE?
It tells you what % of X that a company earns as profit when it employs X amount of money.
It is the return on capital employed.
EBIT / CE
EBIT - Earnings before interests and taxes
CE - Capital employed (Total Assets - current liabilities) = Shareholder equity + long term debt.
Capital Employed is all the money you’ve used to keep your lemonade stand running. It includes both your own money (shareholder equity) and any borrowed money (long-term debt).
But there’s another thing to remember:
• Total Assets: This is everything your lemonade stand owns—like the stand itself, lemons, sugar, cups, and even any cash you have on hand. • Current Liabilities: These are the small debts you owe soon, like if you promised to pay your friend back for helping you buy more lemons.
The Simple Equation:
Capital Employed is like saying, “How much money do I have tied up in my lemonade stand after taking away the small debts I owe soon?”
• Total Assets - Current Liabilities is all the valuable stuff you own after paying off the small, short-term debts.
This number (Capital Employed) will be exactly the same as the sum of your Shareholder Equity (your own money) and Long-Term Debt (borrowed money).
The Big Picture:
So, Capital Employed is all the money invested in your lemonade stand, either from your savings or from loans, minus any small debts you need to pay soon. This is the total amount of money you’re using to keep your lemonade business running strong!
Why do sharks look similar to dolphins? Convergence in evolution.
Given the same environment and behavior (fast movement in water), organisms evolve in a similar way.
What was the lizard experience in Caribbean’s?
6 different lizard species were studied across islands and they happened to evolve in a similar way based on their habitat on the island I.e tree trunks, leaves, bushes etc…
What is the concept of convergence?
That given the same environment and conditions, the organism tend to select new features which are quite similar. Like dolphins and sharks(fast moving fins), humans and ant cutters (agriculture).
What do ants do that is common to humans?
Any cutter ants in Peruvian Amazon line up with leaves and March towards the colony where they give it to specific ant species which convert it into fungus on which the whole colony feeds. Much similar to what humans do.
How to evaluate businesses from the principles of convergence?
Take an outside view around the business and industry as a whole.
NAUKRI was lucrative because it was top player but closely resembles the success of yellow pages companies. It has a strong network effects and competitive advantage.
Airline market in Asia is not good because the airline companies not making any money in US, the industry is not making money, the top company is not making money.
What’s the question to ask to evaluate a business using the principles of convergence?
Given the same problems by the environment, animals, birds, bacteria, and even businesses seem to devise a similar solution and evolve.
Although Australia was 35 million years separated by other continents, you would see parallels of every specie with a different name. Wolf, kuala
What is longest running recent experiment?
12 tubes, same amount of glucose.
Monitoring the evolution of bacteria whose lifetime is 20 mins.
After 20 thousands of years, 1 bacteria has evolved to consume another molecule other than glucose found in the food solution fed to them. That led to 10 times more reproduction compared to others.
Is evolution fast or slow? Happens gradually or in phases? How’s it related to business?
As per various researches, it happens fast during a certain period where changes can be seen fast but normalize the speed over a range and then for thousands of years it could be same.
Businesses survive the long periods with shorter periods of change downward movement. The magic is if you find such downward movements of great companies and invest.
How do honeybees select a new site?
Scouts go in all directions and measure the quality. Come back to the hive and perform a wiggle dance which varies in length based on the site quality. Bee hive workers randomly attach themeselves and come back perform wiggle dance. Longer wiggle dances gets more random chance and ultimately they select the best hive, with 100% consensus.
Nalanda philosophy of buying?
Avoid all risks
Buy at the best price
Hold on forever
What is the buying criteria of Nalanda?
Has delivered high ROCE historically
Has a fragmented customer base
Has no debt and has excess cash
Has built high competitive barriers
Has a fragmented supplier base
Has a stable management team
Industry is slowly changing
Market share is growing
