Source: China Securities News
Pranav Prasad of Nalanda Investments is a representative of the 'old guard' mindset. The fund he manages, with $5 billion in assets, generated a 15x return over the 15-year period from 2007 to 2022, achieving an annualized compound return of 20.3% (net of fees).
In his book *What I Learned About Investing from Darwin*, Prasad elaborates on the ultimate mindset of the 'Old Man': namely, that avoiding catastrophic risks is essential to longevity; investing is a discipline rooted in historical study, focusing not on 'what might happen in the future,' but on 'what has actually already occurred'; and investors should disregard 'dishonest' low-cost signals, placing trust only in high-cost signals—such as consistent multi-year profitability and cash flow data.
Prasad is also an ardent admirer of Buffett and Munger. His interest in evolutionary theory stems precisely from Munger’s assertion that 'biological principles can indeed guide investment decisions. Sometimes, conventional fundamental analysis may yield limited insights, but adopting an evolutionary perspective can lead to entirely new understandings and reveal a company’s unique strengths.'
Avoiding major risks
Bumblebees are fuzzy insects no longer than 2.5 centimeters. This species—comprising approximately 300 varieties—has existed on Earth for 30 million years and serves as prey for crab spiders and birds.
Scientists constructed an artificial garden using artificial flowers and placed robotic crab spiders among them—some hidden and others exposed. Whenever a bumblebee landed on a flower equipped with a robotic crab spider, the spider would capture it using foam-tipped pincers.
The research team found that even in the absence of crab spiders, the bees still avoided certain flowers, significantly reducing their foraging efficiency. In the wild, this instinct—to accept the cost of hunger in order to evade danger—must have played a crucial role in the species’ successful survival over millions of years of evolution.
Prasad argues that all living organisms prioritize survival above all else—a principle that holds true across both prey and predators in the animal kingdom. Even in the plant kingdom, when individual survival is threatened, resources normally allocated to growth are reallocated to ensure survival.
According to Prasad, Buffett’s two cardinal rules of investing—'never lose money' and 'never forget the first rule'—are fundamentally a directive to eliminate major risks. Just as in the biological world, if the risk of capital loss is too high, we forgo the opportunity for gain, no matter how attractive the potential return may appear.
Nalanda Investment’s approach is to avoid fraudulent entrepreneurs, companies at volatile inflection points, highly leveraged firms, serial acquirers, rapidly changing industries, and business owners who fail to treat all stakeholders fairly. Only by firmly embracing the role of a 'refuser' first can we become better investors.
Buying high-quality stocks at reasonable prices
Long-term experiments conducted by scientists in Siberia have demonstrated that when 'tameness in silver foxes' is used as the sole selection criterion, wild silver foxes evolve over several generations into creatures closely resembling domesticated dogs. The domesticated foxes become extremely docile and actively seek human attention. They also develop floppy ears, mottled fur, and relatively shorter snouts—features reminiscent of the neotenous, doll-like faces humans find appealing—and can reproduce multiple times per year.
Prasad believes investors can achieve substantial returns by focusing on a single business attribute, but once such an attribute is selected, it often comes bundled with many other 'positive qualities.' Industry-favored evaluation metrics—such as quality management, high growth, and high profitability—are neither suitable nor sufficient as standalone 'business attributes' for judging a company’s merit.
Nalanda Investments targets high-quality businesses during inevitable 'short-term setbacks,' investing only when valuations are highly 'attractive' to them. However, because such opportunities are exceedingly rare, they seldom make purchases; over more than a decade of investment history, they have actively deployed capital only three times—including taking advantage of the global equity market selloff triggered by the COVID-19 pandemic to acquire stakes in high-quality companies.
Nalanda Investments focuses exclusively on the quality of a business and constantly reflects on the question: 'Do we want to be permanent shareholders of this company?' Consequently, even if the share prices of low-quality businesses continue to rise, they will not follow the trend and buy in.
Rely only on high-cost signals
In nature, small male green frogs mimicking the deep calls of larger males emit a 'dishonest' signal, whereas the vibrant coloration of male guppies serves as an 'honest' indicator of health and strong 'reproductive fitness.' As investors, we are also bombarded with a barrage of signals—many of which may be 'dishonest,' such as corporate press releases, management meetings and interviews, and investor conferences—all designed to create a favorable impression at very low production cost.
Prasad argues that we should rely solely on costly signals sent by companies. An honest signal from a company is not 'Our profit margin will reach 15% next year,' but rather 'Our average profit margin over the past 10 years has been 12%.' It is not 'We will generate robust free cash flow over the next two years,' but 'Over the past 10 years, we generated free cash flow in only one year.' Nor is it 'We will launch six new products next year,' but 'Looking back at recent years, we have launched one product on average every two years.'
Unlike physics and chemistry, evolutionary biology typically does not make predictions. Instead of addressing 'where humanity is headed,' it seeks to understand the complex question of 'how bipedal humans evolved from quadrupedal ape ancestors.'
Prasad contends that the investment community’s obsession with the future has displaced the critical role of historical data analysis, replacing it with reckless forecasts lacking empirical support—a clear case of putting the cart before the horse.
In the words of Douglas Futuyma, Professor at Stony Brook University, State University of New York: 'The core of evolutionary biology includes describing and analyzing the history of evolution, as well as examining the causes and mechanisms underlying evolutionary change.'
As a long-term investor, Nalanda Investments has moved beyond the preoccupation with 'what will happen in the future' and instead focuses on 'what has actually already happened,' as the former consists merely of a series of conjectures and opinions, while the latter is largely grounded in facts.
Editor /rice