What I Learned About Investing From Darwin
Click here to buy the book.🚀 The Book in 3 Sentences
What I Learned About Investing From Darwin presents a philosophy of patient, long-term investing inspired by an unexpected source: evolutionary biology.
Building on the idea that investing is inherently multidisciplinary, the book draws lessons from Darwin’s theory of evolution and applies them to developing a time-tested strategy focused on permanently owning high-quality businesses.
In the book, Prasad dives deep into his three mantras of investing: avoid big risks, buy high quality at a fair price, and don’t be lazy—be very lazy.
🧠 Key Takeaways
By avoiding type I errors—even if it means making a type II error—you protect your portfolio from existential harm and live to fight another day. Species have survived for thousands of years by minimizing risk, and you’d best do the same.
As Darwin taught us, it’s survival of the fittest. Companies that can’t see beyond today’s calm waters will be blindsided when tomorrow’s hurricane hits. On the other hand, businesses that prioritize long-term resilience, even at the cost of maximizing short-term growth, are the ones that make it to the other side.
The future is too unpredictable, and in the world of investing, uncertainty is one of the biggest risk factors when it comes to building and preserving wealth. Instead of trying to predict “where the puck is going to be” (which, to be honest, no one can do), Prasad prefers sticking to something more consistent over the long term.
If you’re on the hunt for a high-quality business, you can really narrow down your search by screening for a high ROCE. As a general rule of thumb, Prasad likes to see a historical ROCE of 20% or more—five consecutive years is great, longer is even better.
A company’s historical financials tell the story of how it arrived at its current position. Studying that history gives insight into the "how"—how the business grew, how it navigated challenges, and how it created value over time. Understanding those patterns and trends can help you gauge whether the company’s trajectory might continue—or whether it’s more likely to veer off course.
Dividend yields tend to stay within a fairly consistent range over time. So, by comparing the current yield to the historical average, you can get a good sense of whether the stock is undervalued or overpriced based on where the yield is today.
Despite being in different sectors and industries, companies all around the world tend to behave in similar ways when faced with similar problems. And since there are only so many ways a business can overcome and survive those problems, recognizable patterns can be found. These patterns create a template that has a higher probability of succeeding, potentially making it a worthwhile investment. And that template helps you know what to look for when analyzing future investments.
When you invest in a company, with it comes the advantages and disadvantages of the industry it belongs to. Factors like regulation, economic conditions, and demand don’t just influence the company you’ve invested in—they impact all the businesses operating in that space.
When you trace the history of successful companies, a common pattern emerges: focus wins. Businesses that concentrate on a single product, service, or closely related offerings tend to outperform.
If you’re investing in great companies intending to hold them for the long term, the news cycle of the moment won’t change the long-term fundamentals that make those businesses worth owning.
Successful investing isn’t about being the smartest person in the room—it’s really more about having untiring patience.
Being a successful investor doesn’t mean constantly reaching for outsized gains by taking on unnecessary risk. While high-risk investments might occasionally work in your favor, more often than not, they don’t. Instead, the key to long-term success lies in sustainable and predictable returns. What’s interesting about investing is that by playing it safe—accepting average returns during bull markets but minimizing losses during downturns—you can actually end up outperforming the market overall.
✍️ Memorable Quotes
“Natural selection among animals is incessant and merciless and has produced millions of species, all of whom adhere to this simple principle: Minimize the risks of committing type I errors to curtail the risk of injury or death, and learn to live with type II errors or foregone benefits.”
Animals in the wild face countless threats every day. The stakes are high for the decisions they make—literally resulting in life or death.
Their survival depends on avoiding what are called “type I errors.” These are mistakes that could lead to harm or death, such as underestimating a dangerous situation that leaves them exposed to predators.
To stay alive, they’re best erring on the side of caution and avoiding type I errors, even if it means passing up potential rewards like food, water, or mating opportunities, which are called “type II errors.”
The lesson for us investors here is the same: it’s better to prioritize minimizing risks (type I errors) over chasing rewards (type II errors).
In our case, a type I error occurs when you make a risky investment decision that results in a substantial loss of capital. These mistakes can set you back in your pursuit of building wealth in the same way that a fatal, type I error in the wild can put an animal’s life at risk.
Type II errors occur when you pass up an investment opportunity that turned out to be a good one. Although it sucks to miss out on those profits, at least you didn’t lose any money.
Having said that, it’s best to think about risk first instead of focusing solely on returns. Most investors approach their investment decisions the opposite way, which leaves them vulnerable to making type I errors.
At the end of the day, investing is about being able to survive over the long haul. You want to keep playing the game for as long as you can.
By avoiding type I errors—even if it means making a type II error—you protect your portfolio from existential harm and live to fight another day. Species have survived for thousands of years by minimizing risk, and you’d best do the same.
“A strong balance sheet is not the one that maximizes debt to minimize the cost of capital but the one that minimizes debt to maximize the safety of capital.”
I found this quote incredibly refreshing. I get excited when I find a business with no debt (or even negative net debt), but I always hear people say that “debt can be good.”
While I do see how that can be true, I still think a balance sheet is stronger when debt is low or nonexistent. Less debt will be better for the company when things go sideways, which they inevitably will.
The reality is that bad (and unexpected) things happen to businesses all the time. Whether it’s a recession, a bad acquisition, a lawsuit, or something entirely different, problems will be the norm for your investments, not the exception.
This is why the most resilient companies keep debt in check and maintain a conservative balance sheet. It may not be glamorous, and it might even mean slower growth for the company, but financial security is one of the strongest competitive advantages a business can have.
When tough times do eventually arrive (it’s only a matter of time), these companies will be better equipped to weather the storm. Even better, they’ll find themselves in a better position to take advantage of opportunities that their over-leveraged competitors cannot.
As Darwin taught us, it’s survival of the fittest. Companies that can’t see beyond today’s calm waters will be blindsided when tomorrow’s hurricane hits.
On the other hand, businesses that prioritize long-term resilience, even at the cost of maximizing short-term growth, are the ones that make it to the other side.
“The path to creating wealth in rapidly evolving industries is treacherous, and we refuse to walk on it. Many investors are slaves to the famous quote of the hockey legend Wayne Gretzky: “I skate to where the puck is going to be, not where it has been? I am not one of them. I am just not that smart. In fast-changing industries, I have no idea who will win, when, or how. And to draw the parallel with hockey, since I don’t know where the puck is going to be, I refuse to play.”
Many investors get excited about industries that are fast-changing. Think technology, biotech, or anything “disruptive.”
It’s sexier to talk about investing in the next big tech company than it is to talk about putting money into something like Procter & Gamble (PG) or Walmart (WMT). I can see why that is, but there’s a catch.
The problem is that nobody knows what’s going to happen in these fast-moving industries. It’s easy to get caught up in the hype and excitement, but so many of these companies don’t even have a proven track record yet. A lot of them aren’t even profitable.
It’s more like gambling than investing, and that’s why Prasad avoids these kinds of industries altogether.
The future is too unpredictable, and in the world of investing, uncertainty is one of the biggest risk factors when it comes to building and preserving wealth. Instead of trying to predict “where the puck is going to be” (which, to be honest, no one can do), Prasad prefers sticking to something more consistent over the long term.
You may not get the crazy highs, but you also won’t have to worry about the wild lows either. And when it comes to building wealth, consistent and sustainable returns can be a lot more effective than trying to hit a home run every time.
“At Nalanda, here is what we begin with while short-listing businesses: historical return on capital employed (ROCE).”
ROCE measures how efficiently a company generates profits from the capital it uses, and according to Prasad, it’s a good litmus test for identifying the cream of the crop among businesses. There are a few reasons for this:
First and foremost, Prasad emphasizes that a good investment criteria must be measurable. ROCE obviously fits this requirement perfectly because it’s a concrete, easily calculated financial metric.
More importantly, since ROCE measures a company’s ability to generate a return on the capital it invests, ROCE filters out businesses with poor economics. By doing so, it narrows the investable universe to a pool of potentially high-quality businesses.
With that said, consistently high ROCE often reflects exceptional management, which is another reason why Prasad uses this metric as his starting point.
Achieving high returns on capital requires not only operational efficiency but also disciplined decision-making regarding where and how to allocate that capital, which obviously comes from management.
Companies with strong ROCE metrics often have leadership teams that are good at maximizing shareholder value while avoiding wasteful or misguided pet projects.
The final reason Prasad likes this metric is that high ROCE can be a sign of a durable competitive advantage. Businesses with significant pricing power, low-cost advantages, or other forms of market dominance can sustain superior returns over time.
All in all, if you’re on the hunt for a high-quality business, you can really narrow down your search by starting with this one metric. As a general rule of thumb, Prasad likes to see a historical ROCE of 20% or more—five consecutive years is great, longer is even better.
“We should expect the following from a quality management team. That they deliver products and services to their customers that are superior to those of their competitors, allocate capital prudently, attract and retain quality employees, manage their cost structure (which is commensurate with their size and revenue), maintain a quality balance sheet, and continuously innovate by taking calculated risks. All this should—and does—correlate with high ROCE.”
In the same way that the best bowler has the highest score and the fastest marathoner has the best finish time, the quality of a management team can be measured through the company’s historical return on capital employed (ROCE).
If a company consistently has a high ROCE, it’s a sign that its management knows what they’re doing. And according to the author, this is what they should be doing:
First, they need to deliver products and services that are better than the competition’s.
Second, they should use the company’s money with careful discipline, putting it where it will have the biggest impact without blowing it on wasteful projects. They also need to keep the company’s finances in good shape, making sure it will be able to weather tough times should they arise—which they will.
It’s also important that management knows how to build and keep a strong team. Attracting great employees, and creating an environment where they want to stay, is key to long-term success.
Finally, great management teams shouldn’t be afraid to take calculated risks. They understand that staying competitive requires trying new things, even if the outcome of those things isn’t always favorable.
All of this—the superior products, the careful discipline, the financial wherewithal, and the success of the calculated risks—ultimately shows up in a company’s ROCE.
“Table 3.1 — Examples of Robustness In A Business”
In the book, the author talks about “robustness” as a way to measure how durable a business is. He writes that the more of these traits a company has—of which there are seven—the better its chances of standing the test of time.
First, a company with a long history of delivering strong ROCE has already proven it knows how to use its resources wisely. A consistent track record like this shows the company has staying power.
Second, having a fragmented customer base is a huge advantage. If no single customer accounts for too much of the company’s revenue, the business is less vulnerable to losing any one customer.
Similarly, having a fragmented supplier base helps the company avoid being overly dependent on any single supplier, which adds another layer of stability.
Next is financial strength. A company with no debt and excess cash has the flexibility to deal with tough times or take advantage of opportunities. It’s in a much better position to survive and grow compared to one that’s bogged down with debt.
Competitive advantages are also key. Whether it’s a strong brand, unique technology, or something else that sets the company apart, these moats protect the business and make it harder for competitors to take market share.
The sixth sign of a robust business is a stable management team. Consistent leadership provides clear direction and avoids the uncertainty and changing directions that can come with frequent turnover at the top.
Finally, the nature of the industry itself plays a role in all of this too. Companies in slow-changing industries tend to have a more predictable environment to work in, making it easier for them to focus on steady, long-term growth rather than constantly reacting to disruption.
Overall, these seven traits provide a solid checklist for finding businesses that are built to last. Focusing on these qualities in the companies you invest in can help ensure you’re choosing investments that are resilient and well-positioned to deliver consistently strong returns.
“We at Nalanda pursue the profession of investing the same way evolutionary biologists do: We interpret the present in the context of history. Evolutionary biology does not make predictions as physics and chemistry do. Nor do we. Instead, our investment approach attempts to explain the present by interpreting what occurred in the past.”
Nobody can predict the future. That’s one of the fundamental truths of investing—and one that makes projecting too far ahead a flawed approach.
Analyst estimates, discounted cash flow calculations, and other forecasting tools all rely on assumptions about the future. The problem, though, is that the future is messy.
There’s too much room for error, and unpredictability often renders these projections too uncertain to actually be helpful.
Having said that, if the future is uncertain, doesn’t that make the past irrelevant too? Not quite.
While past performance doesn’t guarantee future results (as you’ve probably heard a million times), it does offer something valuable: context.
A company’s historical financials tell the story of how it arrived at its current position. Studying that history gives insight into the "how"—how the business grew, how it navigated challenges, and how it created value over time.
Understanding those patterns and trends can help you gauge whether the company’s trajectory might continue—or whether it’s more likely to veer off course.
In the end, the past isn’t a crystal ball, but it’s the closest thing we’ve got. It’s not perfect, but it’s better than nothing.
“If investors can’t forecast cash flows even a few days or months in advance, how can they be expected to project cash flows years ahead? But this is what the DCF methodology demands. Investors and analysts rarely fail to build massive, complicated financial models that assess dozens of factors to project cash flows over many years in the future. Hail Excel.”
This really nails one of the biggest issues with Discounted Cash Flow (DCF) calculations.
If we can’t even predict what cash flows will look like next quarter, expecting to forecast them years into the future doesn’t make much sense. And yet, that’s exactly what the DCF method requires.
Investors will spend hours building these overly complex models in Excel with dozens of assumptions to try and calculate a precise valuation. But at the end of the day, the whole thing falls apart if your inputs end up being even slightly off—and how will you know since they’re based on future outcomes?
That’s why I’ve pretty much given up on doing DCF calculations altogether. The concept of—"the value of a business is the present value of all its future cash flows"—sounds great in theory. But in practice, it’s way too easy to mess up.
One small change to your assumptions—like changing the free cash flow growth rate or discount rate—can wildly impact your valuation, which makes it feel more like a guessing game than anything else.
Instead of DCF, I’ve started using much simpler and, honestly, more reliable ways of valuing stocks. Now, I just look at how a company is valued compared to its own history.
For example, I’ll check the current P/E ratio against the company’s five-year average. The same goes for the P/FCF ratio and free cash flow yield—I compare those to the historical averages, too.
For dividend investors, this way of going about it also works really well with the dividend yield.
Dividend yields tend to stay within a fairly consistent range over time. So, by comparing the current yield to the historical average, you can get a good sense of whether the stock is undervalued or overpriced based on where the yield is today.
So far, I like this approach a lot better. It doesn’t rely on unreliable predictions about the future. Instead, it’s based on actual historical data, which to me feels way more tangible.
“We invest in convergent patterns. We seek patterns that repeat. As we saw, “replaying the tape of life” often yields the same result. We operate on the principle that the business world is no different. There is a big difference between asserting “I love this business and “I love this business construct.” We are fans of the latter, not the former. We don’t care about a business; we are deeply attached to a business template.”
The idea of investing in a "business template" rather than just a business is really interesting, and I hadn’t thought of it that way before.
To expand on the idea, investing isn't just about the business itself, it’s about being able to recognize the patterns that occur across various businesses.
Despite being in different sectors and industries, companies all around the world tend to behave in similar ways when faced with similar problems. And since there are only so many ways a business can overcome and survive those problems, recognizable patterns can be found.
These patterns can be likened to moats or competitive advantages. When analyzing a business, what you’re really looking for are the qualities that indicate strength, resilience, and protection against competition—things like brand power, network effects, economies of scale, and a clean balance sheet.
When these qualities come together in a business, they create a template that has a higher probability of succeeding, potentially making it a worthwhile investment. And that template helps you know what to look for when analyzing future investments.
If you don’t see a convergence of favorable patterns, then that business probably won’t serve as a solid template, and it may not be a worthwhile investment.
“We detest the phrases ‘This time, it’s different’ and ‘My gut tells me this will work.’ We need to see the evidence that our investment thesis has worked elsewhere. If it hasn’t, we are unlikely to touch it. We are the antithesis of the venture capital community, which earns its living by betting on untested and unproven businesses. I am in awe of successful venture capital firms, but my admiration for them will never translate into a desire to emulate them.”
In other words, if an investment strategy hasn’t shown success elsewhere, it’s not worth the risk.
This is the opposite of how it works in the venture capital world, where the entire game is about betting on potentially groundbreaking ideas even if they lack a proven track record. Prasad doesn’t deny the skill and audacity it takes to succeed in venture capital—it’s just not his cup of tea.
The same holds true for us dividend investors. We’re not trying to chase the next big thing, and we’re not looking for unicorns in a sea of startups.
We want our investments to come with a proven track record. And while chasing bold ideas can sometimes pay off, it comes with significantly higher risk.
When the goal is to build a reliable and growing stream of passive income, taking unnecessary risks is the last thing we want to do.
“Buying into a business means also buying into the industry of that business. For example, while I may think I am investing in a company that makes and sells sanitaryware, I am inheriting all the good and the bad of the sanitaryware industry. No company is an island. We can never ignore the kinds of businesses that surround it.”
Businesses don’t exist in a vacuum—they operate as part of a larger ecosystem within their industry.
When you invest in a company, with it comes the advantages and disadvantages of the industry it belongs to. Factors like regulation, economic conditions, and demand don’t just influence the company you’ve invested in—they impact all the businesses operating in that space.
With that said, understanding these broader industry dynamics before investing is essential. Doing so will help you decide whether this is an environment where your investment can thrive—or if the challenges may outweigh the opportunities.
“If one replays the tape of business history across periods and countries, the overwhelming convergent pattern would be that business focus leads to success. Most of our portfolio comprises businesses with only one product or service or a small set of related products and services. We refuse to invest in diversified companies or conglomerates. We also express disappointment when any of our management teams try to deviate from their course.”
There’s a lot of symmetry between Darwin’s ideas about convergence in nature and the world of investing.
In biology, convergence happens when unrelated species—like bats and birds—develop the same solutions, such as wings, to solve similar problems. The takeaway here is that while there are countless challenges in nature, there are only a handful of effective ways to overcome them.
The business world operates in the same way.
When you trace the history of successful companies, a common pattern emerges: focus wins. Businesses that concentrate on a single product, service, or closely related offerings tend to outperform.
Why is that?
Because focus allows them to master their craft. By avoiding distractions, focused companies will have an easier time evolving. They stick to what they know—and it works.
This is why Prasad avoids investing in conglomerates. He thinks they struggle to be great at anything because they’re spread so thin trying to do too many different things at one time.
With that said, there is a downside to only investing in focused companies. Avoiding conglomerates may cause you to miss out on outliers like Amazon, which strayed from the norm by growing from an online bookstore (focused) into a tech giant spanning multiple industries (not focused).
Still, in the grand scheme of things, success stories like Amazon are few and far between, and chasing them often leads to more misses than hits. For most investors, betting on focus is likely the safer and more reliable path to building wealth.
“Our office doesn’t have a TV screen playing CNBC or any other news; our lone TV screen is used only for video conferencing. The only Bloomberg terminal we have is in the corner of our office pantry; it remains unused and unwatched probably 99 percent of the time. We never discuss recent company news or share prices in our team meetings. I mainly read physical newspapers, in which the information is always one day late. We have never bought or sold a single business based on news flow and never will.”
With an endless amount of information at our fingertips, you are flooded with never-ending updates, breaking news, and “expert” predictions all trying to grab your attention.
It’s easy to believe that staying on top of every piece of information that flashes across your screen will give you some sort of competitive edge. But more often than not, the opposite is true.
You get distracted, which causes you to lose sight of what really matters, which causes you to overreact to information that doesn’t matter in the first place.
Instead of making decisions based on headlines, you’re better off spending time on the things that will truly move the needle—like researching businesses and refining your investment process.
If you’re investing in great companies intending to hold them for the long term, the news cycle of the moment won’t change the long-term fundamentals that make those businesses worth owning.
“There isn’t a single business in our portfolio that has gone up in a straight line. Not one. Over the long run, most businesses in our portfolio have done well, but every business has gyrated wildly in both directions when measured over weeks or quarters. Our default option is to overlook these temporary business upheavals.”
The world is messy, it’s chaotic, and it’s never ever the thing you’d expect. The stock market doesn’t just exemplify that—it amplifies it to an almost absurd degree.
There are so many times when the market just doesn’t make sense.
A bad business’s stock might skyrocket because of some flashy news, while a great business’s stock can tank for reasons that have nothing to do with it.
That’s why it’s so important to truly understand what you own and to take the time to do your research. When you’ve put in the work and built confidence in your investments, it’s easier to handle the ups and downs.
But when prices drop fast and hard, even the best of us can start second-guessing ourselves. At the end of the day, though, conviction is what keeps you grounded, and it’s the only thing that can get you through the chaos.
Without it, you’re probably better off sticking with ETFs and keeping your portfolio out of sight, out of mind.
“What is needed to become a successful investor is not intellect, a commodity, but patience, which is not.”
Successful investing isn’t about being the smartest person in the room—it’s really more about having untiring patience.
Patience helps you resist the urge to make knee-jerk decisions, whether that’s chasing after the “it” stock of the moment, panic-selling during a correction, or trying to “get rich by Tuesday” as Ari would say.
This mindset goes completely against how we’re wired in today’s world, where instant gratification is the norm and anything slower is intolerable.
But the truth about building lasting wealth is that it simply doesn’t happen overnight. It’s a gradual process that requires you to endure periods of uncertainty, volatility, and short-term underperformance to achieve your long-term goals.
Interestingly, seeking out delayed gratification like this doesn’t just make patience an essential ingredient of successful investing—it also turns it into a countercultural quality that is about choosing disciplined endurance over impulsive behavior, which is rare in a world obsessed with immediate results.
And honestly, that’s one of the things I love about investing. It’s not easy to prioritize your future over the things you want today.
Most people would rather spend money on a new car, clothes, or some other frivolous thing. But for me, there’s a deep satisfaction in choosing to forgo those things, knowing that by practicing patience and focusing on the long term, I’m setting myself up for a better future.
“In this complex, unknowable, and uncertain world, we are not trying to make the best investments since we are in the dark about most things. We don’t know what the best investment would be. Instead, we are simply trying to invest well. These are very different ways of investing and lead to radically different investment models. Our model—that of investing well—tries to achieve just one objective amid uncertainty: increase the predictive accuracy of our investments.”
Being a successful investor doesn’t mean constantly reaching for outsized gains by taking on unnecessary risk. While high-risk investments might occasionally work in your favor, more often than not, they don’t.
Instead, the key to long-term success lies in sustainable and predictable returns. And what’s interesting about investing is that by playing it safe—accepting average returns during bull markets but minimizing losses during downturns—you can actually end up outperforming the market overall.
Still, many investors feel the need to chase big wins by taking on risks they don’t need to. They hope to find stocks that will greatly outperform the S&P 500 on the upside, but for every one or two that might actually “go to the moon,” many more turn out to be duds.
Ultimately, you’re better off going for consistent, sustainable returns rather than explosive ones. Explosive returns might be exciting to watch, but they can just as easily blow up in your face.
As I’ve learned in my recent experience, being a successful investor is actually pretty similar to running.
If you push yourself to run too far, too fast, too soon, you risk injury that could take you out of the race entirely. By consciously slowing down to a more sustainable pace, you may be moving slower, but your consistent pace and lower risk of injury could ultimately put you ahead of the speedster who burns out or gets injured.
As the saying goes: it’s a marathon, not a sprint. Still, there will always be sprinters because speed is more exciting.
“If we are surviving and outperforming the market many years from now, it will not be because we know a lot. Instead, it will be because we know that we don’t.”
An important reminder to stay within your Circle of Competence. You’ll have much better success investing in things you know and understand versus things that are outside of your wheelhouse.
Dear Shareholder is a curated collection of the most insightful passages from some of the greatest shareholder letters ever written.