Financial History 145 Spring 2023 | Page 17

Berkshire Hathaway CEO Warren Buffett , who figured out the investing lessons from evolutionary theory before almost everyone else .
McKinsey , Harvard Business School , Bain and the Wharton School of Business to state that the M & A failure rate is over 70 %. If a business is a serial acquirer , stay away . You can ’ t price this risk .
Don ’ t Try to Predict Where the Puck Will Be
What is common between mid-19th century railways and late 20th century dotcoms ? The potential for enormous value destruction wrought by a fast-changing industry .
The path to creating wealth in rapidly evolving industries is treacherous , and it ’ s best to avoid walking 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 .” But in fast-changing industries , nobody really knows who will win , when and how . And to draw the parallel from the hockey game , since you don ’ t know where the puck is going to be , it ’ s best to refuse to play in industries that aren ’ t stable , predictable and boring .
Don ’ t Align with Unaligned Owners
As outside and passive owners , investors want the company owner to align their interest with the shareholders . Strange as it may sound , not every owner has this same objective . There are broadly three categories of owners to avoid in order to mitigate type I risk .
First , government-owned businesses . A long-term investor ’ s aims are typically not aligned with the government . It is not that the government objectives are “ wrong ”— they make sense in the light of multiple constituencies they need to satisfy . They are just different from investors ’ objectives .
Listed subsidiaries of global giants should also be avoided . Global MNCs like P & G , Unilever , Siemens , Cummins , Nestle and many others have locally listed subsidiaries . There is a structural problem with this arrangement because the parent is interested in its own value creation and not that of the subsidiary .
Lastly , it is best to avoid conglomerates . Value creation is possible only through sustained focus . So how does one achieve excellence across multiple entities across entirely different industries ? It ’ s hard , but not impossible . Maybe a conglomerate will succeed in creating great businesses across their entire portfolio one day , but that glorious future is not worth the wait .
Pulak Prasad is the founder of Nalanda Capital , a Singapore-based firm that invests in listed Indian equities and manages about $ 5 billion . This article was excerpted from Chapter 1 of his book , What I Learned About Investing from Darwin ( Columbia Business School Publishing , May 2023 ). Copyright © 2023 Pulak Prasad . Used by arrangement with the publisher . All rights reserved .
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