2023. Pulak Prasad. Columbia University Press.
Investment professionals know that there isn’t any substitute for hours of in-depth textbook study combined with an equal dose of practical experience. However, self-taught investors can develop necessary knowledge and skills for their very own investment success even without the formal rigor of a job title or a corresponding university degree. A 3rd group of investors, less curious about investment theory and practice, may follow basic concepts akin to risk and return, the advantages of compounding, and the impact of taxes. High-priced textbooks, detailed investment guides and retirement planning guides are well suited to these three groups. Star asset manager and founding father of Nalanda Capital, a Singapore-based company, Pulak Prasad has written a timely and practical guide for the center group, however the book can be a stark reminder to investment professionals that each one the technical skills on this planet are not any substitute for good perspective and strategy.
Singapore-based Prasad follows the well-trodden path of previous (and maybe higher known in North America) star investors like Peter Lynch, whose classic guide urged readers to take a position in corporations they know – especially those with high growth potential. Prasad leverages Lynch’s depth of data using examples from his India-focused fund, but places way more emphasis on investment theory and analytical techniques.
This level of detail may overwhelm investors who lack a solid understanding of theory and practice, but it surely is crucial to Prasad’s contention that too many skilled analysts depend on a false precision that gives answers that don’t have anything to do with the elemental query “Is this company a good long-term investment?” Prasad doesn’t reject the analytical tools, but fairly rejects their unbridled use because it hinders analysts’ ability to discover corporations which have superior overall growth and supply downside protection. This makes it an indispensable reminder to chronically underperforming lively managers.
Prasad doesn’t shrink back from detailed commentary on analytical techniques, but uses a folksy style like Warren Buffett’s to relate each point to real-world examples, often from his own portfolio at Nalanda Capital. This supports the narrative flow, which is a lot better than in lots of textbooks – one more reason for investment professionals to choose up the book.
Prasad underlines his arguments using chosen examples from evolutionary biology, including works by Charles Darwin. Each chapter begins with a specific quote from Darwin and Buffett (also referenced generously within the chapter text) and ends with a summary of the major points. Prasad’s ability to attract parallels between evolutionary theory and investment theory emphasizes the concepts most definitely to guide to long-term success and market outperformance.
For example, in his second chapter, Prasad cites an evolutionary biology experiment conducted in Siberia during which wild foxes were bred for a “tameness” gene that might make them more like pups than wild foxes. The experiment began in 1959 and produced a tamer fox in 1963. However, the genetic change also led to other pet-like changes within the animal, akin to “floppy ears, a piebald coloration and a shorter snout” in addition to a shorter reproductive cycle. Prasad draws a parallel between academics’ give attention to a single desirable characteristic and his own preferred investment metric: return on capital employed (ROCE). He explains that ROCE is probably going linked to other positive company qualities, akin to excellent management, exceptional capital allocation, a powerful competitive advantage and the power to innovate and grow a business. By selecting the first metric with essentially the most significance, the associated secondary metrics (floppy ears or outstanding management) are more likely to be attractive. Most analysts err in using earnings before interest and taxes (EBIT) or its related measure, EBITDA (which incorporates depreciation and amortization), because these measures can obscure other financial elements. Prasad’s give attention to ROCE is an initial screen around which he methodically builds his argument in the next chapters with additional financial and evolutionary theories and illustrates each of them using clear examples.
In concluding the book, Prasad has reminded us that the detailed knowledge and refined techniques we acquire through study usually are not an end in themselves but a way to an end. His perspective relies on experience and proven success and investors would do well to follow it. It can be a prospect which will develop into more invaluable in the long run as algorithms and artificial intelligence are used to attain financial goals. (More and faster tables won’t help in the event that they don’t give attention to the perfect metrics.)
The book is clearly written and well edited, with only the occasional minor misstep. Examples of this include Prasad’s claim of a zero percent return on an investment that goes bankrupt (that might be negative 100% fairly than a 0% return) and his clumsy attempt at humor by suggesting that younger readers may not know what one bookstore is. Additionally, a few of Prasad’s advice seems to lack context. For example, “he detests[s] “some debt” on corporate balance sheets, but publicly traded corporations with no debt (and even with less debt than they will carry) and no dual-class voting structures might be prime candidates for leveraged buyouts. This strategy represents a very good potential exit for a lot of lively managers, but seems to contradict the writer’s “buy and hold forever” strategy.
These quibbles are minor, nevertheless. For each amateur and skilled investors, the book reframes the pursuit of long-term investing success from a give attention to the tools at our disposal to a give attention to the outcomes we seek.
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