Good Investors Study Charles Darwin As Closely As Benjamin Graham

  • Jan 04, 2020 AEDT
  • Team Kalkine
Good Investors Study Charles Darwin As Closely As Benjamin Graham

Many people assume investing to be a game where high performing players today are bound to make you rich, and the poor performers today are never going to revive. This forms a part of the several biases comprising the behaviour of an investor.

One such bias due to which even experienced investors lose money is the herd mentality bias wherein the investors tend to follow and copy the investment path of the other investors, especially of the financial influencers.

Investors blindly follow the emotions and instincts, instead of their own independent analysis.

Benjamin Graham, synonymised as the Father of Value Investing and the Dean of Wall Street drove the focus of what were called mere investors to become analysts which involved abiding by several principles of investing and concepts of security analysis, fundamental analysis and value investing theories.

Warren Buffett, considered as one of the most successful investors in the present-day investing world, and many other present-day investing idols were inspired by Benjamin Graham.

A layman Investor would easily develop a feeling that he knows if not everything, then at least most of the things about the company for a prospective investment. However, Graham argued that an investor might never know all there is to know about a company, no matter he has done the best research.

This is because no one can calculate the adverse surprises that would make the stocks plunge.

Graham emphasised on choosing big companies with strong sales since they may be more resistant towards any economic crisis occurring out of the blue. Moreover, these companies are more likely to pay dividends as compared to small companies with lesser resources. Since dividends represent the profitability of the business, Graham insisted on opting for such companies paying dividends.

Another indicator that an investor should consider before investing is the growth in the earnings of the business. Businesses showing improved earnings over the years should take a place in the investor’s list of preferred investment stocks.  

Profit of the business and strong balance sheet form the basis for the investor’s perception towards the financial position of a company. An investor will always choose to invest in a profitable business with strong financials. So was Graham’s emphasis on investing in businesses whose debt (both current and long-term) is less than its current assets.

 A majorly emphasised concept by the Benjamin Graham is to not put any weight in short term earnings since relying on it requires more due diligence and carries greater risk for the investor.

The above-discussed strategies and preferences are a glimpse of Graham’s own book The Intelligent Investor written in the year 1949, which emphasises on the structural logic to security analysis for making an informed investment.

But do the above-discussed indicators based on facts and numbers together complete your knowledge to make an informed investment decision?

A quote by Warren Buffet - American Business Magnate, Investor, and Philanthropist reads:

Buffet emphasises on controlling and managing rationality and emotions while investing in the market since IQ isn’t the single defining factor to being successful.

The reason to bring this quote by Martin Feldstein, an American economist, into the discussion is that we have witnessed in the past that well-settled businesses with fair performance and strong financials have tasted failures. These failures have resulted in putting the businesses from a ‘must have’ list of investors to ‘not have’ list of investors.

So, is it really the numbers alone that matter for making an investment?

This reminds us of a phrase drawn from the evolutionary theory of Charles Darwin, “Survival of the Fittest.”

In literal terms of evolution, this would mean that only the individuals who are best equipped to endure and reproduce are the ones who give birth to the greatest number of descendant populations. The term Fittest in the phrase signifies an individual’s total capability to pass his genes on to following generations, ensuring longer survival of the fittest over generations.

The process of passing genes on to subsequent generations is not only limited to one generation but must continue over many generations.

Likewise, a company where an investor looks to invest must not be limit to giving returns in favourable circumstances but also ensures risk mitigation in times of adverse and unexpected situations.

In the corporate instance, the Company whose fair performance is reflected in its financials and profits invites competition. With less competition, the company manages to create significant wealth for itself as well as the shareholders with lesser costs incurred on tackling the competition.

As soon as new players enter the market and show strong performance, the cost of tackling the competition for the existing companies increases, which directly affects the financial performance and profits of the business.

As a matter of fact, if companies are not able to handle the competition well, they have seen a total rejection from the market and may or may not have returned to the market. For example, it only took less than a decade for Nokia to become a market leader and trend-setter in the mobile phone world. Nokia had developed its operating system called Symbian with multiple versions in the market, which were incompatible with other phones.

While Nokia was having a good time amidst high profits and fair financials around the year 2000, there was a shift taking place from hardware-centric products to software-centric products. By the end of decade, it was quite clear what Nokia had missed upon and resisted the changes in the environment.

 Apple’s iOS and Google’s Android overtook the market with exceptional features and add-ons in the UI.

By 2010, Nokia posted strong profits, balance sheet and earnings. Nokia was seen as the benchmark in the mobile phone industries, and all praises were for the company as a whole.

But what happened amidst all the positive and strong financials? How could Nokia not get along with the change?

Actually, there is not one reason which can answer these questions. However, when viewed through the lens of Darwin’s evolution theory, we can say that Nokia failed to identify the changing preferences of the consumers and its resistance to change ended the company high and dry.  

Not only Nokia but Kodak - the technology company which dominated the photography and filming market during for the most part of the 20th century, buried its chances to become the leader in the digital photography transformation.

In addition to this, Blackberry - another once-popular mobile phone company that was a huge success during the late 20th century through to the beginning of the 21st century and revolutionised the mobile industry by offering devices with an arched keyboard and keyboard like keypad called QWERTY keyboards.

Blackberry failed to recognise the shift in the mobile phone design from the keypad to large phones touch screen display.

By now, it must be clear as to why the investors need to read Charles Darwin and consider the theory of evolution. Evolution and adoption to changes are an unavoidable and nearly the most imperative factor. The companies which are fit and first, are the best to adopt and take advantage of the evolution in response to changes in the environment.

The business player with the quality of the being the fittest (having all the responses) and responds to the changing circumstances shall survive. Companies like Apple and Samsung grew to the top of the charts in the international mobile phone industry, while seeking opportunity from the changing environment during the time when Nokia and Blackberry had their downturn.

At this moment where customers were looking for a more compatible product, Apple invested in its OS and related applications to make the product more friendly and engaging for its customers.

Samsung, however, used Google’s Android OS for its mobile phones sidelining its less competitive OS BADA which would not likely be as successful as Android.

In the present day, Nokia has made a comeback in its smartphone segment partnering with Google for its Android OS.

What you can take away from here is that as an investor one must not only lay emphasis on the outer picture of the company reflected in the financial statements and profit statements but also consider digging deeper into the company and its management’s history of managing the unprecedented changes. Evolving and adapting to changes is an integral part of business survival.


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