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Understanding Darwin Theory; Analogy with Businesses and Investors

  • May 10, 2020 12:48 AM AEST
  • Hina Chowdhary
    Director, Equities Research Hina Chowdhary
    1428 Posts

    Hina Chowdhary is the Director, Equity Research at Kalkine and has an extensive experience of about 15 years in the area of Research, which includes 5+ years in Equities Research particularly.She has earned a Master of Science degree from the renowne...

Understanding Darwin Theory; Analogy with Businesses and Investors

“It is not the strongest of the species that survives, not the most intelligent, it is the one that is the most adaptable to change”- Charles Darwin.

Gold MTF non-AMP

The ongoing COVID 19 turmoil has instigated that now is the time for companies and investors to be tougher, cleverer, and quicker to survive the tough times. The Darwinian evolutionary theory stressed upon the “survival of the fittest” and what better period than that of the ongoing pandemic to help one realise its essence?

Charles Robert Darwin (Source: WikiImages from Pixabay)

In this article, we will discuss how Charles Robert Darwin - the famous English naturalist, geologist, and biologist, best known for his contributions to the science of evolution, gave theories that fit the business and investing world.

The Darwinian Dynamics Relevant Today- Virus Vs Business Survival

Darwin’s 200-year-old discovery of the principle of natural selection needs close scrutiny at this moment. According to his theory, life on Earth did not come pre-purposed and pre-formed. Rather, only those forms of life, be it microbe or man, that best adjust to the changing times sustain, while others are beaten down.

HMS Beagle Image (Source: Monika Schröder from Pixabay)

In 1830’s the Young Darwin set sail on HMS Beagle to what went on to become a momentous journey not only for Darwin but also to mankind. The time that Darwin spent in the Galapagos island studying finches and understanding the minute details paved way for remarkable insights that Darwin is known for, the theory of evolution.

The novel coronavirus, for instance, is one such microbe that has randomly appeared, and is surviving as the globe’s invisible enemy (at least currently!).

Besides, Darwin’s evolutional theory advocates that only the fittest survive. And so is the case for businesses, especially during the current unprecedented times. It is not necessarily the strongest or the first to arrive who are most likely to survive, but the most adaptable who eventually win the race.

In this regard, current technological shift, digitization and e-commerce has become key to business survival amidst COVID-19 induced market uncertainty. In addition, businesses with strong balance sheet, decent liquidity and cash position, experienced management and assertive market share are more likely to survive the challenging times like that of current COVID 19 scenario.

Darwinian Dynamics for Investors

Invertors are in the business of connecting dots and underlying business fundamentals on face value as against being driven by preconceived notions. Darwin could come of help to investors to understand how to uncover the mysteries that businesses throw up, by looking the minutest of details and other investing process, it could be dissecting financial statements or experimenting with forecasting models to ascertain which company has the innate trait to survive market hostility and thrive in the long term.

Understanding the simplicity of evolution theory could help investors to see businesses through the business ecosystem and not independently.

Current Trends Never Continue!

Taking cues from Darwin, investors should understand that there is no concept of a company to rule forever. Companies, just like individuals, consistently expand, age and die, and so does their position in the market.

Taking one of the many examples from the Great Financial Crisis of 2008- robust players like General Motors too went bankrupt, wiping out wealth of several shareholders. More recently, the FAANG stocks have been new market darlings but they too have had their share of ups and downs. In reaction to the US-China trade war that led to a global economic slowdown in 2018, these big techs were one of the preys that lost some steam in the market.

But today, as the world tackles COVID 19, all the FAANG players seem to be favorites and saviors for some market participants, as we stay-at-home resorting to Netflix, ordering essentials from Amazon while practicing social distance norms, whereas Google updates us on COVID facts that we can share on Facebook via our Apple products.

Self Interest is the Best Interest!

Darwin also believed that financial entities, just like humans, are principally concerned in their sustenance and expansion. Moreover, focusing on one’s best interest is the critical key to survival. Investors should be aware of deception and fraud as survival tactics in the stock market and not everything that is told (and sold) might be fruitful.

Sometimes, the seller sells products that fill in his/her pockets but might make a deep hole in the buyers for something that might not be worth in the future. Hence, thorough assessment of fundamental and technical aspects is important to tap potentially lucrative opportunities.

So, what will help you as an investor? Read, study, and analyse the reliable and relevant sources that have a prolonged track record of fairness and integrity.

Art Of Decision Making- The Darwinian Way

As we discuss investing, sound decision making is important while choosing investment avenues keeping in mind risk profile and return expectations.

Darwin is considered to be one of the best decision makers of all times. But why?

Let us understand this from his personal life example.

Having returned from his voyage on the Beagle, Darwin had to address and decide upon a very important matter of his private life- his wedding. He scrutinised this so deep, that he literally is believed to having written pointers on paper- on if he should marry or not!

Moreover, for each alternative he listed some possible consequences and even weighed up the costs and benefits. What do you incur from this? The man here had a goal. He listed alternatives, identified consequences, and assessed the options that best met his goal- the simple yet complex art of decision making.

As investors (and decision makers), this approach can prove fruitful and save us time, money, and energy before embarking on any investment that we wish to pursue, aiding us in effective portfolio building/re-designing.

If one applies Darwin to business and investing, not only will one be better positioned to gauge innate nature of things, but also be great market analysts and decision makers who can prosper, even amid market volatilities and vague sinusoidal trends.

Amidst current global health and financial crisis, businesses that adapted to offer services as per changed customer expectations given new normal of social distancing by embedding technological shift, managing costs and bringing key strategic changes, have been seen to be better positioned to weather the storm. Besides, prudent investors who avoided chasing quick profits in short term, and rather adopted long-term perspective in potentially attractive themes seem to be clear winners.

 

 


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