6 valuable lessons Charles Darwin’s theory of evolution can teach us about modern-day investing

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Do we still recall Charles Darwin, the visionary who revolutionized our understanding of the natural world? It’s safe to say that none of us have truly forgotten him, given his profound impact on the field of evolutionary biology. Today marks the 215th birthday of this intellectual giant, whose brilliant ideas proposed and substantiated theories elucidating the concepts of descent and similarities across generations. Remarkably, his scientific explanations of the struggle for existence remain remarkably relevant to the world we observe today.

Truth be told, every statement and written work of his aligns seamlessly with contemporary thought, particularly when it comes to our choices in finance and money matters. His theory of natural selection bears a striking resemblance to the way we make investment decisions, carefully considering our risk profiles. The concept of patient, long-term investing unconsciously mirrors Darwin’s principles in evolutionary biology.

Charles Darwin’s theory of evolution revolves around allowing time to shape future generations. The characteristics of future generations are deeply rooted in the past. With time as a guiding force, elucidating growth and advancement becomes a straightforward task.

Equating investing game with Darwin’s evolution theory

Pulak Prasad, author of the much-acclaimed book “What I Learned About Investing from Darwin” adopts a similar perspective when it comes to investments. Instead of limiting investment understanding to fundamental elements like risk and return, compounding benefits, and the influence of taxes, Prasad advocates for a philosophy of patient, long-term investing inspired by an unexpected source: Evolutionary biology. The accomplished founder of Nalanda Capital employs wit and wisdom to convey essential lessons drawn from core Darwinian concepts, weaving together vivid examples from the natural world with compelling narratives of both sound and flawed investment decisions, including his own. 

Some of these core investing principles include:

  • Have enough time on your side: Engaging in equity market investments has the potential to generate significant wealth, but it requires considerable time, patience, and resilience. It’s a straightforward concept, though not without its challenges. It’s advisable to refrain from investing in the markets unless you have a time horizon spanning decades, rather than mere months or years.
  • Don’t be lazy—be very lazy: It may appear peculiar for a fund manager to advocate for prolonged periods of idleness and inactivity in the realm of personal finance, but it aligns with the principles of wealth accumulation and finance centred on compounding. The essence lies in the necessity to persist in investments over extended periods, spanning years and decades. The concept of evolution underscores the gradual growth and transformation occurring over time. Just as nothing achieves substantial growth in a single day, investments also require time to mature and compound.
  • Be prudent in deciding investments: Certain individuals encounter systemic obstacles to amassing wealth, including inadequate financial literacy, restricted access to investment avenues, or income inequalities. Recognizing these challenges is crucial for advancing financial inclusion and establishing a more equitable environment.

Moreover, our inherent cognitive biases can result in suboptimal investment choices, such as following trends, overestimating our capabilities, or succumbing to panic during market downturns. Recognizing these biases and implementing strategies to counteract them can substantially enhance our investment results. Emphasizing both the opportunities for wealth accumulation and the potential pitfalls is essential for individuals contemplating investments in the equity market.

  • Block out the market noise: Prasad emphasizes the effectiveness of a Systematic Investment Plan (SIP) as a valuable tool for filtering out investment noise. With SIPs, you commit to investing a fixed amount at regular intervals, automatically deducting funds from your bank account. This eliminates the necessity for constant decision-making or monitoring of market fluctuations, shielding you from being influenced by short-term news or hype. Through consistent investments over time, you acquire more units when the market is down and fewer when it’s up, resulting in an averaged purchase price that may potentially lower the overall cost per unit over the long term.
  • Passive investing helps: Despite the unfamiliarity that many people still have with the concept of investing in equity indices, the evidence is unequivocal: over extended periods, equity index investing consistently surpasses other asset classes in terms of returns. This is primarily because index funds automatically track a diverse array of stocks, effectively spreading risk across various companies and industries. This diversification helps mitigate the impact of the performance of any single company on your overall portfolio. Additionally, compared to actively managed funds, index funds typically boast lower expense ratios, as they do not require costly research teams or intricate stock-picking strategies. Consequently, this leads to higher returns for investors.

Throughout the past century, stock markets have continually yielded positive returns, notwithstanding short-term fluctuations and occasional downturns. Opting for index investments ensures that you can tap into this long-term growth potential.

  • Avoid illegible investments: Many investors tend to undervalue the significance of comprehending an investment before committing their funds to it. While certain individuals may possess the expertise and risk tolerance to navigate intricate or volatile assets like cryptocurrencies, it is not necessarily a fitting choice for everyone.

The cryptocurrency market is renowned for its pronounced price fluctuations, rendering it a risky investment for those in search of stability or predictable returns. In contrast to conventional asset classes, cryptocurrencies face limited regulatory oversight, introducing the potential for scams and manipulation. The enduring sustainability and underlying value proposition of numerous cryptocurrencies remain uncertain, often influenced more by speculation and hype rather than concrete fundamentals.

Pulak Prasad’s book, grounded in Darwin’s theory, provides a well-rounded viewpoint on investment. It recognizes the difficulties and possible risks while also underscoring the enduring advantages of disciplined and well-informed investment approaches. Such an equilibrium proves valuable for individuals seeking to navigate the realm of equity markets and steadily accumulate wealth over the long term.

The book’s most important take can be aptly described as – Wealth doesn’t simply materialize overnight. Significant achievements require time, and your journey is distinctive to you. Therefore, craft your investment journey by your financial goals.

 

 

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Published: 12 Feb 2024, 04:32 PM IST

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