The 7investing Podcast

What do evolution and investing have in common? It's more than you might assume.

Survival of the fittest manifests in both the animal kingdom and also in the business world. Enterprises build competitive advantages, get stronger, and thrive over long periods of time. Meanwhile, their smaller rivals end up going extinct.

So how do we find the best-of-the-best? Are there specific things investors should apply to their process, to avoid making costly mistakes?

To answer those questions, 7investing CEO Simon Erickson recently spoke with Pulak Prasad. Pulak is the CEO of Nalanda Capital, a Singapore-based investment firm who manages nearly $5 billion and invests primarily in Indian-based companies. He is also the author of What I Learned About Investing From Darwin, which is now available to the public.

Simon and Pulak began the conversation by discussing what traditional investment managers are doing wrong. As a whole, active managers typically underperform the broader market -- and for a variety of reasons. Similar to 7investing's seven principles, Nalanda follows three pillars to guide its investing process: 1) Avoid big risks, 2) Demand a fair price, and 3) Don't sell. By abiding by these straightforward rules, they've identified and invested in several of India's best-in-class companies.

With regard to their first pillar, Pulak describes the nuances of investing in India. India's financial markets are less developed than the US or Europe, and most of its companies still face corporate governance issues. Pulak believes many of these companies will eventually go extinct, and is willing to say no many times before finally finding the right company.

Regarding the second, Pulak believes that patience and having capital available will reward long-term investors. Across all of their funds, their average position is capturing an incredible 41% return on invested capital (ROIC).

And finally, they hold on to their positions for years or even decades. When they initiate a new position, they "are either pregnant or they are not" -- meaning they're willing to hold a stock for the duration of the fund's existence. Some of the larger position sizes have grown to 20% or more of the fund's total assets.

In the second half of the conversation, the two discuss similarities between Pulak and Warren Buffett. Simon notes that Buffett was often cautious of innovation, which led him to miss opportunities such as Amazon or Google. Pulak's approach is recognize innovative companies, but never to start a position until they "show me the money" (i.e. have stable and growing cash flows).

In the final segment, Pulak describes the types of companies and sectors they typically are most interested in. They are bottoms-up investors who tend to focus on ROIC as their preferred investing metrics. And they're not worried, at all, about the current macro. Life will go on, and the strongest companies will continue to strive.

Publicly-traded companies mentioned in this interview include Alphabet, Amazon, Cummins, JP Morgan, P&G, Walmart. 7investing or its guests may have positions in the stocks or cryptocurrencies mentioned.

Have you ever had a tough time explaining investing to friends and family members who are unfamiliar with the stock market and its inner workings? Or maybe you still don't understand many terms thrown around by talking heads on CNBC or even 7investing's member calls?

If you answered yes to any of those questions, Brian Feroldi's new book, Why Does the Stock Market Go Up?, might be for you. In this episode, Feroldi sits down with 7investing Lead Advisor Matthew Cochrane to discuss the lessons Feroldi covers in his book.

Feroldi says that he devoured every investment book he could his hands on when he began investing, but some basic questions, such as "Why does the stock market go up?" went unanswered. So he set out to write a book that contained all the answers to his questions over the years about investing, which he had to figure out for himself.

Feroldi emphasizes that the stock market is vital to average Americans, not just investing geeks. More than 100 million Americans invest through pension plans, 401(K)s, and IRAs. He says:

"The stock market is the greatest wealth creation machine of all time. Period. End of story. The stock market literally enables ordinary people, with ordinary incomes, in one generation to build extraordinary wealth for themselves."

Feroldi and Cochrane also discuss how stock prices can mislead new investors, as they'll often consider stocks such as Amazon.com (NASDAQ:AMZN) expensive and penny stocks as cheap.

Another thing Feroldi says that can trip up new investors is a misaligned time frame. Saying you're a long-term investor in bull markets is different from acting as a long-term investor during market crashes. Feroldi then explains why the market has always recovered from crashes and bear markets.

Finally, Feroldi ends the discussion by talking about Roku (NASDAQ:ROKU), a new stock that he's interested in after its precipitous fall the past year.

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