SURVIVAL OF THE FITTEST

 

The following blog has been inspired by an article which I read in 'The Wealth'.

 Charles Darwin was a famous biologist who had written one of the most influential books, "On the origin of Species". One of the most important concepts presented in his book was of the survival of the fittest. The fittest animal, or the animal who has what it takes to survive, will survive. Rest will die one day. Every animal needs to adopt to the changes presented by the nature or else, his death is confirmed. Since my brain is so hard coded with markets, I tried applying the "survival of the fittest" logic to the markets. The results were exactly what I had expected.

Modern Europe holds the title for initiating the capitalism philosophy. Capitalism is an economic and political system in which a country's trade and industries are controlled by the private sector for profit motives. Basically, more profits and private companies' control is capitalism. The concept of capitalism and the concept of survival of the fittest share similar characteristics. We talk about survival of the fittest in the animal kingdom when talking about the principles stated by Darwin. Again, "fittest animal" does not only mean physical strength. When it comes to capitalism, companies basically have to do everything they can to survive. Capitalism is brutal. It is a dog-eat-dog world. We, the consumers, are also affected by crony capitalism. During the first batch of the Sensex in 1986, companies like Bombay Dyeing, Hindustan Motors, Mukand Iron, and Premier Auto were a part of it. After 36 years, only 7 companies from that same batch are still surviving. Only 7. The Sensex index includes 30 companies. What happened to those 23 companies? Capitalism ate them. With the passage of time, we find a significant churn in the top echelon of the bluest of the blue-chip corporates, signifying shifts in relative salience. 

Companies that exited SENSEX didn't exactly become extinct the way dinosaurs did when an asteroid was supposed to have hit the earth. A few of the companies waned gradually with the relative decline of their industries, such as textiles and paper. A few others faded away as they failed to adapt to changing circumstances and lost out to the new entrants in sectors such as automobiles, metals, and pharmaceuticals. Since 1986, only five companies have managed to survive. They were Hindustan Unilever, ITC, L&T, Reliance, and Tata Steel. The fun thing over here is that we can't even bet that these same five companies are here to stay. Being in the markets might sound easy, but it's not. You might bet on Reliance Industries, as they have successfully ventured into 5G technology, and they are also venturing into hydrogen batteries. But what if the cost of operating 5G services shoots up, in turn decreasing their subscriber base and finally destroying JIO? What if India is still an oil-based economy even in the 2030s? The transition is huge, and we might be underestimating this change. There are a lot of things to think about.

My point here is simple. Markets are a game of probability, and so are companies. Companies need to keep adapting to the changes or they will go extinct. As Mr. Satya Nadela says, "either create the future through innovations or adopt the changes." That's the only way to increase your runway. While selecting companies, always keep the "survival of the fittest" philosophy in mind. In the early 2000s, Blackberry was the market leader, and every investor and trader had one. The 2008 financial storm dragged Blackberry with it, making way for Apple to become the new leader in the industry. Back in the 1990s, camera meant Kodak. Kodak had the ability to adopt, but they adopted the wrong change. They went on improving their films, and Japanese companies came in with the concept of "Har Ghar Camera." That's how Canon became the leader. Adopting changes is great, but make sure you adopt the right changes.

Markets are here to stay, but do you think that your companies have the ability to sustain them? Is the management competent? Is their profitability improving? Are customers happy with the services provided by your companies? A company that may appear invincible today unless it adapts and reinvests continuously. The same philosophy applies to humans as well. Look at Bill Gate. There hasn't been a single year in the last 35 years when his name hasn't appeared in Forbes magazine. That's some kind of consistency.

Also, while index investing is passive, the index itself is anything but passive. It is designed to follow the same ruthless logic of evolution that Darwin decoded way back in the nineteenth century.