value
Convergence Can Deceive
The rule
Two businesses can share every surface number yet be completely different underneath. So check the engine, not the resemblance.
Where it flips
Overused, this makes you distrust every comparison and freeze, hunting for hidden differences that aren't there. The fix is to use surface numbers as a starting point, then check the engine underneath only deeply enough to know whether the resemblance is real.
In nature, a shark and a dolphin look alike but are built very differently inside. Companies do the same. Two firms can show the same margins, the same growth, and the same ratios, while one runs on a real advantage and the other on a temporary trick or a fragile bet. If you judge only by the matching surface numbers, you can mistake a weak business for a strong one. The real work is to open up each company and understand what actually drives its results.
A worked example
Aman finds two firms with identical 18% margins. Digging deeper, one earns its margin from a loved brand, the other from a single big customer who could leave tomorrow. Same number, opposite safety. [illustrative]
How to spot it
- ·asks what actually generates the profit
- ·distrusts look-alike numbers without a look-alike engine
- ·checks customer, supplier and moat concentration
Pulak Prasad · What I Learned About Investing from Darwin