Domesticated Silver Fox: The Most Crucial Indicator in Investment
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In 1970, Lyudmila Trut, a female student from the Biology Department of Moscow State University, made a decision that would define her life:
She joined a mysterious and dangerous experiment on the Siberian ice sheet - the domestication of silver foxes.
Over the next half - century, she dedicated all her efforts to this project.
Even at the age of 83, when co - authoring her memoir, Lyudmila still clearly remembered the words from the fox in The Little Prince that came to her mind when she first met the project leader, Dmitry Belyaev:
"You become responsible, forever, for what you have tamed."
The legend dates back to the autumn of 1952.
That year, 35 - year - old geneticist Dmitry Belyaev was determined to verify his hypothesis about animal domestication through large - scale animal experiments.
In 1959, he launched the famous silver fox domestication experiment in Novosibirsk. The core question of this experiment was:
Could an ideal silver fox be quickly selected using only one key indicator?
Belyaev established a strict grading system using only one key criterion - tameness:
Grade III (highly aggressive), Grade II (allows contact), Grade I (friendly), Grade IE (eager for contact).
In each generation, only the tamest 4 - 5% of males and 20% of females were allowed to reproduce.
The results were beyond imagination:
By the sixth generation, some silver foxes began to lick the hands of experimenters and wag their tails in welcome;
By the thirtieth generation, 70 - 80% of the silver foxes had reached the elite level.
Even more miraculously, unexpected benefits followed: floppy ears, curly tails, spotted fur, and shorter snouts - all these "dog - like" characteristics appeared spontaneously.
This experiment, which has lasted for more than sixty years, reveals a profound truth:
When you identify the real key indicator, other high - quality characteristics will "be dragged" to appear together.
Belyaev explained this phenomenon using the neural crest cell hypothesis:
The genes that control fear and aggression also affect the migration and differentiation of neural crest cells during embryonic development.
These cells not only form the nervous system but also participate in multiple systems such as pigmentation, cartilage development, and hormone secretion.
Changing tameness is equivalent to flipping the main switch that affects the entire biological system.
This experiment, which has lasted for more than sixty years and is still ongoing, reveals a profound truth applicable to all complex systems:
The correct key indicator has a miraculous screening and amplification effect.
When you identify the real core variable, other high - quality characteristics will emerge naturally.
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Many years later, Pulak Prasad, the founder of Nalanda Capital, was deeply shocked after rereading the silver fox experiment.
This investor, known as the "Warren Buffett of India", asked himself:
If scientists could select ideal foxes generation after generation using only "tameness", is there also a universal ruler in the capital market that can penetrate the financial fog?
His answer was ROCE - Return on Capital Employed.
The formula for calculating ROCE is:
This formula answers a fundamental business question:
"How much real operating profit can the management generate each year with all the long - term capital entrusted by shareholders and creditors?"
To understand its power, we must break down the two core components of the ROCE formula:
The numerator is EBIT (Earnings Before Interest and Taxes).
It represents the "pure" operating profit of the enterprise. By eliminating the influence of the company's debt level (interest) and the tax area (tax), it directly points to the profitability of the core business.
The denominator is Capital Employed.
It usually refers to total assets minus current liabilities, representing all the long - term capital on which the enterprise's operations depend, including shareholders' money and borrowed long - term debt.
Why is this indicator so powerful?
First, it provides a panoramic view.
Different from the Return on Equity (ROE), which only looks at shareholders' equity, ROCE examines all the capital that the management can allocate, thus more truly reflecting the management's capital allocation ability and the overall operating efficiency of the enterprise.
Second, it focuses on operations rather than financial tricks.
High leverage can easily beautify ROE but is difficult to deceive ROCE.
ROCE can help us bypass the profit illusion brought by financial leverage and see clearly whether the company's profits are driven by excellent operations or high - risk liabilities.
Most importantly, ROCE is the ultimate indicator of competitive advantage (moat).
A company that can maintain a high ROCE (Prasad sets the standard at over 20%) in the long run almost certainly has a strong competitive advantage.
This means that the company has pricing power, a strong brand, network effects, or other structural advantages, enabling it to continuously obtain returns far exceeding its peers.
To put it simply, this core indicator is used to evaluate:
How profitable is this company?
For example, Visa, as a payment network operator, has extremely low fixed - asset requirements, a gross profit margin of 97.77%, and almost zero marginal cost. Its estimated ROCE is as high as 30 - 40%, far exceeding the industry average.
The triple advantages of network effects, pricing power, and capital efficiency have created Visa's "money - printing machine" model.
Another example is that the ROCE of retail giant Costco has been maintained at an amazing level of around 27% for many years, far exceeding the industry average of 11%.
Just as "tameness" brought curly tails and spotted fur in the silver fox experiment, Costco's pursuit of high capital efficiency has naturally brought a strong brand, loyal customers, and a stable financial situation.
ROCE is precisely the key indicator to understand all this.
Prasad believes that ROCE is the "evolutionary lever" for screening high - quality enterprises. Companies with a long - term high ROCE almost certainly have many advantages such as excellent management, strong competitiveness, and high risk - resistance ability.
The annualized return of his fund in the past two decades has been about 20%, which proves that focusing on ROCE can help investors navigate through cycles and obtain long - term compound interest.
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Nalanda Capital has achieved good returns with its "first principle", but this does not mean that there is a truly universal magic formula in the capital market. After all, it also depends on the user of the tool.
Whether it is the silver fox experiment or the ROCE calculation, the greatest inspiration for us is to set some profound and concise "key indicators" for our lives, work, and investments.
If life is an experiment, what is your "tameness"?
Prasad mentioned in his book that he was amazed to learn that the silver fox experiment was still ongoing and that Lyudmila, who was nearly 90 years old, was still working.
On October 9, 2024, Lyudmila passed away peacefully in her sleep at the age of 91, just a few days away from her 91st birthday.
Over the long sixty - plus years, she only did one thing: focus and accompany. - Just like what the fox said to the Little Prince.
For more than sixty years, she observed and recorded the behavior of silver foxes every day, gave each fox a name, and remembered their personalities.
Photo: Lyudmila Trut with a fox.
Paul Graham in Silicon Valley has a famous "life indicator" theory.
He asked: "If your life were a company, what indicators would you use to measure its success?"
Most people would say wealth, status, and achievements.
But Graham's answer was unexpected: "Do I look forward to the day when I wake up in the morning?"
This is indeed a concise, interesting, and powerful "core indicator". Moreover, it is very smart, taking into account both the efficiency and fun of life.
Different life stages require different key indicators.
When young, the growth rate may be the key indicator.
Just as Charlie Munger emphasized "whether you are wiser before going to bed than in the morning".
In the prime of life, progress and balance may be more important.
Jeff Bezos, the founder of Amazon, made decisions using the "regret minimization" framework:
"What will I regret when looking back on my life at the age of 80?" This helped him resign and start a business in 1994.
Another indicator he often uses is "the harmony between work and life".
In middle age, in the face of the likely - to - occur crises, avoiding risks and doing subtraction may become the focus.
In old age, meaning and connection become the core.
Psychologist Viktor Frankl found in the concentration camp that those who could find meaning in suffering were more likely to survive.
His key indicator was: "Am I living for something greater than myself?"
But the hardest part is not finding the indicators but sticking to tracking and optimizing them.
Benjamin Franklin was a pioneer in this regard.
He designed 13 virtues (temperance, honesty, diligence, etc.), focused on improving one virtue each week, and recorded the progress using a chart.
He adhered to this system throughout his life, achieving a legendary life as a scientist, diplomat, and writer.
The modern version can be more concise.
Investor Naval suggests tracking only three indicators:
1. Health (number of workouts per week);
2. Wealth (ratio of passive income to expenditure);
3. Wisdom (number of new in - depth thinking viewpoints per month).
It seems simple but comprehensive and easy to stick to. - Of course, it also depends on the person.
Also, when interacting with people, especially with partners in the core circle, always take "honesty and integrity" as the core indicator.
Finally
Lee Alan Dugatkin and Lyudmila Trut co - authored a book called How to Tame a Fox (and Build a Dog): Visionary Scientists and a Siberian Tale of Jump - Started Evolution.
The book says that humans are a self - domesticated species of ape.
As the book's introduction states, this is a topic that fewer people dare to face directly:
The domestication of humans and self - domestication. Whether it's foxes, dogs, or humans, we are all in a domestication process that runs at high speed once it starts, without exception.
I think there are approximately three levels of thinking here:
1. Self - domestication.
Each of our lives is like a unique "evolution experiment".
2. Human domestication.
All humans who have lived on Earth have collectively staged a group evolution accelerated by culture, with a speed far exceeding that of natural selection.
3. AI domestication.
As a new species, artificial intelligence will bring unimaginable changes (and unknown risks) to Earth's civilization through exponential "self - domestication".
Will this accelerated evolution anger the creator?
In any case, for each of us as individuals, finding and setting our own "life key indicators" may be the most important thing we can do.
Finally, let's end with the words of the fox in The Little Prince -
When the Little Prince was about to leave, the fox said:
"It is only with the heart that one can see rightly; what is essential is invisible to the eye."
The silver fox experiment, ROCE, and life indicators - these seemingly rational tools all ultimately point to the same truth:
The truly important things need to be measured with the heart and nurtured with time.
"It is the time you have wasted for your rose that makes your rose so important."
This article is from the WeChat public account "Lonely Brain" (ID: lonelybrain), author: Lao Yu. Republished by 36Kr with permission.