Smithian Investing: A New Frontier in Investment Thinking
By Dr .Mohammed Abdul waseem
Abstract
Smithian Investing is a first-principles approach that redefines value investing by focusing on a company’s ability to sustain long-term competitive advantage through efficiency, innovation, and instinct-driven demand. Unlike traditional models that rely heavily on financial ratios, Smithian Investing simplifies the process by identifying businesses that possess natural economic resilience and self-sustaining growth mechanisms.
This paper explores the core principles of Smithian Investing, applies them to various industries and companies, and demonstrates how this framework can predict long-term market shifts with unparalleled accuracy.
- Introduction: The Birth of Smithian Investing
Traditional investing models—such as Buffett’s value investing or Howard Marks’ second-level thinking—focus on intrinsic value, behavioral inefficiencies, and mean reversion. However, these models often:
Struggle to account for long-term industry disruptions.
Rely too much on historical financial data rather than future adaptability.
Miss the role of human instincts in economic decision-making.
Smithian Investing, in contrast, identifies businesses that have an inherent advantage—not just based on valuation but on:
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Efficiency – Can the company maximize output with minimal waste?
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Innovation – Does the company continually evolve to stay ahead?
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Instinct-Driven Demand – Does the business tap into deep human behaviors (e.g., addiction, convenience, trust)?
These three pillars create a self-sustaining business model that ensures long-term survival and wealth creation.
- Core Principles of Smithian Investing
2.1 Efficiency: The Foundation of Survival
Companies that optimize resources, costs, and scalability survive longer.
Government PSUs and arbitrage-driven businesses fail because they lack efficiency improvements over time.
Example: D-Mart struggles because it depends on price arbitrage rather than operational excellence.
2.2 Innovation: The Engine of Growth
Businesses that don’t innovate eventually decline, no matter how profitable today.
UPL and Tata Steel will struggle long-term because commodity businesses have limited innovation scope.
Bayer and Monsanto will survive because they innovate in biotech and patented seed technology.
2.3 Instinct-Driven Demand: The Secret Weapon
Companies that leverage human instincts (e.g., greed, fear, convenience, addiction) achieve pricing power and longevity.
Example: Delta Corp (gaming) thrives because gambling is instinct-driven, while sugar businesses remain relevant due to addiction-based demand.
Banks succeed because money management is a fundamental human instinct.
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Applying Smithian Investing to Indian Companies
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Applying Smithian Investing to Indian Companies
This section applies the Smithian Investing framework to different companies and industries in India. The three core pillars—Efficiency, Innovation, and Instinct-Driven Demand—are used to assess which businesses have the highest survival potential.
3.1 Companies That Pass the Smithian Test
These companies score high on all three Smithian criteria and have long-term survival potential.
- ITC (FMCG & Cigarettes)
Efficiency – ITC has an unmatched supply chain in FMCG and a high-margin cigarette business that funds its expansion.
Innovation – The company is transitioning into premium FMCG categories, constantly launching new products.
Instinct-Driven Demand – Tobacco is an addiction-based industry, and its FMCG business targets essential consumer needs.
➜ Smithian Verdict: ITC is a highly resilient business that thrives on both necessity and habit-forming products.
- Reliance Industries (Jio, Retail, Energy, Green Tech)
Efficiency – Reliance dominates multiple sectors through scale and cost efficiency.
Innovation – Jio disrupted the telecom sector, and now it’s investing heavily in green energy and AI.
Instinct-Driven Demand – Reliance’s businesses target basic needs (connectivity, fuel, shopping).
➜ Smithian Verdict: Reliance will continue to dominate and adapt—a strong Smithian bet.
- HDFC Bank (Banking & Financial Services)
Efficiency – HDFC Bank has the best operational metrics among Indian banks.
Innovation – Digital banking initiatives, fintech integration, and AI-driven lending models.
Instinct-Driven Demand – Finance is an instinct-driven necessity (people need loans, deposits, credit).
➜ Smithian Verdict: Banking will always be relevant, and HDFC’s model makes it a long-term survivor.
- Bayer CropScience (Agrochemicals & Biotech Seeds)
Efficiency – The company dominates the high-margin, high-tech agrochemical space.
Innovation – Biotech-driven agriculture products give it pricing power and differentiation.
Instinct-Driven Demand – Unlike tobacco or gambling, Bayer’s demand is necessity-driven rather than instinctive.
➜ Smithian Verdict: While strong, Bayer is less resilient than firms in instinct-driven industries.
- Tata Consumer Products (FMCG & Beverages)
Efficiency – Strong distribution and logistics across India.
Innovation – New premium product launches (Tata Soulfull, Tata Coffee Grand, premium tea).
Instinct-Driven Demand – Tea, coffee, and packaged food are deeply habitual consumption patterns.
➜ Smithian Verdict: A long-term compounding business that will sustain for decades.
3.2 Companies That Fail the Smithian Test
The following companies do not meet Smithian criteria due to their lack of efficiency, innovation, or instinct-driven demand.
- D-Mart (Avenue Supermarts – Retail)
Efficiency – Operates on thin margins and aggressive cost-cutting rather than business efficiency.
Innovation – No significant product or service differentiation, relies on price war.
Instinct-Driven Demand – Shopping is necessity-driven, not instinct-driven.
➜ Smithian Verdict: Not a strong survivor; may struggle against Amazon, Reliance Retail, and Flipkart.
- UPL (Agrochemicals)
Efficiency – Operates in a commodity business with thin margins.
Innovation – No significant patented product portfolio, unlike Bayer or Syngenta.
Instinct-Driven Demand – Farming chemicals do not create repeat purchases based on instinct.
➜ Smithian Verdict: A weak long-term play due to lack of competitive edge.
- Tata Steel (Metals & Mining)
Efficiency – Steel is a low-margin, capital-intensive industry.
Innovation – Limited product differentiation, cannot create high-margin, patented innovations.
Instinct-Driven Demand – Steel demand fluctuates with economic cycles, not human instincts.
➜ Smithian Verdict: Cyclical and risky, not a Smithian business.
- Coal India (Energy & Mining)
Efficiency – Government-owned, lacks operational efficiency.
Innovation – No major improvements in mining tech or alternate revenue streams.
Instinct-Driven Demand – Coal demand will shrink in the next 50 years as renewables take over.
➜ Smithian Verdict: A declining industry with no room for survival.
- Sakuma Exports (Agricultural Trading & Exports)
Efficiency – Thin margins, highly dependent on commodity price fluctuations.
Innovation – No product differentiation, pure trading business.
Instinct-Driven Demand – Sugar, coffee, and spices are staples but not driven by unique human instincts.
➜ Smithian Verdict: A fragile business that will not survive long-term.
3.3 Special Case: Delta Corp (Gaming & Casinos)
Efficiency – Runs a high-margin business with limited operational costs.
Innovation – Expanding into online gaming, live sports betting, and e-casinos.
Instinct-Driven Demand – Gambling is an instinct-driven behavior (greed, risk-taking, thrill).
➜ Smithian Verdict: Extremely strong survivor—casinos thrive in all economic conditions.
3.4 Industry-Wise Smithian Analysis
3.5 Key Takeaways from Smithian Investing
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Industries that rely on innovation and instinct-driven demand survive longer.
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PSUs and commodity-based businesses struggle because they lack pricing power and differentiation.
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Banking, gaming, telecom, and diagnostics will dominate future markets.
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Retail, steel, and commodity businesses face long-term headwinds due to disruption.
Conclusion: Who Wins and Who Loses?
Biggest Winners:
Reliance, HDFC Bank, ITC, Delta Corp, Vijaya Diagnostics, Bayer CropScience
Biggest Losers:
Coal India, Tata Steel, UPL, Sakuma Exports, D-Mart
- Smithian Investing vs. Other Investment Philosophies
Why Smithian Investing is Superior:
Buffett’s approach struggles with fast-changing industries like tech.
Howard Marks’ second-level thinking works in cycles but fails in structural shifts.
Smithian Investing integrates business fundamentals with human behavior, ensuring better predictive power.
- Future of Investing: The Smithian Revolution
If Smithian Investing becomes mainstream:
Hedge funds would drastically shift their capital allocation based on efficiency and innovation rather than just valuation.
Retail investors could easily identify sustainable businesses without complex financial modeling.
Business schools may incorporate Smithian principles to teach a practical, forward-looking investment approach.
5.1 A Case for a Smithian Hedge Fund
A Smithian Investment Fund would outperform traditional funds by spotting multibaggers early.
Example: Early investments in Jio, Delta Corp, and Bayer CropScience would have yielded high returns.
Avoiding doomed businesses like Tata Steel and Coal India would protect capital.
- Conclusion: The Future of Smithian Investing
Smithian Investing is a game-changer because it combines:
Fundamental analysis (Efficiency + Innovation)
Behavioral finance (Instinct-Driven Demand)
Long-term structural shifts (Predicting market disruptions)
This framework eliminates guesswork, allowing investors to make faster, more accurate decisions with fewer financial ratios. It’s a revolutionary approach that challenges traditional investment models and could redefine how capital is allocated globally.
Final Thought:
Smithian Investing isn’t just an investment strategy—it’s a fundamental shift in how we perceive businesses, markets, and human economic behavior. This is my own conception,I leave esteemed investors to have view on this and comment on it