Prashant Jain needs no introduction. But worth mentioning is that he has 31 years of investment management experience. And is the only fund manager in India (and one of the few globally), to have continuously managed a scheme for over 28 years. He recently exited from his post as the Chief Investment Officer at HDFC Mutual.
REALITY: You cannot avoid losses if you are an equity investor.
IMPLICATION: Appreciate the underlying uncertainty or risk in the individual investments and size them appropriately.
Everyone makes mistakes. Everyone makes losses. Be it an individual investor or a professional asset manager. Because we are all dealing with the future, and the future is uncertain.
A lot of attention is focused on going for the big winners, the multi-baggers. But since equities are a lot about discipline and portfolio construction, we can win big over the long term by simply eliminating mistakes. I successfully avoided a long list of businesses that caused large and permanent loss of capital.
But I also missed some great opportunities. I made more mistakes of omission than of commission. I let go of many opportunities because of improper understanding or whatever. Some prominent missed opportunities were Asian Paints, Bajaj Finance, Eicher, Kotak Mahindra Bank, and Divi’s laboratories.
Every portfolio will have its share of winners and losers. But how much is each cornering? This is why sizing is most important in portfolio construction.
I invested in 465 stocks:
- 1 in 4 resulted in a loss
- 113 stocks lost money
- Out of those, 110 stocks were in the lowest two categories where the losses of each were less than Rs 250 cr
- The gains on one large winner were more than the total losses of all loss-making investments
(The data is across the 3 funds that Prashant Jain managed from October 2003 to July 2022).
Nevertheless, the end results were quite strong because the mistakes were quite small. They were well sized. When going in for portfolio construction, sizing of the bets is extremely important. Do it based on the assessment of the risk-reward associated with each investment. Don’t just focus on security selection to the exclusion of sizing. And if you size appropriately, the portfolio returns over time are extremely good.
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REALITY: The majority need not be right.
IMPLICATION: Don't expect to always be comfortable. Almost all great investment opportunities come with a fair amount of pain.
What happened to PSUs is a great example of how the majority opinion can be wrong in stock markets.
Many who criticised me for holding PSU stocks, based their argument on performance: These stocks have never performed. They never criticized the business. They never questioned the competitive advantage of the business. All criticism was on the stock price. That was a giveaway that there is no merit in that argument. It was only a question of time.
There are strong and weak companies. Likewise, there are strong and weak PSUs. I have always believed and invested in the strong ones, irrespective of ownership. I don't hope to find exceptional PSU companies because there are some constraints. It is not that I am unrealistic about that. But if you look at some of the segments like large banks, energy, mining, oil and gas… these are sectors where these companies have inherent significant competitive advantages.
I think the world always knew about the advantages, but because the price was not performing, they chose to ignore it. The cheaper they became, the more pain it caused. I had been through two such cycles earlier on. That is what gave me the conviction to hold on, and even double up in some cases.
Almost all great investment opportunities come with a fair amount of pain. Because pain means something has become really cheap, and that is when big returns can come.
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REALITY: Companies with a great narrative do sound appealing, even if they are profitless.
IMPLICATION: Since it is challenging to have a clear-cut view, keep an eye on the price you pay. And keep an eye on sizing.
A few of them failing in the marketplace has brought everyone down to earth and is actually good for us. Pricing will be rational.
I think some of these companies will turn out to be great companies. The key is to pay the right price. I think many of them will cause large damages to health, but I think there are some very good, very sustainable modules. But still, one has to keep a sharp eye on what one pays.
The challenge is that the journey ahead is not very clear, because these are not linear business models. Neither is growth is at a level where you can estimate long-term growth with high confidence. Nor has profitability been stabilized. One has to work with the range of outcomes and that makes it challenging to have a very clear-cut view.
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REALITY: India is well placed to witness an acceleration in export of services and manufacturing, and the market looks promising.
IMPLICATION: Be clear about return expectations.
India is extremely well-placed in the global context. So, we will be recipients of large amounts of capital. If that happens, there is a fair chance that the currency may not depreciate the way it has in the past. The RBI is now targeting 4% to 6% inflation. If growth in the rest of the world stays weak, so should energy prices. Unlike the Western world, Indian inflation is mainly commodity price led.
However, this is not a cheap market; it is a slightly expensive one. You can make decent money over five years. But this is not a market where you can hope to make big money.
This is a compounding market. If growth is persistent, which is the case with India, over time we should compound. Having said that, I do not expect this market to compound at a rate that is higher than nominal GDP growth.
I think banks and energy stocks continue to be slightly undervalued.
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