Prashant Jain on paying the price for conviction

When I decided to do a series of interactions to understand the behavioural traits and mindset of money managers, I requested Prashant Jain to flag it off.

I warned him that since his career is defined by conviction, one of the questions must address the issue of “who pays the price for your conviction?” Much to my pleasure (and relief), he instantly obliged.

After that, I was met with silence for a while. I concluded that he changed his mind. So when I got a call from an unknown number and the individual introduced himself as Rajat, Prashant’s assistant, I was beside myself with excitement. Without much ado, let me share our discussion.

This is part of a series where I attempt to understand the behavioural traits and mindset of money managers and investors. At the end of this (slightly edited) transcript, I list the 20 individuals interviewed for this series.

PRASHANT JAIN is the CIO and Founder of 3P Investment Managers.

From managing relatively small amounts of money to managing the largest mutual fund in India, there must have been psychological and mental changes. How have you evolved as a money manager?  

At the core I remain the same.

I always tried to act rationally. I always tried to have a long-term perspective.

Whether my views were aligned to the market or contrarian was just the outcome of my process. I took risks when the potential returns justified taking those risks.

Pretty early in my career, when I was quite raw, I faced the Infotech bubble. I believed that those valuations could not be justified. It put immense pressure on the performance of the funds, but I steadfastly held on, and the outcome was good. This pattern was repeated in 2007, and over the last few years in different sectors.

What has changed is my understanding of businesses, my understanding of people, my understanding of the way market function, and the way economies function. As a result, today I can understand a new business much better.

Emotionally, I don’t think that I have changed much. But my ability to handle stress has improved. The way I handled the underformance around Covid as we were exposed to the economically sensitive sectors; I think I handled it better. Way back in 1999, I was unable to sleep.

And your sense of responsibility, has it always stayed consistent?

Yes. Whether it was Rs 70 crore or Rs 1 lakh crore, I always thought in terms of percentages and ensured that my interests were fully aligned with those of the investors. I was investing my own money in the funds. So my mindset did not change despite the significant growth in size.

Of course, the number of scrips held changed. When it was a small fund, it was possible to go with 25-odd stocks. In a larger fund, we would need 30 or 40 or 50 stocks. But this is the outcome of size, not of my mindset.

You still operate in a fiduciary capacity. But has there been any mental shift from working in the mutual fund space to the AIF space?

Most would agree that the way I ran mutual funds was not the typical index hugging style. When people called it risk, I looked at trying to capitalize on opportunities when there was value available in a few pockets. I did not shy away from betting large sums of money even in the large funds. Sometimes, almost 10% of the assets of these large funds was in one stock.

So my style shall remain the same.

I hope to make lesser mistakes.

Given the nature of an AIF product, one can attract investors who are more aligned with the way you manage money, more patient investors who have realistic return expectations.

Mutual funds are a public vehicle. The number of investors is a thousand times more when compared to an AIF. Specially in a place like HDFC which has mass and universal appeal. In every communication, I focused on the long term and spoke of reasonable expectations, but the investors are so diverse.

I do think that my communication now can be more effective because the numbers are much smaller, and this will help me align my strategy better and manage expectations.

You are known for your convictions. How do you balance rigidity and conviction? How do you prevent your ego from coming into play?

Conviction and rigidity are two sides of the same coin. If you are convinced about what you are doing, you will stay the course. And that could be perceived as rigidity.

Conversely, if you are not sure about what you are doing, then when faced with adverse market conditions, you will change your positioning.

Whether in the market or life in general, whatever you believe is right, you must stay the course.

Either your views or your conclusions were wrong. In that case, being rigid is not right. But you will know whether they are right or wrong only after the outcome.

In my case, I stayed the course on the few occasions when my views were different from the market. Whether it was selling out of tech or not participating in real estate or power or NBFCs, or staying the course on economic sensitive sectors during Covid, even in PSUs. The longer-term outcome proved that the initial views were right. The performance recovered on the same stocks which cause the pain.

I am conscious that we need to keep our egos in check; all the more when you are managing someone else’s money. Hence, I have always been open to contrary viewpoints. In my earlier job, we encouraged listening to analysts who had a contrary opinion to ours, and we documented those views. If presented with valid and logical views that made sense, we did not hesitate to change course. There have been cases where I moved out of stocks at significant losses. But these mistakes are not known to the market because the mistakes were small. Fortunately, the bigger and more visible bets turned out right.

As mentioned, you avoided certain bubbles – infotech, power, real estate, NBFCs. But when you do so, the returns take a hit. Conversely, when you invest in PSU and the market does not give you the appreciation, returns take a hit. Who pays the price for your conviction and how do you deal with this?

We must segregate short-term pain and long-term pain. Pain that is temporary and pain that is permanent.

Avoiding a bubble is the best that a fund manager can do for long-term investors. That pain is worth it. The pain lasts for 6 months or 1 year. But when the tide turns, you gain immensely. I have never shied away from avoiding temporary pain. In fact, such occasions are the best time to stand apart and distinguish oneself.

A very polarised market – either on the upside or the downside, poses a big risk or a big opportunity. In times like these, the short-term pain leads to solid gains over the medium term. I looked for such opportunities and tried to capitalize on them, such as not being in the last 6 months of the infotech bubble. The pain is temporary, but look at the huge gains in the subsequent years.

Take the case of PSUs. I don’t think in terms of public sector and private; I think in terms of good businesses and weak businesses. PSUs are in economic sensitive sectors. You won’t find PSUs in the pharma or infotech or consumer space. So when economic sensitive sectors were hit around covid, almost all PSUs were hit. The market interpreted it as the PSUs being bad. That created immense opportunities and we doubled up in some cases, and ultimately these companies have gone up; some of them 3 to 5 times. Today they find wide acceptance in a number of mutual funds and brokerages most are positive at 5 times the price.

So investors have to evaluate the outcome of such strategies over long periods.

I would look forward to such opportunities again.

The short-term pain did not give you sleepless nights?

In 1999, I found it very difficult to sleep for weeks. In 2007, it was not so stressful.

Last cycle, I was quite relaxed. My understanding of the markets and businesses and the mispricing of assets over the near term had improved considerably. So not only did I hold on to those positions, but even doubled up in many cases. Pain notwithstanding. What you lose in 2 years, you gain back in 6 months or 12 months, several times over.

My ability to handle underperformance and the stress it brings, has improved over time.

I get your conviction and courage. But what makes you insecure?

Many a time, I am insecure about my conclusions around a business. There are positive and negative sides to that.

A little insecurity keeps you open to contrary views and opinions, and makes you open to change. A little insecurity is good. It forces you to revisit your hypothesis with multiple people. You read up on it. You think about it. Over time, your understanding improves.

If you are too insecure about your conclusions, you will tend to get influenced a lot by the price movements and you will not be able to handle short-term pain. The portfolio turnover will be high and will lack direction.

While I acknowledge your analytical ability and your prescient insights, does gut feel or luck play a role in the big scheme?

Whether you call it luck or destiny or karma, it plays an important role. I think it is important to appreciate that. It keeps us humble. We should not take credit for all that we do.

Small events can change the course.

At the same time, despite your best efforts, the outcome may not be as good. So if you believe in the role of luck/ destiny/ karma, it will enable you to handle even those outcomes with fortitude.

Share an example of a small event that changed the course in your life.

I wanted to get into the civil services and sat for the entrance exam.

One question was of 60 marks. My English was poor and I had forgotten to read the Hindi version of that question. After I read the Hindi version, I thought that I misinterpreted the question. So I cancelled my answer and attempted it again. If I had just read the Hindi version, I would have nailed it on the first go. What I wrote initially was right. So I ended up losing 60 marks. As a result I did not get my choice of service within civil services.

This delayed my joining SBI Caps by two months. By then the general manager said to me, “Son, I am sorry. The choice posting are gone. All that I can offer you is equity research as SBI Mutual Fund.”

That set me on course to become a money manager.

A small incident of misinterpreting a question during an exam, altered the course of my career.

I’m glad for that incident. And a lot of investors too would be.

1. Prashant Jain
2. Sankaran Naren
3. Nilesh Shah
4. Vetri Subramaniam
5. Anand Radhakrishnan
6. Devina Mehra
7. Saurabh Mukherjea
8. Raunak Onkar
9. Samir Arora
10. Kenneth Andrade
11. Rajeev Thakkar
12. Aswath Damodaran
13. Ian Cassel
14. Vishal Khandelwal
15. Sanjay Bakshi
16. Ramesh Damani
17. Jim Rogers
18. Ben Carlson
19. Mohnish Pabrai
20. Christine Benz