Prashant Jain, director, 3P Investment Managers
Image: Neha Mithbawkar for Forbes India Q. At the turn of every decade, a new wave comes along and there’s an enthusiasm to buy those stocks. You dodged some bullets by not doing so. But did it also mean losing out on some big opportunities?
Prashant Jain, director, 3P Investment Managers and former CIO of HDFC AMC, is one of India’s most successful fund managers. He directly managed three funds at HDFC AMC for three decades, during which he invested in 465 stocks, outperformed benchmark indices by a wide margin, and returned net gains of Rs87,000 crore to lakhs of retail investors. In July last year Jain set up his own investment firm. In an exclusive conversation on Forbes India Pathbreakers, he talks about his investment philosophy and decodes strategies that helped him dodge several bullets and navigate volatile market cycles. Edited excerpts:
Q. You are the longest serving fund manager with around 30 years of experience. Did you ever imagine that you’d end your innings better than cricket legend Don Bradman?
No, I had not thought too much into the future to be honest. At all points of time, I have tried to do my best every single day. But one thing I do recall… I was quite keen that whatever funds I manage, I should run with them as long as possible, and hopefully try and create some kind of track record. That is why, despite the business getting sold or shareholders changing two to three times, I stayed. The desire was to manage the fund for as long as possible.
Q. How have you perfected your methodology of investing in stock markets?
The core of my investment philosophy has been pretty consistent over three decades. I have always tried to avoid unsustainable businesses. When you invest in something that is unsustainable, whenever market prices it appropriately, the losses are permanent. That overvaluation goes because it did not deserve that value, quality was weak, and sustainability was not there. When markets come around to that fact, the destruction in wealth is permanent and even over 10 years, you are unlikely to recover that capital. I have always kept a sharp eye on what you are getting for what you are buying. Even good quality companies can sometimes be terribly overvalued; so overvalued that even in 10 to 20 years they will give you zero or negative returns.
There is no one who will buy all the companies that go up. I have made more mistakes of omission than commission. But I am extremely happy about that because what it means is that I have not lost money on most of the companies we bought and that is the key to this. We are all limited by our understanding of the future. But when you find good quality companies which are unreasonably expensive, the discipline is to just not participate. In most cases you will be right, like the dotcom burst or overvalued sectors around pre-Lehman. It is happening in recent times too. We have seen very sharp corrections in good businesses. But on the flip side, when you stick to the discipline, in some cases, you will be wrong. Either the business will do much better than you anticipated or the markets may continue to value it at a very rich rate. I think these are possibilities and we are always learning.
I often reflect as to why did I make these mistakes of omission. In some cases, the businesses have done much better than what one had expected. But when I look back, there were valid reasons for doing this. In equity markets, one cycle can go on for eight to 10 years. That is the nature of this asset class. Something that is overvalued may remain like that for extended periods and vice versa also. In some cases, I feel it is just a matter of time before some of those mistakes of omission—which today are mistakes of omission over time—will not remain like that because those excesses will over time go away.
Also read: Who are the big sharks of the Indian stock markets? Q. How have you balanced short-term results without losing sight of the long-term game? As you said, the short-term requires some sacrifices and your funds’ performance took a hit between 2013 and 2020. How did you navigate that period?
It is true that the last phase was a bit difficult and extended. Covid again delayed the recovery of the economy sensitive sectors by two years. This three-to-five-year period was indeed painful. What gave me confidence is that the intrinsic value of the businesses I was holding was growing all this while. It is just that for some reason or the other price discovery was not appropriate. But I think I understood the businesses quite well. I was challenging my views and convictions practically every day with myself, and with industry peers and colleagues. There was no convincing answer or counter-argument as to what one was holding was not right for the long term. The alternatives that one was not holding, there were serious challenges in some of those business models and valuations were also extremely challenged.
In the end it boils down to your understanding of the businesses and your faith in the efficiency of markets in the long term. I think that is what enabled me to hold on. I have seen time and again, and even history has taught us, that the pain of three years may go in six months, and the gains are permanent, because it is the undervaluation that is getting corrected. The pain was temporary even though it was extended.Also read: Pathbreakers: Raamdeo Agrawal's Timeless Investing Tips For Blockbuster Market Returns
Q. Tell us about your new venture.
It is a very small setup and we will be fully focussed on building a good investment culture and team. We will follow the same principles of investing that have helped me in the past three decades. This will be a more niche business and we hope to start off with an AIF. At least initially, we haven’t thought this through… the focus will be at the top end of the market.