Check Company's Sustainability before adding it in your portfolio: Prashant Jain, HDFC Mutual Fund
My biggest learning from the market is that you will have to go through pains to earn good money. It is easy but you should have the ability to bear with the pain because more money can be created only if something is bought at low prices.
Prashant Jain, Executive Director & Chief Investment Officer (CIO), HDFC Mutual Fund, talks about his learning from the market as an investor as well as a fund manager, the ways to make money, the process that should be followed while creating a portfolio, when to offload the stakes and how savings can be utilised to earn better returns among others during a candid chat with Anil Singhvi, Managing Editor, Zee Business. Edited Excerpts:
Q: What is your biggest learning as an Investor from the market?
A: My biggest learning from the market is that you will have to go through pains to earn good money. It is easy but you should have the ability to bear with the pain because more money can be created only if something is bought at low prices. Anything is available at cheap rates when there is a problem with it and no one wants to buy it. That's why it is easy to make money in the share bazaar if you can bear the pain and think for the long-term. At the same time, it is also difficult because it is easy to do - for most of the people - what almost everyone is doing. But standing against the crowd and bet on something that no one wants to buy just because my research says that it is a good business, however, it is falling at a regular pace then I have seen that you can make handsome money from it. For instance, technology Stocks or shares of software companies were the most popular stocks in 1999-2000. It was a time when almost every fund and the retail investor had it in their portfolio. Excluding these shares, the entire share market was cheap, and it can be described easily. At that time, dividend yields of companies, apart from the IT companies, stood at 5-10%. In fact, several shares were available below the book value. And, anyone who took something from the old economy, beyond IT stocks, then eight out of those 10 shares have turned five to fifty times in the next 5-7 years. So, this was an example that something that was very popular and had posted good returns in the past did not make money for the next 10 years but all others made money.
A similar thing was seen around 2007, when power companies, NBFCs, real estate companies were popular. There were buy reports on each of them but no one was interested in buying FMCG and pharma stocks. However, the bullishness has ended over there and Rs100 has turned into Rs50 or Rs10 but these two sectors, pharma and FMCG, has grown. This kind of investing is termed as contrarian investing by several people. I think contrarian investment is not completely right and there is a need to have a perfect understanding. If our understanding is right and the conclusion about the business is different from the majority then we can term it as contrarian as well but just being contrarian is not the right thing.
Q: What do you think about while investing i.e. the company's growth or its value?
A: The first thing that one should look in the company is the sustainability of the business, i.e. do the business has the capability/strength to stand for the next 10-20 years. This is the first test, and I think, one should think thousand times before investing in such companies that don't pass the test. If it is possible then one must not invest in those. but, if it seems that the company has strength and can sustain, even if the economic conditions turn bad or competition increases, then it is an investable company. Apart from this, we should gauze the kind of growth the company can report in the time to come.
And, the most important thing in a good investment is to compare our future assessment, whatever it is, of the company with its present rates. For instance, if you took the shares of software companies in 1999-2000 then you would have noticed that their profits have declined in all these 20 years and it has always grown but have provided negligible returns. It occurred just because the then growth assessment of these shares was too high then the reality but the actual growth was too low. So, there is a good relationship between business growth and return but overestimation of that growth may reduce your returns despite there is growth. There have been times when returns have been far better than the business growth and it has happened in cases where the estimation was quite low when compared to the real growth.
Q: So, one should opt for good stocks at high prices to make money or can also compromise on the quality of the stocks and buy something that is available at cheap rates?
A: It is not possible to give a correct answer to it because it is a continuous game. So for a good business whose RoC is high, management quality is good and has a more competitive advantage, then we should give more price for it, but how much more should be given then it depends on your experience, understanding and little luck. However I would like to repeat that return of any business - that is sustainable, can survive and earn profit & RoC in the economy, it may be very high or slightly more - depends upon the kind of price at which it was bought.
For instance, if you have a look at the prices of Pharma shares then they are about 50-70% down for the last four years, the same is the case of automobile companies shares. Their quality has remained intact but they grew slightly low then what was expected by the market five years ago. So, there is a necessary condition that says that one must not invest in unsustainable businesses and returns will be either low or negligible if good businesses are bought at high prices.
Q: What is your biggest learning as a fund manager from the market in these 29-30 years?
A: I am an accidental fund manager as I didn't have such a plan and it occurred when I joined SBI's Mutual Fund segment. It happened just because I joined it a bit late, where they said that you are the last entrant in this batch, so you will have to get into equity research because no one had preference in equity research in 1991 but they had preferred for merchant banking or proposal appraisal and I was sent into the domain just because they didn't have any other option for me. But today I can just say that several people aspire to be a fund manager and there is nothing wrong in it but they should think about it after understanding the same. I have been in the industry for last 30 years and have seen that maximum of people who joined the industry along with me are no more associated with it as a fund manager and are doing something different from this. So, I can just say that this industry is similar to cricketer or film actors as the longevity of success rate is very low in this industry while the failure rate is too high. For instance, several people want to be a Cricketer and maximum of them wants to be Sachin Tendulkar but 99 of those 100 are not able to be Sachin. So, career decision should be based on the average outcome, not the outlier outcome and this is my suggestion to the youngsters.
Q: When it comes to a portfolio then how you decide to keep a share without selling it after it provides good returns in a short period? Talk about your buy and hold strategy?
A: It is simple but hard to digest. The daily price should be considered as your cost, i.e., if a share is priced Rs100 apiece today and there is a condition in which I bought it earlier either at Rs50 or Rs200, which means I am at a loss in one and at a profit in the other respectively, but if I holding it at Rs100 today then I must feel that it has been bought today at Rs100 because I have that sum in my hand. So, everyday price should be considered/treated as a person's cost and then think about the next three-five years. And, this is something that I practice at my end in which a share bought at Rs100 turns is priced at Rs500 today and I think that is it a right investment at today's price or not. Same is practised when a share of Rs100 falls to Rs50 that is it a good investment at this level or not. Historic cost of acquisition is A record here and is just relevant for tax but it doesn't have enough relation with decision making and future outlook.
Q: Do you go for profit booking in the case when the share bought at Rs100 turns up to be Rs500, at least when it seems to be heavily priced and have you ever regretted your decision for selling the share at an early stage?
A: Several times. For instance, it was 2007-09, when I invested a lot in FMCG companies and pharma and then sold both of them. The decision went right in the case of pharma but the FMCG companies grew two-three times from the levels at which I sold them. I can just say that each of our decisions can't go right and that's why every person carries a different thought process. Absence of two different thought process in the trade will not allow the business to go further. So, one of the two will only go right. But I would say that we should always think that today's price is the cost as I will get the same amount if it is sold and I can invest it somewhere else. However, there are times when the share bought at Rs100 was not sold even after turning Rs500 and it went ahead and there are times it was bought but it went up. We have to struggle here daily as we are (price-to-earnings) trying to guess the potential that the business holds in the future. There are occasions in which P/E Multiples of the market have changed a lot and it is hard to predict how the market - in a collective manner - will think about the business.
When it comes to Utility Companies than it was bought - some 10 years ago - at 3-4 times price to book but it is not liked today. Similarly, FMCG companies - 10 years ago - were available at 15 P/E and today they are available at 60-100 P/E. So, we deal with the uncertainties in the market and that's why it is hard to provide consistent performance there.
Q: You have said that while buying the stock you see that will the business sustain for next 15-20 years but what are other important aspects that are taken into consideration before buying its stakes?
A: Quality of the business is the main aspect that we see. Quality means the strength of the business and the track record of its management and its reputation. Are minority shareholders are treated fairly there or not. These are the hygiene factors and is the basic condition. If a business can sustain in the comparative market place and the management quality is above the basic minimum then we think that one can invest in the business. Then we are just supposed to analyse the future growth of the business and the price at which it is available today with respect to the growth.
Q: What factors are taken into consideration when you plan to sell/offload any stock from your portfolio?
A: There are 5 reasons and they are
(i) I had a target price but felt that it has come to such an extent and my business understanding suggest that there is no room in which I can get the returns. So, it should be sold.
(ii) There is a change in an environmental change which has changed the future outlook of the business like the commodity prices has gone down too much or some new technology has come that can change the habits of people, for instance, it is being said that readership in print media has gone down, which is a big factor for the future growth of the business. So, you can change the stock in case of adverse development.
(iii) If we feel that our initial understanding about the business was wrong and the previous research was incomplete and there are some errors - which was deciphered during the further study - and we missed something in it that is capable of changing our view then we will correct the mistake even if we at a loss at that moment. It is also termed as Stop Loss.
(iv) Nothing like this has happened but we get to know about some stock which can provide a better return than this (the existing one) then we can switch to it by reducing our exposure in this.
(v) If some stock which was added to the portfolio at 3% has grown to 6-8% then we can reduce our exposure in it just to reduce the risk associated with it.
Q: Any message for investors who want have either invested in your funds or are willing to do so?
A: Stock market is something that excites many people, however, they feel that they can make money easily here as they have a look at the historical data in which a share priced at Rs100 has turned Rs200 now. This is why several people are interested in direct investment here but I feel that one must stay away from direct investment till he doesn't have a correct understanding about the market. At the same time, one must not invest money here through F&O or by borrowing because it is speculation and you may incur heavy losses here.
Warren Buffet has said that one must have two sources of income in his life and the first is what you earn through your job or business and the second is investments. I think of any man manages to save and invest a bit in a right way than over a period of time it can turn up to be a very good source of wealth creation and returns for him. So, I would like to tell to people that whatever your wealth or saving is just segment it into two parts. Of which one part can be the one that is not required for next 5-10 years and I can sleep well if there is a temporary decline/fall of 10-20% in it and I can tolerate this temporary loss emotionally as well as financially. So, this part of our saving or wealth is the risk factor for us and it should be invested in three-four good and diversified multi-cap or large-cap funds and be patient. If asset allocation has been done and three funds have been chosen then you must have patience. The longer you hold the funds, the more compounding will come in it.
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And when it comes to the second part that can't be risked or can be needed should be invested in fixed income through banks - where a promised returns are offered and it is out of risk or mutual funds - however, the risks are higher than the bank deposits but tax breaks can help you in earning good returns in it and we have better liquidity in it.
So, I think if we invest our risk capital and safe capital correctly by estimating it then I feel that the returns of your fund in the next 10-20-30 years can be 2% lower than other equities that are compounding but it will be 4-6% higher than the returns of the fixed income. So, if you are earning 4-6% more - that too when you don't need to pay the taxes on it until it is not sold - and you go for tax-free compounding for 20-30 years then you will find that even small savings become a huge amount over a long period of time.
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