We recently record a podcast with Prashanth Jain, the CIO of HDFC MF. Here’s the transcript of the conversation.
Podcast link
0:47 - His journey into the markets
4:23 - The evolution of our economy and the Indian markets
7:15 - What does a good business look like
11:48 - His research process
20:15 - His thoughts on portfolio construction
23:30 - What does being wrong look like
27:41 - His thought on using macro inputs in an investing framework
30:15 - Whether the opportunity set of stocks in Indian markets is limited
34:48 - The road ahead for India
37:33 - His thoughts on quality at any price
43:58 - Active investing vs passive investing
47:06 - indian valuations, global valuations, rates and inflation
50:50 - Advise for aspiring analysts and portfolio managers
52:00 - How he invests
Hello, everyone. Thanks for tuning into this episode of Zerodha Educate. In this episode, we have a really, really special guest. We caught up with Mr. Prashan Jain a market veteran, and the first fund manager in India to manage a single fund scheme for over twenty-five years. Prashant has pretty much seen most of the cycles in the Indian market. In this wide-ranging conversation, Prashan speaks about his journey into the markets, his research and investment philosophy, the evolution of Indian markets using macros in investing, current market valuations, and much more. The number of insights that Prashant shared were tremendous. Please enjoy this conversation Prashant.
Mohit: Given the amazing journey you’ve had in the fund management industry. I wanted to start at the beginning and talk a little about you and how your journey got started. How did you get, started in the world of finance? I remember you saying once that you had cleared the civil services examinations, how did that happen? How did it switch to finance then?
Prashant: Mohit, that’s a long story and I don’t think it will, going into that here but suffice to say my journey or my entry into this world was an accident and it is also interesting to know that way back in the early nineties, this was, equities was not a preferred career. Actually, in many ways, people were worried about being in equities and I was the last one to join SBI Mutual Fund in my batch, and my senior, he very apologetically said, “Son, I’m extremely sorry, but all I can offer you is equity research.” You can imagine that equities were not the preferred option. Of course, times have changed and I was fortunate that the way markets have evolved, the way this career, this industry has evolved. I think my experience also highlights the role that destiny plays.
Mohit: Speaking about the role destiny plays, Prashant. I mean, you’ve been in the fund management industry for 26, 27 years which is probably my entire existence on this planet. And when you got started, the Indian GDP was about 30 billion in 1994, and it has like grown at about eight, eight and a half percent is it, they call it destiny. Did you see this at the beginning of your career because your job as the fund manager, largely dependent on the Indian growth story as well you somewhat bet on it?
Prashant: Mohit, very interesting you ask this question. Way back in campus at IIM Bangalore, me and some of my colleagues used to discuss that India has a great future, and those of us who had decided to make our careers in India, we would jokingly say “I’m staying put in this country”. Of course demographics and rich in natural resources, skilled manpower is worked to India’s advantages.
I think what really accelerated things was the balance of payments crisis, which forced reforms onto us, and at around the same time it coincided with you know, the word becoming connected, and that is what unleashed the potential of skilled and cost comparative manpower. And that is because I think software industry, India would not be where we are today without this industry. Today it accounts for almost 5% of India’s GDP but the software industry has given respectable wages to most educated people, which was not the case in the early nineties. So I think industry has helped the economy grow much faster and bring us where we are today.
Mohit: Also when you were starting out, the Indian market was still pretty new. And maybe at that point, electronic trading was just getting started. So this question is around that. How have you seen the type of companies, the market participants, the general industry grow and evolve ever since you started your career in here?
Prashant: Mohit, I’ve been in these markets for now exactly 30 years. Actually, this May I complete 30, and a lot has changed these 30 years and those were the times when you wanted to find the price, it would take 10, 15 minutes for someone to revert with the price because some will go to the ring physically and back. I think we’ve come a very, very long way from those times. I remember people used to struggle filling up the transfer forms, those physical shares et cetera. I think, information, we used to spend a lot of time those days just gathering information.
I have one interesting anecdote: we would go to these, you know, raddi walas and outside the stock exchange and buy annual reports by the kgs, bring them to office and sort them. Because even getting the annual reports was pretty difficult. Then, of course, I think as internet, email, things started getting digitized information availability became easier. As foreign brokerages came into the country, as the corporate governance in India has improved, transparency levels have improved, inside research has gone up, quarterly calls, analyst meets. I think today when I look back, I think we have information overload and it is hard to digest so much information and at times I feel that sometimes we lose sight of the goal because there is so much information.
As far as the market psychology is concerned I think the emotions of fear and greed and hope in investors that remains exactly, the information advantage is clearly gone. I think the advantage will come from the ability to understand the business to have a better view on the future and maybe I think, thinking longer term will continue to give an edge, there are many ways to be successful in this.
Mohit: Prashant since you spoke about the new age, right now will not be information anymore. It’ll be how to analyze a business and how it’s working and where it should be valued probably. Let’s talk a little about that. So on the research process that you have formulated and you have perfected over these 3 decades of your work, you’ve bought and sold great businesses and maybe you also got into some not so great businesses, but during this journey, how have you figured what a good business is worth when you’re buying it? And how would you summarize your philosophy and your investment philosophy? If you believe in describing labels to it?
Prashant: I think whatever I speak for will be in my individual capacity, because as a firm, I don’t think we have a particular sign and the each of the managers have freedom to construct the portfolios the way they deem fit and I made many mistakes and therefore, I’m probably a little wiser today.
And what I’ve learned is that sustainability of the business is the key. Mobility comes from comparative advantages, of course, as technology is changing, as it impacts almost every business around, you have to be constantly reviewing their sustainability is still intact. I think that is the key. The second issue is that you want to be in businesses where the environments are at least reasonable, not great, and you get a fair treatment minority shareholders, this is less of a challenge increasingly in my opinion. And I think finally when it comes to investing, it improves your chances of success who are in growing businesses.
I think there is, and I think up till now most industry participants will agree on these key parameters. The difference in investing approach comes from, what are your time horizons and how much are you willing to pay for a particular business, particular quality, and some growth prospects. And they are based on my experience way back in early ‘91, ‘92, when I saw a whole lot of permanent damage to wealth, severe damage to walth because businesses were overvalued and with hindsight, it is very easy to say it because markets were not trading almost 40 times, today people start getting worried at 20x. But I think right then it was very difficult to figure that out, but it caused massive permanent damage to wealth. I think that has stayed with me and I maintain a sharp focus on “what do you want to pay?” In my experience, a great business need not be a great investment, if the price is wrong.
I can give you any number of examples, but let me give you one or two examples here. What technology in late 90s, early 2000s, it was not a good investment and even though there were very long holding periods and these businesses have grown virtually every single year since then. Because growth that was implied by the evaluations was for more than the actual. I think in investing, I mean, there are two types of risks. One is the business doing badly. Two, the business doing okay but growth not being up to the implied evaluations and therefore the investment going bad. I tend to maintain an equal of focus on.
Mohit: Prashant, when looking at the evaluations of a company. How do you exactly like know if a company is overvalued, is there a quantitative metric you’re using every single time? Is it like a spectrum of things that you’re looking at? If you could like elaborate on that?
Prashant: I think Mohit, that’s an excellent question, and investing in that’s why both considered to be an art and science. I think we are dealing with uncertainty, we are dealing with future, and even the managements themselves don’t know, what the growth is likely to be for a business. And I think there are a whole lot of examples where the managements, either they were too optimistic or actually achieved far more than they actually thought they would. I think it is and that’s what makes this business both challenging and exciting.
Okay, I go around doing it is to build scenarios, and assume what is the risk-reward in different scenarios, and you also look at what is the implied growth rates and how realistic are those growth rates. And let me give you an example here, once again. Technology, IT was about 1% of India’s GDP way back in 2000, but it was nearly 40% of India’s market cap, and our thought was that those 80-100% growth rates, there was no way they could sustain. Because if those growth rates would have sustained, technology would have become very soon 10-15% of India’s GDP, keep on doing a hundred percent, a year, 80% a year, the moment you do that your currency would have appreciated extremely fast. So even if dollar revenue grew, profitability would not hold because the country will move to a balance of accounts.
I think it was this very simple logic, which told you that the implied growth rates, we don’t know what would actually have happened but the odds were not supporting that logic. That is how, there have been few other cases like this, but let me be with that.
Mohit: This takes us back to the first point that you had mentioned when like looking at the business and analyzing it. You said that even though information is readily available right now, there has to be constant analysis of it. So maybe what you’re doing at that point was analyzing it to a degree to find that the valuation was not justified. One more thing you mentioned was that the management plays a very vital role and you’ve got to invest in companies with good management in place. How do you figure that if the management is good or not? I mean, if there’s like a thumb rule for it if there’s like a way to adjust it, apart from just, let’s say your opinion in it?
Prashant: I may say on like and you see, assessing people is extremely tough and many people realize that once they’re married, right? It is not easy and we go a lot by the track record. I would, I mean people are extremely important, there is no denying that, but I think the importance of the environment also cannot be. Because if you look at the technology space, has created huge number of successful entrepreneurs. It will be wrong to say that all of them suddenly were extremely skilled, I think the environment played an extremely important role, but of course, those were more competant, a little more lucky, I would say your approach worked and achieved greater success.
I would say when it comes to assessing people, it is important, but not at the cost of our difficult environment, and our funds have underperformed for some time because the environment was not conducive to what we were. But to answer your point in brief it is basically the track record, the actions, the reputation in the marketplace, to go out and check, if necessary with the ex-employees, with the dealers, competitors, peers & regulators. Well, I think that is what is a reasonably good guide.
Mohit: This entire framework you Prashant guided us through. How long did it take for you to make it, or are you still tweaking it? Are you still working upon it? Like all the aspiring aspirants, like analysts and fund managers right now would want to like, know this from you.
Prashant: I think, I mean, I started off very badly, and I still remember some of the funds that we still run, first we lost about 40-50% of NAVs, around ‘94-’95. That is when we realized that the mistake we had done was we invested in less sustainable businesses. The moment the environment became slightly tough, many of these businesses sharply end up falling. But we realized it, we cut our losses, and by and large, since then we’ve endeavored not to repeat the mistake. I think we have continued to learn, I have continued to learn and the mistakes made in the last few years again proved that even after three decades you make mistakes and there is scope to learn.
For aspiring managers, professionals I would say that listen to everyone, think about, keep an open mind and be open to ideas but do what you think is right and each one should evolve their own styles. Because in my experience, there are many ways to be successful.
Mohit: Prashant, how do you and your team go about filtering and shortlisting stocks? You mentioned that each one in your team might have a different method to filter stocks, and go about analyzing the business. But what’s the general process like, where would a fund manager start and, what does it go through? Where does it end? How do we make the call?
Prashant: I represent a large fund house, therefore we have something called our research universe, companies on which we have internal research available, that number is a fairly large number, around 400 odd companies.
We have companies, we believe they are above a certain minimum threshold, plus quality, and management quality. And therefore we believe that is a lot of investment universe, beyond that the research of these 400 odd companies is available to all the portfolio managers, they are free to construct the portfolios in line with the, you know, the offer documents, regulations.
And I must add that the regulations today define fairly objectively and fairly well, the various forms. I think these are fairly clear-cut positions that respective funds have, and EMS would construct portfolios with that mandate.
Mohit: Well, Prashant, let’s see now that you’ve gotten this research report with you and you’ve selected the stocks that you want to be picking for your portfolio for these schemes that you are managing. Once that is done, how do you pull these businesses together in the portfolio? Like the diversification, how much concentration in the weight, the sizing of the bet, essentially. And does the fact that a large number of investors tend to be likely retail investors, does that influence how the portfolio is constructed in any way? So since a large number of investors tend to be retail investors, does that influence the portfolio construction in any way or that won’t change regardless of who the investor is in the scheme?
Prashant: I guess portfolio construction varies from individual to individual. Of course, I’m assuming for the same type of mandate, and I think there are few broad or basic variants here. One is, as you said, the degree of concentration, the second would be how much benchmark risk are you willing to take. Three is, you know, are you seeking value or are you seeking what is currently in favor and some people would adopt a blend of these two.
I think there is nothing right or wrong in this. As long as you abide by the regulations, I think it is what we individual portfolio managers think is right and what is their individual preference of liking or style. As far as the question of retail investors is concerned, in my experience, and this is my own opinion. I think it would be wrong to say that retail investors are not long-term investors.
Over years I’ve seen that India is such a large country and equities is still relatively a young asset class. Therefore you will find a whole spectrum of investors there, some who are mature who understand equities, and who are there for the long term and some who are still, you know, learning the ropes and kind of looking things around. So again, I will come back and say, it will be extremely difficult be it in any portfolio these very different expectations. I will come around and say, let people evolve their own styles, and over time investors will know better what to expect from a particular manager or from a particular style. There are so many funds, so many styles available over time I think investors will choose what is in their best.
Mohit: Prashant, you had mentioned that when you started out, your team had made a misjudgment and quickly you realized what had gone wrong. You made sure that you did not repeat the same mistake again at least. So if somebody is making a loss in the portfolio, has made a bad investment in a sector or a stock, or just because of the natural environment, like how do they know when to get out of it? What would that journey be like? Is there a framework around that, that fund managers generally follow?
Prashant: The frameworks are simple but putting them into practice is very difficult because what appears reasonable today might appear unreasonable tomorrow because of the business outlook, the environment, or the opportunities that may change, but very broadly speaking, I think mistakes would come from two or three broad areas.
One is, the whole markets have gone down and lead to some temporary losses but over time we have seen that the index moves higher in line with the nominal GDP growth. So I think if you wait it out that could correct itself.
The second is if the business fundamentals have deteriorated, and there could be a situation where the deterioration is temporary, let’s say the large corporate banks the environment goes extremely difficult and we were hoping the NPAs will resolve in one year or two years, but it took three or four years. But you know the business is strong enough to weather this and this environment will improve over time. It may take three instead of one, but I think it is reasonable view. In such cases, I think would make sense to wait it out. I’ve seen in many cases, roll down on things for 5, 6, 7 years, but suddenly the next one or two years, makeup of the entire, holding period.
On the other hand, if the deteriorations in fundamental is such that it is hard to business to recover, Then I think it would make sense you know, to move out of that space, and here I have learnt the harder way and the last few years in that difficult environment, one mistake what we made, I made was that we were hoping that the beverage businesses will come out of the difficult environment but they were not able to do it. Either the companies went bankrupt or the equity capital was directly chopped. I think if you are merging financial and adverse business environment, one should be really.
I think the third source of mistakes would be from over-paying for a business. Business is doing well but the cycle has changed, and what was the preferred sector until yesterday is now giving way for something else. There I think it would make sense to revisit the evaluations because it is no more, you know, a preferred sector so I guess the objective one should evaluate are the current prices of the business valuations makes sense. If yes one should hold, if no then I think one should at least risk exposure. But as I said earlier there are no hard and fast rules and we are dealing with uncertainty, business uncertainty, environment uncertainty, markets uncertainty. Partly I think this is what I would like.
Mohit: Prashant, you mentioned that in terms of the macroeconomic mistakes that can happen, even generally, what are your thoughts on using macroeconomy inputs in the entire stock or sector even like macroeconomic, a timing selection process, how big of a factor would that be?
Prashant: I think it’s an important factor and the topdown does influence business conditions as I emphasized earlier but the environment plays a very important role on the businesses. The challenge is that it’s really hard to forecast the macroeconomic condition. Time and again I’ve seen that it is fast.
I think it is relatively easier to understand the current environment in which one is. That is not good enough at times of investing because, markets also discount the current environment extremely fast, what is known. The really good opportunities come your way when the markets are really pessimistic about some businesses, and that is when you’re hoping for some change. I think, the topdown is good to know but I think one needs to go a little more than that.
Over time you must have also seen that most forecasts are very close to the current readings, like inflation is not moving up so inflationary forecasts keep on moving up, but, and I’m not complaining here because these are extremely difficult forecasts to make because the number of variables that will go into inflation would be simply too large for any one to comprehend and put together and reliable framework. The environment is extremely dynamic, the currency is dynamic, global commodities are dynamic, global interest rates are dynamic. I would say my mind, at least in my limited understanding, there is some role, but it is not extremely important.
Mohit: Prashant you spoke about like looking at the macroeconomic data and then figuring out the opportunities. Speaking of the opportunities, do you think that the, at least our markets are very shallow in terms of the opportunities? Everyone like the mutual funds, PMS schemes, AIF, everybody seeks broadly to the top 200, 250 stock. And isn’t that like a very limited pool of companies in your opinion?
Prashant: I would Mohit, in fact, say just the opposite. Compared to the other EMs and India has the most diverse bit of sectors and stocks that are listed. I just mentioned to you that we ourselves cover 400 companies. This and 70 companies account for two-thirds of the market cap. Some commonality in portfolios is inevitable and that’s how the benchmarks are also.
I would say India offers a very wide gamut of sectorals, companies & market capitalizations investment and to that extent is very a exciting and a very challenging place to make a career in.
Mohit: Prashant adding to that opportunity set question. So since a new company to invest in would generally come via the way of an IPO, in the past five, 10 years, if you take away the recent spurt in IPOs, there haven’t been a lot of noteworthy IPOs that have come early. Now, do you think the markets are growing at an acceptable pace or have been growing at an acceptable pace? And if not, then what do you think needs to be done to push more homegrown companies to IPO?
Prashant: What you are saying is, I don’t think I would agree entirely with that. And I’m again, saying from memory, late nineties, early two-thousands, I think our research coverage used to be around 140 companies. Today we are at 400 companies.
We have seen a reasonably steady growth there, and more listings are a function of how well the economy is doing and how well the capital markets are doing. When would an entrepreneur want to list? When you need capital or when the valuations are attractive for someone to guide you.
I think this is an ongoing process, I’m quite happy. I’m quite satisfied with the pace at which we have evolved, and I think the future is actually much better because, one, globally interest rates are extremely low. That means that we should continue to be fairly large recipients of capital and given the venture funding that is available nowadays I think a large number of startups will evolve and some out of many of these will eventually list.
I think the second set of opportunities coming from being a part of the manufacturing supply chain. Right now as we know, the manufacturing supply chain is shifting steadily out of China. India, I think is extremely well placed to get a good share of that. Government is firmly behind making this happen, and this PLI whole scheme, I think is an extremely important step in that direction. This opportunity is so large that it can pull up India’s GDP growth rates by 1 to 2%. I think going forward to summarize, we should continue to see new companies coming to the markets, both in the service and in the manufacturing.
Mohit: Prashant, you mentioned that you see a growth in GDP of 1 to 2%. If you had to take a call, I mean, I know prediction is very difficult in the markets, and just a general understanding of how optimistic you are on the India growth story? If you had to put a number on it, like arrange maybe over the next 10 years, how much our GDP would grow, what would that number be?
Prashant: Mohit, this is extremely difficult to forecast, even in one year forecasts are difficult. So I think for an investor it is more relevant to take a right of the direction. I think I’m very optimistic on the direction, from the same two or three reasons.
One, globally interest rates are so low to the amount of capital wanting a place to get invested and India offers to the opportunities both on the infra side and on the startup side, apart from the capital market. And, India can absorb a large amount of capital to develop infrastructure. Given the low costs, this is fairly good capital, long-term capital. That is one source of growth.
The second is, as I said, the manufacturing, outsourcing opportunities opening up for India could aid growth rates, and apart from this, when this happens, of course, we have more incomes and consumption continue to here. If I had to put a number I would say our growth next 10 years should be higher than the last 10 years. Assuming that globally interest rates don’t move up too sharply or too early.
One thing, I think we should not forget, the reforms momentum that India is experiencing now is probably the best after early nineties, and seeing this project the words used most, privatization. Earlier we used to refer to it as diversification now we are saying boldly privatization. I think in that one word, it tells you a lot of our goals. Who are able to read into it, the focus on reforms and I can, it’s extremely timely because the external environment. Both, the manufacturing opportunity and the low cost of capital is very conducive,
Mohit: Prashant, I also want to get your thoughts on some broad narrative that are currently relevant in the markets. You spoke about how the entire valuation of the IT space was very expensive in the late nineties, early 2000’s. And, around that mostly right now this narrative of quality at any price and a lot of people are getting on that bandwagon right now.
Some people think that certain good quality companies will always trade at very high premium multiples and maybe for the past few years, they have been. At like what point do you take a step back and relook at what’s happening? Is there some guidance you could throw on this case at this current moment?
Prashant: Mohit, one I think whenever a stock trades, there is a buyer and there is a seller and every trade, there is a buyer & there is a seller. The information available with both of them is the same. The environment is the same, the price is the same and time is also the same. The only difference is the view, what you take of the investment and of the future. I think stock markets thrive on the diversity of opinion, and I’m saying this to emphasize, that whatever I say is my opinion and I mean, even I don’t know whether only time will say if it is right or wrong.
With that disclaimer, in my mind, as I’ve said earlier, a good company will turn out to be not a good investment at the price and I also observed that most excesses rather every excess have been created when the majority of things alike. The majority is seldom right in the stock market.
Of course, it takes time for the majority to be drawn. But eventually, if that opinion was wrong then the majority will be wrong and that I think is a basic difference in elections and stock market. And IT industry, we have discussed that how the majority was wrong not just on what they bought but also on what they sold. Because between 2000 to 2007 the entire world economy delivered phenomenal returns and they were the most hated sectors in early 2000s.
Around 2007-08 infra companies, real estate companies, NBFCs were the most favored and you know what happened subsequently. In time you’ll find this hard to believe even this today’s environment the consumer companies which people today say are quality at any price is a good investment, they were not the preferred investment because the environment was quite different, pharma companies were not very developed.
I think the long term, I mean the definition of long-term in the market is longer than the investment horizons of most investors or the time for which we can bear a pain. The markets long term is longer than that but over long-term I think, markets are perfect and prices will move towards eventually what they, what are the right prices. I must also add that the current extremely low costs of capital, afford quite high multiples for businesses in which you are confident of growth for many many years.
So, one risk to that approach also, apart from the growth rates, one risk also is the any potential increase in the cost of capital, the moment you are buying a business at 50, 70, a 100 PE multiple, cost of capital moves up by one or 2%, it can be quite difficult for that investment. There is one more issue here, and that is unique to India. See if the multiples are high and backed by decent growth, is justifiable because over time if you buy a 50 PE, 70 PE company if the growth is healthy enough over time that multiples look reasonable. Only other challenge is that I think this is more applicable for the consumer-oriented companies. These are not technology companies, they are growing at fairly modest growth rates, if you look at the last 10 years, some of the companies which are trading at very high multiples, growth rates are not able to justify the current. I think the last few years, one interest rates were low and two there was scarcity of earnings growth of most other sectors because of various challenges in the environment.
And I think as you move ahead, as cost of capital is lower, liquidity is good, asset quality pains are behind us, and profit growth is becoming more broad-based. I think that is one more factor to keep in mind, that these high multiples or not as high growth rates maybe become less attractive, appealing when growth is available in other pockets, as well as much.
Mohit: Prashant you mentioned that whenever the buy or sell transaction happening, there’s a buyer and there’s a seller and both of these people with the information they have, they have opinions. Now something tangential to that, in terms of this style of investing. So let’s say in the past few years, people have been debating whether active or passive investing is more fruitful, as an AMC like at HDFC MF you have a few passive funds, even though like you’re predominantly active oriented, how do you think about this debate personally, and what do you think investors should think about it?
Prashant: Mohit, I don’t think there’s any debate here. It is not an election, that you can vote for only one party it is not like that. It is like going to a restaurant and in a thali you can eat 3, 5, 7 dishes. I think there is space for both. The real issue here, I think is the extremely low ownership of equities in the Indian household’s balance sheets and I think that’s the real opportunity here. See, it’s a fact that in the last few years, many active managers have struggled against the benchmarks.
Reason for that is not hard to seek, if you look at the returns for Nifty in calendar 18, 19, and 20 just five stocks each year delivered between 80 to 140% of the Nifty returns in each of these three years. It’s a long portfolio by definition that are far broad-based and therefore this was an environment which was not conducive of the active manager. As markets become more broad-based, I think active managers should be able to improve their performance. But I think that only time will tell whether actives are able to outperform, and if they are able to, with how many, and with what degree. But in the meanwhile, I think investors can invest where they feel like and I think the real, see the gap between active and passive, even if a fund does not do well how much is it? It is quite small compared to the difference between equities as an asset class and bonds, for example. I think the real issue, the real debate is when courage investors to improve their asset allocation towards equities based on their individual risk appetite. I don’t look upon this as a debate at all. If they outperform they will grow, if they don’t, they will grow less maybe not grow, who knows only time will answer.
Mohit: Prashant, another major worry right at this point and we’ve spoken about this briefly is valuations, by some measure people seem to think that the Indian markets right now might be overvalued. Global markets, particularly the US might to some people seem to be in a bubble as well. So there are some global inflation worries, and maybe domestic as well. How do you think about this at the moment? And do you think that these broad measures are somewhat misleading?.
Prashant: Let me limit my comments to Indian markets because it’s hard for me to comment with confidence on markets outside India. But there are two reasons, one cost of capital has very important to markets outside India because the interests are extremely low, and two, the technology companies which have done well and are responsible for the aggregate valuations outside. Is hard to take a view, how long, how much they can do and whether new tax rates or new regulations would crack. So let me not get into that.
Coming to Indian markets, these markets to my mind are fairly valued and I’m not saying fairly valued to avoid, I genuinely believe they are close fair value. Look at the last 10, 15 returns of the Nifty is around 10, 11% CAGR. That is in line with the nominal GDP growth rates, that tells you that the markets have not delivered excessive returns and it is not that they’ve delivered mid-single-digit returns also. Look at market cap to GDP again, the current market cap to GDP is near long-term averages, last 10-15 years. I think some people, they get a sense markets are expensive because they are looking at trailing PE multiples. Please bear in mind that India’s profits to GDP was near 8 % in 2008 and it fell to a low of 2% I think 2 years back. That 8% was an aberration and this 2% also was an aberration.
When businesses are making sub-optimal profits, the PE multiple is not the best of indicators. I think market cap - GDP is a more reliable indicator and which is indicating fair valuations. If you look at PE multiples, look for one or two-year forward PE multiples, that again are suggesting reasonable multiples especially given the current low cost of.
I think Indian markets broadly are fairly valued and they should track nominal GDP growth rates over next few years, or the medium to long term. Inflation, I don’t think is too much of a worry for equities. Because moderate degrees of inflation are I mean, equities are a hedge against inflation. What is inflation? It is companies increasing prices. So equities give you real returns equal to real growth and inflation is a past thing. Of course, excessive inflation can be adverse but I don’t think we’re expecting that.
Mohit: Prashant, a slightly different question now, away from what we have spoken so far. What would your advice be to somebody who wants to be an analyst, a portfolio manager, or a fund manager?
Prashant: I think this career has as I mentioned to you, I came into this as an accident, I had absolutely no prior knowledge or anything. I think, don’t get carried by, you know if you are making a career choice look at the average outputs. Many people move into cricket or media because they are looking at exceptional, outlier outcomes. I think to judge the real merits of a career you must look at the average and let me not say more than that. All I would say is the average outcome here is good, but the variability is much. One should be prepared for.
Mohit: Prashant a little bit about you before we conclude. So how do you personally invest? What is your personal investment philosophy? I’m sure you must have had your fair share of mistakes also and we’ve talked maybe about a few. What have you learned over the years?
Prashant: It’s really simple Mohit, I’ve kept mine extremely simple personally, the last two decades all my money is in my own. By and large, I’ve been significantly overweight equities, had very limited investments in real estate or fixed income. But I would not recommend that to everyone because personally, I’ve been extremely patient and extremely tolerant to volatility. I think asset allocation is the key for any investor and it is a function of ones individual tolerance for volatility and time.
Mohit: Prashant are there any investors who you admire and who you look up to?
Prashant: Well, a lot of them, and I learn from everyone or at least I try to learn from everyone. I think almost everyone around you has the ability to teach something to you who are more to observe and listen. It’s a very long list of people and I’ve learned from many, many people I genuinely in that. Let me not take any names, but of course, all the famous names who are up there and many more who are not commonly known who are not well known, learned from them as well.
Mohit: Could you name a few books for us? Like some books that you enjoy reading or investing, that you’ve learned from?
Prashant: I think, well, one I’ve read many books and I don’t have a great memory about names but let me still try and suggest some names. There’s one book by Peter Bevelin, All I Want To Know Is Where I’m Going To Die So I’ll Never Go There. I think it’s a very good book both for investors and non-investors.
There is another one, The Most Important Thing by Howard Marks. I learned a lot, very simple but really good. I think it is, which is the famous book by Taleb Fooled by Randomness, I think it’s a very powerful very simple book.
I think Morgan Housel recently wrote a book The Psychology of Money that is a book which all of us should read, it tells you a lot about life and also about investing. How to strike a good balance between the two. I think it’s a very good book for even those who are not wanting to make a career in it.
Mohit: Thank you Prashant. Thank you for doing this with us. I mean, there were lots of takeaways for me personally, at least I’m sure everybody who’s listening to this, watching this, they have a lot of takeaways as well.
Prashant: It was a pleasure. Thank you!
Mohit: Thank you for doing this Prashant.
Views expressed are personal and based on current market conditions. Actual events or results may differ. Returns are not assured. Listeners should take professional advice before investing. This is not a solicitation or investment advice to buy or sell any scheme or any security under any sector. Sectors mentioned are for illustrative purposes only.
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