Prashant Jain speaks of 5 of his key learnings in farewell letter

The more bruised a suitcase, the more it has travelled and experienced. Every mark tells a story, Jain said in his farewell letter.

Jain in his long career saw Indian economy opening up, the coming of age of IT industry, commodities boom, bust and boom again; the coming of age of e-mail, mobile, internet, modern retail and ecommerce, renewable power and EVs, the rise of social media, the decline of traditional media, the rise of China, Covid – lockdown, negative interest rates and ESG as a theme, to name a few.

Also Read: What Prashant Jain said on his mistakes, PSU stocks & passive funds

Here are the five key learnings of Jain’s three-decade long career that jotted down in his farewell letter.

1) To him, the efficient markets hypothesis does not hold true, especially over short to medium periods.

“Markets can be driven by emotion and herd behaviour for extended periods and thus keep on throwing opportunities once in a while. The best opportunities are to found either in most difficult market conditions or in most polarized markets. Investing is, thus, more about emotional quotient than about IQ,” he said in the farewell speech.

2) Sizing, he said, is important. Jain said any portfolio will have its share of big winners, winners, losers and big losers. In Jain’s case roughly one of every four were losers, one of every 100 were big losers, 1 of every 20 stocks were big winners and the rest were winners. However, it is interesting to note that gains on one large winner were more than the total losses of all loss making investments, he said. This, he said, highlights the importance of sizing – of assessment of the risk-reward associated with individual

investments and sizing accordingly.

3) Jain’s third key learning highlighted what Warren buffet has famously said: Rule no 1 don’t lose money, rule 2, don’t forget rule no 1.

Jain said he made more mistakes of omission than commission. Some prominent missed opportunities were

, , , , Divi’s laboratories, etc. But he successfully avoided the long list of businesses that caused large and permanent loss of capital.

A list of some prominent sectors to which many of these companies belonged were TMT, real estate, NBFCs, select banks, infrastructure, telecom, power, media etc. What is particularly satisfying is that most of these were never invested in irrespective of price, he said.

4) As a fourth learning, Jain said markets are reasonably efficient over long periods. The duration of mispricing or inefficiency can vary from several quarters to several years.

“It is important in this period to stay the course and to remain solvent (for a mutual fund manager this means to retain

the job / fund). Having an alignment of interest (in the case of a fund manager this means being invested substantially in the same fund) helps at such times. Fortunately, the longer the mispricing, typically the higher is the catchup. Markets thus reward in most cases for the entire of period of pain,” he said.

Jain said the only catch here is that the intrinsic value of the business per share should not erode in this phase.

5) The market veteran said equities are a generous asset class and that the tailwind of a growing economy and growing companies overshadows mistakes of timing and security selection in diversified portfolios in most cases over long periods.

“The key is patience to stay invested for long periods. This brings me to some issues where the debate is ongoing and the jury is still out. I cannot resist my two bits to add to the confusion on these issues,” he said.

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