“Be careful who you call friends. I’d rather have 4 quarters than 100 pennies.” ~ Al Capone.
This is perhaps also true about investing in stocks, or at least that’s what can be inferred from the experiences of Prashant Jain, who is dubbed the Peter Lynch of India and was chief investment officer at HDFC Mutual Fund till July.
In his parting note dated August 30 and released by HDFC Mutual Fund, Jain lamented that most of his bets were not successful—he made money only in 12 percent of his investments as a fund manager.
According to a sample of the data from October 2003 to July 2022 that Jain provided, he invested in 465 stocks during the period and made a net profit Rs 86,541 crore from these investments, including dividends.
Of the total net gains, a mere 55 stocks accounted for more than Rs 74,000 crore–85 percent of the total gains. He made Rs 28,070 crore for his clients from just four investments. Every one of four stock investments delivered a loss to him.
“If only one had the wisdom of avoiding 90 percent of the investments and instead invested more in the 55 stocks!” Jain said.
The performance of his portfolio was largely in line with most successful investors. Ace investor Rakesh Jhunjhunwala, at the time of his death earlier this month, held stakes in 32 companies but his fortune came largely from investments in Titan, Star Health and Metro Brands.
The performance of Jain and others is also consistent with the Pareto Principle, which states that typically 20 percent of the effort gives 80 percent of the results and vice versa.
Also read: Hits, misses and a dash of nostalgia in Prashant Jain’s farewell note, read the full text
Jain, who resigned last month from his position at HDFC Mutual Fund, successfully managed three funds–HDFC Balanced Advantage Fund, HDFC Flexi Cap Fund and HDFC Top 100 Fund. Since inception in the mid-90s, these funds have delivered compounded annual returns of 17.9 percent, 18.6 percent and 18.9 percent, respectively.
In HDFC Balanced Advantage Fund, Rs 100 invested at inception would have become Rs 10,940. Jain said this journey of Rs 100 going to Rs 10,940 was largely a result of six-eight key reasons and decisions. They included going underweight on IT in the late 90s, going overweight on the old economy (capital goods, auto, metals, cement), and the shift to FMCG and pharma.
Jain highlighted that his performance also signifies the importance of sizing because any portfolio will have its share of big winners, winners, losers and big losers.
Also read: Parting Note | Best is yet to come in PSU stocks, says Prashant Jain
“It is interesting to note that gains on one large winner were more than the total losses of all loss-making investments. This highlights the importance of sizing – of assessment of the risk-reward associated with individual investments and sizing accordingly,” said Jain.
Efficient market hypothesis
The efficient market hypothesis is a theory that states asset prices reflect all available information. Jain believes this is not true, especially in the short and medium term. However, the theory works in the long term, he said.
“Markets can be driven by emotion and herd behaviour for extended periods and thus keep on throwing opportunities once in a while,” the 54-year-old said. “The best opportunities are found either in most difficult market conditions or in most polarised markets. Investing is, thus, more about emotional quotient than about IQ.”
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