Q: What you always said and repeated in your talks is that returns are slaves to profits but they are not linear - explain that point.

Jain: If you buy an unlisted business and if it grows ten times in ten years, then the value will also grow nearly ten times in ten years. Similarly, if profits fall by 90% over ten years, let us say, if you bought a typewriter business the value would also have eroded by 90%. But in stock market, these unlisted businesses are listed and they are driven by so many sentiments newsflow, liquidity, so the prices are volatile. So, over the short to medium period, prices are simply volatile but over long periods, they must inevitably track the growth in profits. If profits continue to grow at a faster rate than the returns from the stock, then the P/E multiples could go towards zero, which is not likely to happen because someone or the other will come to buy that business.

Q: When I talk to other people and read what you said, the one thing that you start off with is the ‘eliminate’ and the one thing you want to eliminate in investing is the ‘big mistake’! How does Prashant Jain do that?

Jain: I think eliminating these mistakes is more important than identifying big winners. There are three four things what we do, one is we do not invest in businesses that we believe are not sustainable or are not of a minimum acceptable quality. If you do not understand a business, you will not invest in it. The other thing that is equally important is, what price are you paying for a business. So, you would not like to overpay at least significantly for any business that you buy, even if it is a great quality business.

And how you can stay away from overpaying is by standing slightly away from the market, thinking long-term and building different scenarios. Finally, I believe in always remaining effectively diversified. Quality of diversification is more important than the numbers of the stocks, and we realized that, one, we can make mistakes and two, the pace of change in the world and pace of technological change is so much that we can always go wrong.

Q: What is the Prashant Jain investment philosophy?

Jain: I think I am still learning and still evolving but what I have learnt so far and what I try to practice is that do not compromise on quality. The quality of the business is very important, it should be sustainable, it must have growth and it must have competitive advantages. Growth reduces the chances of your losing money, even if you have slightly overpaid for it. Secondly, one should remain diversified, across key economic variables. It is more important today, because the pace of technological change is increasing and we can also make mistakes.

Q: Industries can become irrelevant overtime.

Jain: Yes, one very important point is you must admit that I cannot see the future clearly, so when a business is becoming significantly overvalued, do a scenario analysis and even an optimistic scenario throws up that there is no value, then you must stay away.

Q: You were the early sellers of tech stocks in 1999?

Jain: Yes, that is right, in fact, we sold maybe three-six months too early. 

Q: Because the process told you?

Jain: I think yes, what we have believed is that we cannot time the markets and many people theoretically say that, 'I will sell when the stock starts going down' but in any upward trend there are so many short-term corrections. So, I do not think we can distinguish between the beginning of the reversal of a trend or whether it is one more correction in the continuing uptrend. So, we try to sell when we think it is expensive. The mistake what we did last time is we did not maintain the discipline of selling in parts. We sold slightly early.

Q: You have been in this business for fifteen years, what do you know now that you wish you had known fifteen years earlier?

Jain: I think if one had greater exposure to countries outside India for maybe one-two years, it would have helped me identify companies like HDFC and Hero Honda way back. But I do not think I have any regrets because what I have realized is that actually a mistake teaches you far more than success. Every time I made a mistake, it forces you to stop and to think. I think that is the price one has to pay.

Q: Who have been your mentors or heroes in the stock market?

Jain: Some of us think that success belongs to me but I tend to think a little differently, that the environment, the people around you play a very important role. So, what I have achieved is I think of course because India has done well and also because of help from lots of people. I have benefited, particularly, from reading bits and pieces about Mr Buffett and also Mr John Bogel.

Q: One is a purely a pick the stocks kind of guy and one is a Index guy - who is better?

Jain: Yes, I think but while we can learn from both that as the market becomes more and more institutionally owned, it will become harder for you to beat the Indices. I think both are perfectly legitimate views but if you understand both, I think it will help you act better.

Q: What are the qualities that an analyst should have?

Jain: First thing is that they must have hunger to learn, willingness to work hard - these are hiring issues. What I have observed is that many of us feel that we are either too biased on a top-down approach, or we take the big picture approach but we ignore the details or some of us gets so lost in details, that we miss the big picture. What we would look for in an analyst is the ability to strike a balance between the top-down and the bottom-up analysis of a company.

Q: What is your favourite market proverb?