Prashant Jain of HDFC Mutual Fund has always been an equity evangelist. However, to his dismay, the retail investor always behaves in an irrational way – investing blindly when the market is at the peak and shunning stocks when the market is at its’ lows. A short while ago, the situation was so grim that Prashant Jain wrote a piece on “Why this is absolutely the right time to buy stocks” in which he bluntly told investors that if they did not heed his advice and buy stocks now, they would regret it later. Prashant Jain pulled out all the stops, even going to the extent of quoting from the Bhagvad Geeta, in his bid to convince investors to buy stocks at the opportune time.
Now, Prashant Jain, in an interview to moneycontrol.com, expanded on his pet theme and explained why, despite the smart rally that the market had seen, it was not too late for investors to dip their toes and buy stocks.
Prashant Jain pointed out, with a confidence in his voice that only years of experience as a fund manager can bring, that while PE valuations were low, especially as compared to FY 2015 earnings, there were a number of factors that indicated that the economy was turning the corner and corporate earnings would increase.
Asked why retail investors met with disappointment in the stock market, Prashant Jain explained that the reason was that investors always get attracted to stocks when he reads in the newspaper that several stocks are hitting their life-time highs. By this time, unfortunately, the markets are highly priced and valuations are not in the comfort zone. However, the retail investor is oblivious to all the warnings and plunges in. Then, when prices correct from the peak, the investor is left holding the stock and vows never to buy stocks again.
Prashant Jain pointed out that the position at present was piquant because as the Index was approaching the magic figure of 20,000, a lot of investors who had bought stocks five years when the Index was at 20,000 were seeing a chance to recover their money and were selling their stocks and redeeming their mutual fund holdings.
This, Prashant Jain emphasized, was a tragic mistake and the investor would live to rue his decision.
Prashant Jain advised investors to get the fear out of their mind that when the Index reached 20,000, it would collapse like a pack of cards. Instead, investors should focus on the PE multiple and ask whether at the Index level of 20,000 or higher, the valuations were reasonable or expensive, he said.
He pointed out that in the entire history of Indian markets, the P/Es had seldom gone below 11-12 times even in extreme situations. Even during the great global crises of 2008, the P/E did not go below 11 times. So, at present, when the market is trading at 14 times one year forward and at 12 times FY15 earnings, the markets were reasonably priced and there was no bubble that could cause a collapse.
Prashant Jain offered what he called a “simple thumb-rule” for investors who were perplexed about how and when to invest to equities. Whenever the P/Es are low, investors should take a medium term multi-year view of the markets, invest systematically and patiently and they would be rewarded.
Prashant Jain was also blunt that investors should not be afraid of investing in high P/E “expensive” stocks. Top quality stocks with high ROE and earnings visibility are always expensive in a relative sense but these are the stocks that deliver multibagger profits, he emphasized.
On the sectors that investors should invest in, Prashant Jain was clear that consumer stocks were the place to be in because there was a good chance to make supernormal stocks. Investors willing to take a bit of risk could look at the ignored sectors like infrastructure, which will outperform when the tide turns.
There is a wealth of wisdom in Prashant Jain’s words and investors would do well to pay heed to it.