- 6 days ago
Temperament, journaling, and knowing when to make money versus when to exit it, are the three most important lessons of investments, said Sankaran Naren, executive director and chief investment officer (CIO), ICICI Prudential AMC.
At the third edition of Outlook Money’s 40After40 Retirement Expo in Mumbai on February 7, 2025, Naren highlighted a few key principles for investors.
At the third edition of Outlook Money’s 40After40 Retirement Expo in Mumbai on February 7, 2025, Naren highlighted a few key principles for investors.
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00:00Welcome to all of you. Thank you Outlook for giving me this opportunity.
00:10See, the biggest lesson that we've learned in equity investing over the years is people
00:19always say knowledge, but the biggest lesson that we have learned is that temperament is
00:27the most important. And if you're able to handle temperament, actually there's a lot of money
00:36waiting to be made over the next few decades in investing in equity. Warren Buffett has
00:45long told that the highest IQ doesn't yield you the biggest returns in investing. And
00:55so somewhere when people tell you, you have to make money in equity, you need the highest
01:00level of knowledge. What I've learned from reading about Warren Buffett and all the great
01:09investors in America and elsewhere over the years is that the first thing that investors
01:15need to focus on is actually temperament. Because see, if you go back and think introspect, you
01:23will find that it was very easy for you to know that in 2007 you had to be cautious because
01:30markets were costly. In 2008 when markets were down after Lehman, you had to buy. And if you
01:38go back to recent periods of time in 2020 when COVID hit and the markets crashed, it was very
01:46easy to know that you had to buy. And in recent times because markets had done very well, you
01:54had to be cautious is something which was very easy to know. But if you look at how investors
02:01behaved, it was exactly the opposite. In 2020, most investors found it very difficult to actually
02:08buy. And if you go back to the environment, let's say three to six months back, it was very difficult to persuade
02:14people that equity market carried risks. That's why on the eve of Diwali actually we gave an interview
02:22saying that equity market is not a fixed deposit. Because the fact is that temperament is possibly the
02:31most important thing in investing. And I would say that if you had to think of a top strategy for all time, I would say temperament
02:41would be the top strategy. The second, I would say is very, very, again, very, very easy. Actually, most people when they spend money, let's assume they decide they're going to buy a two-wheeler for 40, 50,000 rupees, they would normally ask
03:04older holders of that two-wheeler, let's say you and ask that particular older holder, are you happy with that two-wheeler? Or if you're buying a car, you would ask that car owner, any other person who had that particular brand whether they were happy with that car and that would be a decision, let's say of 10 lakh rupees.
03:2310 lakh rupees. But very few people, I have seen too many people taking decisions on the phone involving 10 lakh rupees to buy stocks without doing work. So to reduce that kind of impulsive decision-making in investing, particularly in stocks,
03:46one of the markets, one of the equity strategies that I've always recommended, which again is very, very simple, is that you create a journal and it can be a word document, it can be a notebook, it can be anything that you feel comfortable with,
04:05where before you take any decision to invest, you will write three to five lines on why you are taking that investment or disinvestment decision.
04:18It could be that Naren told you to buy on TV, it could be X told you to buy, but at least you will write three to five lines before you invest any amount of money in anything.
04:31And you will maintain that notebook or word document carefully for years.
04:36And then look back over the years, what did that journal actually tell you to do?
04:43And I would say that it is a strategy which is likely to give you good benefit because over a period of time,
04:52you will realize whether Naren gave you always bad investment ideas over a long period of time,
04:59or whether X, your good friend actually gave you always very, very bad ideas.
05:06And actually, if he told you to buy, you should have actually sold.
05:12Or what kind of benefit you got or what process you had followed actually helped you to make money or what process you followed hurt you.
05:26And, but you have to maintain that journal and the journal cannot be lost.
05:31So if you buy a notebook, you have to store that notebook.
05:35If you write a word document, you should keep that word document.
05:38Because these mistakes or these correct decisions, you should be able to introspect over years.
05:45Because the right investment decision is not something where the returns come in one month or two months.
05:52It happens over years.
05:54So I would say a simple thing would be to maintain a simple, and you don't need to write 100 lines.
06:00Deciding why you bought this share, it should be maximum 5 to 10 lines.
06:05But that 5 to 10 lines have to be bought.
06:07And people have asked me, when you maintain this journal, can it be done after the event?
06:12I tell them, no, it cannot be bought after the event.
06:14It has to be written before the event.
06:17Because the moment you start making it after the event, then you will forget about it.
06:22You will not do it.
06:23Whereas if you create that journaling process before the event, it will turn out to be something beneficial.
06:30Whereas if you make it after, I'm sure one of the days you will stop doing it.
06:35And then it will not work.
06:37So I would say it's a very simple process.
06:39Does it cost money?
06:40No.
06:41It costs one notebook or one word file.
06:44Word file doesn't cost you anything.
06:46But I would say this is a second, I would say.
06:49And these are strategies which are likely to work.
06:52Have I seen successes for people who have used this journaling model?
06:57I've seen big successes.
07:00How many percentage of the people have followed it of the people I've recommended?
07:05One out of five.
07:07Or one out of ten, I would say.
07:10But that one out of ten has succeeded and they have specifically told me that it has been a big success.
07:18And almost everyone who has followed it rigorously have found it a big success, actually.
07:25The third is what my guru Howard Marks told me about.
07:30He said at any point of time you have to ask one question to yourself.
07:35See at all points of time we want to make money.
07:38That I agree.
07:40But if you ask me, you have to ask yourself whether you want to make money or you want to actually protect your money.
07:52And markets are such that there are times when you have to protect your money and there are times when you have to make money.
07:59So you know when markets have delivered huge returns, normally the goal should be to protect your money.
08:11And when markets have delivered huge losses, actually it should be to make money.
08:17And what Howard Marks my guru says is, you have to first define at any point of time which of the two goals you have.
08:24Whether your goal is to make money or whether your goal is to protect money.
08:30So as I meet you today in February 2025, the goal has to be to protect the money you have made.
08:39Because anyone who has invested, for example, in equity in the last five years has made money.
08:45Anyone who has invested in real estate in the last five years has made money.
08:50Real estate is trading at the highest price possibly all over India.
08:54And anyone who has invested in equities also has made money over the last many years.
09:00So today the goal has to be to actually protect the money you have made.
09:05Whereas if you go back to 2020, real estate in the last seven years from 2013 to 2020 had delivered almost zero returns.
09:18Equity had done very badly.
09:20So the goal in 2020 should have been to make money.
09:25It cannot be to protect money because for seven years, 2013 to 2020, real estate had delivered no returns.
09:34And the entire goal was actually should have been in 2020 to make money.
09:44Because in the last seven years, you did not make money either in real estate or in equity.
09:49So the decision whether to try to make money or to protect money should be based on whether people have made a lot of money or actually lost a lot of money.
10:02So if people have lost a lot of money, then I think the goal should be to try to make money.
10:09But instead, if people have made too much money, then I think the goal has to be to protect the money.
10:16This is what my guru Howard Mark says.
10:19So suppose you are in the United States of America and you have made huge money in the technology stocks.
10:26Today the goal should be to protect the money.
10:29Whereas if you are, let's assume, in Brazil, where for 10 years the return has been negative and you have made no money, the goal has to be to try to make money.
10:40And that is the goal that has to be because for 10 years in Brazil, you have lost 20% of your return.
10:49In 10 years, the return was minus 20% in Brazil.
10:53So the goal has to be to try to make money in Brazil.
10:57Whereas the goal, if you are in US and you are in all those FANG stocks, has to be to protect the money you have made.
11:06So coming to the environment and this is something where I must thank Outlook for giving me this opportunity.
11:12See, I am a person who has spent 35 years in financial markets.
11:16So what is worrying me at this point of time?
11:20What is worrying me at this point of time is that the entire risk today in markets is being taken by investors.
11:33You know, I started working in 1989.
11:36At that point of time, all the risk in the economy was being taken by development financial institutions.
11:44Between 92 and 95, all the risk was taken by the investors.
11:49Then after that, in 2007, 8, 9, all the risks were taken by corporates, supported by banks.
11:58Today, you will be surprised, all the risks are taken by investors.
12:03Today, if a company wants to buy a company, any other company, they buy the company immediately do a qualified institutional placement and investors invest in it.
12:14Does the company borrow money for it?
12:16They don't borrow virtually.
12:17They just issue equity and raise money.
12:21So the investors are investing.
12:23Do banks have to finance most of the projects?
12:28The answer is no, because most of the projects are funded by the equity market.
12:34Most of the private equity investors sell the equity to investors.
12:39So all the risks are taken by you.
12:42This means that all the investors in India have to be very careful because the investors are taking the risks in the market.
12:54The companies are comfortable.
12:57They are very, very comfortably placed.
13:00Banks also are not lending to corporates because corporates don't need the money.
13:05Whenever corporate needs the money, they come and do an IPO.
13:08You should see how many IPOs are happening.
13:11Even the smallest company, which is a very, very small company, manages to do an SME IPO.
13:17You will be surprised to note what I've heard from many of my friends today.
13:23Companies which don't even get listed are able to raise unlisted stocks from many investors.
13:29So the risks are being taken by investors.
13:34In my opinion, do the investors know that they are taking so much risk?
13:39I do not know.
13:40But I worry about it.
13:42Whether they know that they are taking all the risks that are there.
13:46And the issuer is not taking the risk.
13:50The investment banker is not taking the risk.
13:52Mutual fund is also not supposed to take a risk.
13:57Because what happens to a mutual fund is that a mutual fund is someone,
14:02suppose you give me money in a small cap fund, I invest in small cap stocks.
14:06If you give me money in a mid cap fund, I invest in a mid cap stock.
14:10So I am also not taking the risk.
14:12So when I think of top strategies for all of you in the equity market,
14:17what you should know is that today all the risks in the equity market are being taken by investors.
14:25So that is the current situation at this point of time and you should be aware of it.
14:30So coming to the market, it's actually very simple.
14:33The small cap and mid caps are overvalued.
14:36They have never been as overvalued as they are today.
14:40The large caps are not so overvalued.
14:44Why has this happened?
14:46This has happened because FIS have sold heavily in large caps in the last four months.
14:53In the last four months, they have sold more than one lakh crores of large caps primarily.
14:58So the mid caps and small caps are very overvalued compared to the large caps at this point of time.
15:04The mid caps and small caps have never been as costly as they have been today at this point of time.
15:09And barring maybe 2007, I don't think there has been a time when mid caps and small caps have been as overvalued as they are today.
15:18And we have a situation.
15:20So what we do as a house is, as I mentioned, considering that we believe that investors have to be more careful today and they have to try to protect the money in equity.
15:31We have been recommending asset allocation.
15:34What is asset allocation?
15:36Asset allocation involves investing in equity.
15:38It involves investing in debt, which no one wants to invest.
15:42It involves investing in REIT, INVIT.
15:44If you can invest in global stocks also because with the exception of NASDAQ, most of the other markets have done very badly.
15:54Could be investing in gold and silver, but they have done too well.
15:58So asset allocation is investing in everything at this point of time and not just equity.
16:07The best equity strategy today is not to put all your money in equity because putting all your money in equity, particularly in mid cap and small cap, is extremely risky at this point of time.
16:19What is worse than investing in mid cap and small cap is investing in SME IPO.
16:26It is investing in unlisted stocks.
16:29Those two things are worse than investing in small cap and mid cap, but small cap and mid cap is also pretty risky at this point of time.
16:36And what we have seen is that over a period of time, people used to tell us, you always recommend asset allocation.
16:44Why do you recommend asset allocation? How will asset allocation do against small cap and mid cap?
16:49But what we realized is that, and here we have not used our funds because that's something that Outlook does not want us to market any of our funds.
17:00And that's the right thing to do in a forum like this.
17:03What we found is that the categories itself have delivered very, very decent returns despite not taking big risks.
17:12Because asset allocation as a framework is doing something which is good temperament, which is buying the asset class which has done badly and selling the asset class which has done well.
17:24And consequently, it turns out to be one of the best methods of investing for the long term.
17:31And it is not investing all your money in only equity at this point of time.
17:37So if you look at, for example, the multi asset category, it has delivered a three year return of 13%.
17:43The aggressive hybrid has delivered a 12 and a half percent return and this is in a bull market.
17:49It's not a market where equity has delivered bad returns, whereas Nifty has delivered a return of 10%.
17:56With the exception of the mid cap index, which has delivered a huge return, it has delivered very good returns against everything except the mid cap index.
18:06And that's why we believe that that is the best equity strategy to follow.
18:11Asset allocation is one of the best equity strategies to follow.
18:14And within the entire equity space, large cap is about the best area to invest in.
18:22You know, people ask me, you keep saying this, but is there a problem with Indian macro?
18:27The answer is no.
18:28Indian macro is in good shape.
18:31How do we define Indian macro?
18:33We look at Indian macro by looking at fiscal deficit, current account deficit and inflation.
18:38In all these three parameters, I would say that India is in good shape.
18:42There is no problem there.
18:44But the problem is that valuations are not cheap.
18:47And specifically the mid and small cap areas are very expensive.
18:53And people have been very exuberant, which is the reason SME IPO and people are buying unlisted stocks.
19:00And we believe that one of the things that people have to remember is that SIPs have to be invested in cheap asset classes and in volatile markets.
19:11What people think is SIP invested in costly asset classes can give good returns.
19:18So what we always recommend is invest SIP in cheap asset classes.
19:22What would be the cheaper asset classes today at this point of time would certainly be large cap, hybrid, flexi cap at this point of time.
19:30So if we have to choose SIP at this point of time, we will choose large cap, flexi cap and hybrid at this point of time.
19:38Because we think that what people don't realize is SIP in costly asset classes doesn't necessarily lead to good returns.
19:47If you are invested for 20 years, it doesn't matter.
19:50But if you are invested for shorter periods of time, whether you are investing in a costly asset class or a cheap asset class makes a difference.
19:59It will take some time for you to understand this because SIP is still an investment and SIP is not an FD.
20:05So that's why you should invest SIP in a cheaper asset class.
20:09And today large cap, flexi cap and hybrid are cheaper than small cap and mid cap.
20:14So what we like at this point of time is asset allocation, large cap or flexi caps.
20:19These are the things.
20:21If you are not in the tax bracket, I think debt is to be also considered for the last three years.
20:27No one has looked at debt for people below the 12 lakh limit that has been done in this year's budget.
20:34Clearly debt has to be considered.
20:36So in our opinion, equity strategies at this point of time have to be large cap focused, asset allocation focused and against small cap and mid cap and against unlisted and SME at this point of time.
20:49Thank you Outlook for the opportunity to talk to all of you.
20:54So please remember temperament is important.
20:57Journaling is useful.
20:59Think whether you are trying to make money or preserve your money.
21:03And I believe this is a time when you have to be a bit more careful than you were in 2020.
21:09But India remains a good structural story.
21:12So look forward to long term returns, but with volatility.
21:16Thank you all.
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