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.
#IDFCFIRSTBank #CelebrateRetirement #OutlookMoney40after40 #OutlookMoney #40After40 #FinancialPlanning
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.
#IDFCFIRSTBank #CelebrateRetirement #OutlookMoney40after40 #OutlookMoney #40After40 #FinancialPlanning
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LearningTranscript
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
02:41temperament would be the top strategy. The second I would say is very, very, again, very, very easy.
02:51Actually, most people when they spend money, let's assume they decide they're going to buy a two-wheeler
03:00for 40,000, 50,000 rupees, they would normally ask older holders of that two-wheeler, let's say,
03:08your, and ask that particular older holder, are you happy with that two-wheeler? Or if you're buying a car,
03:14you would ask that car owner, any other person who had that particular brand, whether they were happy
03:20with that car, and that would be a decision, let's say, of 10 lakh rupees. But very few people,
03:26I have seen too many people taking decisions on the phone involving 10 lakh rupees to buy stocks
03:35without doing work. So to reduce that kind of impulsive decision-making in investing, particularly in
03:45stocks, one of the equity strategies that I've always recommended, which again is very,
03:52very simple is that you create a journal, and it can be a word document, it can be a notebook,
04:03it can be anything that you feel comfortable with, where before you take any decision to invest,
04:10you will write three to five lines on why you're taking that investment or disinvestment decision.
04:17It could be that Naren told you to buy on TV, it could be X told you to buy, but at least you'll write
04:28three to five lines before you invest any amount of money in anything, and you'll maintain that
04:33notebook or word document carefully for years. And then look back over the years, what did that
04:40journal actually tell you to do? And I would say that it is a strategy which is likely to give you
04:50good benefit because over a period of time, you will realize whether Naren gave you always bad investment
04:58ideas over a long period of time, or whether X, your good friend actually gave you always very,
05:05very, very bad ideas. And actually, if they if he told you to buy, you should have actually sold,
05:14or what kind of benefit you got, or what process you had followed actually helped you to make money,
05:24or what process you followed hurt you. And but you have to maintain that journal and the journal
05:31cannot be lost. So if you buy a notebook, you have to store that notebook. If you write a word document,
05:37you should keep that word document. Because these are mistakes or these correct decisions,
05:43you should be able to introspect over years. Because the right investment decision is not something
05:50where the returns come in one month or two months, it 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,
06:02deciding why you bought the share, it should be maximum 5 to 10 lines, but that 5 to 10 lines have to be bought.
06:08And people have asked me when you maintain this journal, can it be done after the event? I tell them,
06:13no, it cannot be bought after the event. It has to be written before the event.
06:17Because the moment you start making it after the event, then you will forget about it, you will not do it.
06:24Whereas if you create that journaling process before the event, it will turn out to be something
06:31beneficial. Whereas if you make it after, I'm sure one of the days you will stop doing it and then it
06:36will not work. So I would say it's a very simple process. Does it cost money? No. It costs one notebook
06:44or one word file. Word file doesn't cost you anything. But I would say this is a second, I would
06:49say. And these are strategies which are likely to work. Have I seen successes for people who have used
06:56this journaling model? I've seen big successes. How many percentage of the people have followed it of
07:05the people I've recommended? One out of five. Or one out of ten, I would say. But that one out of ten has
07:13succeeded and they have specifically told me that it has been a big success. And almost everyone who
07:20has followed it rigorously have found it a big success, actually. The third is what my guru Howard
07:29Marks told me about. He said at any point of time, you have to ask one question to yourself. See, at all
07:37points of time, we want to make money. That I agree. But if you ask me, you have to ask yourself whether
07:45you want to make money or you want to actually protect your money. And markets are such that there are
07:55times when you have to protect your money. And there are times when you have to make money.
08:02So, you know, when markets have delivered huge returns, normally the goal should be to protect
08:09your money. And when markets have delivered huge losses, actually it should be to make money.
08:18And what Howard Marks my guru says is, you have to first define at any point of time,
08:23which of the two goals you have. Whether your goal is to make money or whether your goal is to
08:30protect money. So, as I meet you today in February 2025, the goal has to be to protect the money you
08:39have made. Because anyone who has invested, for example, in equity in the last five years has made
08:45money. Anyone who has invested in real estate in the last five years has made money. Real estate is
08:52trading at the highest price possibly all over India. And anyone who has invested in equities also
08:58has made money over the last many years. So, today the goal has to be to actually protect the money
09:04you have made. Whereas if you go back to 2020, real estate in the last seven years from 2013 to 2020
09:16real estate had delivered no returns. Real estate had delivered no returns.
09:22So, the goal in 2020 should have been to make money. It cannot be to protect money. Because for seven
09:29years, 2013 to 2020, real estate had delivered no returns. And the entire goal was actually should
09:42have been in 2020 to make money. Because in the last seven years, you did not make money either in real
09:49estate or in equity. So, the decision whether to try to make money or to protect money should be based on
09:57whether people have made a lot of money or actually lost a lot of money. So, if people have lost a lot of
10:04money, then I think the goal should be to try to make money. But instead, if people have made too much
10:12money, then I think the goal has to be to protect the money. This is what my guru Howard Marks says. So,
10:20suppose you are in United States of America and you have made huge money in the technology stocks.
10:27Today, the goal should be to protect the money. Whereas if you are, let's assume, in Brazil, where
10:34for 10 years, the return has been negative and you have made no money, the goal has to be to try to make
10:40money. And that is the goal that has to be because for 10 years in Brazil, you have lost 20% of your
10:49return. In 10 years, the return was minus 20% in Brazil. So, the goal has to be to try to make money
10:56in Brazil. Whereas the goal, if you are in US and you are in all those FAANG stocks, has to be to
11:03protect the money you have made. So, coming to the environment, and this is something where
11:10I must thank Outlook for giving me this opportunity. Say, I am a person who has spent 35 years in
11:15financial markets. So, what is worrying me at this point of time? What is worrying me at this point
11:22of time is that the entire risk today in markets is being taken by investors? You know, I started
11:35working in 1989. At that point of time, all the risk in the economy was being taken by development
11:41financial institutions. Between 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 corporate, supported by banks.
11:59Today, you will be surprised. All the risks are taken by investors.
12:05Today, if a company wants to buy a company, any other company, they buy the company immediately do a
12:11qualified institutional placement and investors invest in it. Does the company borrow money for it?
12:17They don't borrow virtually. They just issue equity and raise money. So, the investors are investing.
12:25Do banks have to finance most of the projects? The answer is no, because most of the projects
12:32are funded by the equity market. Most of the private equity investors sell the equity to investors.
12:40So, all the risks are taken by you. This means that all the investors in India have to be very careful
12:50because the investors are taking the risks in the market. The companies are comfortable. They are very,
12:59very comfortably placed. Banks also are not lending to corporates because corporates don't need the money.
13:06Whenever corporate needs the money, they come and do an IPO. You 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.
13:20You'll be surprised to note what I've heard from many of my friends today. Companies which don't even
13:25get listed are able to raise unlisted stocks from many investors.
13:30So, the risks are being taken by investors. In my opinion, do the investors know that they're taking so
13:39much risk? I do not know. But I worry about it, whether they know that they're taking all the risks
13:46that are there. And the issuer is not taking the risk. The investment banker is not taking the risk.
13:53Mutual fund is also not supposed to take a risk. Because what happens to a mutual fund is that a
14:01mutual fund is someone, suppose you give me money in a small cap fund, I invest in small cap stocks.
14:07If you give me money in a mid cap fund, I invest in a mid cap stock. So, I'm also not taking the risk.
14:14So, when I think of top strategies for all of you in the equity market, what you should know
14:19is that today, all the risks in the equity market are being taken by investors. So, that is the
14:27current situation at this point of time and you should be aware of it. So, coming to the market,
14:33it's actually very simple. The small cap and mid caps are overvalued. They have never been as
14:39overvalued as they are today. The large caps are not so overvalued. Why has this happened? This has
14:47happened because FIS have sold heavily in large caps in the last four months. In the last four months,
14:55they have sold more than one lakh crores of large caps primarily. So, the mid caps and small caps are
15:01very overvalued compared to the large caps at this point of time. The mid caps and small caps have never
15:07been as costly as they have been today at this point of time. And barring maybe 2007, I don't think
15:14there has been a time when mid caps and small caps have been as overvalued as they are today.
15:20And we have a situation. So, what we do as a house is, as I mentioned, considering that we believe that
15:27investors have to be more careful today and they have to try to protect the money in equity. We have
15:32been recommending asset allocation. What is asset allocation? Asset allocation involves investing in
15:38equity. It involves investing in debt, which no one wants to invest. It involves investing in REIT, INVIT.
15:46If you can invest in global stocks also, because with the exception of NASDAQ, most of the other
15:53markets have done very badly. Could 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.
16:08The best equity strategy today is not to put all your money in equity, because putting all your money
16:14in equity, particularly in mid cap and small cap, is extremely risky at this point of time. What is worse
16:21than investing in mid cap and small cap is investing in SME IPO. It is investing in unlisted stocks.
16:30Those two things are worse than investing in small cap and mid cap, but small cap and mid cap is also
16:34pretty risky at this point of time. And what we have seen is that over a period of time, people used to
16:42tell us, you always recommend asset allocation. Why do you recommend asset allocation? How will asset allocation
16:48do against small cap and mid cap? But what we realized is that, and here we have not used our
16:55funds, because that's something that Outlook does not want us to market any of our funds,
17:01and that's the right thing to do in a forum like this. What we found is that as the categories itself
17:08have delivered very, very decent returns, despite not taking big risks. Because asset allocation as a
17:16framework is doing something which is good temperament, which is buying the asset class which has done
17:22badly and selling the asset class which has done well. And consequently, it turns out to be one of
17:28the best methods of investing for the long term. And it is not investing all your money in only equity at
17:36this point of time. So if you look at, for example, the multi-asset category, it has delivered a
17:42three-year return of 13%. The aggressive hybrid has delivered a 12 and a half percent return.
17:48And this is in a bull market. It's not a market where equity has delivered bad returns. Whereas Nifty
17:54has delivered a return of 10%. With the exception of the mid cap index, which has delivered a huge
18:01return, it has delivered very good returns against everything except the mid cap index. And that's why
18:07we believe that that is the best equity strategy to follow. Asset allocation is one of the best equity
18:13strategies to follow. And within the, within the entire equity space, large cap is about the best
18:21area to invest in. Now, people ask me, you keep saying this, but is there a problem with Indian macro?
18:28The answer is no. Indian macro is in good shape. How do we define Indian macro? We look at Indian macro by
18:35looking at fiscal deficit, current account deficit and inflation. In all these three parameters,
18:41I would say that India is in good shape. There is no problem there. But the problem is that valuations
18:46are not cheap. And specifically, the mid and small cap areas are very expensive. And people have been very
18:55exuberant, which is the reason SME IPO and people are buying unlisted stocks. And we believe that
19:02one of the things that people have to remember is that SIPs have to be invested in cheap asset classes
19:10and in volatile markets. What people think is SIP invested in costly asset classes can deal with,
19:17can give good returns. So what we always recommend is invest SIP in cheap asset classes. What would be the
19:23cheaper asset classes today at this point of time would certainly be large cap, hybrid, flexi cap at this
19:30point of time. So if we have to choose SIP at this point of time, we will choose large cap, flexi cap
19:36and hybrid at this point of time. Because we think that what people don't realize is SIP in costly asset
19:43classes doesn't necessarily lead to good returns. If you are invested for 20 years, it doesn't matter.
19:51But if you are invested for shorter periods of time, whether you are investing in a costly asset class
19:57or a cheap asset class makes a difference. It will take some time for you to understand this
20:02because SIP is still an investment and SIP is not an FD. So that's why you should invest SIP in a
20:08cheaper asset class. And today large cap, flexi cap and hybrid are cheaper than small cap and mid cap.
20:15So what we like at this point of time is asset allocation, large cap or flexi caps. These are the
20:21things. If you are not in the tax bracket, I think debt is to be also considered for the last three
20:27years. No one has looked at debt for people below the 12 lakh limit that has been done in this year's
20:34budget. Clearly debt has to be considered. So in our opinion, equity strategies at this point of time
20:41have to be large cap focused, asset allocation progress and against small cap and mid cap and
20:47against unlisted in SME at this point of time. Thank you, Outlook for the opportunity to talk to all
20:54of you. So please remember temperament is important. Journaling is useful. Think whether you are trying
21:01to make money or preserve your money. And I believe this is a time when you have to be a bit more careful
21:07than you are in 2020. But India remains a good structural story. So look forward to long term returns,
21:16but with volatility. Thank you all.
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