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.
Read more: https://www.outlookmoney.com/retirement/invest/equity-and-mutual-funds/outlook-money-40after40-temperament-journaling-knowing-when-to-make-money-or-exit-are-3-top-principles-says-sankaran-naren-of-icici-prudential-amc
#OutlookMoney40after40
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.
Read more: https://www.outlookmoney.com/retirement/invest/equity-and-mutual-funds/outlook-money-40after40-temperament-journaling-knowing-when-to-make-money-or-exit-are-3-top-principles-says-sankaran-naren-of-icici-prudential-amc
#OutlookMoney40after40
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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 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,
02:55let's assume they decide they're going to buy a two-wheeler for 40, 50,000 rupees, they would normally ask older holders of that two-wheeler,
03:07let's say, and ask that particular older holder, are you happy with that two-wheeler? Or if you're buying a car, you would ask
03:15that car owner, any other person who had that particular brand, whether they were happy with that car, and that would be a decision,
03:22let's say, of 10 lakh rupees. But very few people, I have seen too many people taking decisions on the phone involving 10 lakh rupees to buy
03:33stocks without doing work. So to reduce that kind of impulsive decision-making in investing, particularly in stocks,
03:48one of the equity strategies that I've always recommended, which again is very, very simple, is that you create a journal,
03:57and it can be a word document, it can be a notebook, it 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 are 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 will write three to five lines
04:29before you invest any amount of money in anything, and 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?
04:44And I would say that it is a strategy which is likely to give you good benefit, because over a period of time,
04:54you will realize whether Naren gave you always bad investment ideas over a long period of time,
05:00or whether X, your good friend, or whether X, your good friend, actually gave you always very, very bad ideas,
05:08and actually 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.
05:27But you have to maintain that journal, and the journal cannot be lost.
05:32So if you buy a notebook, you have to store that notebook.
05:36If you write a word document, you should keep that word document,
05:39because these mistakes or these correct decisions, you should be able to introspect over years,
05:47because the right investment decision is not something where the returns come in one month or two months,
05:53it 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 this share, it should be maximum 5 to 10 lines,
06:06but 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,
06:13I tell them, no, 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 beneficial.
06:32Whereas if you make it after, I am sure one of the days you will stop doing it, and then it will not work.
06:37So I would say it is a very simple process, does it cost money, no, it costs one notebook or one word file,
06:45word file does not cost you anything, but I would say this is a second, I would say.
06:49And these are strategies which are likely to work.
06:53Have I seen successes for people who have used this journaling model?
06:58I have seen big successes.
07:01How many percentage of the people have followed it of the people I have recommended?
07:06One out of five, or one out of ten I would say.
07:11But 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.
07:26The third is what my guru Howard Marks told me about.
07:31He said at any point of time you have to ask one question to yourself.
07:37See at all points of time we want to make money.
07:40That 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.
07:51And markets are such that there are times when you have to protect your money.
07:58And there are times when you have to make money.
08:02So, you know, when markets have delivered huge returns,
08:07normally the goal should be to protect your money.
08:10And when markets have delivered huge losses, actually it should be to make money.
08:18And what Howard Marks, my guru, says is,
08:21you have to first define at any point of time which of the two goals you have.
08:25Whether your goal is to make money or whether your goal is to protect money.
08:31So, as I meet you today in February 2025, the goal has to be to protect the money you have made.
08:40Because anyone who has invested, for example, in equity in the last five years has made money.
08:46Anyone who has invested in real estate in the last five years has made money.
08:51Real estate is trading at the highest price possibly all over India.
08:55And anyone who has invested in equities also has made money over the last many years.
09:01So, today the goal has to be to actually protect the money you have made.
09:07Whereas if you go back to 2020,
09:11real estate in the last seven years from 2013 to 2020 had delivered almost zero returns.
09:19Equity had done very badly.
09:21So, the goal in 2020 should have been to make money.
09:26It cannot be to protect money.
09:28Because for seven years, 2013 to 2020, real estate had delivered no returns.
09:37And the entire goal was actually, should have been in 2020 to make money.
09:45Because in the last seven years, you did not make money either in real estate or in equity.
09:50So, the decision whether to try to make money or to protect money should be based on whether
09:57people have made a lot of money or actually lost a lot of money.
10:03So, 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.
10:17This is what my guru Howard Marks says.
10:20So, suppose 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.
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,
10:39the goal has to be to try to make money.
10:42And 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 FAANG 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.
11:13See, I am a person who has spent 35 years in financial markets.
11:17So, 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.
11:34You know, I started working in 1989.
11:37At 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.
11:50Then, after that, in 2007, 8, 9, all the risks were taken by corporates, supported by banks.
11:59Today, you will be surprised.
12:01All the risks are taken by investors.
12:05Today, if a company wants to buy a company, any other company, they buy the company,
12:10immediately do a qualified institutional placement and investors invest in it.
12:15Does the company borrow money for it?
12:17They don't borrow virtually.
12:18They just issue equity and raise money.
12:22So, the investors are investing.
12:25Do banks have to finance most of the projects?
12:29The answer is no, because most of the projects are funded by the equity market.
12:36Most of the private equity investors sell the equity to investors.
12:40So, all the risks are taken by you.
12:44This means that you, all the investors in India, have to be very careful.
12:49Because the investors are taking the risks in the market.
12:54The companies are comfortable.
12:58They are very, very comfortably placed.
13:01Banks also are not lending to corporates.
13:04Because corporates don't need the money.
13:06Whenever corporate needs the money, they come and do an IPO.
13:09You should see how many IPOs are happening.
13:12Even the smallest company, which is a very, very small company, manages to do an SME IPO.
13:20You will be surprised to note what I have heard from many of my friends today.
13:24Companies which don't even get listed are able to raise unlisted stocks from many investors.
13:29So, the risks are being taken by investors.
13:35In my opinion, do the investors know that they are taking so much risk?
13:40I do not know.
13:41But I worry about it.
13:43Whether they know that they are taking all the risks that are there.
13:48And the issuer is not taking the risk.
13:51The investment banker is not taking the risk.
13:55Mutual fund is also not supposed to take a risk.
13:57Because what happens to a mutual fund is that a mutual fund is someone...
14:04Suppose 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.
14:11So, I am also not taking the risk.
14:14So, when I think of top strategies for all of you in the equity market,
14:18what 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.
14:32So, coming to the market, it is actually very simple.
14:35The small cap and mid caps are overvalued.
14:38They have never been as overvalued as they are today.
14:42The large caps are not so overvalued.
14:44Why has this happened?
14:47This has happened because FIS have sold heavily in large caps in the last four months.
14:54In the last four months, they have sold more than 1 lakh crores of large caps primarily.
14:59So, the mid caps and small caps are very overvalued compared to the large caps at this point of time.
15:05The mid caps and small caps have never been as costly as they have been today at this point of time.
15:11And 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.
15:20And we have a situation.
15:21So, what we do as a house is, as I mentioned, considering that we believe that investors have to be more careful today
15:29and they have to try to protect the money in equity, we have been recommending asset allocation.
15:35What is asset allocation?
15:36Asset allocation involves investing in equity.
15:39It involves investing in debt, which no one wants to invest.
15:43It involves investing in REIT, INVIT.
15:46If you can invest in global stocks also, because with the exception of NASDAQ, most of the other markets have done very badly.
15:55Could be investing in gold and silver, but they have done too well.
15:59So, 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.
16:13Because putting all your money in equity, particularly in mid cap and small cap, is extremely risky at this point of time.
16:20What is worse than investing in mid cap and small cap is investing in SME IPO.
16:27It 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 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.
16:45Why do you recommend asset allocation?
16:46How will asset allocation do against small cap and mid cap?
16:50But 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.
17:01And that's the right thing to do in a forum like this.
17:04What we found is that the categories itself have delivered very, very decent returns despite not taking big risks.
17:13Because 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.
17:25And 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.
17:38So, if you look at, for example, the multi asset category, it has delivered a three year return of 13%.
17:44The aggressive hybrid has delivered a 12.5% return and this is in a bull market.
17:50It'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.
18:07And that's why we believe that that is the best equity strategy to follow.
18:11So, asset allocation is one of the best equity strategies to follow.
18:15And within the entire equity space, large cap is about the best area to invest in.
18:23You know, people ask me, you keep saying this, but is there a problem with Indian macro?
18:28The answer is no.
18:29Indian macro is in good shape.
18:32How 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.
18:43There is no problem there.
18:44But the problem is that valuations are not cheap.
18:48And specifically, the mid and small cap areas are very expensive.
18:54And 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.
19:12What 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.
19:23What 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.
19:31So, 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.
19:39Because we think that what people don't realize is SIP in costly asset classes doesn't necessarily lead to good returns.
19:48If 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 or a cheap asset class makes a difference.
20:00It will take some time for you to understand this because SIP is still an investment and SIP is not an FD.
20:06So, that's why you should invest SIP in a cheaper asset class.
20:10And 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.
20:20These are the things.
20:22If 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.
20:29For people below the 12 lakh limit that has been done in this year's budget,
20:34clearly debt has to be considered.
20:37So, in our opinion, equity strategies at this point of time have to be large cap focused,
20:43asset allocation focused and against small cap and mid cap and against unlisted and SME at this point of time.
20:50Thank you, Outlook, for the opportunity to talk to all of you.
20:55So, please remember temperament is important.
20:58Journaling is useful.
20:59Think whether you are trying to make money or preserve your money.
21:04And I believe this is a time when you have to be a bit more careful than you were in 2020.
21:10But India remains a good structural story.
21:13So, look forward to long-term returns but with volatility.
21:17Thank you all.