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.
Equity Investment Strategies
"The biggest lesson I’ve learned in equity investing over the years is that temperament matters more than knowledge. Warren Buffett once said that having the highest IQ doesn’t guarantee success in investing. While many believe that deep knowledge is the key to making money in equities, what I’ve learned from studying great investors like Buffett and others is that managing your temperament is the most critical factor," Naren said.
In 2007, when markets were expensive, it was obvious that investors should have been cautious. In 2008, after the Lehman Brothers crisis, when markets were down, it was clear that it was time to buy. Similarly, during the 2020 COVID-19 crash, the right move was to buy. And yet, when you look at how investors behaved during these periods, most did the opposite. Many found it difficult to buy during downturns or acknowledge risks during market highs. For example, just three to six months ago, it was challenging to convince people that equity markets carried risks. That’s why, during Diwali, we gave an interview highlighting that equity markets are not fixed deposits, Naren added.
Temperament is the foundation of successful investing, and if I had to rank the most important strategies, temperament would be at the top.
Temperament
Naren said the biggest lesson that we have learned in equity investing over the years is that temperament is most important.
“If you are able to handle temperament, there’s a lot of money waiting to be made over the next few decades in investing in equity,” he said.
Naren cited the example of Warren Buffett and how he has long stressed that a high IQ does not guarantee great investment returns. Instead, it is an investor’s ability to remain rational and composed during market volatility that determines success.
“If you go back and introspect, you will find that in 2007, it was easy to know that markets were costly, and one had to be cautious. In 2008, after the Lehman collapse, one had to buy. Similarly, in 2020, when COVID hit and markets crashed, it was clear that one had to buy. But if you look at investor behaviour, they often did the opposite. In 2020, most found it difficult to buy, and more recently, persuading investors that markets carry risk has been tough,” added Naren.
Journaling
Let’s consider decision-making. When people buy a two-wheeler or a car, they usually seek advice from current owners about their experience. But when it comes to making large investments in stocks, many act impulsively without adequate research, as per Naren. "To reduce this impulsiveness, I recommend maintaining an investment journal."
"It could be a Word document, a notebook, or any format you prefer. Before making any investment decision, write down 3-5 lines explaining your rationale. Whether you’re acting on advice from a friend, a TV recommendation, or your own research, document it. Over time, review this journal to understand what worked and what didn’t. You may discover that certain sources of advice were consistently helpful or harmful," he said.
The key is to record your reasons before making an investment. If you write them after the fact, you may forget or lose the discipline to maintain the journal. This strategy doesn’t require any financial investment—just a notebook or a Word file. Those who have followed this method rigorously have found it extremely beneficial.
Knowing When To Make Money Xs. Protecting Money
Markets go through cycles, and there are times when the goal should be to protect your gains and times when you should aim to make money. When markets have delivered huge returns, focus on protecting your money. Conversely, when markets have suffered losses, focus on making money, as per Naren.
As of February 2025, given the strong returns in equities and real estate over the past five years, the goal should be to protect gains. However, in 2020, after years of subdued returns, the goal was to make money. The decision should always be based on whether investors have made substantial gains or suffered significant losses, Naren added.
For example, in the U.S., where technology stocks have delivered huge returns, the focus should be on protecting money. In contrast, in markets like Brazil, where returns have been negative over the past decade, the focus should be on making money, as per Naren.
Current Market Environment
"What concerns me today is that investors are taking on most of the risk in the market. When I started working in 1989, development financial institutions absorbed much of the risk. In the early 1990s, it shifted to investors, and by 2007-2009, corporates and banks bore the brunt of it. Today, however, the majority of the risk lies with investors," as per Naren.
When companies raise funds, they do so through equity rather than borrowing from banks. Even small companies can raise capital through SME IPOs or private placements. As a result, investors need to be cautious because they are carrying the bulk of the risk, he added.
Valuations and Asset Allocation
Currently, small-cap and mid-cap stocks are highly overvalued, while large-cap stocks are relatively more reasonably priced. Over the last four months, FIIs have sold over Rs 1 lakh crore worth of large caps, driving up valuations in the small- and mid-cap segments. The current overvaluation is comparable to 2007 levels, he explained.
Given this, we recommend an asset allocation strategy. This involves investing across equities, debt, real estate, global stocks, and gold or silver. The best strategy today is not to put all your money into equities, especially small- and mid-cap stocks, he added.
SIP Strategy: Invest in Cheaper Asset Classes
SIPs are a powerful tool, but they work best when invested in undervalued asset classes. Currently, large caps, flexi-caps, and hybrid funds offer better value compared to small- and mid-caps. While SIPs work well over long periods, investing in expensive asset classes can lead to subpar short-term returns, he added.
Maintain asset allocation as a core strategy
• Focus on large-cap, flexi-cap, and hybrid funds for SIPs
• Avoid overvalued segments like small caps and mid-caps
Additionally, the new tax provisions in this year’s budget for individuals earning below Rs 12 lakh should be factored into your investment plans, he opined.
Conclusion
To summarize, at this point, equity strategies should focus on large caps and asset allocation rather than chasing returns in the small- and mid-cap segments. Valuations in these segments are high, and investors need to be cautious. By maintaining discipline, managing risk, and allocating investments wisely, you can navigate this market environment effectively.
