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Investing in equities is a continuous process and we all have to learn from our mistakes - S Naren

| 11/21/2011 4:06 PM Monday

What prompted you to take up fund management as a career option?

Initially I spent four years in investment banking. Around 1989-90 there wasn’t anything called as equity research. Then from 1994 to 2004 I was engaged in broking and then joined ICICI Pru AMC in 2004. I had actually done my engineering but was keener on working in the equity markets.

What is your investing philosophy?    

I am more in favour of value-oriented and contra-oriented investing. However, in India we manage mostly ‘growth at a price’ funds. So the strategy that we follow as a team is growth at reasonable price with a small value tinge. This means, when you have a basic style which is value oriented and a fund style which is growth at a reasonable price, a little bit of value will come even in that growth at a reasonable price. Rather I would put it in a more simple way that the basic style of the fund house is to have growth at a reasonable price. Personally I think, investors should look at value-based investing.

Why is everyone not in favour of value-based investing then?

Value-based investing can be an unstable strategy over a short-term period. That is because it does not guarantee returns in the short run. The value-based approach failed when the markets became irrational as during 1997-99 and 2007. It is a good strategy for a person like Warren Buffet to follow but not an ideal one when public money is involved.

So now coming to the basic question. How do you select stocks?

While buying stocks, we try to look at why is that seller is selling and then we ask ourselves, why are we buying? Remember, every trade in the stock market, which people tend to forget is because there is a seller and a buyer. The seller is selling for a certain reason and the buyer is buying for a certain reason. So what we essentially try to do is that we have a buy argument and then we also try to figure out why the seller is selling.

Do you follow some investing rules?

We do follow some basic rules. For instance, we look at the valuation of a company and study the reasons why a particular scrip will generate returns. But more than the rules, it is important to have a framework which is what helps you to make money. Rules and framework are two different things. For example, a basic rule is that you should not invest more than 10 per cent in any one stock but a framework will be more flexible because it will look at the larger picture of how the investment will generate returns. A framework is also important for team members to be able to communicate well. One single person will not know everything and that is why team effort based on a broader framework helps to take the right approach.

What was your first big investing idea that really worked?

In 2007 when the trading was generally at a low level, I decided to shift from the infrastructure to the pharmaceutical sector. It made me aware of the fact that institutional investing has to follow a different framework from retail investing. That is because in institutional investing the money comes and goes at particular times.

What are the crucial indicators to determine the right timings for entry and exit in a counter?

Following the style adopted by legendary investor Warren Buffet, it works well to look out for a great company with a current problem to be able to buy it cheap. To cite one instance, that is what Buffet did in 2008 with Bank of America. Also, one must keep a track of the cyclical stocks. You must be able to make money when the valuations are in your favour. The process of switching from one stock to the other or one sector to the other is also important. Concept-based stocks must be tracked carefully too.

Do you meet the management of the companies?

Yes, we do encourage meeting the management of the companies we are investing in because it helps us to know how the business is being run and what is the motivation driving them ahead. This gives information that is in addition to the normal factors such as valuation, financials, etc.

How important is technical analysis?

More than technical analysis we look at behavioural factors. That is to say we study the reasons for the stock being sold or bought.

What are the indicators you follow?

We see how much a particular stock has underperformed in relation to the benchmark and whether the ownership pattern has changed. For example, FIIs now have stakes in many companies and it is important to track these changes. We also study the business model of each company and of course the valuations.

Have you ever gone wrong?

No one can claim not to have gone wrong sometime or the other. Investing in equity markets is a continuous process and we all have to learn from our mistakes.

What is more important–selection of stocks or sectors?

Sometimes it is important to choose the correct stock in a given sector but my native style is to choose the right stock even in a bad sector. This is again something I have learned from observing Warren Buffet’s investment style. At the same time, sector selection is equally important too.

How difficult it is to recognise a bear market?

You can recognise when a market is going cheap but you cannot guess what will happen to the market next because the prices are all based on the behavioural pattern of the stocks. Therefore, I believe more in the cycles because it helps to understand the vicissitudes of the market in a more informed way.

What would you say to a layman about the equity markets?

Many people still continue to believe that the equity market is where you can earn some quick money as in gambling. But a wiser approach is to have a perspective of long-term investing. You have to create a framework and operate within it. Also, every investor must set his priorities about how long he can wait and whether the strategy suits his style. You have to ultimately choose an investing style that suits your purpose and objectives.

How does one develop the right model?

You should always see what you have done right ever since you have been investing. That will help you create a model.

How significant role does a fund manager plays? Or in other words, is it possible for an investor to act on his own?

In India, only about 5 per cent of the investors manage their investments in the equity market on their own. The rest of them prefer the services of fund managers. An individual investor must have very good knowledge about the markets and know the behavioural pattern to be able to make the right investments.


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