Often revered, sometimes criticized, but never ignored - Mutual Fund Managers in India are many a time accorded 'semi-celebrity' statuses by the investor and distribution communities. Collectively managing over Rupees 15 lakh crore on last count, Fund Managers have provoked a constant quest within the investment community to delve into their minds and come up with the so called 'pearls of investment wisdom' that could potentially morph them into ace investors too.
Earlier this month, ICICI Prudential Asset Management Company (recently crowned India's largest AMC by Assets Managed), hosted an "Impact Meet" at their head office at Mumbai's tony One BKC building. Attended by over twenty large Independent Financial Advisors from across the country, the meet was kicked off with an interesting talk by S. Naren (the company's Executive Director & Chief Investment Officer) during which he brought to light some of his much sought after 'investing secrets'. Some excerpts from his talk are summarized hereunder.
Firstly, it's vital to understand that successful investing consists of three equally important aspects - which are: Buying, Sizing and Selling respectively. Most investors concentrate the bulk of their energies on only one of these aspects (Buying), while laying a disproportionately low emphasis on the remaining two.
"80 per cent of time is spent on 'buying', most of an investor's thought process is centered around what stock to buy", said Naren, while stressing on the fact that one needs to have concrete strategies for the other two aspects as well.
When it comes to buying stocks, one needs to consider that broadly, three different categories of stocks exist: cyclical companies, steady companies, and trend based companies.
For cyclical companies, one needs to look beyond the bellwether Price to Earnings (P/E) Ratio as a means to determine their future growth potential. "For instance, when sugar prices rise, the earnings of sugar manufacturers will be high and their P/E ratios will be low. That doesn't necessarily qualify them as good investment opportunities - in fact, it's quite the opposite", Naren pointed out.
Investing in cyclical companies requires conviction and a rock solid temperament more than anything else - as these stocks can lie dormant for extended periods of time, only to start racing ahead and becoming multi-baggers later.
On the contrary, the P/E ratio is actually quite a reliable indicator for the second category of companies, which are the "steady" companies. These would include some of the staider blue-chip stocks, for instance the companies that comprise the NIFTY index. "Steady companies become cheap during bubbles", explained Naren, while describing how ICICI Prudential AMC effected a strategic shift from Infrastructure Stocks to FMCG and Pharma companies during the turbulent times surrounding the 2007-2008 period.
For tracking the third category of companies (Trend Based), it is advised to use common sense and intellect, while maintaining a watchful eye towards future trends - a prime example of which would be mobile telephony in the period around 2005.
"The younger you are, the better you can observe current trends. Engaging with high spenders and observing their spending patterns can come in handy", advised Naren.
The second aspect of successful investing is sizing, which is essentially nothing but determining the apportionment of your investment surplus among the various available and shortlisted options. A bottom up approach is advised here, as you neither want to under or over expose yourself to a particular security. Start with a minimum amount, and frequently ask yourself "have you bought enough?", thereby slowly building up to what is an optimal size of investment.
For the last and possibly the most vital aspect of investing ("when to sell out"), Naren offered an interesting technique which is based on behavioral psychology for than anything else. Rather than attempting to sell out at the top of a cycle by trying to "time the peak", one must aim to implement all portfolio level adjustments as "switch ideas".
In other words, it would be much wiser to use common sense and valuation indicators to "cut equity weightage" by switching from equity funds to debt funds rather than "selling out" of stocks in one shot. "Don't worry about the top. It's much easier to implement switches rather than implementing sells", is Naren's advice in this regard.
A few concluding words of advice were provided for those investors who preferred the Mutual Fund route to building stock portfolios themselves. First, think hard before opting for thematic funds (which are really meant for just 10 per cent of the investment populace). Stay put in diversified equity funds instead. Second, don't over diversify by investing in too many funds, as that could actually end up costing you in terms of long term performance. "Don't create a zoo of schemes", said Naren in conclusion.
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