Anand Radhakrishnan makes a case for skepticism in investing

When I met Anand earlier this year in Chennai, it was just my second face-to-face interaction with him. Though I was meeting him after many years, I found him to be the same - amicable and easy to talk to.

Anand has not had it easy. When ITC and RIL were climbing the charts, he missed out on that rally. Some of his bets took a long while to bear fruit. Then there was the double whammy when the debt debacle hit and the AMC had to wind up six debt schemes, and the equity funds were not shooting out the lights.

I was eager to see how this journey has changed him. I reached out to him to participate in this series and he graciously obliged. Here is the conversation.

This is part of a series where I attempt to understand the behavioural traits and mindset of money managers and investors. At the end of this (slightly edited) transcript, I list the 20 individuals interviewed for this series.

ANAND RADHAKRISHNAN is the Chief Investment Officer - Equity at Franklin Templeton Asset Management (India) Pvt Ltd. 

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You have seen bear markets and bull runs. Your funds do well and badly. Your AMC go through ups and downs. How has this impacted your investing psyche? How have you evolved?

Markets don’t stay in a linear direction all the time. They go on a roller coaster ride. This leads to periodic highs and lows in the market and investor sentiment. If you want to travel this journey and survive these cycles, you need to at least partially mute these highs and lows.

It is not being excessively euphoric in good times or wallow in despair in bad times. A good fund manager has to be bestowed with this trait, either by nature or should consciously develop this ability. Some sort of equanimity is required. A healthy dose of skepticism is required.

If you can question anything obsessively optimistic or pessimistic, you will be able to handle the roller coaster ride. Skepticism prevents you from losing money if you are slightly doubtful.

Very early in my career, I was lucky to have a coach/boss who helped me develop this attitude of questioning, of challenging assumptions, not getting swayed by the tide, or excessively going with the flow. The flip side is that you could miss some good opportunities. And I have had my share of big misses. Fairly simple straightforward ideas which look good to the naked eye, if you start doubting and excessively questioning, you miss the bus.

So you have to arrive at a balance that works for you.

How did you feel when you missed those bets?

Obviously, I felt bad about it. There is a lot of regret that comes out of missing a good idea. And you have to go back and correct it. So you need to consciously mute down this skepticism at times.

Some are naturally optimistic. They don’t have the problem of missing ideas; in fact they may catch some bad ideas as well.

Vigorous analysis and thinking is needed; that can’t be avoided in either case.

When you started off were you a skeptic or optimistic?

I used to be very optimistic. I started my career in 1994. I was out of B-school. Bullish. Positive. Changing the way investment management was done in this country. The economy was doing well. The coming of the Liberalization era. Strangely, the next five years were one of the toughest periods in the market. We were brought down to reality and had to face the question: If the economy is doing well, why is the market not doing well?

I had to adjust myself to the reality of the market and be more realistic.

You said that a good track record doesn’t happen by accident. What traits helped you deliver this track record?

Like in any other profession, excellence and longevity doesn’t happen by accident. It is not coincidence. It is not happenstance. A good track record is the outcome of doing things in a systematic manner.

I think early in your career it is important to develop a consistent style. Irrespective of the size of the money you manage. There were times I was managing barely Rs 20 crore of assets in a particular fund. And my boss would tell me to imagine that I was handling Rs 2,000 crore, and act accordingly. You cannot adopt a particular style for a small fund, show performance, gather more assets, and then totally adopt a different style. That won’t give you a consistent track record. You need a particular style that is by and large stable and constant.

It doesn't mean that you don’t incorporate the learnings of the market into your style, but it means that you don’t swing from one extreme approach of investing to another.

Very early on you must accept that you are on a learning curve. You cannot start with the assumption that you know how to make good investments. Instead, the approach should be “I am learning how to make good investments, and I will keep learning and tweaking and adjusting towards changing realities.” Open mindedness and learnability are very important to have a good track record over a period of time.

You speak of consistent style. Is there anything you would do differently today than what you would have done a decade or so ago?

I used to maintain records diligently - investment decisions, key meetings, learnings from corporates, understanding of market cycles. This I did for the first 10-12 years of my career. Then I started relying more on memory and less on my notes, or diary, if I may say so. Now I totally operate out of memory.

I should have continued to keep a diary of my good decisions, bad decisions, mediocre decisions. Of when I made a mistake and why I made that mistake.

There were times I was cautious or conservative in my investment decisions. As a result, I have let go of meaningful opportunities which could have added a few percentage points to investors’ returns. That I would have liked to change.

When you second guess some of your stock picks. How much does gut feel come into play?

I am not at all that type of a person. I am a numbers person. I excessively rely on analytical inputs. Rational points.

Having said that, with certain businesses you don’t have to break your head to know that it is a good business you can invest in. While numbers can help you get that understanding, you need to have a good feeling about it when investing in that company.

The outcome of any investment decision is only probabilistic, not deterministic. You don’t know for a fact if it will make good returns or not. But you look at the variables put together and analyse whether it is a good recipe for success. You look at past experiences and what others have done. And you know if you have a possible winning candidate. But once you take the decision, there are a multitude of other possibilities which can happen as well. Regulations. Competition. These can derail your hypothesis. Then gut feel no longer works. You got to go back to the drawing board and relook your assumptions.

You need a good sounding board, someone you can brainstorm with and seek feedback, instead of getting caught up in our mind’s echo chamber. Otherwise you keep dwelling on the same idea even though reality has changed. That’s when the advantage of working with a team of professionals helps.

In all the decades that you managed money, what gave you sleepless nights?

When the management does something you have not budgeted for. Something odd. Not in consonance with the way I have formulated my thesis around an idea. Then I get worked up. Those are not pleasant conversations to have with the management. And more often than not it leads to a change in view or opinion. Changing the view is easy, changing the investment is tougher because it takes a lot more time and effort to move out of an investment, specially when your investment thesis gets changed.

Poor governance or a string of bad decision making by management has given me reasonable trouble in the past.

As a fund manager, you have a lot of regulations and restrictions when it comes to your private portfolio. Let’s say you quit your job and now have a completely free hand to manage your personal portfolio as you deem fit. Where would you invest? What would your asset allocation look like?

Firstly, I would get more disciplined about my own investments. I have not sweated my savings as much as I would have liked to. I go through a phase of lazy accumulation of savings. And then suddenly go on a lumpsum investment spree. Which is contrary to what I preach – systematic investing.

So the first thing I would do is be more disciplined and structured about my investments, rather than sporadic and adhoc.

I would not change much in my asset allocation. The portion I have allocated for my children or my retirement, I don’t need to be conservative about it. I can take meaningful risks and take the volatility along with it as my time horizon is long. That would be predominantly equity. And the rest in fixed income or low risk assets. As you age, it changes.

If I had to put a number, it would be 30% in low risk and 70% in better yielding volatile assets.

If you had to take one learning from all your decades of experience to tell yourself starting out, or a very young asset manager, what would it be?

Don’t start with a definitive view on investments. Don’t say “I like this philosophy of making money”. You never know till you make serious money. What works for you is different than what works for someone else. Have an open-minded approach to investing. Gravitate towards a mix of styles that suits you personally or what you represent. It is easy to get carried away by catchy books or sloganeering of branded form of investments. It is tough to have your own grounding on where you feel most confident of making investments. You need to feel comfortable about the kind of path you are choosing whether investing your own money or your clients. Don’t do something that makes you feel uncomfortable.

1. Prashant Jain
2. Sankaran Naren
3. Nilesh Shah
4. Vetri Subramaniam
5. Anand Radhakrishnan
6. Devina Mehra
7. Saurabh Mukherjea
8. Raunak Onkar
9. Samir Arora
10. Kenneth Andrade
11. Rajeev Thakkar
12. Aswath Damodaran
13. Ian Cassel
14. Vishal Khandelwal
15. Sanjay Bakshi
16. Ramesh Damani
17. Jim Rogers
18. Ben Carlson
19. Mohnish Pabrai
20. Christine Benz