Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Posted by Muthu on March 28, 2017

We’ve written many times in the past how investor earns much lesser than what the investment provides by jumping the ship in bad times, not staying the course, chasing performance, frequently churning the portfolio, redeeming during corrections, stopping SIPs, chasing current fad or fashion ignoring long term consistency across market cycles, timing the market, not understanding the power of time and compounding, inability to develop long term perspective and so on. The list of behavioural errors investors make is indeed very long.

In this piece, one of the well known financial advisor and popular blogger, Joshua Brown says:

“If a financial advisor could just accomplish one thing for clients – help them capture more of the returns that their own investments offer, then he or she has done something extremely worthy and valuable.

Minimizing these detractors from long-term returns is yeoman’s work and a mission that serious financial advisors are happy to undertake.”

He also points out that the index S&P 500 has provided 10.4% annualised return over last 30 years. During the same period, an average investor has earned only 3.7%.

This massive under performance is due to negative behavioural traits highlighted in the opening paragraph of this piece.

All our efforts are to ensure that you earn 100% of returns which your investment offers without any underperformance due to wrong behaviour.

I’ve taken it as a professional mission to make our clients earn 100% of investment returns.

It pains a lot, every time, when I see any one of you failing.

Help us to help yourself.

Posted in General, Muthu's Musings | Leave a Comment »

Stephen Jarislowsky and a Janitor

Posted by Muthu on March 26, 2017

I’ve been looking for and reading about investors who made it big through ‘buy & hold’ investing of quality companies.

Reading about them reinforces the required conviction to stay the course.

One such investor is Canadian billionaire Stephen Jarislowsky.

To make it really big, these investors started very early (usually in their twenties) and lived beyond eighties. This gave them the crucial variable of ‘time’ which is essential for compounding.

We neither started in twenties nor do not know how long we would live. If someone has investible surplus of Rs.10 crores at the age of 50, at 15% compounding, he would end up with Rs.160 crores  at the age of 70. Such is the power of compounding. We are not aiming for billions but may be few million dollars. We can achieve this despite starting late and not knowing about our longevity.

Stephen looks for high quality large cap companies which are non cyclical and can keep doubling their earnings every 5 to 7 years. He simply buys these companies and hold them forever.  He is now 91 years and started investing when he was in his twenties. He holds the stocks he bought as early as 1948. In fact his secret his ‘buy stocks you never plan to sell’. He believes the one thing investors need to learn is virtue of patience.  He shuns cyclical stocks and looks for industries like consumer staples, alcohol and healthcare which are stable and growing businesses.

He says that shares produce an average real return of 5% to 6% a year (after inflation). The earlier that you can start, the more miraculous will be the effects of compounding over a working life.

While I was reading about Stephen Jarislowsky, I stumbled upon the story of Ronald Read. Last year Ronald Read passed away at the age of 92. He was working as a janitor (door man) at JC Penney. Before that, for many decades, he worked as an attendant in a gas station. When he died, it was found that he has left $8 million in charities for local library and hospital. Nobody was aware that the door man at the local shop was a multi millionaire. He has also bought and has been holding high quality companies for many decades. He never went to college and was a high school dropout. He regularly used to read Wall Street Journal which should have aroused the curiosity of people around him. They completely missed this aspect of his life.

We may not become a Stephen Jarislowsky. But we all earn more and capable of investing much more than Ronald Read. Whether it is Stephen or Ronald, they held on to equities for decades completely ignoring news and noise. They never aspired for quick money and rated patience as the highest virtue in investing.

Without compromising current consumption and present life style, we all are capable of saving more, which we do. Where we occasionally fail is losing our patience and getting carried away by noise.

As I mentioned about stocks, let me give an example of equity fund as well. I was going through a brochure of HDFC Tax Saver. Rs.1 lakh invested in it twenty years ago has become Rs.1.04 crores now. Money multiplied by 104 times in 20 years. Rs.1 lakh invested systematically in it every year for last 20 years is now worth Rs.4.75 crores. An annualised return of more than 25%. Past has been wonderful and we expect future to be more modest but still provide a decent return of 15%.

Last 20 years there have been many negative news and events both in India and across the world. Those who stayed the course with tremendous patience would have built excellent wealth.

Have patience, give time and stay the course. Wealth is all yours.

Posted in Mutual Funds, Stock Market, Wealth | Leave a Comment »

The Coffee Can Portfolio

Posted by Muthu on March 21, 2017

The term ‘Coffee Can Portfolio’ was coined by Robert G Kirby in an article he wrote in 1984.

The concept harkens back to the Old West, where before the advent of the banks, when people put their valuable possessions in a coffee can and kept it under the mattress. They rarely disturbed the coffee can and held it for decades.

The firm in which Kirby worked used to keep buying and selling stocks for their clients. He felt that instead of frequently churning the portfolio, simply buying and holding good companies for long would be more rewarding. It involves less activity and provides better rewards as well.

He says, “The potential impact of this process was brought home to me dramatically as the result of an experience with one woman client. Her husband, a lawyer, handled her financial affairs and was our primary contact.  I had worked with the client for about 10 years, when her husband suddenly died. She inherited his estate and called us to say that she would be adding his securities to the portfolio under our management.

When we received the list of assets, I was amused to find that he had secretly been piggy backing our recommendations for his wife’s portfolio. Then when I looked at the total value of the estate, I was also shocked. The husband had applied a small twist of his own to our advice. He paid no attention whatsoever to sale recommendations. He simply put about $5000 in every purchase recommendation. Then he would toss the certificate in his safe deposit box and forget it.

Needless to say, he had an odd looking portfolio. He owned a number of small holdings with value of less than $2000. He had several large holdings with value in excess of $100,000. There was one jumbo holding worth over $800,000 that exceeded the total value of his wife’s portfolio and came from a small commitment in a company called Haloid: this later turned out to be a zillion shares of Xerox.”

For last few years, I’ve been creating a coffee can portfolio. As of now I own 10 companies. I’m planning to add one or two more in next 2 years. With some future spin offs and demergers, my stock portfolio may end up with around 15 companies. This is a portfolio I’m planning to hold for not less than 10 years.

The same logic holds good for our mutual fund portfolio as well. I make changes only if it is really warrants so. You all invest in mutual fund through us. You are aware that we don’t make frequent changes in your portfolio. We do it only rarely, when it is really required. Though the mutual funds you own may keep changing the underlying portfolio, we ensure minimal tinkering with mutual fund themselves.

We’ve seen that average holding period of stocks is 10 months and that of mutual funds is 18 months. This is only average. 40% of mutual fund investors hold it for less than a year. Whereas you, depending on when you became our client, have been holding on to a portfolio for 5 years, 7 years and even 10 years. This is very rare. Industry data points out that only 2% of investors hold funds for more than 10 years. Already some of you are there in that 2% and rest of you would end up in this elite category in next few years.

You are a living proof that short term investing behaviour can be changed and it is possible to achieve the long term compounding of wealth by staying the course.

Always remember this Buffett quote: The enemy of investment success is activity.

Posted in General, Wealth | Leave a Comment »

Returns

Posted by Muthu on March 18, 2017

As a part of year end process, we’ve been reviewing lot of portfolios.

Last 10 years, Sensex has given an annualised return of 9%. The broader market index, BSE 500 has given an annualised return of 10%.

During the same period, your portfolios which are mix of large cap, mid cap and multi cap funds have given a return of around 15%.

Balanced funds during the above period have given around 12% returns.

Surprisingly, MIPs have given around 10% during this period.

Now there are lot of predictions about long term structural bull market for next one or two decades. Since these predictions crop up during every bull market, I do not want to take the same seriously.

Likewise, during bear markets, one of which happened last year, many experts predicted gloom and doom. I never took them seriously as well.

In my view, markets, economy and businesses continue to be cyclical. There would be both surprises and shocks during next 10 years, like it was the same for previous 10 years and the 10 years before and so on.

Though there is no guarantee of returns on mutual funds, as they are marked to market securities, I believe we can aim for 15% returns in equity funds and 12% returns in balanced funds over next one decade.

As far as MIPs are concerned, I’m not sure whether they will produce 10% returns over next 10 years. What I would like to assume is 2% over and above fixed deposits in a tax efficient manner.

The journey would continue to be as volatile as it was before. It is better to be mentally prepared for a bumpy ride. The reward for going through this bumpy ride is good returns over long term.

The returns mentioned in this piece are only a broad pointer and the actual results may vary. The standard disclaimer, past performance may or may not be repeated in future, always apply.

All the best.

Posted in Mutual Funds, Wealth | 1 Comment »

Chaser is a loser

Posted by Muthu on March 16, 2017

You’ve been our clients for many years. You know that we are completely against chasing performance. We don’t believe in churning portfolio. We make changes, only if it is extremely required. We look for long term performance, consistency, losing less in bear markets and ability to navigate multiple market cycles. We’ve never recommended new fund offers (NFOs), sectoral and thematic funds. We are very choosy about the fund houses we work with.

Why I’m restating the obvious? I sincerely believe the kind of value addition we do with less tinkering of portfolio, preventing you from doing many wrong things and making you do the few right things needs to be shared once in a while so that more activities are not equated with good advice. In fact in investing, a good advisor would ensure minimal activities. More activities are harmful for the portfolio and lead to bad outcomes.

I was reading the current issue of ‘Mutual Fund Insight’. They have taken a period of last 10 years, January 2007 to December 2016. Let us assume you believed in chasing performance and investing every year in the previous year leader (the best fund in large cap category). You would have invested in Rs.1 lakh in Janaury 2007 in Reliance NRI Equity. In 2008, you would have moved to Sundaram Select Focus. Like that you would have invested in ten funds over last 10 years.

As on December 31’st 2016, by doing the above performance chasing, you would have ended up with Rs.1,47,704. An annualised return of 3.93%. You would not have earned even the SB A/C return by investing in equity mutual funds, that too all top performers of the previous years.

Let us assume you instead stayed invested with Reliance NRI Equity for the last 10+ years. As of yesterday, the last 10 year annualised return is 12.84%. This means, Rs.1 lakh invested 10 years ago is now worth Rs.3.35 lakhs.

Do you see the difference? Bad behaviour got you only 3.93% returns whereas good behaviour got you a decent 12.84%.

Never ever chase performance. Out of 10 years, a fund would have 3 or 4 bad years. This is applicable to all funds, including the ones you’re holding based on our recommendations. We have stringent yardstick for both selecting and removing the funds. We are not against portfolio changes. But we’ll do it only rarely, purely based on requirements. I promise that neither we would chase performance nor allow you to do so.

An advisor’s value comes not only from what he does but more so from what all he does not do. We would continue to be less active. We would also ensure that you remain less active. Adhering to this would ensure long term outcome of excellent wealth creation for your family.

I would like to end this with a Buffett quote: We will not equate activity with progress. We don’t get paid for activity, just for being right.

Posted in Mutual Funds, Wealth | 2 Comments »