Wise Wealth Advisors

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

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Our India is not big

Posted by Muthu on June 17, 2018

I was reading this piece recently.

India has been classified into three as India 1, India 2 and India 3 based on per capita income.

There are 280 million households in India with a population of 1340 million, averaging 4.8 persons per household.

We all belong to India 1 for which details are given below.

India 1 has 23 million households containing 110 million people. The working members of these households are 31 million. So an average a household has 1.3 working people.

The annual per capita income of India 1 is US$8,800 (Rs.0.6 million).

Only 8% of India, 110 million people are upwardly mobile.

10 million iPhone users, 32 million car owners, 37 million credit card holders, 50 million post paid mobile users, 59 million tax payers, 65 million domestic flyers, 24 million international flyers and 20 million ecommerce shoppers; all belong to this top 8% of population categorised as India 1.

India 2 with 104 million people spread among 22 million households has per capita income of US$3000 (Rs.0.2 million). This is another 8% of India which is aspiring to move up to India 1.

India 3 with 1126 million people spread among 235 million households has per capita income of US$1200 (Rs.80 thousand). This 84% is poor of India struggling to survive.

India moving from low income to middle income over next 2 decades would increase upwardly mobile and aspirers.

Only 8% of India can even dream of achieving financial independence. Like many countries, only 1% of population may actually achieve it. We need to keep this in mind.

Also giving needs to be part of everyone’s financial planning. Focus on giving should be on par with consuming and saving. We definitely owe that to the less fortunate.

Posted in Economy, General | 4 Comments »

Nothing is the best thing

Posted by Muthu on June 16, 2018

In personal finance and investing, we’ve to do few right things and avoid many wrong things. Once we do few right things, doing nothing is rest of the course. We never get tired of repeating this. The key value we bring into the relationship is ensuring that you do nothing after the course is set.

There are many approaches to investing and personal finance. We follow what we’ve internalised through our learning, experience and inspiration. We can only advice what we follow. That’s why we always focus on buy and hold.

Our strategy has evolved based on our faith in the future of our country. Over next two decades, there is a strong possibility of India moving into middle income from low income. Many sectors and companies would benefit from this growth. For stock pickers, they need to find few quality companies where they can sit on their ass for one to two decades.

For you all, mutual fund investors, need to stick to chosen equity funds and keep investing regularly in a systematic way. Need to tolerate periodic under performance of funds. Even legends underperform close to one third of time. So there is no way the fund managers can avoid this. Though choosing good funds are important; it is still a hygiene factor. What really matters is your discipline in staying the course.

We neither believe in short term wealth nor have knowledge of creating it. You’ve self selected to be our clients since you see merit in the philosophy and the strategy we follow. In our view, it takes not less than 2 decades of high saving and prudent investing to gain financial independence and create sizeable wealth.

Doing nothing was easy last year as markets gave excellent returns. It is a year like current one which shakes the faith. Markets have always behaved like this and future would be no different from the past. Need to accept this bumpy ride with a conviction that we are moving towards a good destination.

Though you heard from me many times, it is difficult to do nothing. Our mind always sees action as a sign of progress. This is indeed true for various aspects of life but not to investing, especially for the strategy we’ve chosen to follow.

So continue to do nothing and stay the course.

Posted in Wealth | 1 Comment »

How a teacher couple turned $50,000 to $800 million?

Posted by Muthu on May 7, 2018

However rare the occurrence may be, we are able to connect well with real life examples. These examples motivate us to work towards financial independence and create sizeable wealth.

Donald and Mildred Othmer was born in the first decade of last century and lived well into their nineties before passing away in the last decade of the same century.

Donald and Mildred Othmer both belonged to Omaha, where Warren Buffett has been living from his childhood.

Donald worked as a professor in a polytechnic. He had scores of patent to his name. He was a good teacher, researcher and consultant. Mildred worked as a teacher.

They knew Buffett’s family well and trusted in his investment ability.

In 1960’s, when Buffett was running an investment partnership, they invested each $25,000 into the same.

When Buffett closed the partnership and gave the option of either taking the corpus back or converting into Berkshire Hathaway stock, they opted for latter. They got around 14,500 shares at $42 a share. This implies Buffett partnership has multiplied their wealth by over 12 times in a decade.

At the time of their passing away, the $50,000 investment has become whopping $800 million.

The couple did not have children and passed on their wealth to charitable causes.

Donald’s bequest of $190 million to the polytechnic where he worked for nearly 6 decades was about four times the institute’s entire endowment there by lifting the institute to a different league.

Donald and Mildred also provided well for Long Island College hospital in Brooklyn and University of Nebraska-Lincoln, from where both of them graduated.

They also contributed for other causes.

Their example again reinforces the need for buying right, sitting tight and staying the course. They held on to their investments for close to four decades without interrupting the compounding.

Had they not known Buffett and instead invested the same capital in index, it would have still become few million dollars.

As on date, had that $50,000 investment continued in Berkshire, it would be worth more than $4 billion.

Be it index or actively managed funds or portfolio of quality companies what is important is not to get swayed by short term movements, hold for long term and staying the course with patience and discipline.

In my view, we don’t need much brain to make money in a high growth economy with a long run way like India. What is required is capital, which needs to be created out of employment or business or profession, investing the same prudently and then simply staying the course.

Stay the course for next one to two decades and see the results

Posted in Stock Market, Warren Buffett, Wealth | 2 Comments »

How to think about investments?

Posted by Muthu on May 6, 2018

At times, for few weeks or months, I don’t get any ideas to write. It’s close to a month since I’ve written to you. Request you to bear with me during such dry spells.

Yesterday was the annual meeting of Berkshire Hathaway. Adam Blum has transcribed notes from the meeting. I found the Buffett’s introductory speech to be very good. Investment perspective makes all the difference in wealth creation. Read and follow what Buffett says below. Then it would be very difficult not to succeed.

“Here’s some personal history, with The New York Times front pages from March 10-12, 1942. You can see I’m a little behind on my reading. This was three months after we got involved in World War II, and we were losing, and headlines were full of bad news about the Pacific. The price of the newspaper was 3 cents, incidentally.

On March 10, the stock market was reflecting this news. And I’d been watching City Service preferred stock for a while. It was $84 a share the previous year and $55 a share at the beginning of 1942, and then in March it was down to $40 a share. On the 11th, I told my dad I wanted to buy three shares. That was all the money I had at the time – I was only eleven years old. So he bought the shares for me.

On the next day, the stock market was down 2.28% and broke 100 on downside, which is the equivalent of a 500-point drop. I was in school wondering what was going on. My dad had bought me the stock at $38.25, which was the high for day, and it was down to $37 by the end of day. Even though the war looked bad until the Battle of Midway, the stock did well and was called for over $200 a share by City Service. But I’d sold at $40 for $5.25 gain after watching it go down to $27. What’s the point? Imagine myself on March 11, 1942. Things were looking bad, but everyone knew we’d win the war, and the system had been working well since 1776.

Investing $10,000 in an index fund in 1942 to own a piece of American business would now be worth $51 million, and you wouldn’t have had to do anything. You wouldn’t have had to understand accounting or look at quotations. All you had to do was figure that America would do well over time, and American business would in turn do well and overcome difficulties. You didn’t have to pick out winning stocks or know when to buy or sell. The overriding question is, ‘how is American business going to do over your investing lifetime?’ If you had taken $10,000 and listened to the prophets of doom and gloom and bought 300 ounces of gold instead, today that still would be 300 ounces of gold.

You could go down to the safety deposit box and look at it and fondle it, and it wouldn’t produce anything. That gold would be worth $400,000 today. If you’d decided to go with a non productive asset versus a productive one, it is one hundred times the value difference. Every dollar earned in investing in the American business was matched by less than a penny gained by investing in a ‘store of value’ like gold over the same period.

We have the greatest tailwind you could ever imagine in this country. There’s no comparison trying to jump in and out of stocks and pay investment advisors and invest in non productive assets. If everyone had just bought in, your friendly stock broker would’ve starved to death, and you could’ve gone to his funeral to atone for it. You do not have to know about accounting and terminology and what the Fed is doing. It’s about a philosophy and forgetting what you don’t know how to do.

Posted in Stock Market, Warren Buffett, Wealth | 1 Comment »

Less churn more gain

Posted by Muthu on April 9, 2018

We are in the process of sending each one of you annual portfolio summary along with our review. We plan to complete the work latest by last week of this month. For those of you who started investing after September’17, the review would happen only from the coming year. Since these investments are less than 6 months old, they become eligible for review only from the coming year.

I was reading Buffett’s annual letter of 1989. He has given an example which illustrates the importance of less churn and not interrupting the compounding unnecessarily.

“Because of the way the tax law works, the Rip Van Winkle style of investing that we favor – if successful – has an important mathematical edge over a more frenzied approach. Let’s look at an extreme comparison.

Imagine that Berkshire had only $1, which we put in a security that doubled by year end and was then sold. Imagine further that we used the after-tax proceeds to repeat this process in each of the next 19 years, scoring a double each time. At the end of the 20 years, the 34% capital gains tax that we would have paid on the profits from each sale would have delivered about $13,000 to the government and we would be left with about $25,250. Not bad. If, however, we made a single fantastic investment that itself doubled 20 times during the 20 years, our dollar would grow to $1,048,576. Were we then to cash out, we would pay a 34% tax of roughly $356,500 and be left with about $692,000.

The sole reason for this staggering difference in results would be the timing of tax payments. Interestingly, the government would gain from Scenario 2 in exactly the same 27:1 ratio as we – taking in taxes of $356,500 vs. $13,000 – though, admittedly, it would have to wait for its money.”

In both the cases the returns are same. When the portfolio is churned and tax is paid every year, the final corpus is $25,250. When the portfolio is not churned and the tax is paid at the end of 20 years, the final corpus is $692,000. A staggering 27 times difference.

Be it mutual funds or stocks, if no churn is not possible, we prefer less churn. The lesser we interrupt the compounding; the more would be the final gains.

The above example given by Buffett strengthens our conviction to keep the churn bare minimum.

Hope you would also agree.

Posted in Warren Buffett, Wealth | 1 Comment »