Wise Wealth Advisors

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

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Nuggets for 19th August

Posted by Muthu on August 19, 2017

I want to keep sharing with you once or twice a month some of my recent tweets. As I always say, the words are mine but the ideas are what I’ve been learning from many investment masters. Since I don’t know what caption to give I’ve decided to name it this way (Nuggets for 19th August and so on).

1)Excess liquidity doesn’t hurt. Try to have minimum one year of expenses in bank. Peace of mind cannot be measured in returns.

2) We blame the markets for our losses. In many instances, it is our behaviour and not the markets which is the root cause.

3) If investing becomes a competition, envy would be the outcome. We need to do what suits our character and enjoy the process.

4) Can you hold a stock whose price has not moved for years, though business is continuing to grow? If yes, you’re a long term investor.

5) In my own holdings, I’ve seen stock price going nowhere for couple of years and suddenly tripling over a year.

6) If your stock price does not move for 3 years and suddenly doubles in 4th year, still you’ve made a CAGR of 18%.

7) We call ourselves long term investors but still keep looking for regular price performance, leading to disappointment & derailment of course.

8) Investing success = 10% knowledge + 90% behaviour

9) Investing success = 10% action + 90% inaction

10) Not all of us are capable of starting & running a business. Thanks to stock market; what a wonderful opportunity we’ve to own good businesses.

11) My blogs and tweets are greatly shaping my behaviour and help me evolve as a better investor. I’m happy if it in some way helps you as well.

12) Periodical corrections or even bear markets are good. It keeps us balanced and knocks some sense to us.

13) But for volatility, everyone would be an equity investor. Who wouldn’t want a smooth 15% annual return?

14) Unlike other asset classes, stock markets purge excesses more frequently, which is what makes it healthy.

15) Trading: Focus on price performance

Investing: Focus on business performance

16) Except for few occasions, where a news or event is the trigger; most of the time market rise or fall for no reason. That’s the way it is.

17) Markets are up around 70% of the time (in years) and down during the remaining 30%. We need to stay during this 30% to enjoy the 70%.

18) Don’t chase because of recent outperformance and don’t ditch because of recent underperformance. Remember chaser is always a loser.

19) Things fall on their own weight. As the saying goes, from the summit all roads lead downwards. Accept no claim of removal of cycles.

20) There are no rules which market has to obey. It can run ahead or fall behind earnings. But long term growth is always equal to earnings growth.

21) First indicator of investment success: your willingness to hold for long term.

22) First indicator of financial independence: Delayed gratification; foregoing some of today’s pleasures for a better tomorrow.

23) Financial independence should be based on our needs not on what our neighbours have.

24) Risk is not short term volatility but long term erosion of capital. While equity is volatile, bonds can erode your wealth.

25) Be it real estate or stocks, our wealth is what someone else is willing to pay. Our net worth is always subject to transient market forces.

Posted in Tweets | Leave a Comment »

What happened when he forgot?

Posted by Muthu on August 14, 2017

My colleague Partha went to a client’s place last week.

The client while searching for something stumbled upon a very old investment he made and completely forgot about it.

In 1995, he has invested Rs.5000 in initial allotment of Reliance Vision Fund.

He wanted us to check the value.

When we checked the same on August 10th (NAV as on August 9th), the value was Rs.2,76,166.

His initial investment has multiplied by 55 times over 22 years. It works out to an annualised return of 20%.

He acknowledged that but for his forgetting, he would not have kept the investment this long.

He also said that after becoming our client and seeing an example from his own life, he is convinced about the benefit of holding equity for long term.

Reliance Vision Fund has been one of the average performers. In the last many years, it has never been a chart topper.

As we always say, as long as we avoid certain kind of funds and some fund houses, any diversified equity fund would do well over long term. What we avoid is more important than what we choose. All that is required to have 4 or 5 diversified equity funds in a portfolio.

Though we select good funds, that’s not our main job. We want to ensure that you hold equity funds for a minimum of 10 years and preferably couple of decades.

If only you can do that, I don’t see why you cannot be very wealthy.

Luckily for him, he forgot. He may even wonder why he invested only a small sum instead of committing few lakhs, which he was capable of even two decades ago.

You’ve heard this John Bogle’s quote from me many times. Please listen now for one more time.

“Stay the course. No matter what happens, stick to your program. I’ve said ‘stay the course’ a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you.”

Posted in Mutual Funds, Wealth | 1 Comment »

How Agnes Plumb made $98 million from Kellogg’s shares?

Posted by Muthu on August 13, 2017

ITC got listed in 1954. I’ve seen families holding this stock for two generations.  A small sum invested decades ago is now worth several crores for them, earning yearly dividends in lakhs of rupees. Likewise, I’ve met people who are holding diversified equity funds for last 2 decades. Thousand of rupees have become lakhs of rupees for them; money multiplied by 40 to 50 times.

In 1996, Agnes Plumb died at the age of 88. She was a single woman who lived with her mother till she passed away in 1960. During last four decades of her life, after her mother passed away, she led a simple life. As her mother was crippled due to an accident, she kept doing small charities for crippled and disabled people. She was also very fond of children and used to help the less privileged.

On her passing away, she left $90 million for hospitals and societies which work for the children with birth defects and are crippled. She also left $2 million each for four of the families who were close to her during her life time.

How come a normal middle class woman made $98 million fortune?

Her father, during his life time was a shareholder of Kellogg’s. She inherited it from her father after his death. Her father has been holding the shares for few decades. After his death, she held it for many decades until her death. The shares continuously got split, resplit and kept doubling. What was once a modest number of shares became 1.3 million shares over many decades and two generations, amounting to a fortune of $98 million. Agnes used to receive $2 million as dividend every year for a small sum invested many decades ago.

During many decades of holdings, there would have been instances when the stock price of Kellogg’s would have corrected 50% or more. There are many years when the price would not have moved at all, as returns are always lumpy in the stock market. There has been wars, booms and bursts, bull and bear markets, gut wrenching corrections, recessions etc. during the holding period. She kept on holding the Kellogg’s shares ignoring all these.

‘Buy & Hold’ works for companies which can survive and grow over many decades. This involves skill, knowledge, luck and huge control over one’s emotions. Some companies succeed and many fail. The long term survival rate is low. But buying and holding index or diversified equity funds is no brainer. Good companies come inside and bad companies keep exiting the index. In diversified equity funds, the fund manager takes care of buying and selling companies. All it needs is to hold on ignoring ups and downs for many decades.  It is very difficult to go wrong and not make wealth if you follow this.

As I always repeat, in fund selections, we focus on what to avoid. Once that is taken care, choice of funds is merely a hygiene factor. What is important is staying the course ignoring market cycles and negative news (most of the news is always negative). 90% of our work is shaping your behaviour and ensure you stay the course. All the other advice and services we do is only 10%.

In a country like India, we can make good wealth if we can start thinking in terms of decades as holding period. It doesn’t require a great brain but an excellent temperament.

I hope we all develop and sustain right temperament.

Agnes Plumb did it. We can also do it.

Posted in Stock Market, Wealth | Leave a Comment »

Some nuggets

Posted by Muthu on August 6, 2017

I’m active on Twitter (@dmuthuk).

I shared with you two weeks ago some of my tweets.

Today I want to share with you some recent tweets.

I’ll keep sharing this periodically.

The words are mine. But the wisdom  behind the same is obtained by reading investment masters.

1) Be it exercise or investing; habit formation is extremely important. What we repeatedly do with effort, at some point becomes a natural habit.

2) There is nothing exciting in staying the course with patience and discipline. It’s dull and boring. That’s why only few make it.

3) Markets are not obliged to provide the returns we seek to achieve our financial goals. Save more. That’s what you can control.

4) Not having to worry about money is a big liberation. That’s why financial independence matters.

5) We don’t see time as a good risk management tool. For a well diversified portfolio, time reduces the probability of permanent loss of capital.

6) All long term investors, knowingly or unknowingly, use time as a risk management tool.

7) The biggest mistake we make is letting short term information cloud our long term judgement. Can’t see the forest for the trees.

8) No investment strategy can be a substitute for inadequate savings. If you save more, even a mediocre strategy would help reach your goals.

9) Money flows in after good performance. It flows out after bad performance. That’s why chasing performance rarely helps.

10) But for volatility, everyone would get rich from equity. Life cannot be that easy. Accept volatility. You’re on your way to wealth.

11) Real financial freedom is not in what we are able to buy. It is in what control we have over our time.

12) Our life span is getting longer while investment span is getting shorter. This strange behaviour is an impediment to wealth creation.

13) Knowledge is about the past. Analysis has assumptions about future, which is unknown. Behaviour is what we control and is our biggest edge.

14) We cannot predict our own future. Still we try predicting macros, interest rates, markets & commodity prices.

15) During bull market, everyone would be a long term investor. The real test comes only in a bear market, where most of us fail.

16) Because of human nature, only a small percentage of people would make it big in the markets. Aspire to be part of this tiny minority.

17) I want to deserve the money I earn by making our clients part of successful tiny minority in the markets.

18) In a market dominated by short term thinking, long term orientation is a huge competitive advantage. Play to your strengths.

19) When we borrow & buy a house, we tie up two decades of future income. This is what preventing even high income earners from creating wealth.

20) Don’t call yourself a long term investor if you’ve not stayed invested in a bear market.

Posted in Tweets | 1 Comment »

How investors lost 11% when CGM gained 18%?

Posted by Muthu on August 1, 2017

I was reading this article.

During the period 2000 to 2010, CGM focus fund delivered an 18% annualised returns while the benchmark S&P 500 was almost flat. This means $100,000 invested in 2000 would have become around $500,000 in 10 years. Capital multiplied by 5 times.

Morningstar, a mutual fund rating agency, studied the performance of the fund and how much an average investor made money on the same. The surprising finding was that while the fund delivered 18%, the average investor lost 11%. Why? Because of the same old behaviour problem which we keep highlighting. After good performance for few quarters, investors pour in money. After few quarters of bad performance, they redeem the money. They don’t stay the course through ups and downs, to capture the actual returns a fund provides.

Davis Advisors conducted a study of funds performance from 1991 to 2010. During these two decades, while equity funds on an average provided 9.9% returns, the average investor earned only 3.8%. They lost 6.1% because of bad behaviour; chasing performance.

Over a 10 year period, even the best investor or best fund, underperforms for a period of not less than three years. According to Davis Advisors, during one third of the time, all long term best performers become worst performers.

That’s why we never allow you to chase performance. Every single fund in your portfolio would go through periods of under performance during ten or twenty year holding period. There is not even one fund which does not go through periods of underperformance.

What is important in mutual fund investing is what we avoid; like NFOs, thematic and sectoral funds etc. Also what is important is the fund hose we work with. Some fund houses are notoriously known for long periods of underperformance, lack of process, poor fund management skills, taking excessive concentration risk etc. We only suggest funds which has a long history of performing consistently over a period of time; across bull and bear markets.

Once chosen, how much ever pressure, sometimes some of you put, we don’t change the portfolio. In your own interest, we don’t budge a bit. Because we know for sure no fund can avoid underperformance. What is important is that is it a routine phenomenon or something fundamentally had changed for bad. In the rare cases of something likely to go bad permanently, we then suggest change. Otherwise, it is sticking to the chosen portfolio with discipline.

What is our biggest value add? If a XYZ fund has delivered 15% annualised returns over last 10 years, our clients would have also got the same 15% returns. It looks very simple but extremely rare. You may not even be aware how difficult it is to do this. The fund’s performance and investors return seldom matches because they don’t stay the course and keep chasing the recent performers.

Fund selection is only a hygiene factor. More than what we choose, it is important that what all we avoid. Once that is taken care, what matters more is mentoring your behaviour to ensure you stay the course without chasing the performance.

As we always say, chaser is a loser.

Don’t be a loser.

Posted in General, Mutual Funds | 1 Comment »