Wise Wealth Advisors

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

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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 | Leave a Comment »

Annual review

Posted by Muthu on March 30, 2018

As always, April is the month of annual review.

We would be sending your portfolio reports along with our notes and inputs.

We plan to complete the task by end of April.

This review is in addition to our meetings and interactions during the year.

Though we’ve given you online access, it would be good if you see your portfolio once a year. Lesser the frequency better would be the results.

Sensex has delivered 11.3% for the financial year 2017-18.

As far as debt is concerned, yields have hardened resulting in subpar performance.

Those of you who have invested during the recent past would see average to poor results.

For those who have been investing for long, the results continue to be good.

Short term is like weather. Not predictable. Long term is like seasons. Reasonably predictable.

Based on our experience and expectation, we are confident of good long term results. Those of you who have been with us for many years have been experiencing it through portfolio performance.

Emotions and liquidity influences short term performance. Fundamentals influence long term performance. Always focus only on long term. For equities, the long term is not less than 10 years. For hybrid like MIPs and balanced funds, long term ranges between 3 to 6 years.  Only for liquid funds, we can expect all time performance.

You’ll start seeing changes in the name of the funds you hold. This is being done by fund houses in line with latest SEBI guidelines. For the funds we’ve recommended, there has been no major changes in fundamental attributes and it is only change in nomenclature. So you need not worry about this.

Expense ratio for funds are being brought down by 15 bps by SEBI. In our view, this is only beginning and we may see more in coming years. Also as we wrote last year, due to TRI benchmarking and reclassification, we expect alpha to come down in the next few years. We would see more passive funds and ETFs coming into the being. We are keenly watching the developments and would suggest suitable changes at the appropriate time.

It is markets which give you results and not us. We are there to ensure you stay the course to receive the long term benefits offered by markets.

I’ve no new message to offer except asking you to stay the course.

Posted in General | 3 Comments »

New example but same old lesson

Posted by Muthu on March 10, 2018

Mutual fund investors are prone to two common mistakes:

The first mistake is investing after few good years and redeeming after few bad years resulting in behaviour gap, the difference between the return earned by investors vis-a-vis the return provided by the funds.

The second mistake is constantly churning the portfolio chasing recent performance.

We’ve given you many examples in the past for both the mistakes.

As our clients, we ensure that you don’t make these mistakes.

In fact, our key value addition is to ensure you avoid these mistakes, stay the course and reach your goals.

Today I want to give an example of second mistake. This is based on an article published in the March’17 issue of ‘Mutual Fund Insight.’

They have taken the 10 year period from 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 small cap category). You would have invested in Rs.1 lakh in Janaury 2007 in SBI Magnum Midcap. In 2008, you would have moved to JM Emerging Leaders. Like that you would have invested in ten funds over the above 10 years.

Chasing performance in the above manner would have increased your wealth from Rs.1 lakh to just Rs.1.4 lakhs. An annualised return of only 3.42%

Instead had you simply stayed invested in SBI Magnum Midcap, your Rs.1 lakh would have become Rs.3.32 lakhs, annualised return of 12.77%

Staying invested got you 12.77% while chasing performance got you only 3.42%

Chasing performance really hurts your return.

Timing the market is the first mistake and chasing performance is the second mistake.

Avoiding these two mistakes would make you a successful investor.

That is the reason why we never let you time the market and suggest changes in portfolio only when it is really required.

Posted in Behaviour, Mutual Funds | 2 Comments »

The path is never smooth

Posted by Muthu on March 5, 2018

If someone has invested 53 years ago in Warren Buffett’s company, Berkshire Hathaway, he would have made a return of 2,404,748%. Yes, you read it right. We all know about the huge wealth creation by Buffett.

Stock markets would always be volatile. At the cost of repetition, 10% correction once a year, 20% fall once in few years and 30% fall once a decade is very normal. Don’t panic. This is how markets work.

During the journey of last 53 years, though the company was growing leaps and bounds, Berkshire share price had suffered four major falls.

Between March 1973 to January 1975, it fell by 59.1%

In a single month, in October 1987, it fell by 37.1%

Between June 1998 and March 2000, it fell by 48.9%

During the global recession, between September 2008 to March 2009, it fell by 50.7%

Though huge wealth was created by anyone who invested in Berkshire, the above four falls would have been gut-wrenching. There would have been many more 10%+ kind of corrections as well. There is no way to create wealth through equities without going through such roller coaster ride.

Though Indian markets provide us opportunity to create huge wealth through next two decades, the journey would not be without pain. Only those who can withstand the pain will enjoy huge gains.

Always keep in mind; the journey would be very rewarding but the path is never smooth.

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

Nuggets for 25th February

Posted by Muthu on February 25, 2018

Some of my recent tweets:

1)Most of us call ourselves long term investors only till a short term setback start happening.

2) A long term investor needs to learn to live through upgrades and downgrades, buy and sell calls, over valuation and under valuation, multi-bagger and 50% falls, breakthroughs and setbacks. There is no way to avoid this roller coaster ride.

3) May sound stoic. But there is no way to avoid pain and under performance in markets. Even legends have undergone this. None of us would be an exception to this rule. All the more, why we need to be modest during successes.

4) I agree with Lou Simpson who said that lot of people don’t have the patience or temperament to really be investors.

5) Patience has its origin in a French word meaning suffering. To be patient is to suffer. No doubt, investors find patience the most difficult trait to develop.

6) Not having to time the market and keep making frequent buy and sell decisions is bliss. Try it and see.

7) Never done anything bad for clients. But financial independence made me to be completely truthful to clients even overlooking my own interest.

8) Businesses grow on a timescale of years. We want stock prices to move on a timescale of few weeks or months. This mismatch reduces our critical asset, patience.

9) We are not capable of timing bull or bear markets. We don’t know when correction would happen, how far and when markets would rise again. We follow this simple rule: Invest when we’ve money and sell when we need money, ensuring a there is a minimum 10 year time period in between.

10) If we learn to appreciate, uncertainty can be beautiful. We fall for forecasts because they provide us the fallacy of certainty.

11) Don’t keep chasing new ideas. Ideas are dime a dozen. Staying the course even with a mediocre idea would give better results than constant churn due to chasing of new ideas.

12) I’m absolutely convinced that if one can master his behaviour, huge fortune can be made through markets over long run. As Munger says, repetition is the heart of instruction and we would repeat this tirelessly for both your and our benefit.

13) Starting its journey from 1979, Sensex has made innumerable new highs in the last 4 decades. It would continue to be so. If you think the current market level is high, wait and see where it would be after 10 years.

14) We fear both rises and falls, peaks and valleys, highs and lows. We are seldom at peace. You can never avoid these swings in markets. Develop and stick to a strategy which would keep you grounded all times.

15) Anything and everything may work in a bull market. The benefits of having a well defined investment philosophy and strategy would be evident only during deep corrections and bear markets.

16) Financial independence not only allows you to control your own time, it also helps you to buy others time (say employing a driver). Time is the most finite and precious wealth.

17) Why we focus mainly on behaviour and emotions? Because mis-behaviour and lack of emotional control cost us lot of money. Losing money is losing time. We just don’t realise it.

18) Corrections and bear markets are regular occurrences. Nothing unusual about it. It only becomes a problem when we sell during these times converting notional into permanent losses.

19) Agricultural income is 100% tax free. Do we take farming as occupation because of this? All investment decisions need to be taken on fundamental merit and not tax arbitrage. Fundamentals would last and tax arbitrage may not.

20) Financial independence is a state where instead of you working for money, money works for you.

21) If you’re feverish about building wealth; would leverage, chase fads and make many other mistakes. Have wealth goals without being feverish. You’ll then make fewer mistakes and build sustainable wealth.

22) Google and go through what experts predicted about effect of demonetisation, Brexit and Trump presidency on markets. The more you read old forecasts; you would not take any present forecasts seriously.

23) Completely ignore all forecasts. Have a broad brush view that our country and hence corporate India would do well over long term. If you don’t have this belief, avoid equity. Equities are only for those who have faith in future.

24) I started learning in a right way only when I started teaching my clients. The best way to learn is to teach. To rephrase it better, the best way to learn is to share.

25) Everyone act based on their self interest. Advisors are no exception. But just be sure that his and your interests are aligned. Don’t believe anyone who says he is acting solely on your interest.

Posted in Tweets | 4 Comments »