Wise Wealth Advisors

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

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Archive for the ‘General’ Category

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 »

Tin-Can-Curt

Posted by Muthu on June 26, 2017

I keep sharing some real life instances of how people from humble background made it big in wealth through investing.

Curt Degerman who was called as ‘Tin-Can-Curt’ by people of his home town Skelleftea, in North Sweden, was a rag picker.

Curt used to travel every day in cycle across the town to pick up bottles and cans from the trash bins. He sold them for a small price to a nearby recycling plant.

He owned a house and used to eat leftover food provided by restaurants.

He did not complete school, never married and was a loner.

He used to visit the public library in town and read all the financial newspapers.

That was his favourite pass time in an otherwise mundane life.

He was a rag picker from the age of 20 to 60, when he died of heart attack.

He had only one relative, his cousin visiting him occasionally to enquire his welfare.

On his death, it was found he has written a will. The will contained assets of his home, 8 million kronor in stocks and mutual funds, 124 gold bars worth 2.6 million kronor,  47000 kronor in bank account and 3000 kronor as cash at home. So other than his home, he had 12 million kronor worth of assets. This was equivalent to around $1.5 million.

He has left his home and the $1.5 million worth of assets to his cousin, the only soul who used to visit him.

He died as one of the richest person in the town.

There is no need for us to lead a life of rag picker or be extremely frugal.

What we can learn from Curt is that even with small income, if substantial portion of it is saved and invested in equities, it can compound to huge wealth over decades.

You’re all earning very well in your employment and business. If you can cut down on unnecessary lavish expenditures and save not less than 30% of your income, invest it in equities and give it at least two decades to compound, you can definitely become very rich.

What is the use of high income if we can never become financially independent in our life?

Also if a rag picker who never completed school can understand power of compounding and potential of equity, shouldn’t we who have access to much better resources gain similar insight?

Think over.

Posted in General, Muthu's Musings, Wealth | 4 Comments »

Simply ignore

Posted by Muthu on May 29, 2017

You would have recently seen an advertisement of Reliance Growth Fund multiplying money by 100 times over last 22 years. Reliance Growth is only an example. There are many good funds which have multiplied money between 40 to 100 times over last two decades.

Who would have got this kind of returns? It’s only someone who stayed the course without break, not worrying about corrections and bear markets, not feeling uneasy during roaring bull markets and not hopping in and out of the markets trying to time the tops and bottoms.

We’ve written many times in the past that investor returns and investment returns do not match due to the behaviour gap; trying to time the entry and exit and chasing performance by constant churning. I observe that not only investors but financial advisors too prone to this kind of behaviour. It’s only human to be so but the end result is that their clients do not get the benefit of staying the course.

In our case, over the years, we’ve shaped our behaviour and constantly keep nudging our clients towards right behaviour. Great wealth is built over long term only by completely shutting oneself from daily noise, in the form of various opinions and suggestions peddled by business channels and newspapers. I do watch business channels and read business papers; because they also provide certain useful stuff and is also entertaining. But I don’t let them affect my investment strategy. Since for many, it may be difficult not to be influenced by constant stream of ‘expert’ opinions, it is better to avoid them.

Corrections are way of life in the markets. Usually a fall of 10% or more is considered as correction. Markets normally go through at least one correction every year. If the fall is more than 20%, then it is called a bear market. I’ve read that less than one out of five corrections turn into bear market. Bear market usually happen at least once in 3 to 5 years. There are more positive years than negative years in the markets. But even in positive years, there would be intra year correction. Corrections and bear markets may or may not have reasons. Even when there are reasons, usually it is different one each time.

Though the reason for bear market may vary each time, economy and businesses always find a way to move on. That’s why bear markets are always followed by bull markets. This holds 100% true for countries like India which are in structural long term growth. Also bull markets can happen even when fundamentals are not good. This is because markets always keep trying to discount the future and not necessarily reflect the present.

The crux is that markets would continue to keep making new highs with periodical corrections and gut wrenching bear markets in between. We are optimistic that our economy and businesses would do very well over next one decade. What you need to do is to simply ignore all kind of noise and just stay the course. Do not get scared by bear markets or become uneasy by bull markets. Always remember the pendulum keeps swinging between optimism and pessimism and is rarely in equilibrium. This is the way to wealth.

Posted in General, Muthu's Musings | 1 Comment »

We are our enemy

Posted by Muthu on April 9, 2017

The average holding period of a stock is around 10 months and that of mutual fund is around 18 months. We’ve been repeatedly highlighting this.

SEBI recently conducted a survey among investors. The results to me are not surprising. 38% of people hold mutual funds for less than 6 months. 19% hold only for a period of one year or less. 21% hold it between one to three years. Only 22% hold beyond 3 years.

There is no further drilling down. I believe that investors holding for more than 5 years may be less than 10% and those holding more than 7 or 10 years would be 2% or so.

The above data clearly indicates 57% of investors do not even hold mutual funds for a year.

In one of our piece we saw how S&P 500 has earned 10.4% over last 30 years while an average investor has earned only 3.7%.

The main reason for this is chasing performance and having a less holding period.

Even for a conservative debt oriented product like MIP, we suggest a minimum holding period of 5 years.

We don’t offer equity if the client is not willing to commit a holding period of 10 years.

Once good investments are chosen, what matters is holding period.

I’ve also mentioned why generally the holding period is less. I would like to repeat the same below:

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.

Many advisors, especially the institutional ones like banks, try to showcase their value by doing lot of activities on clients’ portfolio. This is the way to justify their role and earnings. But this only adds to client earning sub optimal returns. They are afraid to offer inactivity as value proposition.

For the last 11 years, we’ve chosen the tough path of adding value by doing less activity on your portfolio. Since investors generally equate activity with progress, it has not been an easy journey for us. Instead we chose to continuously focus on your behaviour which is what matters once a course is set.

I’m glad that those of you who are staying with us for long are earning good returns. I’m also grateful that you’ve understood our value proposition by continuing to stick with us by sharing our investment philosophy.

Remember if any one of us fail in investments in future, it would be due to our behaviour rather mis-behaviour. We are our own enemy when it comes to investments.

Let us avoid mis-behaviour and behave well, as always.

Posted in General, Wealth | 3 Comments »

Time for review

Posted by Muthu on April 1, 2017

April is always a busy month for us. This is the month we send your portfolio report with our note and inputs. This is in addition to our interactions and meetings during the year.

Sensex as on March 31’st 2016: 25,341

Sensex as on March 31’st 2017: 29,620

Sensex has delivered 17% returns over last one year. Mid cap, small cap and broader market have delivered a much higher returns.

Both equity and debt markets did very well last financial year resulting in excellent returns for equity, MIP and balanced funds.

Your portfolio’s good result is due to years of following discipline and sticking with the investment strategy recommended by us. Discipline, patience and time are extremely rewarded by markets.

Returns always come lumpy and it is never a linear growth. So you would continue to see corrections and bear markets. 10% correction may be expected twice a year and a 20% downfall may bound to happen once in two years.

As long as companies and their earnings continue to grow, declines are temporary and uptrend is permanent. Markets would reach new highs every cycle. The lows reached in a new cycle would be higher than the low of previous cycle.

We would start sending reports today and plan to finish it by this month end. As mentioned earlier this year, we’ll provide web access to your portfolio along with the report.

We’re providing web access as it has become a hygiene factor. We always try to minimise the triggers which can lead to impulsive decisions. So with some reluctance only, we’re offering this facility.

One of the reasons why people get good results from real estate holdings are it is difficult to sell and there is no daily or even yearly quotation. Also a property which is earmarked for your daughter is held for at least one generation.

Whereas mutual funds are easy to sell, you get daily price quotation and rarely earmarked for next generation with emotional attachment. What is actually a boon; easy liquidity and transparency becomes a bane for many investors. If you can hold equity as you would hold to your house, you are bound to get rich over a time.

My sincere and humble request is don’t check your portfolio frequently. It is only a facility offered to you and there is no compulsion to use the same. If it disturbs your discipline or emotions, please write to us. We would then deactivate your login. Once a year review is good enough and please stick to the same.

I take this opportunity to convey our gratitude for being our client. We would strive to add value to your investment journey and ensure that you get rich and more importantly stay rich.

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