Wise Wealth Advisors

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

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Archive for the ‘General’ Category

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 »

Help us

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 | 1 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 | 1 Comment »