Wise Wealth Advisors

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

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Archive for the ‘Mutual Funds’ Category

It all boils down to patience

Posted by Muthu on October 1, 2017

Over a decade, I’ve been writing about the same few things again and again.

Each time, I try to write a little bit differently so that you don’t find it repetitive and boring.

Having been our clients for long, you now know gains are lumpy. It happens in spurts. There is no way to time the entry and exit and we stay invested for long to get the benefit.

There are years of high returns, low returns, zero returns and negative returns.

The expected returns of 15% from equity funds over a decade consist of all such periods.

I want to give you today two examples I came across in the book ‘The Thoughtful Investor’ by Basant Maheshwari.

From 1984 to 2013, Asian Paints has multiplied investor wealth by 1767 times, annualised return of 29.4%

Rs.1 lakh invested would have become Rs.17.67 crores over a 29 year period.

An investor would not have got 29.4% every year. As mentioned, he would have had many years of zero and negative returns as well. In fact though the business was growing, from 1992 to 2002, for 10 long years, Asian Paints went up only by 3 times. Someone who sold out of frustration would have lost this precious wealth creation opportunity.

From 1984 to 2013, Nestle has multiplied investor wealth by 322 times, annualised return of 22%.

Rs.1 lakh invested would have become Rs.3.22 crores over a 29 year period.

Here too an investor would not have got 22% every year.

In fact, for seven long years, from 1999 to 2005, the price did not move at all though the business was growing. If an investor would have sold out of frustration, he would have missed the share price multiplying 10 times in subsequent 8 years.

You’ve seen both bull and bear cycles. You’ve also seen periods where nothing seems to happen. But over a 10 year period, you’ve made decent returns.

This is how markets work and this is how it would continue to work.

In market linked products don’t look for yearly performance. Look for what happens over years.

Patience is your biggest edge. Markets would always reward you for the same.

Posted in Mutual Funds, Stock Market, Wealth | Leave a Comment »

Underperformance is inevitable

Posted by Muthu on September 23, 2017

I always get queries as to why we rarely churn the portfolio. We could always keep changing portfolio based on recent performance and convince you how much we add value to your portfolio. That is an easy path. Why we have chosen the difficult path? Why we prefer inactivity? Why we discourage you from chasing performance?

Based on our experience, we tell you that all funds and fund managers go through periods of underperformance. What matters is the long term track record and not a specific period of underperformance.

I recently came across a study done by Davis Advisors. They have found that all good investors, funds and fund managers underperform around one third of the time. The funds which ends up in top quartile over a 10 year period spends not less than 3 years in bottom quartile. During one third of the time, all long term best performers become worst performers.

We’re committed to provide you long term superior performance and not to keep chasing performance and provide suboptimal returns. Vanguard studies have also shown that performance chasing hurts long term returns significantly where as buy and hold strategy offer good returns. I’ve shared this Vanguard study earlier.

I also shared with you a study came in ‘Mutual Fund Insight’. If you’ve invested in a large cap fund in 2007 and kept changing the same each year based on the previous year top performer, you would have got an annualised return of 3.93%. Whereas buying a fund in 2007 and holding it for 10 years would have delivered an annualised return of 12.84%

Not that we keep quiet during periods of underperformance. We speak to fund houses and regularly keep getting their inputs. Most of the time we feel the issues are temporary and were subsequently proven accordingly. In rare instances, where we believe the future may not pan out well, we recommend change.

So please look at overall portfolio performance and not each fund’s performance. Since you hold around five funds, it is most likely one of them would always be going through a period of underperformance.

Our idea of value creation is not through activities. It is easy for us to do some tinkering frequently and show you action. We’ll never do that. What matters to us is you should reach your financial goals, build wealth and attain financial independence. We would hand hold you through various business and market cycles and help you reach there. We’ll do only what is required. Many a times not tinkering with your portfolio and not allowing you to do so in itself is a big value addition.

Don’t equate activity with progress. Investing is one area where activities should be minimal. Neither you should chase performance nor ask us to do it.

Underperformance is inevitable. Keep this in mind when you look at your portfolio.

Posted in General, Mutual Funds | 1 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 | 2 Comments »

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 »

Stephen Jarislowsky and a Janitor

Posted by Muthu on March 26, 2017

I’ve been looking for and reading about investors who made it big through ‘buy & hold’ investing of quality companies.

Reading about them reinforces the required conviction to stay the course.

One such investor is Canadian billionaire Stephen Jarislowsky.

To make it really big, these investors started very early (usually in their twenties) and lived beyond eighties. This gave them the crucial variable of ‘time’ which is essential for compounding.

We neither started in twenties nor do not know how long we would live. If someone has investible surplus of Rs.10 crores at the age of 50, at 15% compounding, he would end up with Rs.160 crores  at the age of 70. Such is the power of compounding. We are not aiming for billions but may be few million dollars. We can achieve this despite starting late and not knowing about our longevity.

Stephen looks for high quality large cap companies which are non cyclical and can keep doubling their earnings every 5 to 7 years. He simply buys these companies and hold them forever.  He is now 91 years and started investing when he was in his twenties. He holds the stocks he bought as early as 1948. In fact his secret his ‘buy stocks you never plan to sell’. He believes the one thing investors need to learn is virtue of patience.  He shuns cyclical stocks and looks for industries like consumer staples, alcohol and healthcare which are stable and growing businesses.

He says that shares produce an average real return of 5% to 6% a year (after inflation). The earlier that you can start, the more miraculous will be the effects of compounding over a working life.

While I was reading about Stephen Jarislowsky, I stumbled upon the story of Ronald Read. Last year Ronald Read passed away at the age of 92. He was working as a janitor (door man) at JC Penney. Before that, for many decades, he worked as an attendant in a gas station. When he died, it was found that he has left $8 million in charities for local library and hospital. Nobody was aware that the door man at the local shop was a multi millionaire. He has also bought and has been holding high quality companies for many decades. He never went to college and was a high school dropout. He regularly used to read Wall Street Journal which should have aroused the curiosity of people around him. They completely missed this aspect of his life.

We may not become a Stephen Jarislowsky. But we all earn more and capable of investing much more than Ronald Read. Whether it is Stephen or Ronald, they held on to equities for decades completely ignoring news and noise. They never aspired for quick money and rated patience as the highest virtue in investing.

Without compromising current consumption and present life style, we all are capable of saving more, which we do. Where we occasionally fail is losing our patience and getting carried away by noise.

As I mentioned about stocks, let me give an example of equity fund as well. I was going through a brochure of HDFC Tax Saver. Rs.1 lakh invested in it twenty years ago has become Rs.1.04 crores now. Money multiplied by 104 times in 20 years. Rs.1 lakh invested systematically in it every year for last 20 years is now worth Rs.4.75 crores. An annualised return of more than 25%. Past has been wonderful and we expect future to be more modest but still provide a decent return of 15%.

Last 20 years there have been many negative news and events both in India and across the world. Those who stayed the course with tremendous patience would have built excellent wealth.

Have patience, give time and stay the course. Wealth is all yours.

Posted in Mutual Funds, Stock Market, Wealth | 2 Comments »