Wise Wealth Advisors

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

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Archive for the ‘Mutual Funds’ Category

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 »

Returns

Posted by Muthu on March 18, 2017

As a part of year end process, we’ve been reviewing lot of portfolios.

Last 10 years, Sensex has given an annualised return of 9%. The broader market index, BSE 500 has given an annualised return of 10%.

During the same period, your portfolios which are mix of large cap, mid cap and multi cap funds have given a return of around 15%.

Balanced funds during the above period have given around 12% returns.

Surprisingly, MIPs have given around 10% during this period.

Now there are lot of predictions about long term structural bull market for next one or two decades. Since these predictions crop up during every bull market, I do not want to take the same seriously.

Likewise, during bear markets, one of which happened last year, many experts predicted gloom and doom. I never took them seriously as well.

In my view, markets, economy and businesses continue to be cyclical. There would be both surprises and shocks during next 10 years, like it was the same for previous 10 years and the 10 years before and so on.

Though there is no guarantee of returns on mutual funds, as they are marked to market securities, I believe we can aim for 15% returns in equity funds and 12% returns in balanced funds over next one decade.

As far as MIPs are concerned, I’m not sure whether they will produce 10% returns over next 10 years. What I would like to assume is 2% over and above fixed deposits in a tax efficient manner.

The journey would continue to be as volatile as it was before. It is better to be mentally prepared for a bumpy ride. The reward for going through this bumpy ride is good returns over long term.

The returns mentioned in this piece are only a broad pointer and the actual results may vary. The standard disclaimer, past performance may or may not be repeated in future, always apply.

All the best.

Posted in Mutual Funds, Wealth | 1 Comment »

Chaser is a loser

Posted by Muthu on March 16, 2017

You’ve been our clients for many years. You know that we are completely against chasing performance. We don’t believe in churning portfolio. We make changes, only if it is extremely required. We look for long term performance, consistency, losing less in bear markets and ability to navigate multiple market cycles. We’ve never recommended new fund offers (NFOs), sectoral and thematic funds. We are very choosy about the fund houses we work with.

Why I’m restating the obvious? I sincerely believe the kind of value addition we do with less tinkering of portfolio, preventing you from doing many wrong things and making you do the few right things needs to be shared once in a while so that more activities are not equated with good advice. In fact in investing, a good advisor would ensure minimal activities. More activities are harmful for the portfolio and lead to bad outcomes.

I was reading the current issue of ‘Mutual Fund Insight’. They have taken a period of last 10 years, 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 large cap category). You would have invested in Rs.1 lakh in Janaury 2007 in Reliance NRI Equity. In 2008, you would have moved to Sundaram Select Focus. Like that you would have invested in ten funds over last 10 years.

As on December 31’st 2016, by doing the above performance chasing, you would have ended up with Rs.1,47,704. An annualised return of 3.93%. You would not have earned even the SB A/C return by investing in equity mutual funds, that too all top performers of the previous years.

Let us assume you instead stayed invested with Reliance NRI Equity for the last 10+ years. As of yesterday, the last 10 year annualised return is 12.84%. This means, Rs.1 lakh invested 10 years ago is now worth Rs.3.35 lakhs.

Do you see the difference? Bad behaviour got you only 3.93% returns whereas good behaviour got you a decent 12.84%.

Never ever chase performance. Out of 10 years, a fund would have 3 or 4 bad years. This is applicable to all funds, including the ones you’re holding based on our recommendations. We have stringent yardstick for both selecting and removing the funds. We are not against portfolio changes. But we’ll do it only rarely, purely based on requirements. I promise that neither we would chase performance nor allow you to do so.

An advisor’s value comes not only from what he does but more so from what all he does not do. We would continue to be less active. We would also ensure that you remain less active. Adhering to this would ensure long term outcome of excellent wealth creation for your family.

I would like to end this with a Buffett quote: We will not equate activity with progress. We don’t get paid for activity, just for being right.

Posted in Mutual Funds, Wealth | 3 Comments »

Avoid noise

Posted by Muthu on February 12, 2017

How will be the weather on April 7th this year?

How will be the weather on December 10th this year?

No one knows the answer. It can even rain on April 7th or there may be a cyclone on December 10th.

At the same time I can predict that it would be summer in April and winter in December. This does not hold good only for this year but year after year.

Likewise I cannot predict what Sensex level would be in April or December but can definitely tell you that over next 10 years the growth in Sensex would be in line with its earnings.

Weather is not predictable, Seasons are. Short term is not predictable, long term is.

If you can understand this, there is no need to look at markets daily. Your mutual fund investments would grow in line with earnings of the companies they own. If you are a direct stock investor, at least there is some need to track about the companies you own. For mutual funds, you engage a fund manager for doing this job. So not consuming financial news would be of great help to you. I’m not saying that there are no useful things in financial news papers and channels. Since they have to write something daily or broadcast something every hour, much of the content is noise.

If you want to be a successful investor, stop looking at your portfolio daily and consuming financial news regularly.  The more you see the daily gyrations, higher would be your mood swings. Unpleasant emotions would lead to incorrect decisions. If someone has chosen 4 or 5 diversified equity funds ten years ago and simply stayed invested completely shutting out noise, he would be sitting today on decent returns. Last 10 years, in both India and world; so many changes happened in economy, markets, commodity prices, politics, revolutions, terrorism…. the list and events would be endless.

Despite many negative events and unpredictable changes, neither Asian Paints nor Colgate stopped selling paints and toothpaste respectively. Men continued to use Gillette for shaving. People did not stop taking bath using Hamam. Bad news makes headlines. Gradual improvement and everyday life does not.

Since portfolio access is considered a hygiene factor, we would also be providing it in a month or two. But I would be extremely happy if you don’t check your portfolio. Yearly once we do review with you. That alone is sufficient.

I don’t want your financial news consumption or regular portfolio tracking come in the way of wealth creation. Listening to noise can be extremely harmful to your wealth.

Avoid noise. Stay the course.

(Note: The companies and products mentioned are for illustrative purposes only and NOT stock recommendations)

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

Don’t chase performance

Posted by Muthu on January 6, 2017

“Chasing fund performance is often the quickest way to hurt your mutual fund returns.”- Arthur Levitt

Many investors get bored with holding the same portfolio. That too if a fund underperform, they want to quickly change to a better performer. Once a portfolio is a chosen, we suggest changes only infrequently. This is because all funds and fund managers go through periods of underperformance. No fund is consistently on top every year. Last year’s top performer can be this year’s bottom performer. Last year’s poor performer can be this year’s best performer. Though we do have yardsticks in funds selection; it is more of what not to choose and what to avoid. By minimising errors, and giving a diversified portfolio of 5 funds from five different fund houses, we aim for a decent return over 10 year period or so.

Our biggest value addition is we interfere less in your wealth creation journey. We also ensure that you do not become a hindrance in your own wealth creation. Since you are only used to us, you don’t know how uncommon this is. Someone who is our client for last 10 years would hold most of the same funds we selected at the beginning. Holding a portfolio for 10 years is uncommon in the market. The average equity fund holding period is only around 18 months. By our approach, we ensure that the return you earn is equal to fund’s return over a 10 year period. What is the big deal in this? Very few investors earn what the fund earns. There is a huge gap between investor’s performance and investment’s performance as people redeem after bad years and invest after good years. We ensure that you don’t fall into this trap. For our clients, the investment returns and the investor returns are the same.  It would definitely sound boastful, but the fact is this  places you among a very small group of successful investors.  

Please read this article which talks about a study done by Vanguard.

I’ve given some excerpts below.

“The other study was authored by U.S. ETF giant Vanguard, which looked at the histories of more than 3,500 equity mutual funds in order to compare a basic buy and hold strategy to a frequent-trading strategy that simulated the effect of performance chasing.

The study looked at three-year rolling return performance between the years 2004 and 2014, across nine equity groupings (this is roughly in-line with the time the average fund investor holds an equity mutual fund). The simulation also tracked the Sharpe ratio of the average fund in the category, a measure of risk-adjusted return.

The “rules” of the buy and hold were relatively simple: the simulation invested in any fund, and held it to the end of the time period. If the fund was discontinued, the simulation simply reinvested its money into the median-performing fund within the grouping.

For the performance-chasing portfolio, the simulation invested in any fund with an above average three year annualized return. If that fund turned in a below average performance for the next three year rolling period, that fund was sold and the simulation reinvested the proceeds in equal amounts into in the top twenty funds in the asset grouping.

At the end of the day, the simulation produced a total of more than 40 million return paths–a pretty good yardstick for measuring whether performance-chasing or buy and hold is the more sensible strategy.

Category            Buy & Hold      Performance chasing

 Large Blend            6.8%                      4.5%

Large Growth          7.1%                      4.3%

Large Value             7.0%                     4.7%

Midcap Blend           8.9%                     4.9%

Midcap Growth         8.6%                     5.7%

Midcap Value           9.2%                     7.6%

Small Blend             8.9%                     6.3%

Small Growth           8.6%                     5.7%

Small Value              9.3%                     5.8%

The chart above illustrates that buy and hold was the clear winner, beating performance-chasing in all nine style boxes. Note the size of the performance gap between the two strategies.

The Sharpe ratio was better (i.e., higher) for each of the buy and hold portfolios, meaning there was less volatility along with better returns. Talk about having your cake and eating it too! “

We will never chase performance and would not allow you to do the same as well. That’s why you’ve chosen us as your advisor. Our key objective is to ensure that as investors your earn 100% of investment returns without any slippages due to behaviour gap (i.e.) the misbehaviour of chasing performance based on past data.

Posted in Mutual Funds, Wealth | 1 Comment »