Wise Wealth Advisors

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

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Archive for the ‘Mutual Funds’ Category

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 | 1 Comment »

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 »

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 »