Wise Wealth Advisors

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

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Archive for the ‘Stock Market’ 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 »

Good periods are more

Posted by Muthu on September 21, 2017

Many investors are afraid both when the market goes up and down. Markets are rarely in equilibrium.  Moving up and down is its very nature. During bear markets, media hype creates enough scare for people to exit investments. In bull markets, as markets keep making fresh highs, there is a strong fear of fall again hyped by the same media.

Markets do not follow any rules. Each market situation is unique. Every bull and bear markets occurs on different triggers. Over valuation or under valuation can last for long periods of time too. Our investment philosophy is not to time the market. We would go through periods of high returns, low returns, no returns and negative returns. We need to go through all these to get good long term returns.

In terms of years, markets are usually up 70% of time and down remaining 30%. There is no proven method or strategy to only capture good years. You need to go through bad years to get the reward of good years.

Also a 10% correction happens normally once a year. A 20% fall occurs once in few years. During a decade, we may even face a 30% fall too. These are only averages over a long period of time. Actual occurrences may significantly vary. Nobody has consistently timed all these profitably. Neither we nor anyone else can predict short term. Like seasons, long term is more predictable. Like weather, short term is unpredictable.

Because of my profession and interest, I read many good things and some nonsensical ones too, just to get a feel of what is happening around. You’ve no such requirements or compulsions. All of you have full time occupation. The best way to avoid noise is to completely shut it out.

Ignore any ups and downs. Just stay the course. Avoid or minimise use of online portfolio access. Our yearly review is more than enough.

Keep in mind that good periods are more than bad ones. It is easy to remember it now in a bull market. A 10% correction or 20% fall may always be around the corner. Don’t forget to remember it then.

Posted in General, Stock Market | Leave a Comment »

How Agnes Plumb made $98 million from Kellogg’s shares?

Posted by Muthu on August 13, 2017

ITC got listed in 1954. I’ve seen families holding this stock for two generations.  A small sum invested decades ago is now worth several crores for them, earning yearly dividends in lakhs of rupees. Likewise, I’ve met people who are holding diversified equity funds for last 2 decades. Thousand of rupees have become lakhs of rupees for them; money multiplied by 40 to 50 times.

In 1996, Agnes Plumb died at the age of 88. She was a single woman who lived with her mother till she passed away in 1960. During last four decades of her life, after her mother passed away, she led a simple life. As her mother was crippled due to an accident, she kept doing small charities for crippled and disabled people. She was also very fond of children and used to help the less privileged.

On her passing away, she left $90 million for hospitals and societies which work for the children with birth defects and are crippled. She also left $2 million each for four of the families who were close to her during her life time.

How come a normal middle class woman made $98 million fortune?

Her father, during his life time was a shareholder of Kellogg’s. She inherited it from her father after his death. Her father has been holding the shares for few decades. After his death, she held it for many decades until her death. The shares continuously got split, resplit and kept doubling. What was once a modest number of shares became 1.3 million shares over many decades and two generations, amounting to a fortune of $98 million. Agnes used to receive $2 million as dividend every year for a small sum invested many decades ago.

During many decades of holdings, there would have been instances when the stock price of Kellogg’s would have corrected 50% or more. There are many years when the price would not have moved at all, as returns are always lumpy in the stock market. There has been wars, booms and bursts, bull and bear markets, gut wrenching corrections, recessions etc. during the holding period. She kept on holding the Kellogg’s shares ignoring all these.

‘Buy & Hold’ works for companies which can survive and grow over many decades. This involves skill, knowledge, luck and huge control over one’s emotions. Some companies succeed and many fail. The long term survival rate is low. But buying and holding index or diversified equity funds is no brainer. Good companies come inside and bad companies keep exiting the index. In diversified equity funds, the fund manager takes care of buying and selling companies. All it needs is to hold on ignoring ups and downs for many decades.  It is very difficult to go wrong and not make wealth if you follow this.

As I always repeat, in fund selections, we focus on what to avoid. Once that is taken care, choice of funds is merely a hygiene factor. What is important is staying the course ignoring market cycles and negative news (most of the news is always negative). 90% of our work is shaping your behaviour and ensure you stay the course. All the other advice and services we do is only 10%.

In a country like India, we can make good wealth if we can start thinking in terms of decades as holding period. It doesn’t require a great brain but an excellent temperament.

I hope we all develop and sustain right temperament.

Agnes Plumb did it. We can also do it.

Posted in Stock Market, Wealth | Leave a Comment »

How Anne Scheiber built a fortune?

Posted by Muthu on July 30, 2017

Anne Scheiber was born in 1893.  Her father died when she was very young.

Due to poverty, she began to work in her teen years, saved money and graduated from law school. She joined IRS. IRS is ‘Internal Revenue Service’. It is the income tax department of US government.

Being a Jew and a woman in the early part of last century, she faced lot of discrimination. She excelled in her work. But during her 23 year career she never got a promotion due to discrimination. She retired in 1944 with a retirement corpus of $5000.

Though she retired at the age of 50, she lived till the age of 101; passing away in 1995.

Her experience as an IRS auditor, scanning numerous income tax returns, showed her how rich some people became by investing in stocks. So at the age of 51, she became an investor and remained so for next 50 years.

When she died, the five thousand dollars has become $22 million. Inflation adjusted, it is roughly $34 million now. She donated the money to establish scholarship at Yeshiva University and Albert Einstein School of Medicine to help deserving poor women’s education.

Except her stockbroker and lawyer, no one knew she was that rich. She led an obscure life. Her entire fortune was built through investing in equity.

This article says:

Her investment strategies were simple, if not old-fashioned. Forget about market highs and lows on any given day, month or year. Reinvest your dividends. Hang tough and seldom sell.

“She was never looking for a quick buck,” said William Fay, her broker at Merrill Lynch. “Her whole idea was to get performance on a long-term basis. She felt over the long run the value would grow.”

This is how she turned $5000 to $22 million.

There were many times over her investing career her stocks declined even 30% or 50%. She stayed invested through many ups and downs, booms and burst of markets. Many a times, the economy went into recession and came back. There were war and peace, change of governments, economic and political turmoil; through all these she stayed with her chosen portfolio. She rarely sold. She bought companies whose business she can understand.

Once in a while, I keep giving such examples to motivate you to stay invested in equities for long term with patience and discipline; without being carried away by the gyrations of the market and the noise of media.

As Jesse Livermore said, once you buy right, all you need to do is to sit tight. This is very uncommon and difficult. Nobody said it is simple. But by focusing on our behaviour, it is very much possible.

Some of the personalities I write about had some serious flaws as well. In Anne Scheiber case, she was extremely frugal.

I only share with you their investment traits which helped to build fortune. There is no need for us to worry about other aspects of their life.

If a retired lady can do it in the last century, we can also do, not necessarily building a fortune but attaining worthy goal of financial independence

Posted in Stock Market, Wealth | 4 Comments »

Invest when you have money, redeem when you need money

Posted by Muthu on June 24, 2017

There is so much of confusion and discussion about whether markets would go higher or lower or stay flat from here.  I don’t know the answer. But so many experts have different answers; each according to how he sees it.

No one can get the answer correct. On each occasion, someone may get it right. But it would be different person on different occasions. No one consistently gets it right. Some people who have claimed to have seen 2008 crisis, was saying the same thing for very many years and one year they got it correct. Even the dead clock shows time correctly twice a day. If you keep saying regularly markets would correct by 20%, one day you would be proved correct. Likewise, if you keep saying regularly market would rise by 20%, one day you would be proved correct.

Market is an extremely complex mechanism. So many things affect it in the short term and it is very difficult to guess which way it will go. In the long run, only earnings and its growth impact a stock price.

The solution is owning an index or diversified equity funds or a portfolio of high quality companies for long run. Owning an index or diversified equity funds is a more passive activity and one has to be relatively more active in holding a portfolio of stocks.

Index has not been a great indicator of broader market movements in India. Index has given sub-optimal returns over last one decade whereas actively managed funds have delivered a better performance. So indexing is still some time away. As long as one avoids thematic and sectoral funds and invests in well diversified equity funds, there is no need to worry about timing.

Most of you are saving and investing for retirement. Retirement is usually spread over couple of decades. It is not a one time activity. Goals, which happens at a particular point of time, like daughter’s marriage need planning in advance in terms of withdrawal. Daughter’s higher education, which is usually spread over few years, also needs planning in advance for phased withdrawals.

Goals like retirement or building wealth which is spread over decades and even multiple generations needs no timing. It is better to be in equity over the accumulation phase. In distribution or retirement phase, one can have a mix of debt and equity. People who have built great wealth have done it through holding equities for decades without worrying about volatility. ‘Buy & Hold’ works well in a basket of stocks like index or diversified equity funds.

We always tend to extrapolate the present into future. In the beginning of 2016, when there was a bear market, experts were predicting further fall. But markets went up a lot post budget. Likewise when markets corrected during demonetisation, greater bear market and recession was predicted. But we’ve been in a bull market post demonetisation. Now everyone is predicting further heights. It may still rise or correct; we would only know in hindsight.

The markets are always volatile and would continue to be so. Every year, you can look forward to, may be two 10% corrections. One bear market (fall of above 20%) every few years is most likely to happen. This is how it has always been.

In a country like India, whose economy and corporates is expected to grow well over next one or two decades, stock market would also keep growing; but not without going through periodic cycles. If it takes 2 or 3 steps forward, you can definitely expect one step backward. It’s movement is going to be only like this. But every cycle would see new highs. But don’t look to time it. I cannot do it for you. Be skeptical about people who claim they can do it.

Once you invest in equity, simply stay the course.

But for few exceptions, the general rule is invest when you have money and redeem when you need money, ensuring at least there is a 10 year time period in between.

Posted in Stock Market, Wealth | Leave a Comment »