Wise Wealth Advisors

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

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Archive for the ‘Warren Buffett’ Category

This one is must

Posted by Muthu on December 17, 2017

Though we’ve not received any formal communication, we understand through articles in media, as quoted by AMFI (Association of mutual funds in India), the deadline for linking Aadhar with your mutual fund folios has been extended till March 31’st 2018. We would continue to co-ordinate with each one of you and complete the process well ahead of above timeline.

The average mutual fund holding period in India is around 18 months.

A book, Capital Returns mentions that the average holding period of stocks in Asia is 10 months. So for India too, it should be around this number.

I was reading this article today.

As of 2010, the average holding period of US investors has fallen to 6 months from 8 years in 1960.

Warren Buffett once said “What makes sense in business also makes sense in stocks: An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.”

No owner holds his company for 10 months. The holding period is measured in decades.

The idea of owning stocks or equity funds is to grow along with businesses. How much growth would happen in 10 months, the average holding period for most of the investors?

In our family portfolio, be it stocks or equity funds, we buy with an intention to hold not less than 10 years. Not that we would not make course correction, but as a principle it would be less frequent. If we buy right, churn can be kept at the minimum.

All of you have good experience in investment made through us in mutual funds. Why it is so? Because based on our advice, you’ve been holding your investments for many years. Longer the time horizon better would be the results.

You’re a rare breed because very few hold on to their investments for 10 years or more. I’ve earlier shared with you many examples how churning leads to poor returns. Chasing performance in a good fund, investing after few good quarters and redeeming after few bad quarters, would give you subpar returns. But staying invested without hopping in and out even in an average fund, would give you excellent returns.

It is time that matters in investing. This is least understood and followed.

Coming back to the above mentioned article, Warren Buffett’s average holding period for many of his stocks is 20 years against the average of 6 months for the investor community.

He buys right and sits tight. We’ve also seen about a fund manager in UK, Nick Train whose average holding period is 18 years. Once you invest in good funds or stocks, what is required is staying invested for long time.

This one is must. This trait alone would ensure you build a fortune over time.

Posted in Stock Market, Warren Buffett, Wealth | 1 Comment »

How an ordinary businessman made $1.75 billion?

Posted by Muthu on November 5, 2017

$1.75 billion is Rs.11,375 crores. This conversion is to show the magnitude of this sum.

Whenever we hear illustration of if someone has held a fund or stock for 20 years how rich he would have become, we just yawn. We believe those are just illustrations and not a reflection of real life. No doubt it is not easy to hold a stock or fund for 20 years. But I keep giving examples to show, though rare this can be done. We may or may not make  hundreds of crores but tens of crores is possible for high income earners with right investment strategy, patience and discipline.

In 1980, Stewart Horejsi was a struggling business man. Warren Buffett was not well known 40 years ago as he is today. Horejsi heard about an upcoming businessman doing well in capital allocation and building wealth for shareholders. So he invested $10,600 of his family wealth in Buffett’s company, Berkshire Hathaway. He also started adding more shares regularly.

After 3 decades he nearly made a billion dollars out of his Berkshire holdings and got into Forbes list of billionaires. He subsequently diversified his wealth but still hold good number of Berkshire shares. As per Forbes, his current net worth is $1.75 billion.

Buying a good company itself is not an easy job. Keep on buying and holding on to the same for 30 years demands extreme conviction, patience and discipline.

Buy and hold may or may not work for a single stock. But for portfolios, mutual funds and index, selling rarely and holding on for most of the time would work wonders. The argument mainly against buy and hold is disruption. Disruption has always been there for businesses. It is not a new phenomenon. Good companies adapt and thrive. Weak companies fail and die. Buying & holding does not prevent us from tracking developments. Also it does not mean giving up our judgement and discrimination. Selling can be done but it has to be the last option. If we buy right, selling will be infrequent.

You’ve been following our guidance for more than a decade and have been rewarded for the same. Good principles would never go out of fashion though it may have periods of underperformance.

Stay the course and build fortune.

Posted in Stock Market, Warren Buffett, Wealth | 1 Comment »

Lumpy returns

Posted by Muthu on January 4, 2017

“Gains won’t come in a smooth or uninterrupted manner; they never have.”- Warren Buffett

We keep revisiting basics periodically. This is just to refresh our mind and reinforce certain points.

I mentioned yesterday that look for 3 year averages in debt funds like MIPs and look for 5 year averages in equity oriented funds.

This is because in market linked products the returns are lumpy and not linear.

I may be holding a stock which does not move anywhere for 3 years and double in 4th year there by providing annualised returns of 18% over a 4 year period. Nil returns for 3 years can be very frustrating and doubling in one year can be very exciting. The 18% returns is a result of enduring 3 years of frustration and one year of excitement.

Though this is only an example, lot of stocks behave that way in reality. The gains comes in a very short periods of time in a lumpy manner. To get that return, one has to stay invested for the entire course. As I said, it is impossible to time such ups, downs and periods of going nowhere. So being in the market all the time is the only way.

You might have got 9% annualised return in a MIP over a 3 year period. This 3 year period may contain a year of no returns or less returns or even negative returns. Why I’m reemphasising this is, unless you’re ready for this lumpiness, you won’t do well as an investor.

As Morgan Housel mentioned in a piece, Apple has multiplied by 60 times during the decade ending 2012. Still it went down on nearly half of the trading days. If you’re an investor in Apple and worried about it’s falling days (which was as much as it’s rising days), you would have lost the opportunity to generate 6000% returns.

By trying to time the ups, downs and periods of going nowhere, an investor would be able to generate superior returns. Many try and some even succeed. It may be possible say for top 5% of investors. But all of us cannot be in top 5%. Many who try and fail may even end up in bottom 5%.

By definition, most of us can aim to generate only average returns from the market. By discipline, patience and staying invested, we would be able to avoid ending up in below average category. Since not all investors have the above traits of discipline and patience, we may also end up being above average.

Right behaviour would ensure that we rise above average and do not fall into below average. As I always say, all our effort is to ensure this right behaviour.

Posted in Stock Market, Warren Buffett, Wealth | 1 Comment »

Buffett’s suggestion for retirement

Posted by Muthu on November 11, 2015

Warren Buffett has suggested as to how his wife’s money to be managed after he’s gone.

“My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high fee managers.”

If you remember, I wrote a piece two months ago on how equity is essential not only in accumulation phase but also during distribution phase. I suggested that if someone is 50 years old with a life expectancy of 80 years; 3 years worth of expenses should be kept in liquid fund and the balance (27 years) in equity funds. What I’ve suggested is nothing but 90:10 (Equity: Debt) asset allocation.

I’m not saying that this is for all. I would recommend this only for people who can put up with greater volatility and temporary erosion of capital. The benefit would be wealth creation despite withdrawals and ability to pass on wealth to next generation after having a comfortable retirement.

I came across an article which cites that based on the research done for last 115 years (1900 to 2014); this strategy is simple and sound and has performed very well.

It also suggests the following:

“When stocks do well, retirees should take the annual withdrawal from stocks and rebalance the rest of the portfolio back to the 90/10 allocation, the paper said. On the other hand, when bonds outperform, retirees should withdraw from bonds but not rebalance the portfolio.

These changes could provide higher upside potential and better downside protection.”

We’ve written in the past as to how positive years are lot more than negative years for the markets.

For the period 1926 to 2014, US stocks (S&P 500) was positive for 73% of the years.

During close to last 4 decades, Sensex has been positive for 70% of the years.

Over decades, markets only keep trending upwards and the possibility of loss stands greatly reduced. As I’ve mentioned before, the CRISL AMFI Equity fund index has never given a negative return for any 5 year period on a daily rolling basis since inception.

You can chose your asset allocation (Equity: Debt) as 60: 40, 70:30, 80:20 or 90:10.

That is based on your comfort, time horizon, size of corpus and few other factors.

However it is a myth that a retirement portfolio has to be very conservative. To lead a comfortable retirement, not to outlive the money and to pass on good wealth for next generation; choose a minimum of 60% to a maximum of 90% in equity.

Posted in Muthu's Musings, Warren Buffett, Wealth | 1 Comment »

Losing $6 billion, now worth $63 billion

Posted by Muthu on August 25, 2015

Nick Murray has written a wonderful book ‘Simple Wealth, Inevitable Wealth’. I would rate this as one of the very few books both investors and advisors must read. I read this much late in life. I would have been a better advisor had I read this book earlier.

Joshua Brown in this excellent piece cites a passage from the above book and also shares some thoughts on the same.

Please remember that there was Russian Ruble crisis in 1998 (also don’t forget; there is always some crisis or other in the world) when the below incident took place.

“$6,200,000,000

Yes, that’s right, it’s six billion two hundred million dollars.

A very large sum of money, wouldn’t you say? Now what, you ask, does it represent?

It is roughly how much Warren Buffett’s personal shareholdings in his Berkshire Hathaway, Inc. declined in value between July 17 and August 31, 1998. And now for the six billion dollar question. During those forty-five days, how much money did Warren Buffett lose in the stock market?

The answer is, of course, that he didn’t lose anything. Why? That’s simple: he didn’t sell.

Berkshire Hathaway’s “A” shares had dropped in price from roughly $80,000 per share in June to $59,000 by the end of September. These same exact shares just hit a high of $229,000 this year. Buffett knew that while the price may have been changing for his company’s shares, the value that his companies were creating would not be permanently impaired. This allowed him to wait out the ’98 episode rather than reacting to it.”

I’m extremely happy that none of you got perturbed and called me yesterday. I’m glad that we are evolving together. Though it is expensive, I would suggest buying and reading Nick Murray’s ‘Simple Wealth, Inevitable Wealth’.

Only selling in panic, which most investors do, convert the temporary declines into permanent losses.

In the long run, index and good diversified equity funds would only keep going up.

I don’t know how the short term would pan out. But in the long run, a growing economy like India is a great place for investors.

Never lose faith. In the moments of doubt, please call me. We are always there to handhold you.

Posted in Stock Market, Warren Buffett, Wealth | 2 Comments »