Wise Wealth Advisors

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

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Archive for the ‘Warren Buffett’ Category

Less churn more gain

Posted by Muthu on April 9, 2018

We are in the process of sending each one of you annual portfolio summary along with our review. We plan to complete the work latest by last week of this month. For those of you who started investing after September’17, the review would happen only from the coming year. Since these investments are less than 6 months old, they become eligible for review only from the coming year.

I was reading Buffett’s annual letter of 1989. He has given an example which illustrates the importance of less churn and not interrupting the compounding unnecessarily.

“Because of the way the tax law works, the Rip Van Winkle style of investing that we favor – if successful – has an important mathematical edge over a more frenzied approach. Let’s look at an extreme comparison.

Imagine that Berkshire had only $1, which we put in a security that doubled by year end and was then sold. Imagine further that we used the after-tax proceeds to repeat this process in each of the next 19 years, scoring a double each time. At the end of the 20 years, the 34% capital gains tax that we would have paid on the profits from each sale would have delivered about $13,000 to the government and we would be left with about $25,250. Not bad. If, however, we made a single fantastic investment that itself doubled 20 times during the 20 years, our dollar would grow to $1,048,576. Were we then to cash out, we would pay a 34% tax of roughly $356,500 and be left with about $692,000.

The sole reason for this staggering difference in results would be the timing of tax payments. Interestingly, the government would gain from Scenario 2 in exactly the same 27:1 ratio as we – taking in taxes of $356,500 vs. $13,000 – though, admittedly, it would have to wait for its money.”

In both the cases the returns are same. When the portfolio is churned and tax is paid every year, the final corpus is $25,250. When the portfolio is not churned and the tax is paid at the end of 20 years, the final corpus is $692,000. A staggering 27 times difference.

Be it mutual funds or stocks, if no churn is not possible, we prefer less churn. The lesser we interrupt the compounding; the more would be the final gains.

The above example given by Buffett strengthens our conviction to keep the churn bare minimum.

Hope you would also agree.

Posted in Warren Buffett, Wealth | Leave a Comment »

The path is never smooth

Posted by Muthu on March 5, 2018

If someone has invested 53 years ago in Warren Buffett’s company, Berkshire Hathaway, he would have made a return of 2,404,748%. Yes, you read it right. We all know about the huge wealth creation by Buffett.

Stock markets would always be volatile. At the cost of repetition, 10% correction once a year, 20% fall once in few years and 30% fall once a decade is very normal. Don’t panic. This is how markets work.

During the journey of last 53 years, though the company was growing leaps and bounds, Berkshire share price had suffered four major falls.

Between March 1973 to January 1975, it fell by 59.1%

In a single month, in October 1987, it fell by 37.1%

Between June 1998 and March 2000, it fell by 48.9%

During the global recession, between September 2008 to March 2009, it fell by 50.7%

Though huge wealth was created by anyone who invested in Berkshire, the above four falls would have been gut-wrenching. There would have been many more 10%+ kind of corrections as well. There is no way to create wealth through equities without going through such roller coaster ride.

Though Indian markets provide us opportunity to create huge wealth through next two decades, the journey would not be without pain. Only those who can withstand the pain will enjoy huge gains.

Always keep in mind; the journey would be very rewarding but the path is never smooth.

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

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 | 2 Comments »

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 »