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

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Archive for the ‘Warren Buffett’ Category

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 »

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.


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 »

Buffett Fifty: Advice to Investors

Posted by Muthu on March 2, 2015

It is 50 years since Buffett has taken over and running Berkshire Hathaway. In last 5 decades, he has generated an absolute return of 18,26,613%. Yes, you read it right. That works out to an annualised return of 21.6%. During the same period, the index, S&P 500 has given an annualised return of 9.9%. So Buffett has outperformed the index by 11.7%.

Here is a small illustration for you to understand what 21.6% can mean to you for next 50 years. If only a fund can deliver similar return for next 50 years, Rs.1 crore invested today would become Rs.17,647 crores in next 50 years. Lucky are those who trusted and invested with Buffett.

Buffett has released his 50th annual letter on Saturday. Please click here to read the same. The entire 43 page letter is a treasure to read and re-read. I’ve given below a small portion from the same which you may find it insightful.

He explains how during 1964 to 2014, while the markets (S&P 500) appreciated by 11,196%; the currency (purchasing power of dollar) depreciated by 87%. He further explains as to why we should own diversified collection of businesses instead of currency denominated bonds for the long run. Please read on:

“The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities- treasuries, for example- whose values have been tied to American currency. That was also true in preceding half-century, a period including the Great Depression and two world wars. Investor should heed this history. To one degree or another it is almost certain to be repeated during the next century.

Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments- far riskier investments- than widely diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong. Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.

It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing power terms) than leaving funds in cash equivalents. That is relevant to certain investors- say, investment banks- whose viability can be threatened by decline in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near term needs for funds should keep appropriate sums in treasuries or insured bank deposits.

For the great majority of investors, however, who can and should invest with a multi decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing life time. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar based securities.

If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things. Recall, if you will, the pundits who six years ago bemoaned the failing stock prices and advised investing in “safe” treasury bills or bank certificates of deposit. People who heeded this sermon are now earning a pittance on sums they had previously expected would finance a pleasant retirement (The S&P 500 was then below 700; now it is about 2100). If not for their fear of meaningless price volatility, these investors could have assured themselves of a good income for life by simply buying a very low-cost index fund, fund whose dividends would trend upward over the years and whose principal would grow as well (with many ups and downs, to be sure).

Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in the markets. And no advisor, economist, or TV commentator- and definitely not Charlie nor I- can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.

The commission of the investments sins listed above is not limited to “the little guy.” Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index fund investor who simply sits tight for decades. A major reason has been fees: Many institutions pay substantial sums to consultants who, in turn, recommend high fee managers. And that is a fool’s game.

There are a few investment managers, of course, who are very good- though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to their siren songs, investors- large and small- should instead read Jack Bogle’s The Little Book of Common Sense Investing.

Decades ago, Ben Graham pinpointed the blame for investment failure, using a quote from Shakespeare: “The fault, dear Brutus, is not in our stars, but in ourselves.” “

Posted in Basics, Warren Buffett, Wealth | Tagged: , | Leave a Comment »