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

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Archive for the ‘Wealth’ Category

Barber and Odean

Posted by Muthu on January 26, 2018

Happy Republic Day.

Google for Barber and Odean, you’ll get articles and studies based on the work conducted by two Professors Brad M.Barber and Terrance Odean. They have studied in detail about the behaviour of individual investors in the market.

Their study has also been cited in the book ‘Simple but not easy’ by Richard Oldfield.

I’ve extracted the following details from the above book.

These professors studied in details performance of 78,000 individual investors for the period 1991 to 1996.

They classified people on the frequency of their trading. Higher the trading higher would be the turn over. A 100% turnover means a portfolio was completely changed every year. 50% turnover means half the portfolio was changed in a year and so on.

The most active (in term of trading) 15,000 investors had a turnover of more than 100% and made average annual return of 10%

The least active 15,000 investors had a turnover of just 1% and made average annual return of 17.5%

There is an excess annual return of 7.5% for buying right and staying the course patiently.

This is one more example to reinforce why we always insist staying the course not only during ups and downs of market but also during the periods of underperformance of funds.

We’ve explained to you in the past why our churn would be less and most of the time it would simply be staying the course. Chaser is a loser. Studies shows even the best of the investors or fund managers underperform 30% of the time.

As I’ve often repeated, our main job is to make you stay the course at all times.

You’re all similar to the above investors who got more returns because of a very less churn and being patient.

This is your strength. Always focus on the same.

Posted in Basics, Muthu's Musings, Stock Market, Wealth | 2 Comments »

This is your edge

Posted by Muthu on January 17, 2018

You’ve been our clients for many years and by now know what your edge is. Still, as always, let us keep revisiting and reinforcing our investment philosophy.

Let us take last 2 years, 2016 and 2017. Markets corrected by more than 20% in the beginning of 2016. In June, Brexit happened. Markets corrected. November 8th, two events; demonetisation was announced and Donald Trump got elected as President. Markets corrected.

Coming to 2017, in February UP elections happened. Market was worried whether BJP will win. GST, another structural shift and hence disruption happened in July. Market stumbled. Every other week in 2017, there was a worry about nuclear standoff between US and North Korea. In December, Gujarat elections became a point of worry.

I don’t know what will happen in 2018. But markets always keep finding a new reason to worry. Despite all the imaginary and real fears in 2016 and 2017, your portfolio is doing very well. This is because you are staying invested through ups and downs over last very many years.

I wrote a piece in 2015. During the previous 20 years, many equity funds have multiplied between over 40 to 100 times. Based on a HDFC mutual fund presentation, I wrote how scary those 20 years were. I would like to revisit the same again.

In 1996, Congress lost the general elections. This resulted in communist supported and participating third front government coming to power. A hardcore communist, Indrajit Gupta, was India’s home minister from 1996 to 1998.

You would also remember that BJP first came to power in 1996 and could survive only for 13 days. So between 1996 and 1998, there was huge political uncertainty and we had three governments in 3 years.

In 1997, Asian financial crisis happened. Much of East Asia went through severe currency crisis raising fears of serious economic meltdown.

In 1998, BJP again formed government, which only lasted for 13 months and was in constant turmoil due to tantrums of coalition partners.

In 1998, India conducted nuclear tests. Western sanctions were imposed crippling the country’s financial situation.

In 1999, we had a fight with our neighbour Pakistan. Kargil war brought both the nations to brink of a major confrontation.

In 2000, tech bubble burst. Technology stocks world over crashed eroding investors’ wealth.

In 2001, 9/11 attacks happened, creating a huge geo-political crisis. Markets tanked.

In 2001, Ketan Parekh scam happened. UTI crisis happened. IT stocks in India lost value as much as 90%.

In 2001, Indian parliament was attacked by terrorists.

In 2004 general elections BJP lost. Congress government dependant on left support for survival came to power. There was common minimum program and weekly breakfast meetings. Government has to keep on yielding to the left tantrums to stay in power.

After 2004, the global commodities prices started rising. Oil prices also started rising sharply.

In 2008, global financial crisis, considered as worst financial crisis after great depression happened. World markets collapsed, Sensex dropping more than 50%.

In 2008, Mumbai terrorist attack happened.

From 2010-13, corruptions, scams and scandals started hitting the government. 2G, Common Wealth Games and Coal gate are some of the major scams. UPA-2 was most part immobilised and was fighting one corruption scandal after another.

In 2013, markets panicked due to QE tapering worry. GDP growth slowed down. Current Account Deficit (CAD) and Fiscal Deficit (FD) worsened threatening ratings downgrade. Inflation was very high and the currency weakened.

In 2014, rise of ISIS.

Despite all the above, investors wealth multiplied multi-fold.

As Morgan Housel says, “Progress happens too slowly to notice. Setbacks happen too quickly to ignore.”

As a nation, we would continue to progress. Media will keep amplifying fears and anxieties. What you need to do is continue to stay invested. What can be simpler than this?

You’re able to follow the conviction of staying the course by doing nothing. There are very few long term investors in the market as many find it difficult to adhere to this. Markets would create wealth for you as long as you don’t keep tinkering.

Being a long term buy and hold investor and staying the course through ups and downs is your greatest edge.

Keep up the edge.

Posted in Stock Market, Wealth | 5 Comments »

Bad News and Good News

Posted by Muthu on January 2, 2018

Bad News: Inflation destroys wealth

Good News: Compounding builds wealth


Bad News: Discipline is painful

Good News: Outcome is enjoyable


Bad News: Equities are extremely volatile

Good News: Equities create immense wealth


Bad News: Media amplifies greed and fear

Good News: Good books and blogs impart wisdom


Bad News: Short term is unpredictable

Good News: Long term is reasonably predictable


Bad News: Bad things can happen any time

Good News: Proper planning & risk covers can reduce negative impact


Bad News: Life is ephemeral

Good News: Most of us would live to reach old age


Bad News: Cannot control returns

Good News: Can control savings


Bad News: Markets are not under our control

Good News: Behaviour is under our control


Bad News: Disruptions can happen anytime anywhere

Good News: Continuous learning is the available antidote

Posted in General, Muthu's Musings, Wealth | 5 Comments »

Hard and Harder

Posted by Muthu on December 23, 2017

Hard: Making money

Harder: Keeping money


Hard: Start investing

Harder: Stay invested


Hard: Saving

Harder: Properly investing the savings


Hard: Avoiding fads

Harder: Sticking to a portfolio for 10 years


Hard: Controlling greed in bull markets

Harder: Controlling fear in bear markets


Hard: Saying no to easy money

Harder: Sitting tight for long term compounding


Hard: Not looking at daily prices

Harder: Not reacting to price fluctuations


Hard: Looking at opportunities in bear market

Harder: Looking at risk in bull market


Hard: Analytical skills

Harder: Discipline and Patience


Hard: Not chasing multi-baggers

Harder: Contentment with modest returns

Posted in General, 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 »