Wise Wealth Advisors

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

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Points to remember

Posted by Muthu on February 8, 2018

1) Equity beats inflation and provides superior return over other asset classes in the long run.

2) Good years are more than bad years. Based on the past we can say 70% of the time it is good years.

3) Not possible to time the market. Need to stay invested through both good and bad years to reap the long term return.

4) 10% correction once a year is a normal. Should not be surprised whenever it occurs. Only non occurrence should be a surprise.

5) 20% correction once in few years and 30% fall once in a decade is also very normal. Need to live through this roller coaster ride to enjoy high returns which equities offer.

6) Better to avoid checking portfolio during the periods of market turbulence. Once a year review is good enough, more so during bear markets.

7) Need to withstand emotional pain during the corrections and falls. Any adverse reaction to emotional pain would convert temporary notional loss into permanent real loss.

8) Invest when you’ve money. Redeem when you need money. Ensure there is not less than 10 year time gap between both.

9) Have strong filters when you consume market news. If it is not possible, you would be better off ignoring such news and updates.

10) Patience, discipline and staying the course would ensure you reach your goals and become wealthy. Always work on developing these traits.

Posted in General, Muthu's Musings, Stock Market | 4 Comments »

Pain is inevitable

Posted by Muthu on February 6, 2018

We’ve always told you that 10% corrections once a year, 20% fall once in few years and 30% fall once in a decade is very common. There is no way to avoid the same. The 15% expected returns from equity over a decade includes the periods of high returns, low returns, no returns and negative returns.

Globally markets have been falling for last one week. Looks like India would not be immune to this in the short term. In the short run, markets are affected by so many factors. In the long run, it is the earnings and earnings alone which matters.

All our regular sharing and mentoring is to help you face periods of negative returns. Pain is inevitable in the roller coaster ride of stock markets. If we can understand that this pain is part and parcel of journey towards superior returns, we would suffer less.

Nobody would happy to see their portfolio going down by 20%. At the same time need to remember that these are notional losses. We should not make it a permanent loss by selling in panic.

Though I’ve no ability to predict markets, looks like near term may be bad. It would be better if you can avoid looking at your portfolio during such turbulent times. Corporate earnings have started picking up well from last quarter, and the businesses are expected to do well in future. If businesses do well, earnings go up and the same gets reflected in stock prices.

When the market falls, the business does not fall. Colgate would not sell lesser toothpastes due to fall in stock prices. Focusing on business instead of stock price is always a good thing, more so in bear markets.

It is in these times, we need to keep in mind the bigger picture. Good Indian companies have long run way of growth ahead of them which would create tremendous wealth for shareholders. To earn this wealth, we need to go through periods of pain, such as what is happening now.

No pain no gain is definitely true for wealth creation through equities.

Brace yourself to face short term pain for long term gains.

Posted in Stock Market, Wealth | 2 Comments »

LTCG tax is back

Posted by Muthu on February 2, 2018

As you are aware, your debt fund investments like MIPs and liquid funds are subjected to both short and long term capital gains tax (LTCG tax).

For equity, there has been tax only on short term capital gains. Long term capital gains have been exempted from taxation for the last 13 years.

This has been changed by the budget presented yesterday.

Henceforth, long term capital gains on shares and equity oriented funds would be subjected to a tax of 10%.

For the purpose of calculation of long term capital gains, the NAV or share price would be taken as on 31’st January 2018.

Let us assume, you invested in an equity fund in 2010 at NAV of Rs.100. The NAV as on 31’st January 2018 is Rs.300. In 2020, when you redeem this fund, the NAV is at Rs.400. For calculating long term capital gains, your cost would NOT be taken as Rs.100 but only at Rs.300. This has been done to ensure that investments made till 31’st January 2018 does not suffer long term capital gains tax. Any investment from February 1’st 2018, would be subjected to long term capital gains tax of 10%.

There has been strongly divided opinion whether the taxation is correct or not. That debate would continue. But what matters to us is the fact that this tax has to be paid for equity investments made from now on.

We’ve to wait and see how this impact markets in the short term. I would not be surprised if markets react adversely in near future. These things are difficult to predict and does not affect the long term growth trajectory. Earnings have started picking up from last quarter and structurally corporate India is expected to deliver robust growth over next few years. In the long run, only earnings matters and sentiments which are so prominent in near term dissolve.

In 2014, I shared with you a tweet of Ben Carlson.

https://twitter.com/awealthofcs/status/542520113933864960

Start with a $1 investment that doubles in value year.

1) Sell the investment at the end of the year, pay the tax and reinvest the proceeds.

Do the same thing every year for twenty years.

End up with $25,200 clear profit.

(Or)

2) Don’t sell anything.

At the end of twenty years, end up with $692,000 after-tax profit.

See the difference in long term wealth creation when there is no churning.

We advised no churning even when there was no tax on long term capital gains. It now becomes all the more important to keep the churn very minimum.

Equity as an asset class delivers superior returns over all other asset classes in the long run. This was true when there was no tax and continues to be true when there is a 10% tax.

Currently there has been no indexation benefit for LTCG on equity. This is because the cost price of previous years has implied indexing as only the price as on 31’st January 2018 would be taken from now on.

Till 2004, long capital gains from equity was taxed either a flat 10% or 20% with indexation. I would not be surprised, if in the coming years, both the options are again provided to investors.

Now that you are aware of the changes, what you need to do?

Nothing. Just continue to stay the course, as always.

Posted in General | 1 Comment »

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 »

Nuggets for 20th January

Posted by Muthu on January 20, 2018

Some of my recent tweets:

1) When we buy quality, time creates wealth. When we buy junk, time destroys wealth. Time is useful in investing only when it is backed by quality.

2) Right behaviour ensures investor returns is equal to investment returns. Though this sounds very simple, it is rare and only few investors make it.

3) Don’t expect immediate gratification. Only when you accept delayed gratification, you become eligible for long term investing.

4) If we time the market, need to be correct at every entry and exit, repeatedly. We have no such ability. Believe that fortunes are made by buying right and holding on.

5) In investing, genius is one who has developed enormous patience and discipline.

6) Patience does not come easily. It needs tremendous discipline and practice. That’s why making money and retaining it is never easy.

7) My results have improved from the time I started focusing on buying right, sitting tight and be a reluctant seller.

8) Rewards for patience happen only over years not weeks or months. How much ever this is emphasised, only few would follow. Delayed gratification is not easy.

9) In hindsight, staying the course looks easy. As every tomorrow has always been uncertain, staying the course is most difficult but extremely rewarding.

10) Being rich is having only money. Being financially independent is having both time and money.

11) Investing is simple. It gets complicated only because of our behaviour. Behave well, all will be well.

12) There is nothing new in worrying about global factors, politics, interest rates and macros. People have always been worried about it and would continue to do so. Equities have done well despite real and imaginary problems and would continue to do so.

13) In long term investing, it is not effort that counts, it is patience.

14) 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.

15) No doubt that there are many roads to reach destination. But better to choose a good and less accident prone road.

16) You’re ready for long term investing only when you’re able to accept underperformance or even negative performance for few years at a stretch.

17) The biggest challenge for many is the initial capital. Living well below one’s means is generally a good habit, but must for beginners who want to get wealthy through investing.

18) If I’m not able to earn the returns I aspire for, I would not increase the risk. Instead I would reduce my expectations.

19) Without some amount of failure, difficult to get a grip on investing. It is better to fail early as you would still have time to catch up and it would also cost less.

20) Many of us would live long. If we can even do slightly better than average, it would be huge over a long period of time. No need to chase quick returns and end blowing up.

21) In every bull market, there are investors who chase fads and quick money. To paraphrase Buffett; each bull market teaches new investors some very old lessons.

22) Even a horrible investment strategy may work in bull markets. It is difficult to keep the money we make in the absence of a good investment strategy.

23) Patience, simplicity and prudence: old fashioned but much needed virtues for every long term investor.

24) Even mediocre returns would create good wealth over long term if we can avoid permanent loss of capital. We underestimate the importance of not blowing up.

25) Not that you should focus on beating others. However a right temperament would ensure that you outperform most of the investors.

Posted in Tweets | 4 Comments »