absolutezero wrote:vrdiver wrote:I think Gengulphus posted earlier that within his own portfolio the majority of shares have suffered market swings of -25% or so.
It's this bit here. I think G meant 25% swings from peak price (I may be wrong).
I'm talking about a 25% drop from your entry price - which may or may not be peak.
That's a reasonable point, but it's not well-defined, because I generally have multiple entry prices. E.g. for BHP Billiton, I have 23 different entry prices between 2007 and 2017, ranging from 1001.39p to 2258.49p... (That's partly because my HYP generates enough dividends to make fairly frequent top-ups to reinvest surplus dividend income cost-effective and partly because it's split across multiple accounts - quite possibly too many, but at least three are well-justified, for ISA, SIPP and unsheltered holdings.)
One could of course go for
average entry price, which on a (total purchase cost)/(total number of shares purchased) basis is 1399.42p. But that's not all that well-defined either, because for holdings I've top-sliced at some stage there's the issue of which purchases' shares were sold and so should have their particular purchase costs removed from the calculation. For BHP Billiton, that happens not to be an issue, as I've only top-sliced once and that was very early on, when there was only one purchase it could have come from, but it most certainly would be an issue for many of my other holdings... It would in any case be quite a lot of work to calculate it, far more than is justified for a quick across-the-board sweep through the portfolio. (I'm certain about that being a lot of work because CGT calculations require all but the final division of such calculations to be done for a particular usually-sensible-but-occasionally-downright-odd way of matching sales up to buys. So I've had to do almost all the work for the unsheltered part of my portfolio only - and based on experience of that, I'm extremely unlikely to voluntarily extend it to the ISA and SIPP parts as well!)
In the case of BHP Billiton, the fall down to a price of about 600p near the start of 2016 would of course have triggered a 25% stop-loss sale of all previous purchases regardless, as it's over 25% below every single purchase price of mine (and of course therefore also over 25% below any sensibly-calculated average purchase price). That is of course due to it having fallen a lot more than 25%, and it's certainly one of the biggest fallers I've had in the last five years (it might well only be beaten by Carilllion...). But a good number of other shares fell by enough more than 25% that if my average purchase price were a bit less than their average price for the last five years (as BHP Billiton's is, and as expected because my purchases will be biased towards the times they had lower prices and hence higher yields), they would still have fallen more than 25% from their average purchase price.
So anyway, as I said it's a reasonable point you've made there, and I agree that the data I supplied about my own HYP is about falls of 25% from the peak share price - which is actually a reasonably common type of stop-loss order (*), sometimes known as a "trailing stop-loss". So I'll revise what I said to saying that IMHO and based on the evidence of my own HYP, 25% trailing stop-losses aren't in general compatible with HYP share strategies (or other LTBH share strategies) because they result in far-too-frequent sales. I would expect 25% below-purchase-price stop-losses to result in significantly less frequent sales (since a HYP would have to be incredibly unlucky to have always bought at or near the share price peaks) and so at least come a lot closer to being compatible with HYP strategies. On the basis of the very high proportion of holdings (84%) that fell more than 25% from peak, whether it would actually reach compatibility with them looks doubtful to me, but for the reasons explained above, I have no sensible way to provide solid data about that.
I would however say that I think using 25% below-purchase-price stop-losses on a HYP held for the long term ends up having what I can only describe as a very odd attitude towards capital. For example, look at what they would say if they started being used on HYP1 as shown in
pyad's 17-year report in November, and in particular what they would say if applied to the Rio Tinto and Land Securities holdings, which I've chosen as two of its comparatively few holdings that haven't had the question of what the purchase price actually is messed up by being replacement shares on takeovers or having the proceeds of capital returns by other holdings reinvested in them. Both therefore have a £5,000 purchase cost and so would have such a stop-loss set at a value of £3,750. So if Rio Tinto were to suffer a major price fall, the stop-loss wouldn't kick in until the fall had taken £19,046-£3,750 = £15,296 off the portfolio's capital value of £172,485, which is 8.87% of that value, but if Land Securities was the share suffering the major price fall, the stop-loss would kick in at the point that it had taken £6,321-£3,750 = £2,571 off that value, or 1.49% of it. I.e. that stop-loss policy would allow Rio Tinto to inflict over five times as much damage on the portfolio's capital value that it permits Land Securities to inflict...
(*) With the proviso that a trailing stop-loss doesn't look at peaks before the holding's first purchase.
Gengulphus
