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How many shares in a HYP?

Practical discussions about equity High-Yield Portfolios (HYP) for income
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IanTHughes
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Re: How many shares in a HYP?

#218368

Postby IanTHughes » April 30th, 2019, 9:47 am

Arborbridge wrote:Maybe someone can put me right here: isn't this idea of "equal sector weighting" a new take on HYP?

Not entirely new, no. I cannot locate the exact wording but I do remember that from the beginning pyad always said something along the lines of:
All or most selections should be from a separate Business Sector



Ian

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Re: How many shares in a HYP?

#218369

Postby tjh290633 » April 30th, 2019, 9:52 am

Arborbridge wrote:Maybe someone can put me right here: isn't this idea of "equal sector weighting" a new take on HYP?

I think that Pyad had a conversion on the road to Damascus, or similar. He certainly didn't follow that precept in HYP1.

TJH

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Re: How many shares in a HYP?

#218386

Postby pyad » April 30th, 2019, 10:36 am

Arborbridge wrote:Maybe someone can put me right here: isn't this idea of "equal sector weighting" a new take on HYP?
As far as I know, all our previous constructions and maintenance thereof have been primarily based around the company capital weight - I don't remembered anything in the original guidelines about adhering to equal sectors, and discussions on HYP-P traditionally have only mentioned "maximum" size of sectors: e.g. 10% or 20%, rather than attempting equality of sectors.
Indeed, practitioners such as TJH (and myself) are on record as being fairly relaxed about sector size and I don't recall Pyad having put such a specific interpretation on sector weighting previously.

I'm not saying anything is "right" or "wrong", just suggesting that this emphasis could be new and therefore worth remarking upon.


Arb.


Sure I introduced a new rule, so what? It's hardly a major change and as I said it was many years ago for me and my readers though not on TMF/TLF because my HYPing involvement was elsewhere as you know. Although as you indicate I didn't have this rule in the earliest days, HYP1 had two miners at full cost each for example, I later had a re-think about it when running my own HYP show and found it more logical and less risky to have equal cost sectors rather than equal cost shares, which matters for any portfolio having multiple choice sectors as many of my ports did.

The reason is pretty obvious, it's so the HYPer doesn't prefer any sector by overweighting it at cost. Diversification is the cornerstone of the HYP concept but if you equal weight the indvidual shares the result is that any multiple choice sectors, eg BP/Shell being a common one, will result in the portfolio being overweight in those industries which I came to believe is undesirable as it suggests the investor thinks they know something about the long term future - perhaps without even realising it - which merits overweighting, whereas in fact we're all ignorant of that future.

Incidentally I've noticed that many here use official sectors for this purpose. Don't, they are of little or no use for our purposes and positively misleading in some cases. Rather, make up your own mind on this.

Finally, what if a share is added to an existing single share sector, (or even a third to an existing two share multiple)? How much should be invested in it? First test is to compare the existing sector value to the then average. If it's near or above that figure, then it shouldn't have any further investment of any kind, neither top-up nor new share. Thus you consider adding a new share only to those sectors sufficiently below the average to make the investment economical.

Okay you've found such a sector. Average sector value say £10,000 and you have a single share sector worth £7,000 so that you can invest £3,000 and have identified a desirable new share in this sector. You don't have to sell some of the existing share so as to make it £5,000 in each. That's the ideal situation but I'd say just live with the difference so you don't really have to do anything other than purchase the new holding.

And yes I'm aware before the hairsplitters arrive that the additional £3,000 will raise the average sector value so that this will now be marginally over £10,000 but HYPing is not about such minute details, it's about an overall strategy but within that minor variations are inconsequential.

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Re: How many shares in a HYP?

#218394

Postby JamesMuenchen » April 30th, 2019, 10:53 am

pyad wrote:The reason is pretty obvious, it's so the HYPer doesn't prefer any sector by overweighting it at cost. Diversification is the cornerstone of the HYP concept but if you equal weight the indvidual shares the result is that any multiple choice sectors, eg BP/Shell being a common one, will result in the portfolio being overweight in those industries which I came to believe is undesirable as it suggests the investor thinks they know something about its long term future which merits overweighting, whereas in fact we're all ignorant of that.

Then why not simply prefer the higher yielder? Surely picking an additional lower yielding share in the same sector is automatically suggesting you know something about its long term future, or a lack of confidence in your selection criteria?

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Re: How many shares in a HYP?

#218396

Postby pyad » April 30th, 2019, 10:56 am

JamesMuenchen wrote:Then why not simply prefer the higher yielder? Surely picking an additional lower yielding share in the same sector is automatically suggesting you know something about its long term future, or a lack of confidence in your selection criteria?


The principal reason for multiple choice sectors is to reduce company-specific risk. I never said to pick a lower yielder. In fact my advice is that it is only really desirable where the yields are very close so that there is little or no yield sacrifice by holding both shares compared with the higher yielder alone. For example the forecast yields for the common multiple oil choice of BP. and RDSB are 5.73% and 5.83%. Clearly there is no significant income sacrifice by holding both rather than RDSB alone.

If there is an appreciable yield disparity, then the HYPer has to decide whether the degree of yield sacrifice is a sufficient trade-off for gaining the reduced company-specific risk but this situation is less desirable than the above.
Last edited by pyad on April 30th, 2019, 11:11 am, edited 1 time in total.

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Re: How many shares in a HYP?

#218401

Postby Itsallaguess » April 30th, 2019, 11:10 am

pyad wrote:
Finally, what if a share is added to an existing single share sector, (or even a third to an existing two share multiple)?

How much should be invested in it?

First test is to compare the existing sector value to the then average. If it's near or above that figure, then it shouldn't have any further investment of any kind, neither top-up nor new share.

Thus you consider adding a new share only to those sectors sufficiently below the average to make the investment economical.


I was really quite happy to add a second share to my HYP sectors, even if it created a relatively minor and temporary imbalance in the portfolio diversification.

As I was still working and adding capital to my HYP, and as I was never really comfortable with just a single-share in any given sector, then I knew that over time I could carry such temporary sector-imbalances, with a view to working towards the longer-term goal of doubling up in all the sectors where I eventually could. This process took a number of years....

I only want to mention this because your thoughts above seem a little too prescriptive for longer-term HYP builders, although I would hope that's not actually intentional, and that you'd hopefully agree that longer-term HYP builders might quite correctly take a more considered approach to such temporary imbalances, if doing so helps to achieve their intended outcome...

Cheers,

Itsallaguess

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Re: How many shares in a HYP?

#218431

Postby Arborbridge » April 30th, 2019, 12:20 pm

pyad wrote:
Sure I introduced a new rule, so what?


So, nothing - except that as a new spin - or even a new rule - I felt it should be acknowledged as such. In no sense was I criticising you for doing so or saying whether it is right or wrong so there's no need to get all jumpy about my pointing it out. 8-) Nothing you have written about it is at all unreasonable, but neither is my marking the fact that it is an alteration of emphasis from the original.

Arb.

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Re: How many shares in a HYP?

#218443

Postby pyad » April 30th, 2019, 1:01 pm

Arborbridge wrote:
pyad wrote:
Sure I introduced a new rule, so what?


So, nothing - except that as a new spin - or even a new rule - I felt it should be acknowledged as such. In no sense was I criticising you for doing so or saying whether it is right or wrong so there's no need to get all jumpy about my pointing it out. 8-) Nothing you have written about it is at all unreasonable, but neither is my marking the fact that it is an alteration of emphasis from the original.

Arb.


Yes, guess I over reacted a bit, apologies for the slightly agressive tone. It was because utilising equal sectors was all done by me very long ago, about ten years but on my own site, so I was a little surprised by the reaction here which regarded this as new. I'd overlooked the fact that I hadn't written about it here before so for TMF/TLF readers who were unaware of how I constructed HYPs on my site it was indeed new. But it's only a minor shift and a logical one where HYPers hold sectors containing more than one share.

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Re: How many shares in a HYP?

#218466

Postby Arborbridge » April 30th, 2019, 2:28 pm

pyad wrote:
Yes, guess I over reacted a bit, apologies for the slightly agressive tone. It was because utilising equal sectors was all done by me very long ago, about ten years but on my own site, so I was a little surprised by the reaction here which regarded this as new. I'd overlooked the fact that I hadn't written about it here before so for TMF/TLF readers who were unaware of how I constructed HYPs on my site it was indeed new. But it's only a minor shift and a logical one where HYPers hold sectors containing more than one share.


No problem..

I can see the logic, certainly, but starting from where I am now, I could see practical difficulties as my sectors are rather unbalanced. There are always sectors with more suitable companies to choose from than others, and that's where most of us will be now, I should think. I will probably plough on with my current method, topping up the best company at the time, but impose limits on the sectors. If "weaker" sectors catch up, all well and good, but if they don't, it just means the companies just aren't out there.

Arb.

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Re: How many shares in a HYP?

#218467

Postby Lootman » April 30th, 2019, 2:28 pm

tjh290633 wrote:
Arborbridge wrote:Maybe someone can put me right here: isn't this idea of "equal sector weighting" a new take on HYP?

I think that Pyad had a conversion on the road to Damascus, or similar. He certainly didn't follow that precept in HYP1.

Maybe he was waiting to see which set of rules worked out the best? Perhaps it was the failures of HYP1 a decade or so ago that drove his decision to instead emphasise sectors not shares, as he said he changed his mind on that about a number of years ago.

pyad wrote:The reason is pretty obvious, it's so the HYPer doesn't prefer any sector by overweighting it at cost. Diversification is the cornerstone of the HYP concept but if you equal weight the indvidual shares the result is that any multiple choice sectors, eg BP/Shell being a common one, will result in the portfolio being overweight in those industries which I came to believe is undesirable as it suggests the investor thinks they know something about the long term future - perhaps without even realising it - which merits overweighting, whereas in fact we're all ignorant of that future.

The idea that we are all ignorant of the future is a popular enough concept, often expressed in terms of the efficient market hypotheses and "random walk" theories of investing. I 'm not sure that you can credibly assert that of every investor but it's broadly believed that most active investors do not out-perform and so much of the effort we put into trying ends up being futile or even counter-productive.

That said there are individual factors that might drive individuals to not weight all sectors equally. Some examples are:

1) Ethical considerations. For example some people want to avoid so called "sin stocks" like tobacco.
2) Predictable political risk. For example various people here have talked about shunning utilities because of the stated threats by Corbyn.
3) Balance with other investments. lf for instance I am employed in one sector, or have a large holding in my employer via share options, or I run other portfolios, then I might want to avoid that sector here.
4) Global trends. For instance the growth of tech and healthcare, and the decline of coal and non-online retail, are such structural trends that it might be a folly to ignore them.

Morever, and as noted elsewhere, the equal weighting is only applicable when starting out and insofar as the portfolio is created in one go. Once set up, the sector weightings will deviate. So then either you employ some kind of rebalancing, as TJH successfully does, or else you accept that the equal-weighting is ultimately not that important except at one point in time.

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Re: How many shares in a HYP?

#218480

Postby tjh290633 » April 30th, 2019, 3:45 pm

Lootman wrote:That said there are individual factors that might drive individuals to not weight all sectors equally. Some examples are:

1) Ethical considerations. For example some people want to avoid so called "sin stocks" like tobacco.
2) Predictable political risk. For example various people here have talked about shunning utilities because of the stated threats by Corbyn.
3) Balance with other investments. lf for instance I am employed in one sector, or have a large holding in my employer via share options, or I run other portfolios, then I might want to avoid that sector here.
4) Global trends. For instance the growth of tech and healthcare, and the decline of coal and non-online retail, are such structural trends that it might be a folly to ignore them.

Morever, and as noted elsewhere, the equal weighting is only applicable when starting out and insofar as the portfolio is created in one go. Once set up, the sector weightings will deviate. So then either you employ some kind of rebalancing, as TJH successfully does, or else you accept that the equal-weighting is ultimately not that important except at one point in time.

Avoiding a sector does not equate to weighting it less, in my view. There are likely to be sectors which do not qualify for inclusion at any one time, just as there are sectors which one wishes to avoid. I try to avoid airlines and train companies, for example.

Sunset industries may also be ones to avoid for certain people, while others might value the steady flow of static income they offer.

And are fixed line, mobile and satellite telecoms in the same sector? Matters for personal choice.

TJH

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Re: How many shares in a HYP?

#218486

Postby IanTHughes » April 30th, 2019, 4:16 pm

On 21 October 2013 pyad wrote an article - on TMF I believe but it may have been elsewhere - entitled "Introducing the High-Yield Portfolio".

In it he suggested the following:

Here is the essential rule structure:

Choose at least 15 shares, all or almost all from the FTSE100.
Ensure their sectors are diversified. *
Invest equal amounts in each share.
Pick shares yielding above the index at the time.
Do a little research on each prior to selection to try and ensure that dividends can be maintained for the immediate future.
Never sell and ignore share price fluctuations.
Strategic ignorance.

It is said that rules are made to be broken and that is true to some extent here except in one case – diversification. That is utterly fundamental to the HYP approach and must never be compromised. The reason for this is to lower risk. It’s clear that having a wide range of industries will limit the effect on the portfolio of problems in any one of them. What I’m trying to do here is protect the portfolio income because that is its reason for existence.

* - my bold

Of course, HYP1 was already 13 years old by then so pyad may not have been so emphatic at the outset but, as I said earlier, I am sure that Sector diversification was mentioned, even at the very beginning. For one thing, that is how my HYP was set up, albeit with looser restrictions, and I was following pyad's HYP Strategy.


Ian

Moderator Message:
a typo corrected at author request, 5 changed to 13

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Re: How many shares in a HYP?

#218491

Postby Arborbridge » April 30th, 2019, 4:54 pm

IanTHughes wrote:Of course, HYP1 was already 5 years old by then so pyad may not have been so emphatic at the outset but, as I said earlier, I am sure that Sector diversification was mentioned, even at the very beginning. For one thing, that is how my HYP was set up, albeit with looser restrictions, and I was following pyad's HYP Strategy.


Ian


I believe it was implied, right from the beginning*, by buying equal weight of shares However, I doubt any of his readers at that point thought about what would happen subsequently to sector balance as we all rushed off taking care of the (in my view more practical) company balance.

So, it's possible that Pyad always did intend to keep sector balance but that our HYP community emphasised t'other.

Whatever the case, I adopted maximum sector size as the control mechanism for sector risk and I find that operationally easy to do. Just at the mo with, for example financials being so plentiful, but other sectors being less so, it would be quite a struggle to keep sector balance - or re-establish it in my case.

Arb.

* as in "working down the yield table until you come to a suitable share in a new sector".

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Re: How many shares in a HYP?

#218640

Postby pyad » May 1st, 2019, 9:02 am

Arborbridge wrote:
I believe it was implied, right from the beginning*, by buying equal weight of shares However, I doubt any of his readers at that point thought about what would happen subsequently to sector balance as we all rushed off taking care of the (in my view more practical) company balance.

So, it's possible that Pyad always did intend to keep sector balance but that our HYP community emphasised t'other.

Whatever the case, I adopted maximum sector size as the control mechanism for sector risk and I find that operationally easy to do. Just at the mo with, for example financials being so plentiful, but other sectors being less so, it would be quite a struggle to keep sector balance - or re-establish it in my case.

Arb.

* as in "working down the yield table until you come to a suitable share in a new sector".


I thought I was clear but if not, my advice on equal sector investment applies only to cost when setting up a new portfolio, or current average value for new sectors added to an existing HYP. I did not mean to imply that existing portfolios should re-establish sector equality so I'm unsure why you mentioned that. There's no "struggle" required.

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Re: How many shares in a HYP?

#218648

Postby Arborbridge » May 1st, 2019, 9:23 am

pyad wrote:
Arborbridge wrote:
I believe it was implied, right from the beginning*, by buying equal weight of shares However, I doubt any of his readers at that point thought about what would happen subsequently to sector balance as we all rushed off taking care of the (in my view more practical) company balance.

So, it's possible that Pyad always did intend to keep sector balance but that our HYP community emphasised t'other.

Whatever the case, I adopted maximum sector size as the control mechanism for sector risk and I find that operationally easy to do. Just at the mo with, for example financials being so plentiful, but other sectors being less so, it would be quite a struggle to keep sector balance - or re-establish it in my case.

Arb.

* as in "working down the yield table until you come to a suitable share in a new sector".


I thought I was clear but if not, my advice on equal sector investment applies only to cost when setting up a new portfolio, or current average value for new sectors added to an existing HYP. I did not mean to imply that existing portfolios should re-establish sector equality so I'm unsure why you mentioned that. There's no "struggle" required.


Thanks for the clarification, I hadn't noticed that point. It does beg the same question as with capital weightings of individual shares: if balance is important at the beginning why isn't it important to maintain that balance? Or if the balance can be allowed to wander over time, why is it important in the beginning? The portfolio does not "know" what time it is: year 1 or year 10.

Arb.

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Re: How many shares in a HYP?

#218656

Postby IanTHughes » May 1st, 2019, 9:36 am

Arborbridge wrote:
pyad wrote:I thought I was clear but if not, my advice on equal sector investment applies only to cost when setting up a new portfolio, or current average value for new sectors added to an existing HYP. I did not mean to imply that existing portfolios should re-establish sector equality so I'm unsure why you mentioned that. There's no "struggle" required.


Thanks for the clarification, I hadn't noticed that point. It does beg the same question as with capital weightings of individual shares: if balance is important at the beginning why isn't it important to maintain that balance? Or if the balance can be allowed to wander over time, why is it important in the beginning? The portfolio does not "know" what time it is: year 1 or year 10.

My understanding is based on:
pyad wrote:The reason is pretty obvious, it's so the HYPer doesn't prefer any sector by overweighting it at cost. Diversification is the cornerstone of the HYP concept but if you equal weight the indvidual shares the result is that any multiple choice sectors, eg BP/Shell being a common one, will result in the portfolio being overweight in those industries which I came to believe is undesirable as it suggests the investor thinks they know something about the long term future - perhaps without even realising it - which merits overweighting, whereas in fact we're all ignorant of that future.

If an HYPer decides to sell an overweight sector and reinvest the proceeds into one that is underweight, that is surely suggesting the HYPer does, at the time of the re-balance, think they know something about the long-term future.


Ian

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Re: How many shares in a HYP?

#218660

Postby pyad » May 1st, 2019, 9:47 am

Arborbridge wrote:
Thanks for the clarification, I hadn't noticed that point. It does beg the same question as with capital weightings of individual shares: if balance is important at the beginning why isn't it important to maintain that balance? Or if the balance can be allowed to wander over time, why is it important in the beginning? The portfolio does not "know" what time it is: year 1 or year 10.

Arb.


The only logical construction approach at the start is equal sectors because the HYPer has no idea which sectors will develop over eternity to produce the better or worse income streams. So no sector should be preferred.

After that as you probably know, my advice is to permit what I've termed "Market Trading" to operate. This means no tinkering and instead allowing the market to do what it will with the portfolio by way of price fluctuations and corporate events such as bids, demergers etc. My view is that MT will serve an HYP much better over the long term than most HYPers will achieve by tinkering.

Most HYPers have no skill, none, and more likely negative skill by which I mean that by tinkering, they will actually harm their portfolios rather than enhance them. The problem is, as with a lot small investor approaches and not just HYPers, accepting their ignorance. Quite hard to do for many people. It's like saying you're a bad driver or lousy at sex. A lot of people, but overwhelmingly men in my lengthy experience with private investors, feel they have something to prove and have great difficulty in doing nothing even though that's nearly always the best course in time.

Women in the main don't suffer from this mentality and will frequently prove far better HYPers than blokes, simply because they are far more able to do nothing.

So my advice to most of the men round here is either learn to control your feelings that you have to do something and that something good will flow from that, when mostly it won't, or cut your balls off. A marginally radical approach perhaps but it'll do your HYP a world of good.

This is all first principles HYP 101 stuff which I'm sure I've said before Arb and you've been around a long time but perhaps it was on my own site rather than TMF/TLF.

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Re: How many shares in a HYP?

#218661

Postby idpickering » May 1st, 2019, 9:56 am

A great post Stephen. Thanks for your continued guidance. I’m trying to abide by the hands off mantra, and like the fact that when I check my dealing history, my only action over a given month is my monthly top up, and nothing else.

Ian.

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Re: How many shares in a HYP?

#218681

Postby Arborbridge » May 1st, 2019, 10:57 am

Thanks Pyad. I know all the principles, but like trying to be a good Christian, one is osmetimes faced with difficult issues to combat 8-)

You may know, I regard myself as a "slow tinkerer" which is something like being a Christian who strays occasionally. For example, I sold Marks earlier last year, and Interserve while there was still some capital left.

On a broad brush basis, my tinkering works half the time, so I'm not anxious to rush into it but neither am I completely averse to it.

Topping up is a different thing. Every HYPer has cash coming in, or finds cash down the back of the sofa, so the sector/company weight/balance issue raises its head then.

If one sector became overwhelming large I'd be just as worried as the owner of a HYP might be if one share was seen to be providing an enormous percentage of his/her income. That's a gratuitous acceptance of risk when it could be moderated.

Arb.

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Re: How many shares in a HYP?

#218682

Postby Dod101 » May 1st, 2019, 11:21 am

Arborbridge wrote:If one sector became overwhelming large I'd be just as worried as the owner of a HYP might be if one share was seen to be providing an enormous percentage of his/her income. That's a gratuitous acceptance of risk when it could be moderated.


And that gratuitous acceptance of risk is just what pyad advocates. It is illustrated every time he publishes the results of his model HYP.

Dod


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