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.
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.