spiderbill wrote:Timing has been everything with IMB. I had the misfortune/mistake to buy mostly in 2016/17 and am sitting on a 35% capital loss, which will take years of dividends to compensate for. Hard to believe that such a HYP stalwart with such a profitable business has lost me more than Petrofac with all its SFO troubles. The time to buy wasn't then!
Shows how easy it is for apparently good shares to bite you.
I'd say it shows how easy it is to fall into the trap of going into a long-term strategy with the idea in mind that a few years is long-term!
I bought a holding of Electrocomponents in November 2007 and topped it up a couple of times in the first half of 2008. By early 2009, about 18 months after my first purchase, it was down on capital value on my average purchase price by around 40%. Ouch... But what would
really have bitten me is if I'd sold out of the holding at that point, or at any point in the next 7 years or so when after recovering over the first year, its share price meandered along pretty aimlessly - because after that it rose very steeply from about mid-2016 to about mid-2018. That had the result that my holding became rather overweight on capital and low on yield, so that I decided to top-slice about 30% of it just under a year ago. That sale realised about 102.5% of the original cost of my entire holding, so that my net capital drawdown on the holding is now negative (*) - and I've got the dividends paid so far as well, which amount to about another two-thirds of the original cost.
Not saying that Electrocomponents was a wonderful HYP share in 2007-2009 - obviously I thought it was a HYP share then (which it certainly isn't now, as its yield is far too low), but certainly not a wonderful one. At its low in 2009, compensating for my capital loss with dividends alone would have taken about 8 years of dividends at its freshly-cut rate of 11p per year. But that is really a rather pointless figure, because it actually took about
one year for recovery to compensate for that loss. And I'm also not saying that such things will always happen - they won't by any means, as the extreme examples of Carillion and Bradford & Bingley in my HYP (and the almost-as-extreme example of RBS) have demonstrated over the last couple of decades. But Electrocomponents is not the only example of a HYP share that recovered pretty dramatically after a pretty deep share price trough - BHP Billiton (now BHP Group) is the fairly recent example that springs to mind, having roughly tripled in price since its deep low a bit under 3.5 years ago.
What's basically going on is a hare-vs-tortoise race. Capital is the hare and are likely to dash around in both directions; the cumulative effect of dividends the tortoise that plods in the correct direction or worst case, comes to a standstill. In the short term, the hare is
highly likely to be by far the most significant determinant of the outcome of the race - if it dashes forward for a few years, the capital gains are almost certain to greatly outweigh the cumulative dividends and so look far more important than them, and if it dashes backwards for a few years, the capital losses are likely to do the same and so look to take a silly number of years for dividends to compensate for them... :
-( In the long term, it's more likely that the hare has wasted its energy dashing both backwards and forwards, giving the tortoise's slower, steadier progress a better chance of determining the outcome of the race.
HYP strategies are basically a long-term bet on the tortoise - or more precisely, on the overall success of a good-sized bunch of tortoises of different species. You won't get a decent picture of that until they've been racing long enough for quite a high proportion of the hares to have done some dashing
both forward
and backward. Look at some really long-term price charts of typical HYP shares and you'll see that their big dashes quite frequently last a sizeable number of years - e.g. IMB's last big dash forward was about 7.5 years from the spring of 2009 to the autumn of 2016, somewhat less than tripling in price, and its current dash backwards has nearly halved its share price in the subsequent ~2.5 years. The result of that sort of behaviour is that (at least IMHO) anything less than 5 years is definitely still short-term in a HYP context, while 5-10 years only starts to show significant evidence of long-term behaviour but still runs a large risk of being heavily influenced by short-term factors - i.e. you'll probably (though definitely not certainly) get a decent long-term picture of the whole-portfolio behaviour of the HYP, but the picture you get of any particular share may well still be highly misleading.
None of the above is intended as an argument either for or against HYP strategies, by the way - just as a comment on a practical reality of running them: they're dividend-oriented, long-term strategies, which implies that it will take
many years for how well or badly they're doing against the ongoing backdrop of share price movements to show through. Coping with that practical reality is one of the psychological challenges of running a HYP - "too early to tell" is a deeply unsatisfying answer to the natural "how am I doing?" question, which is rather unfortunate when it's the only proper answer that's actually available...
(*) That's a position I believe some here are describing as "negative net cost" or something similar, but it seems clear to me that the cost of the ~70% of my peak holding that I still own is ~70% of my total outlay on purchases - the fact that I once owned further shares that I have sold at a handsome profit doesn't magically reduce the cost of the shares that I still own any more when the type of share I still own is the same as the type of share I previously owned, any more than it would if they were different types of share.
Gengulphus
And many people, thought IMB was the better share of the two.