Criteria for "Top Ups" and "New Shares"

[Wizard]

In a recent post TJH said that he would be willing to "top up" on Vodafone, but if he did not already own it he would not purchase it as a "new addition". I am not sure there has been a clear answer on why, or what the difference in criteria is*, but I did wonder if that is the case or if people are more inclined to use the same criteria for "top ups" and "new shares". It was suggested the best way to find out was to set up a poll on this question.

* Of course nobody is under any obligation to provide answers to questions from other posters.

[Itsallaguess]

I have a sneaking suspicion that 'averaging down' has sometimes got a role to play in decisions to top-up a share that we would not normally want to buy if we didn't already own it.

I know that I've done it quite often in the past, during my early HYP-ing days, and invariably it turned out to be exactly the wrong thing to do.

I don't tend to do it any more, and prefer to respect my top-up capital much better than I used to....

Cheers,

Itsallaguess

[Alaric]

I have a sneaking suspicion that 'averaging down' has sometimes got a role to play in decisions to top-up a share that we would not normally want to buy if we didn't already own it.

Possibly relevant because of CGT if held in a taxable Dealing Account, otherwise does it matter?

It could be relevant from the viewpoint of economising on dealing commission, that if you buy small quantities of a stock you already own, you are hit for dealing commission on the way in but not on the way out. You can also get this problem when awarded a small stake in a spun off Company as a return of capital. Invidior and South 32 are relatively recent examples. With hindsight, South 32 was the one to top up.

[88V8]

To my surprise, I ticked 'Different'.
Because as I posted in the other thread, if I already hold a share and have read nothing negative, and the yield is still OK, I might just top it up without further analysis.
Laziness, really.

V8

[idpickering]

I have a sneaking suspicion that 'averaging down' has sometimes got a role to play in decisions to top-up a share that we would not normally want to buy if we didn't already own it.

I know that I've done it quite often in the past, during my early HYP-ing days, and invariably it turned out to be exactly the wrong thing to do.

I don't tend to do it any more, and prefer to respect my top-up capital much better than I used to....

Cheers,

Itsallaguess

You raise an interesting point. I've done exactly that with IMB, BATS, VOD and PSN, up to my max spend on any share though. I won't keep grasping for any falling knife thereafter, no matter how tempting. Those four are now 'holds' in my HYP, although I have mentioned being tempted to dump VOD.

Ian.

[daveh]

To my surprise, I ticked 'Different'.
Because as I posted in the other thread, if I already hold a share and have read nothing negative, and the yield is still OK, I might just top it up without further analysis.
Laziness, really.

V8

Same here. With a top up I will not always make all the checks in detail the same as I would with a new share. However I will buy cutters (or possible cutters) both as a new share and top ups. For example I bought Petrofac when the share price had been in serious decline and there was talk of a dividend cut. Why? I thought the price falls were over done, that even if the SFO found against the company it would not be as bad as was priced in. I thought the dividend cut was likely (it was cut), but it would still leave the company on a high yield that would be sustainable going ahead. The other financial metrics for the company also looked pretty good. I waited to buy until the share price was back in an up trend so didn't pick at the bottom, and I've been able to pick up more at similar prices recently.

[tjh290633]

I have just looked at my transactions over the last 12 months:

DS  Smith plc Nil Pd           16-Jul-18 Rights sold
Vodafone plc                   16-Jul-18
British American Tobacco plc   09-Oct-18
United Utilities               09-Oct-18
Vodafone plc                   09-Oct-18
William Hill plc               12-Nov-18
AstraZeneca plc                21-Nov-18 Trimmed
British American Tobacco plc   21-Nov-18
William Hill plc               21-Nov-18
SSE plc                        28-Dec-18
British American Tobacco plc   30-Jan-19
Marstons plc                   26-Feb-19
Aviva plc                      02-Apr-19
Rio Tinto plc                  09-Apr-19 Trimmed
Lloyds Banking Group plc       09-Apr-19
Kingfisher plc                 09-Apr-19
South32 Ltd                    24-Apr-19
BT Group plc                   22-May-19
Marks & Spencer plc Rights     13-Jun-19 Rights taken up
Vodafone plc                   25-Jun-19

There was one sale of rights and two trimming of overweight shares. All the rest are top-ups, except for the take-up of Marks & Spencer rights. All of the top-ups were made on holdings with an acceptable yield. Vodafone features 3 times, as does BATS, and William Hill twice.

As you will no doubt recall, I top-up according to my rankings for that purpose, which combines the inverse of capital value and the yield.

TJH

[Itsallaguess]

I have a sneaking suspicion that 'averaging down' has sometimes got a role to play in decisions to top-up a share that we would not normally want to buy if we didn't already own it.

Possibly relevant because of CGT if held in a taxable Dealing Account, otherwise does it matter?

Well, I think it might matter, because there are strong psychological forces at work when we're investing and managing our portfolios, and if we allow those forces to influence us in ways we might not appreciate, then we might suffer losses that might otherwise be avoidable....

The desire to 'Double Down' to help us 'break-even' on a failing investment is one such strong force, and I know that I've been influenced by this process in the past -

Trying to break-even. Sometime a financial loss creates a feeling of desperation in the other direction. Rather than avoiding risk, some investors double-down in an effort to make-up their losses. Research has shown that the desire to break even after a financial loss can be even more powerful than the impulse to avoid taking necessary risk. This effect has been illustrated at the horse race track, where gamblers take more long shot bets at the end of the race day, and at the Chicago Board of Trade, where traders who lose money in the morning increase the riskiness of their investing later in the day. Losing our heads in an attempt to break-even results in compounded losses..

https://www.psychologytoday.com/us/blog/mind-over-money/201303/common-investor-mistakes-and-how-avoid-them-part-ii

Of course this isn't to say that topping up an income-investment that we already hold, that might be 'underwater' from an initial position, is always a bad investment choice, but I think it's very interesting to sometimes see a bit of 'collective fidgeting' when someone asks the obvious question regarding the difference between top-up decisions and new-share decisions.

When there's sometimes an absence of clear, logical reasons for there being a different approach to the two situations, then I begin to wonder if there's any stronger forces at work, that perhaps people either don't realise they are being influenced by, or they do realise, but just don't want to talk about them....

Cheers,

Itsallaguess

[Wasron]

I think that sometimes it’s as simple as accepting that you don’t know whether a company that’s in the doldrums will sink or swim, so in the interest of a balanced portfolio and aiming for high yield (e.g. the HYPTUS ranks it no. 1) then you add to a holding.

If you’re building like I am, and will be for the next 10 or so years, then I find it easy not to agonise over each and every top up.

For context I probably do at least four top ups per month on the regular investment day, and if I sweated over each one I probably shouldn’t be investing in a HYP...

Wasron

[Gengulphus]

I've answered that I use different criteria, because I do. But I use the same criteria about whether I find the company suitable for a HYP: the differences are to do with the state of my HYP, not the state of the company.

Basically, I don't relax my basic criteria for what makes a company a good HYP purchase when doing a top-up purchase, but as I approach, get to and sometimes even somewhat exceed my preferred maximum number of holdings (which is 40), I do tighten them up for new share purchases, essentially to say I must feel it's not just a good HYP purchase, but a very good HYP purchase. As it does currently have 40 holdings, my criteria for new and top-up purchases are currently rather different.

Gengulphus