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The history of HYP4, and the possibility of reviving it

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Gengulphus
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The history of HYP4, and the possibility of reviving it

#245226

Postby Gengulphus » August 18th, 2019, 1:52 pm

HYP4 has been mentioned in the "What PYAD has said about selling" thread recently. I've very little information about HYP4's history beyond its construction, but for what it's worth, here it is, together with a bit of discussion about the possibility of reviving it from its current long-neglected state. I'm posting it as a new thread on HYP Practical, with a thread title mentioning HYP4, because (a) it's very largely about HYP4, with pyad's sale quite peripheral to that subject; (b) the title will make it more easily locatable in future by anyone interested in HYP4 or linking to it; (c) I'd like it to go in the direction of establishing just how HYP4 has performed in practice, not towards yet another "merits or otherwise of HYP strategies" debate, please!

Trade history

HYP4 was purchased by sixteen monthly purchases with £5,000 each from September 2006 to December 2007. It was intended to be a "trading HYP" - which doesn't imply that voluntary selling was intended to be at all frequent, just that it might be done (so IMHO "tinkering HYP" would be a better description). One share was sold and replaced during the course of its construction, between the March 2007 and April 2007 purchases.

September 2006: BP selected and bought
October 2006: Lloyds TSB selected and bought
November 2006: F&C Asset Management selected and bought
December 2006: United Utilities selected and bought
January 2007: BT selected and bought
February 2007: DSG International selected and bought (and a concern expressed about F&C Asset Management)
March 2007: Aviva selected and bought
March 2007: F&C Asset Management sold, replacement British American Tobacco selected and bought
April 2007: Tate & Lyle selected and bought
May 2007: Royal Bank of Scotland selected and bought
June 2007: GlaxoSmithKline selected and bought
July 2007: Persimmon selected and bought
August 2007: Pearson selected and bought
September 2007: Wiliam Hill selected and bought
October 2007: Land Securities selected and bought
November 2007: Compass Group selected and bought
December 2007: Rentokil Initial selected and bought

Reviews

There was one review of HYP4 (together with HYP1, HYP2 and HYP3 as well) by pyad in February 2009, between its completion and pyad's departure from TMF shortly after the review. Unfortunately, it's not very informative, it having been too early in the portfolio's history to have any meaningful income results to report, and so far as I am aware, pyad hasn't reported anything about it or posted any further tinkering by it since he returned to TMF a bit over a year later.

Reviving HYP4?

The big problem with reviving a paper HYP that has 'died' through lack of maintenance occurs when one or more of its holdings have been taken over for cash. The cash proceeds are (usually) large, so that the portfolio's subsequent performance will be significantly affected by not reinvesting them, but reinvesting them in the company that produced them is not possible, and reinvesting them in a different company involves deciding what that company is - which is basically impossible in an unaffected-by-hindsight way unless the decision method is purely mechanical and all the data required by it can still be obtained.

This basically kills off the chances of resurrecting HYP2 and HYP3 convincingly, because HYP2 contained the taken-over shares Hanson and Scottish & Newcastle (*) and HYP3 contained Alliance & Leicester and Gallaher. But HYP4 is probably possible, provided is is treated as a non-tinkering HYP between where pyad left it and now - tinkering decisions are if anything even more difficult to do in an unaffected-by-hindsight way than cash-takeover-proceeds-reinvestment decisions, because for cash takeovers, the fact that they occur and their timing is known and only what share is to be purchased needs to be decided, while tinkering decisions involve all three of those aspects.

But HYP4 happens not to have had any cash takeovers (DSG International isn't still around as such, but that's due to morphing and merging into Dixons Carphone, not a cash takeover), and other corporate action proceeds could be reinvested by the reinvest-in-share-that-generated-them method. It would be quite a lot of work to bring it up to date, with everything that's happened to sixteen shares over somewhat more than the last decade to be worked out, but it could be done... I won't tackle it right now, but maybe (no promises!) I'll take it on over time. In the meantime, the above links will at least give anyone else who wants to give it a go somewhere to start!

(*) And Bradford & Bingley, but that isn't a problem for reviving HYP2 because it was nationalised without any compensation being paid, so there's no reinvestment decision to make for it. (It was of course a financial problem for HYP2's hypothetical owner, but that's a different issue to reviving it.)

Gengulphus

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Re: The history of HYP4, and the possibility of reviving it

#245239

Postby Dod101 » August 18th, 2019, 3:02 pm

Thanks for all of that Gengulphus. I want to comment on pyad's monthly messages. Strange how styles move on, because I thought that the monthly reports are informative and well balanced during that construction phase of HYP4. Nowadays.....well I am sure those interested know what I might say.

Dod

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Re: The history of HYP4, and the possibility of reviving it

#245289

Postby pendas » August 18th, 2019, 7:51 pm

I did hold 7 of the shares mentioned by 31/12/2006 and a total of 13 a year later.

I still hold 8 now.

There have been many buys and sells over the period each share has been held in my portfolio and my only measure is an annualised return of 2.05% using Friday's closing prices for the remaining shares.

Glaxo has produced the most income and Compass the least because it was not held for long unfortunately. Dixons, Rentokil & RBS produced little income before running into trouble and RBS suffered the largest capital loss.

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Re: The history of HYP4, and the possibility of reviving it

#245317

Postby MDW1954 » August 18th, 2019, 10:39 pm

RBS in May 2007 was a triumph for strategic ignorance. Not. Even then, the warning bells were sounding.

For me, the mechanistic nature of the process jars. Thankfully, here on TLF, our own HYP-picking guidelines are less restrictive.

MDW1954

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Re: The history of HYP4, and the possibility of reviving it

#245320

Postby SDN123 » August 18th, 2019, 10:48 pm

Hi,

I think it would be very interesting to revive HYP4, as much as anything to compare / contrast with HYP1.

If I’ve understood you correctly the idea would be to reconstruct the portfolio history assuming that all dividends were spent (not reinvested) and with some mechanical rules around specials and corporate actions (splits, consolidations, etc). No trimming, no new shares,
no topping up. Did I get that right?

I’m asking as I’m considering if I would like to take that on personally as a “payback” to these boards (as I’ve found the boards entertaining and, literally, enriching).

What’s holding me back from actually volunteering is understanding if it’s actually possible only using publicly available data (no subscriptions); my lack of any specialist knowledge and most importantly the fact that I have a very busy career. (Being an expat in a different time zone is just an added nuance.)

I’m assuming several stages:
1. Setting up a data framework;
2. Reconstructing the history of each share;
3. Reporting the current state of the portfolio;
4. On a regular basis (quarterly, biannually or most likely annually) updating the portfolio and reporting again.

Essentially I maintain my own HYP monthly and report annually so, I imagine, the work is in stages 1 and 2 above.

Did I miss anything? Comments in this thread or by PM welcome.

SDN

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Re: The history of HYP4, and the possibility of reviving it

#245344

Postby Arborbridge » August 19th, 2019, 7:24 am

I bought ten of HYP4's shares, and still own eight of them. My HYP construction happened to coincide rathernicelt with the pyad articles rather well, although I didn't keep strictly to his timing.
I've always thought it a great pity that HYP4 wasn't carried on as I believe the result could be quite different to HYP1, but if they weren't, that in itself would be informative.

There was a poster here a couple of years back who apparently reconstructed it and said he would keep it up, reporting here occasionally. I think he's disappeared since after that initial burst of enthusiasm. I know from my own attempts at following "what if" questions with my own tinkering decisions, it is really quite hard to do without some form of hindsight bias. let alone the effort it takes.

I can't think of anyone who would be equipped to do it more rigorously, consistently and for the long term than Gengulphus, so let's hope he decides it is worth his while to do it - please! :)

Arb.

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Re: The history of HYP4, and the possibility of reviving it

#245348

Postby Dod101 » August 19th, 2019, 7:53 am

MDW1954 wrote:RBS in May 2007 was a triumph for strategic ignorance. Not. Even then, the warning bells were sounding.

For me, the mechanistic nature of the process jars. Thankfully, here on TLF, our own HYP-picking guidelines are less restrictive


pyad's comments accompanying his purchase of RBS show how silly Strategic Ignorance really is. This was after it had made a joint bid for ABM Amro and Fred was in full hubristic mode. I clearly remember the situation and I did not and would never have touched RBS with a bargepole, then, before or after. Lloyds seemed then to be the dependable shy cousin to RBS and likely to remain that way, until the fateful takeover of HBOS.

I have only ever held, Lloyds, BT and Glaxo and of these hold only Glaxo today.

Dod

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Re: The history of HYP4, and the possibility of reviving it

#245351

Postby Arborbridge » August 19th, 2019, 8:02 am

Dod101 wrote:
MDW... wrote:picking guidelines are less restrictive


pyad's comments accompanying his purchase of RBS show how silly Strategic Ignorance really is. This was after it had made a joint bid for ABM Amro and Fred was in full hubristic mode. I clearly remember the situation and I did not and would never have touched RBS with a bargepole, then, before or after. Lloyds seemed then to be the dependable shy cousin to RBS and likely to remain that way, until the fateful takeover of HBOS.

I have only ever held, Lloyds, BT and Glaxo and of these hold only Glaxo today.

Dod


I'd suggest your comment only highlights how much Stategic Ignorance is not understood since it is really only a statement of how "silly" it is to rely on "guessing" what might happen one, two or three years out. Your own sentence about Lloyds and HBOS, ironically, illustrates it quite well.

SI isn't silly, just a common sense statement of the obvious. It does not, naturally, prevent us from making bum choices in the first place based on poor judgement ;)

Arb.
Last edited by tjh290633 on August 19th, 2019, 8:51 am, edited 1 time in total.
Reason: Tag corrected

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Re: The history of HYP4, and the possibility of reviving it

#245359

Postby Alaric » August 19th, 2019, 8:31 am

Gengulphus wrote:December 2007: Rentokil Initial selected and bought


The article doesn't say at what price Rentokil was purchased, but it looks as if it may have been an attempt to catch a falling knife, with the stock becoming high yield because the price was collapsing.

http://tools.morningstar.co.uk/uk/stock ... E%24%24ALL

According to morningstar, the price was 150.8 on 26 Nov 2007 dropping to 118.30 on 17 Dec. It bottomed out at 43.5 in November 2008 and has recovered strongly ever since with some wobbles. Current price being 454.4, so that's over ten times its lowest. Total return over ten years 16.62% as against 8.25% for the FTSE 100. Dividend yield is around 1%, so anyone needing dividend income would be disappointed.

Checking dividenddata for the history of dividends, it had dividends of 7.38 per share in 2007, before cancelling them for a few years. A dividend of 2.1p was reinstated for 2012, which is now increased to 4.47p.

https://www.dividenddata.co.uk/ftse-div ... et=ftse100

A contemporary review of HYP4 in 2008, 2009 or 2010 would have needed to decide whether to ignore the collapse of the Rentokil share price and loss of dividend.

Anyone who had bought Rentokil in early 1999 would now just see their initial investment in profit. With these volatile stocks it can easily be when you buy that matters. Back in the days when instant access accounts gave returns in the 4% to 6% range, it could make sense to sit on your hands when markets were falling. That particularly applied if you needed dividends and capital for living expenses.

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Re: The history of HYP4, and the possibility of reviving it

#245365

Postby Dod101 » August 19th, 2019, 8:48 am

Arborbridge wrote:
Dod101 wrote:
MDW... wrote:picking guidelines are less restrictive


pyad's comments accompanying his purchase of RBS show how silly Strategic Ignorance really is. This was after it had made a joint bid for ABM Amro and Fred was in full hubristic mode. I clearly remember the situation and I did not and would never have touched RBS with a bargepole, then, before or after. Lloyds seemed then to be the dependable shy cousin to RBS and likely to remain that way, until the fateful takeover of HBOS.

I have only ever held, Lloyds, BT and Glaxo and of these hold only Glaxo today.

Dod


I'd suggest your comment only highlights how much Stategic Ignorance is not understood since it is really only a statement of how "silly" it is to rely on "guessing" what might happen one, two or three years out. Your own sentence about Lloyds and HBOS, ironically, illustrates it quite well.

SI isn't silly, just a common sense statement of the obvious. It does not, naturally, prevent us from making bum choices in the first place based on poor judgement ;)

Arb.


Re Lloyds and HBOS no one could have foreseen the takeover of HBOS by Lloyds but anyone could have foreseen as I feared, that RBS was heading for big trouble without any help from Gordon Brown or anyone else (except of course the incumbent management) If you do not even try to foresee (or guess, as you would say) what may happen that is just intellectual laziness.

Dod
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Re: The history of HYP4, and the possibility of reviving it

#245370

Postby Alaric » August 19th, 2019, 9:04 am

Dod101 wrote: but anyone could have foreseen as I feared, that RBS was heading for big trouble without any help from Gordon Brown or anyone else (except of course the incumbent management) If you do not even try to foresee (or guess, as you would say) what may happen that is just intellectual laziness.



What was written about the decision (May 2007) to purchase RBS was this
It enters the portfolio at 1,920p plus costs with a forecast yield of 5.1%.


Looking at the prices in 2007, surely they were already falling by May? High yields should be placed in context rather than blindly using them. Strategic ignorance is all very well, but being ignorant of recent price falls?

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Re: The history of HYP4, and the possibility of reviving it

#245372

Postby Arborbridge » August 19th, 2019, 9:12 am

Dod101 wrote:
Re Lloyds and HBOS no one could have foreseen the takeover of HBOS by Lloyds but anyone could have foreseen as I feared, that RBS was heading for big trouble without any help from Gordon Brown or anyone else (except of course the incumbent management) If you do not even try to foresee (or guess, as you would say) what may happen that is just intellectual laziness.

Dod


I don't believe Pyad ever said one should not take into account problems which are known - or possibly even suspected - that's all you are doing. I've seen cases of Pyad ruling out a share on the sorts of grounds you are talking about - but that is not what SI tells us. I does not tell us to ignore things which are plain and upfront or even reasonably guessable - it just reminds us that it is hopeless to predict what might happen down the line, so it isn't worth worrying too much about two years hence or longer.

I don't see any difference between Pyad and yourself in that respect.

Arb.

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Re: The history of HYP4, and the possibility of reviving it

#245381

Postby Arborbridge » August 19th, 2019, 9:26 am

Alaric wrote:
Dod101 wrote: but anyone could have foreseen as I feared, that RBS was heading for big trouble without any help from Gordon Brown or anyone else (except of course the incumbent management) If you do not even try to foresee (or guess, as you would say) what may happen that is just intellectual laziness.



What was written about the decision (May 2007) to purchase RBS was this
It enters the portfolio at 1,920p plus costs with a forecast yield of 5.1%.


Looking at the prices in 2007, surely they were already falling by May? High yields should be placed in context rather than blindly using them. Strategic ignorance is all very well, but being ignorant of recent price falls?


This is the problem with HYP, and one which many of us choose to ignore. It does tend to argue that we should buy into a falling share, which is not always the smartest thing to do. This makes HYP a high risk strategy in the short term, but one must always take into account the risk reducing side of the equation: the portfolio spread and long term holding length.

Another difficulty with your argument is unless one is an out and out TA merchant, how would one know whether price falls were something to worry about, or just market noise? HYPers don't look at charts and indeed we could be deleted for evening mentioning it!
There's something odd about your quote, by the way, because I bought RBS in May 2007 and the price paid was 644.9p. Furthermore, although the price had dropped back, it was still in an uptrend and didn't break down through the trend until August of that year. Even a TA guy might say Pyad's purchase was well timed - below the peak but in an uptrend.

However: warning - let's not continue with that side of the discussion - either PM me or try a different board if you want to pick over the bones!

Arb.

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Re: The history of HYP4, and the possibility of reviving it

#245383

Postby pendas » August 19th, 2019, 9:30 am

I first purchased Rentokil in March 2006 at £1.57 so I guess the share featured in earlier demo portfolios.

I sold in Feb 2012 at 76p.

To reconstruct HYP4 I think you will first need to establish rules on when if ever to sell and how to process any rights issues etc.

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Re: The history of HYP4, and the possibility of reviving it

#245384

Postby Dod101 » August 19th, 2019, 9:34 am

Arborbridge wrote:
Dod101 wrote:
Re Lloyds and HBOS no one could have foreseen the takeover of HBOS by Lloyds but anyone could have foreseen as I feared, that RBS was heading for big trouble without any help from Gordon Brown or anyone else (except of course the incumbent management) If you do not even try to foresee (or guess, as you would say) what may happen that is just intellectual laziness.

Dod


I don't believe Pyad ever said one should not take into account problems which are known - or possibly even suspected - that's all you are doing. I've seen cases of Pyad ruling out a share on the sorts of grounds you are talking about - but that is not what SI tells us. I does not tell us to ignore things which are plain and upfront or even reasonably guessable - it just reminds us that it is hopeless to predict what might happen down the line, so it isn't worth worrying too much about two years hence or longer.

I don't see any difference between Pyad and yourself in that respect.


Now you seem to be admitting that the problems facing RBS at the time of its purchase for HYP4 were foreseeable. If so why did he ignore them? Strategic Ignorance of course! A wilful refusal to try to assess what the future might hold. Or maybe simply chasing yield.

Incidentally in trying to assess if a dividend is sustainable pyad is of course taking a view on the future so he is not even consistent; no Strategic Ignorance there! Maybe going any further in taking a view is just too much for him.

Dod

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Re: The history of HYP4, and the possibility of reviving it

#245385

Postby IanTHughes » August 19th, 2019, 9:36 am

Dod101 wrote:
Arborbridge wrote:
Dod101 wrote:pyad's comments accompanying his purchase of RBS show how silly Strategic Ignorance really is. This was after it had made a joint bid for ABM Amro and Fred was in full hubristic mode. I clearly remember the situation and I did not and would never have touched RBS with a bargepole, then, before or after. Lloyds seemed then to be the dependable shy cousin to RBS and likely to remain that way, until the fateful takeover of HBOS.

I have only ever held, Lloyds, BT and Glaxo and of these hold only Glaxo today.

I'd suggest your comment only highlights how much Stategic Ignorance is not understood since it is really only a statement of how "silly" it is to rely on "guessing" what might happen one, two or three years out. Your own sentence about Lloyds and HBOS, ironically, illustrates it quite well.

SI isn't silly, just a common sense statement of the obvious. It does not, naturally, prevent us from making bum choices in the first place based on poor judgement ;)

Re Lloyds and HBOS no one could have foreseen the takeover of HBOS by Lloyds but anyone could have foreseen as I feared, that RBS was heading for big trouble without any help from Gordon Brown or anyone else (except of course the incumbent management) If you do not even try to foresee (or guess, as you would say) what may happen that is just intellectual laziness.

For me, your argument falls down simply because: If you do try to foresee or guess what may happen then, without 20/20 "future vision", you might foresee or guess just about anything!

Strategic Ignorance (SI) as explained by pyad is certainly not "intellectual laziness", no matter how many times you insultingly claim it is. It is simply a recognition that one cannot see into the future without resorting to guesswork which, if you then rely upon it, inevitably means that you might "foresee" just about anything, good or bad! Now, in my view, that would be intellectual stupidity!


Ian

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Re: The history of HYP4, and the possibility of reviving it

#245391

Postby scrumpyjack » August 19th, 2019, 9:47 am

Strategic ignorance is quite well illustrated by the stories of monkeys throwing darts at the FT outperforming

https://www.forbes.com/sites/rickferri/ ... he-market/

As long as they then hold their shares for the long term?

Unfortunately in the UK a monkey can't be a registered owner of shares. Perhaps he/she could if using a nominee?

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Re: The history of HYP4, and the possibility of reviving it

#245393

Postby Dod101 » August 19th, 2019, 9:50 am

IanTHughes wrote:Strategic Ignorance (SI) as explained by pyad is certainly not "intellectual laziness", no matter how many times you insultingly claim it is.


For some reason, the words, pot, kettle and black come to my mind.

Dod

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Re: The history of HYP4, and the possibility of reviving it

#245394

Postby Alaric » August 19th, 2019, 9:51 am

IanTHughes wrote: It is simply a recognition that one cannot see into the future without resorting to guesswork which, if you then rely upon it, inevitably means that you might "foresee" just about anything, good or bad!


The whole concept of a "sustainable" dividend is based on guesswork. The investor is guessing that the Board of Directors and management won't decide to cut the dividend whether based on external factors or just because they felt like it. You can sometimes predict a plausible decision based on the financial context, for example a Company that isn't making cash profits, has some capital spending commitments coming up and has exhausted its borrowing options doesn't have that many ways to turn.

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Re: The history of HYP4, and the possibility of reviving it

#245396

Postby IanTHughes » August 19th, 2019, 9:59 am

Dod101 wrote:Incidentally in trying to assess if a dividend is sustainable pyad is of course taking a view on the future so he is not even consistent; no Strategic Ignorance there! Maybe going any further in taking a view is just too much for him.

I can only answer for myself of course but my "assessing whether a dividend is sustainable" relies upon the current and recent historical facts with regard to Cash Flow, Debt Levels, Earnings Growth etc etc. I do not rely on "taking a view on the future".


Ian


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