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SDN’s HYP Report – Jan 2016

For discussion of the practicalities of setting up and operating income-portfolios which follow the HYP Group Guidelines. READ Guidelines before posting
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Gengulphus
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Re: SDN’s HYP Report – Jan 2016

#20694

Postby Gengulphus » January 6th, 2017, 2:13 pm

Itsallaguess wrote:I'd probably go beyond saying it's 'virtually useless' for the purpose of making decisions and actually say that it's 'downright dangerous' for the purpose of making decisions, if that's ever what people actually think they can usefully use the metric for....

Two different ways of looking at the same thing - it's not uncommon for a tool to be both useless for a particular job and dangerous if one nevertheless tries to use it for that job. For instances, I can think of quite a few examples involving chainsaws or blowtorches...

Itsallaguess wrote:I'll agree that within someone's personal investment-sphere, they could use the metric to allow some 'what-if' scenarios to be played out, ...

I'm not certain who you're agreeing with there, but it isn't me! My last post's only 'what-if' scenario (about the SSE share price being ten times what it actually is) was a demonstration of the metric's uselessness for making current decisions, not a demonstration of a possible use for it...

Itsallaguess wrote:... but as soon as people start bringing the metric into open discussion in terms of wanting to compare their holdings with anyone else's, then as you say, it becomes useless, and I'd suggest misleading, as a historical price paid is simply that - a historical price....

Agreed - I can use it to evaluate how good my past decisions have been from a growing-income point of view, but the resulting evaluations are of no relevance to anyone else!

Gengulphus

Itsallaguess
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Re: SDN’s HYP Report – Jan 2016

#20699

Postby Itsallaguess » January 6th, 2017, 2:30 pm

MDW1954 wrote:
I think the point that you are making is that yield on bought cost provides no indication of the opportunity cost of capital, as yield on current prices does. You are quite correct; it doesn't.

My view is that this opportunity is not always available. Take RDSB: whatever the forecast yield, the opportunity to swap the capital into another global London-headquartered high-yielding oil giant is fairly limited. Ditto GSK, AZN, HSBC, BLT etc etc. It is easy to take that opportunity by swapping across sectors, less easy by swapping within sectors. This is where the opportunity cost of capital breaks down, IMV: it is easy to identify what to sell by looking at forecast yield, but less easy to identify what to buy.

In this context, I find yield on bought cost gives me some insight into how well (or badly) I made the initial capital deployment decision, although that insight can be clouded or distorted by top-ups subsequent to the initial purchase. It is an additional data point; it costs nothing to calculate; the calculation is performed automatically; and I am not obligated to take any decision based on it.


Thanks for that MDW1954. I'll profess to still not fully understanding the usefulness of the metric to you, even in situations where an 'opportunity-cost decision' might not be being made, but it's clear that you see it as a useful tool in some situations.

That said, I also understand how powerful and comforting this sort of metric can be, but it's that understanding that always makes me question it when the topic is raised during these sorts of discussions.

I always worry that without such probing, and gaining clarity on just what we're talking about here, some newer investors might think that it's a more useful metric than it really is in terms of real-world decision making, so I hope raising the subject has at least tried to cover that aspect here, and might be useful to anyone that's not fully aware of the metric's downsides.

Cheers,

Itsallaguess

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Re: SDN’s HYP Report – Jan 2016

#20701

Postby Itsallaguess » January 6th, 2017, 2:33 pm

Gengulphus wrote:
Itsallaguess wrote:I'll agree that within someone's personal investment-sphere, they could use the metric to allow some 'what-if' scenarios to be played out, ...


I'm not certain who you're agreeing with there, but it isn't me! My last post's only 'what-if' scenario (about the SSE share price being ten times what it actually is) was a demonstration of the metric's uselessness for making current decisions, not a demonstration of a possible use for it...


Yes, apologies, that was really related to the annuity-comparison aspect raised in an earlier 'justification' post, so sorry if that wasn't clear.

Cheers,

Itsallaguess

MDW1954
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Re: SDN’s HYP Report – Jan 2016

#20708

Postby MDW1954 » January 6th, 2017, 2:40 pm

I'll profess to still not fully understanding the usefulness of the metric to you, even in situations where an 'opportunity-cost decision' might not be being made, but it's clear that you see it as a useful tool in some situations.


Let me phrase it differently, then, in the hope of being clearer.

In terms of yield on bought cost, I think that the critical sentence in my response to your question was this:

I find yield on bought cost gives me some insight into how well (or badly) I made the initial capital deployment decision, although that insight can be clouded or distorted by top-ups subsequent to the initial purchase.


If I re-phrase yield on bought cost as "return on capital", instead, does that make it clearer?

MDW1954

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Re: SDN’s HYP Report – Jan 2016

#20732

Postby Itsallaguess » January 6th, 2017, 3:27 pm

MDW1954 wrote:
itsallaguess wrote:I'll profess to still not fully understanding the usefulness of the metric to you, even in situations where an 'opportunity-cost decision' might not be being made, but it's clear that you see it as a useful tool in some situations.


Let me phrase it differently, then, in the hope of being clearer.

In terms of yield on bought cost, I think that the critical sentence in my response to your question was this:

I find yield on bought cost gives me some insight into how well (or badly) I made the initial capital deployment decision, although that insight can be clouded or distorted by top-ups subsequent to the initial purchase.


If I re-phrase yield on bought cost as "return on capital", instead, does that make it clearer?



Well it's clear as to what insight you think the metric gives you, but it's not clear to me how useful that insight actually is, I think that's where the confusion lies to be honest.

How does knowing how well you made the 'initial capital deployment decision' actually help today? It's a rear-view metric, when mostly I'm interested in forward-looking metrics to help me make decisions regarding my HYP, and this one can't help with that.

I can see why people unitise both income and capital for their HYP, although I don't personally, as that can help justify the HYP strategy itself, but I still don't see how knowing a particular share's 'yield on bought cost' actually helps in any real way, I'm sorry.

Cheers,

Itsallaguess

MDW1954
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Re: SDN’s HYP Report – Jan 2016

#20734

Postby MDW1954 » January 6th, 2017, 3:32 pm

It's a rear-view metric, when mostly I'm interested in forward-looking metrics to help me make decisions regarding my HYP, and this one can't help with that.


Absolutely. Return on capital, however one phrases it, can't help with forward-looking capital allocation decisions.

MDW1954


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