TJH Porrtfolio Review

[tjh290633]

I have posted this at viewtopic.php?f=56&t=4329&p=43512#p43512 and, as indicated there, I have topped up my holding of BT.A by adding just over 20% to it at 314p this morning.

My top-up rankings accordingly become:

Top-up          Income                     Cost                
Rank     EPIC   Rank     EPIC   % Income   Rank   Epic   % Cost
     1   CLLN        1   TW.       4.93%      1   PSON    4.41%
     2   PSON        2   MKS       4.48%      2   SGRO    4.40%
     3   BLND        3   BP.       4.31%      3   LLOY    4.37%
     4   LLOY        4   RDSB      4.17%      4   CLLN    4.23%
     5   RDSB        5   ADM       4.02%      5   AV.     4.14%
     6   SSE         6   CLLN      4.00%      6   MKS     3.97%
     7   VOD         7   PSON      3.93%      7   BLT     3.90%
     8   WMH         8   SSE       3.77%      8   LGEN    3.77%
     9   BP.         9   LGEN      3.74%      9   RDSB    3.73%
    10   BT.A       10   GSK       3.71%     10   BP.     3.70%
    11   MKS        11   VOD       3.47%     11   MARS    3.59%
    12   MARS       12   AV.       3.44%     12   ADM     3.59%

Because of my rules, TW., MKS and BP. are disqualified because of their contribution to income. and PSON, SGRO, LLOY and CLLN are disqualified because of the proportion of portfolio cost they represent. In each case, topping up by 20% would take them over my arbitrary 5% limit.

Consequently British Land (BLND) becomes the next candidate for topping up. This is likely to be in several weks' time, by which time it might all have changed.

TJH

[johnw11]

Hi Terry,

I've meaning to ask for sometime what is meant by "proportion of portfolio cost" and how you calculate it. Is it simply the amount in total that you have invested in a share as a percentage of the current portfolio percentage? I currently keep track of the % of value and % of income for shares to try and avoid going overweight on a share. I have to admit that PSN is causing me some grief on both of these but at its current yield I am reluctant to top slice it.

Regards

John

[tjh290633]

Hi Terry,

I've meaning to ask for sometime what is meant by "proportion of portfolio cost" and how you calculate it. Is it simply the amount in total that you have invested in a share as a percentage of the current portfolio percentage? I currently keep track of the % of value and % of income for shares to try and avoid going overweight on a share. I have to admit that PSN is causing me some grief on both of these but at its current yield I am reluctant to top slice it.

Regards

John

What I do is add up the cost of each holding, add them together to get the total portfolio cost, and then the cost of each holding is expressed as a percentage of the total. I put it in after I relised that chasing a falling high income share could leave me seriously overexposed to such a share. The one that alerted me was Mapeley.

TJH

[moorfield]

What I do is add up the cost of each holding, add them together to get the total portfolio cost, and then the cost of each holding is expressed as a percentage of the total.

Terry

Forgive me for picking you up on this as your top-up system is well known and I just wanted to check I've not misread or misunderstood your post here.

On Monday you posted this link viewtopic.php?f=15&t=4245&p=43376#p43376 which goes on to say

I have a procedure for combining the ranking of the weight by value and by yield, to decide which share is the one to receive any reinvested income or new capital.

So have you changed from using value to cost recently? If so, that's quite a shift in thinking no?

M

[tjh290633]

What I do is add up the cost of each holding, add them together to get the total portfolio cost, and then the cost of each holding is expressed as a percentage of the total.

Terry

Forgive me for picking you up on this as your top-up system is well known and I just wanted to check I've not misread or misunderstood your post here.

On Monday you posted this link viewtopic.php?f=15&t=4245&p=43376#p43376 which goes on to say

I have a procedure for combining the ranking of the weight by value and by yield, to decide which share is the one to receive any reinvested income or new capital.

So have you changed from using value to cost recently? If so, that's quite a shift in thinking no?

M

No, I still use the rankings by value and yield, but the contributions to dividend income and the proportion of holding cost to the total are used to decide whether a share that is in line for topping up can be topped up.

Top-up          Income                     Cost                
Rank     EPIC   Rank     EPIC   % Income   Rank   Epic   % Cost
     1   CLLN        1   TW.       4.93%      1   PSON    4.41%
     2   PSON        2   MKS       4.48%      2   SGRO    4.40%
     3   VOD         3   BP.       4.31%      3   LLOY    4.37%
     4   LLOY        4   RDSB      4.17%      4   CLLN    4.23%
     5   BT.A        5   ADM       4.02%      5   AV.     4.14%
     6   SSE         6   CLLN      4.00%      6   MKS     3.97%
     7   MKS         7   PSON      3.93%      7   BLT     3.90%
     8   RDSB        8   SSE       3.77%      8   LGEN    3.77%
     9   MARS        9   LGEN      3.74%      9   RDSB    3.73%
    10   WMH        10   GSK       3.71%     10   BP.     3.70%
    11   BP.        11   VOD       3.47%     11   MARS    3.59%
    12   BLT        12   AV.       3.44%     12   ADM     3.59%

If topping up by 20% will take the percent of income or cost above 5% I rule it out. Hence effectively about 4.2% is the cut-off point. Currently TW., MKS and BP. are disqualified because of their contribution to income, while PSON, SGRO, LLOY and CLLN are ruled out because of their share of the cost. Consequently VOD is next in line for topping up as it stands. A few days ago it was BLND, but it has risen in value.

TJH

[moorfield]

No, I still use the rankings by value and yield, but the contributions to dividend income and the proportion of holding cost to the total are used to decide whether a share that is in line for topping up can be topped up.

If topping up by 20% will take the percent of income or cost above 5% I rule it out. Hence effectively about 4.2% is the cut-off point.

Ah understood, thankyou Terry. I do differently to you and work backwards from my income limit (10%) to calculate a cap on the amount I can top up a chosen share. So for example a top up of Carillion, #1 in my rank, but already contributing 8.5% of income, would be sized to bring it up to the maximum 10% post top up.

M

[pyad]

I don't see any merit in using cost when considering potential top-ups. As I see it, current value is the meaningful test and specifically the percentage that each share, or sector if you like, bears to the total current portfolio value and to the average.

Any share or sector whose value is under average is then a potential top up candidate and the greater the undervalue, ostensibly the more desirable, subject then to whatever share selection process you wish to apply.

But original cost, of either the share or the whole HYP, should have no bearing on this at all in my view. It would actually be misleading to pay heed to it for this purpose.

[tjh290633]

I don't see any merit in using cost when considering potential top-ups. As I see it, current value is the meaningful test and specifically the percentage that each share, or sector if you like, bears to the total current portfolio value and to the average.

Any share or sector whose value is under average is then a potential top up candidate and the greater the undervalue, ostensibly the more desirable, subject then to whatever share selection process you wish to apply.

But original cost, of either the share or the whole HYP, should have no bearing on this at all in my view. It would actually be misleading to pay heed to it for this purpose.

As I explained, the inverse ranking of the current value (i.e. lowest value =1) is a vital part of the top-up ranking calculations, with the yield ranking (highest =1).

The cost of the holding and its share of the dividend income are factors which I take into account when deciding whether or not to take the top-up rankings without qualification.

May I remind you of the huge share of dividend income which arose in the original HYP? Had the replacement share(s) been bought at the then median holding value, it might have been a bit better balanced.

TJH

[pyad]

Nope, can't see the relevance of original cost Terry. So I remain of the opinion that the top-up decision should be based on relative current undervalues which are then filtered by whatever personal selection criteria the investor uses, such as in your case relative income contribution.

I see no logic in permitting original cost to influence this.

However we may be talking at cross purposes to some extent because it appears that are using current relative values. That being the case I still fail to see how original cost comes into it at all.

[Arborbridge]

The cost of the share is relevant in order to stop one ploughing excess resources in to a constantly falling share.
It's a very useful mechanism to rein back one's over-enthusiasm for a share and one needs to base it on the cost, not the current value. Taken to the extreme, an increasing yield and reducing value would lead one to plough an infinite amount into one position, unless some limit is imposed: a rather unwise action.

So, Terry is correct. It is the cost of the share compared with the total capital invested which is the important factor.


Arb.

[pyad]

The cost of the share is relevant in order to stop one ploughing excess resources in to a constantly falling share.
It's a very useful mechanism to rein back one's over-enthusiasm for a share and one needs to base it on the cost, not the current value. Taken to the extreme, an increasing yield and reducing value would lead one to plough an infinite amount into one position, unless some limit is imposed: a rather unwise action.

So, Terry is correct. It is the cost of the share compared with the total capital invested which is the important factor.


Arb.

I can't agree with that at all. Why would you refrain from topping up a share on the sole ground that it is below cost? And repeat as long as it is below current average value? Provided obviously that it meets your tests as I pointed out above. One's normal investment criteria represent the "limit" to which you refer. I'm not claiming that you should blindly top-up any old below average share, I thought I made that clear.

What is not logical is for the "limit" to be related to cost. What you paid for a share has no relevance to its current merits. It may have become better or worse but the fact that the price has fallen is, by itself, telling you nothing. You have to analyse it as it stands now. Allowing the decision to be influenced by cost is little more than superstition. We'll be hearing soon that it is preferable to use the median rather than the mean for calculating the relative values

[moorfield]

Taken to the extreme, an increasing yield and reducing value would lead one to plough an infinite amount into one position, unless some limit is imposed: a rather unwise action.

Indeed - that's my approach I mentioned earlier. Whether it's unwise or not I suppose depends on the limit itself and the number of holdings. I'm comfortable using 10% (or 2x mean of 20 holdings). Pyad might choose to use 13.33% perhaps (2x 100%/15).

[Gengulphus]

The cost of the share is relevant in order to sduring the financial crisistop one ploughing excess resources in to a constantly falling share.
It's a very useful mechanism to rein back one's over-enthusiasm for a share and one needs to base it on the cost, not the current value. Taken to the extreme, an increasing yield and reducing value would lead one to plough an infinite amount into one position, unless some limit is imposed: a rather unwise action.

Or to put it succinctly, it's a mechanism to prevent one throwing good money after bad.

It's not needed if the investor is sufficiently confident about their own ability to avoid throwing good money after bad without it, and willing to take the risk that that self-confidence is misplaced. Neither of those applies to every investor, and it is useful when either of them doesn't apply - either as a hard veto on topping up the share, or as a softer warning to think again about the share's risks.

For what it's worth, I don't use it in my main HYP, but do use it in GDHYP. That's basically because I want to distance GDHYP from my own investment judgement as far as reasonably possible, preferring to try to use some sort of collective HYPers' investment judgement. But I did see how that collective judgement could be fashion-led before and during the financial crisis - at one point, "I know I'm going seriously overweight but the banks are such amazing bargains that I can't resist them" was a pretty popular siren call, and it remained so for quite a while into the decline...

Gengulphus

[Arborbridge]

Pyad,

Maybe we are at cross-purposes. What I'm advocating is a sensible watch on capital deployed into one share, however one assess's that. A constantly falling share - let's take it to really absurd limits - could end up absorbing 100% of one's capital effort. And this could happen even if apparently passing all the safety tests (unlikely, but I'm just stressing the point!). Investors - particularly the less experienced - can get pulled further into a share by the enticing prospect held out, and a sensible limit on capital deploy reducing any temptation to enter into a "cost sunk fallacy" mind set.

Agreed, a falling share can offer opportunities, but HYP is also about moderation and controlling risk through diversity.
Continuously buying into a falling share has also been named as one of the worst errors of the amateur investor (William J O'Neill) and the mechanism TJH and others employ puts a lid on how far one gets drawn into what may be a trap.
Why this isn't something you would advocate for a system aimed at the relatively ordinary investor which is the HYP user, I don't understand. What's not to like?

Of course, each must do what he is comfortable with, but I have my limits on capital investment in any given share, in addition to dependence on one share for income, and current capital value, and will continue in that way.

Arb.

[Lootman]

What I'm advocating is a sensible watch on capital deployed into one share, however one assess's that. A constantly falling share - let's take it to really absurd limits - could end up absorbing 100% of one's capital effort. And this could happen even if apparently passing all the safety tests

Yes, mindless buying a share just because it has gone down is usually a bad idea. There is nothing to stop an individual share going all the way down to zero and it has happened with a few household name shares in the past.

The idea itself is predicated on the belief that mean reversion will happen. But mean reversion generally applies to factors, ratios and other metrics that are cyclical in nature, like P/E ratios or volatility measures. Reversion to the mean doesn't apply to an individual share, which could keep on increasing for decades or fall to zero never to recover.

I think Pyad is thinking with his Value hat on there rather than his HYP hat. You may recall his TMF Value portfolio where he heroically kept buying financial dogs like RBS and Aviva whilst all around people were cutting their losers. His portfolio ended up with something like 75% in those two names, and it didn't end well - he finally bailed close to the bottom when Aviva cut is dividend.

The phrases "don't try to catch a falling knife" and "value trap" come to mind.

[tjh290633]

It may be relevant if I post the cost of my holdings as a percentage of the total:

Rank   Epic   % Cost
   1   PSON    4.41%
   2   SGRO    4.40%
   3   LLOY    4.37%
   4   CLLN    4.23%
   5   AV.     4.14%
   6   MKS     3.97%
   7   BLT     3.90%
   8   LGEN    3.77%
   9   RDSB    3.73%
  10   BP.     3.70%
  11   MARS    3.59%
  12   ADM     3.59%
  13   GSK     3.46%
  14   SSE     3.45%
  15   BLND    3.35%
  16   RIO     3.19%
  17   TW.     2.73%
  18   TSCO    2.71%
  19   TATE    2.57%
  20   VOD     2.51%
  21   RB.     2.42%
  22   UU.     2.40%
  23   WMH     2.26%
  24   AZN     2.24%
  25   BT.A    2.18%
  26   ULVR    2.01%
  27   KGF     2.01%
  28   BATS    1.98%
  29   NG.     1.92%
  30   BA.     1.76%
  31   DGE     1.52%
  32   S32     1.14%
  33   IMI     1.08%
  34   INDV    0.98%
  35   SMDS    0.83%
  36   CPG     0.76%
  37   IMB     0.74%

In general, the ones at the top have been topped up quite a lot, while those low down have mostly been trimmed back. It also depends on when the holding was bought, as they will have been added at the median holding value. LGEN, for example, is the most recent addirion and that cost represents the median holding value at that time. S32 and INDV have been added to, having been spun out of their parents and are currently about 70% and 50% respectively above cost. PSON has been topped up 4 times in the last 3 years. SGRO has recently had a rights issue, which was taken up. LLOY has been topped up twice in the last year. CLLN was first bought and has been topped up in the last 12 months.

I could go on, but the point has been made admirably by Arborbridge.

TJH

[johnw11]

What I do is add up the cost of each holding, add them together to get the total portfolio cost, and then the cost of each holding is expressed as a percentage of the total. I put it in after I relised that chasing a falling high income share could leave me seriously overexposed to such a share. The one that alerted me was Mapeley.

TJH

Hi Terry,

Thanks for that. The important part I am picking up there is original cost in total, not the current portfolio value. That is where I would have gone wrong on my calculations where I am starting to set this up as an additional check on what shares to top-up.

Regards

John

[Arborbridge]

Lootman,

- he finally bailed close to the bottom when Aviva cut is dividend.

I also bought that dog, but sticking to HYP guidelines, I held on and it has recovered to return a small (though still dog-like!) return. Selling out didn't fit with the original HYP philosophy which is why I was never tempted to sell.

Arb.

[miner1000]

I also bought that dog, but sticking to HYP guidelines, I held on and it has recovered to return a small (though still dog-like!) return. Selling out didn't fit with the original HYP philosophy which is why I was never tempted to sell

Hi Arb,

I guess one man's dog is another man's race horse. Aviva is currently up 52% on my purchase price and last time I checked was yielding 4.8% of the price as at 31 December 2016. I wish I had a few more "dogs" this good in my HYP.

Miner

[Arborbridge]

Aviva is currently up 52% on my purchase price and last time I checked

Well done for good judgement, or happenstance perhaps

I bought at the time of the original selection by Pyad - not such a happy moment for timing.