SSE Topped up

[tjh290633]

I had a slight dilemma this morning. I had the money for a top-up, and top of my list was SSE. They report on Wednesday. Should I do it now or wait until then? I decided to follow the maxim of "the time to buy is now" and went ahead.

Added about 17% to my holding at 1430p. This raised SSE to 7.7% above median value and it should now contribute 4,2% to income on the assumption that dividends will be unchanged.

That makes my top-up table look like this:

Rank   EPIC   Rank   EPIC   % Income   Rank   Epic   % Cost
   1   CLLN      1   TW.       4.73%      1   PSON    4.38%
   2   PSON      2   CPG       4.36%      2   SGRO    4.37%
   3   BT.A      3   MKS       4.30%      3   LLOY    4.34%
   4   RDSB      4   BP.       4.25%      4   CLLN    4.20%
   5   BP.       5   SSE       4.23%      5   SSE     4.11%
   6   VOD       6   RDSB      4.10%      6   AV.     4.11%
   7   LLOY      7   ADM       3.86%      7   MKS     3.95%
   8   WMH       8   CLLN      3.84%      8   BLT     3.87%
   9   BLT       9   PSON      3.77%      9   LGEN    3.74%
  10   IMB      10   LGEN      3.59%     10   RDSB    3.71%
  11   SSE      11   GSK       3.56%     11   BP.     3.67%
  12   LGEN     12   VOD       3.33%     12   MARS    3.57%

As you can see, SSE is disqualified from further top-ups for now, because its contribution to income is over 4.2%, which means that a 20% top-up would take it past my 5% limit. It shares that prohibition with the four above it in the % Income column, and also the top four in the % Cost column. That could change in the course of the week. SSE is below the 4.2% cut-off point in the % Cost column. Another top up will bring Carillion back into play. However, until then, BT.A is top rank for top-up, with RDSB on its heels.

TJH

[pyad]

...and also the top four in the % Cost column. That could change in the course of the week. SSE is below the 4.2% cut-off point in the % Cost column...

TJH

We've discussed this before but I'm mentioning it again in case others don't realise it.

I find your filter of relative percentage cost to be flawed. It's unnecessary and could lead to a worthwhile share being overlooked.

What matters in my view is how a share presents itself now. In my own HYP and in the public HYP1 here I have no qualms about adding more to a company with total disregard to the proportion of original cost it represents. I've added to Lloyds for example in HYP1 and would do so again with no regard whatsoever for past cost. What matters is how it stacks up now so if it is the lead candidate for a top-up on its fundies, is below average current value (not median) and offers the right yield I fail to see the importance of past cost.

Having regard for past cost strikes me as little more than superstition, viewing it as something permanently yet indefinably wrong with the company unsupported by any rational or quantitative analysis. But circs change over time.

[StepOne]

I also questioned use of sunk costs in the past, but it makes sense as a way of preventing more money going into a failing share. Otherwise you will end up always topping up the share that has fallen the most. And occasionally (e.g. RBS) that will be a disaster.

StepOne

[pyad]

I also questioned use of sunk costs in the past, but it makes sense as a way of preventing more money going into a failing share. Otherwise you will end up always topping up the share that has fallen the most. And occasionally (e.g. RBS) that will be a disaster.

StepOne

Yes that was the flawed supporting argument proposed in the past when I criticised the idea. It's flawed because I never suggested topping up a share blindly just because it had fallen, I specifically pointed out that it has to stack up on the usual criteria and amongst the most major of those for HYPers is the payment of dividends. Thus RBS cannot be considered for top-up by a long term holder until its fundies improve including resumption of payouts.

What I'm saying is that the rejection for topping-up of an otherwise attractive share, purely because of the sunk cost argument, is illogical to me. As I said it's close to superstition, some sort of belief that the share is jinxed forever.

[StepOne]

Yes that was the flawed supporting argument proposed in the past when I criticised the idea. It's flawed because I never suggested topping up a share blindly just because it had fallen, I specifically pointed out that it has to stack up on the usual criteria and amongst the most major of those for HYPers is the payment of dividends. Thus RBS cannot be considered for top-up by a long term holder until its fundies improve including resumption of payouts.

What I'm saying is that the rejection for topping-up of an otherwise attractive share, purely because of the sunk cost argument, is illogical to me. As I said it's close to superstition, some sort of belief that the share is jinxed forever.

I don't think anyone is blindly topping up falling shares, it's just that the yield can rise for a long time before a dividend cut is announced, so a share on the slide could sit at the top of the rankings for months. And I think that people are including all the usual criteria as well, so this is just another one to add. And all that happens is they top up a different share, which is just as likely as the other to be a good hyp-share, so in the end they are probably going to be no worse off using this extra filter.

StepOne

[pyad]

I don't think anyone is blindly topping up falling shares, it's just that the yield can rise for a long time before a dividend cut is announced, so a share on the slide could sit at the top of the rankings for months. And I think that people are including all the usual criteria as well, so this is just another one to add. And all that happens is they top up a different share, which is just as likely as the other to be a good hyp-share, so in the end they are probably going to be no worse off using this extra filter.

StepOne

"No worse off.." is not a good enough argument for this.

The purpose of a filter is to create and improve selection, you'll agree. Having a filter that merely renders you no worse off is at best pointless and at worst is likely to cause you to overlook an otherwise attractive top-up choice. I continue to find it illogical but I stress that my view is not dogmatic, I'm well open to being convinced otherwise but nobody has put up what I regard as a convincing argument for this weird, emotional and innumerate concept.

Anything that improves HYP selection and top-up is worth considering. This doesn't. It actually reduces it.

[Raptor]

I don't think anyone is blindly topping up falling shares, it's just that the yield can rise for a long time before a dividend cut is announced, so a share on the slide could sit at the top of the rankings for months. And I think that people are including all the usual criteria as well, so this is just another one to add. And all that happens is they top up a different share, which is just as likely as the other to be a good hyp-share, so in the end they are probably going to be no worse off using this extra filter.

StepOne

"No worse off.." is not a good enough argument for this.

The purpose of a filter is to create and improve selection, you'll agree. Having a filter that merely renders you no worse off is at best pointless and at worst is likely to cause you to overlook an otherwise attractive top-up choice. I continue to find it illogical but I stress that my view is not dogmatic, I'm well open to being convinced otherwise but nobody has put up what I regard as a convincing argument for this weird, emotional and innumerate concept.

Anything that improves HYP selection and top-up is worth considering. This doesn't. It actually reduces it.

FWIW, when this subject rose up on TMF I amended my spreadsheets for both methods and since then the "lists" have been remarkably similar, the number 1 has always been the same share..... I still use my own selection criteria and never "blindly" take the top share, even if it ticks all the "boxes".

Raptor.

[tjh290633]

"No worse off.." is not a good enough argument for this.

The purpose of a filter is to create and improve selection, you'll agree. Having a filter that merely renders you no worse off is at best pointless and at worst is likely to cause you to overlook an otherwise attractive top-up choice. I continue to find it illogical but I stress that my view is not dogmatic, I'm well open to being convinced otherwise but nobody has put up what I regard as a convincing argument for this weird, emotional and innumerate concept.

Anything that improves HYP selection and top-up is worth considering. This doesn't. It actually reduces it.

It is worth reiterating why I introduced the "% Cost" limit into my selectioncriteria. Before Fortress came on the scene, Mapeley had a lot of property let to first class clients, like HMRC and some banks, and it had a high yield. Consequently I kept on topping it up. It got to the stage where it was both a high contributor to income and also was a high proportion of the portfolio cost.

It all came unravelled when the company was raped by Fortress and taken private. Had either of those two constraints been in place, I would not have got so deeply into Mapeley. That is why I use that criterion to decide for or against a top up.

TJH

[Arborbridge]

I just don't see the "flaw". In my view it is a perfectly reasonable additional safety factor to take notice of how much capital has been sunk into a given share. One might have pretty generous limits on the cost factor, but nevertheless I believe one is safer playing within those limits. It has nothing remotely to do with superstition: rather the additon of a rationally thought out risk control - quite the opposite of superstition.

The classic HYP safety checks can turn out to be misleading or erroneous, so over-investing in one share should be avoided. Yes, I can be accused of erring in the direction of caution, but I also know what it feels like when a significant percentage of capital or income errodes rather quickly and am not in a hurry to repeat that.


Arb.

[JMN2]

I look at unrealised P&L, and the negative ones stand out. A big negative I wouldn't rush to top up, say Carillion, but would put it on a naughty step instead.

[Itsallaguess]

In my own HYP and in the public HYP1 here I have no qualms about adding more to a company with total disregard to the proportion of original cost it represents.

.......

Having regard for past cost strikes me as little more than superstition

I think that's a bit harsh.

Terry's past-cost check protects an investor 'from themselves' in certain circumstances, one of which Terry has highlighted regarding Mapeley.

Given that most of Terry's rules are there to help keep income and capital generally balanced across his HYP, I think it's a brave move for anyone to hold HYP1 up as an example in criticising that approach, given it's huge structural imbalances on both fronts.

Itsallaguess

[Wizard]

As you know I am new here, so keen to learn. On that basis I wanted to understand how this check is applied.

Am I right to assume that the % of cost runs alongside % of income and % of value? Or is it instead of % of value?

If it runs in parallel to both % of income and value I am trying to figure out when it would kick in. If a share increases in value rapidly with the dividend also rising fast % of income and value would limit top ups regardless of % of cost I think. If the share price falls after purchase and the dividend is cut then presumably the fact it has cut would disqualify it. If the share price falls after purchase but the dividend remains intact for an extended period the yield would start to look very attractive and it may be topped up, if the price then falls again and dividend is untouched the % of value would be 'normalised' and it could be a candidate again. But all these top ups would mean it would quickly be disqualified on % of income.

So unless % of cost is instead of % of value I am struggling to see what it adds as a safety factor. Can anyone enlighten me?

Terry.

[tjh290633]

As you know I am new here, so keen to learn. On that basis I wanted to understand how this check is applied.

Am I right to assume that the % of cost runs alongside % of income and % of value? Or is it instead of % of value?

If it runs in parallel to both % of income and value I am trying to figure out when it would kick in. If a share increases in value rapidly with the dividend also rising fast % of income and value would limit top ups regardless of % of cost I think. If the share price falls after purchase and the dividend is cut then presumably the fact it has cut would disqualify it. If the share price falls after purchase but the dividend remains intact for an extended period the yield would start to look very attractive and it may be topped up, if the price then falls again and dividend is untouched the % of value would be 'normalised' and it could be a candidate again. But all these top ups would mean it would quickly be disqualified on % of income.

So unless % of cost is instead of % of value I am struggling to see what it adds as a safety factor. Can anyone enlighten me?

Terry.

The top up ranking is based on the ranking on yield, where 1 is the highest, and the inverse ranking on holding value, where 1 is the lowest.

My disqualification comes in if topping up a share would take it over 5% of portfolio income or 5% of portfolio cost. I am typically topping up by about 20%, so that suggests a cut-off point of about 4.2%, since adding 0.84% would take it past the 5% limit on those two factors.

Each top up moves the goalposts, so another top up would bring Carillion back into consideration. Not long ago Shell was ruled out, but dividend declarations by other companies have brought it back into the qualified group.

Note that rapidly growing shares will almost inevitably be above the median holding value, and so are very unlikely to get to the top of the top up ranking.

TJH

[Wizard]

As you know I am new here, so keen to learn. On that basis I wanted to understand how this check is applied.

Am I right to assume that the % of cost runs alongside % of income and % of value? Or is it instead of % of value?

If it runs in parallel to both % of income and value I am trying to figure out when it would kick in. If a share increases in value rapidly with the dividend also rising fast % of income and value would limit top ups regardless of % of cost I think. If the share price falls after purchase and the dividend is cut then presumably the fact it has cut would disqualify it. If the share price falls after purchase but the dividend remains intact for an extended period the yield would start to look very attractive and it may be topped up, if the price then falls again and dividend is untouched the % of value would be 'normalised' and it could be a candidate again. But all these top ups would mean it would quickly be disqualified on % of income.

So unless % of cost is instead of % of value I am struggling to see what it adds as a safety factor. Can anyone enlighten me?

Terry.

The top up ranking is based on the ranking on yield, where 1 is the highest, and the inverse ranking on holding value, where 1 is the lowest.

My disqualification comes in if topping up a share would take it over 5% of portfolio income or 5% of portfolio cost. I am typically topping up by about 20%, so that suggests a cut-off point of about 4.2%, since adding 0.84% would take it past the 5% limit on those two factors.

Each top up moves the goalposts, so another top up would bring Carillion back into consideration. Not long ago Shell was ruled out, but dividend declarations by other companies have brought it back into the qualified group.

Note that rapidly growing shares will almost inevitably be above the median holding value, and so are very unlikely to get to the top of the top up ranking.

TJH

So, how often do you find that a share that is OK to top up from a % of value and % of income perspective is barred for reason of % of cost? It's just that I am struggling to think under what scenario that would happen. I suppose that if five years ago a share crashed in value and cut its dividend, then it grows in a modest but balanced way it could be limited only by cost. But that would be a rare scenario I would think.

Terry.

[77ss]

My disqualification comes in if topping up a share would take it over 5% of portfolio income or 5% of portfolio cost. I am typically topping up by about 20%, so that suggests a cut-off point of about 4.2%, since adding 0.84% would take it past the 5% limit on those two factors.

Each top up moves the goalposts, so another top up would bring Carillion back into consideration. Not long ago Shell was ruled out, but dividend declarations by other companies have brought it back into the qualified group.

Note that rapidly growing shares will almost inevitably be above the median holding value, and so are very unlikely to get to the top of the top up ranking.

TJH

So, how often do you find that a share that is OK to top up from a % of value and % of income perspective is barred for reason of % of cost? It's just that I am struggling to think under what scenario that would happen. I suppose that if five years ago a share crashed in value and cut its dividend, then it grows in a modest but balanced way it could be limited only by cost. But that would be a rare scenario I would think.

Terry.

It will very much depend on how long you've been playing the game. I have two such shares (out of 36, which I think is a similar number to thj's collection).

As the years pass, OTBE, your purchase costs are static, but the capital values rises, so purchase cost will rarely be a limiting factor. But if you are fully built and decide to buy a new share, then the new share can easily have a relatively high %age of your overall initial purchase cost. Being in the habit of top-slicing overweight holdings will also contribute.

[pyad]

In my own HYP and in the public HYP1 here I have no qualms about adding more to a company with total disregard to the proportion of original cost it represents.

.......

Having regard for past cost strikes me as little more than superstition

I think that's a bit harsh.

Terry's past-cost check protects an investor 'from themselves' in certain circumstances, one of which Terry has highlighted regarding Mapeley.

Given that most of Terry's rules are there to help keep income and capital generally balanced across his HYP, I think it's a brave move for anyone to hold HYP1 up as an example in criticising that approach, given it's huge structural imbalances on both fronts.

Itsallaguess

HYP1 is of course unbalanced by design due to its no-tinker rule. In any event that has little to do with the discussion, I mentioned it only to state that the daft rule being promoted here regarding proportionate cost would not be applied by me in HYP1 and neither would it in my own, very real, HYP.

It's not "brave" to ignore this superstition, it's logical. All that matters is the current fundies of the top-up candidate, which are chosen from amongst those of below average (not the affectation of the median) present value in the portfolio. Why would you care what proportion of cost it was in the year dot? And if you do, you are misguided. Having drawn up a short list based on below average value, you then choose what you see as the most attractive on your personal criteria of yield and other fundies.

This whole nonsense proceeds from the peculiar belief that a share that has done poorly on original cost, will continue to do so forever irrespective of its latest status indicating it is attractive, perhaps the most attractive in your portfolio for a top-up, yet should be rejected based on cost that no longer matters at all for this purpose. That somehow, this protects from you throwing good money after bad. But it obviously doesn't.

Since when did price action inform investment quality? That's a mug punter approach, buy high and sell low. HYPs and value are the antithesis of that.

The very concept of HYP and its originating cousin, value, is based on certain shares being mispriced. Sure you can go wrong, HYPs are a portfolio approach, there are no guarantees and nobody gets it right with every play. But the idea is that overall you'll get it right more than wrong with a diversified portfolio. Just because Terry went wrong with one play, Mapeley, does not justify the cost rule, not even close. We all have dud shares in our HYPs but apart from the usual fundies test, there is no further protection because this is a risk game and that's why we diversify. One person with one poor top-up proves nothing at all.

What it's also saying by implication is that you would not top it up now if it fails the cost filter, however attractive. If then its price later rises so that it no longer fails the cost filter, yet still retains sufficient desirability, you would then be willing to buy it but at a much higher price! Where's the sense in that because I can't see it. Proportionate original cost cannot be a sound reason to rule out a top-up in my view.

Anyway it's getting repetitive. I've seen no valid argument to convince me that this illogical rule should be followed. Similarly, those who believe in it are unlikely to drop it and consequently will remain illogical. As someone said, it probably makes little difference in the long run to most HYPs and I'd agree. Even more reason then to drop this pointless filter.

[Wizard]

It will very much depend on how long you've been playing the game. I have two such shares (out of 36, which I think is a similar number to thj's collection).

As the years pass, OTBE, your purchase costs are static, but the capital values rises, so purchase cost will rarely be a limiting factor. But if you are fully built and decide to buy a new share, then the new share can easily have a relatively high %age of your overall initial purchase cost. Being in the habit of top-slicing overweight holdings will also contribute.

I think that means that the selection will in effect be biased towards shares held for longer over shares bought more recently. But it is clear this won't apply to me for a long time so I will stop worrying about it.

Terry.

[Itsallaguess]

What it's also saying by implication is that you would not top it up now if it fails the cost filter, however attractive.

If then its price later rises so that it no longer fails the cost filter, yet still retains sufficient desirability, you would then be willing to buy it but at a much higher price! Where's the sense in that because I can't see it.

Proportionate original cost cannot be a sound reason to rule out a top-up in my view.

I'm not clear on how the price of a share rising will affect the percentage cost of that share.

Won't the cost allocation per share be fixed at any single point, in relation to the aggregated costs of all the other shares in the portfolio? How is that affected by share-price?

If I've got a portfolio that I've spent £50,000 on, and it initially contains 20 shares that I've allocated £2500 to each from the start, then each share will have a cost percentage of 5% (£2500 / £50000 = 5%). If one of those shares doubles in share-price, its cost-percentage will still be 5% won't it? How is that affected by the price of the share?

I appreciate you not wanting to prolong this aspect of the discussion, but I raise the above query in case your thoughts are relevant in your consideration of Terry's cost filter.

Similarly, if my own thinking behind this is flawed in the specific area of the above scenario, then I'd like to know if this is the case.

Terry, are you able to comment on my scenario above and let me know if I'm missing anything?

Cheers,

Itsallaguess

[OZYU]

It is strange how fond pyad is of charging many of us with 'nonsense'.

Here are three bit of nonsense (according to pyad) we have thrived on as investors since pyad was in short pants, we believe that: the time to buy is definitely not always now, LTBH is desirable but not central by any means because things change, break the rule(ours is similar to TJH's) on investment on % cost at your own peril because it will eventually bite you hard if you do.

Never stopped our HY effort from thriving. Jointly we are sitting on an overall IRR well in excess of 10% over a very long period in the HY slice, so we must be doing something right with our nonsensical approach!

Therefore there are many ways to go about things in investing. Do what works for you after trying a few things first over a considerable period. We learnt most in the 70s, in those horrible markets and horrendous inflationary times.

Ozyu

[77ss]

It will very much depend on how long you've been playing the game. I have two such shares (out of 36, which I think is a similar number to thj's collection).

As the years pass, OTBE, your purchase costs are static, but the capital values rises, so purchase cost will rarely be a limiting factor. But if you are fully built and decide to buy a new share, then the new share can easily have a relatively high %age of your overall initial purchase cost. Being in the habit of top-slicing overweight holdings will also contribute.

I think that means that the selection will in effect be biased towards shares held for longer over shares bought more recently. But it is clear this won't apply to me for a long time so I will stop worrying about it.

Terry.

Yes! How people choose to manage their HYPs will vary according to the maturities of the said HYPs - among other factors.

I should add that I pay little or no attention to purchase cost - I had the data out of interest - to see whether or not it was a factor I wished to bear in mind.