Donate to Remove ads

Got a credit Card? use our Credit Card & Finance Calculators

Thanks to MyNameIsUrl,GSVsowhat,johnstevens77,BusyBumbleBee,88V8, for Donating to support the site

Sell or not sell

General discussions about equity high-yield income strategies
Gengulphus
Lemon Quarter
Posts: 2938
Joined: November 4th, 2016, 1:17 am
Been thanked: 1500 times

Re: Sell or not sell

#243955

Postby Gengulphus » August 13th, 2019, 10:43 am

scrumpyjack wrote:I have never ever focused on income from my investments, but simply invested in companies that I thought would be a good investment long term. The income was incidental and was sometimes important to help prove the company was actually generating the real profits to pay the dividend.

I was not interested in short term market fluctuations and tended to hold shares for decades or until they were taken over. Probably that attitude started because in my youth dividends were so ludicrously highly taxed (98%), there wasn’t much point in having them, except that they could be offset by mortgage interest.

The result now, 50 years later, is that my dividends now cover my expenditure several times over and I haven’t needed to draw a pension. I can leave that to the kids. I have to say in retrospect that the companies I bought which had a high yield at the time of purchase have often been the worst performers and after 5 or 10 years the growth company dividends overtake them and then carry on growing and in some cases the annual dividend ends up being higher than the cost price of the share.

That's pretty much what I would expect - of the companies that are still in your portfolio. But what about the ones that have fallen by the wayside - ones that although you thought were a good investment long-term, but turned out not to be, or simply couldn't be kept for the long term because they were taken over? If you haven't taken them into account as well, what you say will probably be badly affected by survivorship bias.

If you have taken it into account and the purchased-for-growth-rather-than-yield companies are still coming out ahead, what you've observed can still have multiple explanations. To give a couple, the first can be illustrated by imagining that two companies were bought with £100 each (a small-sounding amount nowadays, but we are talking about 50 years ago!). One had a yield of 9% and annual growth of both capital and dividends of 2%, while the other had a yield of 2% and annual growth of both capital and dividends of 8%. Both have been remarkably good at maintaining those growth rates - in fact, perfect at it (which is of course very unrealistic, but this is just an illustrative example) - and since their capital values and dividends have been growing at the same rate, their yields have remained constant. By now, the first shareholding is worth £100 * (1.02)^50 = £269.16 and is producing annual income of 9% of that, which is £24.22, while the second is worth £100 * (1.08^50) = £4,690.16 and is producing annual income of 2% of that, which is £93.80. So a hands-down victory for the high-growth share over the high-yield share, isn't it, which by the end has approaching 20 times the capital value and 4 times the income, and income nearly equal to the original £100 cost? (And at the current rate, will get to over 4 times the income and income over the original cost in just one more year, and over 20 times the capital value a couple of years after that.)

The answer is that no, it isn't. What it ignores is all the dividends thrown off by the two holdings over the years and what returns they might produce if reinvested - they too are returns earned from the original £100, just by a more complex route. The dividends thrown off by the two holdings are, summarised by decade:


The second holding has produced more in the way of total dividends to reinvest over the years than the first, though by a rather smaller factor of about 1.5 rather than nearly 4. But crucially, it produced a lot less in the way of dividends to reinvest in the early years, when whatever they're reinvested in has the longest to subsequently grow itself. The "Might have grown to" columns show what those dividends would have grown to, assuming a similar 10% rate of total return to those of the two shares. The net result is that the £100 investment in the 9%-yielder/2%-grower has grown to £269.16+£12,903.67 = £13,172.83 and the same-sized investment in the 2%-yielder/8%-grower has grown to £4,690.16+£7,048.92 = £11,739.08.

There is of course no real surprise about that: growing £100 to £13,172.83 over 50 years is a CAGR of 10.25%, which is consistent with having been invested in a mixture of investments with rates of total return of 9%+2% = 11% and of 10%, while growing it to £11,739.08 over 50 years is a CAGR of 10.00%, consistent with having been invested in a mixture of investments with rates of total return of 2%+8% = 10% and of 10%. But my point is that if you only look at the state of the original investments and the income they're producing after 50 years, without also looking at the dividends they've paid over the years and what they have grown to, you get a totally false picture of how the original investment has performed. Basically, the 9%-yielder/2%-grower has passed around 98% of the job of growing the original £100 back to you and only kept about 2% of it for itself by giving you dividends to reinvest, while the 2%-yielder/8%-grower has only passed about 60% of it back to you and kept about 40% of it for itself.

So what that point boils down to is that if you simply compare where the original investments have ended up, you risk getting a totally wrong, biased-against-high-yielders impression of which are the best performers. That problem can be got around by systematically reinvesting each holding's dividends in itself (specifically - just reinvesting them in the portfolio as a whole is not good enough), or by doing a proper rate-of-total-return calculation (e.g. using the XIRR() spreadsheet function) on each holding. So if what you've observed is based on doing either of those, this isn't the explanation - but if it's simply based on looking at the state of the holdings, it's almost certainly at least a big part of it.

The other possible explanation that I said I'd give is much shorter: it may be that you're considerably more skilled and/or talented at picking shares that turn out to produce high rates of growth and total return than I am (*). Shares picked for growth are certainly capable of achieving much higher rates of total return for long periods than ones picked for dividend income, but also more prone to go badly wrong. There are quite a few groups of people for whom I would regard HYP strategies as thoroughly unsuitable. One of them is those who really do have the sort of investment skill and/or talent needed to make a success of growth investing; another is those who want to find out whether they do (or are capable of developing the skill) and who are able and willing to put in the effort needed to find out.

(*) As indicated in my previous posts, I have had one absolutely huge growth share that has set me up for life. But I can't claim that investment skill or talent was involved - it was luck, of the happening-to-be-in-the-right-place-at-the-right-time variety. I've had a few other pretty good successes, but they're much smaller and they're offset by quite a large number of shares picked for growth that turned out not to grow by much (and quite a few of them not at all, or to shrink)...

Gengulphus

Itsallaguess
Lemon Quarter
Posts: 3800
Joined: November 4th, 2016, 1:16 pm
Has thanked: 1296 times
Been thanked: 2357 times

Re: Sell or not sell

#243956

Postby Itsallaguess » August 13th, 2019, 10:48 am

Bubblesofearth wrote:
The risk with a share portfolio is that you avoid, either accidentally or by deliberate action, capturing and keeping any of those shares that are responsible for driving the bulk of growth. Again, I would advise you to look into how markets (and thus portfolios derived from them) tend to evolve.


But if we also accept there's then a risk of allowing a really small number of holdings to continue delivering huge percentages of our income (remembering after all that we are on the High Yield Shares & Strategies board...), then perhaps it's not as simple as you suggest....

If we agree for the sake of this discussion that your approach would perhaps deliver the best overall market returns, but also might give an end result that incorporates additional risk into the subsequent income-delivery, then a middle-ground approach might be to not top-slice such imbalances 'too early', such that we continue to take advantage of the market in this area for longer, but also ensure we have clear markers where top-slicing action does come into affect to then help mitigate single-source risk.

You seem to be suggesting that people should leave everything alone, and perhaps allow a HYP1 situation to develop, but if that end-result isn't at all palatable to income-seekers, in terms of the huge income-imbalances they would have to live with, then some course of action seems necessary.

I don't believe the answer necessarily needs to be 'never top-slice', and that some middle-ground solution can help take advantage of your approach, whilst also helping to salve the worries of income-seekers who might need to actually live with these income-portfolios during what might hopefully be a long and happy retirement...

Cheers,

Itsallaguess

Alaric
Lemon Quarter
Posts: 3366
Joined: November 5th, 2016, 9:05 am
Has thanked: 12 times
Been thanked: 684 times

Re: Sell or not sell

#243957

Postby Alaric » August 13th, 2019, 10:56 am

Gengulphus wrote: One had a yield of 9% and annual growth of both capital and dividends of 2%, while the other had a yield of 2% and annual growth of both capital and dividends of 8%. Both have been remarkably good at maintaining those growth rates - in fact, perfect at it (which is of course very unrealistic, but this is just an illustrative example)


That's the usual rule of thumb about adding the dividend yield and the price or dividend growth rate. A similar calculation would show that a yield of 2%, growth of 8% is to be preferred to a yield of 9% and no growth. Preference shares can have a place in high yield investing but would suffer from the no growth issue. If you needed 9% as income now, you take the preference share or equivalent.

scrumpyjack
Lemon Slice
Posts: 560
Joined: November 4th, 2016, 10:15 am
Has thanked: 20 times
Been thanked: 153 times

Re: Sell or not sell

#243966

Postby scrumpyjack » August 13th, 2019, 11:40 am

Yes Gengulphus, that is of course the case, and I certainly haven’t worked out the returns on individual shares etc or engaged in ‘survivorship bias’. I have simply looked at the total value of my portfolio each year and the income from it. I tend to look at it also in inflation adjusted terms as that used to be extremely important in the 70’s at least, and is still important in my view.

I too had a few shares that produced massive gains. Don’t forget that you can’t lose more than 100% of the cost of an investment, but each share that multiplies five fold, or more, outweighs the total losers by a huge margin. If you sell the winners when they have for exampled doubled you can lose out on a lot of future growth.

I have not until relatively recently invested in ‘growth’ shares that produce very little income, but rather in very solid profitable companies that I thought could carry on increasing profits and dividends. I stayed well clear of the dotcom mania.

In my youth one could certainly not just consider capital growth + dividends as total return. When the dividends were taxed at 98% that equation doesn't work as you can't reinvest gross dividends (unless in a tax free account, but that was before PEPs/ISAs and Personal Pensions etc.

As I say, everyone must do what they are comfortable with and what fits their circumstances and outlook.

Alaric
Lemon Quarter
Posts: 3366
Joined: November 5th, 2016, 9:05 am
Has thanked: 12 times
Been thanked: 684 times

Re: Sell or not sell

#243970

Postby Alaric » August 13th, 2019, 11:56 am

scrumpyjack wrote:In my youth one could certainly not just consider capital growth + dividends as total return. When the dividends were taxed at 98% that equation doesn't work as you can't reinvest gross dividends (unless in a tax free account, but that was before PEPs/ISAs and Personal Pensions etc.


In that era, pension funds and perhaps charities got their dividends gross and in life assurance companies their "life" business taxation was much lower than 98% and their "pension" business was gross as well. To the extent that such institutional investors dominated markets, their needs and attitudes were paramount. "Prices and Incomes" policies were popular in the 1960s and 1970s in an attempt to control or eliminate inflation. I rather thing dividends came into the scope of at least some of these policies which may have prevented dividend increases. The tax changes of the Thatcher era tilted the treatment of personal wealth back towards it not being penally taxed to hold it directly in shares or indirectly thorough ITs and Unit Trusts. That was necessary really to get mass privatisation off the ground.

In the most recent ten to fifteen years, wage and salary growth has been restricted and price increases in aggregate haven't exceeded around 2% a year according to published statistics, whereas dividends have been increased across the board in many UK based Companies.

Gengulphus
Lemon Quarter
Posts: 2938
Joined: November 4th, 2016, 1:17 am
Been thanked: 1500 times

Re: Sell or not sell

#243977

Postby Gengulphus » August 13th, 2019, 12:08 pm

Lootman wrote:There appears to be some doubt as to whether Bland even advocated never selling, but rather just had a personal preference for not doing so voluntarily. Clearly those who do sell, either to re-balance or because the facts have changed since initial purchase, are deemed to be fully-fledged HYPers, and so the issue is not critical. It is merely something that each investor decides for himself or herself. Since which shares to buy is an individual choice, so must be which shares to sell. It would be a very odd strategy that informs you that you are smart enough to make buy trades, but too stupid to make sell trades.

My own view of Bland's bias here is more to do with marketing and promoting his method in the hope of making money from it. He had rules about what to buy, but struggled to come up with rules for selling. This is hardly unusual - many investors have no problem developing a buy list or watch list, but do not feel the same confidence and assurance about whether or when to sell. There is fear of losing more and fear of missing out, and sometimes it is just easier to duck the issue and hang onto what you've got. There is also the "you haven't lost money until you sell" concept. I think Bland recognised that HY shares have a potentially higher risk of losing capital value. So it suited his promotional purposes to pretend that's not important, hence the "capital doesn't matter" mantra, along with the annuity analogy.

The main promoting I see there is promotion of various myths. There is no doubt that pyad did advocate never selling - that's the course of (in)action he recommended in his original article about HYP (specifically, "Having chosen your shares, simply buy and hold forever. Do not be tempted to meddle, and try not to let press comment on your companies influence you.") and so far as I am aware, he's never changed that advice. Various things he has said and done since make it clear that he regards it as a strong recommendation rather than an absolute hard-and-fast rule that must be followed on absolutely every occasion, failing which you cannot claim to be running a HYP, but advocating something means recommending and/or making arguments for it, not legislating about it! And indeed he has not followed it on rare occasions in HYP1 - most recently here.

The same article says far too much about capital and the fact that the HYPer retains access to it for any argument that it was based on a "capital doesn't matter" mantra to be remotely viable. The closest it comes is "Do not worry about the fluctuations in the underlying capital value of your shares that are certain to occur.", but saying not to worry about normal fluctuations in something is a far cry from saying that that something doesn't matter. I don't worry about normal fluctuations in my breathing and heartbeat rates, but that most certainly doesn't mean that breathing and my heart beating don't matter to me!

The same article doesn't give an annuity analogy, but does say near its start that "Conventional wisdom on this topic from IFAs will tend to propel you in the direction of some kind of insurance company product such as guaranteed income bonds or the like." and proceed to suggest a HYP as an alternative. And a guaranteed income bond is a much closer analogue of a HYP than an annuity - nowhere near perfect (analogies very seldom are), but unlike an annuity, a guaranteed income bond does still permit at least some access to capital, with some risk to it.

As regards what pyad's motives were in writing what he did back then and since, I won't comment. TLF has a rule "Robust debate is allowed, but it must remain polite and respectful at all times. Stick to the facts and argue the points discussed, rather than criticise the poster." and at least IMHO, commenting on another Fool's motives is on the wrong side of that rule.

Gengulphus

scrumpyjack
Lemon Slice
Posts: 560
Joined: November 4th, 2016, 10:15 am
Has thanked: 20 times
Been thanked: 153 times

Re: Sell or not sell

#243978

Postby scrumpyjack » August 13th, 2019, 12:10 pm

Alaric wrote:
scrumpyjack wrote:In my youth one could certainly not just consider capital growth + dividends as total return. When the dividends were taxed at 98% that equation doesn't work as you can't reinvest gross dividends (unless in a tax free account, but that was before PEPs/ISAs and Personal Pensions etc.


In that era, pension funds and perhaps charities got their dividends gross and in life assurance companies their "life" business taxation was much lower than 98% and their "pension" business was gross as well. To the extent that such institutional investors dominated markets, their needs and attitudes were paramount. "Prices and Incomes" policies were popular in the 1960s and 1970s in an attempt to control or eliminate inflation. I rather thing dividends came into the scope of at least some of these policies which may have prevented dividend increases. The tax changes of the Thatcher era tilted the treatment of personal wealth back towards it not being penally taxed to hold it directly in shares or indirectly thorough ITs and Unit Trusts. That was necessary really to get mass privatisation off the ground.

In the most recent ten to fifteen years, wage and salary growth has been restricted and price increases in aggregate haven't exceeded around 2% a year according to published statistics, whereas dividends have been increased across the board in many UK based Companies.



Yes there were statutory controls on dividends in part of that period. Also, when I started investing, corporation tax was 52% as I recall, and dividends were then highly taxed in addition with no tax credit. It was therefore very inefficient to distribute profits via dividends to private investors. Also company profits in many cases were very much distorted by inflation so that the declared after tax profit could not be distributed without the company risking insolvency.

Thatchers reforms IMO saved British industry and the economy. The performance of shares since is partly a reflection of that.

Lootman
Lemon Half
Posts: 5799
Joined: November 4th, 2016, 3:58 pm
Has thanked: 34 times
Been thanked: 966 times

Re: Sell or not sell

#244021

Postby Lootman » August 13th, 2019, 4:08 pm

Gengulphus wrote:As regards what pyad's motives were in writing what he did back then and since, I won't comment. TLF has a rule "Robust debate is allowed, but it must remain polite and respectful at all times. Stick to the facts and argue the points discussed, rather than criticise the poster." and at least IMHO, commenting on another Fool's motives is on the wrong side of that rule.

I do not know whether the example you cite counts as an example of "play the man, not the ball" as I believe you are you suggesting. I was attempting to understand some of his prognostications in terms of the fact that he was trying to develop a marketable system, product and service. Rather than merely just giving his own approach whilst listening to others and building consensus, as most of us here do.

That is intended as a statement of fact rather than as a criticism, and was done in what I thought was a very civil manner, or "polite and respectful" to use your words. And more generally I think it is reasonable to note whether a Lemon is here in an amateur or professional capacity. If the latter then that should be disclosed, noted and taken into account. Such posters should be held to a higher standard. This is in fact TLF policy, I believe, and certainly was TMF policy. So for example Ohno/Munro is restricted in what he can say here about his eponymous fund, and I think most Lemons regard that as correct and fair. On that basis it should be reasonable for Lemons to opine on whether there is any conflict of interest, attempt to promote a commercial cause or otherwise utilise this site for personal gain.

So, whether my theories about Bland's motives in some of his "rules" are correct or not is a matter we could debate. My point here is limited to noting that such a discussion is germane if and only if the Lemon being discussed makes money from a related activity. And personally I think it helps to weight the various rules that he espouses through consideration of what compromises and constraints he may have introduced to make HYP a promotable and marketable business rather than just being a personal preference. I believe that additional requirement has informed some of the rules, but not necessarily all of them by any means. If you are suggesting that such considerations should be suppressed here, then I would not agree.

Itsallaguess
Lemon Quarter
Posts: 3800
Joined: November 4th, 2016, 1:16 pm
Has thanked: 1296 times
Been thanked: 2357 times

Re: Sell or not sell

#244029

Postby Itsallaguess » August 13th, 2019, 4:53 pm

Lootman wrote:
So, whether my theories about Bland's motives in some of his "rules" are correct or not is a matter we could debate.


Can't you just call him pyad like everyone else though Lootman?

I'm not sure about anyone else, but I've never been able to read any of your posts mentioning 'Bland' in anything other than a rather scornful tone.

I'm not sure if that's intentional or not, but it's certainly the way it comes across on these boards.

Cheers,

Itsallaguess

csearle
Lemon Quarter
Posts: 1939
Joined: November 4th, 2016, 2:24 pm
Has thanked: 1161 times
Been thanked: 461 times

Re: Sell or not sell

#244039

Postby csearle » August 13th, 2019, 5:22 pm

Moderator Message:
Perhaps we could steer this thread back on topic, which was essentially...
Alaric wrote:If the income is mostly generated by a handful of shares, it doesn't take many market shocks or even stroke of a pen decisions by directors to drastically reduce the income. So sell some and reinvest for diversification?
Thanks. - Chris

Lootman
Lemon Half
Posts: 5799
Joined: November 4th, 2016, 3:58 pm
Has thanked: 34 times
Been thanked: 966 times

Re: Sell or not sell

#244066

Postby Lootman » August 13th, 2019, 6:50 pm

Itsallaguess wrote:
Lootman wrote:So, whether my theories about Bland's motives in some of his "rules" are correct or not is a matter we could debate.


Can't you just call him pyad like everyone else though Lootman?

I'm not sure about anyone else, but I've never been able to read any of your posts mentioning 'Bland' in anything other than a rather scornful tone.

I'm not sure if that's intentional or not, but it's certainly the way it comes across on these boards.

I've certainly seen other Lemons and Fools refer to him by his real name rather than his nom de plume. Insofar as that happens here I've never regarded it as a derogatory reference. Rather it just means one is talking about the real-life person rather than an online account.

Also the term "pyad" can be seen as ambiguous as it applies both to an individual contributor here and to an investment approach (P/E ratio, Yield, Assets-P/B ratio and Debt):

https://www.stockopedia.com/screens/pyad-screen-17/

No offence was intended and I regret any caused.

Anyway, regardless of the rationale behind the "never sell" edict, I believe that there are some sound reasons to ignore that in practice. I listed eight of them earlier and could probably come up with some more if I thought about it more. But perhaps the most important of them is to avoid the kind of highly skewed and concentrated portfolios that we have seen with very long-running un-managed portfolios.

Alaric
Lemon Quarter
Posts: 3366
Joined: November 5th, 2016, 9:05 am
Has thanked: 12 times
Been thanked: 684 times

Re: Sell or not sell

#244079

Postby Alaric » August 13th, 2019, 8:16 pm

Lootman wrote:
Anyway, regardless of the rationale behind the "never sell" edict, I believe that there are some sound reasons to ignore that in practice.


Elapse of time being one of them. Anyone reading the original articles in 1999 or 2000 will have had nineteen or twenty years experience of how shares and markets behave. So the novice in 1999 who might have been told not to sell for fear of getting the timing wrong is an experienced investor twenty years later.

Itsallaguess
Lemon Quarter
Posts: 3800
Joined: November 4th, 2016, 1:16 pm
Has thanked: 1296 times
Been thanked: 2357 times

Re: Sell or not sell

#244083

Postby Itsallaguess » August 13th, 2019, 8:28 pm

Lootman wrote:
Anyway, regardless of the rationale behind the "never sell" edict, I believe that there are some sound reasons to ignore that in practice.


Over many years of owning a HYP, one of the best reasons I allowed myself to sell or top-slice holdings was where large share-price appreciations sometimes gave me the double whammy of relatively low yields, where dividends had not been maintained at the same pace as the share-price rises, and also what were sometimes fairly considerable capital increases in the values of such holdings.

To be able to reduce those holdings and invest that capital into what was very often much more widely-diversified income-related Investment Trusts often not only delivered more income for me, but also gave that income (and in my view also the capital itself...) more 'security' than it had carried previously, given that it was now coming from (and was invested in...) a much more diversified pool of collective investments contained within such IT's, and that's even before we get onto the additional benefits of IT's such as income-reserves and so on...

So even just that single situation is enough to convince me that there do exist clear positions that can be explained simply, where a pure 'never sell' approach could allow us to miss clear advantageous situations to either boost income, diversify income, or improve capital-protection, or in this particular case, I believe, combine all three of those improvements....

Cheers,

Itsallaguess

tjh290633
Lemon Quarter
Posts: 3517
Joined: November 4th, 2016, 11:20 am
Has thanked: 231 times
Been thanked: 1156 times

Re: Sell or not sell

#244087

Postby tjh290633 » August 13th, 2019, 8:47 pm

Dividend controls were mentioned earlier in this topic. I can recall one way to circumvent this was to have a 1 for 1 rights issue at par, which allowed the dividend to be raised considerably, because there were now twice as many shares in issue. I held Babcock & Wilcox at the time and they used this device.

TJH

Gengulphus
Lemon Quarter
Posts: 2938
Joined: November 4th, 2016, 1:17 am
Been thanked: 1500 times

Re: Sell or not sell

#244394

Postby Gengulphus » August 15th, 2019, 12:48 am

Bubblesofearth wrote:In my previous post I said the same argument applies to income. So the question simply becomes which of the following would you prefer;

1. £1000 income from each of 30 different shares.

2. £1000 income from 29 different shares and £10,000 income from the other one.

You cannot IMO simply assume that the extra income from the 30th share would be made up for by previous tinkering, especially if that tinkering is going to ensure that no share is ever allowed to go on to produce that level of income.

Nor can you IMHO simply assume that you've spent the proceeds from the sales involved in trimming the 30th holding to prevent it rising to delivering about a quarter of your income without increasing the income from the rest of the portfolio. Someone might have done so, of course - they might for instance have regarded £30k income as entirely adequate for their needs, with a decent safety margin to allow for the possibility of dividend cuts, and so spent those proceeds on world cruises or the like - but if so, the lower income they get from option 1 compared with option 2 is their own deliberate choice.

And you're right that if they do reinvest the sales proceeds for extra income from other holdings, you cannot simply assume that that extra income will make up for the missing £9k from the trimmed holding - but nor can you assume that it won't more than make up for it. A fairly common reason for me choosing to trim a holding is that share price growth has considerably outstripped dividend growth, resulting in a much raised capital value, a noticeably raised dividend income, and a considerably lower yield than the holding started on. When that's the case, it will be easy to reinvest the trimming proceeds in higher-yielding shares, so that I end up with more dividend income than I started with. Not every case of trimming will be like that, of course, but I see no reason to assume that on average, the income will end up any less than what I started with.

In short, "You cannot simply assume that ..." arguments exist on both sides of this issue, so are very unhelpful in resolving it either way!

Gengulphus

Gengulphus
Lemon Quarter
Posts: 2938
Joined: November 4th, 2016, 1:17 am
Been thanked: 1500 times

Re: Sell or not sell

#244395

Postby Gengulphus » August 15th, 2019, 12:51 am

Lootman wrote:
Gengulphus wrote:There's no clear-cut moral to this story . . .

. . it does say that a point can be reached where one wants the certainty of the trimming proceeds more than the potential of further gains - essentially, reaching one's investment target is highly valuable to one personally compared with being well short of it; reaching twice one's investment target is more valuable to one personally but nothing like twice as valuable - so the personal value added by the potential further gains is nowhere near as much as the personal value added by the gains so far, and so one places more importance on not losing the gains so far than on trying for the further gains.

Actually I think that is the moral of the story. If you are starting out and trying to build wealth, then you have the time and inclination to take more risk. And a portfolio skewed to past winners and elevated risk might be how an investor perceives the path to prosperity.

Whereas once one has achieved that wealth, then the problem is more about keeping it, and that points to a reduction of risk by reducing over-weight positions. Capital preservation replaces capital aspiration. Rebalancing replaces letting your winners run.

The sentence of mine you've edited down at the start of that quote was "There's no clear-cut moral to this story along either "always run your winners" lines or "always trim overweight holdings" lines." Since the moral you've pointed out is not along those lines, your apparent disagreement with me is not real, but manufactured by quoting out of context.

Gengulphus

Gengulphus
Lemon Quarter
Posts: 2938
Joined: November 4th, 2016, 1:17 am
Been thanked: 1500 times

Re: Sell or not sell

#244397

Postby Gengulphus » August 15th, 2019, 1:08 am

Bubblesofearth wrote:
Alaric wrote:
Bubblesofearth wrote:2. £1000 income from 29 different shares and £10,000 income from the other one.

The point at issue is that you don't allow it to reach that stage. Risk and reward are related. Increase risk and you increase reward and the converse. But if finance for your living expenses is heavily dependent on the decisions of one board of directors, is that not a risk too far?

If you don't allow it to reach that stage then you end up with the £1000 income from each of 30 shares rather than £1000 from 29 and £10,000 from one. So, by selling down any outperformer as it emerges, you end up £9000/year poorer but with a more balanced portfolio.

No, you end up with the £1000 income from each of 30 shares AND the trimming proceeds or whatever you've bought with them, rather than £1000 income from 29 and £10,000 from one. If you keep the trimming proceeds or investments you've bought with them inside your portfolio, your income changes by the difference between £9000 and whatever income they produce, which could end up being an income change in either direction depending on what investments you choose to buy. If you take them out and spend them on non-investments, you've chosen to take capital out of your portfolio and can hardly be surprised that you end up with less income from it as a result.

Gengulphus

Lootman
Lemon Half
Posts: 5799
Joined: November 4th, 2016, 3:58 pm
Has thanked: 34 times
Been thanked: 966 times

Re: Sell or not sell

#244398

Postby Lootman » August 15th, 2019, 1:09 am

Gengulphus wrote:
Lootman wrote:
Gengulphus wrote:There's no clear-cut moral to this story . . .

. . it does say that a point can be reached where one wants the certainty of the trimming proceeds more than the potential of further gains - essentially, reaching one's investment target is highly valuable to one personally compared with being well short of it; reaching twice one's investment target is more valuable to one personally but nothing like twice as valuable - so the personal value added by the potential further gains is nowhere near as much as the personal value added by the gains so far, and so one places more importance on not losing the gains so far than on trying for the further gains.

Actually I think that is the moral of the story. If you are starting out and trying to build wealth, then you have the time and inclination to take more risk. And a portfolio skewed to past winners and elevated risk might be how an investor perceives the path to prosperity.

Whereas once one has achieved that wealth, then the problem is more about keeping it, and that points to a reduction of risk by reducing over-weight positions. Capital preservation replaces capital aspiration. Rebalancing replaces letting your winners run.

The sentence of mine you've edited down at the start of that quote was "There's no clear-cut moral to this story along either "always run your winners" lines or "always trim overweight holdings" lines." Since the moral you've pointed out is not along those lines, your apparent disagreement with me is not real, but manufactured by quoting out of context.

The moral that you did mention was the one I elected to focus on, rather than the agnostic one that, it turns out, you evidently prefer.

The reality is that neither approach is inherently superior. Which makes more sense depends upon where on your financial journey you are, as you said.

By the way, and do please correct me if I am wrong here, but I recall from some other posts of yours that this particular share position you accumulated was via some kind of ESOP or stock option plan in your employer. If so then this was not an investment in the normal sense of the word that we use here. Not that that invalidates your experience but it is very different from the active investment choices that most folks here make. It seems to me quite likely that you would not have built such an outsized position in normal investment activity, but rather it was thrust upon you.

And that is fine of course. I have benefited from a couple of those myself in my working days. But I always felt it was more a matter of luck than skill. Choose employer A over employer B and you get a windfall of perhaps millions. Pick B and they go bust and you get nothing. Apparently the first secretary that Google ever hired ended up with millions when it IPO'ed. Had she chosen 100 other jobs she would have had no such luck.

Such a lottery seems to me to be far removed from rational investment, although it is perhaps an argument for doing the same kind of due diligence on a prospective employer as one does on a prospective investment, only more so.

Gengulphus
Lemon Quarter
Posts: 2938
Joined: November 4th, 2016, 1:17 am
Been thanked: 1500 times

Re: Sell or not sell

#244400

Postby Gengulphus » August 15th, 2019, 1:31 am

scrumpyjack wrote:Yes Gengulphus, that is of course the case, and I certainly haven’t worked out the returns on individual shares etc or engaged in ‘survivorship bias’. I have simply looked at the total value of my portfolio each year and the income from it. I tend to look at it also in inflation adjusted terms as that used to be extremely important in the 70’s at least, and is still important in my view.

'Survivorship bias' is generally something that happens unless one takes active measures to avoid it - in the case of a share portfolio, by taking care to look at all the companies it ever bought and not just at the ones that are still in it. So it's not necessary to "engage in" it to end up being affected by it - and I did only say that if you hadn't taken the companies no longer in your portfolio into account, what you said was probably affected by it.

And while I don't doubt that you looked at the total value of your portfolio each year and the income from it, you must have looked at how individual companies performed as well - otherwise you wouldn't have had any basis for saying "I have to say in retrospect that the companies I bought which had a high yield at the time of purchase have often been the worst performers and after 5 or 10 years the growth company dividends overtake them and then carry on growing and in some cases the annual dividend ends up being higher than the cost price of the share.".

Gengulphus

Gengulphus
Lemon Quarter
Posts: 2938
Joined: November 4th, 2016, 1:17 am
Been thanked: 1500 times

Re: Sell or not sell

#244401

Postby Gengulphus » August 15th, 2019, 2:07 am

Lootman wrote:
Gengulphus wrote:As regards what pyad's motives were in writing what he did back then and since, I won't comment. TLF has a rule "Robust debate is allowed, but it must remain polite and respectful at all times. Stick to the facts and argue the points discussed, rather than criticise the poster." and at least IMHO, commenting on another Fool's motives is on the wrong side of that rule.

I do not know whether the example you cite counts as an example of "play the man, not the ball" as I believe you are you suggesting. I was attempting to understand some of his prognostications in terms of the fact that he was trying to develop a marketable system, product and service. Rather than merely just giving his own approach whilst listening to others and building consensus, as most of us here do.

That is intended as a statement of fact rather than as a criticism, and was done in what I thought was a very civil manner, or "polite and respectful" to use your words. ...

Not my words - they are a quote from TLF's rules, which you can access from the "Rules" link on any TLF page (below the TLF banner). And what I said was simply to explain why I won't engage with you in discussing pyad's motives, so that you would know that I wasn't simply missing your point.

Gengulphus


Return to “High Yield Shares & Strategies - general”

Who is online

Users browsing this forum: IanTHughes and 4 guests