HYP investing as a yield trap

[tjh290633]

I think it is time that some figures were placed on the table, because all we have had so far is worries about what has happened in the past with one or two shares, not data on how portfolios have performed.

Here is the performance of my HYP since started in April 1987:

.            Income Units              Accumulation                  April       
Year to      Unit Value     Div/Unit   Unit Value     FT30   FT100   RPI     RPI 
21-Apr-87            1.00       0.00           1.00   1.00    1.00   1.018   1.00
05-Apr-88            0.92       2.87           0.94   0.92    0.91   1.058   1.04
05-Apr-89            1.19       2.75           1.28   1.10    1.05   1.143   1.12
05-Apr-90            1.24       4.33           1.40   1.13    1.14   1.251   1.23
05-Apr-91            1.42       5.75           1.69   1.28    1.26   1.331   1.31
05-Apr-92            1.38       7.97           1.75   1.24    1.26   1.388   1.36
05-Apr-93            1.60       7.33           2.13   1.44    1.46   1.406   1.38
05-Apr-94            1.81       6.65           2.50   1.65    1.65   1.442   1.42
05-Apr-95            1.75       7.93           2.55   1.57    1.62   1.490   1.46
05-Apr-96            2.07       7.81           3.13   1.80    1.90   1.526   1.50
05-Apr-97            2.29       8.90           3.62   1.85    2.21   1.563   1.54
05-Apr-98            3.48      10.52           5.72   2.45    3.05   1.626   1.60
05-Apr-99            3.62       8.91           6.12   2.47    3.21   1.652   1.62
05-Apr-00            3.51      11.96           6.13   2.42    3.35   1.701   1.67
05-Apr-01            3.48      13.15           6.32   2.05    2.89   1.731   1.70
05-Apr-02            3.57      13.82           6.76   1.65    2.69   1.757   1.73
05-Apr-03            2.45      12.95           4.85   0.85    1.85   1.812   1.78
05-Apr-04            3.14      14.37           6.56   1.22    2.25   1.857   1.82
05-Apr-05            3.72      14.02           8.10   1.33    2.51   1.916   1.88
05-Apr-06            4.62      18.70          10.57   1.68    3.06   1.965   1.93
05-Apr-07            5.27      20.84          12.63   1.90    3.31   2.054   2.02
05-Apr-08            4.44      26.09          11.21   1.58    2.93   2.140   2.10
05-Apr-09            2.45      22.76           6.46   0.87    2.01   2.115   2.08
05-Apr-10            3.94      11.91          10.86   1.33    2.91   2.228   2.19
05-Apr-11            4.61      16.71          12.76   1.43    3.03   2.344   2.30
05-Apr-12            4.74      19.09          14.19   1.33    2.96   2.408   2.37
05-Apr-13            5.27      22.91          17.01   1.54    3.29   2.476   2.43
05-Apr-14            5.61      24.19          18.88   1.75    3.38   2.557   2.51
05-Apr-15            6.21      26.23          21.84   1.91    3.47   2.580   2.53
05-Apr-16            5.92      23.81          21.72   1.79    3.17   2.614   2.57
05-Apr-17            6.62      26.21          25.47   2.10    3.76   2.706   2.66
05-Apr-18            6.12      33.19          24.66   1.79    3.62   2.797   2.75
26-Feb-19            6.28      28.73          26.31   2.10    3.69   2.830   2.81 to date

To make comparisons easier, I have rebased everything except the dividend per unit to 1.00 at the outset. That is in actual GBpence per unit.

There have been ups and downs along the way. The portfolio started with 3 shares in a self-select PEP, and was built in four successive years to a total of 12 shares, after which it grew through the split off from ICI of Zeneca, and the demerger of Hanson, from which Energy and Imperial Tobacco were kept. In 1997, Halifax demutualised and its shares were added and an additional subscription added Tesco. A last subscription in 1998 allowed Whitbread to be added, making 18 shares altogether, Energy having been taken over by Scottish Power. At this stage ISAs replaced PEPs, so further subscriptions had to go into a parallel ISA, which had 6 holdings, added to over successive years to bring them up to the weight of the PEP shares, and further subscriptions plus the split of Bass into IHG and MAB, with a couple of extra shares, brought it up to 9, and the PEP was now 25 shares, due to merging in a Single Company PEP which itself had split, making 34 holdings by now.

If you study the figures, and compare the unit price with the market indices, you will see various market traumas and you will see the marked fall of income from 2008 to 2010, for the well known problems. Apart from the formative years, the unit price has always been ahead of the indices although, on a year-to-year basis, it has lagged occasionally. I have lost several shares along the way, apart for take-overs, the first being Marconi in 2002, then Mapeley in 2009, Cattles in 2011, and the last Carillion, of blessed memory. The Dividend can be compared with the RPI, which has, of course, been comprehensively beaten.

I have had my share of duff shares, suffered from chasing yield in the period before 2008 and suffered accordingly, requiring some effort to restore the position in terms of dividend per unit. Note that special dividends are included in my figures.

I think that we can see that perseverance with the HYP formula will give decent results. My IRR since 1987 has been 9.88% to date, having touched about 13% in the heady days.

TJH

[PrefInvestor]

Hi All, Tried to continue the SLA discussion last evening but my post got moved here:-

https://www.lemonfool.co.uk/viewtopic.php?f=31&t=16450&p=203832#p203832

Have just caught up with this thread which has some interesting content.

Personally IMHO I think that all investments need to be carefully screened as best you can for long term company viability and likelihood of good ongoing dividend payments before buying. And yes excessive yield is a reason NOT to buy in my book.

I would also say that ANY investment choice can go wrong and to avoid disasters you need to monitor and take action at some point to stem capital losses. Personally I do a serious review of any investment if it ever gets to 10% down (including dividends taken)and I might bale out or average down or choose to hold for a while longer (seldom !). In this way I try to hold my disasters to a 10% capital loss and I never invest too much in any one (max of about £6,000 in most cases - so I have lots of holdings) so that I can afford to take the pain, sell and invest elsewhere. I see lots of people who are obviously trapped hugely underwater with certain stocks (eg CNA, VOD) and I am determined that it wont happen to me.

ATB

Pref

[Dod101]

Alaric has done a very good job of illustrating the point I was trying to make. I do not sell a high yielder very often but as I said I have managed to avoid most of the recent disasters. If a share is yielding say 9% it is telling us that the market is nervous about the prospects for the dividend otherwise buyers would soon bring it back to nearer the market average. The high yield is an indicator to me that I should take a look and see if I am happy to continue holding. With the tobaccos I am but I thought that Vodafone will struggle to maintain its dividend. I sold SSE last year, on the grounds that its finances are looking increasingly stretched and the political risks of a Corbyn government.

A high yield is not to me an automatic sell signal but it is a sign that I should be on my guard. Crystal balls do not come into it, or at least no more than they do with any form of investing. When we buy or sell any share we are taking a view of the future, crystal ball gazing in ITH's view.

Dod

[daveh]

I think it is time that some figures were placed on the table, because all we have had so far is worries about what has happened in the past with one or two shares, not data on how portfolios have performed.

TJH

My performance data was in the link in the original post. Its on the portfolio board as it wasn't allowed on the HYP Practical board due to the ETFs and Pref share. For ease I've pulled out the performance data and shown it below:

The portfolio was unitised from September 2003 and the details are shown below.

Capital Performance (dividends reinvested) Accumulation units and Income units



Income Performance



The 2nd table now seems to be better (1st attempt at posting and the second table headings were wrong.

The drop in capital due to the banking crisis is obvious in 2008, but interestingly the income doesn't drop until a year later. So maybe there were increasing yields in 2008 that could have warned about trouble to come? I don't recall that being the case and I'm not sure I would have cut the correct shares even if there was. There was a big drop in income in 09 and the income wasn't back above 08 levels until 2012.

The one thing I did gain from the 08/09 crisis was to keep my holdings in any one sector/super sector below 10/20% of the portfolio as I was rather too heavily invested in financials at the time.

[Arborbridge]

If that's REA, please don't touch it. I had an IT with 5% in this company and they are destroying Orangutan habit to cultivate palm oil - I found it very distressing to have inadvertently been dragged into possibly killing off an endangered species.

I hope you will give some weight to this enthical side.

O/T here I think. Every company we invest in has an unethical side if one looks hard enough.

Not OT - people often mention they wouldn't buy tobacco or defence shares, for example, and I've never noticed anyone being "called out" for being OT in those cases. It's a valid consideration for some of us.
I agree that whole stock market shebang could be argued to be unethincal as well as individual companies if you look ahrd enough. But is that a reason to dismiss the subject? No. Each person must make up their own mind on ethics - all I am asking for is serious consideration of the issue I raised and I should hope people would allow be that as an indulgence, if that's what it is. Certainly, palm oil production and the damage it causes is a currently a hot topic and we shouldn't ignore it.

Arb.

[tjh290633]

The drop in capital due to the banking crisis is obvious in 2008, but interestingly the income doesn't drop until a year later. So maybe there were increasing yields in 2008 that could have warned about trouble to come? I don't recall that being the case and I'm not sure I would have cut the correct shares even if there was. There was a big drop in income in 09 and the income wasn't back above 08 levels until 2012.

The one thing I did gain from the 08/09 crisis was to keep my holdings in any one sector/super sector below 10/20% of the portfolio as I was rather too heavily invested in financials at the time.

The income peaked in 2007-8 in my portfolio, but the increase was mainly down to reinvesting money from shares taken over into new higher yield shares.

Looking at my PEP records, Whitbread had been sold because of low yield and replaced by Tomkins in 2006. Hanson had been taken over and DS Smith replaced it in 2007. ICI was replaced by Premier Farnell in 2008, and Cadbury was sold to avoid Dr pepper and replaced with Yule Catto soon after. In the ISA, Trinity Mirror had replaced Scottish & Newcastle while Stagecoach was sold for low yield in favour of William Hill in 2007-8. In the newly merged ISA, HBOS was sold because of the impending rights issue and replaced with Cattles in 2008, then in 2009 I set about repairing the damage. DSG International was replaced with Diageo, Pearson took the place of Trinity Mirror, Mapeley went and IMI came in, I swapped Anglo-American for BHP Billiton in 2010 as well as kicking our Rentokil and Premier Foods in favour of BATS and Unilever. The same year, Yule Catto and ITV went, to be replaced with Glaxo and SSE, Tomkins went in favour of British Land and Brit Insurance went to be replaced by Avivia. In 2011, Northern Foods was replaced by Marstons and Cattles went, replaced by Reckitt Benckiser. Some were sold, some taken over, two vanished.

Since then little has changed. RSA went, replaced by Admiral, Rexam was replaced by carillion and Rio Tinto (no prizes for guessing which was the better choice), and Premier farnell was replaced by Legal & General. No new holdings since then, but Indivior and Carillion have gone without trace. I paid for a cruise with the funds from Indivior.

As I have said in the past, not selling at the first stage of panic paid off, except in the case of Carillion. I did much better hanging on until the share price had risen from the depths in most cases.

TJH

[Arborbridge]

So, if the yield increases to a point where you sell, I have to ask again, how is that strategy protecting your capital?

You cut your losses whilst you can still get out with some value. Those who sold Carillion did relatively better than those who held to the bitter end.

It would have been better not to have invested in that share in the first place.

That's true, but how exceptional was Carillion? When I've checked on instancies of shares I've dumped and then redeployed the capital, it's touch and go whether I win or lose. There are very few I have encountered like CLLN - I think only RBS came near with an 80% drop. Cutting my losses, in my case, has a 50% success rate compared with hanging on for recovery. It is quite hard to come to conclusions about this, since it depends when you ask the questions; one month after an event, one year, five years or more?

Again, I must point out that I regard the portfolio system as a major plank in risk reduction. I'm not overly concerned about one disaster in a portfolio per every few years, regrettable though it is.
So to say "those who got out..." were better off is true for CLLN but you cannot generalise from one particular example; it's especially hazardous to suggest this is a general rule based on one notable disaster. Further, to say it would have been better not to have bought CLLN is self evident: but I would have preferred to buy a crystal ball years before that.

Arb.

[Arborbridge]

The drop in capital due to the banking crisis is obvious in 2008, but interestingly the income doesn't drop until a year later. So maybe there were increasing yields in 2008 that could have warned about trouble to come? I don't recall that being the case and I'm not sure I would have cut the correct shares even if there was. There was a big drop in income in 09 and the income wasn't back above 08 levels until 2012.

So maybe there were increasing yields in 2008 that could have warned about trouble to come?

On the other hand... this was also a very advantageous time to invest and that was indicated by those same high yields. It was (as various managers and writers opined out at the time) a once in a generation opportunity. Those who had the courage and knowledge to invest and ignore your "warning" did well.

Arb.

[Luniversal]

I think that we can see that perseverance with the HYP formula will give decent results. My IRR since 1987 has been 9.88% to date, having touched about 13% in the heady days.

TJH

For comparison, roughly, this is how I estimate compound annual growth rates (CAGR) of eight large investment trusts over 30 years-- from financial periods ending in 1987 to those ending in 2017.

The assumption is that a lump sum was invested in each with 1% purchase costs. All dividends were reinvested once annually, at the year end. Realistic estimates of dealing costs, which have fallen over time, have been allowed for. No account is taken of any interest received on income awaiting reinvestment.

In descending order, CAGRs (%) were:

Scottish Mortgage (SMT) 11.4%
F&C (FCIT) 11.3%
Mercantile (MRC) 11.1%
Alliance (ATST) 10.6%
City of London (CTY) 9.4%
Scottish Amicable (SCAM) 8.9%
Edinburgh (EDIN) 8.4%
Aberdeen Diversified Income & Growth* (ADIG) 5.8%

These are of course before inflation, ~3.4% over the period. An equal commitment to all eight would have brought a CAGR of 9.7%, i.e. 6.3% real. It all but doubled real worth every 11-12 years: not bad for the protections a spread of ITs offers.

Scottish Mortgage was a narrow winner from F&C and Mercantile; that tends to support the belief that capital is better accumulated with Growth funds, despite their smaller ploughback from dividends. Even Alliance, often dismissed as a dog, beat the 'good average' City of London. Growth trust values were more volatile, esp. MRC and SMT, but 'sequence risk' abates over a long stretch.

Suppose one were 30 in 1983. An investment of £37,000 in SMT in Apr. 1983 (the pre-inflation equivalent of HYP1's £75,000 in Nov. 2000) would have grown to £3.13m by Mar. 2018. This could be redeployed for retiral at 65 into, for example, shares yielding 5% for an annual income of £150,000+ if no CGT were chargeable. The worst performer, ADIG, would have grown from £37,000 to £569,000 over 35 years. The average of eight was about £1.4m.

None of these trusts would have required any attention except for annual recycling of income.

* Formerly British Assets.

[Lootman]

I think that we can see that perseverance with the HYP formula will give decent results. My IRR since 1987 has been 9.88% to date, having touched about 13% in the heady days.

In descending order, CAGRs (%) were:

Scottish Mortgage (SMT) 11.4%
F&C (FCIT) 11.3%
Mercantile (MRC) 11.1%
Alliance (ATST) 10.6%
City of London (CTY) 9.4%
Scottish Amicable (SCAM) 8.9%
Edinburgh (EDIN) 8.4%
Aberdeen Diversified Income & Growth* (ADIG) 5.8%

I believe that the investment trust with the ticker symbol SCAM is actually called Scottish American IT.

Suppose one were 30 in 1983. An investment of £37,000 in SMT in Apr. 1983 (the pre-inflation equivalent of HYP1's £75,000 in Nov. 2000) would have grown to £3.13m by Mar. 2018. This could be redeployed for retiral at 65 into, for example, shares yielding 5% for an annual income of £150,000+ if no CGT were chargeable. The worst performer, ADIG, would have grown from £37,000 to £569,000 over 35 years. The average of eight was about £1.4m.

Impressive as those numbers may sound, not many 30 year olds would have had £37,000 as a lump sum in 1983. In fact you could buy a decent home in a leafy part of London for around that amount at the time. I know because I did. And the gains from that were tax free, as were the savings in rent or mortgage paydown.

That said, I agree with (what I believe is) your conclusion that growth (i.e. lower yielding) ITs are better for building wealth than those that crave income and therefore restrict themselves to high yielders.

[daveh]

The drop in capital due to the banking crisis is obvious in 2008, but interestingly the income doesn't drop until a year later. So maybe there were increasing yields in 2008 that could have warned about trouble to come? I don't recall that being the case and I'm not sure I would have cut the correct shares even if there was. There was a big drop in income in 09 and the income wasn't back above 08 levels until 2012.

So maybe there were increasing yields in 2008 that could have warned about trouble to come?

On the other hand... this was also a very advantageous time to invest and that was indicated by those same high yields. It was (as various managers and writers opined out at the time) a once in a generation opportunity. Those who had the courage and knowledge to invest and ignore your "warning" did well.

Arb.

Well I ignored the warning, and continued investing through the banking crisis. Made some bum investments just before the crisis buying RBS, for example, just in time for it to crash, but picked up some bargains after.

[moorfield]

CLLN's yield the day before it's dividend cut was announced was 9.6% (Dividend 18.45p / Close 192.3p) - compare that to VOD (9.8%) and CNA (9.5%) tonight - although I don't know what the relative FTSE (or CTY) yield was at that time.

I'd like to get my hands on more such data as I think it could be insightful and demarcate the range that Dod and I have had a stab at above (1.5x and 2.0x). A project for when I have much more time on my hands alas.

[PrefInvestor]

Well its clear that some posters here have made impressive profits over an extended period by following the HYP strategy, so well done to all those.

I am still searching for the HYP "tablets of stone" that describe exactly what IS and what ISNT HYP. I have read that ETFs are not allowed (why is that ?) or Preference Shares (ditto). Are there any geographical restrictions on investments ?. Any other restrictions ?. Just trying to understand it better.

I confess that I am still concerned that a completely hands free approach to investing, while a nice idea I guess, sounds a bit fraught with risk to me. A bit like driving a car without steering !. Though I guess it can well be argued that the investor is the biggest source of risk when investing !. All of those who have made big gains have encountered a number of share disasters over time - I cant help but thinking that some manual intervention in those situations should have further improved the outcome. eg Getting out of CLLN at the first profit warning for example ?. I note some posters suggesting excessive yield as a possible warning indicator. I would personally count profit warnings as another, they rarely come as individual events and so often foretell more trouble to come.

ATB

Pref

[tjh290633]

Pref, the guidance post on this forum gives you the basic outlines. How you choose to implement them is your choice and your choice only.

Why are ETFs excluded? Because collective investments can be discussed elsewhere and can be used as a point of comparison with an HYP. The rules of this board are that they should not be included in an HYP, but there is no reason why you should not hold them. Just do not count them as part of your HYP. Foreign shares, not quoted on the London Stock Exchange are excluded, but South32's, for example, is an Australian company which has a London quote and is permissible.

TJH

[Dod101]

I am still searching for the HYP "tablets of stone" that describe exactly what IS and what ISNT HYP. I have read that ETFs are not allowed (why is that ?) or Preference Shares (ditto). Are there any geographical restrictions on investments ?. Any other restrictions ?. Just trying to understand it better.

I would personally count profit warnings as another, they rarely come as individual events and so often foretell more trouble to come.

The Guidelines at the top of the HYP Practical Board contain the guiding principles.

I too certainly count profit warnings as a sign that I need to look carefully at the underlying investment. I do not invest mechanically though and of course it depends what lies behind the warning.

Dod

[daveh]

Pref, the guidance post on this forum gives you the basic outlines. How you choose to implement them is your choice and your choice only.

Why are ETFs excluded? Because collective investments can be discussed elsewhere and can be used as a point of comparison with an HYP. The rules of this board are that they should not be included in an HYP, but there is no reason why you should not hold them. Just do not count them as part of your HYP. Foreign shares, not quoted on the London Stock Exchange are excluded, but South32's, for example, is an Australian company which has a London quote and is permissible.

TJH

Except we are on the High yield shares and strategies board so we are allowed to discuss a wider range of high yield topics here than on Practical to quote:

The High Yield Share Strategies board is intended for wide-ranging discussions of ways to obtain high yields from equities. Securities such as preference shares, PIBs, Investment Trusts, ETFs, etc. can be considered. However there are dedicated boards for Investment and Unit Trusts, Gilts and Bonds, and Investment Strategies where some discussions may be better carried out if they relate solely to those securities. In some cases, cross-posting may help others find a discussion of interest, if a mix of types of securities is involved.

I'll admit I tend to post a lot more on Practical than here, but as my HYP contains a pref share and high yield ETFs for non- Uk investments and I recently added TRIG if I want to talk about those parts of my HYP I try and do it here. If I want to discuss the ETFs or prefs in detail not related to High yield investing in general I'd do it on the specific board for those investments.

[tjh290633]

daveH, yes, that is why it is being discussed here, which is the correct place. However pref is asking about the HYP guidelines.

TJH

[StepOne]

I am still searching for the HYP "tablets of stone" that describe exactly what IS and what ISNT HYP. I have read that ETFs are not allowed (why is that ?) or Preference Shares (ditto). Are there any geographical restrictions on investments ?. Any other restrictions ?. Just trying to understand it better

Hi Pref,

There are no tablets of stone for an HYP, everyone has their own rules. Broadly I would say the key elements are;

1. High Yield (obviously?!?)
2. Diversification
3. Minimal tinkering

Within those there is plenty of room for debate though

The rules on ETFs/Investment trusts/Foreign shares were created by Lemon Fool for the HYP Practical discussion board, and are unnecessary in my view.

StepOne

[Alaric]

There are no tablets of stone for an HYP, everyone has their own rules.

There were however a series of articles and demonstration portfolios at the now closed TMF (Motley Fool) discussion site by a Stephen Bland. Non-adherence or opposition to the principles outlined therein is sometimes used as a definition of off-topic in the TLF board, now singular, with HYP in its title. One of the principles was a restriction to UK equities, which is why Prefs, ETFs and ITs were regarded as off-topic for the HYP practical board in the TLF universe.

[IanTHughes]

I am still searching for the HYP "tablets of stone" that describe exactly what IS and what ISNT HYP. I have read that ETFs are not allowed (why is that ?) or Preference Shares (ditto). Are there any geographical restrictions on investments ?. Any other restrictions ?. Just trying to understand it better.

First of all, you must understand that the HYP strategy as espoused by Stephen Bland (PYAD), was originally postulated for a one-shot investment designed to create a reliable income stream. In point of fact, it was originally stated that the capital to be invested could be 25% of a maturing pension pot – 25% being the maximum cash withdrawal allowed at the time. In other words, the income so gained was to be in addition to a pension annuity that would be purchased with the remaining 75%.

With that in mind, PYAD did suggest making selections from a list of shares in yield order - Highest to Lowest – in line with the following recommended constraints:

1) High Market Capitalisation

The reasoning being that the bigger the company the more reliable the income would be, a larger company being better placed to maintain or increase dividends, even during economic downturns. To this end PYAD recommended almost entirely FT100 shares with the occasional FT250 share only if needed to improve conformity to rule 2.

2) Diversification

No more or fewer than 15 shares with most, if not all, from a manifestly different Business Sector.

3) Equal investment

An equal amount should be invested in each of the selections. For this reason it is impossible to include any collective investment which might well include many non-HYP shares as well as making equal investment impossible.

4) No tinkering

Once bought all one should do is collect the dividends, which as stated in the introduction are to supplement one’s other retirement income. Thus, no need to re-invest a portion to create a safety margin, just spend it!

If any of the foregoing are incorrect or if I have missed something, please do correct me.


Please note, as I understand it, there was no prohibition against Foreign Shares. PYAD did point out though that such shares would normally require further management to conform to a foreign tax regime as well as possibly incurring a foreign withholding tax. He also suggested that the London market provided sufficient diversification to make the inclusion of foreign shares unnecessary. I tend to agree with him on this.

I confess that I am still concerned that a completely hands free approach to investing, while a nice idea I guess, sounds a bit fraught with risk to me. A bit like driving a car without steering !. Though I guess it can well be argued that the investor is the biggest source of risk when investing !.

HYP is not “hands-free” investing. Buying shares and creating an HYP is obviously not hands-free and cannot be done without an amount of research. But even when fully invested and drawing income, there will still be occasional events that require one’s attention.

Yes, “hands-free” is technically possible assuming one will always accept the default option to every corporate event. And it is true that, for many corporate events, such inactivity would not introduce any particular problems – receiving funds for lapsed rights, accepting new shares in takeovers etc. However one might end up with an undesired situation such as accepting foreign shares for a takeover not to mention the reduction in income if one simply uses any non-dividend proceeds as extra income.

I believe PYAD said that HYP should be “low” maintenance, not “no” maintenance. However, PYAD did I believe agree whole-heartedly with your last statement above in that decisions by an investor are as likely to cause damage as they are to cause improvement!

All of those who have made big gains have encountered a number of share disasters over time - I cant help but thinking that some manual intervention in those situations should have further improved the outcome. eg Getting out of CLLN at the first profit warning for example ?. I note some posters suggesting excessive yield as a possible warning indicator. I would personally count profit warnings as another, they rarely come as individual events and so often foretell more trouble to come.

Oh dear, the old Carillion PLC (CLLN) example is once again trotted out!

I held CLLN and therefore suffered a total loss, but only on that one single holding. CLLN were off-limits for a top-up once the first profit warning came which if I remember correctly was only in July 2017. Even then, those suggesting that such a warning was a reason to sell out must surely be able to point to concrete evidence – available at the time – that a total loss was on the cards. They cannot because - at that time – there was none. A likely dividend cut, yes, but a total loss, no.

Furthermore, if one has a rule about not purchasing or even selling when a yield is “too high”, one must accept that one could be missing out on what are good solid opportunities. If one uses the example of the loss incurred with CLLN as a reason for instituting some sort of “too high” yield rule, one should also calculate the loss incurred when implementing such a rule.

I am sorry, but any counter HYP argument mentioning CLLN only as a reason to avoid high yield, merely shows to me a complete lack of knowledge of HYP as a strategy and even a lack of knowledge of investing generally.


Ian