HYP1 is 23 - Total Return

[Arborbridge]

If I may very briefly butt in on this 'private' HYP conversation.

Just out of curiosity, I ran the OP figures for HYP1 through an XIRR table on my spreadsheet. I simply took the annual income figures as all being delivered on 12 November every year (other assumptions would lead to other results).

Using that method, the figure I got for HYP1 was XIRR = 8.63%

Seeing this is a one-off investment of £75k made 23 years ago that has provided a total return of £277k, I think you can afford to be more simplistic. On a total return CAGR basis this is 5.85%. That’s in line with most people’s idea of the long-term return from UK equities being around 6%. If you think that’s acceptable, then so be it. But on a risk/reward basis it wouldn’t do for me, particularly given the very low interest rates that have been pre-dominant within the 23 year period in question, which have been extremely helpful to equity investment. And right now, the 5.85% is little more than the risk free rate you can get in a savings account.

And right now, being the operative phrase!! Right some other time in the past, a savings account would be a dead loss while HYP was still delivering.

[simoan]

Seeing this is a one-off investment of £75k made 23 years ago that has provided a total return of £277k, I think you can afford to be more simplistic. On a total return CAGR basis this is 5.85%. That’s in line with most people’s idea of the long-term return from UK equities being around 6%. If you think that’s acceptable, then so be it. But on a risk/reward basis it wouldn’t do for me, particularly given the very low interest rates that have been pre-dominant within the 23 year period in question, which have been extremely helpful to equity investment. And right now, the 5.85% is little more than the risk free rate you can get in a savings account.

And right now, being the operative phrase!! Right some other time in the past, a savings account would be a dead loss while HYP was still delivering.

HYP1 has not delivered though! Let alone still delivering. The current weighting in the portfolio makes it very high risk. If you think it has then maybe you need to take a step back and consider the risk taken and what the performance of lower risk investments has been in the past 23 years, not cash. At no point have I said you'd be better off holding cash for 23 years. Gold has smashed HYP1 and the S&P500 has obliterated it. Do you not think there's any risk associated with selecting the highest yielding shares? Because that's what the market is telling you. The market will not always be right but for large well known companies it is not far off generally.

[Arborbridge]

HYP1 hasn't just beaten cash though, it's beaten the FTSE100 hands-down which is the index from which the components were taken. And plenty of studies have shown that once you get much beyond 10 shares (volatility) risk is close to whole market risk.

BoE

Firstly, risk is not the same as volatility. Really important. Risk is the probability of permanent capital loss. If you pick high yielding shares then that risk is already heightened i.e. you are taking on more than market risk and as we have seen with HYP1 the risk increases over time if you do not rebalance because the capital becomes concentrated in a small number of companies. If you want to use the FTSE 100 as your benchmark, then you've already set the bar very low. I'm sure you can understand this - other global indices are available! The FTSE 100 and HYP1 have not even beaten the ultimate safe haven of Gold which is up about 300% since HYP1 started. Let's not even mention the S&P500. Anyway, if you are happy with the risk/reward HYP1 has provided for 23 years, there is really nothing more I can do to help. Any sane investor would not follow the approach used by HYP1 and the results conclusively prove why.

Everyone sees something different in HYP1, it seems to me. We can weave our own narrative around it, so it will be of continuing interest to all of us. One good reason for continuing the experiment!

Risk - I agree, but you conveniently leave out the portfolio effect which mitigates it, and the fact that HYP1 shows that the portfolio rebalances itself over time . Personally, yes, I would prefer to keep it in balance more exactly by personal intervention, but in 23 years HYP1 has not suffered "permanent capital loss" which completely backs up Pyad feeling that one can relax about capital provided one is investing in large stable companies in a portfolio. And, BTW if you worry about permanent loss from a HYP, almost any HYP built on the FTSE100 - you will really have an awful lot more to worry about. Like considerable social and political unrest, blood on the streets - imagine the scenario necessary to overturn the UK stock market so that HYP permanently loses value. And I mean permanently rather than a cut back of a few years. Even in the Wall Street crash, and our trouble in 1974 that did not happen unless one sold out.

Yes, on the capital side backing the FTSE 100 is setting the bar low, undoubtedly. But again, this is your narrative and you ignored that the FTSE will provide more immediate income than any other index - which is precisely the first item on the HYP1 retirees list. Further, the bar might be low over time, but investing in it answers your very first remark about risk of capital loss. The downside is capital growth: but the trade-off is intended to be lower risk - which has proved to be the case.

Arb.

[Arborbridge]

And right now, being the operative phrase!! Right some other time in the past, a savings account would be a dead loss while HYP was still delivering.

HYP1 has not delivered though! Let alone still delivering. The current weighting in the portfolio makes it very high risk. If you think it has then maybe you need to take a step back and consider the risk taken and what the performance of lower risk investments has been in the past 23 years, not cash. At no point have I said you'd be better off holding cash for 23 years. Gold has smashed HYP1 and the S&P500 has obliterated it. Do you not think there's any risk associated with selecting the highest yielding shares? Because that's what the market is telling you. The market will not always be right but for large well known companies it is not far off generally.

I can tell you only think in terms of TR - OK this thread is actually about TR, but then no one should judge HYP in that way.
So, perhaps it is better not to get dragged into this type of discussion which is tangential to HYP's purpose.

[Bubblesofearth]

And right now, being the operative phrase!! Right some other time in the past, a savings account would be a dead loss while HYP was still delivering.

HYP1 has not delivered though! Let alone still delivering. The current weighting in the portfolio makes it very high risk. If you think it has then maybe you need to take a step back and consider the risk taken and what the performance of lower risk investments has been in the past 23 years, not cash. At no point have I said you'd be better off holding cash for 23 years. Gold has smashed HYP1 and the S&P500 has obliterated it. Do you not think there's any risk associated with selecting the highest yielding shares? Because that's what the market is telling you. The market will not always be right but for large well known companies it is not far off generally.

By all means compare the performance of HYP1 with other investments but please make it an apples to apples comparison. HYP1 has delivered an income for 23 years and during that time the capital has roughly doubled.

What would an equivalent holding in gold be worth now if you had sold an amount each year to provide the same income as HYP1? What about cash given some capital would have had to have been sold between 2008-22 to match the HYP1 dividends?

Yes, the S&P500 would have outperformed but not by quite so much if some of the capital would have been sold off annually to match the dividend yield of HYP1. The dividend yield on the S&P500 has been significantly lower over the past 23 years. Also, selecting a better performing equity index smacks a bit of hindsight bias, no? You could choose a Global tracker but, after charges (although very low) these don't yield much more than 1% so, again, you would have needed to sell down capital every year to match HYP1 income.

I'm not saying HYP1 has been the best possible investment for the past 23 years, just that if you are going to make comparisons then make them correctly.


BoE

[Lootman]

Yes, the S&P500 would have outperformed but not by quite so much if some of the capital would have been sold off annually to match the dividend yield of HYP1. The dividend yield on the S&P500 has been significantly lower over the past 23 years.

The yield on UK shares is significantly higher than on the S&P 500, it is true. However that is not because of any inherent superiority in the earnings power of UK companies. If anything the earnings yield of US companies is higher. Rather it is due to US companies having much lower levels of dividend cover. UK companies choose to have a high payout ratio, presumably because UK investors (both institutional and individual) demand that whilst American investors do not so much. (*)

It is reasonable to presume therefore that US shares will be growthier, since they are retaining and reinvesting more of their earnings. It also reasonably follows that US dividends are safer and more capable of growing.

So as always there is a tradeoff. If you want a higher yield then you accept a lower growth trajectory. And in the case of the FTSE-100, pretty much no growth since 1999. HYP1 has escaped that fate, presumably because a couple of its names did well. But such a dependence on the success of 2/3 names is risky and it clearly could have worked out much worse, as is the case with any portfolio of just 15 shares invested in one small part of the global market.

Personally I feel much more comfortable with a global tracker and/or global ITs. And if I needed more income then make the odd sale. And given that I always want to ultilise my annual CGT-free allowance, those sales are happening anyway.

I would not be able to sleep at night if everything I had was in HYP1, and its volatility shown here indicates why.

(*) You can actually build an American HYP. There are higher yielders there like AT&T, IBM, 3M, Dow Chemicals etc. But generally they have not done well in absolute terms and certainly not relative to the low and no yielders like Apple, MicroSoft, Berkshire and so on. Apple alone has created more stock market wealth than the entire UK stock market.

[1nvest]

Personally I feel much more comfortable with a global tracker and/or global ITs. And if I needed more income then make the odd sale. And given that I always want to ultilise my annual CGT-free allowance, those sales are happening anyway.

I would not be able to sleep at night if everything I had was in HYP1, and its volatility shown here indicates why.

Generally I've not seen evidence that the HYP1 adequately compensates for the higher risk taken in holding a limited number of stocks. Common advice is to buy the entire haystack.

[moorfield]

I would not be able to sleep at night if everything I had was in HYP1, and its volatility shown here indicates why.

Yes for me this is it, lesson learnt over several years. I don't want the income volatility that comes with such a small untouched portfolio like pyads. But neither though do I want a 35 share behemoth like TJHs which for all its tinkering still yields little more overall than CTY.

An interesting side question here to those that do, and clearly also hold ITs etc for income - If not everything in an HYP1 then how much, and why? Why not zero?

[Arborbridge]

Generally I've not seen evidence that the HYP1 adequately compensates for the higher risk taken in holding a limited number of stocks. Common advice is to buy the entire haystack.

That's an odd thing to say when presented with a 23 year record in which the "owner" has at no time suffered a loss of capital. For a retiree, I'd say that was good enough

How little risk do you want, for goodness sake? Do we have to do this for 50 years before you accept that HYP is a relatively risk free way of generating a high and rising income?

I get that some people will never be convinced; will always divert attention by changing the goal posts and introducting tangential considerations, but a Man from Mars would accept that HYP1 fulfilled its original brief - and that is all one can ask of it. All else is OT for this board.

Arb

[Arborbridge]

I would not be able to sleep at night if everything I had was in HYP1, and its volatility shown here indicates why.

Yes for me this is it, lesson learnt over several years. I don't want the income volatility that comes with such a small untouched portfolio like pyads. But neither though do I want a 35 share behemoth like TJHs which for all its tinkering still yields little more overall than CTY.

An interesting side question here to those that do, and clearly also hold ITs etc for income - If not everything in an HYP1 then how much, and why? Why not zero?

Perhaps that is a question better posed on the HY board, which is why that board was commissioned.

[Bubblesofearth]

HYP1 has escaped that fate, presumably because a couple of its names did well. But such a dependence on the success of 2/3 names is risky and it clearly could have worked out much worse, as is the case with any portfolio of just 15 shares invested in one small part of the global market.

No argument with you regarding Global trackers. Indeed, I've suggested them to a couple of friends who have asked me what equity investment I would recommend.

But just on the point I've selected from your post I wonder if the strategy really could have worked out that much worse without being incredibly unlucky. Remember, sectoral diversification means that, for example, only one bank would have been selected and that only in an equal initial amount with the other 14 components. That alone would put you well ahead of the FTSE100 with its pre-GFC bank weighting.

HYP1 actually avoided some of what have turned out to be the best performing shares over the past 23 years e.g.,AZN, RKT, Whitbread, LSE. So you could argue it could have done significantly better.

BoE

[Charlottesquare]

Generally I've not seen evidence that the HYP1 adequately compensates for the higher risk taken in holding a limited number of stocks. Common advice is to buy the entire haystack.

That's an odd thing to say when presented with a 23 year record in which the "owner" has at no time suffered a loss of capital. For a retiree, I'd say that was good enough

How little risk do you want, for goodness sake? Do we have to do this for 50 years before you accept that HYP is a relatively risk free way of generating a high and rising income?

I get that some people will never be convinced; will always divert attention by changing the goal posts and introducting tangential considerations, but a Man from Mars would accept that HYP1 fulfilled its original brief - and that is all one can ask of it. All else is OT for this board.

Arb

Methinks your Man from Mars would particularly feel that concentrating his purchases on shares listed on that little island was far too narrow, after all from Mars he/she/it has observed the entire World. I think Man from Mars would likely choose ITs covering different world regions for the wider geographic exposure that brought.

[Arborbridge]

Methinks your Man from Mars would particularly feel that concentrating his purchases on shares listed on that little island was far too narrow, after all from Mars he/she/it has observed the entire World. I think Man from Mars would likely choose ITs covering different world regions for the wider geographic exposure that brought.

Probably, and so do I!

That is hardly the point of the HYP1 experiment, though. It seems to have worked even with this observed risk, for a generation.
I think it could be, as Pyad has observed, that companies come and go - sometimes one might be providing a quarter of the income, in other years yet another. Overall, the risk of total loss of capital seems to have been well constrained, and the income has risen. That's not to say our Man from Mars couldn't do some things better - but I've discovered there is always someone who can do things better, at least for a while.

Maybe the M from M would just conclude HYP1 has been lucky to get away with it, but personally I think it is because the system has a robustness about it.

Arb.

[Charlottesquare]

Methinks your Man from Mars would particularly feel that concentrating his purchases on shares listed on that little island was far too narrow, after all from Mars he/she/it has observed the entire World. I think Man from Mars would likely choose ITs covering different world regions for the wider geographic exposure that brought.

Probably, and so do I!

That is hardly the point of the HYP1 experiment, though. It seems to have worked even with this observed risk, for a generation.
I think it could be, as Pyad has observed, that companies come and go - sometimes one might be providing a quarter of the income, in other years yet another. Overall, the risk of total loss of capital seems to have been well constrained, and the income has risen. That's not to say our Man from Mars couldn't do some things better - but I've discovered there is always someone who can do things better, at least for a while.

Maybe the M from M would just conclude HYP1 has been lucky to get away with it, but personally I think it is because the system has a robustness about it.

Arb.

My concern is geography, nations and regions rise and fall, often over long periods of time so maybe we can ignore, but nothing is static. (China ascends, China flatlines, The Rise of India, the Problems of India's transition, is Europe ex growth, is Europe stable etc)
I do worry re UK plc and its growth problems (Or lack of growth), of course the FTSE100 is not the UK but the flatness of the FTS100 over last 20 years is not mere bad luck IMHO, there likely is a structural weakness loitering and maybe widening horizons is long term a safer bet.

[simoan]

By all means compare the performance of HYP1 with other investments but please make it an apples to apples comparison. HYP1 has delivered an income for 23 years and during that time the capital has roughly doubled.

What would an equivalent holding in gold be worth now if you had sold an amount each year to provide the same income as HYP1? What about cash given some capital would have had to have been sold between 2008-22 to match the HYP1 dividends?

Yes, the S&P500 would have outperformed but not by quite so much if some of the capital would have been sold off annually to match the dividend yield of HYP1. The dividend yield on the S&P500 has been significantly lower over the past 23 years. Also, selecting a better performing equity index smacks a bit of hindsight bias, no? You could choose a Global tracker but, after charges (although very low) these don't yield much more than 1% so, again, you would have needed to sell down capital every year to match HYP1 income.

I'm not saying HYP1 has been the best possible investment for the past 23 years, just that if you are going to make comparisons then make them correctly.

I'm sorry, but I've made it very clear on what basis I am making comparisons - A total return, risk adjusted basis. That is, after all, the subject of this thread. If I wanted to discuss other aspects of the performance of HYP1 I'd be contributing on the other discussions threads, but I'm not interested in capital and income performance individually, only total return. if you feel that is in some way unfair, then fine, we'll have to disagree because that's how I judge my investment performance.

It's quite simple - 23 years ago someone put £75K into a black box and it has to date generated £277K in return. In absolute terms that seems pretty good, and I accept that this has beaten the return on cash, and (just about) the return on corporate bonds. However, you cannot completely ignore risk. Whether we like it or not, it exists and is ever present. All I am doing is comparing the total return with alternative investments you could have made with £75k, at much lower risk, 23 years ago that did not contain any kind of re-investment. Gold and the S&P500 are obvious examples. Is the total return a good result considering the risk undertaken? You seem to think yes, I think you're wrong and most investment professionals would agree with me; It's not.

[BullDog]

Probably, and so do I!

That is hardly the point of the HYP1 experiment, though. It seems to have worked even with this observed risk, for a generation.
I think it could be, as Pyad has observed, that companies come and go - sometimes one might be providing a quarter of the income, in other years yet another. Overall, the risk of total loss of capital seems to have been well constrained, and the income has risen. That's not to say our Man from Mars couldn't do some things better - but I've discovered there is always someone who can do things better, at least for a while.

Maybe the M from M would just conclude HYP1 has been lucky to get away with it, but personally I think it is because the system has a robustness about it.

Arb.

My concern is geography, nations and regions rise and fall, often over long periods of time so maybe we can ignore, but nothing is static. (China ascends, China flatlines, The Rise of India, the Problems of India's transition, is Europe ex growth, is Europe stable etc)
I do worry re UK plc and its growth problems (Or lack of growth), of course the FTSE100 is not the UK but the flatness of the FTS100 over last 20 years is not mere bad luck IMHO, there likely is a structural weakness loitering and maybe widening horizons is long term a safer bet.

Yes, I certainly encourage anyone younger and still accumulating not to be too overweight in UK investments.

[Alaric]

That's an odd thing to say when presented with a 23 year record in which the "owner" has at no time suffered a loss of capital. For a retiree, I'd say that was good enough

HYP1 avoided total dogs like Carillion by virtue of its start date, Later adopters were not so lucky. Given that static dividends and a collapsing share price equals high yield, the method of selection seems designed to find Companies the market thinks are on their way out or at best are just demonstrating high "yield" by returning capital in the form of dividends.

[Arborbridge]

I'm sorry, but I've made it very clear on what basis I am making comparisons - A total return, risk adjusted basis.

No need to apologise - we know your particular investment interest, and TR was indeed the subject of this thread.

However, it's a bit of a non -argument for me, at any rate. I wouldn't argue that anyone should begin a HYP for sparkingly TR - I didn't and I wouldn't advise it to others either.

But then, HYP was never designed as a TR technique, so it is, as I say, a non-argument. I'm happy to use it as part of an income strategy, and HYP1 shows us how well that works. It's up to the individual to decide if it does what he or she wants - no point using a chisel if it's a plane you need. Personally, I need income, and I'm happy just to let it roll in. (I'm also happy to have an IT which flogs off a few shares to provide my income, BTW. I'm not fussy!)

I apologise if earlier I said this thread was OT - it isn't, but I probably didn't realise which board I was on

Arb.

[simoan]

What would an equivalent holding in gold be worth now if you had sold an amount each year to provide the same income as HYP1?

BoE

As a practicing TR investor with half an hour to spare today I ran the numbers on this in a spreadsheet, out of interest. If you had bought £75k worth of Gold in November 2000, and sold enough on each anniversary to cover the dividends generated by HYP1, the gold would be worth £314k today. The total return would be £445k with a CAGR of 8%. IMHO nothing illustrates the high risk, low reward folly of investing for income only more than these numbers.

[Arborbridge]

That's an odd thing to say when presented with a 23 year record in which the "owner" has at no time suffered a loss of capital. For a retiree, I'd say that was good enough

HYP1 avoided total dogs like Carillion by virtue of its start date, Later adopters were not so lucky. Given that static dividends and a collapsing share price equals high yield, the method of selection seems designed to find Companies the market thinks are on their way out or at best are just demonstrating high "yield" by returning capital in the form of dividends.

Yes, I agree with you to an extent. HYP is a counter-intuitive method, which could be why it raises a lot of hackles among those of us who have been schooled in the usual ideas. Value investing is also similar and it's no coincidence that Pyad was also interested in value. I've several times pointed out that HYP is inherently risky because one is in danger of choosing shares which are falling rather than rising. That is helped by the mitigating safety factors, but you can argue that they do not go far enough.
A more detailed understanding of company accounts and cash flow would add some safety, but the rudimentary ones suggested by Pyad ought to do the trick most of the time - although they can't allow for fraud and black holes in accounting. (I've seen that with one or two of Jim Slaters tips, back in the day)

BTW, I don't believe Pyadf would ever have chosen Carillion if only because in the original HYPs he was looking for companies at the biggest end of the scale.
Anyhow, at the heart of your note is the implication that HYP1 was just lucky. We can never prove otherwise, but I don't believe it was. I think at any epoch one could build a successful HYP - maybe many have, but they just don't bother to report it. Come to think of it, not many people extolling the virtue of TR report either.

Arb.