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Terry Smith says investing for income useless

General discussions about equity high-yield income strategies
Lootman
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Re: Terry Smith says investing for income useless

#123201

Postby Lootman » March 8th, 2018, 2:44 pm

Gengulphus wrote:I am more worried about the possibility of punitive taxation that applies more generally to investment returns. But there's little or no reason for that to be relevant to a decision about whether to invest in dividend-paying or non-dividend-paying shares today, even if I'm intending to hold them long-term.

I'd be more worried about that as well, as there are some on the Left who seem to perceive the entire idea of "unearned income" (as it used to be mischievously referred to) as under-taxed and only relevant to the "evil" rich.

So that could see higher rates of income tax on dividends, and also higher rates of CGT. One idea I saw under consideration was equalising investment income with "earned" income, rather than the lower rates that apply now. And/or even charging NICs on them as well, or merging income tax with NI.

Then there is the separate but related possibility of some kind of wealth tax, in which case even if the tactics you describe to avoid higher taxes on dividends were successful, the taxman would simply start taxing by value rather than by transaction. That would also enable a backdoor tax on ISAs. Again, the justification would be "they can afford it" (and ditto a land value tax, but I digress).

All that said historically income has been easier to tax than capital gains. As an example funds are forced to distribute dividends but not realised capital gains. So companies could stop paying dividends, if the shareholders demand that as you say, and behave more like Berkshire Hathaway. Investors could then just sit tight for years and wait/hope for a new government, selling nothing of course. Or move the holding overseas, assuming no exchange controls anyway.

So I think at the margin the prospect of much higher taxes on investment income could drive income shares to become more like growth shares, retaining their earnings for tax efficiency. If interest rates are rising at the same time because of massive government borrowing and gilt issuance, and/or to prop up the pound, then again I think income shares would be less competitive for many investors.

Julian
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Re: Terry Smith says investing for income useless

#123211

Postby Julian » March 8th, 2018, 3:06 pm

Lootman wrote:
Gengulphus wrote:I am more worried about the possibility of punitive taxation that applies more generally to investment returns. But there's little or no reason for that to be relevant to a decision about whether to invest in dividend-paying or non-dividend-paying shares today, even if I'm intending to hold them long-term.

I'd be more worried about that as well, as there are some on the Left who seem to perceive the entire idea of "unearned income" (as it used to be mischievously referred to) as under-taxed and only relevant to the "evil" rich.

So that could see higher rates of income tax on dividends, and also higher rates of CGT. One idea I saw under consideration was equalising investment income with "earned" income, rather than the lower rates that apply now. And/or even charging NICs on them as well, or merging income tax with NI.

Then there is the separate but related possibility of some kind of wealth tax, in which case even if the tactics you describe to avoid higher taxes on dividends were successful, the taxman would simply start taxing by value rather than by transaction. That would also enable a backdoor tax on ISAs. Again, the justification would be "they can afford it" (and ditto a land value tax, but I digress).
...

I'm glad I refreshed my browser before getting too far into drafting an observation on Gengulphus's post because you lootman have made pretty much exactly the points I was going to make, particularly the, in my view vague (at the moment) but still entirely possible, introduction of a wealth tax. That for me would be the real nightmare scenario that, depending on the level it was set at, might make me seriously consider leaving the country.

I think the only practical lessons I take regarding trying to second-guess possible changes in taxation and how one lets that influence one's investment decisions is that you can't second guess it so the only practical things to do are (a) use existing tax shelters to the maximum that one can, assuming they don't have conditions and/or restrictions that are too onerous(*), and (b) make maximum use of capital gains tax allowances to release stored capital gains e.g. by bed and breakfasting an existing holding, so that one maintains maximum agility to reconfigure one's investments if some seriously detrimental change in taxation (or any other event) occurs.

I learned (b) the hard way. I would rejig my investments more aggressively simply because of my changing thoughts on my investment strategy were it not for the significant capital gains that would be released, gains that could have been lessened had I not ignored my CGT allowance for about 13 of my 17 years of investing.

- Julian

(*) That point was made for completeness. I have no reservations about ISAs or even, for my personal circumstances, SIPPs in terms of being too restrictive or expensive to use as a tax shelter but of course regulations and charging structures can change so it's another case of "who knows what the future will bring?".

Gengulphus
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Re: Terry Smith says investing for income useless

#123334

Postby Gengulphus » March 9th, 2018, 4:21 am

1nv35t wrote:If your investment policy is to track above average yield however that could entail having to change that policy. Which requires a decision of when and into what, along with any taxable events such changes might induce. Better to just be more diversified as a matter of policy (not being over-concentrated into a single element of total return such as dividends).

No, IMHO not better for me at least, because it would involve changing a policy that I currently find satisfactory to an alternative policy that I would find less satisfactory. And even if it were better, better still just to have contingency plans to do so that I can deploy reasonably rapidly if the need arises.

As for being over-concentrated in dividends, that's a matter of opinion. And I've certainly experienced the dangers of being under-concentrated in them, besides which IMHO those of HYPs pale into insignificance. One of the biggest contributors to my investment success was my decision about 18 years ago to extract somewhat less than half of my investments from the tech boom and move it into something very different, which after a bit of trying some possibilities out to see what suited me best I decided was to be largely HYP. What happened subsequently to the somewhat more than half that I left in zero-yield (at the time) tech boom shares is not pretty - no complete failures, but I only eventually extracted about 15% of what it had been worth at the time I extracted the somewhat-less-than-half part...

And while I've continued to have considerable non-HYP share investments alongside my HYP and have had some notable successes with them, I've also had some notable failures. Overall, my record with them mainly differs from my HYP record in being clearly more risky. Their overall returns have been somewhat higher, but not a huge amount higher. Together, the combination of the non-HYP investments' risks and rewards make them a lot more fun than the HYP as an investing challenge, which is a good part of the reason why I continue to run them, but also a lot less trustworthy, which is a good part of the reason why I continue to run the HYP. Basically, without the HYP there, I wouldn't feel OK about the risks of the non-HYP investments - and feeling OK about their risks is pretty important to being able to run them properly, especially to applying the "run winners, cut losers" principle to them to a sufficient extent.

Gengulphus

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Re: Terry Smith says investing for income useless

#123489

Postby Lootman » March 9th, 2018, 1:41 pm

Gengulphus wrote:One of the biggest contributors to my investment success was my decision about 18 years ago to extract somewhat less than half of my investments from the tech boom and move it into something very different, which after a bit of trying some possibilities out to see what suited me best I decided was to be largely HYP. What happened subsequently to the somewhat more than half that I left in zero-yield (at the time) tech boom shares is not pretty - no complete failures, but I only eventually extracted about 15% of what it had been worth at the time I extracted the somewhat-less-than-half part...

My takeaway from that anecdote is that you were taking a very high degree of risk being mostly invested in just one sector. And perhaps even more so if you happened to work in that sector and therefore were doubly exposed to it.

So you had the good fortune to discover the joys of diversification in time. I never succumbed to the dot.com mania at the time and so missed out on some gains but, like you, I was not so hurt by the bursting of that bubble. So whilst HYP "saved" you there, it could have been any diversified strategy like index funds, asset allocation and so on. It is not ipso facto an argument for income investing.

As an aside, I think the big name tech companies now are a totally different kettle of fish, along the lines of what we were discussing upthread before we got arrested. And even the "old tech" stalwarts from 1999 (MiscroSoft, Cisco, Oracle and Intel) have been on a tear recently.

Gengulphus wrote:And while I've continued to have considerable non-HYP share investments alongside my HYP and have had some notable successes with them, I've also had some notable failures. Overall, my record with them mainly differs from my HYP record in being clearly more risky. Their overall returns have been somewhat higher, but not a huge amount higher. Together, the combination of the non-HYP investments' risks and rewards make them a lot more fun than the HYP as an investing challenge, which is a good part of the reason why I continue to run them, but also a lot less trustworthy, which is a good part of the reason why I continue to run the HYP. Basically, without the HYP there, I wouldn't feel OK about the risks of the non-HYP investments - and feeling OK about their risks is pretty important to being able to run them properly, especially to applying the "run winners, cut losers" principle to them to a sufficient extent.

Again, I think that's a good approach to have. The idea being that if an adequate rump of your exposure is in fairly safe and stable areas of the market then you can afford to have some "daft laddie" bets and speculations on the side. Some people like to do that on a 80/20 or 90/10 basis. Stay safe but have a flutter to keep the interest going.

That's my approach too although I use ETFs and big-name shares as the rock. And mostly options as the fun part.

All that said I am not convinced that HYP is the safest place for your safe money. High yield is synonymous with higher risk in at least some circles. And personally I would regard a global index fund as safer than a UK-based HY portfolio.

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Re: Terry Smith says investing for income useless

#123727

Postby Gengulphus » March 10th, 2018, 10:16 am

Lootman wrote:
Gengulphus wrote:One of the biggest contributors to my investment success was my decision about 18 years ago to extract somewhat less than half of my investments from the tech boom and move it into something very different, which after a bit of trying some possibilities out to see what suited me best I decided was to be largely HYP. What happened subsequently to the somewhat more than half that I left in zero-yield (at the time) tech boom shares is not pretty - no complete failures, but I only eventually extracted about 15% of what it had been worth at the time I extracted the somewhat-less-than-half part...

My takeaway from that anecdote is that you were taking a very high degree of risk being mostly invested in just one sector. ...

And mine is that you're 'inferring' things that aren't there in what I've posted. More than just one sector was involved in the tech boom.

And my actual investment in the shares concerned was quite modest - about 5-10% of my investable wealth at the time I made it. But yes, I rode a charging bull for a while before (partially) jumping off when I saw signs of it slowing down. I did indeed take a risk, but only of the bull very suddenly collapsing - which while possible, in the prevailing mood at the time was basically only going to happen on totally unexpected, very bad company news (which is of course a possibility for any share investment). The much more likely way for the bubble to deflate was by that mood changing as the realisation slowly dawned on investors that the long-term dreams they had weren't going to happen for the vast majority of the companies involved, and even for the ones that it was going to happen to, was going to involve long years of (at best) no tangible returns and (more likely) continued investment of substantial amounts of extra capital...

So basically, the risk I took was one that was very high in terms of the severity of its consequences if it happened, but the chances of it happening were pretty low, at least in the short term. And at least for the most severe consequences and with regard to the gains I took off the table, that's relevant because I only stayed in for a few months - something like 80% of all the gains happened in the September 1999 - March 2000 period, I did a first partial dismount from the charging bull at the end of November 1999 and a second in March 2000.

Lootman wrote:... It is not ipso facto an argument for income investing.

I never said it was. And without wanting to start up the so-called "bickering" about my earlier refutation of a statement of yours again, I also never said that was an argument for income investing either, and indeed said explicitly in it that I was not making it as a point in favour of high-yield shares.

Basically, I've seen no arguments either in favour of or against investing in high-yield shares (the specific form of income investing most relevant to this board) that convince me either that investing in them is generally better across the board, or that not investing in them is generally better across the board. I have at times in the past been nearly convinced that investing in them was generally better - around 2005 or a bit after, the evidence of the total-return versions of the FTSE 350 High Yield and Low Yield indices did suggest it quite strongly - but another 13 years or so of data have weakened that suggestion down to near non-existence rather than confirming it. So as things stand my general attitude towards arguments either for or against investing in high-yield shares in general is to look for the holes in them - and I usually find them...

But what I'm generally more interested in is arguments for or against investing in high-yield shares in specific investor circumstances. The point of my "anecdote" that makes it relevant to this board and thread is that high-yield shares were appropriate for me at the time that I used them, and using them has contributed very significantly to my investment success.

I should add that I'm not saying that they are any better than the alternatives you mention in parts of your reply I haven't quoted, such as ETFs and "big name" stocks. My choice to go for a HYP rather than them was partly driven by availability (ETFs were still in their infancy then, and I don't think I even encountered the term until some years later!) and partly by my own preferences; the availability reasons have vanished but my preferences remain (currently, at least - that's something that might well change in the next decade or two as I get older...).

Lootman wrote:... High yield is synonymous with higher risk in at least some circles. ...

No, definitely not "synonymous with" - "an example of" is reasonable, but if they were synonymous, shares of early stage start-up companies would have to either be high-yield or not be high-risk! ;-)

But more seriously, investing in shares at all, even via ETFs or other funds, is an example of higher risk in at least some circles. And in both cases, that's an argument for checking that the investor is OK with the level of risk, but not ipso facto for not investing in the way concerned.

Gengulphus

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Re: Terry Smith says investing for income useless

#123765

Postby Lootman » March 10th, 2018, 1:43 pm

Gengulphus wrote:
Lootman wrote:... It is not ipso facto an argument for income investing.

I never said it was.

I never said that you said it was :D

However the subject of this topic is a critique of investing for income and so it is reasonable to argue that a focus purely on income shares is not the optimal alternative to an all-out growth strategy with all its attendant risks.

In fact I'd argue that a 100% high yield approach is similarly risky to a 100% no-yield growth strategy. I don't think you necessarily reduce risk by swinging from one extreme to the other (and again, I'm not saying that you did).

Rather a balanced approach, with some growth names, some dividend plays and a target yield around that of the market as a whole, is maybe the safest method. And that could tilt you towards index funds and ETFs, absent strong views on individual companies (which Smith clearly has, and most of us have to at least some extent).

Gengulphus wrote:
Lootman wrote:... High yield is synonymous with higher risk in at least some circles. ...

No, definitely not "synonymous with" - "an example of" is reasonable, but if they were synonymous, shares of early stage start-up companies would have to either be high-yield or not be high-risk! ;-)

Well, I assumed the security in question actually had a yield. I was thinking in particular of the junior tranches of corporate debt securities, which typically offer a higher yield to compensate investors for the extra risk, and which are colloquially referred to as junk bonds. Whether that is a case of being synonymous or just having a high degree of correlation I will leave to the denizens of the Pedants Corner Board.

My point was more that if the market is conferring a higher yield on some shares then it is reasonable to infer a general perception of more risk. The investor's job is then to assess whether that risk is worth taking to gamble on a greater return. That can work on a case-by-case basis, i.e. recovery and special situation investing. I am just not convinced as a generalised strategy it gives better risk-adjusted returns than an index fund. In fact I would bet that it doesn't over an entire market cycle.


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