Terry Smith says investing for income useless

[GeoffF100]

Not only has BRK-A failed to beat the S&P 500 over the past ten years, but you currently pay $1.43 for each $1 of assets:

https://ycharts.com/companies/BRK.B/price_to_book_value

http://www.wisebread.com/how-to-buy-ber ... for-17-off

"But Warren Buffett himself has advised against small investors buying Berkshire Hathaway stock. Berkshire Hathaway stock typically sells at a premium of 20 percent to 50 percent above the net asset value (NAV) of its holdings. Warren Buffett didn't get rich buying things for more that they are worth!"

Buffet not only tells small investors not to invest in his company, but he also tells them what to do: buy a tracker.

[Lootman]

Your problem then was not that you bought the wrong share (you clearly did not) but rather that you made a short-term and emotional reaction to a setback and sold at the bottom.

I didn’t say I sold at the bottom. I said an investment in Amazon in 1999, like a number of other high tech companies, would have gone down to around 10% of its value by 2000.

I implied you were cherry picking a good time to buy Amazon

Actually if your example is tech shares in 1999 then that is an egregious piece of cherry picking. My point was that there are individual shares that have delivered outstanding multi-decade growth and, in many of those cases, they did not pay a dividend. Moreover they now represent trillions of stock market wealth that has been created. If you rather mindlessly avoided any share with a zero yield you were virtually condemned to under-perform the index throughout my living memory, with the possible exception of a couple of extreme times where luck might have proven to be the exception.

That is not to say that Amazon etc. will out-perform the market in the future. I have no more idea than you about that. My point, and I believe Smith's point, is that you look at the business when making an investment decision and not just count the yield.

A neutral test case would be to look at a theoretical index fund that invests in the entire market less those shares that pay no dividend. I submit that backtesting such a fund would reveal an under-performance in the long-term, because it would have had a zero exposure to the shares that became dominant in market cap terms. Maybe you will accept that as the price for "income". Or maybe you will claim that with reinvestment the story is different. But those are separate arguments to the one being made here.

[Itsallaguess]

My point, and I believe Smith's point, is that you look at the business when making an investment decision and not just count the yield.

Wouldn't that be arguing with an empty room though Lootman?

Who is it that's seriously suggesting that investment decisions should be made on a single yield metric?

Cheers,

Itsallaguess

[GeoffF100]

On reflection, Buffet does own some businesses directly, and we would expect a price to book of more than one for these. The asset value of the shares that he holds in other companies, on the other hand, is probably just their market value. We are into an accounting can of worms here.

[LeMoss]

https://ycharts.com/companies/BRK.B/price_to_book_value

http://www.wisebread.com/how-to-buy-ber ... for-17-off

"But Warren Buffett himself has advised against small investors buying Berkshire Hathaway stock. Berkshire Hathaway stock typically sells at a premium of 20 percent to 50 percent above the net asset value (NAV) of its holdings. Warren Buffett didn't get rich buying things for more that they are worth!"

That article is an ill informed puff piece for a Berkshire clone mutual fund BIF that markets itself ( expense ratio of 1.4-1%) as a discounted alternative to berkshire because it trades at a 17% percent discount.

Berkshire is not a mutual fund but a conglomerate with insurance as its main business and large purchases of businesses over the years. Book value is not the same as NAV for it as publicly held securities are now a small fraction of the business and it has been that way for 20 years or more.

Book value largely reflects what a business was originally bought for and any increase in value is never reflected by moving the figure upwards. That is the reason why Berkshire has a buyback "floor" of 1.2 times book as Berkshire is certain that at that figure the value of the business far exceeds 1.2 times book. At 1.42 times book, it is valued at an average level over the last 10 years and below the average level over the last 20.

Also Buffett never advises anyone to buy or not buy Berkshire and has definitely not made any such statement about small investors. What he does say is that the average person who had no interest or skill in analysing companies ( including his own) will do better in low cost index funds than the alternatives. Terry Smith says exactly the same thing, it is entirely logical and that is a far distance from the points implied in your post.

[Lootman]

My point, and I believe Smith's point, is that you look at the business when making an investment decision and not just count the yield.

Wouldn't that be arguing with an empty room though Lootman?

Who is it that's seriously suggesting that investment decisions should be made on a single yield metric?

There is a fairly well known (at least on TMF and TLF) investing method that uses yield as the primary driver in selecting shares, to the extent that if someone advocated buying Berkshire Hathaway for an HYP that post would likely be removed on grounds of heresy.

Other factors are surely taken into account, I agree, but there is little doubt about what is the primary metric - it's in the name! Yield may not be sufficient, but it is certainly necessary, for inclusion on this board.

[GeoffF100]

Buffett gave instructions to invest money for his wife's benefit in a tracker rather than BRK:

http://www.thisismoney.co.uk/money/inve ... etter.html

"Investing instructions laid out in his will

One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.)

My advice to the trustee could not be more simple: Put 10 per cent of the cash in short-term government bonds and 90 per cent in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)"

Actions speak louder than words. I have already said that the article i quoted appears to confuse NAV with book value. Nonetheless, it does underline the fact that there is uncertainty about what the NAV is here. I cannot say that I would not invest in BRK, because I have a few thousand pounds invested in it through trackers.

[Lootman]

I cannot say that I would not invest in BRK, because I have a few thousand pounds invested in it through trackers.

Actually until fairly recently your index fund probably didn't hold BRK because it was not in the S&P 500 because of float issues and the high nominal price affecting liquidity, trading volumes and the ability to hedge.

It was only when the B shares were dramatically split and options because feasible that it was admitted to the index. It's still not in the DJIA, for obvious reasons.

[Howard]

My point was that there are individual shares that have delivered outstanding multi-decade growth and, in many of those cases, they did not pay a dividend. Moreover they now represent trillions of stock market wealth that has been created. If you rather mindlessly avoided any share with a zero yield you were virtually condemned to under-perform the index.

My point was that there are individual shares that have delivered outstanding multi-decade growth and, in many of those cases, they did pay a dividend.

(For example, with some of the proceeds of my unsuccessful foray into high tech shares I bought Compass in 2006, a dividend paying share which, with reinvestment of dividends has roughly 8 bagged since then – not a bad performance. However, I wouldn’t advocate only buying shares which pay a dividend).

I suggested a diversified portfolio is desirable.

There is a fairly well known (at least on TMF and TLF) investing method that uses yield as the primary driver in selecting shares, to the extent that if someone advocated buying Berkshire Hathaway for an HYP that post would likely be removed on grounds of heresy.

Lootman, if it upsets you that there are boards where people have different views to you, don’t read them! It’s a bit like advocating that the members of the cycling board should give up their bikes and get cars!
Live and let live!

regards

Howard

[Itsallaguess]

Who is it that's seriously suggesting that investment decisions should be made on a single yield metric?

There is a fairly well known (at least on TMF and TLF) investing method that uses yield as the primary driver in selecting shares, to the extent that if someone advocated buying Berkshire Hathaway for an HYP that post would likely be removed on grounds of heresy.

Other factors are surely taken into account, I agree, but there is little doubt about what is the primary metric - it's in the name! Yield may not be sufficient, but it is certainly necessary, for inclusion on this board.

I'm not sure it's fair to say that yield alone is the single primary driver though....

There's plenty of current discussion going on over on the HYP boards around companies who's yields might be considered 'too good to be true', so I think it's quite clear that yield alone is not being blindly used as the ultimate primary metric.

I think using the Berkshire example regarding it being advocated for a HYP is a bit of a straw man to be honest.

I should add here that I hold quite a few low-yielding investments myself, in a separate portfolio to what I consider my HYP holdings (which consists of single-share HYP-type investments, and also a number of income-related Investment Trusts).

I'm sure there are countless investors who are happy to mix and match their approaches to equity investment, and I'm just not convinced that there's any real, sizeable number who are blindly using yield alone, in ignorance of any other forensic examination of their investments.

Regarding Terry Smith saying that 'investing for income is useless', I'd suggest that statement was intended as an attention-grabbing headline and nothing else.

Cheers,

Itsallaguess

[Lootman]

There is a fairly well known (at least on TMF and TLF) investing method that uses yield as the primary driver in selecting shares, to the extent that if someone advocated buying Berkshire Hathaway for an HYP that post would likely be removed on grounds of heresy.

Lootman, if it upsets you that there are boards where people have different views to you, don’t read them! It’s a bit like advocating that the members of the cycling board should give up their bikes and get cars!
Live and let live!

I was not addressing there the question of whether different people hold different views. They rather obviously do. Rather I was addressing a specific question based on the idea that "nobody invests purely on yield". And with HYP that is the primary and necessary factor. Not to say it is the only one but it may just be the only one that is necessary.

If you haven't owned Apple, Google, Amazon and FaceBook for the last 10/20 years AND yet you claim to have matched or beaten the S&P 500 then you need to explain where you got that 2 trillion in market cap accretion. I don't think the odd yield play like Compass really makes that up.

[Howard]

Some genuine questions here:

I may be wrong, but I thought that Warren Buffett didn’t hold shares in Amazon, Google or Apple until he bought into Apple in 2016? So is he an example of an investor who has historically beaten indices by not holding these companies?

I know Berkshire Hathaway doesn’t pay dividends. But surely Warren Buffett invests in (or his fund owns) dividend paying companies? He then uses the dividends paid to his fund to invest in the best opportunities he and his team can find at the time. Sometimes this means investing back into the company paying the dividend and sometimes not.

So isn’t Warren Buffett an example of an investor who invests in dividend paying companies?

If this is true, then he disagrees with Terry Smith’s headline comment?

This isn’t an argument against holding Amazon, Google or Apple as I have written earlier in these postings that I have held them all for years, but in Investment Trusts (which have performed well!)

Would appreciate comments as this is a very interesting discussion.

regards

Howard

[GeoffF100]

Investors are now exiting from income funds:

http://www.morningstar.co.uk/uk/news/15 ... funds.aspx

Perhaps the under-performance of income shares will come to an end.

The FTSE 250 excluding investment companies has consistently out-performed the FTSE 250:

http://www.iii.co.uk/articles/422011/in ... t-surprise

Unfortunately, there does not appear to be a tracker for the FTSE 250 excluding investment companies. From a passive investor's point of view Investment Trusts are bad news. The shares they hold already appear in the world index, an The Investment Trust managers just add another layer of costs. The Investment Trust managers are, in effect, leeching off the passive investors' returns.

Buffet too is bad news from a passive investor's point of he view. He too is leeching off their returns, but you could say the same about any conglomerate.

[GeoffF100]

Yield may not be sufficient, but it is certainly necessary, for inclusion on this [the HYP] board.

No, no, that is not true. Shares that had a high yield at some point in the past also count as HYP shares. If you buy a share, you must hang on to it until you die, according one sect (or perhaps several) on the HYP board.

[PinkDalek]

Yield may not be sufficient, but it is certainly necessary, for inclusion on this [the HYP] board.

No, no, that is not true. Shares that had a high yield at some point in the past also count as HYP shares. If you buy a share, you must hang on to it until you die, according one sect (or perhaps several) on the HYP board.

To confuse matters further, this is not the HYP ("High Yield Portfolios (HYP) - Practical") board. Rather it is "High Yield Shares & Strategies - general".

The Board Guidance for which includes:

High Yield Share & Strategies - General

The High Yield Share Strategies board is intended for wide-ranging discussions of ways to obtain high yields from equities. ...

From viewtopic.php?f=31&t=8652 and noting Please abide by this guidance. ... Please do not comment or discuss on either of the High Yield boards.

[Dod101]

Howard is confusing the idea of investing in dividend paying companies and investing for income. It was the latter practice that I understand Smith thinks is useless.

Of course since we have just been reminded that this is the Board for wide ranging discussions of ways to obtain high yields from equities, I would have thought that discussion of Buffett and BK was very far off topic, but what do I know?

Dod

[GeoffF100]

To confuse matters further, this is not the HYP ("High Yield Portfolios (HYP) - Practical") board. Rather it is "High Yield Shares & Strategies - general".

As my square brackets indicated, I thought you were talking about the HYP board, rather than the High Yield board. I had not noticed or forgotten the title of the board. I have strayed off topic.

[Howard]

Howard is confusing the idea of investing in dividend paying companies and investing for income. It was the latter practice that I understand Smith thinks is useless.

Dod

I’m not sure you are right, Dod.

It seems to me that Warren Buffet invests in some relatively high yield companies. For example, he has a large stake in Wells Fargo which, in US terms, is a reasonably high yielding company, as is Coca Cola. Also I have read that his early stake in Geico produced huge income streams for Berkshire Hathaway.

I’ve also read that WB’s investment in railroads achieved massive dividend income.

Now I agree that WB wasn’t investing for his pension! But he was investing for an income stream which he used to grow Berkshire Hathaway.

So he was investing for income in these and other cases.

And he is achieving a high yield.

So, whilst I am a happy investor in Terry Smith’s fund and IT, I don’t think his quote is right on this occasion - and Warren Buffett’s behaviour supports this.

What Warren Buffet is saying to his investors might be summarised as - “leave the income generation to me, you can benefit from my skills which will produce a superb total return for you”.

regards

Howard

[Dod101]

Howard- I do not disagree with what you are saying at all but I think the income streams are a consequence of his investing in what he sees as high quality companies and he did not invest in them primarily for the income stream. Apart from anything else most of his enormous pile of cash has come from his famous 'free' float from their insurance operations or so he constantly tells his shareholders in his Annual Letters.

Anyway coming back to Terry Smith's comment, it seems to me to be typically forthright in the way that Smith writes and he knows it will grab headlines. He maybe goes on to qualify what he means but I do not agree with him because if you get a company that consistently increases its dividend like say Imperial Brands I feel sure that its price must move upwards again before long otherwise we will get the absurd position of a yield of 10% or more for a company that is consistently increasing its dividend. There are fashions in investing just like anything else and HYP like shares are not in fashion at the moment.

Dod

[GeoffF100]

I quite like the 30 to 40 Investment Trusts included with the FT250 as they diversify widely and globally. Assuming a average of 10 assets each that adds 300 to 400 diversity, so the 250 holdings in the index might be more like 500+. It also helps reduce domestic concentration down to around 50%.

You are getting the worst of both worlds here. You are paying for huge management and transaction costs by tracking the ITs. By holding them all, you only get their average performance, and you are depriving yourself of the fantasy that you have picked a winner, which appears to be the main reason for buying them. You would be much better off with a FTSE 250 ex investment companies tracker, and a small weighting in a global tracker. That way you would get even greater diversification and lower costs.