HYP - with bells and whistles

[funduffer]

The attached article, by the Value Investor describes a methodology for selecting a High Yield portfolio of shares.

https://www.ukvalueinvestor.com/2018/05 ... ec1b35658a

It has far more checks and constraints than the pyad HYP methodology discussed on the 'other HYP board'.

I thought Step 10 on diversification was the most interesting.

Everything he writes seems sensible, but I have my doubts how many companies which were screened for all these factors would be thrown up. I suspect there would have to be compromises made.

[tjh290633]

I thought 11 was pertinent:

11. Constantly improve your portfolio by regularly selling the weakest link

The truth is that some companies will go from good to bad and some shares will go from cheap to expensive. To use a gardening metaphor, it makes sense to occasionally weed out diseased plants and trim back those that have grown too large.

That's what I do, by and large.

TJH

[Dod101]

I have often used the analogy with gardening to weed out the weakest although in my case the weaker shares are reflected in the smaller holding of less desirable shares. I would have thought it would be difficult to find 30 shares in the UK at least to meet his very demanding criteria. Good article though and well worth reading to remind us HYPers of what we are aiming for and how to go about it.

Thanks

Dod

[moorfield]

I thought 11 was pertinent:
11. Constantly improve your portfolio by regularly selling the weakest link

I do agree TJH - #9, #10, #11 are very pertinent.

One issue I have with #11 is the word "constantly" which could mean anything - monthly, quarterly, annually ? (a la 'Dogs of the FTSE'), or when a certain control criterion is met (as you do) ?

So in that respect I'd like to propose a thirteenth in however one decides to manage ones portfolio:

13. Be consistent

[Gengulphus]

I thought 11 was pertinent:
11. Constantly improve your portfolio by regularly selling the weakest link

One issue I have with #11 is the word "constantly" which could mean anything - monthly, quarterly, annually ? (a la 'Dogs of the FTSE'), or when a certain control criterion is met (as you do) ?

Agreed, though the word "regularly" does clarify that the suggestion is that it's to be done at regular intervals, i.e. monthly, quarterly, annually are compatible with it, as indeed are daily, hourly, once a decade, etc, but not "when a certain control criterion is met". But the word "regularly" basically contradicts the word "constantly": you can only improve your portfolio by selling at the instants when you sell, and "constantly" basically means to do it all the time. Managing a portfolio by constantly selling its weakest link would involve a rather short process that goes "What's the weakest link? OK, sell it. Now what's the weakest link? OK, sell that too. Now what's the weakest link? ..." and only ends when it gets to the point of a 'portfolio' that doesn't have a weakest link because it doesn't have any links at all!

So I would just ignore the word "constantly" - "regularly" does what it probably intended to be its job. But even "regularly" isn't very compatible with the word "occasionally" in the explanation that follows:

"The truth is that some companies will go from good to bad and some shares will go from cheap to expensive. To use a gardening metaphor, it makes sense to occasionally weed out diseased plants and trim back those that have grown too large."

Also, the word "regularly" is liable to lead to a rapidly shrinking portfolio and/or a great deal of 'churn' and consequent trading costs unless you choose one of the longer regular intervals, but if you do that, you're liable to find that the diseased plants have died by the time inspection time comes around... The way that a sensible gardener deals with that is of course to regularly inspect the plants, but only occasionally weed them out as a result of the inspection. So I would change #11 by removing the word "constantly" and adding the word "considering", to become:

11. Improve your portfolio by regularly considering selling the weakest link

But the biggest problem with that advice is its implicit assumption that you know what the portfolio's weakest link is. In practice, one can only follow that advice as though it said:

11. Improve your portfolio by regularly considering selling what you think is the weakest link

But that makes it rather less obviously sensible, because you might be wrong... Or in other words, you may be the weakest link!

Gengulphus

[Lootman]

I thought 11 was pertinent:
11. Constantly improve your portfolio by regularly selling the weakest link

One issue I have with #11 is the word "constantly" which could mean anything - monthly, quarterly, annually ? (a la 'Dogs of the FTSE'), or when a certain control criterion is met (as you do) ?

"constantly" basically means to do it all the time. Managing a portfolio by constantly selling its weakest link would involve a rather short process that goes "What's the weakest link? OK, sell it. Now what's the weakest link? OK, sell that too. Now what's the weakest link? ..." and only ends when it gets to the point of a 'portfolio' that doesn't have a weakest link because it doesn't have any links at all!

Fair point, assuming that you regard the monitoring and pruning of a portfolio to be a time-based thing at all.

But it doesn't have to be. For instance, I might define my "weakest link" as any position that has lost (say) 20% of its value. In that case my pruning is not so much time-based but rather event-based. I may never sell at all in a rising market, but then sell a few things when the market turns down.

In that sense it is more like a stop loss, and those apply "constantly" but are only acted upon "occasionally" or perhaps never. The result is the same - the well known concept of cutting your losers and failures, and letting your winners run.

Of course, you may choose to define the criteria for culling in many different ways. But I suspect for many investors it will be a function of price action, and not just (say) an annual review where you always sell the share you are least happy with.

[Bubblesofearth]

No data, no research, no stats.

The only point I would unequivocally agree with is diversification. The benefits of this can be demonstrated mathematically.

The rest is unsubstantiated opinion.

BoE

[Gengulphus]

But it doesn't have to be. For instance, I might define my "weakest link" as any position that has lost (say) 20% of its value. ...

Yes, you might, just as I might define a "pound note" to be a particle of sand.

In both cases, however, using a definition so greatly at odds with the way one's target audience uses the language will lead to a total failure to communicate anything meaningful.

Gengulphus

[Lootman]

But it doesn't have to be. For instance, I might define my "weakest link" as any position that has lost (say) 20% of its value. ...

Yes, you might, just as I might define a "pound note" to be a particle of sand.

In both cases, however, using a definition so greatly at odds with the way one's target audience uses the language will lead to a total failure to communicate anything meaningful.

Remember that the context here was the rule: "Improve your portfolio by regularly considering selling the weakest link".

Your comment focused on the frequency with which one makes that determination, and by implication therefore the frequency with which action may be taken to sell it. My comment was as much a focus on how "the weakest link" is defined, as that may lead to the determination of timing, or even to a process that isn't time-driven but rather event-driven.

Since "the weakest link" was not defined then it is entirely possible that some investors will regard that as a percentage fall in value. I am surprised you that deem that to be unlikely. But I never said that is the definition for all investors or even most of them, only that it is likely a common one. And you are of course free to choose another metric. In fact, you might even paradoxically regard "the weakest link" as any share that has done too well, and therefore represents too high a percentage of your total portfolio. That might be some kind of "rebalancing" methodology that might also involve even buying your biggest loser.

Other investors may not focus on price at all, but some other metric or event. But whatever you choose, the reviewing and potential culling does not have to be time-driven, which was my main point. Until you tell us how you define "the weakest link" in your portfolio then I am afraid I cannot advise on how and when you should manage that process.

[Gengulphus]

Lootman,

The idea that "the weakest link" could be defined to mean "any holding whose value has lost 20% of its value" totally ignores the fact that the word "weakest" is the superlative form of the adjective "weak", and so is as ridiculous as e.g. the idea that "the fastest runner" could be defined to mean "anyone who has run a mile in under 5 minutes".

Anyone who chooses to use such definitions when interpreting someone else's words is either demonstrating a complete failure to grasp the structure of the English language or wilfully trying to twist those words. If the latter, it's a waste of time continuing debating the matter with them, and if the former, this is not an appropriate forum for remedial English language lessons.

So I'll stop here.

Gengulphus

[Lootman]

Lootman,

The idea that "the weakest link" could be defined to mean "any holding whose value has lost 20% of its value" totally ignores the fact that the word "weakest" is the superlative form of the adjective "weak", and so is as ridiculous as e.g. the idea that "the fastest runner" could be defined to mean "anyone who has run a mile in under 5 minutes".

Anyone who chooses to use such definitions when interpreting someone else's words is either demonstrating a complete failure to grasp the structure of the English language or wilfully trying to twist those words. If the latter, it's a waste of time continuing debating the matter with them, and if the former, this is not an appropriate forum for remedial English language lessons.

You missed my point. In order to determine the regularity and timing of any portfolio review that seeks to cull the weakest, one must first start not with an investigation of the timing but rather with an investigation of what it is to be "weak".

And a good part of that is obvious. For instance, if the criteria for your definition of "weakness" is (say) annual reporting then it is pretty obvious that your review period should be annual. If quarterly numbers, then every 3 months, And so on.

You are seeking to establish frequency without any definition of what your metrics are, and that is a doomed endeavour. Maybe your metrics are not capital loss but something else. Fine, then state that.

Beyond that, you have failed to define what you regard as your "weakest link" so it is impossible for us to help you to determine how often you should review for that. Define that for us and we can at least intelligently discuss timing.

[funduffer]

Just a couple of points on the discussion above.

The Value Investor does have a portfolio based on these principles and reports on it regularly on the website. So it is not just theory, but these are lessons based on experience.

In terms of weeding out the weakest link, from what I can gather, the frequency used seems to be monthly, as in: sell it one month and replace it the next, I.e. about 6 sell trades and 6 buy trades per year.

Probably similar to some of the tinkering HYPers on the other board.

[Lootman]

In terms of weeding out the weakest link, from what I can gather, the frequency used seems to be monthly, as in: sell it one month and replace it the next, I.e. about 6 sell trades and 6 buy trades per year.

Probably similar to some of the tinkering HYPers on the other board.

The article is a bit ambiguous about it. It does talk about "pre-planned" selling at monthly intervals, although I am really not sure why the author recommends waiting a month between selling and buying a replacement.

But then the author also talks about selling shares that have done very well, which is an odd way of identifying "the weakest link" And in that case, as I was explaining to Gengulphus, there is not a regular interval of selling at all, Rather it is dependent on share price, i.e is event driven and not time-driven.

[Bubblesofearth]

Just a couple of points on the discussion above.

The Value Investor does have a portfolio based on these principles and reports on it regularly on the website. So it is not just theory, but these are lessons based on experience.

One persons experience? Is his of any more value than anyone else's?

Without data/stats it's just another anecdotal.

BoE

[toofast2live]

Just a couple of points on the discussion above.

The Value Investor does have a portfolio based on these principles and reports on it regularly on the website. So it is not just theory, but these are lessons based on experience.

One persons experience? Is his of any more value than anyone else's?

Without data/stats it's just another anecdotal.

BoE

There are reports on the website, I think.

[UKValueInvestor]

I just wanted to clarify a couple of points raised here:

1) What does constant improvement mean?

Doing something constantly means doing it frequent or all the time, so it's the wrong word. I've changed it in the article to continuous, which means ongoing but not necessarily at any specific frequency.

Personally I make portfolio improvements monthly because it gives structure to my investment process; I always know what I'm doing next and when I'm going to do it (e.g. selling the weakest link at the start of July). But there isn't anything magical about doing this on a monthly basis. Quarterly or yearly would probably about the same, but I would get bored with such long periods of inactivity (and I think you should work with your personality, not against it).

So in summary, my portfolio improvement process is continuous and regular, but continuous and irregular could work too. In fact, my strategy improvement process is continuous and irregular; I'm always on the look out for ways to improve the strategy, but those improvements tend to come on an irregular basis, usually after an investment has gone wrong!

2) How is the weakest link defined?

For me the weakest link is the holding with the least attractive stats and which I also have the least desire to hang onto, so it's both a hard quantitative definition and a soft qualitative definition.

On the quantitative side, weakest basically means the weakest combination of factors described in the article. So a price decline of 20% would not be the weakest stock. In fact, a price decline usually makes a stock more attractive because the valuation ratios are lower, all else being equal. Stocks that have gone up a lot are often the weakest for the same reason; their valuation ratios are higher and so they are potentially expensive. I am a value investor after all.

Basically I have a stock screen that ranks stocks based on my criteria and so I can see which holdings have the weakest combination of quantitative factors. When I'm looking to sell something, I look at the five holdings with the lowest ranks and select one of those to sell. It may or may not be the lowest ranked holding because I know that quantitative factors can be misleading sometimes. So I'll use a small dose of judgement to decide what to do, rather than just blindly do what a spreadsheet tells me to do (and life is more interesting when you you don't always blindly follow the rules).

I'd better stop there. This reply is longer than I expected already and I don't want to be accused of selling, ramping, etc. etc. I just wanted to clarify a couple of points in the discussion. Hopefully I haven't just increased the ambiguity!

[tjh290633]

In my view the expression should be "continual". However there should not be change for change's sake. If nothing is out of kilter, there is no need to do anything. Obviously one should define limits for action to be initiated, but discretion is required.

Above all, criteria must be relative and not absolute.

TJH