Clitheroekid wrote:I admit that I've never studied the HYP philosophy in detail, so my assumption about never selling may be just a wrong impression, ...
Well, it depends a bit on whose 'HYP philosophy' you're talking about... But what makes sense to me is essentially that it's long-term-buy-and-hold, with the guideline that that means that a HYP strategy aims to hold its shares 5+ years on average, and what it does in practice can reasonably be expected to achieve that aim. The justification for the figure of 5+ years is that that's the sort of length of holding period needed for dividend income to be likely to be reasonably significant compared with the capital gain or loss, i.e. for reasonably good observance of HYP strategies' primary dividend-income objective (see below for more about that). The "on average" part is essential for it to be achievable in practice, given that there's no way of avoiding the possibility of an unexpected takeover of one of one's chosen shares being announced shortly after one buys it. And the condition about the aim being achievable in practice by what the strategy does is there because "I always buy with the aim of holding for many years" can be said by someone whose strategy actually always or almost always finds that a compelling reason to sell has arisen within a few months. They might be being perfectly truthful about their motivations - but if so, there's a mismatch between those motivations and what their strategy actually does. And so in essence, they are deceiving people about the nature of their strategy, though whether they're doing that deliberately or it's a matter of deceiving themselves as well much more innocently is of course uncertain - but whichever it is, talking about the
strategy as a long-term-buy-and-hold strategy just creates confusion about what such a strategy is.
Anyway, the point is that
long-term-buy-and-hold is not the same thing as buy-and-hold-
forever. Taken absolutely literally, the latter means "never sell at all" and is unachievable in practice, at least by those of us who are not immortal billionaires who can afford to invest the amounts required to block all complete takeovers. A more sensible interpretation of buy-and-hold-forever is of course "don't sell voluntarily before you die, but recognise that you only have any control after that for a limited period", with the limited period quite possibly being essentially zero, and I'm pretty certain that is basically what
pyad's original article was suggesting when it said "
At present yield levels it will be quite simple to achieve a starting yield of 4-5% on the portfolio. Having chosen your shares, simply buy and hold forever. Do not be tempted to meddle, and try not to let press comment on your companies influence you. Do not worry about the fluctuations in the underlying capital value of your shares that are certain to occur." So there is a viable argument that buy-and-hold-forever in that sense is the 'HYP philosophy'.
But it's pretty clear that a strategy that almost completely follows the "don't sell voluntarily before you die, but recognise that you only have any control after that for a limited period" principle but very occasionally sells voluntarily for some reason, will behave very similarly to one that completely follows the principle. And in HYP1, the HYP that he selected in his
follow-up article a week later and has tracked ever since, he has decided to sell voluntarily on at least three occasions (the rights received in the first part of United Utilities' complex two-part rights issue, the Mondo shares received when Anglo American demerged them, and either the Alliance & Leicester shares shortly before they would be replaced by Banco Santander shares in a takeover or the Banco Santander shares shortly after) and to voluntarily sell completely when only a partial sale was being compelled on at least one (Ladbrokes Coral). I'm not saying any of those sales were misguided - but they were sales that it would have been possible to avoid doing (or doing as completely) simply by doing nothing, and so were voluntary. So either he didn't quite mean that "don't sell voluntarily before you die, but recognise that you only have any control after that for a limited period" principle when he said to simply buy and hold forever. or he's since discovered (as I believe just about any HYPer will end up discovering if they live long enough!) that it does need some sort of "other than in special circumstances" clause.
That of course invites the question "well, how special do the circumstances need to be?". And my answer at the top of this reply is basically "special enough that they don't come up often enough to interfere badly with the way the strategy is designed around a primary dividend-income objective". And that answer fits what little the
TLF HYP Practical board guidance says about the question, which is just "
A long term buy and hold (LTBH) of these shares is envisaged.", and before that what the
TMF HYP Practical board guidance said rather more extensively. Neither indicates that buying and holding forever or never selling is part of the 'HYP philosophy'.
The primary dividend-income objective does
not mean "go for the highest yield regardless of anything else": it needs to look not just at the level of dividend income, but also at its safety, sustainability and growability. Those inevitably come into conflict with each other in practice, so a HYPer has to decide how to balance them up against each other. Furthermore, it doesn't preclude having other objectives, such as wanting capital to grow, or running the strategy in a way that doesn't use too much of the HYPer's time, and again the HYPer has to decide how to balance them up against each other when they conflict - though this time with the constraint that the dividend income objective needs to be the most important. That's simply because the dividend income objective features highly in the design of HYP strategies - e.g. in them being long-term-buy-and-hold strategies, as I've described above. There's nothing saying that an investor has to have a primary dividend-income objective - it's just that if they don't, that implies that they probably want to choose a non-HYP strategy.
On those objectives, I should say that the proviso "when they conflict" above is important, because that does require the investor to decide whether they think the objectives do conflict. The classic case of that is capital-value objectives vs income objectives. Some think they conflict with each other, so that an investor who is building up their retirement 'pot' should concentrate on building up the capital value of their portfolio and regard the dividend income it generates as being of secondary importance at best, until they retire, at which point the income objective becomes a lot more important and they may well want to switch to a HYP strategy. Others think that getting a lot of dividend income and reinvesting it is an excellent way of building up a 'pot', so the capital-value and dividend-income objectives do not conflict, and so HYP strategies are suitable all along.
Both of their arguments are entirely logical, and endless time is wasted on trying to refute the logic of each others' arguments along those lines in to-HYP-or-not-to-HYP discussions - but the reason for the disagreements is essentially that the logic is based on different premises rather than anything fundamentally wrong with the logic. (I say "fundamentally" because both sides' logic does often do need to be refined a bit to make it fully valid - but it usually is fixable and the refined conclusions still contradict each other because one side is assuming that having lots of dividend income and reinvesting it is a very good way to build up their 'pot' and the other that it isn't and other methods are better.)
Clitheroekid wrote:... but I'd be genuinely interested to know what the philosophy does have to say about holding on to / selling a share that although offering a high yield appears to be in terminal decline.
Hopefully it's clear from the above that the 'HYP philosophy', insofar as it has any sort of separate existence from the mass of different opinions among individual HYPers, doesn't say never to sell voluntarily, and hasn't done for many years now. The question was discussed on the TMF High Yield Portfolio board within a month or two after pyad's introductory HYP articles and he even posted something to the effect of "I don't recommend selling voluntarily, but if you are determined to do it, here's how I would recommend making the decisions". I don't have that archived, but he made the
first HYP1 voluntary sale (the one of United Utilities rights) in 2003, and a
voluntary sale prompted by company performance only in HYP3 and HYP4 in 2007. So even by the date (2008) of the TMF board guidance mentioned above, sometimes selling voluntarily was an established option within the 'HYP philosophy'.
That
doesn't mean that there isn't a strong strand of opinion among HYPers that never selling voluntarily is a good idea: there is, and indeed pyad's final sentence of the last link above says that he was of that view (and AFAIAA, he still is). Equally, there's also a strong strand of opinion among HYPers that occasionally selling voluntarily is a good idea, and FWIW, I'm basically of that view - though the occasions on which I do it have become less and less frequent as the years have gone by (and I don't hold that view strongly enough for it to override all my other objectives - in particular, my objective of keeping the maintenance work on GDHYP low and predictable means that I essentially only sell voluntarily from it in similar circumstances to the rare ones in which HYP1 has sold voluntarily).
Various strands of opinion within the general bounds of 'HYP philosophy' do have various things to say about such situations, ranging from "no, never sell voluntarily" to "yes, you're interested in long-term growing income, and that share is clearly thoroughly unsuitable for the job, so sell and put whatever capital you rescue from it somewhere where it will actually contribute to the job". And there are plenty of variants inbetween - for instance, mine is basically the latter, but
very strongly tempered with "but remember that appearances are often deceptive!". An example of such deceptive appearances is that in late 2014 and throughout 2015, there were considerable numbers of comments on the TMF HYP Practical board (sorry, can't provide any evidence for this other than my memory, as this is not the sort of stuff I archived) prompted by the fact that commodity prices had been declining steeply, triggering severe problems for mining companies that resulted in dividend cuts and big share price falls. Quite a few of them were along "I've bailed out of BHP Billiton / Rio Tinto / Anglo American / whatever and I'm never going to buy from the mining sector again", and at least some were basically saying things along the lines of the commodity supercycle having turned, so that mining was now in long-term decline. Anyone who had that impression in late 2015 (i.e. about 3 years ago or a bit less) and sold out of their miners as a result must now be kicking themselves hard - they're pretty unlikely to have found any HYP share to put the capital they 'rescued' from their mining shares into that has since done better than just leaving it where it was would have done... (To be fair, others just said that they'd discovered the sector was too cyclical for comfort - and at least in my book, sheer personal discomfort with holding a share is a valid reason for rejecting that share in
any strategy!)
To sum up, 'HYP philosophy' itself doesn't say anything about the question of whether to hold on to or sell a share that although offering a high yield appears to be in terminal decline, beyond that if you decide that shares appear to be of that type and you ought to sell them
too frequently, you're not running a HYP strategy (but that "too frequently" has a fairly high threshold: you'd have to be doing that to quite an appreciable number of your holdings per year before it said that you weren't running a HYP strategy). And various strands of opinion within 'HYP philosophy' say highly varying things about the question...
Gengulphus
