Whether HYP (as defined in the guidelines) works

[Itsallaguess]

I'm simply saying that I don't believe trimming winning share holdings is going to improve overall returns or reduce portfolio risk.

I don't think that it's always done to 'improve overall returns or reduce portfolio risk', but simply to help to *live* with the portfolio risk...

I strongly believe that not every portfolio-management process is, or even needs to be, 'measurable' in terms of 'overall returns'.....

Cheers,

Itsallaguess

[GoSeigen]

I'm simply saying that I don't believe trimming winning share holdings is going to improve overall returns or reduce portfolio risk.

Now that's an opinion. You're entitled to it. But do you assert that it is in any way true? Or is it just a zen thing, or faith?

[tjh290633]

There is nothing inherently wrong with the concept of an investment maturing -- even the "commission" is negligible if sensibly managed. In fact most bonds enforce maturity on the creditor so that the selling decision is baked in at the moment of purchase, even if inaction is the policy. Who in their right mind would fail to reinvest a bond that has matured? Same applies to equity: if my expected stream of income has come to an end I want to redeploy the capital.


"Natural" is in the eye of the beholder. A naturalist likes nature, an industrialist likes industry, an artist likes making choices. Each to their own.


GS

Is this some sort of Zen thing? I'm not talking about bonds or equity income streams ending. I'm simply saying that I don't believe trimming winning share holdings is going to improve overall returns or reduce portfolio risk. Each to their own doesn't mean all investment strategies are equally good, it just means people are entitled to do whatever they wish with their own money - a given.

BoE

You have missed the point. Trimming overgrown holdings and reinvesting in a higher yielding share ratchets up the income, above the natural growth rate.

TJH

[TUK020]

Is this some sort of Zen thing? I'm not talking about bonds or equity income streams ending. I'm simply saying that I don't believe trimming winning share holdings is going to improve overall returns or reduce portfolio risk. Each to their own doesn't mean all investment strategies are equally good, it just means people are entitled to do whatever they wish with their own money - a given.

BoE

There is another way of looking at this.

If 'winners' were only monotonically increasing in share price, then I think you would have a point. However the reality is that any trend is overlaid with a large amount of market noise, with a strong mean reversion.
The interesting thing about TJH's rebalancing rules is not the number of times he has top-sliced a successful/lucky pick, but the number of times he has subsequently gone on to top up the same share when its price has dropped again relative to the rest of his portfolio, then top slice again etc.

[tjh290633]

Is this some sort of Zen thing? I'm not talking about bonds or equity income streams ending. I'm simply saying that I don't believe trimming winning share holdings is going to improve overall returns or reduce portfolio risk. Each to their own doesn't mean all investment strategies are equally good, it just means people are entitled to do whatever they wish with their own money - a given.

BoE

There is another way of looking at this.

If 'winners' were only monotonically increasing in share price, then I think you would have a point. However the reality is that any trend is overlaid with a large amount of market noise, with a strong mean reversion.
The interesting thing about TJH's rebalancing rules is not the number of times he has top-sliced a successful/lucky pick, but the number of times he has subsequently gone on to top up the same share when its price has dropped again relative to the rest of his portfolio, then top slice again etc.

You are correct about market noise. From the start of any calendar year there are always some shares which grow and some which fall back. Quite often in the next calendar year positions are reversed. Last year's lemon is this year's rocket, and vice versa. I've posted the comparison of successive years in the past to demonstrate this.

Progress is never smooth.

TJH

[Bubblesofearth]

I'm simply saying that I don't believe trimming winning share holdings is going to improve overall returns or reduce portfolio risk.

Now that's an opinion. You're entitled to it. But do you assert that it is in any way true? Or is it just a zen thing, or faith?

All the evidence I've looked at has led me to that conclusion. Original Dow and US all-share studies, my own analysis of FTSE100 evolution and personal portfolio performance have all demonstrated the same thing, i.e. that performance (both capital and income) is driven by a relatively small number of component companies. Whilst this is not proof (as a fellow scientist I'm sure you appreciate proof is not something we deal in here) it is strong enough evidence to convince me that trimming winners is not a good idea.

What is certain is that any (unforced) sale and repurchase of shares costs money. You will pay at least 1% of the value of any amount re-allocated. Depending on the share in question, that could be around 1/4 the annual divi and will necessarily drag on performance.

BoE

[Bubblesofearth]

There is nothing inherently wrong with the concept of an investment maturing -- even the "commission" is negligible if sensibly managed. In fact most bonds enforce maturity on the creditor so that the selling decision is baked in at the moment of purchase, even if inaction is the policy. Who in their right mind would fail to reinvest a bond that has matured? Same applies to equity: if my expected stream of income has come to an end I want to redeploy the capital.


"Natural" is in the eye of the beholder. A naturalist likes nature, an industrialist likes industry, an artist likes making choices. Each to their own.


GS

Is this some sort of Zen thing? I'm not talking about bonds or equity income streams ending. I'm simply saying that I don't believe trimming winning share holdings is going to improve overall returns or reduce portfolio risk. Each to their own doesn't mean all investment strategies are equally good, it just means people are entitled to do whatever they wish with their own money - a given.

BoE

You have missed the point. Trimming overgrown holdings and reinvesting in a higher yielding share ratchets up the income, above the natural growth rate.

TJH

haha, my Greggs shares have become horribly overgrown since I purchased them for £4-60 a few years back!

The problem is, by your own admission, you have no evidence of whether your strategy works long-term. Unless you have kept a record of how your portfolio would have fared without (unforced) transactions you cannot know whether you would have been better or worse off income-wise. Any immediate uplift in income may not have been sustained.

BoE

[tjh290633]

What is certain is that any (unforced) sale and repurchase of shares costs money. You will pay at least 1% of the value of any amount re-allocated. Depending on the share in question, that could be around 1/4 the annual divi and will necessarily drag on performance.

BoE

I guess that you are talking about the combined sale and purchase costs here.

I've posted this before, but it is a breakdown of my annual costs over the last few years:

.        .        Percent     Portfolio   Value    Value at    Percent  
Tax Yr    Trades   Brokerage   Fees        Total            .   Income   
FY08-09       48      0.489%      0.080%   0.569%   05-Apr-09       6.29%
FY09-10       27      0.245%      0.060%   0.305%   05-Apr-10      10.11%
FY10-11       27      0.241%      0.052%   0.294%   05-Apr-11       8.09%
FY11-12       12      0.093%      0.050%   0.143%   05-Apr-12       3.45%
FY12-13       12      0.058%      0.042%   0.100%   05-Apr-13       2.30%
FY13-14       19      0.124%      0.029%   0.152%   05-Apr-14       3.55%
FY14-15       12      0.042%      0.033%   0.075%   05-Apr-15       1.80%
FY15-16       25      0.119%      0.034%   0.152%   05-Apr-16       3.79%
FY16-17       24      0.121%      0.018%   0.139%   05-Apr-17       3.44%
FY17-18       20      0.063%      0.008%   0.071%   05-Apr-18       1.38%
FY18-19       15      0.033%      0.008%   0.041%   05-Apr-19       0.77%
                                                                         
Average       22      0.148%      0.038%   0.186%                  4.088%
Max           48      0.489%      0.080%   0.569%                 10.105%
Min           12      0.033%      0.008%   0.041%                  0.771%

You will see the hiatus caused in 2008-9 and the relatively low figure for percent income involved. Also the lowest percentage of income in 2018-19.

There was one complete disposal, one sale of rights and one trimming in 2018-19, plus 12 topping ups to make the 15 trades. Obviously events vary each year, and take-overs have an effect. It is unusual to have more than 3 trimmings in one year.

TJH

[Lootman]

performance (both capital and income) is driven by a relatively small number of component companies.

No doubt that is typical, and is the basis of the "let your winners run" mantra that you often hear from traders and investors.

At the same time if you take that to its logical conclusion then you will end up with a very skewed portfolio. As an example suppose that 25-30 years ago you had bought ten shares and resolved to never rebalance or tinker. Nine were market performers and the tenth share just happened to be Apple. At this point you have a portfolio that might be 98% in Apple and 2% in the rest. Almost all your net worth is in just one share.

Do you keep that composition to stay true to your mantra? Or do you take steps to mitigate the single share risk that could, if unlucky, destroy your net worth?

Or to put the issue another way, the strategy that you adopt to build wealth may be different from what is prudent to preserve wealth.

[GoSeigen]

I'm simply saying that I don't believe trimming winning share holdings is going to improve overall returns or reduce portfolio risk.

Now that's an opinion. You're entitled to it. But do you assert that it is in any way true? Or is it just a zen thing, or faith?

All the evidence I've looked at has led me to that conclusion. Original Dow and US all-share studies, my own analysis of FTSE100 evolution and personal portfolio performance have all demonstrated the same thing, i.e. that performance (both capital and income) is driven by a relatively small number of component companies. Whilst this is not proof (as a fellow scientist I'm sure you appreciate proof is not something we deal in here) it is strong enough evidence to convince me that trimming winners is not a good idea.

What is certain is that any (unforced) sale and repurchase of shares costs money. You will pay at least 1% of the value of any amount re-allocated. Depending on the share in question, that could be around 1/4 the annual divi and will necessarily drag on performance.

BoE

So in your studies who [what classes of shareholders of a company] did you identify who could legitimately sell shares without harming their interests? And which are the classes of people that fit into your above conclusion -- who should never sell their shares?

GS

[Charlottesquare]

performance (both capital and income) is driven by a relatively small number of component companies.

No doubt that is typical, and is the basis of the "let your winners run" mantra that you often hear from traders and investors.

At the same time if you take that to its logical conclusion then you will end up with a very skewed portfolio. As an example suppose that 25-30 years ago you had bought ten shares and resolved to never rebalance or tinker. Nine were market performers and the tenth share just happened to be Apple. At this point you have a portfolio that might be 98% in Apple and 2% in the rest. Almost all your net worth is in just one share.

Do you keep that composition to stay true to your mantra? Or do you take steps to mitigate the single share risk that could, if unlucky, destroy your net worth?

Or to put the issue another way, the strategy that you adopt to build wealth may be different from what is prudent to preserve wealth.

Agreed, I saw this in real life with a new client years and years ago (early 1990s)

He had dabbled buying shares from the 1940s/1950s onward and just sat with them all plus took scrips, the catch was one holding had done remarkably well and was at circa 70% by value of the whole portfolio which had by then reached circa £400k (about 15-20 shares ). My role was to reconstruct all the pools for CGT so that a broker could advise upon rebalancing but would have an idea re the CGT bills (not an easy job as lots of scrips and corporate actions, I spent the best part of 2 days in the ICAS premises in Queen Street using their Excedel service to write up all the pools.)

Having circa £280k out of £400k in one share is certainly not a risk averse approach.

[88V8]

What TJH does is more subtle than just rebalancing. He trims when a co's yield has become [relatively] low and may then rebuy when it becomes relatively high.
Thus avoiding a portfolio skewed by value - or is it income, pay attention V8 !! - and improving the overall yield.

So long as the replacement share performs.

Which has not always been my experience.
Frying pan. Fire.

V8

[Bubblesofearth]

So in your studies who [what classes of shareholders of a company] did you identify who could legitimately sell shares without harming their interests? And which are the classes of people that fit into your above conclusion -- who should never sell their shares?

GS

I'm talking about individuals who have invested a sum of money in equities and wish to keep that money, and any profits arising from it, invested in that asset class. For these individuals I believe the best strategy is to start with at least 30 shares, ideally from separate sectors of the economy, equal weighted on purchase and held unless forced to sell by corporate action.

Specifically I believe this strategy to be superior, in terms of risk-adjusted total return, to one that involves unforced transactions of any kind.

BoE

[Bubblesofearth]

performance (both capital and income) is driven by a relatively small number of component companies.

No doubt that is typical, and is the basis of the "let your winners run" mantra that you often hear from traders and investors.

At the same time if you take that to its logical conclusion then you will end up with a very skewed portfolio. As an example suppose that 25-30 years ago you had bought ten shares and resolved to never rebalance or tinker. Nine were market performers and the tenth share just happened to be Apple. At this point you have a portfolio that might be 98% in Apple and 2% in the rest. Almost all your net worth is in just one share.

Do you keep that composition to stay true to your mantra? Or do you take steps to mitigate the single share risk that could, if unlucky, destroy your net worth?

Or to put the issue another way, the strategy that you adopt to build wealth may be different from what is prudent to preserve wealth.

Agreed, I saw this in real life with a new client years and years ago (early 1990s)

He had dabbled buying shares from the 1940s/1950s onward and just sat with them all plus took scrips, the catch was one holding had done remarkably well and was at circa 70% by value of the whole portfolio which had by then reached circa £400k (about 15-20 shares ). My role was to reconstruct all the pools for CGT so that a broker could advise upon rebalancing but would have an idea re the CGT bills (not an easy job as lots of scrips and corporate actions, I spent the best part of 2 days in the ICAS premises in Queen Street using their Excedel service to write up all the pools.)

Having circa £280k out of £400k in one share is certainly not a risk averse approach.

You are looking at an evolved portfolio and seeing risk. But if the outperforming share had been chopped back then the portfolio would likely never have grown anywhere near as much. So instead of a skewed portfolio worth £400k you might have a well balanced portfolio worth maybe £130k. I know which I would prefer.

Even more extreme with the Apple example. This could be a massively skewed portfolio worth perhaps £1m or a well balanced portfolio that had repeatedly trimmed, or traded away, Apple worth not much more than £20k. Again I would ask which would you prefer?

Preventing the possible outstanding growth of a portfolio by trimming or removing winners is not IMO justified simply to retain balance. Picking an Apple or equivalent in the early days is the holy grail of investing. How many times do you hear people say 'if only I'd gotten into that when it was worth peanuts'? Most well diversified portfolios, if left for long enough, will likely contain such a share. Maybe not an Apple but certainly one that will go on to become a lot bigger than the rest. Allow that to happen is my advice.

BoE

[Charlottesquare]

No doubt that is typical, and is the basis of the "let your winners run" mantra that you often hear from traders and investors.

At the same time if you take that to its logical conclusion then you will end up with a very skewed portfolio. As an example suppose that 25-30 years ago you had bought ten shares and resolved to never rebalance or tinker. Nine were market performers and the tenth share just happened to be Apple. At this point you have a portfolio that might be 98% in Apple and 2% in the rest. Almost all your net worth is in just one share.

Do you keep that composition to stay true to your mantra? Or do you take steps to mitigate the single share risk that could, if unlucky, destroy your net worth?

Or to put the issue another way, the strategy that you adopt to build wealth may be different from what is prudent to preserve wealth.

Agreed, I saw this in real life with a new client years and years ago (early 1990s)

He had dabbled buying shares from the 1940s/1950s onward and just sat with them all plus took scrips, the catch was one holding had done remarkably well and was at circa 70% by value of the whole portfolio which had by then reached circa £400k (about 15-20 shares ). My role was to reconstruct all the pools for CGT so that a broker could advise upon rebalancing but would have an idea re the CGT bills (not an easy job as lots of scrips and corporate actions, I spent the best part of 2 days in the ICAS premises in Queen Street using their Excedel service to write up all the pools.)

Having circa £280k out of £400k in one share is certainly not a risk averse approach.

You are looking at an evolved portfolio and seeing risk. But if the outperforming share had been chopped back then the portfolio would likely never have grown anywhere near as much. So instead of a skewed portfolio worth £400k you might have a well balanced portfolio worth maybe £130k. I know which I would prefer.

Even more extreme with the Apple example. This could be a massively skewed portfolio worth perhaps £1m or a well balanced portfolio that had repeatedly trimmed, or traded away, Apple worth not much more than £20k. Again I would ask which would you prefer?

Preventing the possible outstanding growth of a portfolio by trimming or removing winners is not IMO justified simply to retain balance. Picking an Apple or equivalent in the early days is the holy grail of investing. How many times do you hear people say 'if only I'd gotten into that when it was worth peanuts'? Most well diversified portfolios, if left for long enough, will likely contain such a share. Maybe not an Apple but certainly one that will go on to become a lot bigger than the rest. Allow that to happen is my advice.

BoE

Only if you are prepared to carry the risk.

Whilst for different reasons other than growth it is pretty simple to meet in Edinburgh the ex HBOS or RBOS employee who never quite got around to diversification and is having a somewhat less affluent retirement than they believed would be the case twelve years ago, same goes for say Centrica employees (closer to home, a member of my family who is an ex employee who is a whole lot poorer for ignoring too many eggs in one basket)

Your Apple example is fine because Apple is still here and prospering , it has survivorship bias, but at the time you do not know that is the case, same in the dotcom era, you know which ones long term prosper only after the event.

I have only had one share where I sold at more than ten times what I paid, a company called Wiggins Group, I bought at 3.5p mainly sold at circa 45p, watched it carry to about 70p but the shares today are worth nothing. Nobody would suggests you fully jump from your winners, nobody says you have to keep them equal weight, overweight can be fine, but betting your whole life's savings, or the bulk of your life's savings ,on a single business you do not control is rash.

[GoSeigen]

So in your studies who [what classes of shareholders of a company] did you identify who could legitimately sell shares without harming their interests? And which are the classes of people that fit into your above conclusion -- who should never sell their shares?

GS

I'm talking about individuals who have invested a sum of money in equities and wish to keep that money, and any profits arising from it, invested in that asset class. For these individuals I believe the best strategy is to start with at least 30 shares, ideally from separate sectors of the economy, equal weighted on purchase and held unless forced to sell by corporate action.

Specifically I believe this strategy to be superior, in terms of risk-adjusted total return, to one that involves unforced transactions of any kind.

BoE

That's only an answer to the second part of the question.

I am trying to understand who you concluded can legitimately sell shares. Is it only those who no longer want to hold shares at all? Or are there other kinds of shareholders who can sell them? People who want to reduce their allocation perhaps? So that if everyone realised that you were correct and implemented your rules, of course they would get wealthy quicker, but would there remain any price discovery in the market, for example? How much did you examine the effects of everyone adopting your practice?



GS

[Bubblesofearth]

Only if you are prepared to carry the risk.

Whilst for different reasons other than growth it is pretty simple to meet in Edinburgh the ex HBOS or RBOS employee who never quite got around to diversification and is having a somewhat less affluent retirement than they believed would be the case twelve years ago, same goes for say Centrica employees (closer to home, a member of my family who is an ex employee who is a whole lot poorer for ignoring too many eggs in one basket)

Your Apple example is fine because Apple is still here and prospering , it has survivorship bias, but at the time you do not know that is the case, same in the dotcom era, you know which ones long term prosper only after the event.

I have only had one share where I sold at more than ten times what I paid, a company called Wiggins Group, I bought at 3.5p mainly sold at circa 45p, watched it carry to about 70p but the shares today are worth nothing. Nobody would suggests you fully jump from your winners, nobody says you have to keep them equal weight, overweight can be fine, but betting your whole life's savings, or the bulk of your life's savings ,on a single business you do not control is rash.

Company employees, or anyone else for that matter, who fail to diversify their capital at the outset are, I agree, taking a large and unnecessary risk. But that's not what I'm advocating and it is entirely different from seeing an evolved portfolio with a big winner as carrying that sort of risk. When you talk about life savings this presumably refers to the capital invested. If you have spread this capital amongst 30+ shares then even if you manage to capture a big winner and that winner falls back you will still have your capital, presumably having increased roughly in line with the rest of the market. So the risk is not that you lose your life savings but rather that, in allowing a winner to run, you risk it falling back at some stage. The more you worry about that, the less likely you will ever achieve the kind of growth that could happen. You end up with a well balanced £130k rather than a skewed £400k. Even if the big winner subsequently fails you might end up back at around £130k so no worse off for the journey (except perhaps psychologically if you cling to 'if only I'd sold').



BoE

[Bubblesofearth]

That's only an answer to the second part of the question.

I am trying to understand who you concluded can legitimately sell shares. Is it only those who no longer want to hold shares at all? Or are there other kinds of shareholders who can sell them? People who want to reduce their allocation perhaps? So that if everyone realised that you were correct and implemented your rules, of course they would get wealthy quicker, but would there remain any price discovery in the market, for example? How much did you examine the effects of everyone adopting your practice?



GS

This is a tricky area, the essence of which I believe is the question 'how much trading is required to maintain an efficient market?'. I don't know but I suspect nothing like the level currently seen.

There is a similar debate around passive funds like trackers. Would they be viable if there were no traders discovering prices?

Short answer this is not an area I've explored in detail. My beliefs around what works are evidence-based and need to be taken in the context of existing market practices. If those practices changed radically then I have no idea if my preferred strategy would still work.

Tangentially I think equal weighting on purchase works because diversification benefit is not accurately reflected in share prices. Passive funds may have a role in forcing this inefficiency to the benefit of those building individual portfolios of the kind I suggest. I accept this is a controversial view!

BoE

[GoSeigen]

That's only an answer to the second part of the question.

I am trying to understand who you concluded can legitimately sell shares. Is it only those who no longer want to hold shares at all? Or are there other kinds of shareholders who can sell them? People who want to reduce their allocation perhaps? So that if everyone realised that you were correct and implemented your rules, of course they would get wealthy quicker, but would there remain any price discovery in the market, for example? How much did you examine the effects of everyone adopting your practice?



GS

This is a tricky area, the essence of which I believe is the question 'how much trading is required to maintain an efficient market?'. I don't know but I suspect nothing like the level currently seen.

There is a similar debate around passive funds like trackers. Would they be viable if there were no traders discovering prices?

Short answer this is not an area I've explored in detail. My beliefs around what works are evidence-based and need to be taken in the context of existing market practices. If those practices changed radically then I have no idea if my preferred strategy would still work.

Tangentially I think equal weighting on purchase works because diversification benefit is not accurately reflected in share prices. Passive funds may have a role in forcing this inefficiency to the benefit of those building individual portfolios of the kind I suggest. I accept this is a controversial view!

BoE

I think it's crucial to understanding your position, for me anyway. Without having worked it out, the boundaries of your position look very fuzzy. At the moment it seems the advice not to sell only applies to those who have and wish to hold a position in equities. That allows for a lot of exceptions and loopholes! I wish to take advantage of one such loophole, which is that at the moment I sell I do not wish to have such a large exposure to equities but want more cash. It seems that would make me one of the people for whom it is okay to sell?

Happy to hear more when you've firmed up your thoughts. But the fact is there cannot only be buyers in a secondary market and IMO you need to accommodate the sellers and their behaviour in your theory.

GS

[Bubblesofearth]

I think it's crucial to understanding your position, for me anyway. Without having worked it out, the boundaries of your position look very fuzzy. At the moment it seems the advice not to sell only applies to those who have and wish to hold a position in equities. That allows for a lot of exceptions and loopholes! I wish to take advantage of one such loophole, which is that at the moment I sell I do not wish to have such a large exposure to equities but want more cash. It seems that would make me one of the people for whom it is okay to sell?

Happy to hear more when you've firmed up your thoughts. But the fact is there cannot only be buyers in a secondary market and IMO you need to accommodate the sellers and their behaviour in your theory.

GS

No I don't. Like any theory, if I want to put it on firmer ground, all I need to do is test it to see if it works. This is pretty much what I've been doing for the past decade+ and so far so good.

I do not operate in a world of buyers only and if I did then I accept my strategy may not work. It is entirely pointless IMO to work such extreme conditions into a theory that is about optimising equity strategy in the market as it currently exists.

BoE