The Lemon Fool

Charlottesquare wrote:Why do you add the current yield to the growth rate, surely the growth rate should be applied as a power over x years to the current yield?

It's a proxy for the total return over one year.

Initial Dividend yield i increasing at g per year. Initial price 100, yield i
In a year's time the dividend is i *( 1+g) making . If in a year's time the yield is still i, the price will have to have increased to 100 * (1+g) . So the anticipated total return is i from dividends and g from price growth.

dealtn wrote:
However I recognise the relative simplicity of a mechanistic investment strategy that is probably better than simply buying an annuity, and for those who adopt it I wish them the best in it meeting their requirements. But I would suggest that anyone confident enough to be selecting shares to grow capital it is foolish to limit yourself to a subset of the investing universe, particularly where the number of shares available isn't a deep pool, and by the nature of having high yields have associated higher risk.

The only reasonable justification I have come across for people doing so in the accumulation phase of such investing, is that by not adopting such a strategy, when the time comes to manage a HYP in the "living off Income" stage it can be more difficult than if the lessons learned etc. weren't discovered earlier.

It's difficult to keep up with the discussions surrounding any potential different strategies, but I think in the main there are two thing not being given enough credit by those looking to criticise the HYP strategy -

1. It's a relatively simple strategy in terms of the *time* having to be spent on it - in one of your earlier posts you've mentioned a quite valid 'rinse and repeat' total-return approach, but that clearly seems to be a 'busier' strategy than HYP, which has investment-inaction at the very heart of the approach. Time matters for many people, and many people might prefer not having to spend too much of it on investment-matters....

2. Your point above regarding the move from an accumulation phase to then taking income is one, I think, that's not given enough credit. I've been very happy to use an income-strategy very similar to HYP during my accumulation phase, and I think it's a great benefit to be able to track how things are going with one eye on the 'income-switch' that will hopefully get thrown at some future point in time. Knowing that I will have nursed myself over and through the quite natural investment-bumps inherent with *any* investment strategy is, to me at least, a very worthwhile benefit of taking this approach. Why put myself through more than one set of those bumps if I don't have too, and who's to say how high any other particular bumps might be?

Cheers,

Itsallaguess

tjh290633 wrote:If you have figures for the FTSE100TR you may like to compare my accumulation unit figures with that.

TJH

I have just done a little research.

Date         Acc Unit   FTAS TR    Rebased
21-Apr-87        1.00     574.51      1.00
15-May-19      -26.61   7,274.19    -12.66
IRR            10.77%                8.23%

So my HYP has rather beaten the FTAS TR over 32 years. Obviously not every year, but it is the long term we are concerned with.

TJH

tjh290633 wrote:

tjh290633 wrote:If you have figures for the FTSE100TR you may like to compare my accumulation unit figures with that.

TJH

I have just done a little research.

Date         Acc Unit   FTAS TR    Rebased
21-Apr-87        1.00     574.51      1.00
15-May-19      -26.61   7,274.19    -12.66
IRR            10.77%                8.23%

So my HYP has rather beaten the FTAS TR over 32 years. Obviously not every year, but it is the long term we are concerned with.

Terry, you are probably the one reason I have any time for HYP. You are living proof that it can work, albeit with some tweaks that are an improvement on the base model in my view.

Out of curiosity have you compared your total returns to those of the S&P 500, rebased to sterling? It would be interesting to see if your approach licked the main example of a lower-yielding, higher-growing market.

Alaric wrote:

Charlottesquare wrote:Why do you add the current yield to the growth rate, surely the growth rate should be applied as a power over x years to the current yield?

It's a proxy for the total return over one year.

Initial Dividend yield i increasing at g per year. Initial price 100, yield i
In a year's time the dividend is i *( 1+g) making . If in a year's time the yield is still i, the price will have to have increased to 100 * (1+g) . So the anticipated total return is i from dividends and g from price growth.

I see, total return in effect.

tjh290633 wrote:

Date         Acc Unit   FTAS TR    Rebased
21-Apr-87        1.00     574.51      1.00
15-May-19      -26.61   7,274.19    -12.66
IRR            10.77%                8.23%

It is noteworthy that what might seem like a small difference in the annual CAGR actually adds up enormously over an investing career, with the Acc Units more than double the FTAS TR by the period end. This is the difference between c. 8.2% and 10.8% annual returns.

Best wishes

Mark.

TJH is an enthusiastic and experienced investor and we can all learn from him. He doesn't run a HYP portfolio as per the guidelines but rather has run his own method for many years and long before S. Bland codified his. He found the methods similar enough to align himself to the HYP community but I think it would be a mistake for the novice investor to believe they could replicate TJH's success simply by picking 20 or so stocks and leaving them alone.

pendas wrote:TJH is an enthusiastic and experienced investor and we can all learn from him. He doesn't run a HYP portfolio as per the guidelines but rather has run his own method for many years and long before S. Bland codified his. He found the methods similar enough to align himself to the HYP community but I think it would be a mistake for the novice investor to believe they could replicate TJH's success simply by picking 20 or so stocks and leaving them alone.

Quite right. An HYP is like a garden, you have to tend it from time to time. It was 10 years before I had to do anything, when Lloyds TSB and Zeneca both rose well above 10% of the portfolio value, it being about 16 or 18 shares at the time. Prudential was also at about the 10% level. I decided that I had to set a limit on holding value and initially set it at10%, later modifying that to twice the median holding value and later still to 1.5 times the median, when there were over 30 holdings and the value had risen considerably.

I later formalised my topping up decision making. Originally I just topped up the lowest value or the highest yielding holding. Then I hit on combining the rankings by value and yield to choose the recipient.

Of my original selections, only BT.A, MKS and LLOY remain as such, although AZN, IMB and NG. are the ancestors of the original picks. Takeover, failure and delisting have all occurred, and there have been disposals of non- or low-yielding shares from time to time. Doing nothing was never an option.

TJH

Lootman wrote:

tjh290633 wrote:

tjh290633 wrote:If you have figures for the FTSE100TR you may like to compare my accumulation unit figures with that.

TJH

I have just done a little research.

Date         Acc Unit   FTAS TR    Rebased
21-Apr-87        1.00     574.51      1.00
15-May-19      -26.61   7,274.19    -12.66
IRR            10.77%                8.23%

So my HYP has rather beaten the FTAS TR over 32 years. Obviously not every year, but it is the long term we are concerned with.

Terry, you are probably the one reason I have any time for HYP. You are living proof that it can work, albeit with some tweaks that are an improvement on the base model in my view.

Out of curiosity have you compared your total returns to those of the S&P 500, rebased to sterling? It would be interesting to see if your approach licked the main example of a lower-yielding, higher-growing market.

No, I never have done. Originally I recorded the FT30 (and still do) then the FT100 when it came along. More recently the FT350HY index has been of more interest.

If you have relevant data, please feel free to make the comparison.

TJH

tjh290633 wrote:Quite right. An HYP is like a garden, you have to tend it from time to time. It was 10 years before I had to do anything, when Lloyds TSB and Zeneca both rose well above 10% of the portfolio value, it being about 16 or 18 shares at the time. Prudential was also at about the 10% level. I decided that I had to set a limit on holding value and initially set it at10%, later modifying that to twice the median holding value and later still to 1.5 times the median, when there were over 30 holdings and the value had risen considerably.

I later formalised my topping up decision making. Originally I just topped up the lowest value or the highest yielding holding. Then I hit on combining the rankings by value and yield to choose the recipient.

Of my original selections, only BT.A, MKS and LLOY remain as such, although AZN, IMB and NG. are the ancestors of the original picks. Takeover, failure and delisting have all occurred, and there have been disposals of non- or low-yielding shares from time to time. Doing nothing was never an option.

TJH

If you had done nothing what would your capital and come situation be now compared to what they are?

BoE

Bubblesofearth wrote:

tjh290633 wrote:Quite right. An HYP is like a garden, you have to tend it from time to time. It was 10 years before I had to do anything, when Lloyds TSB and Zeneca both rose well above 10% of the portfolio value, it being about 16 or 18 shares at the time. Prudential was also at about the 10% level. I decided that I had to set a limit on holding value and initially set it at10%, later modifying that to twice the median holding value and later still to 1.5 times the median, when there were over 30 holdings and the value had risen considerably.

I later formalised my topping up decision making. Originally I just topped up the lowest value or the highest yielding holding. Then I hit on combining the rankings by value and yield to choose the recipient.

Of my original selections, only BT.A, MKS and LLOY remain as such, although AZN, IMB and NG. are the ancestors of the original picks. Takeover, failure and delisting have all occurred, and there have been disposals of non- or low-yielding shares from time to time. Doing nothing was never an option.

TJH

If you had done nothing what would your capital and come situation be now compared to what they are?

BoE

I have no idea. I had to react to take-overs, demergers, companies going belly up, comkpanies ceasing to apy dividends.

My best guess is that I would have much less capital and much less income, but there is no way of determining that. Had I done nothing, I would have a big pile of cash and only a few holdings. Not that big a pile of cash either.

TJH

Bubblesofearth wrote:

tjh290633 wrote:Quite right. An HYP is like a garden, you have to tend it from time to time. It was 10 years before I had to do anything, when Lloyds TSB and Zeneca both rose well above 10% of the portfolio value, it being about 16 or 18 shares at the time. Prudential was also at about the 10% level. I decided that I had to set a limit on holding value and initially set it at10%, later modifying that to twice the median holding value and later still to 1.5 times the median, when there were over 30 holdings and the value had risen considerably.

I later formalised my topping up decision making. Originally I just topped up the lowest value or the highest yielding holding. Then I hit on combining the rankings by value and yield to choose the recipient.

Of my original selections, only BT.A, MKS and LLOY remain as such, although AZN, IMB and NG. are the ancestors of the original picks. Takeover, failure and delisting have all occurred, and there have been disposals of non- or low-yielding shares from time to time. Doing nothing was never an option.

TJH

If you had done nothing what would your capital and come situation be now compared to what they are?

BoE

I think that is akin to changing your third move in a game of chess and extrapolating where the remaining pieces would reside on the board after another twenty moves- there are a fantastic number of perms.

tjh290633 wrote:I have no idea. I had to react to take-overs, demergers, companies going belly up, comkpanies ceasing to apy dividends.

My best guess is that I would have much less capital and much less income, but there is no way of determining that. Had I done nothing, I would have a big pile of cash and only a few holdings. Not that big a pile of cash either.

TJH

I was referring to the unforced actions (e.g trimming holdings and topping up others with the proceeds) rather than forced actions.

I just find it curious when people state with such apparent certainty that they are better off because of (unforced) actions they have taken but have no record of whether that is the case. I guess we all like to believe we've been smart

BoE

Bubblesofearth wrote:

tjh290633 wrote:I have no idea. I had to react to take-overs, demergers, companies going belly up, comkpanies ceasing to apy dividends.

My best guess is that I would have much less capital and much less income, but there is no way of determining that. Had I done nothing, I would have a big pile of cash and only a few holdings. Not that big a pile of cash either.

TJH

I was referring to the unforced actions (e.g trimming holdings and topping up others with the proceeds) rather than forced actions.

I just find it curious when people state with such apparent certainty that they are better off because of (unforced) actions they have taken but have no record of whether that is the case. I guess we all like to believe we've been smart

BoE

In that case I can tell you that I looked at the longer term (5 years or so) of the effects of trimming and reinvesting in higher yield shares. I came unstuck on one occasion, trimming Imperial Tobacco and reinvesting in ICI and BT.A. the latter two promptly cut their dividends. Several other trimmings worked as planned.

The effects can be seen in rising dividends per unit, above that of the market, and in a rising unit price. Over the long term that has beaten the market, although in the last month or so it has fallen behind.

TJH

tjh290633 wrote:... set a limit on holding value and initially set it at10%, later modifying that to twice the median holding value and later still to 1.5 times the median, when there were over 30 holdings and the value had risen considerably.

It takes a lot of self-discipline to trim one's winners. Especially when the winners still seem to be winning.
Not sure I will ever be able to do that.

V8

Having been investing for 50 years I can certainly say in my case that trimming winners would have been a big mistake that fortunately I have only very occasionally made. Shares that multiply 5 or 10 times hugely outweigh the disasters, and I have found that on average good companies keep on performing better whilst mediocre ones wilt in the long term.

Still chacun a son gout and of course as I understand it HYP is about replacing an annuity with an equity based alternative. It is not about long term total return.

scrumpyjack wrote:Having been investing for 50 years I can certainly say in my case that trimming winners would have been a big mistake that fortunately I have only very occasionally made. Shares that multiply 5 or 10 times hugely outweigh the disasters, and I have found that on average good companies keep on performing better whilst mediocre ones wilt in the long term.

Still chacun a son gout and of course as I understand it HYP is about replacing an annuity with an equity based alternative. It is not about long term total return.

50 years is impressive. I am on only 33 years. But I think this issue depends on the investment objective.

If you are running a growth, smallcap or trading portfolio then cutting your losers and running your winners is a very common axiom. As you say, one winner can more than compensate for several losers.

But in a portfolio designed to pay the bills for widows, orphans or pensioners then minimising risk is more important than trying to shoot out the lights, and then some form of rebalancing can be the right course.

So I'd cut winners in something like a HYP but cut losers in a growth portfolio.

88V8 wrote:

tjh290633 wrote:... set a limit on holding value and initially set it at10%, later modifying that to twice the median holding value and later still to 1.5 times the median, when there were over 30 holdings and the value had risen considerably.

It takes a lot of self-discipline to trim one's winners. Especially when the winners still seem to be winning.
Not sure I will ever be able to do that.

V8

I think it takes more discipline to leave well alone. It's always tempting to take a profit but what you are actually doing is paying commission to interfere with the natural evolution of a portfolio. This evolution, and it's the same for the whole market, will happen in such a way that a minority of holdings go on to provide the bulk of gains in both capital and income.

As long as you are sufficiently diversified to begin with then I see no need to worry about trimming, pruning or whatever. Furthermore I've never seen any evidence it provides for better overall returns or reduces risk.

BoE

Bubblesofearth wrote:

88V8 wrote:

tjh290633 wrote:... set a limit on holding value and initially set it at10%, later modifying that to twice the median holding value and later still to 1.5 times the median, when there were over 30 holdings and the value had risen considerably.

It takes a lot of self-discipline to trim one's winners. Especially when the winners still seem to be winning.
Not sure I will ever be able to do that.

V8

I think it takes more discipline to leave well alone. It's always tempting to take a profit but what you are actually doing is paying commission to interfere with the natural evolution of a portfolio. This evolution, and it's the same for the whole market, will happen in such a way that a minority of holdings go on to provide the bulk of gains in both capital and income.

As long as you are sufficiently diversified to begin with then I see no need to worry about trimming, pruning or whatever. Furthermore I've never seen any evidence it provides for better overall returns or reduces risk.

BoE

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

GoSeigen wrote: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