Selection of underperforming shares

[Gengulphus]

One question springs to mind, was this analysis on the “standard” market index or the total return index?

The total-return indices. I did say so:

To give a concrete example: suppose that I'm a HYPer who wants to know whether my HYP strategy A would be better replaced with one that avoids high yields and is otherwise similar, and am wondering whether comparison over the 3-year period I've held so far is long enough to justify serious conclusions about which is better. I don't have enough data to cover more than one 3-year period of strategy A, so I choose a proxy strategy P for which I can get enough data to cover a lot of rolling 3-yesr periods. A reasonably obvious candidate for P is investing in an idealised FTSE 350 Higher Yield tracker: the way the FTSE 350 Higher Yield index is definitely not HYP, but it is at least investing in the same pool of higher-yield mid-to-high cap UK shares as my HYP strategy is (**); given that choice, the obvious candidate to compare it with is the FTSE 350 Lower Yield index. So if I calculate ((end date FTSE350HY)*(start date FTSE350LY)) / ((start date FTSE350HY)*(end date FTSE350LY)) for as many pairs of three-year-apart start and end dates as I can, using the total-return versions of the indices, and look at the proportions of results above and below 1, I'll get some indication whether a period of 3 years is enough to come to any serious conclusions about whether high-yield strategies are better than the alternative, at least in that pool.

Yes, I know it's easy to overlook one phrase in a post - I've done it myself...

In your estimation could that make a difference to your figures (which index “wins” or “loses”)?

It will certainly make a difference to the figures. On which index "wins" and which "loses", I've done a very quick check of the two full-data-range outperformance vs underperformance answers I gave: for the FTSE350HY vs FTSE350LY (on data from 18/01/1999 to 06/04/2018 (*)), the total-return FTSE350HY index outperformed by 67.7% but the capital-only FTSE350LY index only outperformed by 8.7% over the full range, and for the FTSE100 vs FTSE250 comparison (on data from 24/06/1994 to 06/04/2018), the total-return FTSE250 index outperformed by 50.6% while the capital-only FTSE250LY index outperformed by 131.8%. No real surprises there, of course: if one ignores the dividend part of the returns, one places the indices that have higher dividend yields (the FTSE350HY and FTSE100) at a bigger disadvantage than those with lower yields (the FTSE350LY and FTSE250).

It is perhaps surprising that placing the FTSE350HY under that disadvantage isn't enough to reverse the result of the comparison. I think the reason for that is that the start of 1999, though by no means the peak of the tech boom, was already some way into it, which places the FTSE350LY at a different disadvantage. I can take the capital-only comparisons back rather further to get them well away from the tech boom distortions, to 31/12/1992 - 06/04/2018 data in both cases. Those have the FTSE350LY index outperforming the FTSE350HY index by 2.1% (**) and the FTSE250 index outperforming the FTSE100 index by 170.3%. I cannot produce total-return outperformance figures for that date range, but the capital-only FTSE350LY outperformance figure is so low and the capital-only FTSE250 outperformance figure so high that I'm in no doubt that the total-return comparisons would reverse the former and not reverse the latter.

So yes, pretending the dividends are not part of the returns could change which index one decides "wins". Not certain why one would want to pretend that, though... (At least as an individual investor who is going to receive all the returns - there are obvious conflict-of-interest situations when one person is going to receive the income and another the capital returns.)

(*) So I should have said that I have a bit under 24 years of data rather than a bit over 25 - a mistake: the latter is what I would have had if I'd updated my data to include the last 15 months...

(**) Like the other outperformance figures I've given, this 2.1% is an overall over-the-full-data-range figure, not an annualised figure - which I'm stressing because it's small enough to be mistaken for one!

As a seperate question, do you think that it would make much difference to your final conclusions (about the period of time to judge a strategy)? My guess is probably not, but I’m curious.

That's my guess as well, but I won't take it any further than a guess - establishing the period of time required to judge a strategy if one ignores part of its returns is worth very little effort IMHO!

Gengulphus

[Alaric]

- if one ignores part of its returns

But isn't that what those who profess to following the doctrines of "HYP" do? They congratulate themselves on achieving a higher income than they might have got from investing in a FTSE 100 tracker, but are reluctant to check whether they've lost or under performed on capital value in the process. Equally they sneer at stocks with low yields but high dividend growth and the price growth that can go with that.

[Itsallaguess]

Equally they sneer at stocks with low yields but high dividend growth and the price growth that can go with that.

I don't think it's particularly helpful to use such emotive language as that...

It's not as easy as trying to force an unwanted strategy on someone and then accusing them of 'sneering' when they resist your advances - I'd suggest that it's far better to simply follow such a strategy yourself, and then point out whilst doing so where you think the benefits are....

A good investment strategy should ultimately sell itself....

Cheers,

Itsallaguess

[ReformedCharacter]

But isn't that what those who profess to following the doctrines of "HYP" do? They congratulate themselves on achieving a higher income than they might have got from investing in a FTSE 100 tracker, but are reluctant to check whether they've lost or under performed on capital value in the process.

No sneering from me. I know that others invest more profitably than I do. I follow a HYPish strategy but benchmark it against the FTSE100 TR to make sure that I'm not fooling myself and that I'd do better with a tracker. So far I'm happy with the results.

RC

[Alaric]

A recent comment from the HYP - Practical Board in the context of those disappointed with the price performance of their selections.

Often the accent has been on total return, rather than income generation. To do so misses the whole point of the exercise. Total return is a consequence of the generation of income.

[IanTHughes]

A recent comment from the HYP - Practical Board in the context of those disappointed with the price performance of their selections.

Often the accent has been on total return, rather than income generation. To do so misses the whole point of the exercise. Total return is a consequence of the generation of income.

Correct!


Ian

[Dod101]

It is absolutely incorrect to say that total return is a consequence of the generation of income. The whole point about total return is that it is the aggregate of return from income and the return from capital. What I suppose the quote intended to say was that capital growth is a consequence of the generation of income. Even that does not necessarily follow but it probably does if we assume that the income generated increases year on year.

The general thrust of the argument is I think that if we take an income generating share and the income increases each year indefinitely, then capital growth is almost certain to follow otherwise, in the long run, we would have a share generating its own value in dividends annually. We have not reached that stage yet.

Dod

[SentimentRules]

A recent comment from the HYP - Practical Board in the context of those disappointed with the price performance of their selections.

Often the accent has been on total return, rather than income generation. To do so misses the whole point of the exercise. Total return is a consequence of the generation of income.

Complete rubbish. I have traded/invested in non income producing stocks for years. So obviously total return could not have been a consequence of income generation.

What he fails to point out there is this: when income stocks/funds are not favoured by the markets for whatever forecasting reasons.

Suddenly..... Total return is a minus due to income generation causing fundamental market weakness, causing capital loss. Compounded in many instances because a cut in income causes mass defection and probably costing capital as much as 10-40%.

Let's be honest here. You have to...MUST... consider capital return before ever investing for income. Who is going to buy a stock with an outlook of -30% capital and plus 20% income over 5 years?

What he wrote was an excuse. A fallacy. A disgrace.

[Alaric]

Who is going to buy a stock with an outlook of -30% capital and plus 20% income over 5 years?

Those who set the discussion rules on the HYP - Practical board perhaps?

[SentimentRules]

Imo the market is saying to income funds/stocks...

The party is over. Low rates, QE, decade bull.....

We want to find value now. We want you to focus on company investment and debt cover etc

Time to cut the returns.. .. and start providing true value.

Until they do, most will keep on tumbling. SP's will stabilise when this income 'debt' in the current macro system, is forced down.

[SentimentRules]

I probably managed more high yield portfolios than most bought individual stocks. Directed straight at hyp

[Dod101]

I agree with you SentimentRules but you would be surprised how many, concentrating on income generation, ignore capital, because it is in some silly 'guidance' by the author of the HYP. In fact he did not say to ignore capital returns but that they were less important and even then I think the guy was referring more to market noise than long term declines in capital values.

Without capital you cannot invest but as you must know there are successful income strategies which people like me, relying on my investments to provide my main source of income, tend to practise. It is though apparently not very well understood.

Dod

[SentimentRules]

Totally understand you Dod. And can be rewarding for the savvy. Which I'm sure you are.

Would you agree though in the next 12 months, capital protection never More important now for income strategies?

If the forces that be get their wishes on income reduction given all yhe debt around etc, going to be big hits on capital for many. Too much to recover within ten years through income I would think.. . If selections wrong of course

[SentimentRules]

Standard holders always pay the bills. Always will be the case. And a big invoice is overdue lol

[Lootman]

The general thrust of the argument is I think that if we take an income generating share and the income increases each year indefinitely, then capital growth is almost certain to follow otherwise, in the long run, we would have a share generating its own value in dividends annually. We have not reached that stage yet.

Yes, a portfolio of companies which have good dividend cover and regularly increases in dividend should, assuming a continuation of that theme, increase the share price necessarily, else the yield would creep towards 100%.

That is my preferred approach to dividend investing.

HYP on the other hand worships a high yield for its own sake and takes the view that capital is either secondary or irrelevant, depending on who is talking. Probably a prudent caveat given HY shares' tendency to self-destruct.

That said, I don't claim that HYP can't work or won't work. TJH's records are good in terms of capital as well as income, although his methods vary somewhat from the pure version. And he is probably a better share picker than most. It clearly has also not worked for others who have gone on record as abandoning it.

So perhaps the main criticism of HYP is that it is too individual and idiosyncratic to make generalisations about. It's main flaw may be the same - it's quite hard to measure its performance in general, in the way you can with a fund. It is all things to all people and therein is both its strength and its weakness.

For my needs, a mid-yielding global portfolio works better, and with less risk.

[SentimentRules]

Mid yield were always the smart choice. Poor Vodafone holders finding that out and a few more.

They are the type i feel sorry for. Be it hyp or other form. High yield holding as if there can never be risk to income. Disaster

And that's why capital ia so important. How many times has falling price resulted in income cuts?

Capital return first analysis. ..... especially for income holders . More risk to them.

[IanTHughes]

The general thrust of the argument is I think that if we take an income generating share and the income increases each year indefinitely, then capital growth is almost certain to follow otherwise, in the long run, we would have a share generating its own value in dividends annually. We have not reached that stage yet.

Yes, a portfolio of companies which have good dividend cover and regularly increases in dividend should, assuming a continuation of that theme, increase the share price necessarily, else the yield would creep towards 100%.

That is my preferred approach to dividend investing.

HYP on the other hand worships a high yield for its own sake and takes the view that capital is either secondary or irrelevant

No it does not!

Probably a prudent caveat given HY shares' tendency to self-destruct.

No they do not! Have you not seen all the successful HYP's reported on the HYP Practical board? You really should look, you might learn something for a change.

That said, I don't claim that HYP can't work or won't work. TJH's records are good in terms of capital as well as income, although his methods vary somewhat from the pure version. And he is probably a better share picker than most.

So, why is my HYP is doing so well, and without the methods employed by TJH? If I am a "better share picker" it is because I use the HYP Strategy to select shares.

It clearly has also not worked for others who have gone on record as abandoning it.

Do you have any evidence of that or are you just making it up?

So perhaps the main criticism of HYP is that it is too individual and idiosyncratic to make generalisations about.

Well that is rather obvious! I mean what Share Strategy do you know, one that relies on an individual picking shares, that is not "individual and idiosyncratic".

It's main flaw may be the same - it's quite hard to measure its performance in general, in the way you can with a fund. It is all things to all people and therein is both its strength and its weakness.

Complete nonsense! One can easily measure the Income produced by one's HYP and compare it with other Income producing strategies. Also, although it is not a primary aim of HYP, one can easily measure the Capital results, especially for an HYP in the process of being built.


Ian

[Lootman]

That said, I don't claim that HYP can't work or won't work. TJH's records are good in terms of capital as well as income, although his methods vary somewhat from the pure version. And he is probably a better share picker than most.

So, why is my HYP is doing so well, and without the methods employed by TJH? If I am a "better share picker" it is because I use the HYP Strategy to select shares.

To quote you back at yourself: Do you have any evidence of that or are you just making it up? Given your tendency to always support HYP regardless, the burden of proof is on you. Can you show us records in the way that TJH convincingly can?

[IanTHughes]

That said, I don't claim that HYP can't work or won't work. TJH's records are good in terms of capital as well as income, although his methods vary somewhat from the pure version. And he is probably a better share picker than most.

So, why is my HYP is doing so well, and without the methods employed by TJH? If I am a "better share picker" it is because I use the HYP Strategy to select shares.

To quote you back at yourself: Do you have any evidence of that or are you just making it up? Given your tendency to always support HYP regardless, the burden of proof is on you. Can you show us records in the way that TJH convincingly can?

Unlike your made up statistics, my HYP is posted on the HYP Practical board, as I have told you on many occasions. You could also review pyad's HYP1, if you wanted to understand how an HYP works rather than just criticising it for the sake of criticising it!


Ian

[Lootman]

So, why is my HYP is doing so well, and without the methods employed by TJH? If I am a "better share picker" it is because I use the HYP Strategy to select shares.

To quote you back at yourself: Do you have any evidence of that or are you just making it up? Given your tendency to always support HYP regardless, the burden of proof is on you. Can you show us records in the way that TJH convincingly can?

Unlike your made up statistics, my HYP is posted on the HYP Practical board, as I have told you on many occasions

Link please.