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Sell or not sell

General discussions about equity high-yield income strategies
Alaric
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Sell or not sell

#243342

Postby Alaric » August 10th, 2019, 4:24 pm

Gengulplus in thread about HSBC wrote:
AFAIAA, he's never said it's not permissable - only recommended against it. But in any case, I can lay my hands on what you ask for:
https://web.archive.org/web/20071014125 ... ading.aspx


The very last paragraph caught my eye

I continue to maintain that eternity holding will produce the best long term returns for most HYPers.


If a handful of shares or sectors come to dominate the portfolio, that's a considerable increase of risk. If holding for eternity, market value risk may not be much of a concern, but I would have thought income concentration would be. If the income is mostly generated by a handful of shares, it doesn't take many market shocks or even stroke of a pen decisions by directors to drastically reduce the income. So sell some and reinvest for diversification?

IanTHughes
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Re: Sell or not sell

#243344

Postby IanTHughes » August 10th, 2019, 4:36 pm

Alaric wrote:
Gengulplus in thread about HSBC wrote:AFAIAA, he's never said it's not permissable - only recommended against it. But in any case, I can lay my hands on what you ask for:
https://web.archive.org/web/20071014125 ... ading.aspx


The very last paragraph caught my eye

I continue to maintain that eternity holding will produce the best long term returns for most HYPers.


If a handful of shares or sectors come to dominate the portfolio, that's a considerable increase of risk. If holding for eternity, market value risk may not be much of a concern, but I would have thought income concentration would be. If the income is mostly generated by a handful of shares, it doesn't take many market shocks or even stroke of a pen decisions by directors to drastically reduce the income. So sell some and reinvest for diversification?

So your solution would be what? Sell those shares before they come to dominate the portfolio. Of course, you are right in that now you do not have to wait for that "market shock". No more worrying about future failure for you, because of course the "stroke of a pen" decision has already been made! By you!

I believe it is known as cutting your winners!


Ian

Itsallaguess
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Re: Sell or not sell

#243348

Postby Itsallaguess » August 10th, 2019, 4:43 pm

IanTHughes wrote:
Alaric wrote:
The very last paragraph caught my eye

I continue to maintain that eternity holding will produce the best long term returns for most HYPers.


If a handful of shares or sectors come to dominate the portfolio, that's a considerable increase of risk.

If holding for eternity, market value risk may not be much of a concern, but I would have thought income concentration would be. If the income is mostly generated by a handful of shares, it doesn't take many market shocks or even stroke of a pen decisions by directors to drastically reduce the income. So sell some and reinvest for diversification?


So your solution would be what? Sell those shares before they come to dominate the portfolio. Of course, you are right in that now you do not have to wait for that "market shock". No more worrying about future failure for you, because of course the "stroke of a pen" decision has already been made! By you!

I believe it is known as cutting your winners!


Not cutting, just trimming.....

46.5% of HYP1 income currently comes from just two stocks Ian -

https://www.lemonfool.co.uk/viewtopic.php?f=15&t=14752&start=40#p181069

If you could sleep at night as an retired income-investor with 46.5% of your income deriving from two stocks, you're a better man than me....

Cheers,

Itsallaguess

Alaric
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Re: Sell or not sell

#243350

Postby Alaric » August 10th, 2019, 4:49 pm

IanTHughes wrote:I believe it is known as cutting your winners!


That's a necessity. If you had say half your income generated by one share or one sector that wasn't an investment trust and you couldn't live with a total loss of that income, what should you do? It's a problem that builds up over time.

It would have been a practical problem a few years back for those whose BP dividends were temporarily wiped out when they suspended them after that oil spillage and the clean up costs, if they had a large BP holding. For that matter anyone holding a high proportion of bank shares would have suffered ten or eleven years ago.

IanTHughes
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Re: Sell or not sell

#243365

Postby IanTHughes » August 10th, 2019, 5:24 pm

Itsallaguess wrote:
IanTHughes wrote:
Alaric wrote:
The very last paragraph caught my eye

If a handful of shares or sectors come to dominate the portfolio, that's a considerable increase of risk.

If holding for eternity, market value risk may not be much of a concern, but I would have thought income concentration would be. If the income is mostly generated by a handful of shares, it doesn't take many market shocks or even stroke of a pen decisions by directors to drastically reduce the income. So sell some and reinvest for diversification?


So your solution would be what? Sell those shares before they come to dominate the portfolio. Of course, you are right in that now you do not have to wait for that "market shock". No more worrying about future failure for you, because of course the "stroke of a pen" decision has already been made! By you!

I believe it is known as cutting your winners!

Not cutting, just trimming.....

46.5% of HYP1 income currently comes from just two stocks Ian -

https://www.lemonfool.co.uk/viewtopic.php?f=15&t=14752&start=40#p181069

If you could sleep at night as an retired income-investor with 46.5% of your income deriving from two stocks, you're a better man than me....

Whether you or I can sleep at night, is an entirely different issue.

The point I am making is that - using HYP1 as an example - would you have waited until now before selling/trimming, or would you have started the process before that one share got to 46.5%, maybe long before? Assuming some time before, you would of course now have a more diversified pool of income. But you would also have sold a share before some of that growth in income even occurred. In this way yes, your income is less concentrated, but surely in part because you would have sold the share that would have created the income that would have resulted in the over concentration in the first place!

Therefore, part of your solution to the over-concentration of income is in fact the prevention of some of that income even appearing in the first place!


Look, you or anyone else may still say that that is a price worth paying for less worry and better sleep, fair enough. But at least recognise that such a process comes with a cost. Indeed, if such an ongoing process had been instituted for HYP1, from the outset mind, it is a certainty that the income would now be less than it actually is, maybe significantly less. Mind you, it would be beautifully balanced :lol:


Ian

Alaric
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Re: Sell or not sell

#243370

Postby Alaric » August 10th, 2019, 5:37 pm

IanTHughes wrote: But at least recognise that such a process comes with a cost.


Why is there a cost other than transaction fees? When the income breaches whatever limit is set, just sell enough market value to buy another stock with a similar yield. There's no particular disturbance to the dividend income and the new stock selected may be just as likely to have dividend increases as the one sold. The market may think so, if they trade at comparable yields.

So set 20%by income as the limit, sell half and buy something with a similar yield. You then have two stocks at 10% of the portfolio by income.

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Re: Sell or not sell

#243372

Postby IanTHughes » August 10th, 2019, 5:47 pm

Alaric wrote:
IanTHughes wrote: But at least recognise that such a process comes with a cost.

Why is there a cost other than transaction fees? When the income breaches whatever limit is set, just sell enough market value to buy another stock with a similar yield. There's no particular disturbance to the dividend income and the new stock selected may be just as likely to have dividend increases as the one sold. The market may think so, if they trade at comparable yields.

So set 20%by income as the limit, sell half and buy something with a similar yield. You then have two stocks at 10% of the portfolio by income.

I am not talking about transaction costs nor the cost of swapping one dividend yield for another!

The cost I am talking about occurs as a result of deliberately foregoing dividend growth that would otherwise create the over-concentration, which is apparently the worry.


Ian

Alaric
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Re: Sell or not sell

#243374

Postby Alaric » August 10th, 2019, 5:51 pm

IanTHughes wrote:
The cost I am talking about occurs as a result of deliberately foregoing dividend growth that would otherwise create the over-concentration, which is apparently the worry.


Unless you have a reliable crystal ball that tells you which will be the better performer, you are just halving, say, one dividend generator and bringing in another. You do it because you don't want over 20% of your income at risk from just the one share.

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Re: Sell or not sell

#243376

Postby IanTHughes » August 10th, 2019, 5:54 pm

Alaric wrote:
IanTHughes wrote:The cost I am talking about occurs as a result of deliberately foregoing dividend growth that would otherwise create the over-concentration, which is apparently the worry.

Unless you have a reliable crystal ball that tells you which will be the better performer, you are just halving, say, one dividend generator and bringing in another. You do it because you don't want over 20% of your income at risk from just the one share.

My apologies, there is nothing I can do about your failure to understand yet another of my explanations


Ian

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Re: Sell or not sell

#243377

Postby scrumpyjack » August 10th, 2019, 6:11 pm

I am generally in the camp of letting your winners run. That has worked well for me over the last 50 years.

If the result of one or two shares 10 bagging is that 20% of your dividends come from one share, that’s fine because your total dividends are so much greater than they were and a cut of 20% simply reduces one’s surplus income.

Of course it is a different story if your other shares have tanked so that total dividends are unchanged but far more comes from one company.

But in the end it’s a question of what you personally are comfortable with. There is no right or wrong answer.

Itsallaguess
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Re: Sell or not sell

#243378

Postby Itsallaguess » August 10th, 2019, 6:36 pm

scrumpyjack wrote:
But in the end it’s a question of what you personally are comfortable with. There is no right or wrong answer.


Absolutely.

The 'cost' of a potentially lower, more diversified income, might well be seen simply as a cost of 'insuring' that income, as opposed to 'not insuring' a higher, much more poorly-diversified income.

Insurance costs money...

Time will of course tell if the owner of HYP1 has been 'right' not to pay such a potential 'insurance cost', but in the meantime they must sleep at night knowing that nearly 50% of their income is being provided by just two shares.

As with most insurances, it can't be applied for retrospectively.....

Cheers,

Itsallaguess

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Re: Sell or not sell

#243400

Postby YeeWo » August 10th, 2019, 8:08 pm

FWIW my 2p's worth: -
- XIRR metrics applied to all investments are critically important, Capital Gains or Dividends Received are benchmarked on an equal basis. The XIRR figure reflects equally allowing proper analysis of whether the investment has worked-out.
- 15 to 25 stocks should provide adequate diversification, nothing greater than 10%ish of portfolio as a redline.
GLA,
YW.

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Re: Sell or not sell

#243416

Postby Bubblesofearth » August 10th, 2019, 9:21 pm

IanTHughes wrote:
Alaric wrote:
IanTHughes wrote:The cost I am talking about occurs as a result of deliberately foregoing dividend growth that would otherwise create the over-concentration, which is apparently the worry.

Unless you have a reliable crystal ball that tells you which will be the better performer, you are just halving, say, one dividend generator and bringing in another. You do it because you don't want over 20% of your income at risk from just the one share.

My apologies, there is nothing I can do about your failure to understand yet another of my explanations


Ian


Well, I'll have a go if I may, because I entirely agree with you that cutting/trimming is a poor portfolio approach.

Markets are asymmetrie in their growth. The bulk of gains come from the outperformance of a relative minority of shares.

If you cut back any share that goes above a certain portfolio weight then you guarantee never to reap the rewards that the aforementioned outperformers give. Even if you hop into a nascent outperformer you will sell it (or some of it) as soon as it goes above a certain level. In other words you are basically sacrificing the engine of asymmetric growth that drives all markets and portfolios. Chances are, after enough such hops, you will sink your money into one of the many poor performers and, presumably, never sell?

It's no coincidence that eternity portfolios, including HYP1, have tended to outperform the market. You can talk about risk until the cows come home but the evidence all points to leaving well alone. The one caveat being to make sure you start with a sufficient level of diversification (min 30 shares from different sectors IMO).

And that's without even considering the 1% minimum transaction cost involved in any buy/sell decision.

As for comments about there being no right or wrong decision that's just nonsense if your aim is to maximise returns. And, yes, whilst also minimising risk if one thinks carefully enough and doesn't just look at an evolved portfolio and point to asymmetry.

Boe

Alaric
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Re: Sell or not sell

#243422

Postby Alaric » August 10th, 2019, 9:42 pm

Bubblesofearth wrote:
As for comments about there being no right or wrong decision that's just nonsense if your aim is to maximise returns. And, yes, whilst also minimising risk if one thinks carefully enough and doesn't just look at an evolved portfolio and point to asymmetry.


If you are ignoring market value, and treating the income as an annuity, there's a very obvious single company risk in having a high percentage of income from a single source. If you really want to gamble, why not sell everything else and bet the farm on the best performer or performers?

I'm assuming you are using a conventional meaning in the term "maximise returns" as in total return or highest IRR.

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Re: Sell or not sell

#243425

Postby IanTHughes » August 10th, 2019, 9:48 pm

Alaric wrote:
Bubblesofearth wrote:As for comments about there being no right or wrong decision that's just nonsense if your aim is to maximise returns. And, yes, whilst also minimising risk if one thinks carefully enough and doesn't just look at an evolved portfolio and point to asymmetry.

If you are ignoring market value, and treating the income as an annuity, there's a very obvious single company risk in having a high percentage of income from a single source. If you really want to gamble, why not sell everything else and bet the farm on the best performer or performers?


The answer to that question is of course obvious. How would you know, in advance mind you, which was going to be the "best performer or performers"?


Ian

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Re: Sell or not sell

#243428

Postby Alaric » August 10th, 2019, 9:57 pm

IanTHughes wrote: How would you know, in advance mind you, which was going to be the "best performer or performers"?


Why then not sell a proportion when the income percentage of a single share gets too high? You are foregoing future increases in what you sell, but what you buy might do equally as well.

HYP1 turned into something of a punt on tobacco shares, but if as a sector it hadn't been allowed to exceed 20% of total income, when would the trigger point for switching have been reached?

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Re: Sell or not sell

#243442

Postby tjh290633 » August 10th, 2019, 11:05 pm

Alaric wrote:
IanTHughes wrote:I believe it is known as cutting your winners!


That's a necessity. If you had say half your income generated by one share or one sector that wasn't an investment trust and you couldn't live with a total loss of that income, what should you do? It's a problem that builds up over time.

It would have been a practical problem a few years back for those whose BP dividends were temporarily wiped out when they suspended them after that oil spillage and the clean up costs, if they had a large BP holding. For that matter anyone holding a high proportion of bank shares would have suffered ten or eleven years ago.

It wasn't just bank shares that suffered. My portfolio lost almost 50% of its income when 12 out of the then 36 holdings stopped paying dividends in 2009-10, and a further 10 reduced them. And those included some very blue chip shares.

TJH

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Re: Sell or not sell

#243464

Postby Itsallaguess » August 11th, 2019, 6:23 am

IanTHughes wrote:
Alaric wrote:
If you really want to gamble, why not sell everything else and bet the farm on the best performer or performers?


The answer to that question is of course obvious. How would you know, in advance mind you, which was going to be the "best performer or performers"?


If we take HYP1 as an example of what can happen over many years though Ian, we do know *now* which shares you see as the 'best performers', as we can see that two of them are delivering nearly 50% of the HYP1 income.

If we take your view that all the market has done has been to 'expose' the best performing shares from the original HYP1 selection, I think Alaric has a point if he were to ask why not simply now sell the large number of shares delivering the other half of the income, and plough that capital into what we can clearly now see as 'the two best performers'.....

Is that something you'd countenance?

Also, if you had the capital that HYP1 contains now, would you 'purchase' the highly un-balanced HYP1 portfolio as it stands now to deliver the income that it's currently delivering?

If not, why not - the star performers have been 'exposed', saving you all that time and trouble.....?

Cheers,

Itsallaguess

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Re: Sell or not sell

#243465

Postby IanTHughes » August 11th, 2019, 6:51 am

Itsallaguess wrote:
IanTHughes wrote:
Alaric wrote:If you really want to gamble, why not sell everything else and bet the farm on the best performer or performers?

The answer to that question is of course obvious. How would you know, in advance mind you, which was going to be the "best performer or performers"?

If we take HYP1 as an example of what can happen over many years though Ian, we do know *now* which shares you see as the 'best performers', as we can see that two of them are delivering nearly 50% of the HYP1 income.

If we take your view that all the market has done has been to 'expose' the best performing shares from the original HYP1 selection, I think Alaric has a point if he were to ask why not simply now sell the large number of shares delivering the other half of the income, and plough that capital into what we can clearly now see as 'the two best performers'.....

Is that something you'd countenance?

No of course not! How would we know that those two, now historical "best performers", would continue into the future as the two "best performers"?

Itsallaguess wrote:
IanTHughes wrote:Also, if you had the capital that HYP1 contains now, would you 'purchase' the highly un-balanced HYP1 portfolio as it stands now to deliver the income that it's currently delivering?

No of course not, and for the same reason as given above. How would we know that those two, now historical "best performers", would continue into the future as the two "best performers"?


With respect, I would have thought that those two answers were obvious.


Ian

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Re: Sell or not sell

#243466

Postby Itsallaguess » August 11th, 2019, 6:59 am

IanTHughes wrote:
Itsallaguess wrote:
If we take HYP1 as an example of what can happen over many years though Ian, we do know *now* which shares you see as the 'best performers', as we can see that two of them are delivering nearly 50% of the HYP1 income.

If we take your view that all the market has done has been to 'expose' the best performing shares from the original HYP1 selection, I think Alaric has a point if he were to ask why not simply now sell the large number of shares delivering the other half of the income, and plough that capital into what we can clearly now see as 'the two best performers'.....

Is that something you'd countenance?


No of course not!

How would we know that those two, now historical "best performers", would continue into the future as the two "best performers"?


Hang on though Ian - the reason you've given for not rebalancing HYP1, so that it's not relying on just two shares to deliver nearly 50% of the current dividend-income is that you'd be, in your own words - 'cutting your winners'.

But now you seem to also be saying that we shouldn't sell the dog-half of the HYP1 portfolio and concentrate all the HYP1 capital into those two stellar-performers, because we don't know that they are going to 'continue to be best-performers'.

If we don't know that they are going to continue being 'best performers', then doesn't that lend itself to the re-balancing argument?

You do seem to want it both ways Ian....

Surely it can't be both ways, so which is it?

Cheers,

Itsallaguess


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