Market returns / need to hold best shares / holding shares until they die

[1nvest]

The major returns of the last 30 years have derived from non-UK growth shares. Whilst Apple, Google, Amazon and MicroSoft were adding trillions in market-cap, you were fishing in a fetid swamp of ex-growth British dinosaurs like BT and Lloyds Bank.

Nov 2000 to Feb 2009 in USD terms, whilst BAT added 21.85% annualised Microsoft lost -6.65%, total returns.

PV

Pound was much the same (around 1.42 USD per Pound) at the start and end of those dates, so similar total/annualised returns for a British investor.

As just one indicator of how fishing in different waters can equally yield a nice salmon or old boot.

Investing has a common fractal pattern, a few that do bad, a few that do great, a mid section of bland, where overall the gains in the good cases outweigh the bad cases. You can measure that at the small/short period scale of the large/long term scale.

[Bubblesofearth]

Do you seriously want me to prove that the UK market has under-performed massively in the last 30 years?

Please don't move the goal posts. We are talking about the risk and return from HYP1 and TJH's HYP compared to the Global index. 1nvest has now kindly posted return data showing outperformance of the HYP's one the past 2 decades.

Offering up hyperbole instead of actual data doesn't help anyone's argument.

BoE

[Lootman]

Do you seriously want me to prove that the UK market has under-performed massively in the last 30 years?

We are talking about the risk and return from HYP1 and TJH's HYP compared to the Global index. 1nvest has now kindly posted return data showing outperformance of the HYP's one the past 2 decades.

If you are selecting from only 2% of the world's equities and drawing from only a single country then you are clearly taking a very narrow view of the market. Throw in that you target shares that the market regards as risky by demanding a higher yield and the situation is clear.

And the manifestation of the risk is also clear. The FTSE-100 is barely above its 1999 level whilst the S&P 500 is 250% higher. The US market has out-performed the UK market so comprehensively that it makes no sense to ask for "data". Just look at any chart of the last 25/30 years and it is clear.

OK, you would have received higher dividends in the UK, at least in the earlier years. But then sterling has also declined significantly against the USD and so the under-performance of the UK is even more stark.

A nation cannot go from 10% of global market cap to 4% of global market cap without under-performing. There is no other way you can seek to explain it. Even if HYP is the best house on the street, it is still on a bad street.

[1nvest]

Portfoliovisualizer has US ADR's for around 10 of the original HYP1 stocks available, but unfortunately back data is limited and only around 3 have historical data back to Nov 2000 HYP1 start date, RIO, UU, BAT.

PV

For just those three, initial thirds equal weighted, non-rebalanced, to 2022, and you can click on the Allocation Drift tab, hover the mouse at/near the end of the chart and it indicates original thirds each weightings having drifted to 14% UU, 45% BAT, 41% RIO (UUGRY, BTI, RIO respective US ADR tickers).

The summary tab indicates CAGR of 11.9% versus 7.2% for Vanguard 500 Index, where I set the start month to December 2000 and end month to November 2022

FRED https://fred.stlouisfed.org/series/DEXUSUK/ provides Pound/Dollar historic rates. Click the 'Edit Graph' tab and you can set it to monthly, end of period ... or whatever you prefer, close that and click the Max date range, and you can download that data as a Excel. Indicates 1.421 USD per Pound at the end of Nov 2000, 1.1962 at the end of Nov 2022

So with £75,000 being invested in HYP I set the start date investment to $106,575 in reflection of 1.421 Dollars per Pounds. The final portfolio value at the end of November 2022 was $1,267,862, so dividing that by the 1.1962 £/$ exchange rate = £1,059,908

Stocks picked more due to data limits, however a old style Utilities company, mining company, and a cigarettes company yielded a reasonable total return that considerably excelled the broad US S&P500 index over the same period. More surprising was perhaps the best of those three being the tobacco company, in a transition era towards anti-smoking (banned in pubs/clubs etc.).

Yes it would have been nice to be in google, tesla, whatever did soar over the same period, but comparing to the best with hindsight is a lot easier than identifying the best with foresight.

Many of the UK FTSE 100 stocks are international/global. Basically just do their reporting in the UK, could as easily up and move to the US or wherever. I believe over 75% of FT100 earnings are now sourced via foreign activities. It's not reflective of the UK, other than UK regulatory reporting/compliance controls. Nice for the UK in the sense of having taxes paid to the UK.

Its the collective holdings of the FT100 that has caused a lag/drag factor, too many banks/whatever across a times when banks/financial-crisis hit those banks hard .. whatever.

In past times investing was expensive, a round trip buy and immediately sell again potentially could have wiped out half or more of a modest size investment amount by the time the broker, market maker ...etc. took their slice. Investors tended to pick 8 or so stocks, often preferring blue-chip stocks, and bought-and-held. Funds levied high fees and also had high trading costs, in net of taxes terms investments may have purely served others whilst yielding little for those actually taking the risk. Even today funds/investment trusts can be rip-offs, seemingly low fees, but with hidden costs that are hidden (reported, but with the details buried deeply). In some cases funds of funds, multi-layers of fees/costs, along with foreign dividends withholdings taxation etc. Dividends withholdings taxation averages around 20% I believe, so any fund holding foreign stocks has that headwind that it absorbs, and where in turn the dividends it pays to its shareholders may again incur withholding tax on those dividends. HMRC may also then apply its taxation on those dividends. A brokerage may also levy a 3% type FX conversion cost on dividends not paid in Pounds. Fundamentally the HYP style is more old-school, where investors were more aware of the high drag/cost of the alternatives.

[1nvest]

We are talking about the risk and return from HYP1 and TJH's HYP compared to the Global index. 1nvest has now kindly posted return data showing outperformance of the HYP's one the past 2 decades.

If you are selecting from only 2% of the world's equities and drawing from only a single country then you are clearly taking a very narrow view of the market. Throw in that you target shares that the market regards as risky by demanding a higher yield and the situation is clear.

And the manifestation of the risk is also clear. The FTSE-100 is barely above its 1999 level whilst the S&P 500 is 250% higher. The US market has out-performed the UK market so comprehensively that it makes no sense to ask for "data". Just look at any chart of the last 25/30 years and it is clear.

OK, you would have received higher dividends in the UK, at least in the earlier years. But then sterling has also declined significantly against the USD and so the under-performance of the UK is even more stark.

A nation cannot go from 10% of global market cap to 4% of global market cap without under-performing. There is no other way you can seek to explain it. Even if HYP is the best house on the street, it is still on a bad street.

You don't need to buy the entire haystack, indeed that haystack may be poorly structured, the index methodology or the distribution of stocks being poor - FT30, FT100 for instance. Or incur multiple layers of fees/costs. Investors often diversify solely to reduce concentration risk, such that even 10 assets or less can be enough diversification. Consider that Talmud style asset allocation I posted earlier, three assets, a UK house, US stock index fund, Gold, and overall that yielded similar total returns as all-stock (stock index only).

Yes a factor with HYP style is potential too much concentration into single sectors. The latest fastest growth stocks may for instance be new and pay low/no dividends. But you don't need those and can still achieve reasonable/satisfactory rewards without them. Nor do you need to buy stocks listed in different countries, if stocks have global presence anyway, then where they're domiciled makes little difference other than what the country within which they are listed dictates in the way of regulatory controls/taxation. Buying Cisco stock in Mexico or the US and the total rewards will be the same after adjusting for FX, unless that is Mexican taxation policies differ to that of the US listed shares.

The decline of UK share of global cap is more a reflection of poor UK governance, political interventions/taxation and the tendency to too frequently change the rules. When idiots are seen at the helm the tendency is for firms to prefer to list/move elsewhere where there's more stable government/policies. Which is a cost to the prior host nation as the loss of a listing is a loss to domestic tax income.

[Bubblesofearth]

If you are selecting from only 2% of the world's equities and drawing from only a single country then you are clearly taking a very narrow view of the market. Throw in that you target shares that the market regards as risky by demanding a higher yield and the situation is clear.

And the manifestation of the risk is also clear. The FTSE-100 is barely above its 1999 level whilst the S&P 500 is 250% higher. The US market has out-performed the UK market so comprehensively that it makes no sense to ask for "data". Just look at any chart of the last 25/30 years and it is clear.

OK, you would have received higher dividends in the UK, at least in the earlier years. But then sterling has also declined significantly against the USD and so the under-performance of the UK is even more stark.

A nation cannot go from 10% of global market cap to 4% of global market cap without under-performing. There is no other way you can seek to explain it. Even if HYP is the best house on the street, it is still on a bad street.

Your argument seems to be;

The FTSE100 has underperformed the Global Index.

HYP is taken primarily from the FTSE100.

Therefore HYP is a poor strategy.

The problem you have is that this chain of logic is not backed up by the data. The question you should ask is why not? What is it about HYPs that allow them to outperform the Global index even whilst the universe from which they are taken is shrinking?

I would also suggest being careful not to select a particular countries index (S&P) that has performed especially well. That smacks of hindsight bias.

BoE

[Lootman]

Yes it would have been nice to be in google, tesla, whatever did soar over the same period, but comparing to the best with hindsight is a lot easier than identifying the best with foresight.

Yes and no. If you look at the US companies with the largest market cap (since those are the shares that have added the most value) you will find that they are companies that were fairly well established decades ago. For example MicroSoft has been around for nearly 50 years and was a large-cap over 30 years ago. Apple is almost as old but really took off in the 1990s. Amazon is nearly 30 years old. Google has been listed for over 10 years. And so on.

The only runaway successes that are more recent are Tesla and Nvidia and, yes, you would have been lucky to have picked those out. But the rest would have been captured by an ordinary index fund.

And of course of those most do not pay a dividend and none pay a high dividend, so a HY approach would have missed them all.

Its the collective holdings of the FT100 that has caused a lag/drag factor, too many banks/whatever across a times when banks/financial-crisis hit those banks hard .. whatever.

It's actually a problem with any income fund or portfolio, even overseas ones. If you look at the holdings of income funds, UK or foreign, they tend to be full of financials, utilities, tobacco, phone companies, energy and the like. A true HY fund will find itself wading in ex-growth parts of the market. For any kind of capital return they often rely on cyclical sectors like energy and mining, which can work great, or not.

Or else they play games with options or around ex-dividend dates.

When you take a HY approach then you are effectively choosing to bet on some sectors over others, and your returns will reflect whether we are in a growth or value upswing. HYP1 started at a very conveniently flattering time - the collapse of the dotcom bull market. If you had started it 5 years earlier or later, its numbers would look a lot worse because growth trumped value.

If you are selecting from only 2% of the world's equities and drawing from only a single country then you are clearly taking a very narrow view of the market. Throw in that you target shares that the market regards as risky by demanding a higher yield and the situation is clear.

And the manifestation of the risk is also clear. The FTSE-100 is barely above its 1999 level whilst the S&P 500 is 250% higher. The US market has out-performed the UK market so comprehensively that it makes no sense to ask for "data". Just look at any chart of the last 25/30 years and it is clear.

OK, you would have received higher dividends in the UK, at least in the earlier years. But then sterling has also declined significantly against the USD and so the under-performance of the UK is even more stark.

A nation cannot go from 10% of global market cap to 4% of global market cap without under-performing. There is no other way you can seek to explain it. Even if HYP is the best house on the street, it is still on a bad street.

Your argument seems to be;

The FTSE100 has underperformed the Global Index.

HYP is taken primarily from the FTSE100.

Therefore HYP is a poor strategy.

I did not say that HYP is a poor strategy IF you are determined to only invest in a very narrow segment of the market. It's not a style that could ever work for me but I can see how someone with limited means might see it as a way of "stretching" their income a little further.

What I am saying is that you have a headwind if that narrow segment of the global market is under-performing over decades. You have to row faster just to keep still. Why handicap yourself so?

[Bubblesofearth]

I did not say that HYP is a poor strategy IF you are determined to only invest in a very narrow segment of the market.

So when you say;

So anyone who made a decision 30 years ago to invest only in UK shares, and high yielding shares at that, committed a fundamental error

and add that it's 'fishing in a fetid swamp' you're not saying it's a poor strategy? Makes me wonder what criteria you would require before saying something is a poor strategy!

Anyway, this discussion seems to be becoming circular so maybe time to stop.

BoE

[Lootman]

I did not say that HYP is a poor strategy IF you are determined to only invest in a very narrow segment of the market.

So when you say;

So anyone who made a decision 30 years ago to invest only in UK shares, and high yielding shares at that, committed a fundamental error

and add that it's 'fishing in a fetid swamp' you're not saying it's a poor strategy?

Correct. What I am saying is that it may not be a bad strategy if you have decided to invest only in one narrow and historically under-performing market segment. But that such a high-level asset allocation decision is flawed and, I would argue, that was fairly predictable given that it was a trend that has been going on for a century or so.

And by the way, your use of the phrase "hindsight bias" in this context also applies to HYP1. There were several other HYPs back then both by Pyad and by others. And yet it is always HYP1 that is cited. And by no coincidence, it had better returns than the others, due to the good fortune of being in a couple of sectors that bounced. Pyad's value portfolio, which went into the global financial crisis 80% invested in financials and tanked, is also conveniently never talked about now.

But as I said, the flaws of the approach were predictable - I was saying as much on TMF in the late 1990s, although those posts have no doubt long since vanished and I am certainly not going to go looking for them. So yes, we can agree to disagree.

[1nvest]

I would also suggest being careful not to select a particular countries index (S&P) that has performed especially well. That smacks of hindsight bias.

Pre 1930's and gold was money, Sovereign pound coins, that you could deposit for safe keeping and interest, and where inflation broadly averaged 0%. Real returns from bonds/gold. From 1930's that ended, September 1931 and banks in the UK were forced by law to return prior deposited gold coins (sovereigns) only in the form of paper pound notes; US 1933 and gold was nationalised, compulsory purchased, locked up in Fort Knox and only paper notes being permitted as currency (excepting silver dollars etc). Which facilitated being able to print/spend money (induce inflation), where combined inflation and taxation resulted in prior cost to borrow (crown/state having to pay real rates of return to borrow gold) towards 0% real cost (after taxation/inflation) .. in the broad sense. Former stocks that were seen as being only for speculators, became the only viable real rate of return asset. The Roaring 20's uptake of stocks by many, resulted in the 1930's Wall Street Crash, too many were literally borrowing in order to buy stocks and that bubble burst.

States are great at spending other peoples money, and are ever seeking more. Printing/spending, taxation etc. There's a likelihood that forward time and that thirst still wont be quenched and that even stocks could transition to where the reward expectation after costs/taxes/inflation might decline to 0% real levels, similar to bonds/gold.

How to invest in a era where 0% real total returns are the 'usual'? Well volatility wont disappear so the best way is to hold a bunch of assets that each have 0% real expectation, but do so in a volatile and non-correlated manner. -25% and +33% single asset transition yields 0% (sticking with real terms figures), two assets that do the same but in complete inverse correlation yields a positive real outcome. All diversified investments in effect capture that fractal effect. A few stocks that do very well, a few that do poorly, overall average a positive real outcome. Doesn't matter if that fractal is short term/small or long term/large. Doesn't matter if you hold 1000 stocks, or 10 stocks. With smaller numbers and assuming equal weightings you have more invested in individual best (and worst) holdings than you do if you hold a large number of stocks with smaller amounts invested in each.

For me, currency diversification of Pounds invested in a UK home, US$ (primary reserve currency) invested in stocks, gold ... collectively provides three way currency diversification, three way asset diversification, income is also diversified across imputed rent, dividends, SWR. Which in itself can be sufficient enough diversification (dilution of concentration risk).

Yes US$ and US stocks might be considered as having swung-high, but what to do? Swapping out for a world stock fund = global currency, that gold already is. Swap to UK stocks (Pounds) and that becomes too much Pound over-concentration. I note that generally when you think things to be relatively high, that today's ceiling can still become tomorrow's floor, over-priced can become even more over-priced. I did sell some US$/US stocks a number of years back, to move from BRK holdings into FT250 holdings, yet likely would have done no better/worse than if I'd just left things as-is. I admit to there being even greater temptation to further continue that migration, but as last year revealed, the FT250 endured a bad year, whilst US stocks continued on up. I'm thinking of undoing that, rolling FT250 back into US stock (MKL has appeal as it also pays no dividends), but I'm awaiting a FT250 rebound/US decline before doing so.

Fundamentally you can do OK with three assets/holdings, or 1000+ holdings. Divide the 1000 set into three sets ranked from years worst to best and the overall averages/outcomes tend to reward similar to the set of three. Much of investing is finding how many/what assets you're comfortable holding longer term, as changes, profit chasing ...etc. are more inclined to cost rather than benefit.

[dealtn]

No it's a single observation and not statistically significant enough to draw any conclusion from. Would you be drawing the opposite conclusion if it, or any other portfolio, had underperformed?

Agreed it's a single observation and I said only that it's "indicative" when combined with other reports about EW which suggest something similar about its merits. I never claimed that my single observation was conclusive, rather that there is some evidence around that it may beat capital weighting, that's all.

And I never claimed you made the conclusive view. I fully accept your claim was it was indicative. My counter is that a single observation is far from indicative - indeed it is far from being statistically significant.

[vand]

The S&P500's recovery is ALL accounted for by just 7 stocks:

https://ofdollarsanddata.com/the-bulls- ... k-in-town/

Although it's not uncommon for rallies to lack breadth, the degree of it this time round is many standard deviations out of what we have ever seen before.

[GoSeigen]

The S&P500's recovery is ALL accounted for by just 7 stocks:

https://ofdollarsanddata.com/the-bulls- ... k-in-town/

Although it's not uncommon for rallies to lack breadth, the degree of it this time round is many standard deviations out of what we have ever seen before.

So what happens when the other stocks join in?

GS

[EthicsGradient]

The S&P500's recovery is ALL accounted for by just 7 stocks:

https://ofdollarsanddata.com/the-bulls- ... k-in-town/

Although it's not uncommon for rallies to lack breadth, the degree of it this time round is many standard deviations out of what we have ever seen before.

For a better picture, I think we'd need to see how much of the (larger) drop from January to October 22 was also due to those 7 stocks. Just looking at graphs, Nvidia is well above its Jan 22 level, Apple a bit above, Microsoft about equal, but Tesla, Amazon, Alphabet and Meta are all still down. So I think what this really shows is that the big tech sector has been volatile. They plunged, and now they have recovered (with Nvidia joining the mega caps, thanks to AI enthusiasm - whether that will be sustained is another question).

[JohnW]

How to make something out of possibly nothing. OK, it’s common that a minority of SP500 stocks account for a calendar year’s rise in the index. This year it’s an ‘amazing’ seven stocks only, except the year was only 4.5 months old when that measurement was made.
Can we hold our breath to the end of the year?

[1nvest]

The current market value of a entire stock/company is based on what the last two traders opined was a fair price to sell/buy a typically small number of that stocks shares at. Ooo, look, the last two that traded Tesla shares did so at a agreed $263 per share price and as there's 3.2 billion shares in issue that makes the company worth $0.8 Trillion. It's book-value however is $15/share, less than $50 Billion in total. If market conditions changed tomorrow such that buyers were only prepared to pay book-value for shares then its share price would drop 94%. It's a Ponzi where the hope is that shares you buy might later be bought by another for a even higher price, or that its earnings/profits expectations are actually delivered. If another startup produces cars that run on water/hydrogen that is cleaner than mass production and disposal of batteries !!!

Or what if the third of US stock total market cap holders that are foreign (to the US), opted to drop their dollar exposure !!! Russia, India, China, Africa, S America, Arabia ...etc. populations make up over two-thirds of the global population and their current intent is to collectively move away from US exposure.

[vand]

The S&P500's recovery is ALL accounted for by just 7 stocks:

https://ofdollarsanddata.com/the-bulls- ... k-in-town/

Although it's not uncommon for rallies to lack breadth, the degree of it this time round is many standard deviations out of what we have ever seen before.

For a better picture, I think we'd need to see how much of the (larger) drop from January to October 22 was also due to those 7 stocks. Just looking at graphs, Nvidia is well above its Jan 22 level, Apple a bit above, Microsoft about equal, but Tesla, Amazon, Alphabet and Meta are all still down. So I think what this really shows is that the big tech sector has been volatile. They plunged, and now they have recovered (with Nvidia joining the mega caps, thanks to AI enthusiasm - whether that will be sustained is another question).

The outperformance of the mega caps will be a good indicator of this

[vand]

The S&P500's recovery is ALL accounted for by just 7 stocks:

https://ofdollarsanddata.com/the-bulls- ... k-in-town/

Although it's not uncommon for rallies to lack breadth, the degree of it this time round is many standard deviations out of what we have ever seen before.

So what happens when the other stocks join in?

GS

well by then the big-7 will be 99% of the market anyway so it won't matter

[EthicsGradient]

For a better picture, I think we'd need to see how much of the (larger) drop from January to October 22 was also due to those 7 stocks. Just looking at graphs, Nvidia is well above its Jan 22 level, Apple a bit above, Microsoft about equal, but Tesla, Amazon, Alphabet and Meta are all still down. So I think what this really shows is that the big tech sector has been volatile. They plunged, and now they have recovered (with Nvidia joining the mega caps, thanks to AI enthusiasm - whether that will be sustained is another question).

The outperformance of the mega caps will be a good indicator of this

Well - 7 mega tech stocks out of 500, and 50 mega-ish general stocks out of 2000, won't necessarily have that much of a correlation. And the graph is of the percentage growths of each group, rather than the absolute change that the "just 7" headline is about