Tilting for yield and the bath analogy

[OhNoNotimAgain]

Thanks - I think it would be useful for a thread like this to be able to note specifically what you're referring to here, and just where it's being referred from.

Could you please pull out a short extract from one of the Barclays Equity Gilt Studies that corroborates your view, and please also provide a link to the underlying document for reference?

Cheers,

Itsallaguess

Barclays does not publish it on line so I can't link to it. I used to buy if for £100 a copy but it stopped that practice a few years ago.

I got my copy last year by a devious route and I am unable to copy a section from it to paste here. Which I don't think would be allowed anyway.

The important point it states is that £100 invested in the UK stock market in 1945 would, before costs, be worth £236 in real terms at the end of 2020 if income was not reinvested. If income had been reinvested the comparable figure would be £5,799.

An alternative approach, using real data and costs, is to compare the relative performance of any fund that has income and accumulation units.

[Lootman]

The important point it states is that £100 invested in the UK stock market in 1945 would, before costs, be worth £236 in real terms at the end of 2020 if income was not reinvested. If income had been reinvested the comparable figure would be £5,799.

An alternative approach, using real data and costs, is to compare the relative performance of any fund that has income and accumulation units.

That is not the "important point" at all. It merely states that if you invest more cash then you will end up with more cash. Which is stating the bleedin' obvious.

It says nothing about whether shares with a high dividend or yield will out-perform shares with a low dividend or yield, which was the question I believe.

[mc2fool]

Uh? Well the whole raison d'etre of this thread was to discuss the DMS study but IIUC, despite having made numerous posts in the thread, you haven't actually read it, and instead you have posted a screen that you're not interested in and wouldn't touch with a bargepole?!?

Oh well....

There have now been two long discussion threads on DMS and so I understand pretty much what it is and that is the usual academic study with little practical use for investors. If income investors want to use it as a means of feeling better about their approach, that's fine, but please don't tell me it is useful. Once again, you have completely missed (or chosen to ignore) the point of the screen, and I have no idea why you thought the results were of any interest to me. Where did I claim that?

Uh? The DMS study isn't about income or for income investors! Maybe you should read it!

I've already acknowledged that "(unless someone puts together an ETF/fund for it) the DMS half-of-the-whole-market method just isn't [practical for private investors] and must just remain as academic", and I understand that the supposed point of your screen is that shares with the supposedly better selection factors of low P/E, P/CF & Low P/B also often have high yield, but so what? You've already acknowledged that proves nothing, and you now say you wouldn't touch the results with a bargepole, so, really, how is it useful?

You keep on referencing Dreman -- who happens to be another one of those "star" fund managers who did well for a while but whose methodology fell apart in the end, resulting in Deutsche Bank, who owned the fund, firing him and removing his name from the fund -- and I've asked already for a pointer to a Dreman long term study that supports the points you're making about better selection factors, which I'm sure would be of interest to folks here.

So how about you tell us (and link to) the Dreman studies you're referring to and we stop going back and forth on the proves-nothing screen, eh?

[simoan]

Uh? Well the whole raison d'etre of this thread was to discuss the DMS study but IIUC, despite having made numerous posts in the thread, you haven't actually read it, and instead you have posted a screen that you're not interested in and wouldn't touch with a bargepole?!?

Oh well....

There have now been two long discussion threads on DMS and so I understand pretty much what it is and that is the usual academic study with little practical use for investors. If income investors want to use it as a means of feeling better about their approach, that's fine, but please don't tell me it is useful. Once again, you have completely missed (or chosen to ignore) the point of the screen, and I have no idea why you thought the results were of any interest to me. Where did I claim that?

Uh? The DMS study isn't about income or for income investors! Maybe you should read it!

I've already acknowledged that "(unless someone puts together an ETF/fund for it) the DMS half-of-the-whole-market method just isn't [practical for private investors] and must just remain as academic", and I understand that the supposed point of your screen is that shares with the supposedly better selection factors of low P/E, P/CF & Low P/B also often have high yield, but so what? You've already acknowledged that proves nothing, and you now say you wouldn't touch the results with a bargepole, so, really, how is it useful?

You keep on referencing Dreman -- who happens to be another one of those "star" fund managers who did well for a while but whose methodology fell apart in the end, resulting in Deutsche Bank, who owned the fund, firing him and removing his name from the fund -- and I've asked already for a pointer to a Dreman long term study that supports the points you're making about better selection factors, which I'm sure would be of interest to folks here.

So how about you tell us (and link to) the Dreman studies you're referring to and we stop going back and forth on the proves-nothing screen, eh?

I already told you the result of his studies are detailed in his book "Contrarian Investment Strategies". Jeez, keep up. The data covers 27 years from 1970 to 1996. I'll be honest, I have no interest in Dreman these days as I don't want to be exposed to poor businesses, but every now and again a good value opportunity will arise and I will buy, but I'm not a value investor, more GARP. However, at least Dreman looked at a broader range of value criteria than dividend yields. Just to be totally clear, I have no interest in academic studies and prefer more than 20 years of first hand experience of what works and what doesn't.

BTW It's been a great twelve months for low P/D value shares, hasn't it, or has it? Over the past 12 months which half of the FTSE100 has done best - 50 lowest yields or 50 highest yields? If I told you it was the 50 lowest yielding shares (average yield of 2.1%) would you be surprised? Because I have just run the numbers and that's the case based on Stockopedia data.

[mc2fool]

So how about you tell us (and link to) the Dreman studies you're referring to and we stop going back and forth on the proves-nothing screen, eh?

I already told you the result of his studies are detailed in his book "Contrarian Investment Strategies". Jeez, keep up. The data covers 27 years from 1970 to 1996. I'll be honest, I have no interest in Dreman these days as I don't want to be exposed to poor businesses, but every now and again a good value opportunity will arise and I will buy, but I'm not a value investor, more GARP. However, at least Dreman looked at a broader range of value criteria than dividend yields. Just to be totally clear, I have no interest in academic studies and prefer more than 20 years of first hand experience of what works and what doesn't. I assume all these academic are so rich now by following their own recipe that they are sat on their yachts in the Caribbean.

You didn't tell me but, indeed, you did cite it as the first investment book you ever read in a reply to another poster. It's this book I take it (large PDF).

Well, OK, yes, it looks at four different (individual) factors, including yield, but it is only US and only for 27 years, and they are, in fact, academic studies.

I think you seem to be assuming that the DMS study is saying that selection by yield is best, but it doesn't claim that at all. It's just a study looking at that one factor, which is one of the factors Dreman also looked at. Dimson et al have produced other studies looking at other factors, indeed, I linked to one earlier about the value premium in the UK (1955–2001) that looks at price-to-book, viewtopic.php?p=546758#p546758, and I'm sure they've looked at other factors too (inc. momentum, which I also linked to).

I can understand that you prefer to be an active investor based on your own experience, I appreciate and have no problem with that at all, but I have to say I grow increasingly puzzled about your contributions to this thread: you have no interest in academic studies yet cite academic studies and academic studies by Dreman who you have no interest in 'cos you don't want to be exposed to poor businesses and post a screen based on those academic studies the results of which you wouldn't touch with a bargepole. It sounds to me that you are very much dissing the very points you are making.

BTW It's been a great twelve months for value shares, hasn't it, or has it? Over the past 12 months which half of the FTSE100 has done best - 50 lowest yields or 50 highest yields? If I told you it was the 50 lowest yielding shares (average yield of 2.1%) would you be surprised? Because I have just run the numbers and that's the case based on Stockopedia data.

Now I thought you thought yield was a poor selector of value? Of course, any strategy has it's up and down periods. But I see that both my MSCI World Value Factor ETF (IWFV) and MSCI World Min Vol ETF (MINV) have more or less equally beaten MSCI World over the last twelve months, with only the MSCI World Momentum ETF (IWFM) doing worse. Chart

However, since 2014 (the inception of those factor ETFs), value has done the worst and momentum the best. Chart.

[simoan]

So how about you tell us (and link to) the Dreman studies you're referring to and we stop going back and forth on the proves-nothing screen, eh?

I already told you the result of his studies are detailed in his book "Contrarian Investment Strategies". Jeez, keep up. The data covers 27 years from 1970 to 1996. I'll be honest, I have no interest in Dreman these days as I don't want to be exposed to poor businesses, but every now and again a good value opportunity will arise and I will buy, but I'm not a value investor, more GARP. However, at least Dreman looked at a broader range of value criteria than dividend yields. Just to be totally clear, I have no interest in academic studies and prefer more than 20 years of first hand experience of what works and what doesn't. I assume all these academic are so rich now by following their own recipe that they are sat on their yachts in the Caribbean.

You didn't tell me but, indeed, you did cite it as the first investment book you ever read in a reply to another poster. It's this book I take it (large PDF).

Well, OK, yes, it looks at four different (individual) factors, including yield, but it is only US and only for 27 years, and they are, in fact, academic studies.

I think you seem to be assuming that the DMS study is saying that selection by yield is best, but it doesn't claim that at all. It's just a study looking at that one factor, which is one of the factors Dreman also looked at. Dimson et al have produced other studies looking at other factors, indeed, I linked to one earlier about the value premium in the UK (1955–2001) that looks at price-to-book, viewtopic.php?p=546758#p546758, and I'm sure they've looked at other factors too (inc. momentum, which I also linked to).

I can understand that you prefer to be an active investor based on your own experience, I appreciate and have no problem with that at all, but I have to say I grow increasingly puzzled about your contributions to this thread: you have no interest in academic studies yet cite academic studies and academic studies by Dreman who you have no interest in 'cos you don't want to be exposed to poor businesses and post a screen based on those academic studies the results of which you wouldn't touch with a bargepole. It sounds to me that you are very much dissing the very points you are making.

BTW It's been a great twelve months for value shares, hasn't it, or has it? Over the past 12 months which half of the FTSE100 has done best - 50 lowest yields or 50 highest yields? If I told you it was the 50 lowest yielding shares (average yield of 2.1%) would you be surprised? Because I have just run the numbers and that's the case based on Stockopedia data.

Now I thought you thought yield was a poor selector of value? Of course, any strategy has it's up and down periods. But I see that both my MSCI World Value Factor ETF (IWFV) and MSCI World Min Vol ETF (MINV) have more or less equally beaten MSCI World over the last twelve months, with only the MSCI World Momentum ETF (IWFM) doing worse. Chart

However, since 2014 (the inception of those factor ETFs), value has done the worst and momentum the best. Chart.

Yes. That’s the Dreman book. There’s a big difference between reading a book with individual examples and practical ideas, and reading a research paper. Besides, Dreman, whatever you make of him, is not an Academic and eats his own cooking by investing his (and others) money into the Value funds he runs. I don’t agree with all of his conclusions and I imagine his results since the GFC have been hammered by the S&P500.

[tjh290633]

Thanks - I think it would be useful for a thread like this to be able to note specifically what you're referring to here, and just where it's being referred from.

Could you please pull out a short extract from one of the Barclays Equity Gilt Studies that corroborates your view, and please also provide a link to the underlying document for reference?

Cheers,

Itsallaguess

Barclays does not publish it on line so I can't link to it. I used to buy if for £100 a copy but it stopped that practice a few years ago.

You can find a note about it on their website at https://www.cib.barclays/news-and-event ... study.html

You have to be a client to access it.

I have a copy from 2011 when it was publicly available.

TJH

[OhNoNotimAgain]

Thanks - I think it would be useful for a thread like this to be able to note specifically what you're referring to here, and just where it's being referred from.

Could you please pull out a short extract from one of the Barclays Equity Gilt Studies that corroborates your view, and please also provide a link to the underlying document for reference?

Cheers,

Itsallaguess

Barclays does not publish it on line so I can't link to it. I used to buy if for £100 a copy but it stopped that practice a few years ago.

You can find a note about it on their website at https://www.cib.barclays/news-and-event ... study.html

You have to be a client to access it.

I have a copy from 2011 when it was publicly available.

TJH

A lot has happened since then.
We had free money for a decade.
Now it has suddenly all changed.
What worked very well post the financial crash has now suddenly fallen out of favour and what was unpopular is now popular. And that change only started a year ago.

[dealtn]

Cash distributed doesn't give you a way to measure the company. It tells you what has been paid out of it (what left the bath to the bucket). It might be useful as a negative measure, though. How much you need to subtract from the assets of the company when distributed.

Cash generated would be a much more useful metric for company valuation. Water leaving the taps and entering the bath.

It is tangible, yes, but it is "yours" not the company's. It gives you money to reinvest, but so what? There are other ways to realise cash to reinvest. You also don't need to reinvest it if it was never distributed - what kind of an investment advantage is that?

There is a link to value, so if value provides a long run advantage then that correlation is useful.

Partially true. As an analyst I always focussed on cash flow. But it is a minefield. It works well on my old sector of mining but applying it to banks and insurance companies is neigh on impossible, as Fred Goodwin proved.

Moreover operating cash flow is fine, but you never know what the company will do with it, it might make an acquisition or commit to a new project that eats cash for years.

More importantly analysts don't publish forecasts of operating cash flow but they do kindly forecast dividends. As with generals in wars, you use what you have, not what you would like.

Agreed "cash" is a difficult measure for financials. The prospect of acquisitions etc apply to all companies not just those that don;t pay dividends. You could equally claim that (high) dividend paying companies are more likely to stretch their balance sheets, or take on high levels of debt. As a shareholder you should be aware, and wary, of any director decisions.

Analysts do forecast operating cashflow. Most won't get it, despite it being published, because they rely solely on the "free" availability of that research. If its important to you (which given your "most importantly" suggests) then that value is worth paying for, particularly if it helps you "outperform".

[dealtn]

The important point it states is that £100 invested in the UK stock market in 1945 would, before costs, be worth £236 in real terms at the end of 2020 if income was not reinvested. If income had been reinvested the comparable figure would be £5,799.

An alternative approach, using real data and costs, is to compare the relative performance of any fund that has income and accumulation units.

If that is the most important thing you got for your £100 then you really haven't extracted the value of of your £100. I (seriously) suggest you go back and re-read it.

All you have picked up is what a plumber (and anyone really) can tell you. It is quicker to fill a bath with both a running tap and a plug in place, than just the tap and no plug.

[mc2fool]

Yes. That’s the Dreman book. There’s a big difference between reading a book with individual examples and practical ideas, and reading a research paper. Besides, Dreman, whatever you make of him, is not an Academic and eats his own cooking by investing his (and others) money into the Value funds he runs. I don’t agree with all of his conclusions and I imagine his results since the GFC have been hammered by the S&P500.

Yet the research study part of the book you're citing is academic and not much different from what the DMS study does. Dreman takes the whole market (1500 shares), sorts by the factor being tested, divides it into quintiles and recalculates annually, whereas DMS does the same but just divides it into halves (or three in some charts, hi/med/lo). Both are equally academic and inpractical for a private investor by themselves. Sure, Dreman takes inputs from those and then applies further idiosyncratic judgement, which just turns the strategy into an active one -- and that leads into another old debate altogether, so let's just leave it there now.

[88V8]

...a post from Rob which claimed that -

Dividends, growth in dividends and reinvested dividends are the main source of equity returns over the long run.

A key flaw with all studies involving dividend reinvestment is that they assume the dividends are available for reinvestment, gross.
In most cases they are not. My marginal rate is 33.75%.
Studies that disregard the reality of being a PI, are in my view, unlikely to be worth reading.

As regards rebalancing, there is TJH's rebalance-as-you-go, and at the other extreme the 'annual' method which would presumably involve a complete reassessment of potential candidates, rather time consuming but it does at least clear out the dead wood which with TJH's method tends to linger.

If I had to pick a mechanistic method I think for me TJH's would be preferable as it imposes the need to 'sell one's winners' at the moment when they are winning, which I always find difficult.

I am btw writing as an income investor.

V8

[OhNoNotimAgain]

The important point it states is that £100 invested in the UK stock market in 1945 would, before costs, be worth £236 in real terms at the end of 2020 if income was not reinvested. If income had been reinvested the comparable figure would be £5,799.

An alternative approach, using real data and costs, is to compare the relative performance of any fund that has income and accumulation units.

If that is the most important thing you got for your £100 then you really haven't extracted the value of of your £100. I (seriously) suggest you go back and re-read it.

All you have picked up is what a plumber (and anyone really) can tell you. It is quicker to fill a bath with both a running tap and a plug in place, than just the tap and no plug.

Have you read it?

The bath analogy doesn't really work. There is nothing comparable to a "bath" in a company's finances, except maybe cash. But no company is going to sit on a massive pile of cash forever.

The only consistent comparable measure of free cash flow is dividends, Operating cash flow is simply not forecast on a consistent basis.

[dealtn]

The important point it states is that £100 invested in the UK stock market in 1945 would, before costs, be worth £236 in real terms at the end of 2020 if income was not reinvested. If income had been reinvested the comparable figure would be £5,799.

An alternative approach, using real data and costs, is to compare the relative performance of any fund that has income and accumulation units.

If that is the most important thing you got for your £100 then you really haven't extracted the value of of your £100. I (seriously) suggest you go back and re-read it.

All you have picked up is what a plumber (and anyone really) can tell you. It is quicker to fill a bath with both a running tap and a plug in place, than just the tap and no plug.

Have you read it?

Which year?

The bath analogy doesn't really work. There is nothing comparable to a "bath" in a company's finances, except maybe cash. But no company is going to sit on a massive pile of cash forever.

The only consistent comparable measure of free cash flow is dividends, Operating cash flow is simply not forecast on a consistent basis.

We will have to disagree then. Free cashflow is forecast, just not as easy to find.

Dividends paid out no longer belong to a company. How would you value a company that has cash of £10m on its balance sheet and no other assets or liabilities that earns £1mio consistently every year which announces a £11m dividend? What about if that dividend was £5mio, or £1mio. I would be interested to see your method and what inputs you would put into a dividend discounted valuation model.

The only way you can do it is to project the earnings (or assets) forward that enable the company to pay those dividends (and the value of the non paid out retained earnings that remain on the balance sheet). Dividends by themselves are poor predictors of the future, or of company valuations. were it not so you could double a company's value by doubling the dividend.

[Lootman]

Dividends by themselves are poor predictors of the future, or of company valuations. were it not so you could double a company's value by doubling the dividend.

And conversely, according to Ohno, a company that pays no dividend has zero value and potential to give returns.

Bad news for Berkshire, Google and Amazon, I guess.

[OhNoNotimAgain]

A key flaw with all studies involving dividend reinvestment is that they assume the dividends are available for reinvestment, gross.
In most cases they are not. My marginal rate is 33.75%.
Studies that disregard the reality of being a PI, are in my view, unlikely to be worth reading.

As regards rebalancing, there is TJH's rebalance-as-you-go, and at the other extreme the 'annual' method which would presumably involve a complete reassessment of potential candidates, rather time consuming but it does at least clear out the dead wood which with TJH's method tends to linger.

If I had to pick a mechanistic method I think for me TJH's would be preferable as it imposes the need to 'sell one's winners' at the moment when they are winning, which I always find difficult.

I am btw writing as an income investor.

V8

As an an experienced investor you will know that all such studies are gross. You can't do them over half a century adjusting tax rates every time they change and for all different types of investors.

Unlike TJHs efforts the the index linked to earlier actually exists and shows what happened when a fully defined mechanistic method was followed.

[OhNoNotimAgain]

Dividends by themselves are poor predictors of the future, or of company valuations. were it not so you could double a company's value by doubling the dividend.

And conversely, according to Ohno, a company that pays no dividend has zero value and potential to give returns.

Bad news for Berkshire, Google and Amazon, I guess.

As Stephen Pinker says says the anecdote is a tried and trusted way of sending a very powerful but misleading message. It is is much easier to digest than a detailed, analytical study of all the data such as the Barclays Study.

[Lootman]

Dividends by themselves are poor predictors of the future, or of company valuations. were it not so you could double a company's value by doubling the dividend.

And conversely, according to Ohno, a company that pays no dividend has zero value and potential to give returns.

Bad news for Berkshire, Google and Amazon, I guess.

As Stephen Pinker says says the anecdote is a tried and trusted way of sending a very powerful but misleading message. It is is much easier to digest than a detailed, analytical study of all the data such as the Barclays Study.

But do you agree with my assertion that your approach would apply a zero weight to any and every company that does not pay a dividend?

[OhNoNotimAgain]

Free cashflow is forecast, just not as easy to find.

Sorry, you are simply wrong. I know. I used to make company forecasts for a living and no one did it for all the reasons I explained before.

[dealtn]

Dividends by themselves are poor predictors of the future, or of company valuations. were it not so you could double a company's value by doubling the dividend.

And conversely, according to Ohno, a company that pays no dividend has zero value and potential to give returns.

Bad news for Berkshire, Google and Amazon, I guess.

As Stephen Pinker says says the anecdote is a tried and trusted way of sending a very powerful but misleading message. It is is much easier to digest than a detailed, analytical study of all the data such as the Barclays Study.

Of which the "most important message" is that a portfolio with reinvested dividends exceeds that exact same portfolio without reinvested dividends. I really don't think you need to rely on the conclusions of a detailed analytical study of all the data to tell you that! It is self evident.