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Sell or not sell

General discussions about equity high-yield income strategies
Lootman
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Re: Sell or not sell

#243613

Postby Lootman » August 11th, 2019, 7:27 pm

Alaric wrote:
funduffer wrote:Surely this debate is all about personal attitude to risk?

It should be, were it not for a TMF author who seemingly had an aversion to a bit of share dealing in his suggested annuity replacement portfolio and wrote that those who did so were ""tinkerers".

There appears to be some doubt as to whether Bland even advocated never selling, but rather just had a personal preference for not doing so voluntarily. Clearly those who do sell, either to re-balance or because the facts have changed since initial purchase, are deemed to be fully-fledged HYPers, and so the issue is not critical. It is merely something that each investor decides for himself or herself. Since which shares to buy is an individual choice, so must be which shares to sell. It would be a very odd strategy that informs you that you are smart enough to make buy trades, but too stupid to make sell trades.

My own view of Bland's bias here is more to do with marketing and promoting his method in the hope of making money from it. He had rules about what to buy, but struggled to come up with rules for selling. This is hardly unusual - many investors have no problem developing a buy list or watch list, but do not feel the same confidence and assurance about whether or when to sell. There is fear of losing more and fear of missing out, and sometimes it is just easier to duck the issue and hang onto what you've got. There is also the "you haven't lost money until you sell" concept. I think Bland recognised that HY shares have a potentially higher risk of losing capital value. So it suited his promotional purposes to pretend that's not important, hence the "capital doesn't matter" mantra, along with the annuity analogy.

It seems to me that there are a number of clear examples of when it it prudent to sell rather than mindlessly cling to a "never sell, ever" precept, and that is why most folks who comment on the HY boards do actually sell when deemed wise. A few examples:

1) A share abolishes or reduces its dividend, or shows clear signs that it will.
2) A share is in a sector that is in a secular decline because it is being substantially disrupted, like retail. Think textiles or steel a few decades ago.
3) You wish to engage in a bed-and-ISA strategy and the share no longer meets the criteria for a HYP purchase.
4) You wish to utilise your annual CGT-free allowance.
5) The dispersion of results from the constituents in your portfolio leads to a highly skewed portfolio that causes you worry and stress.
6) You wish to diversify into other strategies rather than have all your eggs in one (HYP) basket.
7) There is a more promising prospect but you don't have the cash to buy it.
8) A corporate action does not mandate a sale but the alternative would break your HYP rules, e.g. the purchase of Vodafone by Verizon and you don't want to hold Verizon because it is foreign.

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Re: Sell or not sell

#243662

Postby Bubblesofearth » August 12th, 2019, 8:38 am

Alaric wrote:
Bubblesofearth wrote:Let me ask you a question - would you prefer to have £10,000 in each of 30 shares OR £10,000 in each of 29 shares and £100,000 in the other one


The idea of HYP1 was income rather than value. So the question really should be whether you were happy with £ 1000 income from each of 29 shares and £ 10,000 from the other one. If your spending requirements were such that you needed an income of £ 39,000, you would feel vulnerable to the £10,000 income being suspended


In my previous post I said the same argument applies to income. So the question simply becomes which of the following would you prefer;

1. £1000 income from each of 30 different shares.

2. £1000 income from 29 different shares and £10,000 income from the other one.

You cannot IMO simply assume that the extra income from the 30th share would be made up for by previous tinkering, especially if that tinkering is going to ensure that no share is ever allowed to go on to produce that level of income.

In the long term the price and income from shares are inextricably lined as they both reflect the performance of the underlying business.

BoE

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Re: Sell or not sell

#243666

Postby Alaric » August 12th, 2019, 8:58 am

Bubblesofearth wrote:
2. £1000 income from 29 different shares and £10,000 income from the other one.


The point at issue is that you don't allow it to reach that stage. Risk and reward are related. Increase risk and you increase reward and the converse. But if finance for your living expenses is heavily dependent on the decisions of one board of directors, is that not a risk too far?

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Re: Sell or not sell

#243673

Postby tjh290633 » August 12th, 2019, 9:29 am

Bubblesofearth wrote:It's a shame tjh did not keep a record of how his portfolio would have evolved had he never voluntarily trimmed any shares. I say voluntarily because appreciate there have been forced corporate actions.

BoE

I have kept records of how a single share in each holding would have done, eliminating the effects of trimming and topping up. Here are the figures for my current holdings:

.                                .   Tinkered    1 share                        
EPIC Share IRR IRR Since Start yld
ADM Admiral Group plc 12.73% 12.35% 05-Mar-14 6.63%
AV. Aviva plc 3.32% 5.62% 26-Oct-10 6.53%
AZN AstraZeneca plc 16.21% 9.12% 01-Jun-93 4.37%
BA. BAe Systems plc 11.51% 5.45% 26-Nov-99 2.13%
BATS British American Tobacco plc 9.78% 9.84% 19-Feb-10 4.76%
BLND British Land plc -2.20% 5.77% 01-Oct-10 5.50%
BLT BHP Billiton plc 5.38% 3.46% 19-Feb-10 2.86%
BP. BP plc 12.62% 11.11% 09-Nov-79 5.03%
BT.A BT Group plc 10.52% 12.69% 28-Nov-84 5.31%
CPG Compass Group plc 14.24% 10.24% 31-Jan-01 1.18%
DGE Diageo plc 18.00% 18.00% 06-May-09 4.37%
GSK GlaxoSmithKline plc 7.47% 9.04% 28-Sep-10 5.34%
IMI IMI plc 45.02% 8.86% 30-Mar-09 7.82%
IMB Imperial Brands plc 21.62% 15.07% 01-Oct-96 5.71%
KGF Kingfisher plc 3.16% 4.25% 04-Sep-07 3.47%
LGEN Legal & General Group plc 10.68% 10.89% 14-Jun-16 6.72%
LLOY Lloyds Banking Group plc 17.60% 10.43% 22-Dec-88 5.50%
MARS Marstons plc 7.04% 7.09% 17-Feb-11 5.72%
MKS Marks & Spencer plc 8.21% 11.42% 09-Feb-70 2.06%
NG. National Grid Transco plc 13.78% 10.09% 20-Oct-00 4.73%
PSON Pearson plc 3.88% 4.81% 22-Oct-09 4.36%
RB. Reckitt Benckiser Group plc 13.29% 11.75% 21-Mar-11 4.08%
RDSB Royal Dutch Shell plc B 8.40% 7.34% 07-Jun-06 3.77%
RIO Rio Tinto plc 36.42% 30.25% 27-Apr-16 6.08%
S32 South32 Ltd 42.17% 11.97% 18-May-15 3.19%
SGRO Segro plc 8.68% -15.81% 04-Sep-07 4.23%
SMDS DS Smith plc 14.02% 7.32% 08-Feb-07 4.09%
SSE Scottish & Southern Energy plc 6.23% 7.54% 28-Sep-10 6.69%
TATE Tate & Lyle plc 13.00% 3.08% 21-Jul-99 5.46%
TSCO Tesco plc 8.91% 7.14% 19-Jun-97 3.08%
TW Taylor Wimpey plc 5.19% -2.29% 30-Aug-05 4.26%
ULVR Unilever plc 13.74% 13.74% 19-Feb-10 3.72%
UU. United Utilities Group plc 9.10% 8.34% 09-Aug-01 7.12%
VOD Vodafone Group plc 8.20% 8.28% 16-Aug-06 6.09%
WMH William Hill plc 3.13% -2.75% 05-Mar-08 6.20%

The first column shows the actual performance, the second that of a single holding untouched. The date column shows when the share was first bought and the last one shows the yield when first bought.

You will not that Diageo and Unilever have the same figure for both columns, because they have been neither trimmed nor topped up. Of course, sometimes you win and sometimes you lose, as with British land. That one is due to topping up at higher prices than today's.

I have the same data for shares disposed of, but only to the date of disposal.

TJH

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Re: Sell or not sell

#243675

Postby tjh290633 » August 12th, 2019, 9:35 am

Lootman wrote:I think Bland recognised that HY shares have a potentially higher risk of losing capital value. So it suited his promotional purposes to pretend that's not important, hence the "capital doesn't matter" mantra, along with the annuity analogy.

I think the idea was that you should ignore share price movements, becuase they are always much more than the changes in dividend, which reflect your primary objective. The mantra is not that capital does not matter, rather that you should follow the perfomance of the dividend, and that the share price is of secondary interest.

TJH

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Re: Sell or not sell

#243676

Postby Alaric » August 12th, 2019, 9:40 am

tjh290633 wrote:BP. BP plc 12.62% 11.11% 09-Nov-79 5.03
MKS Marks & Spencer plc 8.21% 11.42% 09-Feb-70 2.06%
The date column shows when the share was first bought and the last one shows the yield when first bought.


A couple of blasts from the past there. Thinking back, an investor would have hoped for growth from those share purchases as quite probably twice that dividend yield would have been available on a deposit account.

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Re: Sell or not sell

#243680

Postby Alaric » August 12th, 2019, 9:53 am

tjh290633 wrote: The mantra is not that capital does not matter, rather that you should follow the perfomance of the dividend, and that the share price is of secondary interest.


I think you have to be wary of shares where the Directors appear to be distributing more in dividends than they are making in profits. Distributing an 8% dividend whilst running down the worth of a Company isn't of benefit unless you desperately need the "income". The original articles suggested that price dips were only fluctuations and you could sit them out and await recovery. That's not always the case.

Vodafone earlier this year was a case in point. It was paying more in dividends than it was making in profits. It was suggested that it had the cash flow to pay these and that made the dividend "sustainable". The directors thought otherwise and "rebased" aka cut the dividend. Purchase could have been justified as a recovery stock and the later announcement of their "masts" spin off may have helped.

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Re: Sell or not sell

#243686

Postby tjh290633 » August 12th, 2019, 10:04 am

Alaric wrote:
tjh290633 wrote: The mantra is not that capital does not matter, rather that you should follow the perfomance of the dividend, and that the share price is of secondary interest.


I think you have to be wary of shares where the Directors appear to be distributing more in dividends than they are making in profits. Distributing an 8% dividend whilst running down the worth of a Company isn't of benefit unless you desperately need the "income". The original articles suggested that price dips were only fluctuations and you could sit them out and await recovery. That's not always the case.

Vodafone earlier this year was a case in point. It was paying more in dividends than it was making in profits. It was suggested that it had the cash flow to pay these and that made the dividend "sustainable". The directors thought otherwise and "rebased" aka cut the dividend. Purchase could have been justified as a recovery stock and the later announcement of their "masts" spin off may have helped.

What you are saying is that a company with a negative cash flow should be avoided. The opposite is when the company is investing capital in itself.

TJH

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Re: Sell or not sell

#243688

Postby Alaric » August 12th, 2019, 10:13 am

tjh290633 wrote:What you are saying is that a company with a negative cash flow should be avoided.


No I'm not. What I am saying is that you avoid Companies that aren't making enough profits to finance their dividends or are using accounting tricks to make profits appear long before they are earned as cash , so their net worth is or should be reducing and the market reacts by marking down their shares.

But then if a Company has negative cash flow, in other words it isn't generating enough to finance its growth, why is it paying a dividend?

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Re: Sell or not sell

#243691

Postby tjh290633 » August 12th, 2019, 10:22 am

Alaric wrote:But then if a Company has negative cash flow, in other words it isn't generating enough to finance its growth, why is it paying a dividend?

Because it has retained earnings.

TJH

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Re: Sell or not sell

#243694

Postby Alaric » August 12th, 2019, 10:29 am

tjh290633 wrote:Because it has retained earnings.


When a Company pays out retained earnings, it is running down its net worth. If the "market" takes notice, it knocks the price down. So yes you have an 8% dividend, but it's been financed by knocking 8% or more off the value of the Company. It makes the regular dividends more akin to a special dividend or even a formal return of capital.

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Re: Sell or not sell

#243696

Postby Gengulphus » August 12th, 2019, 10:33 am

Bubblesofearth wrote:
IanTHughes wrote:
Alaric wrote: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

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?

A true story, though with a lot of detail omitted for reasons of privacy and brevity: I had a large shareholding that had already grown many times from my acquisition cost and was quite a large portion of my total wealth in October 1998. I trimmed it by enough to recover my acquisition cost and get a nice enhancement to my other investments, that I would keep even if the company went bust, and still be running a large holding of the shares. Over the following year, the tech boom got going properly and the value of the large fraction of my original holding I'd kept continued to grow, about fourfold over what it had been when I trimmed and becoming a very clear majority not just of my investment portfolio, but of my total wealth, including house. Throughout that time, I continued to run my winner - which was made rather easier by the fact that I'd trimmed and made the rest of my investment portfolio considerably healthier, but its size was still a source of significant nervousness.

And then the tech boom really took off: there were days in the autumn of 1999 when my holding's value rose by more than a year's salary in an afternoon, and it quite rapidly got up to being 90%+ of my total wealth... Which meant that it became a major source of nervousness and indeed distraction from work. So in late November 1999, I trimmed again - and this time the sales proceeds were not just enough to make a very healthy addition to my other investments, but also to leave me set up for life... And the boom continued: by March 2000, the shares were more than 50% higher than they had been for that second trimming, and I trimmed a third time.

And then the bubble started collapsing, and within the next few years, the share price dropped to less than 5% of what it had been for that third trimming (which had by sheer luck been at or very near the share price peak). I did trim once again during the fall, still leaving a very substantial fraction of my original holding, but that was not so much because of my investment strategy as because I'd decided I wanted to move to a better house and preferred selling from the still-large shareholding to any other way of raising the funds for it. So it isn't really relevant to questions of whether or when to use trimming as part of one's investment strategy.

So my trimming produced two very noticeably less-than-optimal trimming decisions out of three, and the fact that the third had been close to optimal was more luck than judgement - not a good advert for the practice, is it? But if I hadn't done any trimming during the period, I would have ended up a lot less wealthy at the end of the tech boom and bust than I actually did - maybe only about 10% as wealthy... Equally, if I'd sold the lot in March 2000 at the peak of the tech boom and done no trimming beforehand, I would have ended up more than 3 times as wealthy as I did (that's after taking account of the massive CGT bill doing that would have produced, by the way - it would have been more like 5 times as wealthy without the CGT).

There's no clear-cut moral to this story along either "always run your winners" lines or "always trim overweight holdings" lines. But while I sometimes kick myself a bit about the October 1998 trimming, to a much lesser extent about the November 1999 trimming, and about not trimming to a far greater extent in March 2000, what I would be kicking myself about very hard indeed is if I had not trimmed at all! Perhaps the moral is "run your winners, but not to the point of collapse" - but that's a difficult moral to follow, because judging the point of collapse is a lot easier with horses than with shares! And when in doubt about that, hedging one's bets by selling some but keeping a substantial holding isn't clearly bad - as with all hedging, one pays something in terms of statistically-expected returns in order to improve the realistic-worst-case returns.

None of this is directly relevant to HYPs or even high-yield shares - like many of the shares affected by the tech boom, the share concerned didn't pay any dividends at all at the time. But it does say that a point can be reached where one wants the certainty of the trimming proceeds more than the potential of further gains - essentially, reaching one's investment target is highly valuable to one personally compared with being well short of it; reaching twice one's investment target is more valuable to one personally but nothing like twice as valuable - so the personal value added by the potential further gains is nowhere near as much as the personal value added by the gains so far, and so one places more importance on not losing the gains so far than on trying for the further gains... That verdict is very much a personal one, though: a 65-year-old who wants to retire asap and has a HYP that is producing about 50% of the retirement income they're looking for and that rises massively in capital value because one of its holdings 'bubbles' massively, to the point that they could trim and reinvest the proceeds to raise it to 100% of that income, might regard doing that trimming as a no-brainer, even if they thought the 'bubble' highly likely to inflate further - why risk the achievement of their target in the pursuit of exceeding it? A 50-year-old who is in no real hurry to retire and has a HYP that is producing 5% of the retirement income they're looking for and could raise it to 10% similarly might view the decision very differently: further big gains would be highly valuable to them. But if those further big gains did materialise, to the point that they could trim and reinvest to reach 100% of their target, they might start thinking more like the 65-year-old...

So my point is that I think at least the vast majority of HYPers would end up deciding to trim (or even completely sell) a holding that had grown enough - but "enough" will mean vastly different things for different HYPers. For some, it's so much that it's very unlikely to happen (and probably even more difficult to imagine it happening, at least for anyone who hasn't experienced a real stockmarket bubble) and there may be a few who would really stick to their guns and not sell no matter how much of a bubble the holding was clearly in, but I'm firmly of the opinion that there would in practice turn out to be a "point of trimming" for most HYPers if the price of one of their holdings rose enough, whether they know it or not. So the differences of opinion on this question are IMHO at least very largely differences about how high that point is and/or whether the HYPer finds it conceivable that their holding could rise that high in practice.

Gengulphus

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Re: Sell or not sell

#243709

Postby Alaric » August 12th, 2019, 11:19 am

Gengulphus wrote:And then the bubble started collapsing, and within the next few years, the share price dropped to less than 5% of what it had been for that third trimming (which had by sheer luck been at or very near the share price peak).


That was part of the economic background to HYP1, an attempt to avoid Companies that were priced at 20 times what they were worth. TMF was very keen on index trackers at the time, considering that they would return 12% a year. The Indexes, being blind to value, would also have included some shares at considerable multiples to their objective worth.

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Re: Sell or not sell

#243713

Postby Gengulphus » August 12th, 2019, 11:27 am

IanTHughes wrote:The scenario is: someone, not me of course, has owned HYP1, for 18+ years, right from the outset, without any re-balancing process at all, such that years ago the concentration of the portfolio income became un-balanced and has now ended up so completely un-balanced as you believe it now is.

The relevant question you should be asking is: would that person, after years of inactivity, suddenly spring into action and re-balance it now? To me the answer is clear: that person would do no such thing!

That's not clear to me. The October 1998 trimming of the shareholding that had become large I mentioned in my last post was in fact the first time I had ever sold shares voluntarily, despite having owned shares since 1984 - I'd sold compulsorily in a few takeovers prior to that, but never before chosen to do so. I think that 14-year delay before my first voluntary sale, although not quite as large as the 18-year delay in your scenario, does qualify as "years of inactivity".

The reason why I did the sale after 14 "years of inactivity" was basically that things had changed qualitatively. My previous share investment strategy had been to pick up small certificated shareholdings in privatisations and a few other sources such as other IPOs and employee share schemes, then stick the share certificates in a bottom drawer (literally! - it was the bottom drawer on the left side of my desk) and forget about them apart from paying dividend cheques into my building society account when I received them. It hadn't been a major part of my overall investment strategy, which had focussed on savings accounts, including TESSAs - until the shareholding concerned started taking off and became a major part of my overall investments. It took me some time to realise that I really needed to overcome my inertia and rethink my strategy - indeed, IIRC I regarded the October 1998 trimming as a special case and didn't get around to properly rethinking it until the November 1999 trimming (and the fact that I joined TMF in October 1999 is not entirely unconnected with that!), but it was basically that qualitative change from my share portfolio being a minor part of my overall investment portfolio to a major part of it that triggered the shift to sometimes voluntarily selling.

That qualitative change would not have happened to a HYP1 owner now, after 18 years, but others could have done. For instance, someone might have set it up while still 18 years from retirement and run it on the original articles' "non-tinkering" lines without really reviewing it, using whatever income it threw off for nice-but-not-essential purposes (e.g. to assist with reducing an offset mortgage). Now, after 18 years, they've paid off the mortgage and feel ready to retire - and they finally get around to really looking at the detail of the income they're planning to retire on... The qualitative change in that scenario is from funding their essential living expenses with salary to funding them with HYP1 income (probably plus a few other sources such as the state pension).

Not saying that that scenario is particularly likely, but it's enough to make your answer "that person would do no such thing!" less than entirely clear to me.

Gengulphus

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Re: Sell or not sell

#243748

Postby daveh » August 12th, 2019, 1:23 pm

I can comment on what I did with my HYP when it became quite unbalanced. I started my HYP when pyad instigated the idea on TMF ( I'd started a pyad 26 mechanical portfolio initially, but just morphed it into a buy and hold HYP as I thought the idea better fitted my phycology). I initially started investing with sharebuilder in £250 blocks monthly, investing ~£1k in each company. Then I upped the holding size to ~£5k (as I found I had more cash free to save) and SSE and UU. were my first purchases at the larger size. They made up 18 and 17% of my 12 share HYP income in 2002. I will admit at the time I didn't even notice. With SSE they kept raising the dividend, plus I had automatic dividend reinvestment set up so by 2009 that had crept up to almost 20% of the income from my now 22 share HYP. There were three other shares that produced more than 10% and 5 shares that had cut their dividend entirely*.

By now I had noticed and was not happy with so much income from one share, but I decided I wouldn't sell/top slice I would instead put no new money in to SSE and would stop all automatic dividend reinvestment (except on a small certificated holding of Lloyds - though at the time it was one of the 5 non payers). I was happy that, as I didn't need the income and was still investing new money in the portfolio, I could rebalance just by the new money and dividends going into top ups and new shares.

Fast forward to today and SSE is down to 7% of this years income and will be a bit less when the rest of this years dividends are declared (about 10% of this years income is still to be declared). So doing nothing wrto sales has brought SSE's income back into line and now the largest income provider is Persimmon which will produce about 9.5% of this years income (* one of the non payers in 2002). However I'm now a lot nearer to retirement and am more careful about not letting my HYP get so unbalanced, as there is less time to correct it via the addition of new monies. So I have trimmed back Segro (twice), but not because of income, but because it was making too large a capital contribution to my HYP which consists of 31 shares, 5 ETFs and 1 infrastructure fund.

I would probably have been better off in capital terms if I had top sliced SSE as my recollection is that it was at a much higher price (but lower dividend) back in 2009 when I made the decision that I'd let new purchases rebalance the portfolio rather than do a tinker. I'd also comment that if I'd cut Persimmon at the time it had stopped paying I'd have been much worse off as I'd have made a significant capital loss compared to the present significant capital gain and would have missed out on some very meaty dividend payments. So all in all I'm happy with my relatively minimal tinkering strategy, it suits me.

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Re: Sell or not sell

#243807

Postby bluedonkey » August 12th, 2019, 4:30 pm

I have Rentokil (RTO) in my HYP. It was HYP when I bought it in July 2006. It is now yielding about 1%. The dividends are however increasing at 15% per year. For those who do believe in tinkering/trimming, should I? The capital value is about 3.5% of the portfolio.

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Re: Sell or not sell

#243809

Postby Gengulphus » August 12th, 2019, 4:34 pm

Alaric wrote:
Gengulphus wrote:The answer is a case where a judicious trimming and reinvestment of the proceeds might well have proved to have a positive long-term effect on HYP1 portfolio income - and I have archived evidence in the form of this TMF post that I was nervous about the size of the HYP1 holding at what would have turned out to be a good point to trim (warning: that link is a 'spoiler' for the trivia question!).

From your link

Gengulphus wrote:For example, if your worry is that too much of your income will be coming from one company, making you too vulnerable to that company cutting its dividend, you could specifically trigger tinkering on the proportion of income coming from each share. In a 15-share HYP with reasonably large holding sizes, for instance, "review the ordinary dividend income at the end of each year; sell 20% of any share that provided 10% or more of that income and reinvest the proceeds" might be a reasonable tinkering strategy.)

Did anyone at that time pick up HYP1's increasing reliance on tobacco for returns?

You seem to have missed my point, possibly due to your browser not properly going to the specific post in the thread the link points to. The link does that with the "#10550997" at its end - if you need to find it manually, it is the post labelled "Number: 35491 of 75484" and dated "Date: 24/05/2007 16:41", slightly over halfway through the thread.

The nervousness about the size of a HYP1 holding that I expressed in it was:

Indeed, to my mind the long-term danger of not tinkering is that it permits a lack of diversification to build up. If I had to pick out the danger spot in HYP1, for example, it would be the big holding of BT, which accounted for 12.8% of the portfolio's value in the last review and (given BT's relatively high yield) probably a somewhat higher proportion of its income. If disaster strikes that holding for some reason, it will affect the portfolio a lot more than disaster on an average holding would...

So it wasn't about a tobacco holding, and my point was that the high exposure to BT had resulted in a large reduction to HYP1's income a few years later. Specifically, the "last review" the quote refers to was in April 2007 and had the BT holding value at £17,714, which is 12.8% of the portfolio total of £138,179. I didn't have a convenient income figure for it at that time because it contributed no income to the November 2006 annual review, having been added to HYP1 as the replacement for Associated British Ports in August 2006, but its contribution to the income reported in the November 2007 annual review was £858, 19.3% of the total £4,452. I don't have pyad's detailed figures for November 2008, due to him being absent from TMF at the time, but kool4kats produced a figure of £898 for 5682 shares at 10.4p+5.4p = 15.8p each in pyad's absence, and on checking, that share count was stated by pyad both before and after his absence. The portfolio total of £4,664 stated by kool4kats was wrong, because it missed counting the £550 income from the taken-over Alliance & Leicester. Also, the revised total of £5214 that correcting that produces differs quite markedly from pyad's figure of £5,040 for the same year to November 2008, which is easily explained if one knows the background: the figure kool4kats produced was for the TMF-board-maintained version of HYP1 (later known as CHYP1) rather than pyad's version, and the two deviated quite noticeably from each other in 2008 due to happening to choose different replacements for the three shares taken over during the year (Resolution, Scottish & Newcastle and Alliance & Leicester). So the BT income figure for that year was £898, 17.8% of the portfolio total of £5,040, still a very high percentage compared with a 'fair share' of 6.7% in a 15-holding portfolio.

And then in the November 2009 annual review, the portfolio income dropped to £3,187, an income fall of £1,853. That review doesn't give any breakdown of the income by company, but dividenddata tells us that BT paid 5.4p+1.1p = 6.5p during the year, so with the share count still being 5682, its contribution to that income was 5682*6.5p = £369. So BT's income fall was £898-£369 = £529, 28.5% of the total portfolio income fall of £1,858 - and more extensive calculations along the same lines that I've done in the past say that it was easily the biggest contributor to that income fall. Indeed, most of them didn't even have £529 income that they could possibly lose!

So my point was that BT was the biggest contributor to portfolio income at the time of my post expressing nervousness about the holding, on both a backward and a forward view (easily checked from the links to the November 2006 and November 2007 annual reviews above) and so the prime candidate for trimming at that time - and trimming it then would have turned out to be a good idea. Its dividends have recovered a lot, but they're still not quite up to the 15.8p total for 2007, making its income performance decidedly substandard for HYP1.

So finally to answer your question as best I am able, I don't remember anyone picking up HYP1's increasing reliance on tobacco for returns, or indeed income, at the time of that post. But there are special circumstances: the original tobacco share Gallaher had been taken over and replaced with BATS only about a month before, so BATS hadn't yet made any contribution to HYP1's income. And the November 2007 annual review only shows a dividend of £120 paid by BATS in the year, which is easily checked to be its interim and so only around 30% of its normal annual total at the time, and nothing from Gallaher. An RNS search on Investegate would probably show that either its normal dividend payment schedule didn't have any dividends going 'ex' between November 2006 when the HYP1 year started and April 2007 when the takeover went through, or that a condition of the takeover was that it wouldn't declare its normal dividend - but I'm not going to bother doing that RNS search! Then pyad was absent for the November 2008 annual review, but kool4kats calculated £601 based on 862 BATS shares (pyad later said the count was actually 863, which would make it £602 instead, but that's hardly a difference worth worrying about!). So the income due to tobacco shares was £602/£5,040 = 11.9% of the total portfolio income for that year, rather large but nowhere near as large as the 17.8% BT contribution. There are a few comments on dividend safety in the thread that followed from kool4kats's report - in particular, TJH said he would trim 6 of HYP1's shareholdings if he were running the portfolio by his rules, including both BT and BATS, and Luniversal said the following:

Luniversal wrote:(1) Two thirds of the income is reasonably safe, if not buoyant, but the following sources, perhaps two-fifths of it, lie under clouds:

LAND (big debts, not rallied much on base rate cut)

BT.A (see this thread, passim, and no less than 18% of the total income)

LLOY (resumption of payments uncertain, toxicity worries)

DSGI (at 20p probably discounting far worse than no divis)

AV. (also has a toxicity problem)

But it's in the following year that BATS became the most-productive dividend income source in HYP1: the combination of the portfolio total dropping 36.8% to £3,187, BT's contribution to it dropping 58.9% to £369 and BATS's contribution to it rising 28.2% to £772 really put a rocket under its percentage of portfolio total income, more than doubling it from 11.9% to 24.2%. That high percentage doesn't seem to come up in the November 2009 annual review thread in any significant way, at least that I can spot in a quick skim plus a few searches for likely words like "balance", but around then is when I remember the issue of HYP1's major imbalances really becoming a big discussion point. Certainly I was aware of the issue, and aware that other people were aware of it, by a few months later when I posted this poll, since I took care to make it clear that I was only asking about a change of reinvestment-of-corporate-action-proceeds policy, not moving from non-tinkering to rebalancing-through-sales-and-reinvestment policy.

Gengulphus

Alaric
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Re: Sell or not sell

#243812

Postby Alaric » August 12th, 2019, 4:40 pm

bluedonkey wrote: The dividends are however increasing at 15% per year. For those who do believe in tinkering/trimming, should I? The capital value is about 3.5% of the portfolio.


Do you need more income?

There are several shares out there where the price over the past few years has increased faster than the dividends. If you don't actually need to cash it for more income, let it run and hopefully continue to enjoy the return in excess of the FTSE 100.

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Re: Sell or not sell

#243814

Postby Lootman » August 12th, 2019, 4:46 pm

Gengulphus wrote:There's no clear-cut moral to this story . . .

. . it does say that a point can be reached where one wants the certainty of the trimming proceeds more than the potential of further gains - essentially, reaching one's investment target is highly valuable to one personally compared with being well short of it; reaching twice one's investment target is more valuable to one personally but nothing like twice as valuable - so the personal value added by the potential further gains is nowhere near as much as the personal value added by the gains so far, and so one places more importance on not losing the gains so far than on trying for the further gains.

Actually I think that is the moral of the story. If you are starting out and trying to build wealth, then you have the time and inclination to take more risk. And a portfolio skewed to past winners and elevated risk might be how an investor perceives the path to prosperity.

Whereas once one has achieved that wealth, then the problem is more about keeping it, and that points to a reduction of risk by reducing over-weight positions. Capital preservation replaces capital aspiration. Rebalancing replaces letting your winners run.

In a sense, a permanently untinkered HYP is a momentum-based strategy, which is interesting in itself since many would regard HYP as deriving more from a value approach - quite the opposite to momentum investing.

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Re: Sell or not sell

#243905

Postby Bubblesofearth » August 13th, 2019, 7:48 am

Alaric wrote:
Bubblesofearth wrote:
2. £1000 income from 29 different shares and £10,000 income from the other one.


The point at issue is that you don't allow it to reach that stage. Risk and reward are related. Increase risk and you increase reward and the converse. But if finance for your living expenses is heavily dependent on the decisions of one board of directors, is that not a risk too far?


If you don't allow it to reach that stage then you end up with the £1000 income from each of 30 shares rather than £1000 from 29 and £10,000 from one. So, by selling down any outperformer as it emerges, you end up £9000/year poorer but with a more balanced portfolio.

Unless you assume that, by tinkering, you had managed to match the income growth from the outperformer? That seems unlikely to me given outperforms are relatively scarce. Also given that, even if you were successful in capturing another then it too would be trimmed before being allowed to get too big.

From a risk perspective I see things as being the polar opposite to your argument. The risk with a share portfolio is that you avoid, either accidentally or by deliberate action, capturing and keeping any of those shares that are responsible for driving the bulk of growth. Again, I would advise you to look into how markets (and thus portfolios derived from them) tend to evolve.

BoE


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