HYP1 is 22 - thread discussing income and capital diversification

[Bubblesofearth]

Did trackers exist 22 years ago?

V8

1970's in US and 1980's in UK

BoE

[Lootman]

Did trackers exist 22 years ago?

1970's in US and 1980's in UK

Indeed, and in fact the first of those new-fangled ETFs will have its 30th birthday next year.

So trackers have been a viable option for several decades now, and make it as easy to invest overseas as in the UK, removing one set of reasons to only invest in the UK, which I have long considered a major failing of something like HYP.

[kempiejon]

Doris is a handy pseudonym for a long-term buy and hold investor but it's not realistic take it to extremes. Anyone that really is that indolent but still wanted to invest in equities would be best advised to buy a tracker.

Did trackers exist 22 years ago?

V8

My introduction to investing was via the Motley Fool UK investment Guide Book back in the late 90s and I'm pretty sure the advice in there was buy a tracker, I did. Legal and General FTSE100.

[Alaric]

My introduction to investing was via the Motley Fool UK investment Guide Book back in the late 90s and I'm pretty sure the advice in there was buy a tracker, I did. Legal and General FTSE100.

At around the time the FTSE 100 peaked at just under 7000 in the 1998-2000 period, it was a common theme for TMF to push trackers. That went alongside the mantra that x% of "managed" funds failed to beat "the" index.

Funds that tried to follow an index had been around since the 1950s when they would nominally follow the FTSE 30. Trackers got a boost in the 1980s after the FTSE 100 and similar indexes became available. I think Legal & General were among the first in the UK to offer them.

[Lootman]

My introduction to investing was via the Motley Fool UK investment Guide Book back in the late 90s and I'm pretty sure the advice in there was buy a tracker, I did. Legal and General FTSE100.

At around the time the FTSE 100 peaked at just under 7000 in the 1998-2000 period, it was a common theme for TMF to push trackers. That went alongside the mantra that x% of "managed" funds failed to beat "the" index.

I was following the US TMF almost from its inception nearly 30 years ago and, like its later British cousin, it originally spoke up for the prudence of using tracker funds for many/most investors. Warren Buffett and Jack Bogle both reiterated that.

The problem is, with the stunning exceptions of Vanguard and iShares, you can't really make a lot of money selling cheap trackers. And it is even harder to make money advising people to buy trackers.

So over time TMF US and TMF UK instead started advocating other strategies where it was easier to attract revenue streams. This came down to recommending more active approaches which of course might need tip-sheets or advisory services. In other words TMF gradually became part of the for-profit investment establishment - the very thing it originally sought to disrupt.

HYP can be seen as just one of those themes. Ostensibly it is a do-it-yourself fairly passive approach. But judging by the endless debates here (and almost nowhere else) and the existence for a while anyway of a paid tipsheet, it is easy to see why TMF UK gave it a home.

Quite where it goes now, with its originator mostly AWOL and an ageing cohort of adherents remains to be seen. But given that it appears to barely exist outside of TLF, which itself gets no revenue from it, one could easily believe that it may not stand the test of time.

Index funds, on the other hand, have gone from strength to strength, even if TMF rarely promotes them any more.

[MDW1954]

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[Bubblesofearth]

HYP can be seen as just one of those themes. Ostensibly it is a do-it-yourself fairly passive approach. But judging by the endless debates here (and almost nowhere else) and the existence for a while anyway of a paid tipsheet, it is easy to see why TMF UK gave it a home.

Quite where it goes now, with its originator mostly AWOL and an ageing cohort of adherents remains to be seen. But given that it appears to barely exist outside of TLF, which itself gets no revenue from it, one could easily believe that it may not stand the test of time.

Index funds, on the other hand, have gone from strength to strength, even if TMF rarely promotes them any more.

Earlier in this thread I asked the question as to what it was about HYP1 that led to it's significant outperformance, at only a small uplift in risk, compared to the FTSE100 from which it was taken. I was interested in others views on this but my personal belief is that it is primarily down to equal weighting on purchase.

Interestingly I believe that Bogle himself now advocates such a portfolio even over a tracker. IIRC it would contain a larger number of shares but the principles of equal weight on purchase and buy-and-hold are the same. Further research would be needed here and that might be difficult to find given such an approach would be difficult for any fund manager to take. Equal weight trackers do exist but these churn holdings so do not have the long-term buy-and-hold aspect. They also carry charges. However, comparisons here would be interesting.

In short there are some lessons from HYP that can be taken to create an investment approach that might be better than a simple tracker. Remembering also that, although they are low, trackers do carry charges and any graph of performance vs the index being tracked will show a lag that is largely a reflection of this.

A final word - a lot of the debate on TLF HYP is thinly veiled confrontation and I'm as guilty of this as anyone. It would IMO be useful, from an investment perspective, to move away from this occasionally to more open exploration. A long time ago I read a book by de Bono about adopting different modes of thinking during a discussion that was kind of along these lines. It included temporarily abandoning critical thinking and embracing a more exploratory mode. At least that's my recollection.

BoE

[dealtn]

Earlier in this thread I asked the question as to what it was about HYP1 that led to it's significant outperformance, at only a small uplift in risk, compared to the FTSE100 from which it was taken.

Its a single sample experiment. Occam's razor would suggest luck. Would the question even be posed were 1 of the now, with hindsight, winners not selected in favour of an alternative?

Hindsight and Survivor Bias will clearly be strong influences here among debaters unable to neutralise bias in their thinking. Absent other chosen portfolios to assess in aggregate HYP1 is (extremely) successful as a portfolio, but (extremely) weak as a proof of concept.

[Alaric]

Its a single sample experiment.

Taking one step back, it's a demonstration that picking and holding 15 equal weighted shares from diverse sectors will throw up a handful of winners over twenty years or more. Does that prove anything about the original selection method?

[NotSure]

Its a single sample experiment.

Taking one step back, it's a demonstration that picking and holding 15 equal weighted shares from diverse sectors will throw up a handful of winners over twenty years or more. Does that prove anything about the original selection method?

Not in and of itself, IMHO. If HYP1 had chanced upon 15 losers, like 10 or 12 of the shares have proven to be, would it prove the opposite?

[Arborbridge]

Its a single sample experiment. Occam's razor would suggest luck. Would the question even be posed were 1 of the now, with hindsight, winners not selected in favour of an alternative?

Hindsight and Survivor Bias will clearly be strong influences here among debaters unable to neutralise bias in their thinking. Absent other chosen portfolios to assess in aggregate HYP1 is (extremely) successful as a portfolio, but (extremely) weak as a proof of concept.

I'm not sure "extremely weak" - but I take the point, and it's a real pity that few other people have started and persevered with a real time portfolio of the HYP1 kind. I guess the reason is, that it's a lot of effort to maintain. There are a myriad of HYP universes which start at different moments, but it would be impossible to track more than a handful.

There are other HYPs that trundle along, but none that I know of like HYP1 in real time with a severe no tinker policy.
As you say, many of the "studies" people publish are made in the rearview mirror. A missed opportunity: anyone worried about this could always have started a second and third example
But generally, it is far easier to pick holes in the effort of others.

Arb.

[NotSure]

A missed opportunity: anyone worried about this could always have started a second and third example

AIUI, there was a HYP2 and a HYP3. How have they fared?

Edit:

But generally, it is far easier to pick holes in the effort of others.

It's not picking holes in the effort of others, it is simply questioning, generally politely, the conclusions drawn.

[BullDog]

A missed opportunity: anyone worried about this could always have started a second and third example

AIUI, there was a HYP2 and a HYP3. How have they fared?

Edit:

But generally, it is far easier to pick holes in the effort of others.

It's not picking holes in the effort of others, it is simply questioning, generally politely, the conclusions drawn.

There was another pyad portfolio started, I think, in 2019? It's periodically reported on but not by pyad.

[dealtn]

A missed opportunity: anyone worried about this could always have started a second and third example
But generally, it is far easier to pick holes in the effort of others.

Why would anyone worried by this (not sure what "this" is - concentration? lack of other example portfolios?) be motivated to do so?

I would say those that want to prove to others it is a successful concept would need to in order to demonstrate a higher burden of proof. Otherwise all that is shown is that it is possible to pick a successful long run portfolio - not that the method works consistently, or has merit now (or at any other time since that initial attempt >20 years ago). Monkeys with darts could pick a successful portfolio. Advocates for simian superiority would be derided were the evidence to be a single set of darts thrown many years ago.

I have no issue with anyone choosing whatever strategy they like, for whatever purposes suit them. To extrapolate any method's success on the basis of a single portfolio, consistently wheeled out as some kind of proof of concept, is dubious proof to put it mildly. I would be surprised if its advocates would be as accepting of a single portfolio as a means of proof of a growth strategy if it contained say Microsoft or Amazon over the same time period if that were the only portfolio available to demonstrate such "proof".

[Arborbridge]

A missed opportunity: anyone worried about this could always have started a second and third example
But generally, it is far easier to pick holes in the effort of others.

Why would anyone worried by this (not sure what "this" is - concentration? lack of other example portfolios?) be motivated to do so?

This being the problem you brought up about a single example of a non-tinker HYP. It is regrettable, but not disastrous. As I say, anyone could have started one, and I would have thought the motivation would be to show whether the portfolios turned out to be radically different. It a share no one thought of doing it - or in Pyad's case didn't persevere with it.
However, we do have one example which has been giving excellent results over 22 years, and hopefully Pyad will persevere with it.

I'm sure one problem is: where would you stop? - considering the universe of possible HYPs is huge.

I'm sure if there were three examples a year apart, some people would still say that isn't enough.

Arb.

[dealtn]

Why would anyone worried by this (not sure what "this" is - concentration? lack of other example portfolios?) be motivated to do so?

This being the problem you brought up about a single example of a non-tinker HYP. It is regrettable, but not disastrous. As I say, anyone could have started one, and I would have thought the motivation would be to show whether the portfolios turned out to be radically different. It a share no one thought of doing it - or in Pyad's case didn't persevere with it.

Presumably many did start them. There is a whole board on this site dedicated to the practical running of them - and on TMF before. So where are all these wonderful successful portfolios? Their absence speaks volumes. All we get is HYP1 glorification. The neutral observer sees survivor bias.

However, we do have one example which has been giving excellent results over 22 years, and hopefully Pyad will persevere with it.

I expect he will. I hope he does regardless of its results, but again question the relevance of such as a proof of concept. It simply shows a single instance of it has worked (until it hasn't).

I'm sure one problem is: where would you stop? - considering the universe of possible HYPs is huge.

I'm sure if there were three examples a year apart, some people would still say that isn't enough.

Arb.

You make my point. The potential universe is huge, yet only 1 example is put forward for success. What other scientific experiment would claim to have a proof from a single event that anyone could decry as simply being random. I'm not sure at what point an analyst would theorise success. But certainly more than one. Dimson et al and many other long run analysts of the equity markets have multiple publications over multiple years in multiple markets when they theorise on what makes long run successful strategies.

[Lootman]

[Earlier in this thread I asked the question as to what it was about HYP1 that led to it's significant outperformance, at only a small uplift in risk, compared to the FTSE100 from which it was taken. I was interested in others views on this but my personal belief is that it is primarily down to equal weighting on purchase.

Interestingly I believe that Bogle himself now advocates such a portfolio even over a tracker. IIRC it would contain a larger number of shares but the principles of equal weight on purchase and buy-and-hold are the same. Further research would be needed here and that might be difficult to find given such an approach would be difficult for any fund manager to take. Equal weight trackers do exist but these churn holdings so do not have the long-term buy-and-hold aspect. They also carry charges. However, comparisons here would be interesting.

In short there are some lessons from HYP that can be taken to create an investment approach that might be better than a simple tracker.

Regarding equal weighting I would expect that to outperform when smaller companies outperform. Whilst in a momentum based market, such as we had for a few years up to 2021, it would underperform. The most liquid equal-weight tracker I know of is RSP and looking at its performance against SPY (the largest tracker for the S&P 500) their returns are similar:

https://www.etf.com/etfanalytics/etf-co ... SPY-vs-RSP

Whilst this article goes into more detail about that comparison:

https://seekingalpha.com/article/452585 ... -sense-now

Of course RSP does rebalance to maintain the equal weighting and you are arguing to not do that. So would an unchanged RSP have done better than the rebalanced one? I don't know but we'd need a reason to believe that it would rather than just the anecdotal results of one portfolio.

One other thing about equal-weighting trackers is that they tend to exist for narrower market segments. You couldn't run one for an all-share index because you would have to buy relatively large positions in the smallest most illiquid issues. An individual investor could manage something like that, with a lot of effort, but a fund could not. Most equal weight trackers I have seen are for market sectors such as biotech shares, whch individually can be a bot of a lottery.

[ADrunkenMarcus]

But that is timing and for instance US LEXCX has done fine without resetting since 1935 and still is giving the S&P500 a run for its money despite being near 50% weighted into a single stock (Union Pacific (railroads)).

Is that, then, an argument for buying Union Pacific?

Best wishes


Mark.

[moorfield]

No - I take the opposite view. It is an idea for those with not quite enough capital to retire on comfortably. More or less the position I was in: 4-5% income would meet the bills. Much lower wouldn't.

I suppose I had forgotten to look at it from that angle. If Doris was comfortable with £3,451 p/a (inflation adjusted) (*) when she retired in 2001, then allowing for 2003-04 and 2008-09 when a little belt tightening would have been needed, her HYP1 income has been a resounding success, regardless of concentration.


(*) Let's suppose that HYP1 might have been scaled up by a factor of x10 - £34,510 p/a. £111,230 today.

[dealtn]

If Doris was comfortable with £3,451 p/a (inflation adjusted) (*) when she retired in 2001, then allowing for 2003-04 and 2008-09 when a little belt tightening would have been needed, her HYP1 income has been a resounding success, regardless of concentration.

And if the future, because of that unnecessary concentration, leads to a halving of income were one (or more) of those holdings to fail, would you be labelling that outcome one of resounding success?

Why run the risk?

It seems difficult to justify a rules based system when the minor inconvenience of an additional simple rule to avoid such concentration through infrequent rebalancing would remove such an elementary and obvious flaw.