HYP1 is 22 - thread discussing income and capital diversification

[IanTHughes]

That is unrealistic for anyone living off their dividends but no one except me and maybe IAAG seems to recognise that.

I think you are wrong there. Many of the current HYPers here recognise the problem and have applied practical ways around it. This was all discussed a decade ago (and more) on TMF and various limits and mitigations were proposed by posters such as BSD, Gengulphus and TJH. TJH and myself are very clear and publish changes as they happen, and why.
So the net of practical people recognising this problem is far wider than you and IAAG - ironically neither of whom attempt to run a HYP. AFAIK.

Meaning therefore that HYP1 as it stands is a failure.

I am sorry to burst a bubble but Dod101 and Itsallaguess are nowhere near the only two people to notice that HYP1's income and capital is less diversified than when starting out. To coin a phrase "it is bleeding obvious"!

However, Dod101 and Itsallaguess can lay claim to being two of the most vociferous staters of "the bleeding obvious" whilst studiously ignoring the success that HYP1 has achieved in its primary aim - the production of income!

HYP1 was set up to show whether a simple "buy and forget" portfolio, comprising individual High Yield shares, could create a hIgh and rising income

Over the now 22 years the income received, even while starting at a high yield, has increased at an average of 5.99% per year! At the same time it has produced a far superior overall income result than might have been achieved by many other possible investment alternatives.

Only the truly blinkered would claim HYP1, set up as it was to provide a high and rising income, has been a failure. Which of course they do!


Ian

[Arborbridge]

Meaning therefore that HYP1 as it stands is a failure.

Dod

Well, an interesting question here: What does failure look like? What was HYP1 set up for?

It isn't a failure because it has become unbalanced, Dod. All you are saying is that you don't like it being unbalanced - that isn't failure: that's only not doing something you personally desire, and that is easy to rectify if you want to. You are testing against something Pyad, never claimed as a target. It is a classic post hoc altering of the goals.

Failure would be HYP1 not doing something that it was intended to do. There was no requirement for the income to be steady (I remember Pyad had some words about being aware of the risks), or for the portfolio to be balanced (I'm not sure Pyad ever used the term in his guidelines). Neither was there a requirement to be the best portfolio in the world! - in my experience there is always someone who can produce a better performing portfolio, so that would be a vanity project.

The only criterion to judge failure against is the target set on day one: a portfolio which could be set up by a layman and which would provide a high and rising income.

Anything else is outside the aims of HYP.

Anything else is bluster, or voluntarily added requirements via bells and whistles which - to be fair - most of us actively using HYP have indeed applied. What we can't be sure of is whether our voluntary interventions have been a improvement or not over what would have happened: that we can never know.

I'm with Ian Hughes on this one. HYP1 has proved beyond doubt that an amateur investor with little knowledge can set up a portfolio using the HYP method which will provide a high and rising income.

Arb.

[Dod101]

Meaning therefore that HYP1 as it stands is a failure.

Dod

Well, an interesting question here: What does failure look like? What was HYP1 set up for?

It isn't a failure because it has become unbalanced, Dod. All you are saying is that you don't like it being unbalanced - that isn't failure: that's only not doing something you personally desire, and that is easy to rectify if you want to. You are testing against something Pyad, never claimed as a target. It is a classic post hoc altering of the goals.

Failure would be HYP1 not doing something that it was intended to do. There was no requirement for the income to be steady (I remember Pyad had some words about being aware of the risks), or for the portfolio to be balanced (I'm not sure Pyad ever used the term in his guidelines). Neither was there a requirement to be the best portfolio in the world! - in my experience there is always someone who can produce a better performing portfolio, so that would be a vanity project.

The only criterion to judge failure against is the target set on day one: a portfolio which could be set up by a layman and which would provide a high and rising income.

Anything else is outside the aims of HYP.

Anything else is bluster, or voluntarily added requirements via bells and whistles which - to be fair - most of us actively using HYP have indeed applied. What we can't be sure of is whether our voluntary interventions have been a improvement or not over what would have happened: that we can never know.

I'm with Ian Hughes on this one. HYP1 has proved beyond doubt that an amateur investor with little knowledge can set up a portfolio using the HYP method which will provide a high and rising income.

Arb.

Clearly to an adherent of the HYP philosophy, to disagree is a heresy but I knew that anyway. My point is that on the narrowest of criteria HYP is maybe a success but we did not need a 22 year demo to show that. In real life, few of us I imagine would be happy with 2/3rds of the income coming from just 3 shares, so the holder would need to do quite a bit of rebalancing along the way and I thought that the HYP idea was that it was a 'hands off' approach. Ergo it has not worked.

We will need to agree to disagree on this as I imagine that we will never come to a meeting of the minds.

Dod

[IanTHughes]

Meaning therefore that HYP1 as it stands is a failure.

Well, an interesting question here: What does failure look like? What was HYP1 set up for?

It isn't a failure because it has become unbalanced, Dod. All you are saying is that you don't like it being unbalanced - that isn't failure: that's only not doing something you personally desire, and that is easy to rectify if you want to. You are testing against something Pyad, never claimed as a target. It is a classic post hoc altering of the goals.

Failure would be HYP1 not doing something that it was intended to do. There was no requirement for the income to be steady (I remember Pyad had some words about being aware of the risks), or for the portfolio to be balanced (I'm not sure Pyad ever used the term in his guidelines). Neither was there a requirement to be the best portfolio in the world! - in my experience there is always someone who can produce a better performing portfolio, so that would be a vanity project.

The only criterion to judge failure against is the target set on day one: a portfolio which could be set up by a layman and which would provide a high and rising income.

Anything else is outside the aims of HYP.

Anything else is bluster, or voluntarily added requirements via bells and whistles which - to be fair - most of us actively using HYP have indeed applied. What we can't be sure of is whether our voluntary interventions have been a improvement or not over what would have happened: that we can never know.

I'm with Ian Hughes on this one. HYP1 has proved beyond doubt that an amateur investor with little knowledge can set up a portfolio using the HYP method which will provide a high and rising income.

I cannot find the original HYP article online but, from my own saved copy, pyad very clearly, and quite correctly, warned of the risks involved!

I wish to stress, though, that anybody considering this approach must be made aware that there are risks. Neither the income nor the capital is guaranteed. If you cannot live with that then, clearly, don't do it.

Furthermore, there is no mention at all that the income should only increase year-on-year! That "proviso" has been added by others since, no doubt in order to justify continually bleeting on about "the bleedin' obvious".


Ian

[Itsallaguess]

Meaning therefore that HYP1 as it stands is a failure.

Well, an interesting question here: What does failure look like? What was HYP1 set up for?

It isn't a failure because it has become unbalanced, Dod. All you are saying is that you don't like it being unbalanced - that isn't failure: that's only not doing something you personally desire, and that is easy to rectify if you want to. You are testing against something Pyad, never claimed as a target. It is a classic post hoc altering of the goals.

Failure would be HYP1 not doing something that it was intended to do.

But the HYP strategy was designed with the CRITICAL FEATURE of sector-diversification at it's very heart though Arb -

The most critical feature of HYP share selection is sector diversification in order to spread the risks around different industries.

Although a higher yield could be obtained by concentrating on certain sectors like utilities for example, the risks to the capital and income would be too high.

https://web.archive.org/web/20160609102 ... 050304.htm

I simply fail to see how that 'critical feature' of sector diversification, where it clearly (and quite quickly, as it happened...) worked itself out of a no-tinker HYP, can be so easily ignored when it suits people to...

The second sentence above is warning about exactly the situation that HYP1 found itself in over 12 years ago now, when nearly 71% of income was being generated from just five holdings, and where that figure has broadly risen in the subsequent years. It's sitting at 80% from five holdings at the current time...

It wasn't a 'nice to have' Arb - it was deemed to be CRITICAL to the HYP strategy by the bloke who actually wrote it...

You've said yourself that 'Failure would be HYP1 not doing something that it was intended to do', and so I fail to see how anyone could read that HYP article and not say that it wasn't clearly intended to be much more diversified.

The key word is CRITICAL...

Cheers,

Itsallaguess

[IanTHughes]

From that article:

"The most critical feature of HYP share selection is sector diversification in order to spread the risks around different industries.

At no point was it suggested that sector diversification should be maintained, not least because to do so would have negated the whole "buy and forget" nature of the portfolio. Only those like you insist that such a requirement should now be added.

And you continue to do so, even after 22 years evidence of an average annual increase of 5.99%, clearly demonstrates that HYP1 has magnificently achieved its primary aim - a high and rising income! Even someone as blinkered as you obviously are must accept that, despite your misgivings, HYP1 has succeeded in its primary aim - providing a high and rising income!

But no, on the contrary, you keep on saying that HYP1 has failed, because of your own personally added aims that income should always steadily rise, never decrease, and should not be over-concentrated. Aims never metioned in the original HYP set up. However, I can find no sign from you as to a strategy whereby the same or better "income" result might have been achieved. Do you have such a strategy? In comparison to HYP1, many Investment Trusts have failed miserably, can you do better?


Ian

[Arborbridge]

Diversity and equal weighting were built into the original prescription. Since then, we have all concluded that Pyad therefore intended, this to be permanent condition.

That is locgical, but it seems to me that it wasn't necessarily his intention at all. It was his intended starting position for choosing a layman's portfolio, but he also believed that one need not touch it thereafter except for market trading.
His position was that a layman trading would be likely to make matters worse compared with events forced on the portfolio by the market. It also follows that he did not regard passing variations in diversity or balance* as being critical, and that they would correct over an extended period. Indeed, in his latest report he mentioned just that, and clearly does not regard income being dependent on a few big hitters at any given epoch as being critical or likely to bring about a failure of the main target. The imbalance one or two regard as a "failure" is not at all: it is part of the evolutionary process of a long term classic HYP - it's baked in to the initial recipe. To talk of it as a "failure" is incorrect: it's no more a failure than a round loaf of bread is because it isn't a split tin. But does it still taste like bread? yes - so it met its target.

Naturally, investors can do what they like about "balance", but I believe the above sums up pyad's position.

(*AFAIK he rarely mentioned "balance" except as a starting condition)

Arb.

[Itsallaguess]

The imbalance one or two regard as a "failure" is not at all: it is part of the evolutionary process of a long term classic HYP - it's baked in to the initial recipe.

So a rapidly rising and then steadily maintained high-concentration risk of both income and capital was 'baked into the initial HYP recipe'?

And that's after the very wide sector diversification of income and capital was deemed CRITICAL in the opening paragraphs of the HYP strategy document, because not to do so would deliver ''risks to the capital and income that would be too high'?

Why were those 'risks' CRITICALLY IMPORTANT on Day 1, and yet they are not then important from that point onwards...?

If the original HYP strategy was fundamentally clearer on that specific point then there'd be absolutely no problem, but I'd be astounded if 'the man on the street' for whom such a long-term, hands-off income-strategy was designed for would fully appreciate that very important point until he quickly began to actually see it happening...

Anyway - we'll no doubt go round in circles on this, so I'm happy to leave it there and we'll see how things go next year.

I'll bring some pop-corn...

Cheers,

Itsallaguess

[Arborbridge]

The imbalance one or two regard as a "failure" is not at all: it is part of the evolutionary process of a long term classic HYP - it's baked in to the initial recipe.

So a rapidly rising and then steadily maintained high-concentration risk of both income and capital was 'baked into the initial HYP recipe'?

And that's after the very wide sector diversification of income and capital was deemed CRITICAL in the opening paragraphs of the HYP strategy document, because not to do so would deliver ''risks to the capital and income that would be too high'?

Why were those 'risks' CRITICALLY IMPORTANT on Day 1, and yet they are not then important from that point onwards...?

If the original HYP strategy was fundamentally clearer on that specific point then there'd be absolutely no problem, but I'd be astounded if 'the man on the street' for whom such a long-term, hands-off income-strategy was designed for would fully appreciate that very important point until he quickly began to actually see it happening...

Anyway - we'll no doubt go round in circles on this, so I'm happy to leave it there and we'll see how things go next year.

I'll bring some pop-corn...

Cheers,

Itsallaguess

I think there is only one person who can answer this properly, and that's Pyad. we are just trying to guess what was in his mind. Yes, nuff said, I think, so "donna nobis pacem".

As you say, the next year or so will be very interesting indeed knowing that a drop in income from the current big beasts has been signalled. But then, investment is a never ending story, barring a total loss.


Arb.

[pyad]

...Anyway - we'll no doubt go round in circles on this, so I'm happy to leave it there and we'll see how things go next year.

I'll bring some pop-corn...

Cheers,

Itsallaguess

I can tell you how things will very prob go next year regarding this thread subject. The portfolio will remain highly unbalanced with concentration of both income and capital in a minority of the shares, just as it has for a very long time. The actual shares concerned may change, and have over the years as I've said, but the fact that it is so unbalanced simply goes with being no-tinker.

Discussing it every year as though this is a big surprise is a little tiresome. Especially as it is often the same people year after year who must expect it. Enjoy your popcorn next year as the discussion will be a repeat of this year, and last year, and the year before that...

I'm looking forward to 100% of the income from just one share, that'll really give youse all something to talk about.

[88V8]

Is Doris aware of all this angst?

V8

[Arborbridge]

...Anyway - we'll no doubt go round in circles on this, so I'm happy to leave it there and we'll see how things go next year.

I'll bring some pop-corn...

Cheers,

Itsallaguess

I can tell you how things will very prob go next year regarding this thread subject. The portfolio will remain highly unbalanced with concentration of both income and capital in a minority of the shares, just as it has for a very long time. The actual shares concerned may change, and have over the years as I've said, but the fact that it is so unbalanced simply goes with being no-tinker.

Discussing it every year as though this is a big surprise is a little tiresome. Especially as it is often the same people year after year who must expect it. Enjoy your popcorn next year as the discussion will be a repeat of this year, and last year, and the year before that...

I'm looking forward to 100% of the income from just one share, that'll really give youse all something to talk about.

Zen maestro.

[IanTHughes]

I'll bring some pop-corn...

So, no change there


Ian

[Itsallaguess]

I'm looking forward to 100% of the income from just one share, that'll really give youse all something to talk about.

That's what we like to see - pyad in full 'Sod you all, I'm buying more Aviva' mode...

Where do the years go...

Cheers,

Itsallaguess

[Lootman]

I'm looking forward to 100% of the income from just one share, that'll really give youse all something to talk about.

That's what we like to see - pyad in full 'Sod you all, I'm buying more Aviva' mode...

Where do the years go...

Don't forget Lloyds Bank as well. Wasn't his value portfolio 80% in financials when the subprime crisis hit? Oops.

I think for credibility Pyad should tell us what percentage of his income is reliant upon his HYP1 portfolio, if he even runs it? Or even HYP in general. I think it might be a case of "do what I say; not what I do".

[tjh290633]

My objection to the results of HYP1 are essentially that after 22 years or whatever it is it may be living up to the basic need for income but the derivation of that income would certainly leave me very concerned with 2/3rds of it coming from 3 shares. That is unrealistic for anyone living off their dividends but no one except me and maybe IAAG seems to recognise that. That is why I say that HYP1 is a failure.

Dod

That is unrealistic for anyone living off their dividends but no one except me and maybe IAAG seems to recognise that.

I think you are wrong there. Many of the current HYPers here recognise the problem and have applied practical ways around it. This was all discussed a decade ago (and more) on TMF and various limits and mitigations were proposed by posters such as BSD, Gengulphus and TJH. TJH and myself are very clear and publish changes as they happen, and why.
So the net of practical people recognising this problem is far wider than you and IAAG - ironically neither of whom attempt to run a HYP. AFAIK.

Arb.

As I see it, the problems arise from starting with an equal weight portfolio but allowing it to deviate too far from that state. Not only that but, when one of the heaviest weight shares was taken over, all of the proceeds were put into a single share. In my view there are a number of rules which can prevent such imbalance.

First is to set a limit on the deviation allowed above the median holding vale. For an initially 15 share portfolio, that limit could be set at twice the median holding weight. If that limit is reached then 25% of the holding should be sold and used to too up underweight holdings with a higher yield than the trimmed share.

Second, if a share is taken over, any replacement share should be bought at the then median holding weight. Surplus funds from this activity can be used, either to top up underweight holdings or to buy a new holding at the median weight.

Third, if a share ceases paying dividends with no immediate prospect of resumption, or if the yield on a share falls below about half that of the portfolio, then consideration should be given to culling such shares.

Fourth, if the share of income from a share rises above a certain level, such as twice the median share, that share should not be topped up. Likewise if the cost of a holding has become double the median holding cost then that share should not be topped up. Both these measures are to avoid over reliance on a given share and to reduce the risk of over concentration.

It has been suggested in the past that only say 80% of portfolio income should be withdrawn, the balance being held as a cash buffer or reinvested in the portfolio to enhance the income flow from dividends. The question of how large a cash buffer should be has been discussed, and between one and two year's anticipated dividends is a reasonable level.

Broadly speaking, these are measures that I have adopted for my own portfolio. It is not possible to say how HYP1 would have performed had they been applied from the outset, but one thing is certain. The gross imbalance in both holding values and in share of income would have been avoided. Whether income would have been more or less than from HYP1 cannot be assessed, but reinvestment of trimming proceeds or surplus income in higher yield shares is likely to have enhanced the income.

TJH

[BullDog]

That's what we like to see - pyad in full 'Sod you all, I'm buying more Aviva' mode...

Where do the years go...

Don't forget Lloyds Bank as well. Wasn't his value portfolio 80% in financials when the subprime crisis hit? Oops.

I think for credibility Pyad should tell us what percentage of his income is reliant upon his HYP1 portfolio, if he even runs it? Or even HYP in general. I think it might be a case of "do what I say; not what I do".

My guess? It was more lucrative to run the paid for tip sheet.

[Dod101]

TJH has very helpfully discussed what would/should be done in real life, or at least his personal version of what should be done, The fact is that in real life, almost no one would leave HYP1 as is if he/she were living off it and for PYAD to imply otherwise is simply nonsensical. As I said early on in this thread the experiment or whatever it is has illustrated that in real life leaving a HYP alone is unrealistic. The demonstration has proved that HYP does not work that way and we could easily dispense with it. What further purpose is served except as Bulldog said, to illustrate the danger in leaving a HYP untinkered. It does not need tinkering now; it needs a wholesale reconstruction.

Dod

[IanTHughes]

TJH has very helpfully discussed what would/should be done in real life, or at least his personal version of what should be done, The fact is that in real life, almost no one would leave HYP1 as is if he/she were living off it and for PYAD to imply otherwise is simply nonsensical. As I said early on in this thread the experiment or whatever it is has illustrated that in real life leaving a HYP alone is unrealistic. The demonstration has proved that HYP does not work that way and we could easily dispense with it. What further purpose is served except as Bulldog said, to illustrate the danger in leaving a HYP untinkered. It does not need tinkering now; it needs a wholesale reconstruction.

So, what you are saying is that an investor should have accepted a lower income than might have been achieved by HYP1?

You keep banging on about the "dangers" of HYP and yet so far, HYP1 has produced more income than many possible alternatives. HYP1 has also achieved a Total Return (XIRR) over the past 22 years of 8.11%, and an annualised increase in the income generated, from a high start mind you, of 5.99%. Could you please point to a similar investment strategy, simple enough for a relative novice to implement, that would have achieved the same or better results?

The only "danger" I see, is your constant anti-HYP bias, based on nothing more than unsubstantiated hot air, being shown up for the total nonsense it is!


ian

[Arborbridge]

TJH has very helpfully discussed what would/should be done in real life, or at least his personal version of what should be done, The fact is that in real life, almost no one would leave HYP1 as is if he/she were living off it and for PYAD to imply otherwise is simply nonsensical. As I said early on in this thread the experiment or whatever it is has illustrated that in real life leaving a HYP alone is unrealistic. The demonstration has proved that HYP does not work that way and we could easily dispense with it. What further purpose is served except as Bulldog said, to illustrate the danger in leaving a HYP untinkered. It does not need tinkering now; it needs a wholesale reconstruction.

Dod

Danger? Well, yes, there is potentially a danger of disaster, but this has not yet produced a tragic result over 22 years and looks less likely to as time goes on and proves the concept works. Far from it, as we see from the very rewarding results which Pyad has published recently, both in income and capital. Most people looking at that overall result would be very happy indeed, and people are being extremely harsh for no good reason, in my view.

As for "wholesale construction" - the point of HYP1 was to see what would happen. Having proved that the result fulfills Pyad's aims, there is no point "reconstructing" or altering the experiment from here onwards. Indeed, now is a most interesting time to carry it on - will the doomsters be confounded? Or will they never admit that HYP1 fulfills it's target, being sidetracked by bickering about how it isn't quite what they would have done?

Arb.