Bubblesofearth wrote:dealtn wrote:
Agreed. But this thread is specifically about HYP1, and its resulting (over) concentration. Many appear to, instead of acknowledging this, and acting as you describe, prefer to defend this specific portfolio as a proof of HYP concept success, and see no issue with the concentration risk seemingly on the basis it has worked out ok (so far).
For an investment strategy purposely designed for those unable (or unwilling) to monitor portfolios and market risk - with specific intention at inception to diversify away elements of risk - I find it bizarre that ongoing lack of diversification risk is ignored, or considered ok.
I don't think anyone is claiming proof of concept from something we can all acknowledge is n=1. But, by similar logic, you cannot claim failure of concept. The fact that concentration has occurred is obvious and should be expected. It was never in doubt and was not something that was ever claimed to be something to try to avoid.
Really? Comments such as
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.
suggest some struggle with the idea a single example portfolio's success are enough proof of concept that HYP as a strategy overall works. Instead, at best, it merely shows it can work. Draw a probability distribution and select a single point on it to the right hand side and you can "prove" an above average result. Don't worry about any of the other single observations on the left hand side.
Bubblesofearth wrote:
Diversification on purchase can actually be viewed as a way of expecting and allowing for exactly the kind of divergence we've seen. Some companies will fail, some will do OK and a small number will excel. Diversification should allow you to at least have some money in the latter. It is this minority of high performers that drive much of the gains of the whole market. You could be unlucky and not select any of these shares in your portfolio (hence the argument for more than 15 shares) but by regularly selling down any strong performance you are guaranteeing not benefitting fully from them.
There was a study some time ago, that has been linked on here or TMF in the past, looking at the performance of the original Dow components over time. Equal weight long term buy and hold outperformed the other strategies looked at which IIRC included price-weighting as well as equal weight with rebalancing. Of course this is another n=1 study but it was interesting nonetheless.
What we don't have is any material evidence that the 'concentration risk' of HYP1 or any other evolved HYP has led to significant underperformance vs rebalancing. Maybe that will emerge over time, maybe it won't. But until it does it's presumptive IMO to call such concentration an obvious flaw.
BoE
HYP was proposed as an alternative to other strategies, and postulated as an alternative to purchasing an annuity at retirement. It wasn't proposed to be the best investment strategy in the form of income return (or any other form of return) so looking for underperformance versus the market, or alternatives, shouldn't be anyone's task - or a demonstration if its flaws or failures. What would be a failure would be an obvious risk, systemic to the strategy, such that the probability of being to the left of its benchmark on that probaility distribution was higher than alternative approaches that it set out to be better than. The right hand side of the distribution can look out for itself and any excess outperformance (were it to systemically exist) be utilised to better protect the left.
In other words there is no need (or claim to be) best on the right, but there IS an importance to protect the downside - else why not adhere to that safe annuity route?
So I would argue the "obvious flaw" embedded into the strategy is the acknowledged rising concentration over time has a rising probability associated with drift towards either extreme of that probability distribution. Concentration leads to above average variability in outcomes - away from the norm to out or under performance. Given the asymmetry of purpose here, where outperformance isn't necessary, but protection from underperfomance is, why would you have that rising volatility and embedded attraction to the extremes of the distribution as a sytemic feature of your strategy?
A simple rebalancing rule would address this. You would give up some (potential) upside to put a floor on the downside. Doris wouldn't understand (or care) about options as a financial instrument - which could achieve the same thing. But, for example, a rule to ensure the top 5 shares in a portfolio didn't provide 50% of the income (or capital?) such that the exposure to a failure in one or two of the specific investments was limited would be value accretive to a simple rule based strategy designed to provide a steady rising income, and not designed to outperform the average (and certainly not designed to be top decile).