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Admiral exceeds weight

For discussion of the practicalities of setting up and operating income-portfolios which follow the HYP Group Guidelines. READ Guidelines before posting
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Arborbridge
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Re: Admiral exceeds weight

#428711

Postby Arborbridge » July 19th, 2021, 10:10 am

moorfield wrote:
Arborbridge wrote:
No decision as yet.




Well we have a gently crashing market this morning, so you might have missed the boat already! No rush ... :lol:


Gently crashing? :lol:

Quite a few favourite shares marked down today.

moorfield
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Re: Admiral exceeds weight

#428734

Postby moorfield » July 19th, 2021, 11:18 am

Arborbridge wrote:
Gently crashing? :lol:

Quite a few favourite shares marked down today.




Yes it's just the start, wait until the US wakes up ...

By the end of the day you could be considering buying more ADM on a tastier yield, rather than selling. :? :lol:

Gengulphus
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Re: Admiral exceeds weight

#428751

Postby Gengulphus » July 19th, 2021, 11:57 am

Arborbridge wrote:
Dod101 wrote:I am not a HYPer and I find confirmation for this stance most weeks. Arb seems to be a sensible fellow but for him even to consider cutting Admiral at this juncture seems to irrational. It must be the heat that is getting to him. Here we have a decent share offering a nice big increase in the dividend (manna from heaven to HYPers) and Arb worries about it being overweight!

I too hold Admiral and think it may be a little overweight (like me!) but so what? It produces the goods.

Still, Dod, a method is a method, and if one accepts that not having too much weight in one share is one of HYP's* safety factors, then trimming is not irrational, as you suggest. It is a perfectly logical reaction to what the market has dealt.
"Rationality" has to be judged within the framework which has been laid down - i.e. within context. Not to trim within that context would be an irrational step. Naturally, the HYPer has the right to over-ride the rules if it seems appropriate - for example if the situation is judged to be temporary on any reasonable basis. That's why Terry does not always react immediately to any given situation, and why he sometimes vetoes a particular action in favour of something alternative course. That was one part of my objection to MDW's criticism of me the other day. The other was that there is a tenuous link, at best, between any particular decision and the long term difference between two portfolios.

That framework / context also includes the HYPer's financial circumstances. E.g. imagine two retired HYPers who collaborate on their HYP selections, buying equally-sized original holdings of precisely the same fifteen shares on the same date, with an anticipated safe withdrawal rate from their dividend income of 4%. The only difference is that one has £24k annual income from a company pension plus £200k to invest in their HYP, while the other has £800k to invest in their HYP - so they're both anticipating £32k annual income in retirement (to keep the example simple, assume that the state pension isn't a significant factor, e.g. due to very early retirement, lack of an NI contribution record or suchlike).

Both allow big imbalances to build up in their HYPs - and then one year, a couple of their biggest contributors to portfolio income happen to run into severe difficulties and cancel their dividends (*). If those dividends amount to say 25% and 15% of portfolio income respectively, one of the HYPers sees an annual income drop from £24k + 4% * £200k = £32k to £24k + 60% * 4% * £200k = £28.8k, i.e. a 10% income fall. They might well reckon that even if they have the bad luck to experience such cuts, they can take a 10% income fall in their stride and so not be all that bothered about the risk posed by the portfolio imbalances...

Meanwhile, the other HYPer sees an annual income drop from 4% * £800k = £32k to 60% * 4% * £800k = £19.2k, i.e. a 40% income fall. They're quite a bit less likely to reckon they can take such a fall in their stride, and so might well want to rebalance their portfolio so that no pair of companies accounts for more than say 20% of portfolio income, or even increase its number of holdings to reduce that limit to say 15% for any pair of companies (**).

The point is that those two HYPers can end up entirely rationally making different decisions, despite having HYPs that are identical with regard to which shares they hold and the weightings of those shares. So one cannot actually say which decision is rational just based on the HYP's share selections and weightings: one also needs contextual information about how important the HYP is in the HYPer's financial affairs. And that importance has many aspects to it , such as what other sources of income they have, how much income those sources provide, how vulnerable that income is to cuts, how big the HYPer's outgoings are on food, accommodation, travel, entertainment, etc, and how easily 'belt tightening' measures can reduce those outgoings if needed.

In short, judging what's rational in financial decision-making (about HYPs or anything else) is a complex job and needs a lot more information than just a portfolio listing!

(*) Note this example is not assuming general economy-wide problems like those we've had the last year and a bit. Increased diversification won't help against them - what it will do is reduce the chances of experiencing the bad luck of a few companies that are producing a high proportion of your income between them happening to run into severe company-specific difficulties at more-or-less the same time.

(**) Note that a 15% limit on the income contribution of any pair of companies is possible with just 15 holdings - e.g. if they all make equal income contributions, they'll each contribute 6.67% of portfolio income and so every pair of them will contribute 13.33%. But it's rather close to the borderline of what's possible, so a HYP run that way would require remedial action quite often for things like unequal dividend rises - and I'm a bit doubtful about whether such a 'HYP' would actually end up really qualifying as an LTBH portfolio...

Gengulphus


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