On Doris

[Wizard]

Moderator Message:
As this thread has morphed into a discussion about the viability of HYP (as defined by the guidelines of the HYP-P board) it is no longer concerned with the practical aspects of running an HYP so it is now on HYP-Strategies (leaving a link). - Chris

There have been a few name checks for Doris recently, including from myself. I had a few spare minutes in the garden this afternoon so I went back to the original Doris article, I must admit having read it my previous recollection of Doris' situation was far from perfect. I think there are some interesting things to note from the original article:

1. As I think Arb mentioned, Doris was rich, but I had forgotten how rich. Her share portfolio was worth about £7 million pounds. This accounted for "most of her wealth"
2. This share portfolio generated an income of £275k a year, apart from this and interest on cash her only other income was her (State?) Pension. So Doris did not have a lot of further diversified income sources.
3. Doris' portfolio was many decades old and had been run on a strictly no tinker basis, despite this it had seemingly not become anywhere near as imbalanced as HYP1 has in a much shorter time, I conclude this as the portfolio is described as "The shares... weren't concentrated in any particular sector but were well diversified."
4. Her income "was vasty in excess of her outgoings". So she had an unquantified by seemingly large Safety Margin. From the choice of language "vastly in excess" I reckon a 50% Safety Margin would not be an unreasonable assumption.
5. Her cash deposits were about £1.5m. Even if she spent all her £275k dividend income that is an income reserve of about five and a half years. If her Safety Margin was the 50% I suggest then she had enough cash to live for over a decade with no income.
6. If Doris' portfolio generated an income of about £275k off £7m it was yielding around 3.9%, which if this was actually around the early 2000s would have been a bit above the FTSE100 yield, so certainly not aggressive in that sense. Compared to many of the HYP portfolios here the yield was pretty pedestrian and on average may well have gravitated more towards the Unilevers of the FTSE100 rather than the IMBs.

On balance my view is with her vast Safety Margin and epic Income Reserve Doris would probably not even have noticed the impact of Covid-19 on her finances. It does rather make me return to the thought that maybe HYP isn't really for anyohe with a 'normal' amount of capital to invest.

If anyone wants to read it in full the article can be found here...
http://web.archive.org/web/201004211949 ... doris.aspx

[Itsallaguess]

4. Her income "was vastly in excess of her outgoings". So she had an unquantified by seemingly large Safety Margin. From the choice of language "vastly in excess" I reckon a 50% Safety Margin would not be an unreasonable assumption.

5. Her cash deposits were about £1.5m. Even if she spent all her £275k dividend income that is an income reserve of about five and a half years. If her Safety Margin was the 50% I suggest then she had enough cash to live for over a decade with no income.

http://web.archive.org/web/201004211949 ... doris.aspx

That seems to be a linked Motley Fool article about Doris from 2006, but with regards to the above two 'income-reserve' and 'safety margin' points in particular, of which there has obviously been lots of discussion on these board in recent weeks, I can't ever remember any specific mention of either of those two 'risk-management' aspects in any of the original HYP articles that I have read over the years.

Here's a link to the first couple of original HYP articles on the old Motley Fool board, where Pyad first started to discuss this income-investment strategy -

Retirement Pays Dividends (Nov 6th 2000) - https://web.archive.org/web/20140219210446/http://news.fool.co.uk//news/foolseyeview/2000/fev001106c.htm

Retirement Pays Dividends - Part 2 (Nov 13th 2000) - https://web.archive.org/web/20140528041455/http://news.fool.co.uk/news/foolseyeview/2000/fev001113c.htm

In both of the above original HYP articles, 'risk' is clearly mentioned with regards to both capital and income, but the 'risk' to income isn't as well explained as it might be. There's some words on the subject here, from the second article linked above from November 13th (my bold) -

My belief is that a portfolio along these lines will generate a rising income over a long period together with a good chance of some capital growth as well. On top of that your money is available to you at any time, at market value, and you don't have to pay any charges whatsoever, apart of course from the small initial brokerage charge on purchase.

It is almost the perfect investment for an income player, as long as the person can accept the risks involved -- and I do stress that point. This is not for those who will lose sleep if the portfolio plunges in value. It is for those who can ignore the fluctuations in capital value and accept that there is a risk that the income will not, in fact, rise. But I consider that latter risk quite small.

Given what's been written about Doris in the 2006 article above, and when set against that final section above, discussing risk to income, then I personally think that Pyad missed a trick with the original HYP Strategy articles, which on the whole I think were fantastic introductions to the world of income-investment and share-dealing in general, for anyone who hadn't any experience of either.

I believe that if Pyad had thought to spend one of his latter HYP articles specifically discussing the two ideas of 'income-reserve' and 'safety-margin', in the forms that Lemon Fool income-investors now consider them, then I think many of the subsequent challenges to the HYP idea that have been discussed and repeated over the years would have been highly mitigated, by installing those two very simple and highly important aspects of any income-strategy right at the heart of his great idea.

The above is not wishing to knock the general HYP Strategy at all, but is simply aiming to highlight what seems to be a clear discrepancy between the 'Doris' that the strategy was initially devised for, and the Motley Fool audience it was actually delivered to, when it seems to be clear from the above 2006 article that Doris was obviously well-placed to take on a higher risk to her investment-income, given her clear 'income-reserve' and 'safety margin' benefits, but where those risk-management aspects were unfortunately not then mentioned again specifically in the subsequent HYP articles...

I often wonder, if Pyad were to be given the opportunity, whether he would perhaps seek to have redressed those specific omissions in the original HYP articles, to help explain these very important but relatively simple income-risk-management aspects to his inexperienced 'income-seeking' audience...

Cheers,

Itsallaguess

[Dod101]

To me the fundamental point is not Doris's reserves of cash or lack of them, it is that she did not need them anyway. I doubt that any portfolio is going to experience the loss of every dividend simultaneously and it would seem that if she lost 50% or more of her dividend income it would not make any difference to her lifestyle nor apparently her required income. This obsession with income reserves and so on is simply because most of our portfolios do not generate a sufficiently large income so that the holder does not feel that he/she can ignore a loss of some dividends in any one year.

Likewise there is no need for Doris's portfolio, given its size, to increase the risks in it by going for 'the highest available income which is judged to be sustainable'. She could happily go for lower yielding shares, thus normally reducing the risk to that income.

In other words, why Stephen Bland would introduce Doris in the context of promoting high yield portfolios I do not know. She did not even start small and build up her portfolio over the years; it was based on an inheritance, so the story has few parallels for the average income investor I would have thought, certainly for the average adherent on the HYP - P Board as far as I can see.

Bear in mind that this £7 million capital, £275,000 income portfolio was obviously pre 2006 and even today that is more money than most of us will accumulate in a lifetime.

As we all should know by now going for higher yielding shares to produce an income to live off is actually quite a dangerous strategy which is why we need all those income and cash reserves. For someone of relatively modest means (and I count myself in that category) it is essential to constantly watch the higher yielding shares. BT is a case in point as we saw again this week and its dividend cancellation had nothing to do with the Covid 19 virus.

Dod

[Gersemi]

I think the central part of the story - which is why PYAD told it - is that Doris achieved a 11% compound growth over a long period of time without doing any trading (other than forced by corporate actions) when most of his other clients failed to achieve that despite taking a great deal of interest in their investments. The fact that she had such surplus over her requirements simply explains why she didn't need to monitor it. The buying of the portfolio and then leaving it to do its stuff was always a very important part of PYAD HYP strategy, he didn't originally envisage it being built up over time, but rather being bought with a pension pot at retirement.

[moorfield]

6. If Doris' portfolio generated an income of about £275k off £7m it was yielding around 3.9%, which if this was actually around the early 2000s would have been a bit above the FTSE100 yield, so certainly not aggressive in that sense. Compared to many of the HYP portfolios here the yield was pretty pedestrian and on average may well have gravitated more towards the Unilevers of the FTSE100 rather than the IMBs.

If anyone wants to read it in full the article can be found here...
http://web.archive.org/web/201004211949 ... doris.aspx

At the same time that article was written, December 2006, City of London IT (CTY) was paying a dividend of 9.36p on a share price of ~300p - a yield of 3.1%. I usually reference this IT here as a benchmark for the minimum acceptable performance one should expect from an DIY high yield income portfolio (if you can't beat CTY, you might as well buy it). So Doris' portfolio looked to be high yield, but only just. Perhaps if she was that wealthy, and ignorant of her investments, an investment trust would have suited her better?

[Lootman]

I think the central part of the story - which is why PYAD told it - is that Doris achieved a 11% compound growth over a long period of time without doing any trading (other than forced by corporate actions) when most of his other clients failed to achieve that despite taking a great deal of interest in their investments.

Pyad/Bland didn't have any clients in the investment sense. He did tax returns for people and claimed to learn about investments by seeing the returns that his tax clients did or did not get. I was always rather dubious about that part of his claim because he would have had no knowledge of their unrealised gains.

And since Doris is a mythical character, so are her alleged 11% returns.

[Wizard]

I think the central part of the story - which is why PYAD told it - is that Doris achieved a 11% compound growth over a long period of time without doing any trading (other than forced by corporate actions) when most of his other clients failed to achieve that despite taking a great deal of interest in their investments.

Yes, I agree and that is pretty much what PYAD said at the end of the article. I presume he was being paid for writing the article and a few sentences that just said buying and holding can get you a better return than tinkering would be unlikely to have justified the fee, so it had to be padded out with a nice little story.

Given what's been written about Doris in the 2006 article above, and when set against that final section above, discussing risk to income, then I personally think that PYAD missed a trick with the original HYP Strategy articles, which on the whole I think were fantastic introductions to the world of income-investment and share-dealing in general, for anyone who hadn't any experience of either.

There is a danger in all this is that we read and re-read these articles looking for meaning and subtle messages that were never there in the first place (there is probably a word for that, but it is not in my vocabulary). The alternative is that the reason the concepts of Income Reserves and Safety Margins were not mentioned is because they were not envisaged as part of the HYP approach. Remember, that as you quoted, PYAD stated his view was that the prospect of income not rising was "quite small". If you think the risk of your income not growing is quite small maybe you don't consider mitigating that risk as important.

[James]

There is a danger in all this is that we read and re-read these articles looking for meaning and subtle messages that were never there in the first place (there is probably a word for that, but it is not in my vocabulary).

It's called "a degree in economics"

[Wizard]

There is a danger in all this is that we read and re-read these articles looking for meaning and subtle messages that were never there in the first place (there is probably a word for that, but it is not in my vocabulary).

It's called "a degree in economics"

Ah, well I do have one of those, so I think you have probably correctly diagnosed the problem

[Itsallaguess]

Given what's been written about Doris in the 2006 article above, and when set against that final section above, discussing risk to income, then I personally think that PYAD missed a trick with the original HYP Strategy articles, which on the whole I think were fantastic introductions to the world of income-investment and share-dealing in general, for anyone who hadn't any experience of either.

There is a danger in all this is that we read and re-read these articles looking for meaning and subtle messages that were never there in the first place (there is probably a word for that, but it is not in my vocabulary).

The alternative is that the reason the concepts of Income Reserves and Safety Margins were not mentioned is because they were not envisaged as part of the HYP approach.

Remember, that as you quoted, PYAD stated his view was that the prospect of income not rising was "quite small". If you think the risk of your income not growing is quite small maybe you don't consider mitigating that risk as important.

Of course, which is why the final part of my earlier post mentioned a rhetorical question, asking that if Payd perhaps had his time again, whether he would indeed have covered the two important aspects of 'Income Reserves' and 'Safety Margin' when he set out to develop and propose his income-investment strategy all those years ago...

It's all well and good someone holding Doris up as a shining example of how the HYP strategy might 'work', but I think it would be fairly safe to assume that large numbers of early HYP-article readers might well not possess the sort of wealth that she can clearly afford to be more blasé about...

It's clearly a gap in the 'safety-net' side of the original strategy, and whilst many on these boards have considered the importance of 'Income Reserves' and 'Safety Margin' for themselves, and are benefiting from doing so during the current income-market turbulence, they are clearly such hugely important 'risk-mitigating' aspects for any income-strategy to take into account, that omitting any specific mention of them has diminished the really valuable scope of the original articles, in my view..

Cheers,

Itsallaguess

[1nvest]

I think the central part of the story - which is why PYAD told it - is that Doris achieved a 11% compound growth over a long period of time without doing any trading

From the linked article ...

Over some forty years, at £7m it was around 65 times its value when she inherited it at a then value of £108,000 back in the thirties. A compound growth rate of roughly 11%.

Comparable to FT All Share index total return (dividends reinvested) over a similar 1930's for 40 years (68 times more).

Apart from her pension, her income consisted of the share dividends and interest on cash held in her bank account. The latter grew constantly because her income was vastly in excess of her outgoings, the dividends were paid to the bank and she took out what she needed leaving the balance to grow continuously.

Ahh! But if looking at price only, dividends going into a cash deposit account then that's totally different. Instead of FT All Share growing 68 fold, price only saw a 11 fold increase over the 40 years (nominal).

Here's a story which may be wholly fact, wholly fiction or somewhere in between.

Pretty clearly looks totally fictional, but based on fact. i.e. if you invested in the 1930's for 40 years reinvesting dividends they you would indeed have seen around 11% compounded growth based on FT All Share (Composite) historic performance. The story teller however is both having and eating their cake. Suggesting dividends were added to cash, but using compound total returns with dividends reinvested. Double counting.

Take another story for instance, equally based on fact (historic stock performance), Clara, Doris's older sister, who inherited a portfolio in the late 1920's (Jan 1928) and 50 years later with dividends being added to a cash deposit account and spent, ended (Dec 1974) with less than half (46%) of the inflation adjusted start date stock value.

The closest real world long term 'unchanging' case I know is LEXCX that started with 30 blue chip stocks in the mid 1930's (1935). Recently that has nearly 40% of its 20 odd present day stocks invested in a railroad stock (Union Pacific). Quite a considerable single stock/sector risk/bet. It also holds 15% in Berkshire Hathaway, that didn't even exist back when it was started, i.e. 30 stocks have evolved through mergers/acquisitions over time in a 'natural' way - without any intervention. Indolence can work ...
Jack Bogle

recommended the ultimate in buy-and-hold investing: a completely static portfolio. He would buy the 50 largest companies in the S&P 500 and then never buy another.

https://www.forbes.com/forbes/1999/0614 ... fe643e6874

Professor Jeremy Siegel of the Wharton School calculated a hypothetical return (before transaction costs) if someone bought the 50 largest S&P 500 stocks on Dec. 31, 1950 and held on. Average annual return: 12.6%, a fraction of a point better than the market (which Siegel defines as all listed stocks). He then created separate buy and hold portfolios for every year since until 1996. Result: the buy-and-hold approach beat the market three-quarters of the time and it never underperformed by more than 0.6% a year.

[AleisterCrowley]

There is a danger in all this is that we read and re-read these articles looking for meaning and subtle messages that were never there in the first place (there is probably a word for that, but it is not in my vocabulary).

Hermeneutics, in this (Pyadian) context.

[Alaric]

It's clearly a gap in the 'safety-net' side of the original strategy

There was a simple minded resilience test applied to the solvency of insurance companies back in the 1980s, part of which was to consider the financial position were the equity values to fall by 25%. If not fussed by market values a non-trading income orientated investor could probably just not take too much notice of such a fall.

Recent events would suggest that an equity orientated income strategy should perhaps consider the risk of a 50% fall in dividend income. Mitigation strategies include having more income than needed and perhaps as well a cash or near cash reserve. Not chasing income for its own sake might also come into it.

[1nvest]

Remember, that as you quoted, PYAD stated his view was that the prospect of income not rising was "quite small". If you think the risk of your income not growing is quite small maybe you don't consider mitigating that risk as important.

Over the last century+, dividend value declines have been moderately small, -33% type maximum declines in nominal terms. Adjust for inflation however and historic declines have seen in excess of being -85% down. That is however the most extreme case, from a relatively high prior dividend level point. More broadly factoring in for a cut of a third would seem reasonable enough, maybe 50% cut tops.

[1nvest]

Recent events would suggest that an equity orientated income strategy should perhaps consider the risk of a 50% fall in dividend income. Mitigation strategies include having more income than needed and perhaps as well a cash or near cash reserve. Not chasing income for its own sake might also come into it.

Judgemental. How do you decide how much cash to hold as a buffer, how much of dividends to reinvest/spend in order to provide a consistent inflation adjusted income to match liabilities? In contrast total return and drawing ones own dividends out of that total return leads you to SWR style of income provision, that is a consistent inflation adjusted amount of income provision, without having to focus (concentrate) on specific asset/stock types (above average yielders). The lower the SWR (the more multiples of yearly spending the portfolio value) the greater the security. Doris for instance in having perhaps a 50x spending portfolio value, 2% SWR or less (£170K/year inflation uplifted spending relative to a combined £7M stock + £1.5M cash portfolio value) was safe enough to be almost guaranteed success no matter how her assets were actually invested (capacity to be more widely diversified). 3% SWR (having 33x spending) is nearly as safe. Start pushing 25x (4% SWR) and risk increases. 5% or higher SWR and its more hit and miss.

How much longer would you have to work to increase wealth from 25x to 33x for the greater security of a 3% SWR over a 4% SWR? Save 32% more in inflation adjusted terms before retiring? Which in itself is a risk (having remained working longer than necessary).

Sadly rather than the state caring/supporting more through thick and thin, collective "insurance", increasingly states are inducing greater risks for individuals. The NHS was devised to support each/any equally, funded by all. State/occupational pensions tending to do similar. The present direction however is increasingly more towards individuals bearing considerable risks of funding their own healthcare and retirement funding. A risk is that in more having to self-fund (save more/work longer) so also will average rewards decline. Some suggest historic 4% SWR are a thing of the past, and 3% or less is the new 'average'. And a government policy of to hell with those that will never be in a position, due to whatever reasons, to achieve 33x spending or more levels of savings.

Yes the more you can accumulate/save the safer you are. The tendency however will be for those that can accumulate to save more than they need to, which in turn will tend to lower average rewards. Unknowable. Labour once back in government might for instance decide that wealth should be better shared around more fairly and could for instance introduce rules that dividends within ISA were no longer tax exempt, capital gains exemptions only, and that all dividends should have 50% withholding taxes applied.

[Itsallaguess]

Recent events would suggest that an equity orientated income strategy should perhaps consider the risk of a 50% fall in dividend income. Mitigation strategies include having more income than needed and perhaps as well a cash or near cash reserve. Not chasing income for its own sake might also come into it.

No he didn't...

Cheers,

Itsallaguess

[Dod101]

Not chasing income for its own sake should always come into it in my book anyway.

Dod

[scrumpyjack]

Even crazier to chase income if your dividends are 275k. You are going to pay a lot of high rate income tax.

[moorfield]

Even crazier to chase income if your dividends are 275k. You are going to pay a lot of high rate income tax.

Well that's why Pyad & Co were engaged in the first place to deal with that tax return; I don't imagine it was to offer any investment advice.

[Alaric]

Pretty clearly looks totally fictional, but based on fact. i.e. if you invested in the 1930's for 40 years reinvesting dividends they you would indeed have seen around 11% compounded growth based on FT All Share (Composite) historic performance. The story teller however is both having and eating their cake. Suggesting dividends were added to cash, but using compound total returns with dividends reinvested. Double counting.

Also an extremely wealthy private investor would have had to contend with some hair raising tax rates until the 1980s and 60% even during most of the 1980s. One for you, nineteen for me (the taxman) as observed by George Harrison in the 1960s.