50 years of "A Random Walk Down Wall Street"

[Lootman]

Just to say, I think that it's a brilliant book. Having been put off by the title for years, I finally succumbed in a bookshop in Hong Kong.

Many things made that trip memorable. But one of them is undoubtedly my delight in discovering and devouring that book.

Yes, that book influenced my thinking a lot when I read it (1990, give or take). The other two names often mentioned when giving credit to the rise of index investing are Eugene Fama and John Bogle.

In fact I was sufficiently impressed with the thinking that in 1996 I quit my job at a well known active fund manager and took a job at one of the largest index fund providers then and now.

I still like to have a few side bets. I can't quite let go of the idea that I am an investment genius. .

But for my financial solvency and sanity I use a lot of index funds. And I mean traditional market cap based funds and not these "active" or "smart" or "customised" indexes.

[OhNoNotimAgain]

There are usually two reasons for a trade - trimming a holding which has become overweight and reinvesting accumulated cash. However there was a lot of portfolio adjustment after 2008, when a lot of companies stopped paying dividends and were sold. There has also been a number of take-overs, which lead to a total disposal and the purchase of one or more substitutes.

With dividend yield up to 5%, that alone accounts for 5% transactions. If I trim a share by 25% and that share is 4% of the portfolio, then the sale and reinvestment accounts for a further 2% of the portfolio. Likewise a takeover might account for 8% with the reinvestment.

It's not hard to get the transaction level to a high level.

TJH

That's the problem with only holding a small number of stocks, individual holdings get quite lumpy.
Corporate actions normally account for about 2% of turnover but can be as high as 5% in some years.
The trick to keeping transactions low is diligent indifference to market noise and volatility.
Capital values are very volatile and transient, the real value is in the dividend income as you know. Keep aiming for that, ignore froth and go fishing.

[NotSure]

That's the problem with only holding a small number of stocks, individual holdings get quite lumpy......

That in itself would suggest that markets are still operating efficiently, and not simply moving in lock-step due to excessive allocation to index trackers?

[tjh290633]

There are usually two reasons for a trade - trimming a holding which has become overweight and reinvesting accumulated cash. However there was a lot of portfolio adjustment after 2008, when a lot of companies stopped paying dividends and were sold. There has also been a number of take-overs, which lead to a total disposal and the purchase of one or more substitutes.

With dividend yield up to 5%, that alone accounts for 5% transactions. If I trim a share by 25% and that share is 4% of the portfolio, then the sale and reinvestment accounts for a further 2% of the portfolio. Likewise a takeover might account for 8% with the reinvestment.

It's not hard to get the transaction level to a high level.

TJH

That's the problem with only holding a small number of stocks, individual holdings get quite lumpy.
Corporate actions normally account for about 2% of turnover but can be as high as 5% in some years.
The trick to keeping transactions low is diligent indifference to market noise and volatility.
Capital values are very volatile and transient, the real value is in the dividend income as you know. Keep aiming for that, ignore froth and go fishing.

I could widen the limit on holding weight from 1.5 times the median weight to twice, which would remove many of the trimming actions, but would probably lead to the same shares being sold entirely because of low yield.

Bear in mind that each time I trim, the proceeds are invested in shares with higher yield than the trimmed share, except in the case of the odd miner which has a very high yield and has been pushed up by that. In the last two years only BHP and South32 have fallen into that category, and their yields may fall in the coming year (or not). In fact, when S32 was trimmed it's yield had not risen to the recent level.

Some would say that a high yield is a sign of danger and is to be avoided. I prefer to avoid the low yield sector. Looking at corporate actions, I see TATE, Aviva, and GSK during the current year. I also finally dumped Marstons. Those accounted for about 3% of the turnover, with the same again as I reinvested.

TJH

[OhNoNotimAgain]

There are usually two reasons for a trade - trimming a holding which has become overweight and reinvesting accumulated cash. However there was a lot of portfolio adjustment after 2008, when a lot of companies stopped paying dividends and were sold. There has also been a number of take-overs, which lead to a total disposal and the purchase of one or more substitutes.

With dividend yield up to 5%, that alone accounts for 5% transactions. If I trim a share by 25% and that share is 4% of the portfolio, then the sale and reinvestment accounts for a further 2% of the portfolio. Likewise a takeover might account for 8% with the reinvestment.

It's not hard to get the transaction level to a high level.

TJH

That's the problem with only holding a small number of stocks, individual holdings get quite lumpy.
Corporate actions normally account for about 2% of turnover but can be as high as 5% in some years.
The trick to keeping transactions low is diligent indifference to market noise and volatility.
Capital values are very volatile and transient, the real value is in the dividend income as you know. Keep aiming for that, ignore froth and go fishing.

I could widen the limit on holding weight from 1.5 times the median weight to twice, which would remove many of the trimming actions, but would probably lead to the same shares being sold entirely because of low yield.

Bear in mind that each time I trim, the proceeds are invested in shares with higher yield than the trimmed share, except in the case of the odd miner which has a very high yield and has been pushed up by that. In the last two years only BHP and South32 have fallen into that category, and their yields may fall in the coming year (or not). In fact, when S32 was trimmed it's yield had not risen to the recent level.

Some would say that a high yield is a sign of danger and is to be avoided. I prefer to avoid the low yield sector. Looking at corporate actions, I see TATE, Aviva, and GSK during the current year. I also finally dumped Marstons. Those accounted for about 3% of the turnover, with the same again as I reinvested.

TJH

That's the problem with using yield rather than dividends. Yields reflect share price but dividends don't.
Trimming because yields fall, i.e. share price have risen, means you sell your best performing stocks and lose out on the momentum effect.

[Lootman]

That's the problem with using yield rather than dividends. Yields reflect share price but dividends don't.

Mindlessly targeting the biggest dividends is as bad as buying only shares with the highest yields. You end up with only very large companies that pay out too much to allow for the possibility of much growth.

Better by far in my view, if you have to focus on income at all, is to use the rate of dividend growth. If a company is growing its dividend reliably by 10% a year then long-term you can expect capital growth at a similar rate.

You want to avoid companies that are disgorging themselves on the alter of a high yield or dividend. Much like how the FTSE-100 has paid out hefty dividends since 1999 but the index itself has gone nowhere in those 23 years. You might as well have bought a bond and taken less risk.

[Itsallaguess]

Trimming because yields fall, i.e. share price have risen, means you sell your best performing stocks and lose out on the momentum effect.

There's been plenty of times in the past where I've been so concerned with missing out on 'future momentum' that I've gone on to lose out on the momentum that I'd already had...

As an income-investor, taking advantage of large share price rises that eventually feed into relatively low underlying yields has been a good selling indicator for me over the years, and one where I can then rotate that capital into higher-yielding options.

It's possible to 'lose out' on the momentum effect that's sitting there staring you in the face as well you know...

Cheers,

Itsallaguess

[OhNoNotimAgain]

That's the problem with using yield rather than dividends. Yields reflect share price but dividends don't.

Mindlessly targeting the biggest dividends is as bad as buying only shares with the highest yields. You end up with only very large companies that pay out too much to allow for the possibility of much growth.

Better by far in my view, if you have to focus on income at all, is to use the rate of dividend growth. If a company is growing its dividend reliably by 10% a year then long-term you can expect capital growth at a similar rate.

You want to avoid companies that are disgorging themselves on the alter of a high yield or dividend. Much like how the FTSE-100 has paid out hefty dividends since 1999 but the index itself has gone nowhere in those 23 years. You might as well have bought a bond and taken less risk.

You are right that in the 20 years to end 2020 gilts had outperformed equities, and probably till the end of 2021 though I don't have the data.

But hey, things changed this year. And, over 120 years there was a 77% probability that equities outperformed gilts over any 10 year period.
After 20 years of that not happening, leaving equities yielding twice as much as gilts, what might happen next. And we all know how important reinvested dividends are to total returns.

[Lootman]

That's the problem with using yield rather than dividends. Yields reflect share price but dividends don't.

Mindlessly targeting the biggest dividends is as bad as buying only shares with the highest yields. You end up with only very large companies that pay out too much to allow for the possibility of much growth.

Better by far in my view, if you have to focus on income at all, is to use the rate of dividend growth. If a company is growing its dividend reliably by 10% a year then long-term you can expect capital growth at a similar rate.

You want to avoid companies that are disgorging themselves on the alter of a high yield or dividend. Much like how the FTSE-100 has paid out hefty dividends since 1999 but the index itself has gone nowhere in those 23 years. You might as well have bought a bond and taken less risk.

You are right that in the 20 years to end 2020 gilts had outperformed equities, and probably till the end of 2021 though I don't have the data.

But hey, things changed this year. And, over 120 years there was a 77% probability that equities outperformed gilts over any 10 year period.
After 20 years of that not happening, leaving equities yielding twice as much as gilts, what might happen next. And we all know how important reinvested dividends are to total returns.

I was not arguing for investing in bonds over shares. In fact I own no bonds and have little use for them.

Rather my point was that since 1999 UK large caps have gone nowhere, which isn't a good sign that paying out high dividends is a sound strategy unless you really aren't bothered about growth.

[tjh290633]

That's the problem with using yield rather than dividends. Yields reflect share price but dividends don't.
Trimming because yields fall, i.e. share price have risen, means you sell your best performing stocks and lose out on the momentum effect.

Yes, but yields reflect dividends. The share price reacts to an increase in dividend, so affecting the yield.

You think that I should concentrate on the dividends yet, by trimming a share which has grown faster than the rest, I end up with higher dividends. With some shares I have done this several times in succession. Imperial Brands is such an example. Demerged from Hanson in 1996 at 375p, I built my holding up to the median level by subsequent purchases at 417p, 369p and 440p. I sold my rights in 2002 and also trimmed the holding at 1084p. Trimmed again in March 2003 at 987p, then again in March 2007 at 2323p. In January 2008 I trimmed again at 2669p, then sold my rights in June 2008. I added some more in July and August 2013 at 2278p and 2233p, then had occasion to trim again in February 2016 at 3579p.Since then I have added more on 6 occasions, between October 2017 and February 2022, at prices between 3130p and 1584p. Currently they are too high in terms of share of income to be topped up again, yielding 6.5%, and they are 3rd highest in holding value. I now have about 20% more shares than after building the holding up in the late 90s. For some long time my cost was negative.

Where am I going wrong?

TJH

[OhNoNotimAgain]

That's the problem with using yield rather than dividends. Yields reflect share price but dividends don't.
Trimming because yields fall, i.e. share price have risen, means you sell your best performing stocks and lose out on the momentum effect.

Yes, but yields reflect dividends. The share price reacts to an increase in dividend, so affecting the yield.

You think that I should concentrate on the dividends yet, by trimming a share which has grown faster than the rest, I end up with higher dividends. With some shares I have done this several times in succession. Imperial Brands is such an example. Demerged from Hanson in 1996 at 375p, I built my holding up to the median level by subsequent purchases at 417p, 369p and 440p. I sold my rights in 2002 and also trimmed the holding at 1084p. Trimmed again in March 2003 at 987p, then again in March 2007 at 2323p. In January 2008 I trimmed again at 2669p, then sold my rights in June 2008. I added some more in July and August 2013 at 2278p and 2233p, then had occasion to trim again in February 2016 at 3579p.Since then I have added more on 6 occasions, between October 2017 and February 2022, at prices between 3130p and 1584p. Currently they are too high in terms of share of income to be topped up again, yielding 6.5%, and they are 3rd highest in holding value. I now have about 20% more shares than after building the holding up in the late 90s. For some long time my cost was negative.

Where am I going wrong?

TJH

Terry, your story is typical of that provided by active fund managers so say look how smart I am.

But, as Steven Pinker says, the anecdote may provide a good story but is often proven misleading by analysing the data in its totality.

[tjh290633]

Terry, your story is typical of that provided by active fund managers so say look how smart I am.

But, as Steven Pinker says, the anecdote may provide a good story but is often proven misleading by analysing the data in its totality.

But all I am doing is following my well tried and documented system, built on a high yield concept. Anybody could use the same methods, some possibly do.

I repeat, what am I doing wrong in your eyes? How would you change it?

TJH

[simoan]

But all I am doing is following my well tried and documented system, built on a high yield concept. Anybody could use the same methods, some possibly do.

I repeat, what am I doing wrong in your eyes? How would you change it?

TJH

If you are happy with the results of your method then you’re clearly doing nothing wrong. In fact, I would say HYP is a reasonable approach for old people (over 70) to gain some equity income, but even then, not for 100% of a portfolio.

However, what frustrates me about the HYP approach is that it’s a terrible method for younger investors looking to build their wealth through equity investments. This seems to be the point Lootman is making. No-one under 60 should be investing purely based on dividend yields IMHO, especially if they are still working. However, I appreciate it may work well for old people who already have wealth.

All the best, Si

[gryffron]

I really doubt that a figure as low as 2-3% of market participants can move prices to reflect information. Indeed, I would argue that talking " 3% of investors" shows poor consideration of the question.

I disagree. Market Makers ALWAYS set their opening prices based purely on information. Every single day. If they get it wrong, the active traders will profit from them, regardless of how few or how many there are.

Gryff

[OhNoNotimAgain]

Terry, your story is typical of that provided by active fund managers so say look how smart I am.

But, as Steven Pinker says, the anecdote may provide a good story but is often proven misleading by analysing the data in its totality.

But all I am doing is following my well tried and documented system, built on a high yield concept. Anybody could use the same methods, some possibly do.

I repeat, what am I doing wrong in your eyes? How would you change it?

TJH

I am not saying it is wrong, in my view it is sub-optimal. Using price as an input into allocation will always be flawed because it is mostly noise.
It is better, in my view, to determine portfolio weights using a fundamental factor and then populate it according to price.

[tjh290633]

I am not saying it is wrong, in my view it is sub-optimal. Using price as an input into allocation will always be flawed because it is mostly noise.
It is better, in my view, to determine portfolio weights using a fundamental factor and then populate it according to price.

Which fundamental factor?

TJH

[tjh290633]

However, what frustrates me about the HYP approach is that it’s a terrible method for younger investors looking to build their wealth through equity investments. This seems to be the point Lootman is making. No-one under 60 should be investing purely based on dividend yields IMHO, especially if they are still working. However, I appreciate it may work well for old people who already have wealth.

All the best, Si

You have to bear in mind that, for some considerable time, using higher yield shares gave a better total return than using low yield shares. Just look at the comparison between the FTSE350 HY and FTSE350LY TR indices.

In my view, if you are saving towards retirement, what you are striving to achieve is a flow of dividend income to be drawn when needed in retirement. Your argument is that the switch between a total return strategy and an income generating strategy can be made at or near retirment. My argument is that there is no need to switch because income can be reinvested to provide even more income until such time as it needs to be withdrawn.

TJH

[simoan]

However, what frustrates me about the HYP approach is that it’s a terrible method for younger investors looking to build their wealth through equity investments. This seems to be the point Lootman is making. No-one under 60 should be investing purely based on dividend yields IMHO, especially if they are still working. However, I appreciate it may work well for old people who already have wealth.

All the best, Si

You have to bear in mind that, for some considerable time, using higher yield shares gave a better total return than using low yield shares. Just look at the comparison between the FTSE350 HY and FTSE350LY TR indices.

In my view, if you are saving towards retirement, what you are striving to achieve is a flow of dividend income to be drawn when needed in retirement. Your argument is that the switch between a total return strategy and an income generating strategy can be made at or near retirment. My argument is that there is no need to switch because income can be reinvested to provide even more income until such time as it needs to be withdrawn.

TJH

We really shouldn’t have this discussion because we are never going to agree. Part of the problem is you’re setting your bar SO low in the first place by restricting yourself to the highest yielding shares in the FTSE100 and then comparing performance with it. That’s a really stupid, short-sighted, parochial thing to do if you’re under 60 IMHO and building your investment portfolio from scratch. I understand the problem because dividends are so alluring but they are not the be all and end all in investing. I am not aware of a single successful long term investor who built wealth using a high yield only investment approach, let alone one artificially restricting itself to UK large caps. Why is that?

I only started investing 23 years ago and retired last year. There’s absolutely no way I would be in this position using a UK large cap only high yield approach. And yet I did not use any more risk than that of HYP to achieve that result. I just selected a portfolio of higher quality companies that did the compounding for me. As discussed on another thread, the almost complete lack of technology exposure has left a UK large cap only High Yield approach in tatters compared to other markets over the past 20 years. In particular, to have no exposure to the S&P500 for the past 20 years is nothing short of criminal IMO.

I’ll leave it there, it’s not a discussion I really want to get into any further as we’ve all been here before and I can only take so much repetition.

All the best Si

[Itsallaguess]

My argument is that there is no need to switch because income can be reinvested to provide even more income until such time as it needs to be withdrawn.

I am not aware of a single successful long term investor who built wealth using a high yield only investment approach, let alone one artificially restricting itself to UK large caps.

Sorry to have to point this out for you Si, but aren't you talking to one?

Cheers,

Itsallaguess

[simoan]

Sorry to have to point this out for you Si, but aren't you talking to one?

Cheers,

Itsallaguess

Sorry, who? I’m talking about a much lauded fund manager or a widely renowned investor in the public domain. I don’t know one. If you mean TBH, then yes, we’ll done because he met his own low investment goals, but he’d better not look at a long term chart of the S&P500.