PYAD - Profit, Yield, Asset & Debt

[AsleepInYorkshire]

We have been adding to our daughters JISA. By the time she is 18 we will have added £36K. Whilst we can afford to do this, it does mean, by choice, we can't add this to our own private pensions. It's not a "hardship" but it's still hard to support our decision. Dad's helping with her stock choices. She's not going to learn this overnight. We read results when they come out and we've decided to reinvest dividends.

But I started with a small piece of advice I picked up from TMF in 2000. Profit, yield, assets & debt or PYAD. And we have been going over that for a year now.

I can assure you that we don't have the next Warren Buffet on our hands, but she's picking stuff up a bit at a time.

When I joined TMF in Feburary 2000 I had just been diagnosed with clinical depression. My memory fails me now but I believe sometime later that year we drove down to London and stayed in a [posh] hotel so we could go to one of the social's.

We were both pleased and honoured to meet Stephen (TMFPYAD). Twenty years later whenever my daughter talks about shares she uses PYAD as her benchmark. She can develop from there.

Sometimes the playing field should be levelled up. How we all build our portfolio's and understand stocks and shares is as individual as the wrinkles on our faces.

When someone is kind enough to offer information I've always felt grateful. Twenty years ago Stephen's TMF pseudonym was in itself a form of information.

There will come a day when information isn't being offered to us from others, other than what's the best oil to use on our wheelchairs. And some will manage to make a drama and a negative out of that experience too.

https://www.youtube.com/watch?v=LpwabPQW4p4

Thank you Stephen

AiY(D)

[kempiejon]

Technically the PYAD monicer was for
Low PE,
high yield,
low PTB assets
lack of debt

[Itsallaguess]

There will come a day when information isn't being offered to us from others

And there might come a day when information is being offered that cannot then be questioned.

Which of those two situations would concern you most?

Cheers,

Itsallaguess

[OhNoNotimAgain]

Chasing alpha is a mugs game.
Just rely on beta and do something more productive with your/her life.

[Lootman]

Chasing alpha is a mugs game. Just rely on beta and do something more productive with your/her life.

So you have converted to market-cap index tracking?

And given up on the mug's game of so-called "Smart Beta" which of course is really just "chasing Alpha".

[OhNoNotimAgain]

Chasing alpha is a mugs game. Just rely on beta and do something more productive with your/her life.

So you have converted to market-cap index tracking?

And given up on the mug's game of so-called "Smart Beta" which of course is really just "chasing Alpha".

Depends what you think beta is?

[Lootman]

Chasing alpha is a mugs game. Just rely on beta and do something more productive with your/her life.

So you have converted to market-cap index tracking?

And given up on the mug's game of so-called "Smart Beta" which of course is really just "chasing Alpha".

Depends what you think beta is?

It is usually measured off the major index for that country, region or sector. Which of course is cap-weighted.

If you vary from that benchmark then you are essentially engaged in seeking alpha, even if your approach is passive. You are taking a market view.

[OhNoNotimAgain]

Chasing alpha is a mugs game. Just rely on beta and do something more productive with your/her life.

So you have converted to market-cap index tracking?

And given up on the mug's game of so-called "Smart Beta" which of course is really just "chasing Alpha".

Depends what you think beta is?

It is usually measured off the major index for that country, region or sector. Which of course is cap-weighted.

If you vary from that benchmark then you are essentially engaged in seeking alpha, even if your approach is passive. You are taking a market view.

Not at all. Alphas is the return from stock selection. If you hold all the stocks in the index, but weighted differently, that is not alpha, it is still a form a beta. Though I am not sure what you would call it.
The mkt cap index gives you a valuation of the market at a moment in time. But measuring the difference between two points in time does not give you the return of the market because that excludes dividends.

[Lootman]

Chasing alpha is a mugs game. Just rely on beta and do something more productive with your/her life.

So you have converted to market-cap index tracking?

And given up on the mug's game of so-called "Smart Beta" which of course is really just "chasing Alpha".

Depends what you think beta is?

It is usually measured off the major index for that country, region or sector. Which of course is cap-weighted.

If you vary from that benchmark then you are essentially engaged in seeking alpha, even if your approach is passive. You are taking a market view

Not at all. Alphas is the return from stock selection. If you hold all the stocks in the index, but weighted differently, that is not alpha, it is still a form a beta. Though I am not sure what you would call it.

No, if you hold (say) the 500 shares in the S&P 500 index but weight them differently, then you are deviating from the index in the hope that the selection criteria you use will add value over how that index returns. That is seeking alpha. You cannot have it both ways.

[OhNoNotimAgain]

No, if you hold (say) the 500 shares in the S&P 500 index but weight them differently, then you are deviating from the index in the hope that the selection criteria you use will add value over how that index returns. That is seeking alpha. You cannot have it both ways.

I disagree, unsurprisingly.

There are two risks when investing.

The first is Systematic Risk, the danger of an event like Covid or the war in Ukraine which is impossible to predict and avoid but can be mitigated by diversifying across the whole asset class. I.e buying every share.

The second risk is Specific Risk where the unique factors of that company can have a negative impact like Enron, Patissiere etc and is the big weakness of the PYAD approach where all your risk is very concentrated.

As far as I know no one has dictated that Systematic Risk, which is effectively beta, must be minimised by weighting by mkt cap. Some argue equal weighting is better.

[Lootman]

No, if you hold (say) the 500 shares in the S&P 500 index but weight them differently, then you are deviating from the index in the hope that the selection criteria you use will add value over how that index returns. That is seeking alpha. You cannot have it both ways.

I disagree, unsurprisingly. There are two risks when investing.

The first is Systematic Risk, the danger of an event like Covid or the war in Ukraine which is impossible to predict and avoid but can be mitigated by diversifying across the whole asset class. I.e buying every share.

The second risk is Specific Risk where the unique factors of that company can have a negative impact like Enron, Patissiere etc and is the big weakness of the PYAD approach where all your risk is very concentrated.

As far as I know no one has dictated that Systematic Risk, which is effectively beta, must be minimised by weighting by mkt cap. Some argue equal weighting is better.

I don't have a problem with people thinking that they can beat the index by deviating from it. I do have a problem when someone does that but then claims that is not at attempt at adding alpha.

Either you are employing tilts, factors, alternative weightings or whatever you call it. Or you are not.

[OhNoNotimAgain]

I don't have a problem with people thinking that they can beat the index by deviating from it. I do have a problem when someone does that but then claims that is not at attempt at adding alpha.

Either you are employing tilts, factors, alternative weightings or whatever you call it. Or you are not.

Maybe it is semantic but I regard alpha as coming from stock selection. I would argue that buying the whole market, then tilting it to favour the PYAD factors is not alpha but a form of beta.

[Lootman]

I don't have a problem with people thinking that they can beat the index by deviating from it. I do have a problem when someone does that but then claims that is not at attempt at adding alpha.

Either you are employing tilts, factors, alternative weightings or whatever you call it. Or you are not.

Maybe it is semantic but I regard alpha as coming from stock selection. I would argue that buying the whole market, then tilting it to favour the PYAD factors is not alpha but a form of beta.

Back in the 1990s I worked for what was (and still is) one of the largest global providers of index funds. At some point the guys who ran the mainstream index funds had the idea that they could beat the index whilst reducing the overall risk of the portfolio. They figured that what they had learned from managing index funds would help them beat that same index.

The key was that they only deviated within fairly narrow parameters. They still invested in all 500 shares in the S&P 500, but varied the weightings by a bit here and there. This was no out-and-out growth fund or attempt at getting a huge alpha through risk taking. Rather the aim was to do slightly better than the index at a slightly lower risk. And so it proved to be.

What those guys never would have attempted however was a wide deviation from the index. They still held all 500 shares. And they certainly did not weight by anything as naive as dividend yield.

So I might concede that was a so-called "smart beta" approach. But something like holding a zero weighting in any share based purely on a zero yield or zero dividend would have been anathema for them. Rather it was all about the steady accumulation of an edge that was consistent and sustainable in any market.

[Alaric]

They still invested in all 500 shares in the S&P 500, but varied the weightings by a bit here and there. This was no out-and-out growth fund or attempt at getting a huge alpha through risk taking. Rather the aim was to do slightly better than the index at a slightly lower risk. And so it proved to be.

What those guys never would have attempted however was a wide deviation from the index. They still held all 500 shares. And they certainly did not weight by anything as naive as dividend yield..

Seems to make sense. After all if you could successfully go lighter on the dogs in a large index and go a bit heavier on the performers, you get the market average plus a bit.

[OhNoNotimAgain]

I don't have a problem with people thinking that they can beat the index by deviating from it. I do have a problem when someone does that but then claims that is not at attempt at adding alpha.

Either you are employing tilts, factors, alternative weightings or whatever you call it. Or you are not.

Maybe it is semantic but I regard alpha as coming from stock selection. I would argue that buying the whole market, then tilting it to favour the PYAD factors is not alpha but a form of beta.

Back in the 1990s I worked for what was (and still is) one of the largest global providers of index funds. At some point the guys who ran the mainstream index funds had the idea that they could beat the index whilst reducing the overall risk of the portfolio. They figured that what they had learned from managing index funds would help them beat that same index.

The key was that they only deviated within fairly narrow parameters. They still invested in all 500 shares in the S&P 500, but varied the weightings by a bit here and there. This was no out-and-out growth fund or attempt at getting a huge alpha through risk taking. Rather the aim was to do slightly better than the index at a slightly lower risk. And so it proved to be.

What those guys never would have attempted however was a wide deviation from the index. They still held all 500 shares. And they certainly did not weight by anything as naive as dividend yield.

So I might concede that was a so-called "smart beta" approach. But something like holding a zero weighting in any share based purely on a zero yield or zero dividend would have been anathema for them. Rather it was all about the steady accumulation of an edge that was consistent and sustainable in any market.

So what happened?

[Lootman]

I don't have a problem with people thinking that they can beat the index by deviating from it. I do have a problem when someone does that but then claims that is not at attempt at adding alpha.

Either you are employing tilts, factors, alternative weightings or whatever you call it. Or you are not.

Maybe it is semantic but I regard alpha as coming from stock selection. I would argue that buying the whole market, then tilting it to favour the PYAD factors is not alpha but a form of beta.

Back in the 1990s I worked for what was (and still is) one of the largest global providers of index funds. At some point the guys who ran the mainstream index funds had the idea that they could beat the index whilst reducing the overall risk of the portfolio. They figured that what they had learned from managing index funds would help them beat that same index.

The key was that they only deviated within fairly narrow parameters. They still invested in all 500 shares in the S&P 500, but varied the weightings by a bit here and there. This was no out-and-out growth fund or attempt at getting a huge alpha through risk taking. Rather the aim was to do slightly better than the index at a slightly lower risk. And so it proved to be.

What those guys never would have attempted however was a wide deviation from the index. They still held all 500 shares. And they certainly did not weight by anything as naive as dividend yield.

So I might concede that was a so-called "smart beta" approach. But something like holding a zero weighting in any share based purely on a zero yield or zero dividend would have been anathema for them. Rather it was all about the steady accumulation of an edge that was consistent and sustainable in any market.

So what happened?

As I said there was small but consistent out-performance versus the index. None of the usual thing that happens with active funds where they are first quartlle one minute and 4th quartile the next.

Our clients were institutional and so of course charges were considerably lower than retail. None of the 1% a year nonsense. Our pension fund clients often chose this at 20 basis points a year over the 5 basis points for our standard index funds.

I haven't worked there in a long time but those "index plus" funds are still selling. But not in retail as far as I know - it is too messy dealing with large numbers of small investors.

[OhNoNotimAgain]

I don't have a problem with people thinking that they can beat the index by deviating from it. I do have a problem when someone does that but then claims that is not at attempt at adding alpha.

Either you are employing tilts, factors, alternative weightings or whatever you call it. Or you are not.

Maybe it is semantic but I regard alpha as coming from stock selection. I would argue that buying the whole market, then tilting it to favour the PYAD factors is not alpha but a form of beta.

Back in the 1990s I worked for what was (and still is) one of the largest global providers of index funds. At some point the guys who ran the mainstream index funds had the idea that they could beat the index whilst reducing the overall risk of the portfolio. They figured that what they had learned from managing index funds would help them beat that same index.

The key was that they only deviated within fairly narrow parameters. They still invested in all 500 shares in the S&P 500, but varied the weightings by a bit here and there. This was no out-and-out growth fund or attempt at getting a huge alpha through risk taking. Rather the aim was to do slightly better than the index at a slightly lower risk. And so it proved to be.

What those guys never would have attempted however was a wide deviation from the index. They still held all 500 shares. And they certainly did not weight by anything as naive as dividend yield.

So I might concede that was a so-called "smart beta" approach. But something like holding a zero weighting in any share based purely on a zero yield or zero dividend would have been anathema for them. Rather it was all about the steady accumulation of an edge that was consistent and sustainable in any market.

So what happened?

As I said there was small but consistent out-performance versus the index. None of the usual thing that happens with active funds where they are first quartlle one minute and 4th quartile the next.

Our clients were institutional and so of course charges were considerably lower than retail. None of the 1% a year nonsense. Our pension fund clients often chose this at 20 basis points a year over the 5 basis points for our standard index funds.

I haven't worked there in a long time but those "index plus" funds are still selling. But not in retail as far as I know - it is too messy dealing with large numbers of small investors.

Interesting, thanks for the feedback. So what was the factor? Was it an algorithm or were the deviations subjective?

It sounds as if the tilt was not big enough to make a substantive difference, would that be correct?

The problem is that investment styles come in and out of favour. Since the crash of 2008, and ZIRP and QE, growth was the only game in town, so value tilted indices got pummeled. However, that all changed a year ago and now value tilted indices are ahead and, more importantly, gradually making up the ground they lost in the QE period.

[dealtn]

I don't have a problem with people thinking that they can beat the index by deviating from it. I do have a problem when someone does that but then claims that is not at attempt at adding alpha.

Either you are employing tilts, factors, alternative weightings or whatever you call it. Or you are not.

Maybe it is semantic but I regard alpha as coming from stock selection. I would argue that buying the whole market, then tilting it to favour the PYAD factors is not alpha but a form of beta.

You are deliberately choosing to allocate across those shares in proportions that aren't the same as the market. Equal weighting the 1st and 500th stock is an alpha selection.

[OhNoNotimAgain]

I don't have a problem with people thinking that they can beat the index by deviating from it. I do have a problem when someone does that but then claims that is not at attempt at adding alpha.

Either you are employing tilts, factors, alternative weightings or whatever you call it. Or you are not.

Maybe it is semantic but I regard alpha as coming from stock selection. I would argue that buying the whole market, then tilting it to favour the PYAD factors is not alpha but a form of beta.

You are deliberately choosing to allocate across those shares in proportions that aren't the same as the market. Equal weighting the 1st and 500th stock is an alpha selection.

Well spotted.
Because we all know that the market correctly prices everything all the time.
Don't we?

[dealtn]

I don't have a problem with people thinking that they can beat the index by deviating from it. I do have a problem when someone does that but then claims that is not at attempt at adding alpha.

Either you are employing tilts, factors, alternative weightings or whatever you call it. Or you are not.

Maybe it is semantic but I regard alpha as coming from stock selection. I would argue that buying the whole market, then tilting it to favour the PYAD factors is not alpha but a form of beta.

You are deliberately choosing to allocate across those shares in proportions that aren't the same as the market. Equal weighting the 1st and 500th stock is an alpha selection.

Well spotted.
Because we all know that the market correctly prices everything all the time.
Don't we?

No. But that's irrelevant. You are claiming to be only beta exposed, which simply isn't true. You are (deliberately) choosing an alpha exposure also.