Capital

[hiriskpaul]

I share Lootman's preference to steer clear of discussions on HYP as it tends to flush out people with some bizarre beliefs who spout such a lot of nonsense that I barely know or have any enthusiasm to continue discussion, particularly as their minds are so rigidly set. But to provide some evidence to counter the LY/HY FTSE experience, Vanguard's Growth ETF of US shares produce a USD CAGR of 15.9% over the last 10 years compared with the return on their High Dividend Yield ETF of 11.4% pa (The S&P 500 achieved about 14.0% pa total return). There is plenty of other evidence around to show that HY shares have not been a great investment over that period compared to the market as a whole or growth/LY if anyone can be bothered to go and look for it. But this proves nothing. Depending on the start and end dates, different results can be obtained.

I would be cautious about taking returns on LY/HY seriously in any case without knowing how it is constructed and understanding when shares enter/leave the indexes. For example, could the LY return be dragged down by struggling companies not paying dividends, which then fall out if they fail, drop below size threshold, or get removed the instant they start paying dividends again?

Selecting by yield is an imperfect form of value selection, which historically has done well (just not recently). Imperfect because it misses value companies such as Berkshire Hathaway, which choose to return capital to shareholders via buybacks (if at all).

In the TJH/Wizard debate, but at the risk of putting words into others mouths I think I can see the root of the disagreement. TJH is discussing his portfolio which picks from a very small sub-set of securities - UK listed high yielding ordinary shares and (critically) he chooses to be fully invested in that sub-set. In this case "Capital" CANNOT matter. By Capital here I am referring to overall portfolio value, the value of his chosen sub-set or say the value of the FTSE 100 (I am not clear which metric TJH is referring to when he talks about the market). As soon as you choose to be fully invested, overall portfolio value will fluctuate up and down (esp. so with a sub-set such as UK HY shares) and all that can be done is consider aspects such as diversification and which shares would give a better return, or in TJH's case income, when reinvesting dividends, disposals, etc. Wizard on the other hand I know invests much more widely. His portfolio contains FI securities for example and he may choose not to be fully invested. To Wizard (and me) capital (portfolio value) absolutely does matter and I would prefer not to put myself in the position of potentially seeing my portfolio value drop by 50% or more.

[IanTHughes]

Nobody, apart from you of course, has ever claimed that:

£ 1 of income has a higher worth than £ 1 of capital

Why do you persist in using this argument?

Is the assertion that income is more valuable than capital not a central tenet of the "HYP Stategy"? It's stated often enough by the defenders of the faith. Why else would shares be selected sorting by dividend yield?

Nobody, apart from you of course, has ever claimed that:

income is more valuable than capital

Your ignorance of the HYP Strategy, even after so many years of people patiently explaining it to you, is a quite remarkable ignorance!

Oh well, I guess ignorance will always out


Ian

[Alaric]

Nobody apart from you of course, has ever claimed that:

income is more valuable than capital

It's something claimed frequently on the HYP-P board. If it wasn't I don't believe this topic would have been started.

In the original TMF articulated approach to HYP (PYADic HYP for shorthand) the approach was one of hold forever, never sell unless forced by market activity. There was also comment about capital not being an objective in and of itself, but that the high and increasing income an HYP seeks to deliver would mean that over time cpaital would naturally trend upwards.

[IanTHughes]

Nobody apart from you of course, has ever claimed that:

income is more valuable than capital

It's something claimed frequently on the HYP-P board. If it wasn't I don't believe this topic would have been started.

In the original TMF articulated approach to HYP (PYADic HYP for shorthand) the approach was one of hold forever, never sell unless forced by market activity. There was also comment about capital not being an objective in and of itself, but that the high and increasing income an HYP seeks to deliver would mean that over time cpaital would naturally trend upwards.

My apologies but, not being someone who has yet achieved the level of ignorance of HYP that you have so remarkably managed, I cannot see in the above statement where it is stated that:

£ 1 of income has a higher worth than £ 1 of capital

or

income is more valuable than capital

Would you be kind enough to point out my obvious failing in this regard?


Ian

[1nvest]

The Barber, The Surgeon, The Car Tuner

... and the sand-throwers. The HYP sandpit seemingly needs a perspex shield to be erected around it. Not only in view of Covid-19 but also to prevent others getting that grit in teeth sensation from all of the sand throwing outside of that sandpit. I guess that's only natural when those not singing from the same hymn sheet within the sandpit are banished to outside. Surely it would be better to not have such regimental rules for the sandpit in order to avoid such over-spill?

2) Having checked the current Guidelines I can see nothing in them specifically suggesting capital is an off topic matter, as long as the discussion is in the bounds of the overarching objective of the board, i.e. the practical management of an HYP.
I think on that basis it is reasonable to post this here, if a Mod disagrees I understand they will move it, though I think that would likely kill any discussion.

Yep!

[Alaric]

Would you be kind enough to point out my obvious failing in this regard?

You stormed off in a huff at the suggestion that total return be used as a measure of success or otherwise of the hypothetical HYP portfolios you were investigating,

A rejection of total return of a measure is a claim that capital and income are not of equal value.

[IanTHughes]

Would you be kind enough to point out my obvious failing in this regard?

You stormed off in a huff at the suggestion that total return be used as a measure of success or otherwise of the hypothetical HYP portfolios you were investigating,

Stormed off? I am still here! Or do you now think me a ghost?

Furthermore, how I decide to measure the success or otherwise of any portfolio that I manage, is entirely my own affair. I will not be forced to any other way by the HYP ignorance of any "Anti-HYP" religious cult, such as the brigade that you apparently aspire to lead. You and others are of course entirely free to measure the success or otherwise of any HYP that I publish in any way you wish to, assuming that you are capable of such an exercise - unlike you I do not belong to any religious cult and therefore do not insist that everyone must do things my way!

A rejection of total return of a measure is a claim that capital and income are not of equal value.

Oh well, ignorance of HYP will always out

I can only ask again, where in the following quote:

In the original TMF articulated approach to HYP (PYADic HYP for shorthand) the approach was one of hold forever, never sell unless forced by market activity. There was also comment about capital not being an objective in and of itself, but that the high and increasing income an HYP seeks to deliver would mean that over time cpaital would naturally trend upwards.

Is it stated that:

£ 1 of income has a higher worth than £ 1 of capital

or

income is more valuable than capital

Seriously, am I missing something that is obviously so clear to you, or did you just make it up?


Ian

[Alaric]

Seriously, am I missing something that is obviously so clear to you, or did you just make it up?

This being a board about "Investment Stategies", perhaps there are two questions.

The first is whether a strategy that prioritises capital above income or income above capital is a good idea and would have a characteristic that it didn't treat or value a £ 1 of income the same as a £ 1 of capital.

The second is whether "The HYP Stategy" or what would be self-described as HYP strategies are examples of such.

[IanTHughes]

Seriously, am I missing something that is obviously so clear to you, or did you just make it up?

This being a board about "Investment Stategies", perhaps there are two questions.

The first is whether a strategy that prioritises capital above income or income above capital is a good idea and would have a characteristic that it didn't treat or value a £ 1 of income the same as a £ 1 of capital.

My apologies but you only quoted one line of my post, no doubt a simple typo error. In total, what I actually asked was:

I can only ask again, where in the following quote:

In the original TMF articulated approach to HYP (PYADic HYP for shorthand) the approach was one of hold forever, never sell unless forced by market activity. There was also comment about capital not being an objective in and of itself, but that the high and increasing income an HYP seeks to deliver would mean that over time cpaital would naturally trend upwards.

Is it stated that:

£ 1 of income has a higher worth than £ 1 of capital

or

income is more valuable than capital

Seriously, am I missing something that is obviously so clear to you, or did you just make it up?

I don't quite know how to make such a question any more simple, or maybe you missed it?


Ian

[Alaric]

I don't quite know how to make such a question any more simple, or maybe you missed it?

Perhaps I need to re-express. Are there strategies which don't treat capital and income equally? Are some varieties of HYP amongst them?

[IanTHughes]

I don't quite know how to make such a question any more simple, or maybe you missed it?

Perhaps I need to re-express. Are there strategies which don't treat capital and income equally? Are some varieties of HYP amongst them?

I give up! Please, do enlighten us


Am I now to assume that when I ask:

Where in the following quote:

In the original TMF articulated approach to HYP (PYADic HYP for shorthand) the approach was one of hold forever, never sell unless forced by market activity. There was also comment about capital not being an objective in and of itself, but that the high and increasing income an HYP seeks to deliver would mean that over time cpaital would naturally trend upwards.

Is it stated that:

£ 1 of income has a higher worth than £ 1 of capital

or

income is more valuable than capital

Seriously, am I missing something that is obviously so clear to you, or did you just make it up?

You did in fact make it all up


Ian

[1nvest]

I'll have to start keeping two wallets, one with notes obtained via dividends, and the other via having sold some shares. So when bartering for goods/services from a HYP'er I'll get a better discount with the 'more valuable' notes from the dividends sourced wallet

I do source DIY dividends out of capital/total return, such that its other investors paying that 'dividend' (in buying the shares that I sell) often at a price/book value of 2, and where the firm retains its full book-value. Had the firm sourced the dividend then its a 1:1 decline in its book value. That does mean I end up with fewer shares than had the firm paid a dividend and I'd retained the same number of shares. I'm casual so I'd be more inclined to write it off as all-washing (equal), but Buffett has detailed how one (DIY dividends from selling some shares) tends to end up being the better overall. So maybe dividends are more valuable in having cost more overall!

[IanTHughes]

I'll have to start keeping two wallets, one with notes obtained via dividends, and the other via having sold some shares. So when bartering for goods/services from a HYP'er I'll get a better discount with the 'more valuable' notes from the dividends sourced wallet

Why would you want to do that? Any HYPer knows full well that £100 received as a dividend has exactly the same value as £100 received as a result of a sale of shares.

Or do you, like Alaric, believe there is a difference?


Ian

[Alaric]

Or do you, like Alaric believe there is a difference?

I thought it was "HYPers" who believe there's a difference between £ 6 received as dividend with £ 100 capital value remaining and £ 8 received as dividend with £ 98 capital value remaining. Why otherwise would they prefer the latter? They would select the £ 8 dividend and ignore the loss of capital value on the grounds of either strategic ignorance or that capital doesn't matter. For that matter isn't it some HYPers who believe that one should buy stocks cum div rather than ex-div because "dividend income is what it's all about".

[IanTHughes]

Or do you, like Alaric believe there is a difference?

I thought it was "HYPers" who believe there's a difference between £ 6 received as dividend with £ 100 capital value remaining and £ 8 received as dividend with £ 98 capital value remaining.

I cannot answer for anyone else but I would say:

£6 Cash + £100 Capital = £106
£8 Cash + £98 Capital = £106

No, it is just you that thinks there is a difference in value. As to why only you can explain.

I do not think I have made a mistake but of course would bow to your superior knowledge of mathematics if you think I am mistaken and you can see a difference that I have missed. Am I mistaken?

Why otherwise would they prefer the latter? They would select the £ 8 dividend and ignore the loss of capital value on the grounds of either strategic ignorance or that capital doesn't matter.

Because HYP is an Income Strategy, I thought that was obvious to anyone with even rudimentary knowledge of the HYP Strategy. Do you not have a rudimentary knowledge of the HYP Strategy? I have to say that after so many have so patiently explained HYP to you over the years, I am surprised at your continued ignorance of the HYP Strategy. Or are you perhaps just pretending? You rascal you!

For that matter isn't it some HYPers who believe that one should buy stocks cum div rather than ex-div because "dividend income is what it's all about".

I give up! Do please enlighten us


Ian

[Alaric]

Because HYP is an Income Strategy

What does an "Income Stategy" entail? Does it mean ranking or valuing income above capital?

[1nvest]

I'll have to start keeping two wallets, one with notes obtained via dividends, and the other via having sold some shares. So when bartering for goods/services from a HYP'er I'll get a better discount with the 'more valuable' notes from the dividends sourced wallet

Why would you want to do that? Any HYPer knows full well that £100 received as a dividend has exactly the same value as £100 received as a result of a sale of shares.

Or do you, like Alaric, believe there is a difference?

Ian

Thought the smiley might suffice, should perhaps have wrapped my post in a <sarcasm> tag Ian. Failed attempt to lighten up the mood.

[tjh290633]

In the TJH/Wizard debate, but at the risk of putting words into others mouths I think I can see the root of the disagreement. TJH is discussing his portfolio which picks from a very small sub-set of securities - UK listed high yielding ordinary shares and (critically) he chooses to be fully invested in that sub-set. In this case "Capital" CANNOT matter. By Capital here I am referring to overall portfolio value, the value of his chosen sub-set or say the value of the FTSE 100 (I am not clear which metric TJH is referring to when he talks about the market). As soon as you choose to be fully invested, overall portfolio value will fluctuate up and down (esp. so with a sub-set such as UK HY shares) and all that can be done is consider aspects such as diversification and which shares would give a better return, or in TJH's case income, when reinvesting dividends, disposals, etc. Wizard on the other hand I know invests much more widely. His portfolio contains FI securities for example and he may choose not to be fully invested. To Wizard (and me) capital (portfolio value) absolutely does matter and I would prefer not to put myself in the position of potentially seeing my portfolio value drop by 50% or more.

I've seen my portfolio drop by 50% or more on a number of occasions now, and it does not worry me. It has always bounced back again in the fulness of time. In the case of the FTSE100 (which I use as my yardstick) it took a long time to recover fully from the Dec 1999 peak, but if you hadn't succumbed to the dot-com madness, it was a lot quicker. At the time of the peak in the FTSE100, at 6930.2, my income unit value was £3.74. I see that my unit value got back to £3.75 in November 2005, when the FTSE100 languished at 5423.2. It looks like about October 2016 when the FTSE100 got back above that level, at 6954.22, and my income unit was at £6.07 on that date. End of the month data in each case.

I use my income unit value because, of course, a lot had happened in the intervening period. For the benefit of those obsessed by Total Return, my accumulation units values on those dates were £6.85, £9.13 and £24.06 respectively.

It's not a case of saying that Capital Value is unimportant, it is just the realisation that it may fluctuate up and down, and not to be too concerned about it. When you are looking for income, seeing that rising comfortably above the RPI by a considerable amount compensates for any concerns about capital.

TJH

[IanTHughes]

Because HYP is an Income Strategy

What does an "Income Stategy" entail? Does it mean ranking or valuing income above capital?

I am sorry but you will just have to work that out for yourself.

Here are a couple of articles with regard to HYP to start you off.

https://web.archive.org/web/20140219210 ... 01106c.htm
https://web.archive.org/web/20160608182 ... 011116.htm

Do please come back if you need further explanation, but may I suggest a separate thread specifically for discussing HYP, or maybe Income Strategies in general?



Ian

[tjh290633]

It might be instructive for you to follow the fortunes of the total return versions of the FTSE350LY and the FTSE350HY indices. Both started at the same value on the same day. You can find the current values by Googling "World markets at a glance". The HIX TR value is 5439 while the LIX TR value is 4761. I accept that in recent years the differential has narrowed, but they didn't get that way by accident.

For US data since the 1920's, cap weighted non dividend were terrible. Equal weighted was great. Without looking I suspect the LIX TR is based on cap weighting.

From memory the mechanism is that the FTSE350 is ranked by dividend yield from each share, then the capital value of each share is calculated and the mid point calculated, where as much capital resides above as below that point. Those above are the HIX and those below are the LIX. I believe that the constitution of each is recalculated trimonthly.*

From https://research.ftserussell.com/produc ... es.pdf?768

7.4 FTSE 350 Yield Indexes

7.4.1 The constituents of the FTSE 350 Yield Indexes will comprise the companies in the FTSE 350. These companies are ranked in order of dividend yield and the boundary between the FTSE 350 Higher Yield and FTSE 350 Lower Yield indexes is determined so that the market capitalisation of each index is approximately 50% of the market capitalisation of the FTSE 350 index. Appendix C describes the process for determining the constituents of these indexes.

* No, annually. The details are in Appendix C. There are however adjustments made at the quarterly review of the Index boundaries.

TJH