Market returns / need to hold best shares / holding shares until they die

[vand]

Then.. why doesn't it beat market cap weighted?

Over the years I have consitently beaten the FTSE100, using an equal weight approach. Here are the results sine 1987:

And that would put you in the top <5% of active money managers, which of course certainly does happen, but most investors don't do this well.

[vand]

Then.. why doesn't it beat market cap weighted?

The problem with an equal weighted - how many shares are you holding? The global indexes contain about 3000-4000 publically traded securities in developed markets. Say you own 1000 in an equal weighted index. That means each company gets 0.1% weighting. An individual stock can thousand-bag (as some have done) and you are not able to capture any of that because you are continually selling and rebalancing in the EW index.

If EW is better then an EW index would outperform cap-weighted across most timeframes... and you know what? it just doesn't.

I'm not talking about EW indices or rebalancing. I'm talking about an initial EW portfolio of shares that is then left alone. A portfolio of maybe 50-60 shares. You don't need to capture all future big winners, just a representative sample.

If buying individual shares isn't your bag then an alternative approach would be to buy ETF's or IT's for different geographies and to EW these on purchase then leave alone.

BoE

so the 50-60 biggest companies by market cap and equally weight them, then let it run indefinitely?

History has shown that the largest companies by market cap are continually changing from decade to decade. What if the largest companies in the 2030s or the 2040s are all outside of that top-50 today?

Of today's largest 50 companies, how many of them came from ouside the top 500 a decade ago?

I hope you can see the huge holes in your proposal. You want to have your cake and eat it...

[Bubblesofearth]

so the 50-60 biggest companies by market cap and equally weight them, then let it run indefinitely?

History has shown that the largest companies by market cap are continually changing from decade to decade. What if the largest companies in the 2030s or the 2040s are all outside of that top-50 today?

Of today's largest 50 companies, how many of them came from ouside the top 500 a decade ago?

I hope you can see the huge holes in your proposal. You want to have your cake and eat it...

The only long-term study I'm aware of looking at this type strategy is that carried out on the original Dow 30 stocks;

https://www.mauldineconomics.com/frontl ... -mwo040309

The following is an extract from the article but you might find the rest of it worth a read;

Now we come to the interesting part. The next-to-the-top line is the original Dow 30, using a price-weighted index, just like the current Dow 30 uses. The only changes in the next 80 years are companies getting bought or dying. That "Original 30" gives us an annual return of 9.6%. Just 0.7% a year, so you might think, not much difference. But if you start with $100 and compound it for 80 years, that 0.7% becomes a quite large differential. With the Dow 30, your $100 would have grown to $96,993 as of December 2008, but the Original 30 would have grown to $161,603.

And there is an even bigger differential if you simply equal-weight the components rather than use a price-weighting methodology. Your $100 grows at a 10.4% clip and becomes $272,554, or almost three times the actual Dow 30.

Personally I would not simply select the biggest companies. I would try to ensure maximum diversification by building a portfolio of companies selected from different sectors of the economy and, where possible, different geographies.

BoE

[pyad]

HYP1 was equally weighted and right now is up 96.5% over about 22.6 years, whilst the FTSE100 is up 21.7%. Not conclusive evidence that EW beats the cap weighted index but perhaps indicative along with other examples like TJH.

The shares were selected mostly from this index, with sector diversification being an over riding requirement. Beating the Footsie or any other capital benchmark was never the aim. HYPs were, and remain, all about income. Nonetheless it is interesting to see the dramatic outperformance of capital.

I should point out that there has been a lot of corporate action over that time, with probably half or more of the original constituents disappearing to bids and reorgs etc. Reinvestment of cash released by these activities was at the then average share value in the portfolio so as to maintain the EW rule, either by topping up an existing below average holding or adding a new one. There is no voluntary trading or rebalancing other than in a very few cases where tiny holdings created by a corp. action I deemed too small to be worth holding.

As expected and mentioned by others in this thread, a few of the shares do most of the running to create the above mentioned growth so that there is now an enormous variation between the best capital performers and the worst. This goes with the territory of no tinkering.

[dealtn]

HYP1 was equally weighted and right now is up 96.5% over about 22.6 years, whilst the FTSE100 is up 21.7%. Not conclusive evidence that EW beats the cap weighted index but perhaps indicative along with other examples like TJH.

No it's a single observation and not statistically significant enough to draw any conclusion from. Would you be drawing the opposite conclusion if it, or any other portfolio, had underperformed?

[Lootman]

HYP1 was equally weighted and right now is up 96.5% over about 22.6 years, whilst the FTSE100 is up 21.7%. Not conclusive evidence that EW beats the cap weighted index but perhaps indicative along with other examples like TJH.

No it's a single observation and not statistically significant enough to draw any conclusion from. Would you be drawing the opposite conclusion if it, or any other portfolio, had underperformed?

His HYP has also dramatically under-performed the global index over the same time period in terms of total return. So by his argument that would have been a better investment, and of course with much less risk.

Then again his do-nothing approach is not true EW anyway. The idea that someone is smart enough to know what and when to buy, but not smart enough to know what and when to sell, is ridiculous.

[1nvest]

LEXCX (US) bought 30 stocks in the 1930's on a buy and hold basis. Now holding 22 stocks, where Union Pacific is 33% of the total weighting. From 1960 to recent its continued to reasonably closely compare to a total stock market index fund (total returns). IIRC last time I looked a few months back and it was holding just 20 stocks i.e. it naturally evolves over time, even for instance holds some BRK shares (Berkshire Hathaway) that weren't even around in the 1930's. Often prior big/dominant stocks that have become heavily weighted in a portfolio evolve via spin offs.

In past times of higher expenses it was common for US investors to look at the Dow 30 and pick the ten they preferred from that. Equal initial weighted bought and held and as one example if PG were one of your ten picked at the start of 1986 then 5% of the total available investment amount invested in that would have grown to reflect a total portfolio 3.5% real (after inflation) rate of return to the end of 2022 even if all other nine stocks returned nothing. Same for MCD .... and others. A reasonably high probability that one of the ten would do relatively well where that stock alone could have yielded a OK overall portfolio reward even if the other nine went broke the day after having started.

Whilst HYP (non rebalanced) follows a similar approach, using high yield as a selection method does add higher risk. The high yield reflects potential further declines/failure or a rebound, 'value', but where if you push too heavily towards that you're at greater risk of none of ten/whatever shares floating-the-boat. Other similar approaches to that style commonly pick from a set of candidate stocks that are perceived as being less likely (too big) to fail, sound/solid stocks with long histories and market dominance.

You obviously here much less about failed HYP's than you do about successful HYP's. My guess is that failed HYP's are more common than having picked say 10-15 stocks from the Dow, bought-and-held.

His HYP has also dramatically under-performed the global index over the same time period in terms of total return. So by his argument that would have been a better investment, and of course with much less risk.

To me, Pyad's HYP and World/global look to have returned similar total returns, around 0.1% lower log linear regression line slope for HYP1 than global. Just noise of a difference. Point to point (CAGR) is less reliable as a comparison measure as that's far more subject to start and end point levels that tend to be volatile.

[pyad]

...His HYP has also dramatically under-performed the global index over the same time period in terms of total return. So by his argument that would have been a better investment, and of course with much less risk...

This comment is obvious rubbish for two reasons:

1 I didn't choose shares from any global index, it was the FTSE100 so consequently that index must be the fair benchmark. It is ridiculously unreasonable to make the hindsight observation that it failed to beat some global index. To compare an HYP with a global index on a fair basis would require that the shares were drawn from that index. Anyone can look at an actual real time strategy over many years, then find some totally unrelated index in order to claim with hindsight that it under performed. A worthless observation.

2 Total return was never the aim anyway. It's all about income though nice to observe the large capital outperformance. But if you are really concerned about total return and not merely trying to stir up false controversies for sport, why not compare HYP1 with its benchmark, the FTSE100? You'll find that it trashes it on TR even more than it has on capital, but you wouldn't do that because it would wreck your wholly flawed thesis.

Two possibilities result from your comments:

1 Eiither you were aware of how baseless your claim was and went ahead anyway with posting. Trolling is one word for that.
or
2 You genuinely weren't aware, which displays a staggering ignorance of HYPs and how to measure them, or indeed any strategy, against some benchmark.

I leave readers to judge which it is.

[pyad]

No it's a single observation and not statistically significant enough to draw any conclusion from. Would you be drawing the opposite conclusion if it, or any other portfolio, had underperformed?

Agreed it's a single observation and I said only that it's "indicative" when combined with other reports about EW which suggest something similar about its merits. I never claimed that my single observation was conclusive, rather that there is some evidence around that it may beat capital weighting, that's all.

[Lootman]

...His HYP has also dramatically under-performed the global index over the same time period in terms of total return. So by his argument that would have been a better investment, and of course with much less risk...

I didn't choose shares from any global index, it was the FTSE100 so consequently that index must be the fair benchmark. It is ridiculously unreasonable to make the hindsight observation that it failed to beat some global index.

Wrong. It is widely accepted that the biggest factor that affects your returns are making the right high-level asset allocation decisions. Compared to that it generally makes little material difference which shares you pick within a given universe.

So anyone who made a decision 30 years ago to invest only in UK shares, and high yielding shares at that, committed a fundamental error, which was obvious to at least some of us even back then, given the UK's structural long-term decline.

The major returns of the last 30 years have derived from non-UK growth shares. Whilst Apple, Google, Amazon and MicroSoft were adding trillions in market-cap, you were fishing in a fetid swamp of ex-growth British dinosaurs like BT and Lloyds Bank.

Whether this HYP beat that HYP or vice versa is irrelevant. The key question is whether you got your high-level allocation right or wrong. And you weren't even close. And as an illustration, UK shares have gone from 10% of global market cap 30 years ago to under 5% now. If you failed to get that bet right then the rest hardly matters.

[Bubblesofearth]

Whether this HYP beat that HYP or vice versa is irrelevant. The key question is whether you got your high-level allocation right or wrong. And you weren't even close. And as an illustration, UK shares have gone from 10% of global market cap 30 years ago to under 5% now. If you failed to get that bet right then the rest hardly matters.

It would help (or nullify) your argument if you presented the actual total return data for HYP1 or TJH's HYP alongside that for the Global index over the same time-period. Eyeballing a few MSCI index charts my suspicion is that HYP1 has beaten it since its (HYP1's) inception. Especially when you factor in the significantly higher dividend yield over that period.

Just suggesting that presenting the actual data would help if you have it. Or were you just guessing?

BoE

[Lootman]

Whether this HYP beat that HYP or vice versa is irrelevant. The key question is whether you got your high-level allocation right or wrong. And you weren't even close. And as an illustration, UK shares have gone from 10% of global market cap 30 years ago to under 5% now. If you failed to get that bet right then the rest hardly matters.

It would help (or nullify) your argument if you presented the actual total return data for HYP1 or TJH's HYP alongside that for the Global index over the same time-period. Eyeballing a few MSCI index charts my suspicion is that HYP1 has beaten it since its (HYP1's) inception. Especially when you factor in the significantly higher dividend yield over that period.

Just suggesting that presenting the actual data would help if you have it. Or were you just guessing?

I do not think that anyone seriously doubts that the UK has under-performed over that time period. As I pointed out, the UK went from 10% of global market to less than 5% in a generation, and so clearly it under-performed. You can find the chart of VUKE against VUSA or VEVE as well as I can.

So that just leaves the question of whether a particular HYP that abandoned all semblance of risk management could possibly have compensated for the bad decision to restrict investment to only the UK? And that is possible. But I doubt that many people would have been happy with that speculation and the risk of such a narrow bet.

[Bubblesofearth]

I do not think that anyone seriously doubts that the UK has under-performed over that time period. As I pointed out, the UK went from 10% of global market to less than 5% in a generation, and so clearly it under-performed. You can find the chart of VUKE against VUSA or VEVE as well as I can.

So that just leaves the question of whether a particular HYP that abandoned all semblance of risk management could possibly have compensated for the bad decision to restrict investment to only the UK? And that is possible. But I doubt that many people would have been happy with that speculation and the risk of such a narrow bet.

OK, so having conceded that HYP1 and TJH's HYP returns (which btw is what you were talking about) may have beaten the Global index you are now playing the risk card. In which case I would ask the same question, do you have the data? Risk is most commonly measured by volatility so what have the volatility of the Global index and the HYP's been?

Or is that a guess as well?

BoE

[Lootman]

I do not think that anyone seriously doubts that the UK has under-performed over that time period. As I pointed out, the UK went from 10% of global market to less than 5% in a generation, and so clearly it under-performed. You can find the chart of VUKE against VUSA or VEVE as well as I can.

So that just leaves the question of whether a particular HYP that abandoned all semblance of risk management could possibly have compensated for the bad decision to restrict investment to only the UK? And that is possible. But I doubt that many people would have been happy with that speculation and the risk of such a narrow bet.

OK, so having conceded that HYP1 and TJH's HYP returns (which btw is what you were talking about) may have beaten the Global index you are now playing the risk card. In which case I would ask the same question, do you have the data? Risk is most commonly measured by volatility so what have the volatility of the Global index and the HYP's been?

Or is that a guess as well?

The risk card? Seriously?

As it happens I think TJH's method of investing is as good as it gets if you have to restrict yourself to UK equities. He deserves far more credit than Pyad.

HYP1 is a speculative crapshoot that has no place in the portfolio of any rational person.

[1nvest]

I do not think that anyone seriously doubts that the UK has under-performed over that time period.

FTSE 100 has under-performed, but is comprised of around 70% of its earnings being from foreign. FTSE 250 has compared to others, HYP1, TJH HYP, other broader indexes, where around 50% of its earnings are foreign sourced.

The failing is in the FTSE100's structure. FTSE 250 is more tilted towards equal weighted, rare for any one single stock to be more than 2% of the total weighting, FTSE 100 in contrast has at times had single stocks at the 10% capped limits (above 10% if not otherwise restricted by the index methodology) and where its also had a number of such high individual stock weightings combined in the same sector. Financials pre 2008 financial crash for instance. Whilst the FTSE 250 appears high on financial sector weightings, that includes something like 40 odd Investment Trusts that individually diversify but are factored as being 'financials' within the FTSE 250.

That both HYP1 and TJH HYP (and FTSE 250) have been in the same ballpark for general/broader total returns, whilst the FTSE 100 from which HYP1 and TJH HYP were/are selected has considerably under-performed is indicative of it being less a UK drag factor, more a FTSE 100 index methodology drag factor. High weightings to sectors such as financials across a period of dot com bubble burst, financial crisis, Covid 2000-2021 years not having worked out so well.

The risk card? Seriously?

As it happens I think TJH's method of investing is as good as it gets if you have to restrict yourself to UK equities. He deserves far more credit than Pyad.

HYP1 is a speculative crapshoot that has no place in the portfolio of any rational person.

HYP1 methodology is sound and that methodology has deep/long history of success. There are also instances of implementation failures I suspect mostly from over-reaching on the yield side or insufficient diversity, or simply ditching after a swing low (disappointment in point to point (shorter term) performance resulting in a buy-high/sell-low actual outcome).

Risk wise and having single stocks rise to 33% or more is perceived idiosyncratic risk. Those single high weighted holdings however can/do naturally rotate over time. Tends to induce more yearly volatility (higher standard deviation in yearly rewards), but that is only a real risk if you load all in and all out at single points in time (that could similarly yield a benefit). Most investors add over time, withdraw over time such that it smooths down the paper value risk.

More a case of what one might be comfortable holding. Pyad/TJH like income, personally I'd prefer zero dividends as I can create my own out of total returns to the amount and timing I prefer, and where I can negate the taxation of those with capital losses. As such I prefer a FTSE 250 holding, and, from what I've seen, that's compared to HYP1 and TJH HYP. Whilst there are shorter period drifts (years), more broadly (decades) each/any of those might have served adequately well enough. Textual dick-pic'ing point-to-point, over-analysing shorter (years rather than decades) time periods, is more inclined to induce a poorer/unsatisfactory outcome - a greater inclination to buy-high/sell-low in reflection of a period when a chosen choice relatively lags, for a while. HYP1 of those three was proposed as a good choice for some, the Doris types who are totally disinterested, however in practice splits/changes occur perhaps more frequently than what the disinterested would like, involving actions having to be taken. Again a reason why I prefer a FTSE 250 choice such as VMIG, where dividends are auto-reinvested. If I were to contract dementia and was nursing home bound for perhaps another 10 years of lifetime, where VMIG was just left as-is for those years, then likely the legacy from that would be OK.

[Bubblesofearth]

The risk card? Seriously?

As it happens I think TJH's method of investing is as good as it gets if you have to restrict yourself to UK equities. He deserves far more credit than Pyad.

HYP1 is a speculative crapshoot that has no place in the portfolio of any rational person.

So no actual data then.

BoE

[Lootman]

The risk card? Seriously?

As it happens I think TJH's method of investing is as good as it gets if you have to restrict yourself to UK equities. He deserves far more credit than Pyad.

HYP1 is a speculative crapshoot that has no place in the portfolio of any rational person.

So no actual data then.

The data card?

Do you seriously want me to prove that the UK market has under-performed massively in the last 30 years?

[1nvest]

So no actual data then

Here's some comparison data
CAGR = annualised reward between start and end dates
LLR = log linear regression (slope), which is better at avoiding start and end date level volatility, is more reflective of the broader average annualised reward

Total returns (dividends reinvested at the ongoing rate of return) 2021 to 2020 inclusive years
£ adjusted
HYP1 = November years, all others calendar years


FT All Share is 70%+ foreign earnings, FT250 is 50% foreign earnings, is more reflective of the UK market.

Last couple of years has seen the FT250 relatively lag, fall back down into alignment with the others (such as TJH HYP). Would have been a good time to rotate out of FT250 into another. Over those years the US (S&P500) has relatively led/pulled ahead, so might equally be a good time to be rotating out of the US and into another - but that's just speculation. Many in the US are however following that, looking more towards international, including Vanguard funds i.e. they also see the US as being relatively high.

[1nvest]

Here's a more recent comparison that includes TJH HYP vs FT250 total return growth lines since 1987



The blue line is a 'Talmud' style, equal split between land (house), commerce/merchandise (stocks) and in-hand (gold), where imputed rent is also included within that.

[TUK020]

The major returns of the last 30 years have derived from non-UK growth shares. Whilst Apple, Google, Amazon and MicroSoft were adding trillions in market-cap, you were fishing in a fetid swamp of ex-growth British dinosaurs like BT and Lloyds Bank.

Oooh,l A Fetid Swamp Yield Portfolio FSYP
Sounds exciting; can we get IanTHughes to back test it?
Then we can codify the rules, set up a page to perpetuate it, and ban input from all non believers