ReallyVeryFoolish wrote:Or when reflecting on the more ridiculous aspects of things sometimes posted here like "never sell anything", "always buy the highest yield", "the time to buy is always now" and so on (paraphrasing, obviously). Can anyone think of a single, successful, professional fund manager running an income or income/growth fund who has even remotely come close to managing his fund like that?
"Never sell anything" in the context of doing so to provide income is HYP policy (to the extent its even suggested to ignore capital value). Which bears the risk that at times the dividend income may be inadequate, such that in practice either holdings have to be sold, or some other alternative measures have to be in place to account for that, such as a cash-buffer. What if instead you accepted that some/all of the best performing stock might be sold periodically as part of cash-buffer replenishing. Typically for a set of assets over a period of time one or more will tend to have performed very well, such that the best uplifts the average of the whole to above the individuals, most of the holdings actually lag the broader average. Hold a buy and hold HYP long enough and likely you'll see relatively heavy weighting into a small number of holdings - which increases risk (over concentration).
TUK020 wrote:Once one has some idea of what an appropriate reserve is per investment strategy (e.g basket if ITs vs HYP stocks), then a more meaningful comparison of performance for the invested portion of the strategy.
Question to the longer term members of TLF & TMF: has any such analysis been done already? and where would I find it?
Contrast stocks with "old-money" (generational) asset allocation, the "a third, a third, a third" mantra ... art, gold, land assets, that may generate zero ongoing income. Typically something is sold periodically to top up available cash (buffer) and that cash is drawn down until all spent and something else is sold, often the right tail (best) asset. If one piece of art had risen 100 fold, then selling that to re-load the cash buffer and buy perhaps 90 other of relatively lower priced pieces of art.
That old-money (three thirds) style asset allocation can compare as equally as well to the likes of stocks, gold, home value (land) in overall benefit. Where for instance the rewards from art can be similar to having invested in stocks. John Maynard Keynes (economist (1883–1946)) started building his art collection in 1918, buying works by Cezanne and Delacroix. In later years, he added pieces by Cezanne, Degas, Matisse, Modigliani, Picasso, Renoir and Georges-Pierre Seurat. A study valued the collection over time by using various insurance appraisals conducted over the years as well as estimates commissioned by the authors from specialists in 2013 and 2019. If the combined works had kept pace with inflation, they would have been worth about 500,000 pounds. Instead, they were worth 76.2 million pounds, not too far short of the 90.2 million pounds the authors calculate Keynes would have generated in the U.K. stock market. “The long-term returns from the Keynes collection are substantial,” according to the report’s authors, David Chambers and Elroy Dimson of the University of Cambridge’s Judge Business School and Christophe Spaenjers of HEC Paris. However, the ten most valuable items of the works he amassed account for 88% their total value — and just two of the works account for almost half of the entire collection’s valuation.
Art as an Asset: Evidence from Keynes the Collector
David Chambers, Elroy Dimson, Christophe Spaenjers
Published: 29 January 2020
...This translates into a nominal internal rate of return (IRR) of 10.4% (6.1% in real terms). The year 2019 value of the art collection is only 16% lower than what it would have been if Keynes had instead invested his outlays in U.K. equities, reinvesting dividends (costlessly) back into the portfolio; the annualised under-performance relative to the equity market is just 0.2%. The collection performed especially well shortly after purchase, suggesting that Keynes was able to buy art at attractive prices. Yet, even over the last six decades the collection continued to appreciate at an annualised real rate of 4.8%. After procuring additional valuations for the collection’s most important works in both 2013 and 2019, we conclude that our estimate of its performance is robust to averaging across idiosyncratic elements in the valuation of individual artworks.
... Fundamentally the cash buffer sizing is the primary factor/complexity. The more held in cash the greater the total portfolio drag factor tends to be. But equally cash % weighting can be variable, perhaps heavily loaded to say 40% initially that is then drawn down to zero over time ... broadly averaging 20% cash over those years. With HYP throwing off dividends to supplement 'cash' then if the expansion rate of cash exceeds/matches the draw from cash rate then there may be no need to sell individual assets. Periodically however that might not be the situation and in which case assets may need to be sold, and ideally not at a time when stock values were down. It's all a dynamic portfolio/cash management issue that is subjective to circumstances. Fundamentally you want to be topping up cash during good times to levels that are sufficient enough to carry you through the bad times when you'd rather not have to sell assets, combined with choice of assets held as for some assets it can be a case of one asset having done well over a time when another asset performed poorly (asset correlations).
Broadly the above 'evidence' of comparison was suggestive that distinctly different assets can yield the same broadly similar outcome/success. But its all so subjective that you could likely be selective of time periods/assets to suggest otherwise. The usual "Lies, damned lies, and statistics".
