Carillion

[Simon Woods]

What the heck happened today Stephen?

You have been saying for nearly a year that Cariilion was undervalued and that its high dividend was attractive and therefore it remained a “buy” – as we all know its share price crashed today by over 30% and the dividend suspended.

It must be right sometimes to advise portfolio holders to sell as a precaution don’t you think? “Strategic ignorance” can be just that – ignorance – ignorance of all the shorters out there, for one.

Another clunker – RBS – should have been sold years ago.

Comments please.

[Stephen Bland]

It’s your call if you wish to sell any share. TDL is only advisory.

I advise on what I believe is the optimum overall very long term strategy which on balance is never to sell voluntarily. It’s a very weak and innumerate argument to select examples which appear to support your view whilst ignoring those which contradict it. This is the kind of loose talk one sees on share forums all the time and is an example of the psych. weakness known as confirmation bias. You mention two shares that have done badly by holding. I can show you shares that have done very well after having suffered extremely weak periods but similarly, that would be a poor argument and reflect confirmation bias on my part.

The real test is not therefore you or I selecting isolated examples which appear to prove what we want, it’s whether on balance and over a long period, holding beats selling for the whole High Yield Portfolio. I think it does and hence my advice. I can’t actually prove it numerically, but having followed markets for many decades, and having been in a position to observe large numbers of private investors who habitually get timing and share selection wrong and lose money, I believe I’m right. I’ve seen investors with big cap portfolios fifty and more years old, who never touch them and just let market trading like bids and divestments etc. effect any changes. These investors in general, over long periods, trash the traders, dabblers and tinkerers who think they actually know something about shares. Ignorance is bliss and Strategic Ignorance is double bliss.

I accept that never selling will result in some shares that may not fully recover dividends and capital, even over a long time, and that I’ll call it wrong on occasion. But my point is that eternity holding also captures those that do recover well and you don’t know in advance which ones will and which won’t. My view is that the value recovered by the latter will more than compensate for the value lost by the former over time. And don’t tell me that it is somehow clear in advance which shares will go on to put in a great recovery and which will not. Nobody knows and those that think they know, know the least.

As for “shorters” in the case of Carillion, I’m not interested in them, or longers either. I’m not interested generally in what the markets are saying at all about my selections and the day I become interested is probably the day I’d have to give up. One of the fundamental vindications of my HYP strategy is that shares are purchased in many cases when the market is against them, the price is depressed and the yields forced up to HYP levels. I know for certain that going against the market in my structured and calculated way works over time. That doesn’t mean that every share does well on dividends and capital, it means that the portfolio overall is very likely to do so, though there are never any guarantees because equities involve risk. A diversified portfolio approach like HYPs is designed that way so as to lower risk. But it goes with portfolio territory that some shares will do much better than others.

However, listening to “the market”, dilettante bulletin board gossip, press or broker comment and the rest of the torrent of guff out there is definitely not the way to go when deciding on initial share selection or subsequent direction. The success I’ve achieved with TDL over its nine year plus life to date, has been achieved because I studiously don’t follow anybody else.

So I’m not about to change a view built up over many decades and which has worked for a lot of people, just because of a couple of weak shares.

[Anil Kumar]

Dear Stephen, I am sure you must be following all the news of CLLN. I would highly appreciate if you could give your advice what do you make of the news released by the board of CLLN. Is it a buy/hold or sell at these levels. Look forward to your comments please.

[Stephen Bland]

Update in this week’s TDL to be released later today. Due to financial services legislation, I am not permitted to give personal advice to individual readers on the forum.

[Simon Woods]

Dear Stephen,

Thanks for your detailed and inevitably defensive reply – I nevertheless accept the generality of the points which you made, of course. I have no wish to sell the shares and thereby crystallise my losses – its too late for that I fear – however all that we are left with now is..hope of an eventual improvement in value and hopefully even a dividend. By the way and with reference to the pscho-babble of “confirmation bias” sometimes its perfectly valid to sell shares from time to time even when holding long term. I did in fact have a 10% stop loss on Carillion for a while then forgot to renew it. Whoops.

I merely pointed out albeit rather bluntly that your past assessments in support of Carillion, bearing in mind that company’s indebtedness as a result, inter alia, of poor management by that company of its contracts, pension deficit etc etc – something which you say you abhor – were on the facts even at the time rather than with the benefit of hindsight, probably erroneous. Perhaps it was not just me who was “innumerate”. If so a small degree of contrition in the piece you posted yesterday about the Carillion debacle might have been in order and yes I realise that you are not an advisory service. As for myself: silly me – I should have realised that an over generous dividend unless its currency driven usually spells trouble coming down the line and acted accordingly.

“Strategic ignorance” like so many other approaches in this game has its limitations which by the way I must accept, however risk should never be discounted altogether and I believe that Carillion carried a lot of that and it should have been more clearly highlighted in my humble opinion. No doubt your paying subscribers will draw their own conclusions anyway.

As for the 9 years of the HYP you refer to – most of that time was post 2008 crash and in a market which as been mostly on the up since around March 2009.The next 9 years may well be a very different kettle of fish, I fear in my ignorance, of course.

Kind regards,

Simon Woods

[Stephen Bland]

I don’t think you are right Simon.

First of all confirmation bias is not “psycho babble” at all. It is a clear and very common failing of people trying to demonstrate something in a totally unscientific way by selecting only that evidence which supports their view and ignoring that which opposes it, even though the latter deserves equal consideration in order to form a fair opinion. Consequently an argument based on confirmation bias has little validity. You hear it all the time in general conversation and forums everywhere, not just financial message boards, and it is exactly what you were doing in your criticisms.

Secondly, I freely admit that I cannot call it right every single time for every single share I select. No share adviser can. That’s why we have diversified portfolios and the real test of TDL is not the odd poor share but whether on balance I get it right sufficiently often for my portfolios to deliver, which in the HYP world primarily means producing long term increasing income.

[Simon Woods]

Thank you Stephen. I will let you have the last word on this and overlook your now overt condescension and leave it to others to pass their own judgments. Carillion is now quite dead in the water having lost over 70% in just three days and those you seem to despise so much including people within the Southbank stable believe that there is stil more to come before there is perhaps a buying opportunity. It could take a generation or more for such a share to recover,if ever. By the way stock picking is an art as much as a science in my ever so humble opinion. Unfortunately I suspect that there are some other Carillions out there waiting to happen and soon, even unto your HYPs.

[Stephen Bland]

Okay last word then. I’ll ignore the personal insults because they add nothing to this discussion.

The fact is that my HYP strategy has been successful so presumably I must be doing something right. Note that success here is measured by long term increasing income. Capital values are secondary or irrelevant depending on the individual investor’s views. Clearly though it is welcome if capital does improve over time and if the primary objective of increasing income is achieved over the years, it is highly likely that capital will follow as has happened.

One of the factors that I believe contributes to my getting it right is a steadfast refusal to follow others. I’d be swapping shares around every day if I paid heed to any of the enormous amount of comment out there constantly being expressed on forums, by the press, brokers etc. On top of it all, there is always a wide range of contrary opinion so even if I wished to follow it I would be bewildered by the different views. Which ones to follow, which to ignore? My answer, ignore the lot. Not because I “despise” it as you said but because it is of no help to me at all, quite the reverse, it is a hindrance for the reasons above.

Even on Carillion, many people felt that it was attractive right up until it wasn’t. My own analysis based upon its published accounts and news showed this too and at present it appears that I was mistaken. As I said, I’ll never call every single share correctly and if you think you or someone else can, good luck with that.

The majority of my selections are of shares at a time when they are unloved by the market as demonstrated by their higher yields. Experience, and I have a lot of it, shows that this is the right time to buy and of that I am certain. Overwhelmingly if the market is against a big cap share, resulting in a falling price and a higher yield, it will be wrong and proven so over time by the share continuing to reward us with good dividends and quite possibly a capital gain too. But just occasionally it is correct and there is no reliable way to weed out the times when it is correct from the vastly greater number of times when it is wrong.

Thus HYPs will almost for certain contain a very small number of lousy dividend performers at any stage you look at a portfolio. They will similarly contain a number of outstanding dividend performers too. You have to accept this if you wish to invest in equity portfolios at all but if the investor or adviser has the requisite skills, the good performers will way over compensate for the poor ones. Also, poor performers on balance will recover dividends and capital too over time. On balance means not in every case but sufficiently frequently to justify continued holding as a policy because I don’t know in advance which ones will do the business for us in time.

To reiterate, the test is not whether I’ve called every single selection right because that won’t happen, but whether I’ve structured the portfolios sufficiently well in order that they win in total over long periods. The results speak for themselves. It’s the portfolio that matters, not the individual shares.

And if you want a good demonstration of an early selection of mine that went very wrong in the financial crisis of the late noughties, even suspending dividends so I dropped it to Hold at one stage yet not advocating a Sell because I don’t do Sells, I’ll use confirmation bias, which you don’t seem to believe exists, and mention Persimmon. There was a widespread view back then that it was going bust, including opinion from experienced and knowledgeable investors at my publisher. So I should break my rule and call a Sell at a big loss on the selection price. “Nothing Doing” was my response because “Doing Nothing” is the HYPerway and I am not about to break my rule on no-Sells and also, I do not follow anybody else.

PSN recovered magnificently and went on to deliver a relatively vast income over the years, with secondarily a huge capital gain too. Coincidentally I reviewed the share in the latest TDL which you didn’t seem to notice. I suspect that if you were around back then you would have written similar messages criticising me for choosing PSN and then not calling a Sell when it got into big difficulties.

But I won’t use that to prove you wrong because it would be confirmation bias and therefore not a scientific, ie. logical, argument.

I agree by the way that share selection is to some extent an art and not an exact science but that has nothing to do with unscientific flawed arguments based on highly selective and therefore unrepresentative examples.

[Simon Woods]

Thanks. No hard feelings I hope. All I was trying to say in essence was that when there is clearly a veritable Tsunami of heavy weight shorting by powerful hedge funds and the like (equivalent they say to over 25% of Carillion’s value and even now most of the shorters scarily have not yet closed their positions so they expect the stock to fall even further) going on against a particular stock for many months on end then there’s usually a good reason for it and it shouldn’t be ignored. Such facts are surely relevant in investing, even when taking the long view – in terms of research etc -to an expert such as yourself? It was not mere market noise but a very concerted attack on that particular stock putting investors at risk and we should have been warned of that. It merited special investigation. I agree and by and large support your investment approach (although not to the point of dogma) as I have said before but I was merely talking about that one stock…there was no need for us to have such a general debate on principles all of which I broadly accept anyway and btw the insults seemed to have been mutual to me – since you accused me of “innumeracy”! however please accept my apologies for the tone of some of my comments – I was and am nursing a significant probably permanent loss and was feeling sore. As for capital versus income, well we have lost both in the case of Carilion haven’t we – with a vengeance.

Ends.

[Alan Rogers]

Hi Stephen, I follow you knowing that occasionally there will be a set back, but think the set forwards, so to speak, see them off and your performance information shows that, so I am not discouraged by the fact that you are human and must expect unknown unknowns to visit you. I don’t do any research myself so I bought Carillion on the positive commentary. I was surprised to learn they were in a big hole on contracts and pensions, though I understand this was the reason for all the shorting and well known some time ago. My only thought is that you might have informed us and perhaps seen evidence for Hold earlier when the problems were apparently clear. Were you aware of those income problems and extent of pension shortfall, or only post crash?

Kind Regards

Pete Rogers

[Stephen Bland]

No Pete, of course I was not previously aware of the serious contract problems as revealed in their recent shock news. I’m surprised you even ask me that.

Note that rumour and gossip etc. does not constitute “evidence” of anything in my book because almost all of that turns out to be plain wrong. The fact that on very rare occasions it may be accurate does not vindicate paying any attention to it as an overall part of the strategy.

[Author]

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