[Stephen Bland]

True but the reason I listed those points is that I wanted to comment on the specific issues raised by the original poster, whilst at the same time reiterating that I follow my concept of SI. So when I consider these companies for HYP selection, I do not dwell on those issues but nevertheless thought it desirable to offer some response to the query.

[Stephen Bland]

How you deal with SKY, or any share, is your call.

I cannot know whether the bid will eventually be approved or not though I don’t see why the annoyingly lengthy delay increases the likelihood of it being refused. But as I see it, continued holding offers worthwhile potential rewards whether the bid goes ahead or not.

If the bid succeeds then holders will receive 1,075p per share which is a return of about 110p or 11.4% over the current market price of 965p. That is substantially more than any dividends that could be earned from other shares over the time until the bid money is paid because I guess that period may be no more than about eight months from now at the latest. Additionally if the bid goes through but is delayed until 2018, SKY will pay a special final 10p dividend making the return 120p. Thus holding for a successful bid makes sense for a HYPer, even with the frustrating delay, but clearly it does carry the risk that the bid fails.

If the bid fails the price is likely to fall back but dividends should recommence at presumably around the figure of the last payout (though no guarantees of course) but the worst that happens is that holders are simply back to owning what I advocated as a worthwhile HYP share in the first place. Thus holding also makes sense here. The downside of a failed bid is that investors may, prior to assumed dividend recommencement, miss out on some dividends that were not paid under the bid terms whilst it was in progress. It’s possible in this case that the company might compensate us for those missed payments but they are not obliged to do so and the offer terms make no mention of this point. Nevertheless I’d say that continued holding is desirable.

So whether the bid finally succeeds or fails, doing nothing remains the optimum course for HYPers in my view.

[Stephen Bland]

1 It will be a very long time before all cars will be purely electric.

2 Oil has many uses other than vehicle fuel.

3 Big oil companies are highly likely to adapt to changing circumstances.

4 My policy of Strategic Ignorance says pay no heed to the distant future. Long term forecasts are nearly always wrong.

[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.

[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.

[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.

[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.

[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.

[Stephen Bland]

Thanks for the suggestion. In fact this idea had crossed my mind years ago, right back to when I founded TDL. At that stage I had to make a decision whether to record the portfolios including or excluding accumulated dividends. I rejected the former.

Principally this was because of the sharply increased record keeping burden. I have enough to do already and dealing with accumulated dividends and their reinvestment would complicate this substantially. And it is not just during the construction because each January I show the performance of all completed portfolios to date. So I would have to carry on, in my records, maintaining the performance of HYP7 and its accumulating dividends and how I reinvested them long after it was finished and I had moved on to future HYP constructions.

Had I opted to bring in accumulated dividends and their reinvestment from the start, I would now be facing an overwhelming workload in having to account for this and maintain it continually in every portfolio to date in order that my annual performance updates would remain accurate. So I understand your reasons but in practice I won’t be doing it that way.

The annual updates show the latest capital value of every completed portfolio and their total dividends for each past year.

[Stephen Bland]

I guess if two shares were otherwise identical on all the criteria I seek, except for cover, then I’d prefer the one with the higher cover. But that is just theoretical because in practice no two shares are ever likely to be that identical on my usual filters apart from cover. So something more important to me than cover would probably tip the balance before I started worrying about cover ratios.

Glad you like TDL.

[Stephen Bland]

My current view on every past share I have ever selected since the foundation of TDL in March 2008, where it is still held in any portfolio, is shown on the latest Dividend Schedule that accompanies each issue. The latest DS published with this week’s issue shows SSE as a Buy. Note that it is only the latest edition that is valid for this purpose and it always over rides all past issues. The reason being that my views on a share will often change over time with circumstances.

One other point. The word “toppish” in the context you use it regarding price is not one that has much meaning in the HYP strategy. It is a description that traders might mention but trading is not part of the approach. My judgement of a share is based on its current yield and other fundamental factors so that absolute price alone or price action over some past period is irrelevant for HYP share selection.

[Stephen Bland]

I think you are getting a little ahead of things here and I don’t wish to speculate on what might happen in the circumstance you mention.

Other readers are welcome to comment though.

[Stephen Bland]

Taking your last question first, I don’t advocate rebalancing annually or any other frequency. Rebalancing is actually a form of voluntary trading and there is no voluntary trading in the HYP strategy as I promote it. Also, rebalancing will involve costs.

The reason I am anti is that I believe what I call “market trading” will work to the advantage of HYPers long term by enforcing a certain amount of reorganisation but at optimum values, better than is likely to be obtained on balance by HYPers rebalancing or otherwise tinkering. By market trading I mean corporate activity such as bids, cash returns, spin-offs and so on, the market trading for you.

On your first points if you have a complete HYP6, then with new money whatever its source I’d advise prioritising new sectors if you find any in HYP7 or any of my earlier selections as shown on the Dividend Schedule where still Buys at the time you have the cash available. If not, go for top-ups.

[Stephen Bland]

Good question but it’s not a criterion to which I personally pay that much attention. For those who may not be aware, cover is the ratio of earnings per share/dividend. Dividends are usually less than eps and the greater the ratio, the safer in theory is the payout. Companies aim for cover of >1 meaning that they pay less in dividend than eps, though occasionally it may fall to <1 where for example profits have fallen a lot in a year but the payout is maintained at a previous level which is higher than the current year's eps.

One major weakness in cover is that there can often be two or sometimes more versions of eps in the accounts, plus those calculated by outside analysts. So one would have to make a decision on which version to use and that decision may give wildly varying outcomes for cover. Also, eps will vary year to year and maybe dramatically on occasion, whereas dividends are likely to follow a far smoother pattern.

Ability and willingness to pay a particular dividend is influenced heavily by available cash, both at the time and for future requirements. Eps is an accounting calculation and subject to a lot of underlying influences, whereas cash, is well, cash.

I know some other commentators set a lot of store by cover but for me, it is not especially important and particularly not one year in isolation. I'm not saying I disregard it entirely but it comes low down in my assessment of shares.

[Stephen Bland]

That’s exactly right Nigel. A number of companies have paid special dividends lately, accompanied by a share consolidation. The consolidation is purely to avoid what they perceive as the ignominy of the large price drop that would likely occur when the special goes xd. The ratio by which the number of shares is reduced is calculated so as create approximately the same share price before and after xd but that’s just a cheap trick in my view.

All smoke and mirrors really and in effect, these deals represent a forced sale of part of one’s holding. On balance I dislike them, if a company wishes to pay a special dividend then fine but I’d leave it at that. There is no financial need to accompany this with a share consolidation and if the share price falls at xd, well so what.

I see this as another typically unnecessary fashion trend by ovine company boards, no doubt propelled along by investment bankers who derive fees from this nonsense. It’s not unlike the needless fashion for share buybacks that has been so active in recent years for similar reasons. Both of these effectively act against the small private shareholder in favour of the large institutional shareholders but then who cares about the former? The ownership and market in big caps is totally dominated by institutions and other pros so there is little profit to be made from the likes of us individual investors.

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