Reply To: Carillion

[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.