Stephen Bland reveals the thought processess behind his oversized 13-share portfolio.
For some time now I have not found any shares displaying my pyad characteristics of deep value coupled with that other desirable essential of forecast rising eps, in which I'd feel happy investing.
So I decided recently to have slight change of direction. Don't worry, I haven't lost it and become a chartist, started buying unintentionally ironic "growth" shares or trading in that fools arena, derivatives. I remain desirous of making money by trading shares in the market and none of the above three popular approaches, and therefore losing approaches, are any aid for me towards achieving that aim.
Note for the avoidance of misunderstanding that although this article is about yield, it is most definitely not aimed at High Yield Portfolio (HYP) investors in an attempt to suggest that they trade. All my previous advice on running HYPs remains because that strategy is principally about income not trading.
What I am concerned with here is using yield as a value trading indicator, a buy/sell signal. Same old same old in other words but an easing up of my classic value tests with a concentration towards the yield. Yield is not a new value indicator for me because it was always the 'y' in pyad anyway. I've always liked it and have seen it as twofold criterion. Firstly higher relative yield indicates the potential presence of value in a share and secondly it tells you how much income to expect from holding it. This is in contrast to my other value tests like P/E and P/TBV which indicate relative value but that alone.
When it comes to using yield as the principal indicator of value shares, and paying less attention to, even sometimes ignoring, other features I am weakening my value tests compared with my traditional deep approach. Since the first principle of value investing is minimising the downside I need to compensate for the loss of other filters and am doing so in two ways.
First, when yield is most of what matters I go up the cap scale considerably. Thus I'm looking very largely at the FTSE100 with maybe a little 250. I don't altogether rule out smaller cap yield based plays but I certainly concentrate on the bigger jobs. Other things being equal I always preferred bigger over smaller even with deep value where the choice existed which it did only very rarely. But when it comes to concentrating upon yield, big assumes a much greater importance simply because big caps are more secure dividend payers in general than small companies.
The second compensating risk tactic I use in order to try and maintain downside minimisation is to enlarge my portfolio considerably. Thus at the moment I hold thirteen shares, all big caps and most of which were bought as yield plays. I do in addition hold a small HYP as I reviewed here last week but that is held on classic HYP grounds for income, the shares there were not bought for trading. I have though duplicated many of the HYP holdings with larger tranches of the same shares in my trading portfolio because they fit both investing styles.
I must admit to feeling a little nervous at first by deciding to go for such a large portfolio. It didn't at first feel right, almost treacherous in a way, like scoring with a mate's wife. I'd always thrived on the rush of investing big in one or two shares. Not that I ever advocate that others follow this, it is rather mad. But I didn't do it just for the sake of some sort of phoney contrived eccentricity, it's just the way I am, always have been and it's nothing to do with investment as such. If a majority of people believe that some sort of path is correct, I immediately question it because I know that so often in life, but not always, the majority is wrong. Human nature mandates that people to do things simply because others are doing them - the well known herd mentality - and investing is no different. You can make serious money only by going against the crowd because the crowd doesn't make serious money.
So by holding a portfolio of big cap value shares which I intend to trade at some point by using yield as the most important buy/sell signal for most of them, I felt I was going somewhat mainstream. Something with which I suspect the majority of small investors would be comfortable. But for me, mainstream is not the norm, I don't feel that happy doing something that many others are doing, even though that was never the reason for doing it.
Bottom line of course is will it work? Dunno yet, I've adopted this style only fairly recently but I'll let you know in due course.
