VALUE INVESTING
A Winning Stock Market Strategy

By Stephen Bland (TMFPyad)
March 11, 2005

Here are the latest valuations of my two eternity portfolios.

In my Value Investor newsletter I am constructing a new high yield portfolio for readers by adding one new selection each month. It's early days but performance to date has been pretty good whilst the dividends have been rolling in to boost it further. Unlike the HYPs here, I intend trading shares in the Value Investor HYP when I spot attractive opportunities for readers.

HYP1

The estimated value including reinvested income is £101,674, an increase of 35.6% on the original investment in 4.33 years. Equating to a compound 7.3% a year, this is ahead of cash.

The portfolio capital is up 14.9% and continues to leave behind the market, the latter having fallen 20.9%. The result is that excluding income it is 45% ahead of it on capital alone but with income reinvested the lead is even greater because of the higher income of the portfolio.

HYP1 start date 13 November 2000 

                                £  orig.   no.  price   val   move
                           invest  price  shs.    now   now      % 

Un. Util. (LSE: UU.)         5000   620    807    600  4842   -3.2
Gallaher (LSE: GLH)          5000   416   1190    774  9211  +84.2
Scot. & New. (LSE: SCTN)     5000   490   1010    447  4515   -9.7
Royal & Sun (LSE: RSA)       5000   393   1271     84  1068  –78.6
All. & Leic. (LSE: AL.)      5000   645    768    874  6712  +34.2
Britannic (LSE: BRT)         5000  1020    485    490  2376  –52.5
Lloyds TSB (LSE: LLOY)       5000   705    702    503  3531  -29.4
Intercon. Hotel (LSE: IHG)   2500   380    658    676  4448  +77.9
Mitchells & But(LSE: MAB)    2500   356    691    329  2273   -9.1
Boots (LSE: BOOT)            5000   575    861    614  5287   +5.7
Land Sec. (LSE: LAND)        5000   771    651   1369  8912  +78.2
Ass. Br. Ports (LSE: ABP)    5000   321   1542    475  7324  +46.5
Hilton (LSE: HG.)            5000   232   2275    307  6984  +39.7
Rio Tinto (LSE: RIO)         5000  1120    442   1790  7912  +58.2
Anglo American (LSE: AAL)    5000   942    526   1253  6591  +31.8
Shell (LSE: SHEL)            5000   572    865    488  4221  -15.6

Totals                      75000                     86207  +14.9
FTSE100                    6274.8                    4962.1  -20.9 

Income                             Yield on capital invested %

Year ended 13/11/01 £3,451                   4.6
           13/11/02 £3,474                   4.6
           13/11/03 £3,197                   4.3
           13/11/04 £3,205                   4.3

HYP2

The estimated value including reinvested income is £116,691, an increase of 55.6% on the original investment in 1.91 years. Equating to a compound 26.0% a year, this is way more than cash.

The portfolio capital is up 41.5%, slightly more than the market which is up 32.2%. The result is that excluding income it is 7% ahead of it on capital alone but with income reinvested the lead is even greater because of the higher income of the portfolio.

HYP2 start date 02 April 2003 

                                 £ orig.  no.  price   val   move
                            invest price shs.    now   now      % 

Lloyds TSB (LSE: LLOY)        5000  338  1479    503  7439  +48.8
Scot. & New. (LSE: SCTN)      5000  348  1436    447  6419  +28.4
Dixons (LSE: DXNS)            5000   87  5762    153  8816  +76.3
Un. Util. (LSE: UU.)          5000  546   915    600  5490   +9.8
Hays (LSE: HAS)               5000   78  6435    135  8687  +73.7
Legal & Gen. (LSE: LGEN)      5000   75  6696    117  7834  +56.7
BA Tobacco (LSE: BATS)        5000  580   862    931  8025  +60.5
Brad. & Bing. (LSE: BB.)      5000  297  1685    315  5308   +6.2
Hanson (LSE: HNS)             5000  320  1563    499  7799  +56.0
Land Sec. (LSE: LAND)         5000  736   680   1369  9309  +86.2
The BOC Group (LSE: BOC)      5000  795   628   1012  6355  +27.1
BAA (LSE: BAA)                5000  465  1075    589  6332  +26.6
Shell (LSE: SHEL)             5000  394  1271    488  6202  +24.0
AMVESCAP (LSE: AVZ)           5000  311  1609    351  5648  +13.0
Anglo American (LSE: AAL)     5000  970   516   1253  6465  +29.3

Totals                       75000                  106128  +41.5
FTSE100                     3753.4                  4962.1  +32.2 

Income                             Yield on capital invested %

Year ended 02/04/04 £4,564                   6.1

General Comment

I am so convinced that HYPs are the way to go for long term investors who are happy with the risks of equities, that I have devoted a section of my Value Investor newsletter each month exclusively to this strategy.

Evidence for my belief is seen in the returns of the above two portfolios which so far are excellent, beating cash, inflation and the market by a long way and in both falling and rising circumstances too. This shows that HYPs are not just some fad but an outstanding long-term strategy which works in all seasons and beats the great majority of all equity strategies. Readers should note that they do so with no more risk than the market, with almost no costs and with very little involvement required from the investor.

When comparing HYP income with cash, note that interest suffers a higher tax liability than dividends. The latter are tax free to basic rate payers and charged at 25% on higher rate payers. The effect is that gross interest would have to be 25% higher than dividend income in order that the net incomes after tax are the same. So for example a dividend yield of 4% gives the same after tax income as gross interest of 5% whichever tax rate is applicable.

Read Value Investor to see how I am building up HYPs for readers there. The first one is near completion and I will be starting a second portfolio in the April edition. Sign up here for a free 30-day trial.

Stephen holds Alliance & Leicester, Lloyds TSB, Royal & SunAlliance, United Utilities.