VALUE INVESTING
Fashion Victim Or Leader?

By Stephen Bland (TMFPyad)
May 27, 2005

My Value Investor newsletter features my High Yield Portfolio (HYP) strategy in addition to the value shares trading approach. Those who follow my regular Friday articles will have noticed the updates of my public HYPs which have beaten the market over the years I have been running them. In November of this year the first portfolio, HYP1, will be five years old, a period which many commentators consider marks the turning point between the short term and the medium to longer term for equity investment.

I can't help noticing though that articles about the HYP idea have been springing up all over the place. I've even been asked to write a couple myself for other publications. Now as any contrarian will be aware, once some investment idea has reached the level of the popular press, the dinner party or the pub, where it is being discussed by people who otherwise generally have little interest in such things, it may well be time to start thinking whether it is not perhaps getting a bit too late.

I don't think that applies to the HYP and here's why it's different from short term fads. Before I get on to that though, note that there is nothing particularly wrong with fads provided the investor is shrewd enough to get in and out on time. But that is a very demanding proviso. In practice, large numbers of people lack this instinct and get drawn in, and pull out, at precisely the wrong points.

The critical difference between investment fads and the HYP is that no timing is needed for the latter in order to derive good performance. With true fads, unless you are one of the few whose timing is on target you are likely to lose your shirt. But the HYP approach is always in season and this is the principal reason why it will never merely be a short term fashion, despite it being popularised presently.

For a lump sum investor, now is always the right time to set up their HYP. Now yesterday, now now and now tomorrow. Consequently, I have no fear that the popularisation of HYPs will be their downfall due to fad chasers piling in and dumping later. There may be fewer or greater numbers of investors following the idea at various times, but this will not affect performance. That is why I chose the HYP approach as one of the two components of Value Investor.

Far from being a fashion victim, HYPs are likely to be fashion leaders in the end because making money is always in fashion.

Readers might wonder just why no timing is needed or why fad status is not harmful to HYPs. Well, unlike for example the tech shares or property booms we've seen, high yield shares are not a homogeneous form of equity investment. They are not identified by all being a similar thing like techs or residential property. The difference is that almost any share relative to the market could at certain times be a high yield share and at others, the same share might be an average or low yielder. Whereas in contrast a tech is a tech or a house is a house.

It follows that there is no permanently identifiable list of high yield shares, no HYP written in stone, no specific individual shares in the same industry to go in and out of fashion and ruin the strategy as happened with the tech boom and bust. The yields of individual shares shuffle over time relative to the market and to each other. There is always, at any moment an HYP of some kind available. Rank the FTSE100 or 350 by descending yield whenever you wish and work down by sector diversification and some other security factors and there's your HYP at that point. But some time later it may be different.

Regardless of timing, I believe this will always work as an outstanding long-term investment strategy whenever it was selected and irrespective of how popular the general idea was at the time. It is no fad, it is permanently on tap. The HYP idea may suffer from faddism but that is not the same as saying that its effectiveness does so too.

You don't need to bother to do your own searching though, Value Investor does the work for you in selecting monthly a new share for your HYP, presenting the most attractive selection in each issue having regard to diversification within the current portfolio under construction and other security criteria. Just last week, I've started a second portfolio in the May edition of the newsletter. Click here to find out how you can sign up a free 30-day trial.