LONG TERM EQUITIES - ANY GOOD ?

[Jon39]

This post is simply to encourage thought about long-term equity investment - nothing else.

I am not a frequent poster on the Finance section of PH, it is usually sports car nattering for me. However, I have made a few contributions here recently, and have discussed the long-term investment method with some clearly knowledgeable people.

I have found that this system can work well, and a helpful benefit is not having to spend too much time dealing with the investment matters. I suppose you could say, it is for the paid employees (that includes the board) to do the work, and not the providers of the risk capital. However, don't take that comment too seriously.

Dividends are often underestimated, but they can form a significant part of an overall investment return, and can also form part of personal income if desired.

Below is an example of holdings in a company, to show what is possible with a BUY AND HOLD FOREVER APPROACH. You might be staggered at the figures, but I do appreciate that it may be unusual for anyone to retain holdings for 30 years. The initial investment amount was chosen purely for this example, but you could substitute any starting figure and achieve exactly the same percentage results. It is a large business, but I will not name it, because I never forecast future success or failure.
IE. I do not know whether this company will continue to perform well.

A THEORETICAL EXAMPLE, BUT FIGURES ARE CORRECT.

31 DEC 1983 - SHARES PURCHASE COST = £9,000

1992 - YEAR 9 - ORIGINAL INVESTMENT NOW PAID BACK BY DIVIDENDS.
2004 - YEAR 21 - ORIGINAL INVESTMENT PAID BACK 5 TIMES BY DIVIDENDS.
2010 - YEAR 27 - ORIGINAL INVESTMENT PAID BACK 10 TIMES BY DIVIDENDS.
2014 - YEAR 31 - ORIGINAL INVESTMENT PAID BACK 15 TIMES BY DIVIDENDS.

Note how compounding is now really gathering pace.

2015 - TOTAL DIVIDENDS RECEIVED SINCE THE ORIGINAL SHARES PURCHASE = £163,334


The £9,000 original investment was paid back in 9 years.
Total dividends = £163,000
Shares value now about £400,000.

£9,000 to £560,000 - certainly figures to ponder.

The future performance of this business would have been completely unknown in 1983. It was though a significant business then, not a start-up.

I expect many shareholders must have owned shares in this company at times, seen a share price rise and then sold, happy with their profit. The long-term approach is obviously not always as successful as in this example, but it does show that with the business and economic future continually being unknown, you can take a profit too soon.

I know I have picked an example that work really well, so that you can see what might be possible. There will be many that prove hopeless, but at least with the very long-term approach, if you do have an unexpected future winner lurking amongst your spread of holdings, when it comes alive you will still be 'in the game to collect the prize'.

[010101]

By holding only one company you might have been taking a degree of risk that is not commensurate with your returns.
By definition black swans are unexpected.
I detect a large amount of hindsight bias.
If you had been holding a portfolio then the total dividends would have been in a taxable bracket, disallowing your calculations of compound interest.
You also have £391,000 of capital gains tax liability.

Edited by 010101 on Friday 11th March 19:47

[Jon39]

010101 said:

By holding only one company you might have been taking a degree of risk that is not commensurate with your returns.
By definition black swans are unexpected.
I detect a large amount of hindsight bias.

Your response does make me realise, that I might have more talent for business investment, than trying to be a writer but then causing confusion.

No, of course an investor should never hold only one company.
The Eggs Rule is paramount.
My last paragraph did include the words, 'amongst your spread of holdings', but sorry that I did not make that point clearer.

I am usually holding investments in around 25 businesses, and began building a stake in the company featured during 1986. That is the only reason I have access to 30 years of data.

You mentioned hindsight. That is what I was trying to explain in my post. With companies held long-term, you do have many chances of holding a good business, but you will only know that with hindsight. However the important thing is, you are holding that company. If you pick something hoping it will do well, but tend to only hold for a just a short time, you are introducing a secondary investment risk, that of timing. When big businesses run into problems, I have often seen them eventually recover (sometimes with a new CEO), but I could never forecast the timing of those recovery events, and the upward share price movements can then be quite rapid. With long-term, you do not even have to attempt such forecasting.


PEPs and ISAs have been around for a long time, so no CGT liability, or additional tax on dividends. I had forgotten, but you have now reminded me. Originally the tax credit was reclaimable within a PEP, so that aspect would in fact increase the dividend total that is shown. I don't have time to do those calculations though.

'...disallowing your calculations of compound interest.'
There is no compound interest included. The dividend figures are simply the amounts paid.

Edited by Jon39 on Friday 11th March 20:37

[010101]

If none of the 25 companies in a hypothetical holding prospered and you never updated your investments then the opportunity cost could dwarf any gains.
The purchasing power of your capital should also be factored in, as the returns you show are nominal.

Edited by 010101 on Friday 11th March 21:14

[Simpo Two]

We seem to have gone from

'£9,000 to £560,000'

to

'the returns you show are nominal'

in four posts.

[Jon39]

010101 said:

If none of the 25 companies in a hypothetical holding prospered and you never updated your investments then the opportunity cost could dwarf any gains.

You need to read my previous contributions.
Track record has been praised.

My calendar year comparison monitoring system, soon revealed that the fund contained good enough holdings. Obviously only works for periods completed.
If that had repeatedly showed failure in the early years, I probably would have given up. Luckily, it was good from the start.

I have just completed this weeks figures:
Fund = +4.04% (inc divs received so far this year)
FTSE All-Share = -2.23%
That is pleasing for 2016 so far, but I never know what is going to happen next.
As you correctly say, we can only be certain with hindsight.

There are of course, always going to be individual poor performers.
I can see that I have 14 companies in the negative at present this year, but it is only the overall total fund percentage change that I am concerned about.

(Looking at the printout, who could have guessed on 1st January, that Tesco would now be showing +28.6% ? That surprised me.)

[bayleaf]

Jon39 said:

You need to read my previous contributions.
Track record has been praised.

My calendar year comparison monitoring system, soon revealed that the fund contained good enough holdings. Obviously only works for periods completed.
If that had repeatedly showed failure in the early years, I probably would have given up. Luckily, it was good from the start.

I have just completed this weeks figures:
Fund = +4.04% (inc divs received so far this year)
FTSE All-Share = -2.23%
That is pleasing for 2016 so far, but I never know what is going to happen next.
As you correctly say, we can only be certain with hindsight.

There are of course, always going to be individual poor performers.
I can see that I have 14 companies in the negative at present this year, but it is only the overall total fund percentage change that I am concerned about.

(Looking at the printout, who could have guessed on 1st January, that Tesco would now be showing +28.6% ? That surprised me.)

You're a bizarre one trick pony who keeps bleating on about some investments you made whose returns (including compounded divs) were OK. Lotus 123

[010101]

Certifiable said:

Incorrect.
CGT is only payable on realised gains.

I know.
I thought the OP is intonating that he has realised the profit.

[010101]

Simpo Two said:

We seem to have gone from

'£9,000 to £560,000'

to

'the returns you show are nominal'

in four posts.

I will clarify:
Nominal in this context does not mean small. I am trying to show the price of something in 1983 is not the same as in 2016, in nominal terms. The value in terms of equivalent purchasing power could be the same though.
For instance, a three bed house in 1983 is still a three bed house in 2016, but the nominal price is different.

Edited by 010101 on Friday 11th March 23:06

[TooLateForAName]

When you don't say what the investment was this is so much hot air.

My guess from your stated date would be that the investment was in a thatcher privatisation - so the shares would have been bought at a price significantly below real value anyway.

[Simpo Two]

OK, different interpretation of nominal!

Without finding out, I'd guess prices in general have gone up 4x since 1983. So £9,000 - £560,000 becomes £9,000 - £140,000 in terms of buying power. I'd be happy with that

[010101]

Simpo Two said:

Without finding out, I'd guess prices in general have gone up 4x since 1983. So £9,000 - £560,000 becomes £9,000 - £140,000 in terms of buying power. I'd be happy with that

The UK Money Supply (M3) has increased from £76 billion in 1980 to

£2.5 TRILLION in 2015.

Everyone should get wet when it is raining money.

Someday it might be a dry and sunny economy that is forecast.

Edited by 010101 on Sunday 13th March 08:58

[walm]

I think Jon admitted elsewhere that he really backed up the truck in early 2009 which backs up my whole complaint about his returns which is that it isn't a repeatable genius system he has devised, just good timing.

And there are HUGE numbers of "rock-sold" dividend payers out there who collapsed:
BP
Tesco
Sainsburys
Pearson

Sure you are nicely diversified with 25 holdings but one Gulf of Mexico is going to wipe out a LOT of dividends from the other 24.

[anonymous-user]

walm said:

And there are HUGE numbers of "rock-sold" dividend payers out there who collapsed:
BP
Tesco
Sainsburys
Pearson

Sure you are nicely diversified with 25 holdings but one Gulf of Mexico is going to wipe out a LOT of dividends from the other 24.

There is also an equally HUGE numbers of dividend payers which continue to have a history of strong dividend growth - what did Standard Life pay out lately? The diversification is important and if a company stops paying out and is likely to continue to do so (they announce this) then move to another stock. Personally I prefer this 'investing for income' approach to investing in funds run by managers who despite being 'experts' in the stock market surprisingly still need to work for a living.

[walm]

RaymondVanDerDon said:

if a company stops paying out and is likely to continue to do so (they announce this) then move to another stock.

After the stock has been completely crushed - yeah, great idea.
The point is that dividends are vulnerable and when they don't grow as expected the stock price reaction will offset many years of the dividends.

To give an example.
If a stock trades on a 4% div yield and the management team halve the div then the stock is going to drop 50% (ceteris paribus).
Ouch.

Once again it has to be said for those who continue to insist in some magic bullet to stock market investing riches, IF IT IS SO EASY EVERYONE WOULD DO IT!

[anonymous-user]

walm said:

After the stock has been completely crushed - yeah, great idea.
The point is that dividends are vulnerable and when they don't grow as expected the stock price reaction will offset many years of the dividends.

To give an example.
If a stock trades on a 4% div yield and the management team halve the div then the stock is going to drop 50% (ceteris paribus).
Ouch.

The point of this approach is to invest for income. The stock price dropping is an irrelevant paper loss until you decide to sell - and if you're planning on selling then this investment approach isn't suitable for you. And what is your interpretation of a stock being completely crushed? Sainsburys Tesco BP are still FTSE100 are they not?

walm said:

Once again it has to be said for those who continue to insist in some magic bullet to stock market investing riches, IF IT IS SO EASY EVERYONE WOULD DO IT!

It's not a get rich quick scheme. It's a long term investment approach, which does have a following - see High Yield Portfolios (HYP) on Motley Fool boards.

[anonymous-user]

Actually there was a piece on BBC Newsnight highlighting the reduction in dividend payers a few months ago. It suggested that companies are looking to move away from the traditional model of running a business for the shareholders, instead saying they have more of a social purpose and no more dividends as a consequence. For me this is the biggest risk to my investment strategy; not the current stock price.

[walm]

RaymondVanDerDon said:

walm said:

After the stock has been completely crushed - yeah, great idea.
The point is that dividends are vulnerable and when they don't grow as expected the stock price reaction will offset many years of the dividends.

To give an example.
If a stock trades on a 4% div yield and the management team halve the div then the stock is going to drop 50% (ceteris paribus).
Ouch.

The point of this approach is to invest for income. The stock price dropping is an irrelevant paper loss until you decide to sell - and if you're planning on selling then this investment approach isn't suitable for you. And what is your interpretation of a stock being completely crushed? Sainsburys Tesco BP are still FTSE100 are they not?

walm said:

Once again it has to be said for those who continue to insist in some magic bullet to stock market investing riches, IF IT IS SO EASY EVERYONE WOULD DO IT!

It's not a get rich quick scheme. It's a long term investment approach, which does have a following - see High Yield Portfolios (HYP) on Motley Fool boards.

I fully understand about the benefits of an income based approach to investing.
My point is simple.
A high div isn't some magic bullet to surefire returns in equities. That's all.

The reason is important.
Dividends AREN'T SECURE.
They move up and down.

And claiming that "paper losses" aren't real losses is an absolutely crazy attitude!

Being in the FTSE100 isn't some marker of a healthy stock price.
If BP dropped 50% it would still be in!

From their peaks, PSON is down -40%, and SBRY and BP both down -33%. TSCO is -50% in the last 5 years
Yet the "divs are great" team would be holding the whole time and watching their capital disappear.

[DonkeyApple]

RaymondVanDerDon said:

Actually there was a piece on BBC Newsnight highlighting the reduction in dividend payers a few months ago. It suggested that companies are looking to move away from the traditional model of running a business for the shareholders, instead saying they have more of a social purpose and no more dividends as a consequence. For me this is the biggest risk to my investment strategy; not the current stock price.

They'll stop spouting all that guff once they start having to compete against cash again. Equities, being higher risk than cash, must always pay more interest to attract investment. The very recent few years of ultra low interest in cash along with the devaluing of cash has just meant that the gross % needed to be paid by equities has fallen to a historically low level. Once cash rates start rising then they'll have to start increasing divis again to compensate. No amount of new age waffle will change that and if anyone in those companies is so young as to believe it then they will be in for a small surprise as cash yields start climbing and they rapidly begin to lose equity value to their peers.

[AnimalMother]

RaymondVanDerDon said:

It's not a get rich quick scheme. It's a long term investment approach, which does have a following - see High Yield Portfolios (HYP) on Motley Fool boards.

Interesting:

http://www.dividendletter.com/how-the-high-yield-s...