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Deep Diver / Exhausting Cash-May 19, 1998
Q.....
Hi Tom. I've got a question on what to do if a stock goes down and keeps going down. I'm not talking about when its time to completely can it. No one can give the correct answer to that. Individually, we have to make that decision according to fundamentals, company news, ratios, gut feelings, etc.........
What I'm questioning here is, when a company is "on the way down". AIM will keep recommending "buys", but at some point you need to say enough is enough and question if your money is just going down the drain. Can you just stop and go into a wait and see mode, to see if the company starts to reverse ?
Since there is a tool to prevent over selling of a good company in the
"Vealie", is there a "reverse Vealie" that protects you from over buying a bad company ?
What do you do with AIM in a continuing downtrend ?
Thanks, Rob
----------
A.....
Hi Rob,
You've touched on the single biggest problem that most investors face - whether they are AIMers or not. It's difficult enough to determine what's going on from annual reports and maybe Value Line regarding a company, but then we have to throw in all the market psychobabble as well. Like Fred Sanford (Sanford and Son), we're never sure if this is "the big one!"
Let's assume that we've been able to determine that there's really no fundamental shift in the long term projections for the company. Other than quarterly fluctuations, they are still on target to advance the way we want, given a 3-5 year time horizon.
If AIM's been selling shares as the price rises, you probably have a pretty good feel for the stocks relative valuation. If you think that the stock is way overpriced at AIM's latest sell point, then you might want to increase the Buy Resistance (Buy SAFE) to the point that the FIRST buy is at a price with which you will feel comfortable. I usually try to keep the first buy point below the 26 week moving average of the price. This keeps me from buying back too soon after a speculative bubble. Once that first buy has occurred, AIM will continue to buy as usual.
The next thing I try to do when one of my stocks is falling in price is determine how long my cash will last (how far will the price fall before my cash reserve is exhausted) and how many shares I'll have at that end point. These are theoretical end points, but are usually close. From that information I make a judgement as to whether the stock will represent a proper proportion of my overall portfolio - even when 100% invested. If I feel that the size of the holding is appropriate for my overall account, I'm content to follow AIM's advice as long as the dive continues and the cash lasts.
So now I feel comfortable with the size of the holding, the long term potential of the stock, and where I'll start letting AIM do some buying. Now it's just a matter of letting the price guide AIM's actions.
There have been times when I've bought until the cash reserve for that individual stock has been exhausted. Then the price continued to decline. Now my Buying Power is gone but the price is "better" than ever! I have sometimes, under these circumstances, "borrowed" cash from other accounts and continued to buy. Remember that any homework done in the above analysis needs to be done again at this point. We want to be "SURE" that the money we're taking from our other stocks is going to be best utilized in this particular stock. Each stock has its own buying power requirements, so now we have to think about where it's best utilized.
Most often, I've just quit buying when the allocated cash is exhausted. It has been too difficult to determine if the stock justifies more cash. Or other times the rest of my stocks have been under duress as well, so there wasn't a big surplus from which to draw. Actually when the broad market is gloomy, it's sometimes easier for us AIMer's to buy. We can see the evidence of mass negative psychology in a down market. It's when one stock out of ten is getting killed that we begin to wonder if there's something we don't know about this individual stock that's gone wrong.
So, there's nothing as simple as the vealie for the buy side - other than just letting the end of the cash reserve determine how deep to go. I hope my rambling helps a little bit, however. It's been my experience that if I've done my homework well, I'm usually delighted with the prospect of running out of cash during a market decline!
Best regards,
Tom
Newport, Excel Spreadsheet-May 12, 1998
Q........
Hi Tom!
Back in December I read Lichello's book and discovered your AIM web
page. At that time I ordered a demo copy of Newport. Although I
think that Newport is a very nice program, I feel that before I order
the full version that I would like to do the work by hand as described
in Lichello's book. I think this would give me a better feel for what
the Newport program is actually doing.
I've been reading the SI bulletin boards and came across somebody that
posted that there was an AIM Excel spreadsheet available. I thought
that this might be a good way to develop a hands-on feel for AIM.
I was wondering if you might tell me where I might obtain a copy of
an Excel spreadsheet for AIM. I saw the name Bill Riedeman mentioned
but do not know how to get in touch with him.
By the way, I am not a subscriber to SI yet, but just wanted you to
know that I read all that is posted... A very nice bunch of people,
by the way!
Thanks and good AIMing to you.
Glenn
----------------------------------------------------------------------------
A........
Hi Glenn,
I'm attaching copies of the files made by Bill Riedeman for your review. You are right, AIM takes a bit of fiddling to see just how it's going to react to different market conditions. Try some "what if" experiments and see what AIM does with a real life price history. I think you'll be surprised at how conservative AIM really is.
AIM's a very long term activity. Please don't become impatient if it looks like you're not getting 20 trades a week!!!
Best regards, Tom
Aim software can be found here: http://www.aim-users.com/aimware.htm
Idiot Wave-May 12, 1998
Q......
At 08:44 AM 5/12/98 +0200, Gary wrote:
dear tom
hi, i'm a new vistor on your page .
i am sold on aim (i will be soon buying the newport program )
please excuse my ignorance , but how do i get the idiot wave in south
africa ? is it on the program ?
thanks for your imput
regards, gary
-----------
A.....
Hi Gary,
Welcome to the AIM pages. Actually, there's information on the Idiot Wave in several locations at the AIM Web site. First, there's the weekly newsletter that takes the market pulse and gives the Idiot Wave reading for the latest period. The AIM Dictionary will give you the basics. In the AIM FAQ pages, there's some more information and then on the Idiot Wave History page you'll find the main graph (not always up to date) and more description. Linked from that page are the Idiot Wave components. Each of the four pieces are given a detailed description there. All pages are accessable from:
http://www.aim-users.com/
The IW doesn't move very quickly in either direction. It follows the trend of the market by combining moving averages of several bits of data. Unfortunately for you, it reflects the U.S. market's data only. It does seem that the world markets are more closely linked these days, so maybe it does some good for the non-U.S. markets as well. There's enough description at the web site that you should be able to get some ideas about construction of a similar barometer for your local stock exchange.
Since I use the IW as the "target" for my AIM cash reserves, it's good to check it when your cash reserves are nearly fully funded. If you feel uncertain as to whether my IW is appropriate for your local markets, then use 50% cash reserve for your more "exciting" stocks, 33% cash for stocks like large industrial cyclicals and diversified mutual funds and maybe 20% for large utility stocks. These values can be used both as your starting cash reserves and also as your upper limit on cash in a good market. When you reach that level, that's when you start using "vealies" to contain the cash reserve levels.
Please let me know if this helps. I'm sure Bob Norman will be pleased to have yet another country represented in his Users List! I'll be happy to help out as you get started with your AIM/Newport accounts. Newport's settings are AIM "by the book" for their default positions. Cash reserve is 1/3 of total value unless you change it. It's denominated in U.S. Dollars as is the stock or fund price. I don't think this should be a problem, however. Just put everything in as your local currency and all should be well.
Best regards,
Tom Veale
AIM, SPYDRS & Rydex-May 1, 1998
Q......
Hi Tom,
I'd like to ask some questions regarding SPDRs and AIM. Can I assume
that in an upwardly trending market, with no corrections, that AIM would
lag the buy and hold investor? In this scenario, it would seem that AIM
would be selling off into the trend, thus generating a large cash position (standard AIM, excluding Split-Safe and "Vealies"). The buy and hold
investor, being fully invested at all times, will end up with the bigger
gain, right?
As I see it, AIM would prove to be more profitable when the market goes
into a correction phase. The volatility that AIM so much loves would
then put a damper on the buy and holder. Due to the very high P/E of the
S&P 500, its seems likely that pullbacks and/or corrections could al-
ready be in the pipeline. Of course, the big question is should I bridge
jump all my money now, or wait for a pullback?
I'm still debating whether or not I should go with one or two aggressive
growth mutual funds, in lieu of SPDRs. One of my reasons for doing so is
that if you buy the market, you can never exceed the market. However,
finding mutual funds that *consistently* outperform the S&P is not an
easy task. This is why I would stick with funds with high 3-yr. returns
vs. very high 1-yr. returns. A large majority of funds end up being
"1-yr. wonders." My other option is a couple of strong, volatile tech
stocks like Compaq and Intel. Who knows, maybe AMD would be even better
for AIM than Intel.
Keep up the good work.
Rob
----------
A.....
Hi Rob,
As an alternative to a pure S&P index fund, you might want to look at the funds from Rydex. They have one fund that mirrors the S&P but with a higher BETA. That is achieved with some fancy footwork which would be best explained by them. There's a Rydex OTC fund as well.
The list of funds at the AIM web site tries to cull the poor performers from the good ones. It measures performance against the S&P on both the short term and long term. It also looks at the fund's bull and bear market performance. Take a look at those as well. You might find one that suits your needs. The Rydex funds didn't make my list because they are too "new."
One aspect of mutual fund investing is that they distribute capital gains, dividends and interest (which you should reinvest as an AIMer). From a tax planning point of view, this can be a pain. However, something in favor of the Index funds is that they have a very low "turn-over" rate which means less distributions and therefore less in the way of taxes.
In each case, as the market moves upward, we AIMers have to satisfy ourselves that we are participating and doing very well on a "risk adjusted" basis. Our cash reserve is our insurance policy. We hedge our investments using the cash. Like essentially all hedging plans, there's a price to be paid for the insurance.
The use of the split SAFE and vealies will help you to stay closer to the B&H investor. With enough stumbles in the price of equities (yes you are right, with high P/E's and low interest rates, it's just a matter of time until the pendulum swings the other way) our cash reserve will eventually buy enough shares so that our account is larger than the B&H investor. At that point it is very hard for B&H to keep up. This scenerio needs a long time and plenty of cycles to occur.
Best regards, Tom
Aim Performance in bad years-Apr 18, 1998
Q.....
Hi Tom,
Have you seen any research as to how AIM would have done from 1928 to 1933, say, using the DOW? We should be able to find the data in a library. Also, the Japanese market (Nikkei) from 1988 to now would be good, too (when it went from 39000 to 14000)!!
Thanks,
Gary in Florida
----------
A.....
Hi Gary,
I seems that I'm always trying to get the AIM site finished, but get interrupted with having to keep other things going. This last week, I didn't even get the weekly report up as I was busy doing my taxes. I promise I'll get the report done soon!!
I'm glad you found the vealie definition at the site. I still have a couple of terms there to finish. Most of the work I've done on AIM has been to compensate for its very conservative nature in a bull market. AIM tends to fall behind the major market averages because of the cash reserve acting as an anchor on performance. It's been so long since we had a low risk market that people are starting to forget how painful they can be. Mr. Lichello concentrates on the period from 1969 to 1974 and statistically, it's one of the worst periods in history. I modeled the 20 years from 1969 to 1988 using the Value Line Composite Index as the basis. At its low point in late 1974 it had lost 2/3rds of its value. The Buy&Hold investor wasn't back to break even until 1982 where the AIM investor was in the black 4 years sooner. That means there were 10 pretty aweful years before AIMers were again happy.
AIM was tapped out of cash reserve from 1973 (a year before the bottom) until 1978. This is sad, because the late 1974 dip was a tremendous buying opportunity. By the time the full 20 years was up, AIM was ahead by nearly 100% over its starting position while the Buy&Hold investor was up about 33%. So, AIM's averaging down did, in fact, pay off, but both investors had a long period of sad looking returns. I believe the index that I used didn't include reinvested dividends. If it had, both investors would have recovered to the black sooner.
I have a friend in Japan that's been modeling the last decade of the Nikkei 225. He has also found that the only scenerio that was a winning one was either cash or bonds. He indicated that AIM would eventually be the winner as in my 20 year history because of its downward averaging, but it still had its work cut out for it. One thing he mentioned is that although the Nikkei has been down, not all stocks have done badly. With good stock selection, he could have beaten the average's record.
One thing he mentioned is that the Japanese government has its pension money invested in many types of securities. He says that there's a fair amount of political manipulation of the Nikkei by govt as they "support" it at various times to maintain office. He says that Japanese investor's biggest problem is trying to subtract this manipulation factor before evaluating the fundamentals of the stocks. It also messes up technical analysis to have such a large, unpredictable player in the market.
I've not modeled the late '20s and early '30s but can imagine that similar results would have occurred to the US late '60s and '70s and to the Nikkei 225. In each market crisis there's been events that most likely will not repeat. However, it doesn't mean that there won't be some "new" and unforseen event that will bring the Big Bear out of hybernation. The peak of oil production predicted for the end of the first decade of the new millenia could bring on a long term bear market as oil prices rise along the Supply/Demand curve. We'll just have to wait to see what technology has done to compensate by then.
If I can help in any way to answer other AIM related questions, please just send them along!
Best regards,
Tom
Vealies, Idiot Wave, Minimium Share-Apr 15, 1998
Hi Tom,
As I've worked more with my 123 spreadsheet for AIM, I've noticed some things and the following questions relate to those items.
Regards,
Mak
>Q1:
"At what precise moment do you call a Vealie?"
----
A1:
Let's say that after a long string of successful Sell events I now have 50% Cash Reserve in my individual stock account. The next Market Order that AIM gives me says to sell 110 shares at $20 per share. This equals $2200 dollars value.
Instead of actually selling shares, I bring up the Portfolio Control value (in your case, it's displayed in your 123 program) and add 1100 to it. This will eliminate the Sell Market Order.
I only pull a "vealie" when AIM/Newport has indicated that a Market Order is pending and Cash Reserve is fully funded. If it were a mutual fund, and my "fully funded" point is 33%, then any market orders I receive from AIM/Newport to sell after that point are turned into "vealies."
After a string of "vealies" the Cash Reserve will have been diluted as a percentage of the total value. The first "vealie" occurred with the Cash Reserve hit the 50% mark, but the second and third occurred when the Cash Reserve was at 48% and 46% respectively. When the Cash Reserve has been diluted by 10% (50% reduced to 45%) then I resume selling shares in conjunction with the Market Orders that AIM/Newport gives. This will usually close the gap to the upper Cash Reserve limit again and then I repeat the process.
Yes, I use the Idiot Wave value instead of a fixed %age for the upper limit of the Cash Reserve. So, I might perform my first "vealie" when the Idiot Wave shows 50% is appropriate. If the Idiot Wave risk indication falls, say to 45%, then I would perform "vealies" until the cash is diluted to 40%-41% before I resume selling.
Let's assume that I've performed 3 "vealies" in a row at around 40% Cash Reserve and then the Idiot Wave starts to rise. When it's risen to 45%, I'd start to follow AIM/Newport's advise and sell again to bring the Cash Reserve up to that point. As the IW continues to rise, I'd sell again and again to keep the cash level in concert with the IW's recommendations.
>Q2:
>"Which of course gets me to the next point. Do you regularly
>put up the Idiot Wave on the Silicon Investor?"
-----
A2: Yes. I update the Idiot Wave values weekly in my newsletter. It's posted not at Silicon Investor, but at the AIM web site:
http://www.execpc.com/~oldcat/3bbs.htm
and there's also the three or four previous week's reports stored at:
http://www.execpc.com/~oldcat/oldbbs.htm
So every week you will know if our Idiot Wave has given us a new target for our cash reserve. It's divided into a value for individual stock holdings (high volatility) and mutual funds (lower price volatility).
>Q3:
>"When AIM kicks in a Buy signal, and given existing share prices the
>Buy isn't enough to warrant 100 shares of purchase, what do you do?
>Pass on the opportunity, or purchase odd lots as Mr L apparently
>suggests?"
-----
A3:
If the AIM Market Order isn't large enough to be practical, I just ignore the signal.
I usually trade to the nearest 100 share lot rather than odd lots with my larger holdings. With today's very reasonable commissions, Mr. L's suggestion of using odd lots is much more usable than in the past. Full service brokers used to charge $100 for a 100 share trade or anything less than that. It was a flat $100 no matter if it was just 1 share!
Now, with discount brokers offering any trade up to 5000 shares for just $15 or so, we can rationally trade 10 or 50 or some other number of shares. Our attempt here is to keep commission costs (one of our only controllable costs in our "Equity Warehouse") to 5% or less of the transaction's value. If commissions are $15, then that would put the lower limit on the order size at $300.
In my larger holdings, I still use 100 shares or $1000 as my minimums for trading. This is for ease of accounting more than any other consideration.
>Q4:
>"By the Book, I thought a Buy order was a Buy order and a
>Sell a Sell regardless of whatever it was. You on the other hand
>have limit orders placed in your system. Why? And at what price do
>you set your limit orders?"
>Regards
>Mak
-----
A4: The Newport program calculates what one's next buy and sell prices are based upon what minimums for trade size one has used. In AIM "by the book" as soon as you have satisfied the range including the SAFE and Portfolio Control values, you get your first Market Order. However, it might be for just $1! Since this isn't a practical order size, I created the math necessary to calculate the Market Order points for predetermined order sizes. That same math has been included in the Newport program. Even with mutual funds, each fund family has a minimum order size (usually in dollars rather than shares) that must be used.
With Stocks, the beauty of knowing at what the next price orders will fulfill AIM's requirements plus one's personal preference for minimums for trading is:
- one can place "good until cancelled" orders for those minimum size trades in advance. Then the brokerage takes care of the orders when the price targets are achieved.
- at least the minimum order will be filled when the price, even just momentarily, reaches the next target.
- an arbitrary time of the week or month for updating one's AIM files may not coincide with the best price of the period.
- once the first order has been filled, one knows exactly what the next buy and sell minimum order prices are, and can place new orders to replace the old ones.
Only one mutual fund, to my knowledge, presently lets you place orders in advance (good for 90 days) at predetermined prices. That's American Century Funds (the old 20th Century).
Hope this helps. Please let me know if there's anything that I've missed. I can see by the depth of the questions that you are working your way through the pragmatic aspects of how to set up the "Mak's International Equity Warehouse" and what's required. I consider AIM to be the basics of my "business plan" for my investing. Taking that outline and creating a full, operational business requires the type of analysis you are doing. Considering the rather brief intro I gave you to my business, I'm glad to see that you are enjoying the exercise of analysis of Mr. L's ideas.
Best regards, Tom
Trading Minimums-Apr 10, 1998
Q.....
I was wondering how everyone sets their minimum $ amount to trade and/or shares to trade.
Is it a percentage of total account value, personal preference, or is their some other method.
TIA
Evan
----------------------------------------------
A1.....
Hi Evan,
I think Tom can answer and correct me... See the Reply #'s 3802 and 3804 (AIM Users Group BB) as these explain for mutual funds and you could use a similar tac for individual stocks. The only addition I would add is that some funds require minimums to trade and others do not. This should be taken into consideration when setting minimums. I have to adjust some for my children's Price funds...
I have used these suggestions since December 97 and they seem to be working quite well in my situation. (Building cash for the next opportunity... SOON?? says the Idiot Wave? )
SAM
------------------------------------------------------
A2.....
Hi Evan,
I hope some other AIMers will respond to your question as well. In these days of deep discount commissions, the rules have changed a bit from a few years ago. I used to follow a strict 100 share rule for my minimums or $1000, but that was back when $50 commissions per trade was a "bargain!" I've always tried to keep the commission cost at
less than 5% of the transaction's cost. With deep discounters, the share minimum and also the dollar minimum can be quite a bit smaller. (try to make them equal in value, however)
Mr. Lichello suggested that we set the minimum for trading at the share and dollar equivalent of 5% of the equity side of our accounts. I find this to be just as good as any other measure. I do go as low as 2.5% on some of the larger mutual fund accounts that I tend. Most of the time, however, my stock accounts are in the 5% range or higher.
The main "rule of thumb" to follow is that you want to make more money than Uncle Sam and also the Broker. Overall, this will make you very happy. It's like my Grandpa used to say, "The first person you should pay is yourself (meaning savings), and then pay everyone else." I feel my efforts at investing are worth more than either of my silent partners - the IRS or the broker. Therefore, I make sure that I get paid the most. I use the LIFO method when figuring this sort of thing. (I use FIFO for my actual tax calculations, but that's "tradition" for me) If I assume I make a 20% gain on a LIFO basis, then 4% goes to the government, a max of 5% to the broker, then the remaining 10% to 11% is all mine. Remember, silent partners should be considered as a "cost of doing business" and nothing more. Keep their share as low as possible.
I hope this helps a bit. If anyone else has any thoughts on this, please chime in!!
Best regards, Tom
-------------------------------------------------------
A3.....
Hi Evan,
I see that Tom has a great answer... as always. I'll offer a slight variation that I use because I got very frustrated trying to use current account value to establish the 5%-value for a minimum trade. The problem is, and this is true if you use Newport, Excel or scratch paper, the "5%" number is constantly moving as price moves. For example if you've been buying XYZ and have accumulated 10,000 sh at the current price of 2.125/sh, the current value is $21,250; 5% of this is $1,062.50. If the price of XYZ goes up 1/4 pt., the new value is $23,750 and 5% of that is $1,187.50 which is a change of almost 12% in the minimum-trade amount. To be consistent with the 5% rule, I found I had to keep changing limit orders because the value for minimum-trade kept changing. This, of course, defeats the purpose of a limit order. So as an alternative, I started using portfolio control as the reference value for computing the 5% dollar minimum. Now the only time the minimum-trade value changes is when a limit order to buy gets tripped or when I apply a Vealie.
None of this is meant to contradict what Tom has said about paying yourself first or minimizing commissions as a % of total transaction value. That is a universal truth and we must follow that advice or we're going to regret the deviation. The flaw in what I'm doing is that 5% of PC may be a long way from 5% of stock value, so you may find you have to adjust to something besides 5% to provide a number that's appropriate and meets the conditions that Tom laid out to pay yourself first.
Btw, I'll bet your question ends up on the FAQ thread anyway!
Bruce
Following posts copied from SDI AIm thread as referenced above:
#3802
To:Ray Jahn who wrote (3801)
From: Bernie Goldberg Wednesday, Jan 14, 1998 5:31 AM
View Replies (1) / Respond to of 18097
Hello Ray,
When dealing with dealing with Mutual Funds you will most likely deal with dollars rather than shares. I set my minimum number of shares at 1. According to Mr. Lichello's book you should set your minimum dollar amount at $500 or 5% of your total stock value whichever is greater.
If your share price is 13.23 (that does seem a little strange), and you have a 100 share minimum with a $1000 minimum you won't be able to buy any shares until TWCUX drops to $10 a share which is a 32.3% drop. You should be getting more AIM activity than that on a price drop of that magnitude in my opinion.
Mr. Lichello in his book states quite emphatically not to worry about 100 share blocks. AIM works with dollars and percentages. As a matter of fact I have my minimum shares set to 1 on all of my accounts.
For example: I bought this week 26 shares of DD at 53.025 for a total of $1403 including commissions. AIM will instruct me to sell 19 shares when the stock reaches 71.625 my total income for that transaction will $1353 including commissions. I use Jack White for a broker and total commissions for the 2 transactions is $50. My net gain on the 2 transactions will be 7 shares of a $53 stock at a total cost of $50 less whatever dividends I receive from the 26 shares of stock in the interim. This works out to approximately 26+%($371 less taxes).
Hope this helps.
Bernie
----------------
#3804
To:Ray Jahn who wrote (3801)
From: Tom Veale Wednesday, Jan 14, 1998 12:15 PM
View Replies (1) / Respond to of 18097
Hi Ray, As supplement to Bernie's directions, for Newport's relief, it's good to set the minimum number of shares below, but near the value of the minimum dollar value you've chosen for the fund.
For instance, if you choose $500 as your minimum for trading and the share price is presently an indicated $13.23 then 500/13.23= 37.792. You would set the minimum Share amount at 30 shares. This leaves Newport free to calculate the minimum on the Dollar value instead of the Share value. The benefit is that Newport "runs" faster. It's always calculating what the next buy and sell points are relative to the min. dollars and min. shares. If there's a big difference in value, there's more calculations to be done - which slows Newport down.
This isn't a bit deal, but does help. As Bernie said, the minimums of 5% of the equity value or $500 will be appreciated by both you and your fund manager!
Best regards, Tom
Aim meetings & history-Mar 6, 1998
Q.....
Hi Tom,
My name is Paul and I am a fellow Wisconsin resident (Village of
Grafton). I learned about AIM during 1981 or so. An elderly co-worker of mine (Ralph) was into investing and I used to tease him. He was trying to get to $100,000.00 in savings before he retired. I on the other hand was a new "young adult" trying to save for my 1st house. I was putting much cash away in money market accounts that he told me about and making 15+ percent on my money. As you might recall, this was a time of high inflation and I thought if I don't buy a house soon I would never get one. He was the one who told me about money market accounts when I was a naive passbook saver. I figured this guy knew something.
I used to laugh how he read over the Wall Street Journal and Barrons
every night (3rd Shift). I did not think much of saving then but do now! I was told by him that if he could do it all over again, he would go by this this book he just read. He then handed me the AIM book to read (borrow and return). I read it and began to question the method. I used up a ream of paper, a whole bunch of pencils, and probably some
batteries for the calculator. I tried different methods/numbers but the system seemed to work no matter what I did. The only two problems I had with the system was: 1) With a market that goes up over time (a fact the market has done over any length of years), and 2) A 50/50 split would not yield returns I thought a larger investment in stocks could make.
I realized about 5 years ago how I probably should have used the system but never did. I started to look for the AIM book and couldn't find it anywhere. I wanted to find the book before I started using the AIM system. About a year ago I was able to locate it through somebody that had e-mailed a message to a newsgroup on the internet. I located this through a "Deja News" search. I ordered the book and found it had been updated with new information. One of the new ideas in the book was a larger ratio in the equity portion of the program. WOW, one problem down. Now what about my problem of the history of the "up market" over time?
About two weeks ago I did a search (Alta Vista) on "AIM" and Lichello" and hit your web site. Here was the answer to my second dilemma. Finally, an approach that would work for me!!!!
I see that you came up with a "Vealie" method that takes care of my
concern. Thanks! This is exactly what I needed to feel the system will
work under the conditions I believe the long term investor needs with
the AIM system.
I also found your different SAFE percentages an extra bonus. I had tried different percentages (0/0,5/5,10/10) with very little luck. It is embarrassing to say now that I see what you have come up with, but I never thought of trying different percentages for buy/sell. An extra
thanks again! (Actually after trying different methods I tried a 6-10%
expected growth rate I added to Portfolio Control - I was scared to
actually try it.)
I know this is a long message but I felt the frustrating hours I spent
trying to fine tune the program was going down the tubes. I wanted to
give you an idea of how happy I am that I found your web page. I look
forward to hopefully hearing from you as I have some questions.
1) How long have you been using this method?
2) Is there really an AIM user group?
3) Is there a Milwaukee area group that actually meets?
I am not sure from reading your web site if I fully understand "Idiot
Wave" yet. If, after I read it a little more carefully, I have questions would you be willing to take more questions? I am not a great "web user" as of yet and would feel uncomfortable using the bulletin board.
THANKS AGAIN!!! Hope to hear from you.
Paul
P.S. I would be interested in your Newport program but I have a
Macintosh computer. I know, but I like my Mac and still feel it is a
great investment.
----------
A.....
Hi Paul,
Thanks for the kind note and don't hesitate to ask any questions that might come up. It's good to hear about how Mr. L's book came into someone else's life. I started investing when I got out of college with the spare change that was left each month. The market was being particularly unkind at the time (1971 to 1974) so every time I bought a stock at what looked to be an incredible steal, the price would continue to drop. Unfortunately, I didn't have significant "buying power" as I was just starting to invest.
I stayed essentially fully invested through around 1980. I was continually saying to myself, "If I just had some spare cash, I'd buy more of this.", when my favorites would get hit by a market upset. Finally I started to listen to myself and sold a portion of my portfolio, just to raise cash. I then used that cash to buy into dips.
When I came across Mr. L's book in about 1985-6, I was already indoctrinated to the idea of using cash. Mr. L's book added structure to what I was doing "seat of the pants." It was like a warm pat on the back.
I actually didn't start using AIM right away. I was skeptical of some aspects of letting a mathematical algorithm rule my asset allocation. In January of 1987 I started a fresh spreadsheet using AIM to mirror my existing portfolio. As the year went by, I actually raised more cash than the AIM model did. However, I was already buying back shares in Sept and early Oct BEFORE the crash. AIM was quietly humming a happy money market tune and ignoring the small price discounts.
When the the crash did occur, I'd already spent down my cash reserve from about 65% cash to about 45% cash. AIM had managed to get to about 50% cash at the market peak, but then it just rested. I spent most of my cash in late Oct and early Nov. with the final dollars being spent in the first week of Dec. just as the market bottomed. AIM, on the other hand, barely spent anything in Oct., spent more heavily in Nov. but really emptied the pockets just as the market hit its low in early Dec. Both accounts were fully invested right at the bottom, but it was already clear that AIM had been the better purchasing agent.
Starting January 1st of 1988, I switched to AIM, pretty much "by the book." Since I was starting AIM 100% invested, it took a while to get to the point that the cash reserve was an anchor for the account. It was in 1989 that I came up with the idea of using the split SAFE. I was modeling long term histories of mutual funds with the idea of using a fund for a portion of my account. (by this time I owned my first computer - an 80086 XT) It became apparent that while using equal resistance to both buying and selling, eventually the AIM account was going to lose performance because of an ever-increasing cash reserve. I chose to use the split SAFE to build in a bias for accumulation. This helped things quite a bit.
In January of 1990 I switched all of my IRA's into one account at one mutual fund. My choice was an aggressive momentum fund called Ultra Fund from 20th Century. It was small - less than $500 million in assets but had been around for about 8 years and had a good track record in good markets. It had an equally bad record during bear periods! It sounded just right for AIM! It's been great, too. However, I already knew that my split SAFE wasn't going to be enough by about 1992 or '93. Market dips just barely touched the cash, and the reserve had grown from 33% to about 50%.
Making arbitrary adjustments to the equity/cash ratio seemed to be the only way to make AIM work long term. However, then one had to make a "market timing" decision, and that is, at best, a guess. The other idea was to ignore the Sell signals that come along once the cash is "fat." That only pent up the sell side and did nothing for the buy side.
I had read about people using "stop loss orders" at a certain percentage below current prices as a safety valve for their portfolios. This is contrary to AIM's basic plan. However, once I realized that the stop loss orders were a movable item, I took a second look. These folks were moving the stop loss order up as the price rose, always staying a certain percentage away. This gave me the idea for the "vealie (so named by Colorado AIMer, Bernie Goldberg)." It worked out to be sort of an inverted AIM Buy. Just like the Buy, it raised Portfolio Control by half the "order" amount. By doing so, it usually cancels the Sell order and also raises the next Buy order incrementally. It's simple and it works!
I'm delighted that the AIM site showed up in your search. It took a long time to get the listings to show up on a regular basis with the bigger engines. Infoseek has been the most reliable, but the others work well now, too. The AIM Users Group is a loose collection of AIMers that now spans the US, Canada and has a few "members" in other countries (Peru, New Zealand, India, Netherlands, and Germany). Some use their own spreadsheets and those with Windows based systems tend to use Bob Norman's "Newport". If you would like a Mac compatible AIM spreadsheet, I know there's some available and will get you an address. I also know of someone that runs the Newport software with a "windows emulator" program on a Mac.
If you read on the AIM bulletin board, you'll find that there's only a few of us that spend much time publicly tooting our horns. Most prefer to be "lurkers" that read but don't write. This is fine with me. Recently, Bob Norman and I have discussed having a "private" bulletin board, where more people would feel comfortable, but that's still off in the future. Most lurkers come to me with questions via email. Many of the more common questions I've put in digest form at the FAQ page and just recently have started a separate page at Silicon Investor for others.
The AIM group got started out of my frustration in not being able to find anyone that knew what AIM was. I joined Prodigy many years ago and started to ask on the Money Talk BB at Prodigy whether there were any AIMers around. After a few tries, I did find some folks that had heard of it or tried it for a while, only to get bored or, finding it more work than they wanted, gave it up. However, some folks noticed that I usually was selling shares when prices were up and buying when everyone else was in a panic! After a while they started to ask how I seemed to always be doing the right thing at the right time. The AIM discussion started there.
About a year ago it looked like Prodigy might just fail, so I went looking for a good home for our bulletin board activity. I found Silicon Investor. the good news is that one can browse there for free, but the bad news is that it costs a one time fee to be able to post notes. That's still better than a monthly charge, I guess.
The largest concentrations of AIMers are in California, Florida, Colorado, and Wisconsin. The entire east coast is a strong area for AIMers, too. We all "meet" on the web and by email. We've joked about getting together for an AIM seminar someplace warm and sandy sometime, but it's not happened yet. As the number of Newport users grows, the chances of an actual meeting gets better. I'd love to do it. I've given talks at the Port Washington Rotary Club, some investment clubs and at Concordia U. in the past. I could dust off my slide projector and put together a "dog and pony show" if we ever get that far. There's about a dozen AIMer's that have been using Mr. L's methods for a while here in Ozaukee county. It wouldn't be too big of a stretch to get them all together if we chose a place that served beer!!!
If you would like a copy of the Idiot Wave graphs, send me your mailing address and I'll pop one in the mail. It's really just my attempt to break away from the "one size fits all" mentality of a fixed cash reserve for starting. I also use it as the target for the cash reserve before I start "vealies." Right now it's indicating 47% cash reserve is appropriate for starting an account with an individual high BETA stock. 47% is also the value I use +or- about 5 points for the maximum cash reserve I'll allow in my accounts before 'vealies' occur. It's more a curiosity than anything else for most people. A market barometer.
Thanks again for the note and the complements. The pages get better with time, but I still have plenty to finish. Hope you keep at it! Please feel free to stop at the office sometime. Bob Norman is my landlord and he runs Gantner-Norman Insurance. The office is next to the Amoco gas station in Port on Grand Avenue. If you would like to see a bunch of real-live AIM examples in stocks and mutual funds, we have plenty for "show and tell!"
Best regards,
Tom Veale
PS: I find ironic humor in the fact that you searched the world (via the web) for info on AIM, and it turns out that the "hotbed" of activity is in the next town over!!
"If ifs and buts were nickels we'd all be millionaires"
P. 274, 4th. Aim Edition
When to cash put-Mar 4, 1998
Q.....
Dear Tom,
Here's 3 questions for you.
1. When using AIM with a given stock, is there a point in time that you should cash completely out, as there is no more room for this to work?
2. Also, since the Portfolio control never decreases, it makes it
harder and harder to sell stock. You seem to need greater increases in stock price to exceed the portfolio control number in order to sell. Has this ever presented a problem for you, and if it has, how have you compensated?
3. Wouldn't this system work a whole lot better if you were to start your aim account when a stock is depressed, like stocks that have just made new 52 week lows, than starting with a stock that has already been in an upswing?
Thanks, Jeff
----------
A.....
Hi Jeff,
Yes, there is a time to finally leave one investment and move those dollars to another. Unfortunately AIM won't tell you when. I review my holdings frequently to help assure myself that the stocks are still moving in the right direction. My basic guidelines are to see the potential of a double in sales and book value over a three to five year period. I use Value Line's estimates for this. If the stock falls out of this envelope, I start to look for a new home.
There are other clues about how companies screw up that are harder to pin down. Here's a few:
1) I don't like companies that send out fancy annual reports when they are losing money.
2) Companies that are spending money on a "new administration building" usually fall out of my grace. I want them to spend money on plants and equipment, not fluff. In the book "100 TO 1 IN THE STOCK MARKET" author Thomas Phelps refers to such spending as "EGOnomics, not economics" and waves a red flag.
3) Salaries out of line with the company size or the competition's executive compensation is a sign of a top-heavy company.
4) A company that is maturing and loosing its growth rate and/or volatility might also trigger a desire to change stocks.
An intrinsic part of the way AIM works is that as you deplete the number of shares owned in a rising market, the next sell price gets further and further away. AIM is saying that you can get greedier because you've already made a nice profit. This does cut down on the number of trades a bit, but the gains are correspondingly larger.
I've also found that stocks that are rising in price will periodically have stock dividends or splits. This helps the AIM user that has a minimum share requirement to fulfill to get the "next trade." I've had stocks split 2:1 more than once, each time has revitalized the AIM account by shrinking the trade range to more useable values.
As with any shopping, the better you manage to buy, the better the value for you. I try to be patient and wait for nice low prices, but it's still a bit of a guessing game. I bought into a gold fund a year ago at what was a two year low. OOPS! AIM's helped to contain the loss, but not to avoid it completely. Cyclical stocks are the easiest to capture for an AIM account by buying near their cyclical lows.
Some stocks of some truly great companies have rarely dropped enough to get what felt like a good price. I'm afraid I've missed lots of good stocks because of this. Some would never been great AIM stocks, as there wasn't much chance to buy shares, but still they would have been great investments. With the use of "vealies" to keep a lid on the cash reserve, even steady growers become pretty good AIM stocks.
I also look for walking wounded in the Worst Performers list in Value Line (page 33 of the index section) each week. One has to be a bit selective here since some stocks are on that list because they "deserve" to be!! More often, I use it to look for sectors of the market that have been abused by a rotation. If I see 5 to 10 stocks from the same sector on the list, it tells me that it's been through a recent rotation. I'll then go study that sector to look for the best stock in the group to buy. Chances are, even the best of the sector will be off its recent highs.
Please let me know if I can be of any further help.
Best regards,
Tom
"If ifs and buts were nickels we'd all be millionaires"
P. 274, 4th. Aim Edition
Cash Reserve - Pooled, Individual or ?
Q.........
How do people handle the AIM Cash Reserve? Do they use an individual cash level for each and every investment (individual AIM accounts) or do they pool all the cash and AIM each investment, drawing on the common cash as needed?
Thanks,
--------------------------------------------------
A........
Some people like every separate investment totally segregated including its own cash reserve. AIM really doesn't care how you do this as long as the AIM mechanism is allowed to do its work. So whether you use a big POT or a lot of little POTLETS, it should work out. There are some differences in how we perceive things, however.
-----------------------------------------
Karl Marx Method:
"Each according to its own need...."
Pool the cash reserve and ignore the software's indicated cash reserve levels. Let the best company managers fund the worst!
-----------------------------------------
Las Vegas Method:
"Here's the deed to the Ranch......"
Let each stock go as deeply into negative cash reserve as AIM might ask. When the total Cash Reserve for the entire portfolio is exhausted, then you have to face using MARGIN as a method of continuing to buy.
-----------------------------------------
Banker's Method:
"Our suggested Loan Loss Reserves indicate that......"
Assume that your overall portfolio should match the overall market relative to risk. When market risk is highest, so your cash reserve percentages should be highest and visa versa. If not following the overall market, possibly re-align the portfolio with different stock selections.
Your total cash reserve percentage should follow the Idiot Wave's Mutual fund level if you have a diversified portfolio. It should have been low in late 1998 and again in late 2001. The rest of the time it should stay even as a percent of portfolio value or be growing faster than the portfolio when risk is rising.
----------------------------------------
Mutual Fund Manager's Method:
"Our Redemption Reserves are wholly adequate to cover any forseeable market event......."
Take the proceeds from every AIM sale and start a new AIM account. This is especially appealing right near market peaks! Then, of course, right when the market is near its bottom, sell all the really bad stocks for "Tax Loss Reasons" and build a healthy reserve "Just in case it goes lower."
Historically this is exactly what institutional managers have done. It's well documented that their reserves are the lowest at the peaks and the highest near the bottoms.
-------------------------------------------
Some of this is tongue in cheek, but I've probably used the Banker's model the most over the years. I would like to totally divorce each stock and cash reserve from each other and do to a large degree. However, the Loan Officer at Veale Intl. Equity Warehouse's S&L division is a friend of mine and sometimes he'll let me borrow from one stock to continue buying in another - ala "Karl Marx."
I abhor debt and am not even comfortable with low cash reserve levels. This ends up being a driving force in letting AIM run to rather high cash reserve levels. I use the Idiot Wave to control the impulse to accumulate too much cash. This has, on balance, given me pretty good total performance on a long term basis.
I now start my "new" AIM accounts as large as I see fit within the spectrum of my current investments. I still fall back on the basic concept of the "Investment Pyramid" to see where this new idea fits as a building block. If it's highly speculative, it belongs near the top of the pyramid and needs to be sized accordingly. If it's a Mid-Cap moving towards "Blue Chip" status, well, it can fit as a much larger block much further down the the pyramid's sides. To a degree, I size the Cash Reserve also according to where in the Investment Pyramid the new investment falls. The more speculative the issue, the greater the Cash Reserve percent will be.
Best regards, Tom
AIM -IRA / 401K Variation-Feb 25, 1998
Preface: John has brought up an idea that should help many of you that are contributing to 401's and IRA's from earned income. This idea uses the AIM model as a "trigger" for asset allocation.
Q.....
Tom,
I have e-mailed you some other questions previously, but here is another
one. I was thinking through a way to make AIM even more powerful the
most risky AIM investor like myself. I wanted to see what you thought
about these modifications and if they may work or if they would screw up
Lichello's formula too much.
Proposal: In an effort to benefit from the ups and downs even more I was
wondering if I could simulate the 1/3 cash that I have. Upon an initial
investment an investor could split his/her lump sum into 2/3 and 1/3 and
then determine what the sell/buy resistances are for this setup. Once
this is done let's say that the buy resistance will come to about $500
each buy. I would propose that the investor keep a minimum of two buys
in cash prepared to do just that (this could be argued). Then with the
remaining cash left, invest it in the fund ADDing to it not BUYing.
This would increase the simulated cash and increase the amount of stock
by the appropriate 3rds. I would do this on my first AIM driven buy,
buying what AIM says and adding the remainder. A person already
invested using AIM could do the same and just wait until the first low
to buy getting rid of the excess cash by again adding it. Meanwhile,
because I need to be investing monthly, I would put cash into my cash
reserve on a monthly basis and AIM driven selling would do the same.
Each time AIM says buy, again I buy whatever it recommends and add the
remaining cash to the investment that time or the next buy if I want to.
This would still use all the modifications that you and Mr. Lichello
have made too.
Based on only averaging about two buys/sells per year this would take
advantage of those even more. If I am putting cash into my reserve each
month I would be helping to get it back up for the extremely lean time
when buys come often.
If you have any questions please let me know. I think this might be
worthwhile for people like me, but I am interested to see if you think
may be completely off base here. Thanks for checking this out. I look
forward to hearing from you.
John
----------
A.....
Hi John,
Good to hear from you again. It looks like you have been spending some serious time thinking about Mr. Lichello's model. In general, almost anything you want to try that follows Mr. L's basic Buy Low, Sell High ideas will probably be to your benefit.
Your idea of souping up your ongoing "thrift plan" by using AIM as the purchasing guide instead of DCA or TWINVEST is a good one. I've thought about similar ideas for the person that's still earning an income, but never formalized it. The idea was to start with a lean cash reserve and fund the reserve from earned income.
Your concept of keeping a couple of AIM Buys in reserve as the cash content of your AIM account is good. Then you can do some AIM directed buying even before your next contribution. Letting the cash reserve accumulate as ADDs in the TRADE window is a good idea, too.
If I understand you correctly, you would then use AIM to trigger selling at the appropriate times as well as buying. However, you would only BUY as much as AIM asked, but then further deplete your Cash Reserve with one big ADD of shares with a DEDUCT of CASH. I assume that you would leave the "Two AIM Purchases" minimum in the cash reserve to allow for more AIM buys before your next contribution to the account.
If the market were to rise for a very long time, you would be accumulating lots of cash, potentially. In that case, please use "vealies" to keep the Portfolio Control in line with the overall portfolio. Actually, since you are going through periodic reductions of the cash, this shouldn't happen too often.
The market in recent years seems to be on an almost perpetual rise. This has been beyond the concept of what Mr. Lichello expected back in 1977. AIM "By the book" would have raised so much cash in most mutual fund accounts that only the end of the world would have used it up completely! I think you've added one more great idea to the overall scheme. Thank you. If you don't mind, I'd like to add it to the Question and Answer page.
Best regards, Tom
LIFO / FIFO Defined-Feb 15, 1998
Q.....
Tom, On your web site, you mentioned that "I believe that every sale was profitable both on a LIFO and FIFO basis." Could you please define these terms?
Thanks,
RFH
----------
A.....
Hi Rob,
These are both accounting type terms. If we are looking at our inventory of stocks and mutual funds, Uncle Sam asks us to decide what way we will figure our taxes as we buy and sell shares of stock. Further, Uncle Sam asks us to be uniform in our decision.
LIFO stands for "Last In, First Out." This mean that the last shares purchased in one stock are the first ones sold, for tax calculation purposes.
FIFO stands for "First In, First Out." This means that the first shares purchased are the first ones sold, for taxes.
There is another method that is allowable - Average Cost Basis. This is most commonly used with mutual funds. This is the sum total of all costs to purchase shares including reinvested distributions averaged by the number of shares represented.
If we buy 1000 shares of XYZ at $10 per share, that is our base cost (plus commissions, etc.). If 5 years later we sell all of it, there's no need to differentiate between LIFO and FIFO. However, let's say that we own the full 1000 shares for two years without selling any. During that two years, we add an additional 300 shares (100 @ $8-1/2, 100 @ $7-1/2 and 100 @ $7), because the price becomes more favorable and AIM suggests we buy. Now, when AIM says to "Sell 100 shares @ $10-1/2", which shares are we selling?
There are three potential answers:
FIFO - We're selling original shares. The tax calculation is the proceeds of $1050 minus the cost of $1000 or a $50 capital gain. (I'm keeping this simple without the added costs of commissions, etc.)
LIFO - We're selling the LAST shares. The tax calculation is the proceeds of $1050 minus the cost of $700 or a $350 capital gain.
Average Cost Basis - Here we add all purchases and divide by the total number of shares. $10,000 + $850 + $750 + $700 = $12,300. Total shares is 1300. $12,300/1300 is $9.462 average. The tax calculation is the proceeds of $1050 minus the cost of $946.20 or a $103.80 capital gain.
Now you see why Uncle Sam wants us to be consistent year to year and in each class of security we use.
I have always used FIFO for my individual stocks. It's easy and keeps my stock inventory "fresh". For Mutual Funds, I have always used Average Cost Basis. Again, it's easier for me than the other alternatives.
The benefit of any particular method over another could be debated in a fashion not dissimilar to the old "chicken and egg" story. However, in the long run, it seems to all come out in the wash.
For the AIM user, it's interesting to note that sometimes AIM will have us buy deeply into a market price dip and then have us sell shares off BELOW our initial purchase price as it starts to recover. In this case, the shares are being sold at a LIFO profit, but a FIFO loss. Using LIFO for tax calculations, you pay some tax. Using FIFO, there's a loss!
Hope this helps more than it confuses!!
Best regards, Tom
Aim Discussions - Free-Feb 13, 1998
Q.....
Hi Tom,
Just tried to access the website today,found that the AIM Mini BB is now a part of the Silicon Investor.Couldnt access it as it asked for a login name and a password.Will the access to the much informative Mini BB remain restrictive henceforth?
Best Regards,
Chetan.
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A.....
Hi Chetan,
Hurray! The SI pages are now free on a Read Only basis!
Best regards, Tom
See previous post for an update on this
Aim Threads-Feb 12, 1998
Q.....
Tom, Hope this finds you well and enjoying the nifty buying
opportunities lately. where are the AIM'ers currently hanging out and
how are things going. Is anyone using the Microsoft NetMeeting program
for communications? I still use aim with a spreadsheet approach. I
may code up a C++ version with some new software I have.
Take care up there, and stay warm.
Gene Stillman, Albuquerque 50's day, 20's nites.
----------
A.....
Hi Gene,
Good to hear from you again! My web site is the main drawing card for the AIMers of the world. I post my weekly yellow press views of the market, the Idiot Wave and my trades! About a year ago, it looked like Prodigy was about to roll over and play dead permanently. I packed up as many of the AIMers from Money Talk and moved us over to Silicon Investor. It's grown nicely over there. Good soil for planting a crop of greenbacks!
Since then we've had about 3500 posts to the AIM forum. That should keep you busy for a couple of hours!!! The address for our AIM web site is:
http://www.execpc.com/~oldcat/index.htm.
I've continued to flesh out the site with examples, an FAQ, Dictionary, Idiot Wave graph, and other stuff that helps to tell the AIM story. There you will find the link to the Silicon Investor Bulletin Board pages as well. You can read to your heart's content! About 7000 visitors have accessed the web site in the first year. I'm really pleased that the pages are being found by people overseas. We have people from India, Peru, the Netherlands, and New Zealand as well as Canada and the US. Most are in the Read Only mode, but do contact me by email once in a while.
I've been busy buying everything in sight recently. Prices have really been hit hard on some of my favorites. My cash "burn rate" has been enormous this Dec. It's about time to turn around and refund some pretty soon!!!!
Best regards, and please keep in touch,
Tom
Note: additional AIM thread on IHUB at:
http://www.investorshub.com/boards/board.asp?board_id=949
AIM - Frequency / Size / Options-Feb 12, 1998
Q.....
Hi Tom,
I have read Mr. Lichllo's book and I am very interested in trying it out.
I have a bunch of questions for you:
1. How often are you adjusting your portfolio? Monthly, Quarterly,
Bi-weekly?
2. How much money did you start with? $10,000?
3. Have you read any of Wade Cook's stuff? I am interested specifically in
trying to write covered calls against a stock but managing this with AIM.
Do you have any thoughts on this?
4. Are you using the New AIM (as outlined in the third edition)? If so
have you used it from the start?
5. Have you used margin at all? How do you feel about using margin when
your stocks are below a certain threshold? (if you know what I mean.)
6. Are you available for consultation or can you be reached telephonically?
7. What was your year like in 1994? How well did AIM do?
8. Thanks for a great website.
Sincerely,
Glen
-----------
A.....
i Glen,
I'm glad you found the web site and found the info helpful. It took a while for the various search engines to pick up the site, but now it shows up with most of them. I'll see if I can answer your questions one at a time:
>>1. How often are you adjusting your portfolio? Monthly, Quarterly,
>>Bi-weekly?
The software that I use for my AIM accounts is set up for weekly updates of the prices of the stocks. I've used monthly and biweekly as well. The benefit that weekly updates brings is just that it helps you stay in tune with what's happening with your equities. I'm not sure there's much other benefit. I have a general rule not to trade in the same stock more than once a week. Like all my rules, I break this one on occasion.
The software graphs the price history against a 26 week moving average. For the technically minded, this gives a feel for AIM's efficiency compared to other T.A. methods. The program also gives you the next buy and sell prices for each equity you manage with it. This allows you to place orders in advance for a minimum buy and sell for the program. I set these orders up as "Good until cancelled" and "Do not reduce". Then I'm done until the next trade occurs. This single feature takes much of the tension out of investing.
>>2. How much money did you start with? $10,000?
It's been rare that I've started an account with less than $10,000. When I first started AIM ten years ago, I had several stocks left over from my prior methods of short term trading. These I bunched together by business types and created accounts big enough to trade with AIM.
The smallest account that I've ever started was with a mutual fund. I started that one with $3600 total, split between equity and cash on a 2/3 - 1/3 basis. That account is presently up around 175% since starting it sometime in the early '90s. It's still at about 1/3 cash, btw!
The largest account I ever started was worth about $80,000 initially. That one was started with almost 80% cash reserve. AIM was the only way that I ever made any money with that stock as it is still today only at about the same price that I started with. My AIM profits are about 195% since starting the account. That stock, at one point was 1/8th the value of where I started with it!
>>3. Have you read any of Wade Cook's stuff? I am interested specifically in trying to write covered calls against a stock but managing this with AIM.
>> Do you have any thoughts on this?
I only have a cursory knowledge of Mr. Cook's writings. What he promotes seems to be his seminars. His methods are quite advanced for those not familiar with investing in general. The beauty of AIM is that it is simple and methodical. The best reason to use AIM is to take advantage of the Herd Effect that the short term traders exhibit. AIM is always willing to buy from the fearful and sell shares to the exuberant!
I use the sale of covered calls to enhance my AIM trading. This isn't easy to describe all at once, but the basics are:
1) since I know at what price I'll sell my next 100 shares, I can sell a covered call (one contract) near that price.
2) the premium in the contract has to be enough to justify the transaction after ALL EXPENSES! That includes commissions, taxes and a happy profit for me.
3) I don't use covered calls until my AIM account is nearly as full of cash reserve as I will let it get. Let's say between 40% and 50% typically. The reason is that the premium might be nice, but it won't buy many shares if the price falls away from the strike price and expires. I can't stress this enough! AIM requires Buying Power. That means cash. If I already have plenty of cash, then I can "afford" the extra premiums I might gain from selling Calls.
>>4. Are you using the New AIM (as outlined in the third edition)? If so have you used it from the start?
When I started my AIM accounts in earnest was January of 1988. I had just been through the "crash" and was buying everything in sight in October, November and December of 1987. There was no cash reserve left! So, I sort of started my AIM accounts with 100% invested and 0.0% cash.
I've started AIM accounts without cash and with as much as 80% cash over the years. Today I use the Idiot Wave as my guide for the starting cash reserve on a new investment. It's been pretty good about its advice. Right now it's saying that new single stock accounts (a high BETA stock) need 51% cash reserve available. Early last summer it only wanted 40% - 41%. It ranges about based upon its components measure of market risk. Right now it's pretty high on a couple of them.
>>5. Have you used margin at all? How do you feel about using margin when your stocks are below a certain threshold? (if you know what I mean.)
So far, I've not had to use any form of debt to finance my AIM accounts. Since I am retired, I have no other source of income but my investments. If I have a bad year in the market, I don't want to be beholden to the banks or brokers. Where would I come up with the money to satisfy a margin call? It certainly wouldn't be prudent to sell equities off that I'd just been accumulating for their future potential! In my situation, I feel I just can't afford any debt.
Since I have other assets other than securities, should the market really get trampled, my cash reserves exhausted, and the market still kept descending, I would potentially have some borrowing power left by mortgaging those other assets. That would be a last resort, however. I don't think I would do it unless absolutely every indicator I could dream up told me the market would turn around in relatively short order. AIM likes to generate cash in a hurry after a buying spree, so it could quickly start paying off the margin or bank debt once the recovery was under way.
I treat my investing as a business. The business is has two parts. One is set up like a warehouse for stocks. AIM is my inventory control manager, purchasing agent and sales manager. I make the decisions about what equities we'll inventory. The other division of the business is the banking end. It takes care of all the cash that is generated by the warehouse. It earns interest while it's flush with cash and loans makes loans to the warehouse when the shelves need restocking. It knows that AIM won't buy for poor reasons, so it loans this money willingly. The banking side of the business has only been completely without reserves once. That was in the very beginning, January of 1988.
My general rule of thumb is stay away from all forms of debt. Be your own banker, it's much cheaper and you sleep better!!
>>6. Are you available for consultation or can you be reached telephonically?
I'll be happy to answer any questions that might come up along the way. Also our AIM Bulletin Board is a great place to ask questions as well. There you will get some different interpretations from people from all across the country. (and recently from overseas) You can access the BBs from the web site. However, until you register with the server, Silicon Investor, you will be in a "read only" format.
>>7. What was your year like in 1994? How well did AIM do?
If memory serves me, 1994 was tuff on my bond portfolio and since I use AIM with it as well, it was in a buying mode. My stock account was up for the year, but it was a confused market. Seems to me that AIM was busy all year as the market churned about. I have all those records at my office, so can't quote the actual numbers right now. I'll check and send them later.
Thanks for sending the note and questions along. Hope this gets you up and running.
Best regards, Tom Veale
Idiot Wave-Feb 12, 1998
Q.....
Hey Tom--
Just checked in on your website for the first time in a while! You've made
some phenomenal improvements!!! Great pix! How about Blue Monday eh??? Great
comeback today though. Hope all is well. Love to all.
Andy
----------
A.....
Hi Andy,
Just another day surfing on the Idiot Wave!!! I guess I know what I've done the last two days, but can't even guess about what might happen tomorrow!!!
The Idiot Wave was in the High Risk area for 10 of the last 11 weeks. Guess it knew something that the rest of us didn't!!!
Best regards, and say HI to Jo,
Tomaso
Aim Trading - GTC-Feb 12, 1998
Q..... (from an non-believer!)
Tom,
I was reading your description on CGNX. How did you buy 100 shares on
10/19/97 at 27.5 when that day was a Sunday? On neither the Friday before or
the Monday after did the price go anywhere near 27.5
Saul
----------
A.....
Hi Saul,
Sorry for any confusion. If you will note the dates on all of the trades shown, they are on Sunday. The program I use for managing my accounts is a weekly update and records everything as "Week Of" in its histories. My trade occurred during the week of 10/19 (Thursday maybe?). I very rarely buy or sell shares of the same issue more than once in a week, so this is fine.
I use the recommended trade prices in the program to enter 'good until cancelled' orders with my brokerage (Waterhouse's WebBroker, btw). Because they are 100 shares orders and because they usually sit awhile before filling, they tend to rise to the top of the pile at that price. Because the orders are on a gtc basis, I don't have to be sitting there watching the ticker all day. What fills does and what doesn't stays open. Very low maintenance!
I've used AIM for fully ten years and it has proved remarkably reliable. As you will see in the CGNX graph, it saved my rump and had me average down from my starting point of about $18 all the way to under $13. Then it built a comfortable cash reserve on the rise back into the $30s. I first bought at $18 after the price had fallen about 50% from its previous high. I thought that was a good price, and (given enough time) it was. Unfortunately, it wasn't the bottom! AIM helped me by using up a good portion of the cash reserve as the price continued to decline. AIM's done this on many of the stocks I own. I guess I think I'm a good bottom fisher, but the reality is that I usually buy in too early.
Thanks again for the question and again I apologize for any confusion. AIM usually doesn't do as well as Buy&Hold in the short term. It usually does a bit better than short term trading because it maintains a partial position in the issue as the price rises. It takes many market cycles to have AIM beat both Buy&Hold and ST Trading on a permanent basis. AIM's a long term method of risk managing a stockholding. It's best suited to stocks that have a very good 3 to 5 year potential, but maybe a few bumps along the way.
Best regards, Tom
Aim Spreadsheet - MAC OS-Feb 12, 1998
Q.....
Tom:
I took a glance at your new thread at AIM Q&A.
I am using an AIM Excel spreadsheet on a Mac. As you know it was put together
by Bill, sent to me by Bruce and Linda helped me with the conversion.
Santos
From: Sbtorres88@aol.com
----------
A.....
Thanks Santos, Hope you don't mind me posting the email address, there's been several frustrated Mac users out there that could use the template, I'm sure.
Best regards, Tom
Note: Check Tom's Web site for more Software Info.
Lichello - Dead or Alive-Feb 8, 1998
Q.....
Hello,
My name is Rick, I bought Robert's program about 10 years ago, right after I lost everything I had in the crash. But I put it on a shelf and forgot about it until recently when I contimplated getting back into the market again. Is Robert still around? I get the feeling you are using his name in past tense. Thank-you.
----------
A.....
Hi Rick,
I've attempted to contact Mr. Lichello a couple of times, but haven't had any success so far. My attempts were through Signet Books. I'd send a letter to him C/O Signet. I never got the letters back, but never had a response either.
Since the latest revision of his book came out in '92, we can assume that he was still around then, but I've not seen anything new since then. I keep hoping that he'll show up one day in my email box, but no luck yet! I guess I do sort of write about Mr. L. in the past tense; hadn't noticed that before!!
If there's anything I can do to help you as you re-start your AIM activities, please let me know. I never heard the AIM tapes, although I remember seeing bits of Mr. L's infomercials. There's a fellow here in Port Washington that bought the tapes also, and maybe I can borrow them some time. If you want to move into the Electronic AIM Age, there's a good template for Excel that's available from one of our contributors on the BB. It's good for creating What If type scenerios. For running several AIM accounts at once, I'd recommend Bob Norman's Newport Programs. It's easier to use than a spreadsheet like excel and gives you very good presentation of the important aspects of your account with most of the AIM calculations hidden.
Thanks for writing, how did you locate the AIM pages? Search Engine? Silicon Investor? Amazon Books? Please keep in touch.
Best regards, Tom Veale
Broker-Feb 8, 1998
Q.....
Hi! I have not talked with you for a while but have been browsing the
threads on silicon investor. Say hello to Linda Kaplan as I do not have her email.It was her posting somewhere that got me in touch with you folks. I am unable to communicate with you on Si investor as you have to be a member and I ma thinking through whther it is worth the bucks to join...I do read the postings however.
By the way, where do you trade? I have been using Ameritrade (used to be Aufhauser)...I get unlimited trades (mx of 20 trades per month) for a year for $800. ...there is a $8 charges for quantities less than 100 shares I believe.
----------
A.....
Hi again J.B.,
I'll let Linda K. know you are in the neighborhood!
Presently I'm using Waterhouse's WebBroker and an old friend that's a broker. He's been handling more than half my account for a decade and acts as a discounter for me. His rates aren't as cheap as most of the deep discounters, but he understands my methods. He's also a baptized AIM user now as well! He not only uses it for his own account, but for selected other clients. This is starting to bring him more business. He doesn't tell them how he "times" the market, but is very good at suggesting that people lighten up near market tops and add shares near market bottoms. Funny how that works!!
You can alway keep in touch with email, if you aren't interested in anything more than browsing SI. So far SI has been a good second home for us. We used to gather on Prodigy's Money Talk BBs but that looked like it was nearing the end of its useful life.
Best regards, Tom
Aim Basket or Individual Accounts-Feb 8, 1998
Q.....
Congratulations on your outstanding A.I.M. site, which I just found.
I corresponded with you some a couple of years ago, I think, when I
was on Prodigy and there was a Prodigy discussion group about A.I.M.
You were kind enough to snailmail me a stack of printouts dealing with
your own A.I.M. approach and results.
I mostly just wanted to say hi again. I'll mention also that I still
use A.I.M. for one of my accounts. It's an IRA in three American
Century (formerly 20th Century) funds. Unfortunately, the funds have
seemed stagnant for about two years now. I've managed to turn $10,000
into about $11,000 in that time, which I think would have happened
even without A.I.M. Why _three_ funds? Well, I was following Mr.
Lichello's advice that one set up a portfolio for doing A.I.M. As I
recall, however, you are a proponent of applying A.I.M. to just one
stock or fund at a time. Am I correct? I also think it was you who
was using A.I.M. with the 20th Century (American Century) Ultra fund.
How is that going? Ultra is one of the funds in my account and it has
been flat-flat-flat for some time.
Any advice in a situation like that?
-- Stephen
----------
A.....
Hi Stephen,
Yes, it's the same Tom from Wisconsin that blabbered about AIM on Prodigy! I'm glad to hear from you again. As the halls were emptying at Prodigy a year ago, I realized that I had to have a place to move our forum and a new home for the web pages. I first cloned the web site to ExecPc in Milwaukee and then started a serious hunt for a provider of a "bulletin board" type of environment. I kept both web sites going for a time then changed the Prodigy site to a "we've moved" message. In the mean time I came across the Silicon Investor pages. There was a good, active discussion group there dealing with the stocks that seem to work best with AIM, so I declared it HOME!
We've prospered there with about 3300 postings so far since about February. Our web site is now showing over 6000 hits in just under a year. All this is good news for me and other AIMers as the wealth of experience grows. I'm glad you like the pages. I've been busy freshening them just recently and adding some new links. The format of my weekly newsletter has changed very little since the Prodigy days. I still report on the Idiot Wave and the trades that I've made during the week.
If you look at "Tom's Account" you will find the IRA comparison to the NASDAQ is my Ultra Fund account. Note that even though I'm still ahead of the NASDAQ since 1990, I've been loosing ground. I'm beginning to think that I may have to change horses here. Both Ultra and Vista seem to have had their individual troubles. I invested with them because I wanted to use AIM in conjunction with a Momentum strategy. I thought that as Momentum got caught in a similar fashion to 1987, I'd get a chance to buy lots of shares at cheap prices. I've been surprised at the strength of the market as much as anyone. Ultra has offered very few chances to pump cash back into the fund. I'm using a Buy SAFE of 0.0% and a Sell SAFE of 10% and still I'm only getting a buy about once a year.
My Vista account is just about the opposite. It has managed to fall and offer great buys several times, but never seems to advance back to much above previous highs. I ran my cash reserve on Vista down to about 15%-16% this last April and recovered much of that cash in the rise through September, but that was the end of my selling. Now it's back near the trigger point of more buys.
I feel that each stock and fund has its own 'personality'. It is best managed by AIM as a separate entity because of this. You can manage a group of stocks or funds under a common AIM account, but the activity might be thwarted by one equity moving contrary to another. If one fund is up and another is down, AIM will say to do nothing. This can be self-defeating. Since you have a major safety valve in AIM, a second one in using a mutual fund, you don't really need a third of mixing funds together. Remember, AIM needs volatility to work well. Mixing funds in one AIM account reduces volatility.
On of my biggest mistakes with AIM was to let its Selling continue way too long. I didn't realize when I first started with mutual funds that their upward long term bias meant that Cash Reserves would build to levels that would make the portfolio ineffective. If you go to the AIM FAQ's at the web site, you'll find a method affectionately called a 'vealie'! This is sort of a reverse Buy. If your cash gets too fat for the account, you perform a vealie to cap the cash reserve and keep your portfolio in the correct proportion of equity and cash. Right now the Idiot Wave is recommending 34% Cash Reserve for mutual fund accounts. I think this is about the upper limit of cash reserve for all times, but certainly right now there's no need to be heavier in cash. Make sure that you keep your Cash/Equity ratio under control.
I hope this will help you with your thoughts on investing. I think my next mutual fund target will be a "sector fund". I've had good luck with closed end funds but haven't tried a sector fund yet. Please keep in touch and drop by the Silicon Investor Mutual Fund AIM pages as well.
Best regards, Tom
Aim & Deep Divers-Feb 8, 1998
Q.....
I was impressed with the information and software you have reg AIM on the web. I have been using this technique reasonably successfully..just using an excel spreadsheet.
There are 3 stocks in my portfolio which really concern me and am getting nervous about continuing to pour money "like a drunk sailor" as Lichello puts it in his book....they are LSI,COMS and ASND.
Any expereince or thoughts on these.
----------
A.....
Hi JB,
I'm in the same bar with you with my sailor's hat on with ASND, I started that account just recently at $32 only to have it fall off rather dramatically! My last purchase was at $22.125 and took my total position up to 2000 shares. I have my fingers crossed on that one. I started it with 50/50 Cash-Equity ratio as my Idiot Wave has been suggesting. Thank Goodness!!
I don't own either of the other two stocks, but own one that's very similar to LSI. It's VLSI Technology. I just put up a new AIM Stock Example at the web page on VLSI. Take a look at it to see how AIM's been doing for me so far. I've owned it since 1990 and have never found such a deep cycle stock like this one before! LSI and VLSI both tend to follow the same patterns. Hope this will help to give you the confidence to continue!!
So, that's not bad, we have one stock in common, and 'twins' on another! 2 out of three! Sounds like you have pretty good selection techniques for finding AIM compatable stocks!
Bob Norman's Newport software for running AIM is really nice. I've used it in DOS and now Windows versions since 1993. I still have a Lotus 123 spreadsheet I use occasionally to create What If AIM scenerios, but I use Newport to keep all of my active stock histories.
I'm glad you found the web site okay. Do you remember how you did the search that brought you there? I'd like to know how you found it, if you have the time. How long have you been an AIMer? Have you visited our AIM BB over on Silicon Investor?
Best regards, Tom
Note all posts prior to this were originally posted on or before Feb 8, 1998
Aim Software & Mac OS
Q.....
Is there any SW for Mac OS? We may be fewer in number, but we do spend
money and we do invest.
Thanks,
Quentin
----------
A.....
Hi QC,
At this time, I haven't seen anyone comment on a Mac based software. One gal is running the Newport program (Windows based) on a Mac through a program called "Virtual PC" (I believe that's the name).
Unfortunately I can't be of much help here. I'll ask around again on the BB. I know that several people have built AIM templates for Lotus and Excel. Maybe they could be more easily converted to run on Macs.
If I can help in any way, please let me know.
Best regards, Tom
Note, The abpove was tru at the original time of writing and posting on SI, It may not be correct today!
Aim - AI Modifications
Q.....
Tom,
Since I know you are a big AIM user, I wanted to tell you and the others that I have developed a new AIM program which I feel has many neat and exciting features. The program, which was written in Microsoft Excel, employs a backpropogation learning algorithm (if you don't know what that is, don't worry) that samples historical data from an equity and then calculates the best Buy Safe %, Sell Safe %, and Portfolio Control Factor. This enables you to modify AIM slightly to maximize your return by adjusting the program to the
"personality" of the equity. In addition, you can also input values (stock price, shares, Portfolio Control, etc) and have the program tell you if you should Buy/Sell/Hold, Market Order, and Shares traded. Also, the Buy Threshold and Sell Threshold are computed so you know exactly what price the equity must fall or rise to, in order to trigger a buy or sell signal.
I will finish up the final touches on the program within the next week. Also, once I get access to SI, I will post a message there as well for those who might be interest in the software.
Aiminvest@aol.com
P.S.-- Portfolio Control Factor is the term I use for the percentage of Market Order that is added to your current PC when making a buy. For instance, Lichello says to take 50% of your market order and add that to PC. I have found in my research, that 50% is not the ideal. In fact, in most cases, 54-58% generates better results. My software calculates the best PC Factor, as well as the best Buy Safe and Sell Safe.
----------
A.....
Dear AIMinvest,
Sounds like you've put in a goodly amount of time on the AIM template for Excel. My first AIM template was a Lotus 123 piece (circa 1988) that worked quite well. However, it carried all the usual Lotus bloatware with it and was a bit slow.
The Split SAFE is a great single improvement on the original AIM. I've always been surprised that Mr. L didn't come up with the idea. We've been using that since 1989 or 1990. I had attempted to get in touch with Mr. L at that time to get his thoughts on the subject, but received no reply. I wrote to him via Signet Books. I'm not even sure if he's still alive. I keep hoping one day he'll show up on SI or in my Email in-box!
Over the last few years, several people on Prodigy and SI have made attempts at adding some artificial intelligence to the algorithm and at least two were following the same path of an altered PC addition. I don't know if they ever completed the work, however. It sounds like you've carried it to a higher threshold. Congratulations!
When Mr. L conceived of AIM, the market had been really stinky for nearly a decade. I really don't think he planned to see a market like the 1980s or 1990s. AIM "By the Book" didn't account for a steady or unsteady rise over an extended period of time. Since he never capped the cash reserve in any way, AIM's overall liquidity was absurd after an extended bull phase. That lack of an upper limit on Cash Reserve sent many potential AIMers off onto other paths.
At the AIM Users Group web pages, you've probably read about the artificial cash cap I've been using on AIM and what to do when that ceiling is reached. This is another great single improvement. In my opinion, an AI feature that would maximize total return would address the maximum "draw down" of the stock over an extended period of time and use this within the calculations. I "ballpark" such values and compensate my portfolios accordingly. With ten years experience of AIMing, it seems natural to me. AIM Newbies don't have this luxury of experience.
AIM's only nasty habit is that it tells people "I told you so!" when they try to cheat AIM! When the price is changing and AIM's calling for a BUY or SELL, they decide that they can wait another day and see if they can get an extra buck out of the trade. Then the market turns and they miss the trade for now. It's my opinion that once a business plan is adopted, it should be followed. There's room for modification, but only at "annual meetings" and not daily! Micromanagement doesn't compensate for missed opportunities. We have lots of "shoulda, woulda, coulda" reports on the Bulletin Board regarding this.
AIM's biggest benefits are risk management, asset allocation and market timing. An investor must have already sensed a need for one or all of those before he'll allow himself to be "baptized" in AIM's ways. It performs all quite well right out of the book. I think the improvements we've been making to the algorithm collectively are making it better. Mis-application is still the biggest single problem new AIMers have. As Mr. L likes to remind us, AIM still won't make a bad company good!
Please let me know when you have the program up and running. I'll be happy to list it as a resource at the website. Bill Reideman has a working Excel AIM spreadsheet available, but I don't believe he has a PC Adjust feature in it. Another fellow just introduced his DOS based "stand alone" version and many of us use the Newport Windows "stand alone" as well. I'll get the names and email addresses of some of the others if you would like to contact them. Thanks for the note, I look forward to seeing you on the SI threads.
Best regards, Tom in WI
Newport - Newest Versions
Q.....
How do I know if I have the latest version of Newport? What version do you have? My version is 1.2. Also, in my version, the program takes the whole screen, so the task bar at the bottom of the screen disappears. It makes it harder to switch back and forth between running programs. Does this happen on your computer?
Thanks,
RFH
----------
A.....
Hi RFH,
I'm now using V 1.22 and I believe this is the latest. You should probably write to Bob Norman ( email - newport@execpc.com ) to get the latest. He'll most likely send it to you via an attached email file.
In W-95 it still fills the screen all the way, also. I find if I open other programs first and then Newport, I can toggle (using the Alt plus the Tab keys) between programs.
In my older W 3.11 machine, I just toggle back to Program manager and can open what I wish. I'm pretty sure Bob Norman's aware of this, but don't know if there's anything in the works to change it.
Best regards, Tom
Twinvest - How to Start
Q.....
Hi Tom,
This looks like a good idea for and AIM site.
Since you started it I have a question. Both Ann and I are making initial deposits of $2000 in Roth IRAs. Because of our age and recent semi-retirement I have decided that taxwise it would not be a good idea to convert our regular SEP IRA over to ROTH. I don't see any reason to not be putting any new funds into a Roth IRA.
I can't see doing too much with AIM with only $2000 in an IRA so one of my solutions is Twinvest, but I am not sure how to start.
Do I make an initial purchase of say $1000 and go from there or what?
Another thing I have thought of is to consider the new IRA an addition to an already established AIM such as APCC which has been real good to me as you know. I don't think it would make to much difference to Newport if the shares of stock were in two different accounts. What is you opinion?
Bernie
----------
A.....
Hi Bernie,
Interesting questions! I am also in the middle on the Roth vs traditional IRA. I will be doing the same as far as I can see. I'll add to my retirement accounts, but in the form of new Roth IRAs.
Twinvest is sort of a slow motion affair if all we're going to do is send in $2000 once a year! However, if one were to stage the payments on a quarterly basis, maybe there would be a bit more entertainment value!
Normally, one starts a Twinvest account with 75% of the initial payment going to the equity side. In this case, it would be $1500 with the remaining $500 going into a money market fund or a short term bond fund. I think for Twinvest and a retirement account the s-t bond fund makes more sense. Twinvest rarely taps existing cash reserves, so liquidity is almost a null subject.
My friend Mike does exactly what you are proposing. He owns a stock in both his personal account and in a retirement account. However, he treats the total as one AIM account in his Newport files. This will work just fine. I think he usually sells shares in his IRA when AIM says to sell, because it has no tax consequence. I'll have to ask him how he does this.
When you add to an existing account (even though it's kept at a different location) you should use Newport's Trade window and the ADD Stock and/or ADD Both feature. This is true if you are going to add to a present AIM holding or if you are using Twinvest.
Best regards and glad you like this new site as well,
Tom
Buy / Sell - Ranges, Minimums
Q.....
Tom,
I hate to bother you, but I have a few questions. I have read Robert
Lichello's book and I am not quite sure how you determine the buy and
sell price ranges. I am right now just checking my mutual funds once a month and plugging them into the formula. Based on the FAQs in the back of his book there were a few different ways to determine what the
ceiling and basement amounts are for selling and buying but how about
for your price ranges? Also once you had a list of recommended mutual
funds that met certain criteria of Lichellos on your webpage. Do you
have a place where these are updated still or not? Thanks for your
time. You are helping laymen like me out a ton.
John
----------
A.....
Dear John and Julie,
The minimums for trading are set many times by the mutual funds themselves. If they don't have a pre-set minimum for buying and selling, then use about 5% of the value of the mutual fund's value in your account (just the equity fund, not the cash reserve). I guess I'd use as a secondary rule no less than $250 per trade. It wouldn't be worth the tax accounting to trade much less than that.
It's a bit complicated to pre-calculate the next buy and sell prices. If you continue to do AIM longhand, you just enter No Trade where AIM's asking you to buy or sell less than your minimum. Bob Norman's Newport Programs has the ability to do these calculations for you and the computer screen presents them to you each week when you update your prices. I'd advise something like this as your next step along the AIM path.
I was asked to take the mutual fund report off the bottom of the weekly newsletter. The reason was that people like to print out the newsletter and didn't want to reprint that over and over again. I can't remember where I moved it to! I was in the process of updating the list about a month ago and got sidetracked. Inow have finished it as a separate AIM page. ( http://www.execpc.com/~oldcat/sp_rprt.htm )
The intent of the list was to have a good source of names that fit well with AIM for very long term holdings. As an alternative, Jim Battaglia is constantly reviewing mutual funds for good AIM candidates. However, his list is usually for people that want to periodically switch funds. If you contact Jim, tell him that you would like some mutuals for AIM for a 3 to 5 year period and see what he says. His email address is in the FAQ section of my web site.
The two biggest things I look for in AIM mutual funds are:
1) Forbes ratings of A+ or A in bull markets and D or F in bear markets.
2) History of beating the S&P 500 over long periods of time.
This should give you the volatility that you need for AIM and the long term growth that we all desire. It takes AIM several market cycles to get ahead of Buy & Hold, but once it does, there's no looking back.
I also feel very strongly about the two basic improvements that I've made to AIM. The split SAFE values for buying and selling and the use of a cash reserve maximum percentage. These are described more fully in the FAQ page.
Please don't hesitate to ask questions. If I didn't want to help, I'd never have built the web site or left my email address there!!! Mr. Lichello did a marvelous job creating a tool for risk management. His view was from the '70s during a time of a stalled market that didn't seem to have future growth as a major potential. What I've done is to help make AIM usable in a roaring bull market. The biggest single problem I had with AIM when I started using it 10 years ago was that it was too conservative and raised cash levels to too high a level. I was good enough at picking good stocks and funds that AIM was always selling and never did enough buying. Hope this helps!
Best regards,
Tom Veale
Aim - Convert existing
Q.....
Tom, You must have been around for awhile as I see your name all over
the place associated with AIM investing. I am new to the AIM strategy
and see great opportunities with it. I have set up AIM for a group of
stocks I own and now want to setup my 401k mutual funds with it and my
childrens college education funds with it.
SO my first question is how do I properly setup AIM for my 401K. It
invests a % of salary every 2 weeks. The amount can be split among
several mutual funds which include Growth, Income, Bonds, etc.. I have a starting position in 2 funds. Each 2 week period is an additional investment in the funds.
Do I setup AIM with the two funds and establish a cash reserve in a Bond or asset protection fund? This would serve as the cash reserve.
The second question concerns my childrens funds. I am not adding to
these currently and want to set them up with AIM. They are in 2
agressive growth mutuals right now. Both has a small percentage of cash reserve in a MM.
Some advice would be helpful!
BTW: my stock AIM has netted profit already.. yee haw!
Thanks, Steve
----------
A.....
Hi Steve,
I've been keeping an AIM topic going for nearly 5 years now, first on Prodigy through their Money Talk Bulletin Boards and most recently on the web. I'm glad you could find reference to our pages easily. It looks like you are serious about getting up and running with AIM. I'll be happy to help in any way I can.
For your 401K, if your existing accounts are already sizable, I think I'd just start AIMing them right now. Instead of selling off some of your present position to raise cash, just set up AIM by making the Portfolio Control value 0.90 of today's stock fund value (assuming that it is profitable!). This will make the account start selling with just a small rise in price of the fund. Then you can build your cash reserve out of future profitable sales. If the market turns against you and asks you to buy before you've established a cash reserve, you can use your biweekly cash to supplement any buying AIM requests in the near term.
For the continuing contributions to the 401K, I'd suggest using Mr. Lichello's TWINVEST for that. I've used it and it works marvelously. After you've accumulated another $10,000 of value (cash and equity) in that new account, set it free with AIM as its guide and start another. Your idea of using some low risk asset protection plan as the Cash Reserve is a good one. You don't want to be in the position of having to sell a bond fund at a loss to buy more shares of your favorite fund at AIM's insistance!
Generally, you want to use mutual funds that stay nearly 100% invested all the time. These will have the greatest price volatility. I use FORBES magazine's annual mutual fund report (comes out in Aug. or Sept, check your local library) and look for funds that are rated A+ for bull markets and F for bear markets. Then I screen those for funds that still beat the S&P 500. These will work beautifully with AIM.
I think my advise for the kid's money is pretty much the same. If the accounts are already profitable, set Portfolio Control to 0.90 of the current value of the equity side of the account. Then AIM will start to build a suitable cash reserve right away. I would like to caution you based upon my own experience, however. When I first started using mutual funds, I let them sell too many shares and build too big a cash reserve. I'd cap the cash reserve at about 33% maximum and start doing vealies after that. You can read about vealies at the web site under the AIM FAQ section. This will maximize your growth with a diversified aggressive growth fund. Also read about the Split SAFE idea as well.
Please feel free to ask any further questions as time goes along. I built the web pages to assist others along the learning curve. Hope they help you as well.
Best regards, Tom in WI
Newport - Who wrote it
Q.....
Hi Tom,
I bought the book about 8 months ago. Started reading it and stop. A few
days ago I finished it. I am a wanabee AIMer. Hope it works. I am very
excited about it. BTW, are you NEWPORT software?????? If you are I want
buy it! But no forms, I rather download it, if possible (payment by
credit card).
Of course you could help me getting started!! Thanks.
I downloaded all the pages, are you kidding me!!??
Regards,
Francisco
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A.....
Dear Francisco,
My very good friend, Bob Norman, wrote the Newport software and sells it. He has no way to accept credit cards, but can send the program electronically, as a file attached to Email. He's done this several times now to overseas customers. Drop him a note about payment and he'll let you know how to accomplish it.
Please feel free to ask questions as they come up. I'll do what I can to steer you in the right direction!
Best regards, Tom
Idiot Wave - Newport
Q.....
I am considering purchasing the newport program for aim investors. I do not
completly understand what idiot wave is, but is it a part of the newport
program or is that something extra that has to be purchased with newport.
Thanks
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A.....
Hi Bob,
Bob Norman of Newport Programs is the author of the AIM software, along with Dave Ratatori who did the graphics. In Newport are all of the years of experience of using AIM in the real world. It allows for the SAFE to be split for buying and selling, lets you make graphs, keeps track of the accounts for you, and lets you make internal adjustments for stock splits, distributions, additions, and the usual things that come along in an active account. It's AIM without the drudgery of maintaining a spreadsheet.
My Idiot Wave is a separate, free, report that I have kept going for many years. I needed a market risk monitor that mirrored what AIM's opinion would be. The Idiot Wave is an attempt to make a better judgement of what the market's risk is at any particular time, independent of the psychological burdens usually gathered by watching or reading traditional financial news. I wasn't comfortable with Mr. Lichello's "one size fits all" mentality with either 50% Cash Reserve or 33%. The Idiot Wave floats around with market risk and gives a 'reading' that seems to be appropriate for the starting of new accounts.
I also use the IW as a guide as to how much cash reserve should be built up in an account. It's my opinion that it's just as senseless to keep large amounts of cash reserve around in a low risk environment as it is to have too little cash on hand when market risk is high. The IW helps me to target the size of my cash reserves for existing accounts.
Although the Idiot Wave isn't necessary for running a good AIM/Newport account, it's a good partner. It was nice to know in mid summer 1987 that the market was getting a bit 'flakey' (IW peak of about 56% Cash Reserve). It was just as nice to know in December of 1987 that the world hadn't come to an end (IW dropped eventually to less than 20% cash reserve). It took great intestinal fortitude to follow AIM during the '87 "crash". At least the IW was there to sooth the AIMer's nerves by indicating that the market had become a very Low Risk environment.
I don't know if the IW is as good in more normal markets, but it seems well suited to guide us during market extremes. I report the weekly values of the components and the resulting IW suggestions at the AIM web site (http://www.execpc.com/~oldcat/3bbs.htm) for all to ponder. The main thing that can be said is that if all four components agree with the total AIM rational, then one can be fairly certain about the outlook. Less caution needs to be given when only some of the components agree with the overall view. This is the case right now. Some components are high risk, but not all.
This got a bit long winded, hope you don't mind. I have really enjoyed the Newport software. It's a nice, tight application specific program. Its default settings are pure Lichello. If you want to tinker, you can, as the flexibility is built in. It isn't a full blown spreadsheet like Excel or 123. When Bob did the design for Newport he took only what was necessary to run a successful account - no excess baggage. Hope this helps in your decision-making.
Best regards, Tom Veale
Aim - Options or Futures
Q.....
Dear Mr. Veale,
To your knowledge, has anyone used AIM / Idiot - or a modified version - for futures trading ? or even options on futures?
I can feel the potential of implementing AIM's principles to futures but I can not put it in practice? What is your opinion?
What is the price for Newport? Do you have a demo version?
Thank you in advance for your help. Looking forward with interest to
hearing from you.
Kind Regards,
Ammar
PS Where is Mr. Lichello now?
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A.....
Dear Ammar,
Here's the answers in reverse order! First, I've tried to contact Mr. Lichello a few times, but with no success. Not having a direct way of doing so, I wrote to him care of Signet Books hoping to hear back. Alas, no reply. He last updated the AIM book in 1992, so we know he was around then.
Newport Programs has an order form for their software at the web site
http://www.execpc.com/~newport/index.htm
They sell the full program as a demo for $19.95 (with a 90 day clock built in). On that disk is the complete program, Help and a 'slide show' demo. You can use the program to try a variety of strategies or histories, but for a limited time frame. The full program is $119.95, I believe. The ubiquitous Shipping and Handling fee is also there to be added.
If you plan to do several "What If" type of histories for longer periods than 90 days, I'd suggest your getting a copy of one of the AIM templates for Excel. These are freebee's that people have developed. They are cumbersome for running a real time AIM program, but are great for trying AIM out on new situations to learn how it would respond to market swings.
I have used option contracts as an AIM suppliment, but not as the main equity for AIM. I've not corresponded with anyone that has to date. In owning an equity for AIM, I've found that during times of broad market moves (either up or down) there are generous option premiums to be harvested while staying very close to AIM's original intent.
For instance, lets assume we have our favorite stock at $25. AIM is suggesting that we sell an additional 200 shares if the price is to reach $29 5/8. We check the newspaper and find that there's an October CALL contract at $30 that is selling for a $1.50 premium a this time. Since we plan on selling the shares at near $30 anyway, why not sell two CALL contracts today, collect the $300 gross and let the clock run. If the option expires unexercised, we keep a net of about $260. If the option fills, we keep the $260 net and get the sale of 200 shares as well- just as AIM wanted. Assuming that AIM made $6 per share selling the stock for us, our option strategy just enhanced that by an additional $1.40 bringing the total yield to $7.40. That's nearly a 25% improvement in yield on the transaction.
I do not use this strategy until I have AT LEAST a 30% cash reserve accumulated for a stock. The reason is that one must have adequate buying power already on hand at every point except a market bottom. Should the option expire unexercised, we will not be adding any cash to the reserves. This is not a good thing if the market turns against us.
That's about as close as I've come to using AIM with options. I have essentially NO experience with trading futures contracts. I can envision AIM acting as an "Inventory Control Manager" on a commodities type product. Let's say we have an inventory of Coffee at a value of $2 per pound. We could adjust our inventory using AIM. Sell off some inventory at higher than $2.00 and add inventory below that point. The inventory is being substituted for a stock equity position. Here again, I would guess that options and futures could play a hand in there somewhere, but don't have the experience to advise how.
I hope this helps in some fashion! One more note on the Newport software, it's designed for weekly updates. Even that is an excellerated rate of activity beyond what Mr. Lichello suggests in his book. However, it's probably not often enough for the 'day trader'.
Best regards, Tom Veale
Sell - which stocks
Q.....
Greetings, I am relatively new to investing but I have been studying Mr. Lichello's methods since 1993. I have been using his methods on my retirement money and now have an IRA with Schwab for about $48000. In April I bought stocks for the first time and have a portfolio of 6. I am using the AIM to manage the portfolio. It now is signaling me to sell. Which stocks do you choose to sell? The ones which have increased the most? or the least?
Thanks, Seeker
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A.....
Hi Seeker,
When using AIM to manage a basket of stocks, you are acting much as a mutual fund manager acts. This is a tuff call from 'over here', but there are some things to consider that may lead you to the correct choice as to which stock(s) to sell. I've done the same form of management in the past, so know your delemma.
First thing I would look at is the appropriatness of each equity to the AIM system. It wouldn't do you any good to sell off jucy AIM stocks and be left with steady growers that won't generate much AIM activity. You are going to want the remaining stocks to have high BETA (volatility), low price stability, probably low long term debt, and good but irratic growth. Obviously you want stocks that are in industries that have excellent long term potential (electronics VS horseshoes).
Next, examine the motives that got you involved with the stock in the first place. Were you looking for long term growth, or were you following a momentum trend that was to have known limits. Sell stocks that have reached short term goals in place of selling stocks that still have good long term potential.
In assembling a basket of stocks, be careful not to mix stocks from different parts of the business cycle. Although it may give the overall account more stability, it tends to confuse the picture when AIM calls for a decision. For instance don't mix capital equipment issues with their customers. The cap. equip. companies lag their customers in the business cycle. In this case, the customer's stocks might be going up and the cap. equip. cos. aren't. You might look at this picture and want to sell the cap. equips. because they are not 'performing'. The error would be that maybe the customer's stocks had already peaked and the cap equip guys had just started their run.
So, if you have a real mixed bag of stocks that you are AIMing, it's a harder decision than if you have separate AIM accounts for industry groups (or individual stocks). The more of a mixed bag it is, the more I tend to sell what's up and hold the remainder. This assumes that I'm still satisfied with the fundamentals of the remainder. (if I'm not, I'd do a non-AIM sale of the stock and pick up an equal value of an issue that is better suited to AIM and has better fundamentals)
My own experience with a group of stocks (about 10) was that after a couple of years of AIMing, the portfolio had 'concentrated' into about 4 stocks. These tended to be very good AIM stocks on their own. Also, I now had fairly large positions in these from concentrating the total value into fewer and fewer issues. It was at that point that I divided the portfolio into separate AIM accounts for each issue. They each went on their own way after that.
One last thought about IRA's. It's impossibe to gain any benefit from a LOSS in an IRA. There's no taxable gains, so there's no offset. This is what led me to use a mutual fund for my IRA, as it's harder to actually loose money with mutuals. With individual stocks there's a much higher probablility that I'd make an error in selection.
Thanks for the great question.
Best regards, and let me know how you do,
Tom
Aim Software - Spreadsheets
Q.....
Hi Tom,
Is the Newport program the only one available for tracking stocks and
mutuals using aim? Is there a spreadsheet that will do the job??
Thanks
Dave
------
A.....
Hi Dave,
There's a couple of templates for AIM around and they're free. If you check with Bill Riedeman on our AIM BB on Silicon Investor, I'm sure he'll be happy to send you a copy. His works with Excel. The spreadsheets are ideal for doing What If type calculations. ("Bill Riedeman" gwbill@televar.com )
If you want to keep a real time portfolio of stocks and funds, you will probably do better with Newport in the long run. It's simple to use, gives good graphic history of the results and has the Next Buy/Next Sell feature that's so valuable for running a successful AIM account. (Newport's address: http://www.execpc.com/~newport/index.htm)
I'm sure there are others, but I've not found any that were any good. There's a free one around that does the simple calculations, but gives no graphs or history, just an instant "window" on the stock. The guys at Newport are AIMers and their enthusiasm for the method shows in their software.
Hope this helps,
Tom
See http://www.aim-users.com/ for additional info. on other software programs
Aim Software or Paper
Q.....
Hi Tom
I have just read the book and am ready to begin the program. Right now I am researching stocks and mutual funds to buy and choosing asset
allocations. I am enjoying the process but it sure is confusing. Any
info you may have will be appreciated. Do you use the Newport software or do the transaction on paper?
Carol
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A.........
Dear Carol,
When I started with AIM back a decade ago, I did all of my calculations long hand on 13 column paper. As I became 'literate' with computers, I created a template for Lotus 123 for running my AIM accounts. Much of what I learned about how AIM works comes from those times.
I'm now a NEWPORT user and am very content to let it do all the 'work' of keeping the spreadsheets up. It makes all the graphs and screens that I care to see regarding my AIM investments and does them quickly and without much of the computer's memory or hard drive space being used.
Please refer to my Questions and Answers page on the Web for some ideas on finding proper stocks and funds for AIM. You will find that page at: http://www.execpc.com/~oldcat/qanda.htm
There are other pages nested on the AIM topic as well. Most of Mr. Lichello's book and even my own AIM pages make more sense after you have been keeping an account for a while. So you may want to do a couple of examples first and then go back and re-read some of the material again.
Please let me know how you are doing and if I can help any as you get started. Did you find my address thru Silicon Investor or thru the web pages on AIM? Always curious!!! Be patient with AIM as it takes a while for it to show results. I think you will be quite happy a year from now that you chose this risk management method.
Best regards,
Tom Veale
Mutual Funds - Vanguard
Q.....
Do you use any Vanguard funds for Aim, and if so which funds are the best?
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A.........
The only Vanguard funds that I've used are VGPMX (precious metals) and VGENX ( Energy). Those have so far worked well with AIM. I've not really studied the rest of their funds, and so can't really comment.
As a general rule, pick a fund with the largest Percent change from the 52 week low to the high. AIM needs volatility to drive it.
Hope this helps,
Tom
Aim - Capital Gains
Q.....
Hi Tom,
My name is Daniel. I was given a copy of Robert's AIM book about a year ago and reread it again this weekend. It's really good stuff. Then I found your site, which is such a bonus.
I've been investing a little over a year now. I dollar cost average via DRiPs in 6 stocks and I have a growth plus a Mid-cap Mutual fund. I also have a IRA with 4 stocks. I like stocks because of the control I have over when to realize cap gains and expenses are very low. Plus most mutual funds fail to beat the market anyway. But with AIM, buying on the dips is crucial. As is taking a profit.
I know AIM says that when I add new money (which I would like to do every month) , I use 33 or %50% (or your value) for cash and the rest for stock, but when do I buy the new shares? Do I wait for a buy signal or can I do it in between the buy and sell range?
Since I'm just 31, I am a long term investor. So if I can feed money to AIM on a monthy basis, why sell and realize a capital gains, then wait for 20% drop before I can buy more. How likely is this? I could up the SAFE for sells I guess.
Thanks for you web site. I just knew there was one out there!
Daniel
--------------
A.............
Hi Daniel,
It sounds like you are off to a good start with investing and AIM. I think I'd suggest two separate accounts for your activities, however. First, for all new money being added, start a TWINVEST (chapt. 15?) account. It's perfect for periodic additions like you're doing now. You build an equity position at the same time you are building a cash reserve. Tvest is very easy and efficient and takes no time at all. Once you've accumulated about $10,000 in the new Twinvest account, then unplug t-vest and start up AIM. If you continue to make contributions, start a new t-vest account with a new stock or fund.
Second, if you have enough total value accumulated in the existing stock and mutual fund accounts, then use AIM on them. For a mutual fund account you can get on with $5000 to $10,000 total value including cash reserve for an active AIM account. For stocks, it's a bit of a problem when share prices are high and your total number of shares is small. I'd suggest that individual stock accounts have a minimum of 500 shares in them. If you have a mixed bag of stocks and none of them large enough to make a single AIM account, then separate them by industry, or other catagory and make 'baskets' of stocks. Trade each basket as a separate AIM account. You don't want to mix utility stocks with biotechs, however! Try to mix them in groups that move together, and then when AIM tells you to unload $1000 of equity, you get to choose which one!
Cash is Buying Power in AIM. Let it accumulate by selling as AIM suggests - BUT, don't let it get to be too large a portion of the portfolio. If the stock has had drops of 50% from previous highs, it needs to have 50% cash reserve at the market tops. If, like a utility, it has never dropped much more than 25%, then chances are you will never need more cash that that. This holds true of mutual funds as well. If the fund shows no drop of more than 30%, then use that as the cap of the cash reserve. Then stop selling and use my method of reverse buying, now referred to as a "vealie". Instead of selling the amount AIM suggests, you take half of the value of the market order and ADD it to Portfolio Control. This negates the sell order and lets the risk expand a bit. After this has been done a few times in a row, the cash reserve will have dropped in percentage to a lower level of the total. Once it's dropped 10% of your upper limit (5% if the top is 50%) then you start to sell again. You keep repeating this process in a long upwardly trending market and thereby improve your overall return beyond Mr. L's original AIM.
'Reverse buying' is probably the best way to keep the capital gain tax to a minimum and still stay within the AIM envelope. Mr. L's AIM didn't have a ceiling on Cash Reserve. The original AIM just kept selling forever. There's no reason to let the cash reserve rise to 80% of the account if the stock never displays a drop of more than 40%. You'll never use all the cash, so therefore it's a drag on the portf. performance.
Hope this helps,
Tom
Cash Reserves - Depletion
Q.....
Tom,
Some of my mutual funds have been rapidly declining lately. I have been following newports recommendations and have found this is depleting my cash reserves rather quickly. I have been entering prices on a weekly basis and have received buy signals weekly. I have only about $500.00 cash left in my pbegx account. Do you think it would be prudent to slow the buying down?
How would you accomplish this? Please reply. Thank you.
Sincerely, Ken
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A.............
Hi Ken,
It sounds like time to fatten up your BUY Resistance (SAFE). You'll want to be able to continue to buy all the way to a market bottom, in theory, and THEN run out of cash!
How large was your cash reserve in percent of total portfolio value before the buying started? The IW has been recommending about 32% in recent months. This should have been enough for even aggressive growth funds line pbegx even with SAFE set at 0.0%.
To set the Buy Resistance to the proper level, think about what price you feel would be near the bottom. Then, using the What If window, adjust the Buy Resistance to inhibit any buying until you get to that magical value. Then you will exhaust your cash at about the same time the market bottoms (in theory!!!).
I hope this helps, please let me know how you make out. I have been in the Buy Mode with my 20th Century Vista account recently as well. However, it's just getting going. I was at about 32%-33% when this buy cycle started, but it's not done that much buying yet. Maybe pbegx has greater downside movement.
Best regards, Tom
Split SAFE - Separate Buy and Sell SAFE
Q.........
OK. I just read the FAQ's section and I have a question. You said you set your sell resistance to 10% but your buy a 0%? How often are you contacting your mutual fund to purchase shares? It seems like you would be doing a lot of transactions in smaller amounts. Is this correct?
Rich
----------------------------------
A........
Hi Rich,
The reason for the change is twofold; first, there's AIM's basic 'no growth' initial design. Mr. Lichello's original AIM assumed that a stock or fund would never grow but would cycle endlessly in the same range. This has been particularly wrong in the case of mutual funds. They tend to grow in price per share along with the general market.
Second, because of their diversity, funds don't fall in price very much so the cash reserve isn't well utilized. If you model most funds' histories for a 10 year period you will find that eventually AIM will have you very heavy in cash - even if the market risk hasn't changed from the beginning of the time frame. This is because the funds actually increase in price per share over that time frame. If the cash reserve gets too large, then the overall performance starts to fall off. One's goal is to be 100% invested at or near the market bottom. Too much cash prevents AIM from accomplishing that goal.
By building in some bias for accumulation (by reducing the Buy SAFE), AIM tends to stay more fully invested over time and makes better use of the cash reserve. There is an increase in the number of Buy trades over time, which in turn, does increase the number of Sell trades as well. The main thing is that the cash has better utilization while cycling from close to fully invested at market bottoms to having adequate cash reserves at market tops. The size of the trades doesn't change, since I use a minimum $$$$ amount before I make a trade. With my IRA I've averaged about 4 transactions per year since Jan. of 1990. Presently I have my minimum $$$$ amount set at about $1500 for both buying and selling of shares. I've been with the same mutual fund for the entire period. By setting a minimum dollar value for the trade, I keep AIM making efficient trades. The addition of the minimum value is, in essence, like adding a small amount to SAFE. First the price increase or decline must satisfy the SAFE and Portfolio Control variance. Next the price has to move enough to generate a market order at least as large as I've designated as my minimum. Most mutual funds have a minimum order size requirement, so this is a way to satisfy it. The math for this has been built into Bob Norman's Newport Program. There's separate adjustments for buy and sell SAFE as well as minimums for both dollar and share numbers. Newport doesn't give a market order until all the minimums have been satisfied as well as the SAFE range. I hope this helps a bit. I appreciate having the FAQ's actually READ by someone!!! Lots of time was spent modeling mutual fund long term price histories before I came up with the idea of separate Buy and Sell SAFE's. This is a very nice and logical advance on Mr. Lichello's work. If he had had a modern PC at his disposal I think he would have eventually found this idea himself.
How long have you been an AIMer. I started converting all of my holdings over to AIM in Jan. of 1988. It's no small coincidence that Jan. of '88 followed closely after October 19th, 1987!!! Thanks again for the note. Please let me know if I can be of further service.
Best regards, Tom
ZIG ZAG ANALYSIS AND AIM
Q.........
How can Zig Zag analysis be used to help set up the proper size Hold Zone for an AIM investment?
---------------------------------
A..............
Don Carlson was kind enough to bring this idea to the AIM forum. http://www.stockcharts.com lets us set up and vary the Zig Zag percentage. First we look at AIM's traditional Hold Zone which is about 30% (Buy SAFE - 10%, Sell SAFE 10%, Buy and Sell Minimums both 5%) We can use that 30% in the longer time frames and see an approximation of the number of AIM "round trips" we might expect over time. When I set up one of those StockCharts.com pictures, here's what I'm using:
Period: Weekly
Style: HLC Bars
Chart Size: Huge
Duration: 3 Years
Price Overlays: Zig Zag (Basic), 35% (to start)
Exponential Moving Average: 26 weeks
Indicator Windows: Williams%R
and this is how it would look on CGNX, for instance:
http://stockcharts.com/def/servlet/SC.web?c=CGNX,uu[h,a]wahlyyay[df][pe35!b26][vc60][iLk14]&pref....
(3 cycles, all correctly on the "right" side of the 26 week M.A.)
At 30%
http://stockcharts.com/def/servlet/SC.web?c=CGNX,uu[h,a]wahlyyay[df][pe30!b26][vc60][iLk14]&pref....
(6 cycles, 3 on the "wrong" side of the M.A.)
At 25%
http://stockcharts.com/def/servlet/SC.web?c=CGNX,uu[h,a]wahlyyay[df][pe25!b26][vc60][iLk14]&pref....
(8 cycles, 3 on the wrong side of the M.A.)
and finally at 20%
http://stockcharts.com/def/servlet/SC.web?c=CGNX,uu[h,a]wahlyyay[df][pe20!b26][vc60][iLk14]&pref....
(15 cycles, 6 on the wrong side of the M.A.)
As you can see, we can develop more trades only by sacrificing the overall return on each "round trip." So, there's going to be a sweet spot somewhere that fits our trading habits and also gives us the best possible return. In E.4 of Mr. L's book he is now asking us to consider roughly a 40% "round trip" (10% SAFE on buys and sells plus 10% minimums on buys and sells for a total of 40%). Here's the same charts with 40% used:
http://stockcharts.com/def/servlet/SC.web?c=CGNX,uu[h,a]wahlyyay[df][pe40!b26][vc60][iLk14]&pref....
(3 cycles, all on the "right" side of the M.A.)
So, if I were going to choose between 35% and 40% I guess I'd choose 40% and not trade very often but make a bundle each time I did. However, a case could be made for Original AIM of 10% SAFE and 5% minimums - 30% overall. We'd be making 30% LIFO six times instead of 40% LIFO just three times. If each of the sells at 30% LIFO was a $1300 trade, then we'd make $300 times 6 or $1800 in realized gains. If we used 40% and had a $1400 trade just three times, we'd make a LIFO of $400 times three or $1200 of realized gains.
For this example, I'd prefer the Original AIM. It generates a 50% improved realized gain.
The point of diminishing returns comes when the number of transactions increases at a slower rate than the drop in LIFO gain per transaction. In the above example we had a 100% gain in the number of transactions along with a 25% drop in LIFO gain. It still netted us more realized gain.
Let's be simplistic here for this series of examples:
40% LIFO X 3 trades ($400 X 3) = $1200 realized gains
30% LIFO X 6 trades ($300 X 6) = $1800 (50% better)
25% LIFO X 8 trades ($250 X 8) = $2000 (11% better)
20% LIFO X 15 trades ($200 X 15) = $3000 (50% better)
15% LIFO X 21 trades ($150 X 21) = $3150 (5% better)
10% LIFO X 30 trades ($100 X 30) = $3000 (5% worse!!!)
Here it would appear that 20% would be the ultimate level without risk of diminishing returns. One also has to understand the consequences of faster cash Burn Rate and other things along with the fact that AIM may sell several times in a row in a rising market which isn't explicitly shown in Zig Zag analysis.
Of course not considered here is the difference between our GROSS and NET gains. Since our "fixed costs" are the same in each trade, we need to understand this. Giving up $15 commission on a $100 cap. gain event is quite different from $15 on a $300 cap. gain! In taxable accounts Uncle Sam always takes his share no matter what, and that's alway just a percent of what's left after commissions.
Robert Gammon had approached this from a different direction in his AIM 2000 presentation showing that a smaller LIFO gain per round trip accelerated his portfolio growth in an IRA when very small commissions are part of the equation.
We've always talked about keeping commissions to something less than 5% of our transaction costs (historically mine have been less than 1%). We've always assumed that AIM's healthy LIFO gains would assure that we made many times what the broker did. This "test" shows that as we reduce the LIFO gain, we also "increase" the percent of gross profit being given to the broker. We started with commissions being about 3.75% of gross profit and ended with it being 15% of gross!
Best regards, Tom
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