Hi Clive,
On the Ocroft Method I have understood two options... that I have mentioned before. As I do not have a Standard AIM Spreadsheet so I have not tested the two options:
1 The AIM is run with standard parameters, or with adjusted parameters, and when a Buy Advice is triggered the trade is entered into AIM but in reality it is not executed. In this procedure the AIM Pc is updated with 0,5x Buy Value.
The Real Cash Reserve will greater that the Reserve AIM shows. When the drop in price continues at some point a new Buy Trade is advised, based on the Updated PC, and again this procedure is repeated, as in your example:
"Rather than perhaps 13.3 shares being bought at $75, another 14.8 shares at $67.5, another 16.5 shares at $60.75 (combined $3000 paid for 44.6 shares at average cost of $67.25), you might buy all of those 44.6 shares at a price ('average cost') of $63 price (being the first month with AIM indicating no action/trade after a series of buy trades)".
In this procedure the Residual Trade Advice is by dropping prices being ignored. With each Buy Trade Advice a new Residual Trade appears and a new PC-Value is created. Only the Actual Advice is entered into AIM but no Trade is actually executed.
At the point of the dip and a small recovery that satisfies the amount of recovery at the Accumulated Buy Advise is to be executed, say a 10 % Recovery, and assuming that the Buy then consumes exactly all the Available Cash. This then results in a single large Buy of X shares at a Price of Y. With a continuing price rise Ocroft set a criteria of 20% profit. I think I recall Ocroft set that 20 % Profit criteria on his Total Investment, which included his original investment with which he stated his AIM Management. . .Thus the recovery price from the Dip Buy Point has to be greater that 20%. So id Ocroft started with $ 20000 and invested $ 10000 to start AIM, and with the Total Purchase Amount at the Dip Buy is $ 10000. . . then the Portfolio Profit of 20% is Achieved at an Equity Value of $ 24.000 Net Value. . .and not just LOOKING a 20% Profit on the $ 10000 Dip Buy. One could figure in the trading costs in this as well.
2 The AIM is run with standard parameters, or with adjusted parameters, and when a Buy Advice is triggered the trade is NOT entered into the AIM. . . .One simply notes the Buy Advise and leaves it at that.. .Note that in this case the PC is not updated upwards and its value remains as is was... The PC would thus remain smaller that in Case 1 above.
With the price continue dropping the AIM Algorithm simply keeps adding value to the previous Buy Advice. This continues then until the price recovers and rises say 10% and assuming that this occurs at a point that the Single Buy Value at the Dip Buy Price Y2 is equal to the Available Cash.
Comparing the two cases I observe that in Case 1 the subsequent Buy Advise Points that are determined by say a 10% price drop and the Buy Amount is determined by an ever larger PC, and in that way INCREASING the Buy Advice Amount at each following Buy Advice. So the Accumulated Buy Values at say 3 or 4 steps down the Deep Diver increase rapidly. . .This is the well know AIM Cash Burn Problem. So when the price dips to the point of recovery + 10% then the Buy Price is Y1 and the Buy Value is the value of the Reserve(assume the €10000). Then 10000 = N1*Y1. . .Calculated with using the traditional Safe Value and N1 is the effective number of Shares.
In Case the PC was not changed and the consecutive Buy Advises were accumulated. They are simply recorded at an Update as the price drops. . .AIM simply keeps increasing based on the original PC, which MEANS that the Buy Advice is tempered considerably relative to Case 1 at each 10%. . .The Last Buy Advice on Case 2 would be smaller than in Case 1, because the Cash Burn Brake due to NOT changing the PC would give a lower Final Buy Amount when the recovery occurs and the Buts are executed ate Price Y1=Y2.
What are the relevant results for Case 1 and Case 2 when the Recovery to the Buy Price Y1=Y2 occurs?
Assume that for case 1 at Price Y1 the amount to buy from Accumulated Buy Value = $ 10000 = N1*Y1------> N1 = 10000/Y1.
The Buy Point @ Price Y2=Y1 for Case 2 comes at exactly the same point. . .at Recovery Price Y1=Y1.
Since for case 2 The Accumulated Buy Amount at this point is less that for Case 1 it follows that N2<N1 and that means that for Case The Reserve has not yet been exhausted, which means that for Case 2 the Buy Value N2*Y2 < € 10000 and some Cash remains on the account.
Which method is . . .ehhh. . . Better?
3 In Case 1 if the price keeps rising after the Buy @ Y2 $ 10000 is invested and the Profit Point of 20% would be reached at Price Y13 at which the Equity would be worth $ 24000.
4 In Case 2 if the price keeps rising after the Buy @ Y2 a smaller amount than $ 10000 is invested. In order to get to a Equity value of € 24000 the equity price Y23 must be greater than Y13 and THAT requires waiting a bit. . .or a long time. . .for the price to reach Y23 > Y13. . . if it happens.
If in both cases the equity is sold an either Y13 or at Y23 the Yield Percentage Yield13 > than the Yield Percentage23 because the profit of $ 4000 is achieved in a shorter time for Case 1 than for Case 2
5 If however the price keeps dropping to a point that the Buy Amount for Case 2 is also $ 10000 then bath cases become identical...In both cases the investment $ 20000 and the buy point are identical.
