Hi Clive, Re: AIM and deep cycle occurrences........
Looking back at Lichello's famous (infamous) 16 cycle
$10-$4-$10 pattern he compounds the portfolio at about 40% roughly with each complete cycle (peak to peak). This is also true of the low-to-low values. I guess we could say that with each cycle even the bad news was better than before.
While the drop in Price/Share is 60%, the drop in the AIM model is about 37%. In other words the Downside Capture Ratio (DCR) is about 0.62 (37/60). On the upside, the Price/Share rises 150%. AIM rises about 115%. That gives us an Upside Capture Ratio of around 0.76 (115/150). The difference between the UCR and the DCR is the source of the majority of the Total Return, since the share price never exceeds the original starting point. The remainder of the gain in Total Return is derived from his interest on the Cash side since there is no dividend indicated in the series.
So, just following Lichello's simplest methods gains significant benefit from a deep cycle event. With a 50/50 Equity to Cash ratio and two deep cycle events, AIM manages to have equal equity value at the peak to the Buy/Hold investor. After that point, the AIM engine will always be ahead of Buy/Hold assuming the same pattern.
"Cash Drag" is a typical arguement against using traditional AIM. Even Mr. Lichello fell victim to wanting to limit that drag when faced with longish bull markets. He built a system on the expectation that no new higher highs would ever be realized. Then when the market place, over the course of almost two decades kept extending fundamentals, valuations, multiples of the fundamentals, his system was caught a bit short on a comparitive basis.
Even if we assume zero earnings on the Cash side, doesn't the cash pay reasonable dividends each time it is deployed and harvested? With traditional AIM type settings, Cash earns roughly a 30% LIFO each time it is deployed and then recovered through selling. With AIM we then can afford to let it be idle for quite a long time before we start to suffer true "time value" loss on it. It is most peoples' impatience (even Mr. L's) while waiting for the next "big one" that drives them to deploy cash too soon or start with too little in the first place.
For me, monitoring the UCR and the DCR to assure myself that the portfolio design and the management of that portfolio are both healthy is very important. We always want to keep the UCR high, but can't do things to improve it that would compromise our DCR goal.
Mr. Buynhold is always willing to remind us during bullish times that he's made four steps forward and we AIMers only made three. However, Mr. Buynhold doesn't like to acknowledge that he took three steps back during the Bear where AIM only took two.
Best regards, Tom
PS: It's snowing in Port Washington as I type!
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