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Hi Tom.
Lotus 123 within SmartSuite V 9.8.1 (WordPro etc).
Lotus Graphs are far superior to Excel's.
I tend only use Excel only for Macro/VB as I'm more familiar with VB than LotusScript
Best regards. Clive.
Hi Clive,
Nice histogram. In Lotus 123 DOS I was always able to embed the + and - symbols like you've done here. When we constructed Newport, it became key to include such things.
What spreadsheet did you use to create the nice graph?
Best regards, Tom
Events such as
where a sequence of AIM buys occurs and draws down cash reserves to zero prior to further declines can be alleviated with a bottom fishing style.
If we ignore the first four (three sells, one buy) trades in the above chart and focus on the next 6 buys we see that AIM would have burned all of cash before the lowest low, which in turn severely impacted overall results.
If you take a trade timing type route then you might either use a 'arrive late, leave early' style and look to join a trend once a clear upward trend is evident and take profits as that trend continues, or alternatively you can bottom-fish and attempt to place many sequential buy orders all at the same time near to the bottom price level (and/or similarly look to sell many sequential sells orders collectively near the top).
You'll generally trade in and out more with such a bottom/top fishing style, accepting relatively small losses against individual positions, but equally you may avoid larger amounts of losses (or smaller gains) should the prevailing trend continue.
For example in the above chart the 6 buy trades occur around an average amount somewhere between 150 and 250 price level and result in all of cash being utilised too early, whereas with bottom fishing you might have bought all 6 at a much closer price to that of the (approx) 50 low price.
Using those 6 buy trades as an example and assuming $1000 trade size amounts, $15 trade cost and 5% ($50) stop loss then on the first false bottom buy we invest $1000 and perhaps the next (or even same) day sell out again at a total cost of $80 (two $15 trade fees and a 5% worse price ($50 loss)). The next buy, being two sequential buys ($2000) incurs a $130 cost, the third ($3000) a $180 cost, the 4th a $230 cost, the 5th a $280 cost before perhaps the 6th turns out to be at or around the bottom price level.
So bottom-fishing doesn't come cheap. In total in the previous example we would have endured a $2340 cost/loss against the $6000 sum (6 buys) in order to get all 6 in at or around the bottom price level. Equally however instead of perhaps an average price of 200 against $6000 invested (comparable to 30 stocks) we'd instead have perhaps $3600 invested at around a 50 price (comparable to 72 stocks).
The other benefit of the bottom-fish in this context is that going forward the conventional style would be deeply out of the money, awaiting a substantial recovery before any selling would resume, whilst the bottom-fish style would be better placed to take advantage of any price rebounds.
A long winded post I know, but perhaps one that might help some preserve their cash reserves in view of current market characteristics.
Good luck with your fishing.
The potential reversal in down-trend has not seen any volume, so we could adapt a bottom fishing style here and revert back to delaying any AIM Buys/follow any AIM Sells in view of potential further downside and, for any recent buys, we might consider taking a loss against recent purchases - sell at a loss in anticipation of re-buying the stock back at a later date/lower price.
Such a style may involve a sequence of buy and sell back again at a small loss in anticipation of better overall cost-averaging of multiple AIM trades into a single better price later.
A penny saved is a penny earned - Benjamin Franklin
Hi Clive, Re: Market Risk.................
I talked to a broker friend today about his impression of the market. While it has been stinky, he also feels the end of the current decline may be near. His reason:
"I had a call from a worried client today and he wants to get 100% into Cash!"
So, my friend's view is that if some folks are starting to panic and capitulate, then the end of the decline is at hand.
Best regards, Tom
I should point out that over my entire accounts I am not currently loaded to 85% stock exposure levels, but closer to between 58% and 68% levels (depending against which baseline the measure is made e.g. 68% compared to current total value).
I run a rather unconventional AIM style, having stripped down AIM into three separate engines, buy-and-hold, stop-loss and volatility/cost-averaging capture.
I hold a diverse range of good quality large cap high yield stocks for the B&H element, use a time diversified stop-loss style that represents a managed futures style, and use a form of scaled up AIM volatility capture method that's like Don Carlson's EZM ladder (but without the initial UP leg) for volatility capture and downside cost-averaging purposes).
B&H remains as ever fully loaded. The stop-loss style is loaded to around 75% levels. The volatility capture component however has just recently moved to 0% loaded having sold out following recent stock price rises over the last couple of days.
Generally the stop-loss and volatility capture elements are heavily inversely correlated which helps both to reduce volatility across the whole whilst maximising utilisation of funds.
Primarily for me therefore cWave and vWave provide an indicator of how much downside (cash) is required to cover to the bottom of the volatility capture Ladder. The closer that bottom is the larger the amounts traded at each ladder rung (and the larger the potential volatility capture gain). Having a Ladder top that is very close to the price at the time of starting a new Ladder means that overall AIM's volatility capture trade sizes are magnified significantly.
I personally see these three distinctly different styles as being representative of style diversification, in the belief that such an approach is likely to remain less correlated with each other than that of class/sector diversification. From what I've seen as more ETF's are introduced that cover a vast range of classes that were previously unavailable to public investors, the more closely those classes appear to subsequently correlate with each other.
My mid/longer term indicators suggest that we've been in a Bear since 2000. That indicator also suggests we could remain in such until 2013 or so, when the FT100 would have a yearly peak of around 8000 and average of 7000 (around the same as the 7000 FT100 level highs that we saw during 1999), and a low of around 5800 to 6000.
All very ball-park figures, but if in any way accurate that amounts to around a 2008 current to 2013 peak providing a 8% p.a. capital price appreciation between now and then. Coupled with some good quality stock presently priced at 8% dividend yields and that's a 16%+ p.a. total investment benefit potential.
I suspect that new money injected at present levels is money well spent providing you have the character to ride through some turbulence in the interim.
Better opportunities may arise between now and then, but depending upon the timing the current 10% to 20% cash reserves would have swelled with added income from dividends.
Hi Tom.
I've been buying in many of the equity sleeves these last two weeks.
Me also. With further buys enqueued awaiting 30 day time diversification.
cash indications are very low by historical standards.
The way cWave works is that it generally jumps between levels of around 25%, 50% and 75% cash reserves being indicated in reflection of Relative Valuation being in low risk, average risk and high risk.
Whilst RV is in low risk I can't help but feel that there is still a high probability of some potentially large declines yet to come.
Perhaps vWave and cWave are just simply saying that if larger declines do follow, then likely the subsequent recovery back up to present levels would occur within an acceptably short period of time.
During the Wall Street Crash the Dow halved, halved again and then halved yet again - however a double-up recovery from the last halving occurred quite quickly. Perhaps we're in a similar type region to that after the second halving - where prices could still halve, but then quickly recover back up again.
On that basis being low in cash wouldn't be such a bad thing. We might miss potentially better buying opportunities should further falls occur, whilst in contrast if we maintain too much cash now then we might miss a sharp recovery gain.
We've got good quality stocks over here currently priced to pay high yields. Having bought into such stock you'd not only have locked in a high income but also sizeable subsequent capital gains. Those gains may take a few years to come, but in the mean time the income serves as a sweetener whilst we wait.
Best Regards. Clive.
Hi Clive,
These cash indications are very low by historical standards. I've been buying in many of the equity sleeves these last two weeks.
Best regards, Tom
cWave indicating 14.1% Cash
The Relative Valuation remains below the low risk line this week.
The primary downward trend looks as though a potential reversal may be forming, indicating that we should consider following any AIM buy or sell signals.
cWave Indicating 17.15% Cash
The Relative Valuation has dropped below the lower line this week, which scales up cWave's bottom price level - which in turn reflects a lower cash reserve of 17.15% being indicated.
This doesn't look like it will be a short lived down spike in stock prices and whilst cWave is indicating accumulation the price trend is still negative, so perhaps consider delaying any AIM indicated buy trades for the time being.
There's many a scared investor out there and negative sentiments would appear to be high and growing.
FWIW I take the view that we're in a Bunny market (Bear) - a sideways ranging period that started in 2000 that's likely to continue to 2013 to 2015.
Why? Well generally, for reasons I wont go into here, stocks provide a capital gain that paces inflation over the longer term, coupled with a dividend income that equals cash rate and also rises with inflation over time (cash in turn tends to equal inflation). (Another influencing factor however is trading costs and taxation methods that result in different countries exhibiting different stock market characteristics (for example the US income taxation generally results in different stock price/income characteristics to that of the UK)). We can use this to our advantage and make longer term estimates accordingly.
At the height of the dot com bubble in 1999 the UK's FT100 index dividend yield fell to 2.1% when the FT100 hit 7000 highs. That 2.1% yield is substantially down from the 4% to 6% longer term average.
In the Nineties earnings and yield expectations were high from the Tech companies. Billions were ploughed into those expectations and subsequently lost.
To recover and revert back to a 4% to 6% longer term average yield, 7000 index value and, in this case, assuming 3% to 6% inflation involves a progressive price motion along the lines indicated in the following chart.
The alternative would be to endure a short sharp shock event - such as a Wall Street Crash or 1970's type financial crisis event - which the government is under pressure to avoid.
We see from the chart that prices are falling inline with what might reasonably be expected. For the current 2008 year lows of 4100 wouldn't be out of the ordinary, so there's still some considerable potential declines that may occur over the shorter term, but if so then likely a later recovery back to present levels might equally follow. Anything above 6800 in the current year would be tending towards very expensive levels.
On a stochastic basis, given projected 4100 low, 6800 high for 2008 and 5600 current
( 5600 - 4100 ) / ( 6800 - 4100 ) = 0.55 (55%) so we're placed around midway between projected year low/high levels.
Assuming prices recover back to 7000 in 2013 then from present 5600 levels and 5.5 years to run = 25% gain over 5.5 years or 4% p.a. capital gain. Coupled with a current 3.5% dividend = 7.5% p.a. average.
So overall I'd say UK stocks are reasonably priced, not particularly worth adding to at current prices, but equally not worth worrying about reducing either.
We're in a period where range (AIM) traders are more likely to fair better than buy and hold. An alternative would be to seek out potential better growth elsewhere - countries not enduring Bunny market conditions at present.
Clive
Thanks Clive,
This one may end up looking worse than it is. Like in the cowboy movies when the good guy gets shot and it's "only a flesh wound."
Bleeds a lot, but heals okay.
The Value Line based v-Wave indicates greater upside potential than downside risk.
Best regards, Tom
I'm a day late updating the iBox due to PC problems.
I had AVG anti-virus installed and one of its automated updates of its virus database resulted in a total system failure. So I've had to spend the last few days recovering from backups and, as is usually the case, in not having saved a backup for a couple of months I've had to re-do quite a few bits here and there.
Needless to say AVG's been dropped and replaced with another Anti-Virus product.
On the UK financial markets front the cWave is down from 46% to 44.7% cash reserve being indicated.
I've also added a current trend indicator that's based on a combination of Heikin Ashi, Bollinger Bands, Zig-Zag and MACD indicators. The current trend is clearly negative at the present time.
Clive.
I have subscribed to the RBS rights issue and hope for the best.
You and the majority, so faith and hopes look high
LONDON (ShareCast) - Royal Bank of Scotland (LSE: 91ID.L - news) has got its rights issue away, with 95.11% of shareholders backing the bank's £12bn cash call, it revealed today.
It received valid acceptances in respect of 5.82bn shares for the 11 for 18 rights issue at 200p a share it announced in April. The deadline was 11am last Friday.
The rights issue was fully underwritten by Goldman Sachs (NYSE: GS - news) , Merrill Lynch (NYSE: MER - news) and UBS (Virt-X: UBSN.VX - news) who will now have to find buyers for the remaining 299.38m shares.
Hi Ls7550,
I have subscribed to the RBS rights issue and hope for the best.
Your chart is very informative and I am happy to see (AIM wise) that RBS is down the most. Also I read that Barclays is looking for money from the Country funds.
I have the feeling that the banking sector is down now for the second time in this downwave. By the way i had a June buy in the ishares Europe Dividend fund, which may be connected to this.
Kind Regards,K
Hi Karw.
RBS have progressed a rights issue to raise funds and as such future dividends will be somewhat diluted
But they're little different to LLOYDS, Barclays and any of the other larger banks, and will most likely be one of the survivors that we later see going through mergers. But you never know.
At the end of the day - long term we'll need banks and the big guns will likely fair well in picking off the primary business from the smaller failing banks.
Some believe that we're near the bottom for banks and RBS is on a historic PE of around 3.75
Lloyds TSB are also paying out at around the 9% level, so RBS isn't alone - nothing particular extraordinary so to speak.
I believe they're considering (or have already) paid out an interim dividend in shares, but will revert to cash payment for the final and they have a payout policy of 45% cash payout of earnings thereafter.
They've raised funds from the rights issue, effectively retained the interim dividend and potentially now have sufficient funds to cover any right-offs (dirty laundry) and potentially are well placed and well managed.
A penny saved is a penny earned - Benjamin Franklin
Hey,
When RBOS acquired ABN/Amro i got a few RBOS shares.
Last week i got a dividend from RBOS and to my surprise it was more than 9% of value.
That is very good but the question arises: why so high?
I know that the share value is depressed because new shares are sold to existing shareholders.
Is there any information about RBOS one needs to know ? ( and someone outside the UK doesnt know?)
Kind Regards, K
RE UK ZZ Targets AMBER status
The UK and US markets generally align reasonably well over time.
More recently however we've tended to see quite a bit more volatility in the UK
There is also some evidence of a potential re-convergence between the two markets, with the UK recently entering a William Cringan's Zigzag Targets AMBER status (pending red) whilst the US (Dow) remains in neutral gray following the most recent green status. So it would appear more likely that the UK is due to fall back modestly.
For Tom and others who have UK ETF's, start looking for the flip to a ZZ top (red), perhaps in the interim postponing any UK based AIM indicated buys whilst trading any UK AIM indicated sales.
I've dropped the RV and cWave reports from the iBox as reviewing historical values simply throws up near mirror images to that of the US based iWave/vWave excepting the (deficiency) of cWave not rising as high during high risk events.
Simply the vWave is more likely to better steer you through troubled waters than what the cWave would.
Instead I've replaced the previous iBox content with a more simplistic insight into AIM settings.
Back into Lloyds again
GTC at 4.15 that was nearing its expiry date got filled at 4.147
So far this years ISA allowance played on LLoyds has
3.95 in, 4.65 out (70p gain)
4.07 in, 4.70 out (63p gain)
so the current 4.15 back in again does so with an overall averaged down cost of stock to 2.82. Which is 20% below the current 52 week LLoyds low, and has a forward dividend yield of 13.5%.
I don't intend trading out of these holdings and have moved them to my longer term buy and hold bottom draw.
I haven't yet started 2008/9 ISA though - but that's another story yet to unfold that may involve further trading in/out Lloyds until sub-prime volatility quietens down.
RE: Tax
Hi Tom
I tend to run the stop-loss strategy on a separate fuel to that of volatility capture set.
When a stop-loss based position runs to its time stop then that is a year long event, and typically the stock isn't sold even at that time but rolled over into a new position for the subsequent year long period.
Positions that are stopped out during the year do so at a short term (less than one year) capital loss which could be used to offset other positions that were showing capital gains.
I personally prefer an index fund fuel for the stop-loss engine and individual stocks for the volatility capture engine. Trading the volatility capture holdings in a tax free account where possible.
I know very little about US taxation matters and whether this might be viable approach in the US.
Regards. Clive.
Hi Clive, Re: Stop 'Losses' in a taxable account............
Because most of my holdings are very long term, it tends to be a rather rare occasion that I actually sell at a loss. Because of that, stopping out of a position usually brings on a taxable event that then makes the overall next egg shrink (by the tax amount) before I can then again invest when the market prices are more favorable.
Stopping out brings about long term gains on older shares and can bring on shorter term gains on the newest stuff. I get taxed heavier on the newer shares.
Best regards, Tom
RE: Applying the cWave based method outlined in the iBox to individual stocks.
The FT100 example I've recently added at the bottom of the iBox that shows a ROCAR of 150% provides an indication of how the cWave might be applied to individual stocks.
For each candidate stock you need to use the cWave * 1.5 amended value for calculating the bottom price level e.g. bottom price = current price * ( 1 - ( cWave factor * 1.5 ) ) against historical price levels. In each case having identified the historic stock price level and the cWave based indicated bottom price level associated with that date, you then have to partition the range between those two prices using whatever step size you believe to be reasonable (perhaps 25%) and then compare the current dates price to see if it is below any of those down step price levels.
On identifying potential candidates you then have to make a judgement whether the stocks relatively lower price is justified, may continue lower, or has the potential to recover (a good sign is if the stocks price has already been exhibiting some relative strength). If you believe that the potential for a recovery is good then that's a candidate stock that can immediately be bought into with part (or possibly even all) of allocated funds according to the indicated cWave based calculated amount to invest (as though you'd originally starting monitoring that stock back at the historic date and have observed a current buy signal). Repeating such plays across time might provide actual total returns that approach that of the 150% type annualised ROCAR level as indicated in the iBox example.
For US stocks Tom's Perverse PIC list candidates might be a good place to start. That said I can't speak from personal experience as I don't trade individual US stocks, only UK stocks.
But be warned, some will not work out as expected and you may end up being 100% buy-and-hold in a stock that has a lower price than your averaged down price level, so you either have to be prepared to only pick stocks that you are reasonably content to possibly hold for the mid to longer term, or add in additional exit at a loss conditions for when things don't work out as expected.
Trading individual stocks in this manner is much more speculative (higher risk of a loss go hand-in-hand with potential higher rewards) and therefore should perhaps only be applied to part of your overall total investment funds.
No guarantees, and don't blame or seek recompense from me if it doesn't work out. I'm not registered to provide financial advice... consult an independent financial advisor before using .... and all the other usual disclaimers apply.
Clive.
OT : Illusions
No ones noticed the 3D optical illusion effect in the iBox vWave vs cWave graph yet then.
The red on blue bars, on my monitor at least, give a 3D type effect I had thought. But then maybe its just my ageing eyes.
There are a few others you can check out over on Gummy's web site
http://www.gummy-stuff.org/illusions.htm
My youngest son loves the (stare at the 3 dots for 30 seconds...) Jesus one.
In the article mentioned by AIMster this AM one of the most important parts was a simple statement that avoiding underperformance in the short term is key to achieving long term outperformance.
I find this true in my own account many time. If the market drops significantly and my management model keeps my losses smaller, then I don't have to 'outperform' to such a great degree on the next uptick. Maintaining the relative lead through the next swing of the pendulum builds the long term outperformance.
One thing I have noticed in the past is that in attempting to limit downside losses, such as through holding part cash part stock, the risks can be higher than you might initially anticipate.
If you burn cash and end up 100% in stock too quickly when the stock price continues further south, then you end up with comparable downside losses from that point to that of buy and hold, but may have only partially gained from any previous upswings that buy and hold enjoyed full exposure to when you were only partially invested in stocks and stock prices were rising.
LD-AIM for instance magnifies the downside risks by effectively raising the bottom price at which you become 100% invested in stocks. Classic AIM also has a deficiency here as typically the next buy price level after a previous buy trade is too close (typically the first buy after starting an AIM account is around 15% below the start price level, consecutive buys after that first buy however typically occur at around a 2% or 3% lower price than that of the previous buy trade price level).
This is a principle reason why I personally prefer a bottom up approach of identifying a bottom price level at which I'm relatively content to become 100% loaded in stock at and structuring my trades according to that value. Equally it's the reason why I use a modified D'Alembert style that only starts investing after an initial downward price step rather than investing straight from the start price level.
By delaying by one downward step the cost averaging is improved. For example a 6000 start price level and 5000 and 4000 lower levels using a straight off approach would invest 33.3% of funds at each of those levels, an average of 5000 overall. Delaying by one step down means the average lowers to 4500 (50% in at 5000 and a further 50% in at 4000).
When the stop-loss component manages the Ladders cash reserves, then having 0% invested in the Ladder at the offset doesn't mean we miss any gains if the stock price rises, just that those gains are trapped by the price appreciation (stop-loss) engine instead, possibly even to a greater extent.
Clive.
Re Gapping
My previous posting reminded me of a element that isn't considered that often on the AIM boards - Gapping, where the stock price moves significantly through a target buy or sell price level.
For AIM gapping generally works to your advantage, you end up buying stock at a lower price or selling at a higher price.
For a stop-loss based strategy however gapping works against you, and potentially significantly so. This is where the six-sigma, black swan type issues come into play. A strategy that might seem viable on paper gets totally wiped out by the infrequent large moves.
I struggled with this for quite a while and ended up using guaranteed stops for a period of time, until I realised that I needn't pay an insurance premium and that instead a simple solution resolves the problem.
My January stop-loss position is a good example, I targeted a 5% stop loss, but actually encountered a loss over twice that amount on that position. But in rolling that position into my April's start position the loss was in effect mitigated.
I also now use manual stops based on end of day prices. If the stocks price falls below my target 5% stop loss price level at any time during the day, then at the end of day I close out the position, even if the price has subsequently rebounded back up above the stop loss price level.
Over time this simple end of day action means that some positions are stopped at a greater loss, whilst others are stopped out at a lower loss or even when in profit. Over time however the overall effect is a combined average stop loss level very close to my 5% target level across all stopped positions.
Hi Tom
one of the most important parts was a simple statement that avoiding underperformance in the short term is key to achieving long term outperformance.
One of the reasons for my long term IH signature of A penny saved is a penny earned - Benjamin Franklin
I'm already signed up to John Mauldin's newsletter and had already seen the article before AIMster's posting.
I've used a stop loss based strategy along the lines as outlined in the iBox for many years now as the core of my investment style, and that's performed much the same as your Fraternity account by avoiding a significant amount of the the 2002/03 declines. Doesn't make as much during Bull periods, but doesn't lose as much during Bears.
I know that you base your Fraternity account on iWave as I've followed your historical reports with great interest in the past. Nice to seen an update, thanks.
I've personally found that simple time diversification is just as good as any other more complex technical analysis based arrangements. One position started each month with 1/12th of the total funds, 12 overlapping year long positions, each with a 5% stop loss or 12 month time-stop. When stopped the accumulated dividends and cash deposit returns help counter the year on year total loss.
So far this year January's stopped out, but I rolled that failure into April's start. Feb through April are showing current gains (having been started at 5851, 5745 and 5430) of 6%, 8% and 14% respectively as of the present time. I haven't started May's position yet, but will do over the next week or so as I'm moving from month start position opening to mid month based openings. I may be wrong but the feel I get is that the start of each month is more active, and that moving to mid month will avoid that additional volatility/intensity.
The stop loss plays serve as my price appreciation capture and downside loss limitation component parts. AIM like volatility and downside cost averaging plays potentially add to that investment return.
Best regards. Clive.
Hi Clive, Re: Performance enhancement.....................
In the article mentioned by AIMster this AM one of the most important parts was a simple statement that avoiding underperformance in the short term is key to achieving long term outperformance.
I find this true in my own account many time. If the market drops significantly and my management model keeps my losses smaller, then I don't have to 'outperform' to such a great degree on the next uptick. Maintaining the relative lead through the next swing of the pendulum builds the long term outperformance.
Looking at one graphic should give an idea of how this works:
The lowered asset value decline during the 2002-2003 decline allowed the account to be in better shape going forward. Mild underperformance through 2006 and up to the market peak in 2007 still left the account leading the NASDAQ Composite. The more mixed decline during late 2007 through do date affected both accounts but should let the managed account again possibly maintain or out perform going forward.
As the cash cushion rebuilds the account will, on the short term, probably start to lag the index again. However, that will also probably coincide with another market top. That will again keep the account's decline lower than the index's.
So it seems it's a matter of maintaining the lead and adding slowly to it over time. A small performance enhancement during market declines can achieve larger long term rewards.
Best regards, Tom
For reference, using the 13000 current Dow, 11,500 first down leg (go 50% in) arrangement as per outlined in the iBox example, such a 13% up, 11.5% down (1.13 * 0.885 = 1) pair has historically encountered one round cycle per annum since 1928 when using time value discounting.
So if you had bought 50% in and then sold 50% out making a 13% gain once each year that's an average volatility capture element benefit of 6.5% p.a. On top of that you would also have benefited from an element of inflationary uplift (capital appreciation benefit) provided by the stop-loss side of the pair.
Even assuming just cash deposits being used at a rate of 5% and assuming an average 25% volatility capture stock exposure level (26% ROCAR) then such a pairing would have averaged around 6.5% + ( 0.75 * 5% ) = 10.25% p.a. which is near comparable (or in excess) to the total return that 100% buy-and-hold achieved.
And that's for something as mundane as the Dow. With a blend of individually managed more volatile holdings likely that volatility capture benefit would be enhanced.
D'Alemberts.
AIM has many common features to D'Alemberts betting sequence, but played on both sides at the same time, as though a two party partnership had split their combined funds and one was playing a roulette tables reds using D'Alemberts whilst their partner played blacks.
Reflected into stocks this means one side starting 100% loaded in stocks and playing the short side whilst the other starts 100% in cash and plays the long side. Or simply, as per AIM, collectively starting with 50% stock and 50% cash.
However playing just one side, the long side volatility capture (which entails starting with 100% cash and 0% stock exposure) with twice the sized bankroll will generally perform equally to that of playing both sides (separately playing both the long and short side volatility capture).
I've updated the iBox to reflect greater detail as to such a single sided (long) view.
Being 100% in cash however loses out if/when stock prices rise, so to accommodate price appreciation capture we have to do something else with those cash reserves. A stop-loss based style is ideal for this purpose as that will typically get us back into cash relatively quickly as stock prices start to decline, freeing up the cash for the volatility and downside cost averaging components to do their work. Yet provide us with acceptable gains when prices generally rise.
The tighter level of downside indicated by cWave means that we trade larger amounts than might be indicated by more conservative (lower) bottom price level indicators, which in turn can significantly magnify the volatility capture gains.
Unlike in the casino where if you encounter a sequence of losers you can lose your entire bankroll, when applied to stocks the worse case scenario is that you end up 100% in stock bought at a cost averaged discount level relative to the initial start dates price level. The price may remain below that bottom level for a period of time - so you become a buy-and-holder who bought in at an average price level somewhat close to that 'bottom' price level. Ultimately however the price will again rise back up and through the bottom price level at which time you recommence volatility capture trades.
Clive.
RE: Ladder and Stop-Loss
Generally collective volatility is indicated by 1/SQRT(n) where n is the number of stocks.
For example 16 diverse stocks each allocated the same initial capital amount have collective overall volatility of 1/SQRT(16)=0.25 (25%) that of the volatility of a single stock.
Which is the better?
$30,000 (initially $20,000 stock, $10,000 cash) invested in each of 16 different (diverse) individual stock AIM's using Classic AIM settings (10/10/5) or $480,000 (initially $320,000 stock and $160,000 cash) invested in a single Index AIM using LD-AIM scaling of 4 and a 4 times smaller hold zone to account for the reduced (25%) volatility.
I suspect that generally both are comparable on a risk/reward basis overall. Yes a single stock might fail (6.25% loss against the total fund value), but equally another single stock might double up in value or more to counter that failure.
However a principle risk is that when AIM'ing the Index no account is given to scaling down the hold zone nor scaling up the trade size (LD-AIM) to counter the lower volatility, and instead Classic AIM settings are used - which installs the risks associated with lower overall investment returns (but has the benefit of lower overall risk).
In practice the difference between scaling and not scaling is relatively small. Generally AIM's volatility capture benefits amount to between 0.5% and 2% of the total fund value. Perhaps something like 5% of stock value trade size = 3.3% of the total (stock and cash) value (assuming 66.6% stock/33.3% cash average) being round-robin (buy/sell paired) twice per annum (4 AIM indicated trades, 2 buy, 2 sell) against a 30% hold zone (buy to sell price range). 3.3% * 2 * 0.3 = 1.98% of the total fund value volatility capture benefit. (These figures are demonstrative only, more commonly AIM's buy and sell pairs occur over periods of years rather than within the same single year - perhaps 4 sells one year, 3 buys the next year....etc.).
When no trade size scaling/hold zone size reduction is implemented for an Index based AIM then perhaps only 25% of that volatility capture benefit is achieved - providing a lower 0.5% of the total fund value volatility capture benefit.
The typical conclusion drawn being - '..that AIM'ing an Index fund is not good - the volatility is too low - not enough trades...' etc.
Simply the hold zone is often too large (and the trade amounts too small) when AIM'ing index funds and volatility capture benefits are missed.
What I've personally done to address this is to strip out AIM's volatility capture component and construct a ladder that's similar to Don Carlson's EZM rebound column. The ladder is constructed at the micro AIM hold zone size (I'm more recently using 0.1% price movement steps). The ladder also is constructed to scale up the trade size in a manner whereby the bottom rung (the point at which 100% all-in stock is reached) is pre-calculated (known in advance). Each rung has an indicator as to the next buy and sell points from that point - calculated based on scaled down conventional AIM hold zone values.
I don't trade each and every rung, but I'm free to trade at any point whenever I deem fit based on the amount the stocks price has moved since the last trade, the trade gain that would be realised (and associated trade costs), my view of the possible trend continuation or reversal etc.
Which leaves me free to focus on cost-averaging multiple steps. If for example I can cost average 20 buy steps into a single purchase at the lowest of the 20 purchase price levels then I've achieved some benefit - the same goes for cost-averaging multiple sales. I personally see such cost-averaging to be the primary potential to add the greatest amount of alpha (surplus) investment return benefits.
Generally the initial funds at risk are very low, only if the stock price falls significantly are larger amounts invested. The ladder singularly seeks to trap volatility capture benefits. In association with the ladder I therefore use a stop-loss based strategy that has much more invested from the offset, but sells out relatively quickly when prices fall. The stop-loss and ladder combined have a negative correlation in the sense that as one sells out so the other starts buying. However the sell out occurs a lot quicker (stop-loss) than that of the cost average based buying (ladder), which is generally a good thing during a Bear phase.
In practice actual market orders placed at any one time reflect the overall sum of the two styles.
Its all in the very early practical application stage at present, but I've set a target volatility capture goal of 6% of the total fund value as I believe that cost averaging multiple rungs can significantly amplify conventional AIM's volatility capture benefits. For the stop-loss style I've set a goal of 9% such that the combination of both style is a 15% overall target (of total fund value (cash/stock)). I'm also still running in parallel with conventional AIM holdings.
In view of an expected average of 70% overall stock exposure I'm further considering applying elements of leverage to lift overall average stock exposure levels closer to 100% levels (around 50% leverage) as much of the leverage costs (cost of debt) can be internally financed via the cash reserves (periodic external cost of debt will however at times be required). Based on 8% cost of debt, 5% cash rate and a half and half internal versus external debt rate (6.5% average overall cost of debt), I suspect that the 15% target return could be lifted to approaching that of a 20% total return. I am however waiting until I'm comfortable enough with the basic unleveraged returns before implementing the leverage element. Most likely I'll also align periods of leverage with that of favourable vWave indicated levels.
I feel that the targets are not too stretched and that potentially the rewards could be even higher as the volatility capture target chosen is somewhat conservative in my opinion.
Practical running is a breeze. My stop-loss style and ladder are all pre-calculated and its just a question of a few minutes position checking time once each day (periodically with a market order being placed).
I'll be posting periodic updates here to advise of how the live run is progressing. Hopefully I'll be contender at matching or exceeding Firebird's 25% ATTIC target.
Clive.
Thanks Tom.
Possibly more volatile shorter term cycles to come - that would be fine with me.
Another buy back in would leave me sitting on an effective yield of nearly 15% relative to the amount originally deposited a few weeks back into this years ISA.
Best Regards. Clive.
Congratulations Clive,
The Financials here in the U.S. are an interesting play. Everyone seems to be waiting for the 1st Qtr revenue and income reports from the sector. It's pretty much a sure thing that the reports aren't going to be rosy. Every participant will probably try to write down as much of their bad news as possible.
So, with that in mind, we probably should expect a relief rally after announced earnings/loss for the qtr.
TV
Out of Lloyds again mid morning at 4.70 for a 15% gain.
35% combined gain in 5 weeks - 2 round trip trades.
So far on an annualised basis this is running at 2100%
Lloyds is one of the more conservative banks and as such is less likely to be one of the failures.
Playing the banking crisis volatility is enabling me to turn a nice little profit. Long may it continue.
As anyone who uses a rebalancing based style (such as AIM) knows, the cash (or Bond) reserves generally act as a drag. Countering that however the rebalance benefits generally uplift the stock value return.
The way I personally address the cash-drag effect is to :
1. Split the total fund into STOCK and BOND parts using vWave (Bond side = vWave cash indicated value).
2. Split the STOCK side into a number of individual AIM accounts, initially all near equal in capital values and each assigned their own cash reserve. I use LD-AIM on these in order to maintain an acceptable minimum trade size versus trading cost ratio. The stock I personally prefer to AIM here are good quality, large household name companies with acceptable fundamentals (debt ratio etc.), selected from a diverse range of sectors (diversity) and that pay above average dividend yield.
3. For the BOND side I again (Classic) AIM even higher yielding stock (or whatever is paying a good income and has potential for level/growing price potential).
4. Whilst each individual AIM has its own cash reserve in practice I pool all of those cash reserves and trade those funds using a Managed Future style that primarily focusses on downside loss limitation and which generally averages 50% stock exposure, 50% cash exposure and provides a 8% average return.
Collectively the overall account averages around 80% stock exposure, generally utilises stocks throughout, holding Value type stocks (which generally outperform over the longer term) whilst using a combination of Hedge Fund (AIM) and Managed Futures styles.
As vWave is somewhat akin to an AIM of the market wide Index, in effect this structure benefits from AIM rebalance benefits at the top level (vWave), on the single AIM Bond side (Classic AIM) and within each of the individual Stock side AIM accounts (multiple LD-AIM's). In addition to this I also rebalance between Stock AIM's, previously using a simple once yearly rebalance style, but more recently using target based rebalancing (when any one stock reaches 1.5 times that of the median stock value then 20% of that stock is sold off in order to fund the purchase of another stock (or uplift a relatively under-performing existing stock holding)).
My personal experiences are such that this style with its multiple rebalancing benefits over time counters cash-drag (and more). Yet a further benefit is that the overall account encounters lower volatility than that of the market Index and as such generally value-adds compound benefits over time.
Back into LLOY again this morning at 4.0725, 1998 stocks.
So the recent addition of this years 7K ISA coupled with the previous trade in effect means I've picked up 1998 LLOY stock at an average price of 3.50 within the TDW ISA account - which is below the 52 week low price for LLOY (and a rather nice forward dividend yield of nearly 11%)
My intent is to amalgamate this in as part of my virtual Bond component (vWave indicated cash reserve side) based on a AIM of quality high yield stock - in a somewhat similar manner to how Tom uses a AIM on CHY for his retirement accounts 'Bond' component.
Hi Clive,
Congrats on your sell today. Buying is the work, selling
is the fun part. Now turn up the Pioneer and take the paint off the walls. :) Ken
Congratulations Clive, Nice to know the Sales Dept. kept working while you were out having your noon meal.
Best regards, Tom
Returned from lunch to see that LLOY sell limit order just got filled 5 minutes ago.
After returning home mid-morning today I see that LLOY had breached 4.65 but has since fallen back to 4.55.
According to my Newport style AIM calculator
http://www.jfholdings.pwp.blueyonder.co.uk/aim_gtc.htm
the next sell is at 4.62. I didn't however have a GTC in place as my intent had been to hold the stock for its 9.5% forward yield. In view of the short term gain in LLOY however I've decided to go fishing and have placed a limit order to sell at 4.65.
These LLOY holdings are £7000 worth of this years ISA allowance, so I'm using a LD-AIM style here and looking to sell out all of the 1764 stock purchased on 15th Feb (bought at 3.95 so a potential 17.7% gain in one week in a tax-free account).
Lloyds/TSB tripped its AIM indicated buy limit order today at 395p. Adding more into a good quality blue-chip at a bargain price level IMHO.
I've recently started moving across to TD-Waterhouse as my principle broker. First order to be tripped under the new account - proving its working OK. Did notice however that the order fill didn't actually register until some 15 minutes after the limit priced had actually been breached.
I like their account linkages - having set up both an ISA and linked savings account with them.
Had quite a few problems with moving cash into the accounts though. Online limits resulted in funds being bounced back out with no warning, despite having apparently transferred OK. A telephone call after having noticed the absence of funds in the account however quickly resolved the problem.
They're not to on-the-ball with W-8BEN's Had to prompt them to send me a form despite opening the account with a trading US stocks and/or in dollar amount option.
I had been toying with the idea of buying some CHY at the recent lows as an addition to the virtual bond side of my overall AIM account, but overall the 9.4% net after (basic rate) tax forward yield from Lloyd's wins out.
Hi Clive, I think KARW was going to create one for their market in the Netherlands.
TV
Neil, With a UK and US Relative Valuation, can an Aussie RV be far behing
Didn't a German also indicate they were working on a RV also a few weeks back?
Hi Neil, With a UK and US Relative Valuation, can an Aussie RV be far behing?
Best regards, Tom
Hi Clive, Re: Relative Valuation....................
Here's the U.S. Relative Valuation as of the end of last week's data:
A similar tapering off of P/E but here in the States we're also seeing the reduction in shorter term interest rates. The dual effect has been to drop from very high risk to low risk now.
Best regards, Tom
Hi Clive,
Good Luck with the UK version of the AIM board.
When I was over there in July I purchased stock for my father so he could use AIM to get a feel for it.
I purchased Babcock Ltd (BAB), I wanted something that wasn't going to crash and burn and BAB seemed to be a fairly diversified company.
All I have to do now is get him to overcome the psychology of putting some more funds into a stock that has fallen in price.
Regards
Neil
Hi Clive, I somehow missed the start of this new board for the U.K. This helps put the "International" into the name of our Equity Warehouses!
Best regards,
Tom
President - Veale International Equity Warehouse
Hi Clive,
Good luck on your board, I'll be boardmarking it and look forward to your ideas.
Charlie
Thanks Ken.
I see you have a risk chart posted with suggested cash positions
It's my fallback alternative for Tom's (now private) iWave that I've been maintaining for around a year now.
http://www.gummy-stuff.org/markets.htm - gives a feel for how global markets generally move in lockstep - so its not that surprising to see that recent iWave suggested cash levels of around 53% (see http://investorshub.advfn.com/boards/read_msg.asp?message_id=24171198 ) more or less matching the recent 50% level indicated by DY6/7PE.
DY6/7PE provides an indicator of equity/cash levels to carry and current trend direction, whilst PE+BoE (short rate) provides an indicator of bounds.
Congrat's on being the first.
Best regards, Clive.
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