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Hi Adam!
Quote:
“What you do is a step above that by actually buying stock at that level to decrease the cash level. So when you buy the stock amount do you increase the PC by the value of the stock or by half of it?”
I don’t use Portfolio Control at all. So there is nothing to increase. I devised my own method that tells me how much and when to buy and sell.
Doing Vealies and not participating in the price rise and locking in those paper profits doesn’t make sense to me at all. Imagine the stock rises, and you do Vealies as it goes up. Then price reverses, comes down to the same level where you started to do your Vealies. At this point your account hasn’t changed in terms of profit or loss. (Maybe you are even showing a loss if you were buying more shares on the way down). You are back where you started. But you could have done a much more profitable thing instead. You could have bought shares instead of doing Vealies, to get your Cash reserve to the proper level. If the price does the same thing as in the first example, you have a realized gain because you were locking in gains on the price rise. In scale trading being proactive is much more profitable than sitting on the sidelines and doing nothing.
Vitali
Re: Hi Toofuzzy!
Thank you for providing the input regarding my issue.
"QUESTION :
Assuming you have been selling and raising cash while a security has been going up, why would you want to reduce cash and buy more when a security is at a high ?
Just wait for the next market crash to soak up the cash."
That's a good question and good advice. Normally, when my cash reserve is only slightly out of balance (1 percent or so), that's what I would do. I would sell a little less when a new sell order is generated, in conjunction with more aggressive buying when a buy order is generated. This technique brings Cash reserve % to alignment pretty quickly and easily. And it stays in alighnment nicely.
Once in a while though, my cash reserve goes out of balance drastically by 10 or more %. This happen because the channel inside of which I trade has shifted up or down substantially. My Cash Reserve % is calculated based on the relationship of the current price to the channel’s upper and lower levels. In that case I can’t use the technique described above, or rely only on waiting for the price to come down to a more favorable level to make a large purchase of stock. Because the price may not fall in the near future. Instead it could be rising for months, and you end up with a missed opportunity. I don’t want to turn into a gambler.
Let’s talk briefly about how we make an initial investment in the stock market. If you ask Mr. Lichello when is the best time to start investing in the stock market, he would say right now is the best time to invest. Then why would I wait for the price to fall to make an initial investment? Also, when you get a new lump sum of cash that you want to add to your existing AIM engine, you normally don’t wait for the price to fall. You calculate how many shares you need to buy and buy that amount of stock at whatever the market price might be at the time.
When I have to purchase a large chunk of stock to bring my cash reserve to a new level, I treat these rare events as a new investment opportunity, and make the necessary changes at the price the stock is trading at currently. Otherwise what happens is I start hoping that the market would do something for me (fall in this case). And the market rarely does you favors. And I turn into an emotional investor like 95% of them out there.
I hope this answers your question Toofuzzy.
Vitali
Re: Help with Equation. Hi AIMStudent!
You can disregard my previous reply to your answer. I looked closer to your solution and figured it out. I changed sell to buy and it worked great. I can adapt this equation to whether cash reserve needs to be higher or lower. I'll just subtract larger number from the smaller.
What threw me off initially with your equation is the fact that the price in my spreadsheet had changed from the previous sell and the numbers were a little off. But like always your math is still top notch. Thank you for your help!
Vitali
Re: Help with Equation. Hi AIMStudent!
Thank you for taking a shot at this problem. I think you confused buying shares with selling shares. Your solution to the problem was selling shares, and I’m looking to buy shares to reduce extra cash. Let me clarify. When I have cash reserve at 59% cash to stock ratio, and want it to drop to 43.5%, I don’t want to sell shares. That would only increase extra cash and raise the cash to stock ratio %. I want to buy more shares to reduce extra cash.
When I’m talking about 59% cash reserve, I refer to cash to stock ratio. 59% in cash $1,179.80 and 41% in stock $819.81. If cash to stock ratio is 0% then for me it means I have $0 in cash and $1,999.61 in stock. (I hope this is how other people interpet this too.) If I want cash reserve to drop to 43.5%, I want cash to decrease from $1,179.80 to $885.50, and stock value to increase from $819.81 to $1,149.42. This would put cash to stock ratio right at 43.5%
As I input in my spreadsheet the numbers for buying new share amount at a specific price, the Cash to stock ratio changes automatically. Thus by trial and error, I concluded that I would need to spend $294.30 to buy 22.5 shares at $13.08 to get to that cash to stock ratio of 43.5%. I just don’t have the equation to get these figures.
My spreadsheet calculates the new stock price and adjusts the portfolio value accordingly. So that’s why $1,149.42 - $819.81 doesn’t equal the spent amount of $294.30, but instead $329.61. The stock price increased from the previous line of $12.54 to current $13.08.
I hope this makes sense to you AIMStudent.
Vitali
Need help with Equation to rebalance portfolio
Hello Everybody! I do scale trading, a variation of Lichello’s AIM. I manage each of the stocks in the portfolio separately with individual cash reserve for each stock. When cash reserve goes out of balanced I have to manually rebalance each stock. It’s tedious trial and error work trying to figure out how many shares I have to buy in order to bring the cash back to proper ratio. I use excel spreadsheet for this. For illustration purposes say I have Cash Value column with $1,179.80 and a Shares Value column with $819.81. The cash reserve column shows 59%. But my analysis tells me that I should have only 43.5% cash. I need to by stock worth 15.5% of my cash reserve. The purchase price for these new shares will be $13.08. What I end up doing is playing with share numbers in the buy column, trying to find out how many shares it takes at the price of $13.08 to lower the cash reserve from 59% to 43.5%. I gradually increase the number of shares until I find the right number, so that my cash reserve would show 43.5%. Sometimes it takes me 20 tries to get it right. There must be a better way of doing this. My goal is to have an equation where I input the new cash reserve ratio of 43.5% and the stock purchase price of $13.08 and have the excel spreadsheet calculate how many shares I should buy to get to my new cash reserve ratio. I hope someone here can help me figure this out.
This message board has been very helpful for me in the past. I’ve learned so much from you guys. Thank you for your help in advance. Happy Investing!
Vitali
Hi everybody! Re: Lichello Video
I'm glad that the community here found Robert Lichello's video useful and interesting. I agree with Tom that it is a great introduction to the AIM concept for those unfamiliar with it. And good idea placing the video link at the top of this page.
Vitali
Meet Robert Lichello in person. Video of him giving an interview about AIM.
Hi everybody. I came a cross a gem, a video on Youtube of Mr. Robert Lichello himself talking about his AIM strategy in an interview video recorded in 1985. I've read Mr. Lichello's book several times, and always wondered what the author looked like and how he spoke. I've never seen a photograph of Mr. Lichello, until now. With this footage we can all meet the genious in person, well almost. Enjoy!
Sorry if this topic has been posted in the past by somebody else already.
Hi Toofuzzy! Log VS Linear scale…
“…but why bother for the trading signals if the answer is the same?”
The answer is not the same Toofuzzy. The differences between log and linear scale charts go much deeper than just visual.
Take for example a price range between $1.00 and $100. Let’s say I want to be 50% invested when the stock price sits at 50% between the top and the bottom of the range. On a linear scale that 50% mark is $50.50. On a log scale it is $10.00. We have over 40 dollar price difference between the log and linear scale. The difference is even greater when it comes to cash allocation. With a $10,000 account, the linear scale would tell me to invwest $5,000, whereas the log scale would tell me to invest $1,483.54.
“You can always take the values and put it on the log chart.”
What values? $5,000 or $1,483.54?
Let’s say my strategy is to invest money in 10 equal portions of the total amount of $10,000, which comes to $1,000 for each potion. I also want to spread out my equal dollar portions invested across equal portions of the price movement of a stock. So I divide the total price range of a stock into 10 equal parts. I will be investing 1/10th of my cash into each part. Seems simple enough, right? On a linear price chart, assuming we have a price range between $1.00 and $100, 1/10th of the scale will be roughly $10 per step. So, working with the capital of $10,000 we invest $1,000 on the first step at $1.00 price level. On the second step, at $10, we invest another $1,000. On the third step at $20, we invest $1,000 and so on. As for the sell criteria, we want to sell each portion when the price reaches the second step. So, our round trip equals one step, or $10.00.
Now let’s look at the profits we can expect to make using this linear scale. This is where the rubber meets the road. The profit we have made on the first step is $9.000. The break down of the math is as follows: The first purchase of 1,000 shares at $1.00 per share for a total investment of $1,000, with the price increase from $1.00 to $10.00, a $9 increase (1000 X 9 = $9,000 profit).
The profit from the second step is only $1,000. We bought 100 shares at $10 for $1,000 invested. Price went from $10 to $20, a $10 increase (100sh X $10 = $1,000 profit).
The profit from the 3rd step is $500, which is even less than profit from the second step. We bought 50 shares at $20 for $1,000. The price went from $20 to $30, a $10 increase. (50sh X $10= $500 profit).
I’m going to skip the other steps and just give you the profit of the last 10th step. We bought 11.11 shares at $90.00 for $1,000 invested, and sold them at $100 price, for a whopping profit of $111.
As you can see, we were investing the same amount of $1,000 on each step of the way, but our profits kept diminishing from $9.000 on the first step to just $111 on the last 10th step. Note that on each step the price increased by $10, the same amount every time. That’s linear scale for you at it’s best.
Log scale doesn’t have any of these issues.
Vitali
Hi Tom! Log vs Linear...
Yes, like that. You got my point.
Vitali
Hi Toofuzzy! Why log scale and not linear…
I use log scale because linear chart doesn’t make sense to me. If you look at a price range of say $120 to $127, about a 6% difference it may look like an inch on my log scale chart.
If you look at the same 6% price range at a much lower price level of say $1.88 it would look like a flat line. If you were to stretch that line to be an inch wide just like in the above range of $120 to $127, it would be about 700% price difference. It's not such an extreme and uncommon example. I study stock charts that go way back into the past where a company was priced just a few pennies. For me a linear scale chart distorts the truth.
Any newbie looking at the price axis of a linear scale chart will see a ruler/division lines and immediately associate it with a traditional ruler that measures distance. Common sense will tell them, 1 inch is the same distance no matter where you look at the ruler. They will apply the same logic to the linear stock chart. They will think if a price moves from one line to the next, it would mean a fixed amount of dollars earned or lost no matter where you look at the same unit of distance. But they will be wrong. Common sense logic cannot be applied to linear chart. Linear chart distorts reality.
As I invest money, I want to get a visual feedback or representation of how my profits or losses are growing. For me that’s the number one purpose of a price chart. A linear chart completely distorts that representation. I want to have a price chart where a 1 inch price movement here affects my account in the same way as a price movement of 1 inch there. That’s why I do all my calculations on a log scale.
Vitali
Hi AIMStudent! Excel Spreadsheet...
Your instruction solved the issue of an extra step. Thank you! Now my spreadsheet looks nice and tidy.
Vitali
Hi AIMStudent, Excel spreadsheet.
You were right, I did confuse dollar amount and Log value. After applying your fix the equation started to work beautifully. Thank you so much again. You saved me from a lot of frustration. Some day I'd like to understand math as well as you.
One more question. How do I combine these two equations into one:
10^2.0 = $100 and [100% * (LOG(100.00 - LOG(1.00))] + LOG(1.00) = 2.0
so that they take up only one cell in my spreadsheet? Right now I can only do it in two steps, and two cells.
Vitali
AIMStudent, thank you for a fast response. I checked your equations and the first one with linear scale worked perfectly. Thank you.
Unfortunately I found a problem with the second one - Log equation.
Dollar Amount as Log = [Desired % * (LOG($ High Price) - LOG($ Low Price))] + LOG($ Low Price)
I tested it multiple times and it produces the wrong results. For example:
If the high price is $100 and the low price is $1.00, and I input 100%, the result I get is $200. It should be $100, not $200 because my high price is $100 at the 100% top. There is no $200 in my price range between $1 and $100.
Is this normal behavior or did something go wrong here?
By the way, when I did the same test with the first linear equation you provided, I did get the correct $100 answer.
Thanks!
Vitali
Hi Everybody! I’m working on Excel spreadsheet to help me with scale trading calculations. I’ve run into a math problem I can’t solve on my own. I hope maybe someone here knows how to solve it.
I do a lot of stock’s price range calculations. Currently I use the following equation to figure out the percentage of current stock price in relationship to its historic top and bottom range. ( LOG (current price) - LOG (top of range) ) / (LOG (bottom of range) – Log (top of range) ).
With this equation all I do is input the current stock price and it tells me where that price is in relationship to the top and bottom price range expressed in percentage terms. It’s very useful.
Now instead of entering the stock’s price, I want to input a specific percentage of the range and have the equation express it as the stock price. For example, let’s say we have a historic price range of a stock with the low of $16 and the high of $43. $16 is 0% and $43 is 100%. I want to be able to input into the equation a number 29%, and have it tell me where this percentage falls within the price range of $16 and $43. Express 29% as a specific price level. Also, it has to be calculated using a Log scale. Is this doable or unrealistic to accomplish?
Thank you in advance if you can help me with this.
Hi Clive!
Thanks for yet another great explanation example and the excel document.
I agree that the older we get, the faster time flies. Time doesn't take pitty on anyone.
Vitali
Hi Adam!
I tested it and the math really works. It would have taken me a while to figure out how to do the PC increment like that. But your genius saved me time. Thank you for helping me and taking your time to do this example.
Vitali
Toofuzzy, thank you for this clarification.
Vitali
Thank you Toofuzzy and Clive for your examples. Now I have two ways for doing the same thing. This is very useful.
Vitali
Hi Firebird400!
Thanks for the update and for taking your time trying to find it. Appreciate it. I'll be patiently waiting for the good news.
Vitali
Hi Adam! Thank you very much for the formula. It's going to be very useful for me.
I have a couple of questions:
At the start of the formula there is a 1+. What does it mean? Also, at the end there is /100. Why divide by 100? Sorry. I'm not very technical in math and Excel.
Vitali
Thank you Clive for sharing your personal style of investing. I must agree that it is very unconventional.
It's just so wrong to be abusive towards someone just because they have a different way of investing. Everyone has a right to be different.
Vitali
Hi Tom!
I agree. That's a great benefit in knowing your next limit order. Is it possible to calculate the second buy limit order, below the first one? Do markets ever crash that low in one day to ever have the need for a second buy limit order?
Vitali
Toofuzzy, thanks for clearing that up.
That's a good point about "Anything you change has unintended effects." I'll keep that in mind.
Vitali
Clive, you are welcome to butt in any time. :)
Thank you for your thoughts and advice. I was confused about your math though.
Quote:
"If for instance you are performing monthly checks and inflation is running at 2%/year then for monthly ... 1.02^(1/12) = increase (multiply) PC by 1.0016515813 each month."
I'm not very strong in math. Can you please demonstrate how to do this equation on a simple calculator?
If the inflation is 2%, where did 1.02 come from? And what does it represent?
Vitali
Thank you Tom for explaining this topic.
Vitali
Hi Clive!
Quote:
"For me, I no longer really require AIM."
That is highly impressive and commendable Clive. I only wish that some day I could reach your level of skill.
Do you find yourself trading less often now compared to what a normal AIM program would suggest? Do you use any kind of rules for percentages or amounts traded?
Vitali
Hi Adam! Thank you for sharing with me your knowledge and experience. This is valuable information. Everything you said makes sense.
Let's talk about the technical side of increasing PC.
I'm thinking about taking the 20% annual PC increment and dividing it either by 12 months or 365 days. Then I can increment the PC by a small fraction each day or month, in order to prevent a large and sudden PC jump at the end of the year. I don't want the PC increment to take effect only once a year.
I would like to automate the following: Whatever date I enter into the spreadsheet the algorithm should know how many days has passed since the previous trade, and it will increment PC by a proper value. The problem is each month has a different number of days. Maybe assign each month an average number of days instead of an actual number. Any thoughts about how to program this?
Vitali
Hi Tom!
I understand now that I first must figure out how to pre-calculate at what price AIM would generate the next buy/sell order, before I can use the order value as a percentage of Portfolio Control.
Thanks!
Vitali
Hi Firebird400!
Last month you said you have the EZ-Money program from Don Carlson, along with the spreadsheet and instructions. Since Don's passing, no one else has these instructions except you. All hope is on you. I would really appreciate it if you could share these instructions with me and other members of this board who might need them too.
Please get in touch with me via a P.M. Thank you!
Vitali
Hi Tom!
This is very interesting, but it's still confusing to me how to calculate the Minimum Trade Value as a percentage of Portfolio Control.
When calculating SAFE, instead of using 10% of the stock value I should use 10% of Portfolio Control? Should SAFE from now always be a percentage of PC in all other calculations when investing?
It would be very helpful to understand it if you could do a math example of all the calculations involved to get a market order. Starting from today's price and Portfolio Control.
Thank you Tom!
Vitali
Toofuzzy, thanks for your thoughts about REITS. I was thinking the same thing. They are not suitable for a low risk cash alternative.
Vitali
Hi Adam!
Thank you for the summary of your investment strategy. It's very helpful to see different points of view on the same topic.
Do you increase the portfolio control value gradually on a monthly basis or only once a year? If there is a sustained bear market, is it logical during those times to also gradually decrease the Portfolio Control by 10-20% annually? Would this make it a mirror image of the bull market PC adjustments?
Vitali
Appreciate the help Tom!
Vitali
Appreciate the explanation Tom! It's very helpful.
Vitali
Thank you Clive for your thoughts and advice. This is very useful.
Vitali
Toofuzzy, you make a good point. I ended up with 0% cash in 2002 and 2009. So then, there is no such thing as too much cash. There will always be a time when it's needed.
"You can always put some of the cash in a short term bond fund."
How about REIT's (Real Estate Investment Trust) that pay 10% annual return? Or are they too risky?
Vitali
Thank you Tom for the example. It seems that it's worth using the changes you've made to AIM by the book. In this example were you using both split SAFE and Vealie? Do you implement any other changes?
Vitali
Thank you Tom!
This resource is very helpful. I'm learning a lot.
Vitali
Hi! I'm having an issue with AIM. When I back test the default AIM formula during a bull market, my cash reserve grows way too large. If I initially start with 50% cash, after a while it ends up being almost 90%. This diminishes future profitabiity. I’ve considered rebalancing the portfolio to bring cash back to 50/50 alignment, but this would mean buying more stock when the price is high. And this goes against AIM’s philosophy. I understand that I can start with 20/80 cash to stock ratio, but I prefer to not do that.
Is there an AIM technique or enhancement that can let me control or limit the selling of profitable positions? Thanks for any input.
Vitali
Great advice Toofuzzy. Thanks for the clarification.
Vitali