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Thanks,
I appreciate it.
Best regards,
Ray
This is the way I decide how many ACTUAL shares to purchase in an LD-AIM program and how many VIRTUAL shares to use in this same LD-AIM program.
The first thing to decide is what my settings will be. For instance, assume that this is a volatile stock and assume that I use the standard AIM-HI settings of 10% SAFE and 10% Minimum Transaction to this LD-AIM. However I usually differ from AIM-HI in that I do not use a SAFE amount for the Sell side of the equation.
The next thing to decide is how large I want my first Buy/Purchase to be. For instance, assume that I want my first purchase to be around $1,500. That means that my original Portfolio Control will be around 18,500.
The next thing to decide is how many Consecutive Sells I want before I am completely sold out of this program. Assume that the stock I want to purchase is down about 30% from its most recent high and looks like it is about to stage a recovery. If I do not intend to use any SAFEs on the Sell side of this program (creating a 30% Holding Zone for the program.....i.e. no Sell SAFE, 10% Minimum Transaction and 10% Buy SAFE), this would mean that each time I have a Sell transaction I would be selling 10% of the programs Total Shares (Actual shares plus Virtual shares). Since each Sell is about a 10% increase in program value (actually it is 11.11%) and I figure the stock has a good chance to recover back to its recent high (approximately a 30% gain), I would probably purchase 3 Sells to begin this new LD-AIM program.
An example of how this would work for a $10 stock:
With a Portfolio Control of 18,500 this means that the Total Shares to set up this LD-AIM program would be 1,850 Total Shares. This means I now have to decide how many of these Total Shares will be Actual Shares and how many will be Virtual Shares.
Please remember that I am buying 3 Sells worth of stock in this example and each consecutive sell is 10% of the Total Shares (Actual plus Virtual shares).
My first “Sell” would be 185 shares (10% of the original 1,850 Total Shares....Actual Shares plus Virtual Shares). This would leave 1,665 Total Shares in the program.
So, my next “Sell” would be 167 shares (10% of 1,665 Total Shares). This would leave 1,498 Total Shares in the program.
My last “Sell” would be 150 shares (10% of the 1,498 Total Shares).
This tells me that I need to purchase 503 Actual Shares to set up this new LD-AIM program (185 shares + 167 shares + 150 shares).
Now then, for me to have 1,850 shares of this $10 stock in order to create an original 18,500 Portfolio Control this means that after I have purchased 503 Actual Shares there would still be a deficit of 1,347 shares. This 1,347 deficit shares becomes my 1,347 Virtual Shares for use in this particular LD-AIM program.
So, when I set up this LD-AIM program after buying 503 Actual Shares of a $10 stock it looks this way.
18,500 Portfolio Control
$18,500 Total Stock Value (Actual Shares + Virtual shares of a $10 stock)
10% Buy SAFE
0% Sell SAFE
10% Minimum Transaction
1,850 Total Shares, which consists of:
(503 Actual Shares)
(1,347 Virtual Shares)
Please remember that these 1,347 Virtual Shares never ever change, but remains a constant number of Virtual Shares as long as I run this particular LD-AIM program.
If the stock went straight up with no intervening indicated purchases I would have my first sale of 185 Actual Shares; my next sale would be167 Actual Shares; my last sale would be the remaining 150 Actual Shares. At this point I would be sold out of the program after the stock gained approximately 30-35%.
To change it around a little bit using the same first Buy amount ($1,500), the same stock value ($10) and the same Portfolio Control value (18,500), assume that I want to be out of this program after the stock gained approximately 20%. In this case, I would make only 2 Sell purchases. I would purchase the first “Sell” of 185 shares (10% of the Total 1,850 Actual and Virtual shares), and purchase the second “Sell” of 167 shares (1,850 minus 185 sell = Total 1,670 Actual and Virtual Shares). I would not buy the last Sell of 150 shares which I used in the previous example.
In this example, I would purchase 352 Actual Shares to set up this LD-AIM program. This new LD-AIM program would look like this:
18,500 Portfolio Control
$18,500 Total Stock Value (Actual shares + Virtual shares of a $10 stock)
10% Buy SAFE
0% Sell SAFE
10% Minimum Transaction
1,850 Total Shares, which consists of:
(352 Actual Shares)
(1,498 Virtual Shares)
Again, these 1,498 Virtual Shares remain constant throughout the entire time the program is active.
The first decision I make is what my AIM settings should be....i.e., Buy SAFE, Sell SAFE, Minimum Transaction amount. The next decision I make is how large and acceptable the first Buy amount should be.
For instance, assume that instead of deciding that I want my first Buy to be approximately $1,500, I decide that $1,250 is a more acceptable amount for my first indicated purchase in this program. In this instance my original Portfolio Control would need to be approximately 15,000 and I would have 1,500 Total Shares (Actual Shares plus Virtual Shares of a $10 stock). Using the value of 2 “Sells” for my stock purchase the first purchase would be 150 Actual shares (10% of 1,500 Total Shares) plus 135 Actual shares (10% of the remaining 1,350 Total Shares) for a total of 285 Actual Shares. I would then give my broker orders to purchase 285 shares of this $10 stock.
This new LD-AIM program would appear as:
15,000 Portfolio Control
$15,000 Total Stock Value (Actual shares + Virtual shares)
10% Buy SAFE
0% Sell SAFE
10% Minimum Transaction
1,500 Total Shares, which consists of:
(285 Actual Shares)
(1,215 Virtual Shares)
One more time....as long as I am active in this LD-AIM program these 1,215 Virtual shares never change in my calculations.
btw, I used to use Toofuzzy's AIM calculator for my calculations and these purchases are what I seem to remember. My memory isn't as sharp as it used to be, so I could be wrong in my calculations. Hope we are able to use the AIM calculator again very soon.
Others have different methods of setting up their LD-AIM programs. Thought I would share how I set my programs up when I begin a new LD-AIM program.
Regards,
Ray
I have used some LD-AIM programs with a few of these in the past. Recently sold out of MIDU and TNA. IMO, the volatility of these ETFs make them well suited for AIM type investing.
Regards,
Ray
In the FWIW category:
The 21 day moving average for the Fear & Greed Index is now at 52 which places it in the "Greed" category. It has steadily been climbing higher for the past few weeks.
IMO, it is time for caution when starting new AIM programs.
Ray
Hi Clive,
Hope you are doing well.
Back in 1984 I was finishing up studying for the Chartered Financial Consultant designation. In one of our investing textbooks I was introduced to what they called the "Constant Dollar" method of investing. Some call it "Constant Value".
Basically a person takes their initial investment amount and makes buys and sells around that value....always readjusting back to the original value with their buys and sells. If someone invests $100,000 in a stock or fund then that is their "Constant Dollar" amount for the duration of the program. They can set up a rule that when it increases to $110,000 they will sell $10,000 to get back to the "Constant Dollar" amount. If it should decrease to $90,000 then they would buy $10,000 and get the value back to $100,000.
Since I learned this style of money management the Residual Buys created by AIM sort of play at my mind even though I try to ignore them.
I understand it is a feature (not a "flaw"), but I still haven't totally accepted it as a feature after all these years. Maybe one day.
Best regards,
Ray
Hi Tf,
I haven't fooled around any with Trend Following type strategies since I discovered AIM in 2004. I don't have the investing personality to be either all in or all out. That is why I was very happy to discover Mr. Lichello's book when I did. Sort of solved my problems with being all in or all out.
Not sure how to combine Trend Following with Contrarian Investing (AIM). To my way of thinking they are polar opposites. Maybe, as Tom suggested, just run the two different strategies and see how they perform in the future.
I guess the biggest way to modify the AIM formula to avoid Residual Buys is to adjust the Portfolio Control to the Stock Value after a Buy is made. That way it is almost like a person begins a new program after each Buy is made. I am still thinking about this one. Even though Residual Buys drive me crazy, I am not the type of person who likes to tinker much with something that is already working. This is still in the pondering stage for me.
Best regards,
Ray
Hi daisy42,
This is an interesting conversation to me. It is comparing two distinctly different investing styles....trend following versus contrarian investing....with respect to cash conservation and overall drawdowns.
Over the years in using AIM some have suggested on this board that one way to conserve cash and try to avoid "catching a falling knife" is to use a moving average crossover to determine if the stock decline has sort of "bottomed out" before making a cash purchase. When the faster moving average moves up and crosses above the slower moving average then a purchase could be made at that time. Of course, there are no guarantees that the stock won't turn back around and head lower, however the investor is acting on an indicator suggesting that the worst might be over.
Someone recently suggested to me that another way to conserve cash and make one's purchases more meaningful from a profit standpoint is to make the next consecutive purchase the same dollar amount as the most recent AIM directed purchase.
For example, using the AIM-HI method of 10% minimum transaction and a 10% SAFE on a $10.00 stock the first purchase would be made when the stock declined in value down to around $8.33....a decline of $1.67. The next "consecutive" purchase would be made when the stock dropped another $1.67, or down to $6.66 (which is $8.33 minus $1.67). The next purchase after that would be made when the stock declined down to $4.99 ($6.66 minus $1.67 decline). In addition one could also increase the SAFE amount to with each consecutive purchase in order to conserve cash.
Before discovering AIM in 2004, for about a year I tried to follow a Trend Following newsletter which used a 39 week moving average. The program also used a Relative Strength methodology in order to choose which mutual funds to purchase. However, the service selling the newsletter kept changing the rules. After studying numerous charts it seemed to me that such an investing system left a lot of money on the table and that the majority of the profits to be made came when more shares were purchased at lower prices.
Also, there seemed to be a lot of "whipsawing" around whichever moving average was chosen. The reason is because some of the more popular moving averages....50 day or 200 day....will sometimes create support and resistance areas and a tug of war between the bulls and the bears. The newsletter suggested using "Collars" around the moving average to hold down the whipsaws which occur. For example, suppose the ETF or stock crosses down over a 200 day moving average at $100. This would trigger a sell signal. Suppose one used a 3% Collar. If the stock turned around and head back higher then the investor would not reenter the ETF or stock until it gained 3% or rose to $103.
I am sure there is a reason for using a calendar with a trend following system, but I am not sure how much better it would be than just following the system and not paying attention to what day of the year it might be.
Just some of my observations over the years.
Best regards,
Ray
More thoughts on the Fear & Greed Index:
I had previously written that I couldn’t think of a good use for the Index in setting up the amount of the cash position for a new standard, by-the-book AIM account, and I still can’t figure that one out. I had mentioned that, because of the extreme volatility of the Index, it might be better suited for short-term Options Traders. The V-Wave seems to be much better suited for establishing the amount of the cash position for longer-term standard, by-the-book AIM accounts.
Of course, that is just my personal opinion.
However, on second thought, there might be a use of the volatile Fear & Greed Index for an AIM offspring....LD-AIM. Since, in theory, one can sell out of an LD-AIM program and go to 100% Cash, then this type of AIM can become short-term in nature depending on how quickly the stock price moves.
Suppose that one has been researching and tracking a stock and decides to set up a new LD-AIM program. He or she takes a look at the Fear & Greed Index and sees that it is in the “Extreme Greed” range. He or she might decide to just purchase only 1 Sell of stock at this time and plan on buying more shares as the price falls when investor sentiment swings the other way to the Fear side and the algorithm indicates that purchases should be made.
On the other hand, suppose that when the investor sets up the new program the Index is showing “Extreme Fear”. He or she might decide to purchase 3, 4, or even 5 Sells depending on how far the stock’s price has recently fallen.
In addition, he or she might also decide to use the Index to help them determine what Buy and Sell settings they might want to use for the SAFE and Minimum Transactions in their new LD-AIM program.
For instance, assume the Index is showing Extreme Greed when the new program begins. The investor might want to use smaller settings for their Sells since the stock’s price might not be able to advance much further because of recent gains. The investor might be happy with smaller profits when they appear if they believe further advances in the stock’s price won’t be happening soon.
If the Index is showing Extreme Fear then the investor might want to use larger Sell settings in order to maximize the profit potential of the program, depending on how far the stock’s price had recently fallen when the new LD-AIM program was initiated.
Because of its volatility I don’t personally think I would ever use the Index as a standalone indicator to decide how much Cash to use in a program, but instead use it in conjunction with other indicators and current situations.
Just some additional thoughts this morning.
Ray
Hi Adam,
I have thought about it, but I have not come up with an answer as to how we could do it.
The Index shows us how nervous or how confident investors are at the present time. It is a very volatile index and changes very quickly. That is why I decided to smooth it out using a short term moving average. Since 21 days is roughly one month of trading on the exchanges that seemed like a good average to use. The big problem with moving averages are their "lag" time.
Just my opinion, but any use of the Index by an investor would need to be discretionary. My opinion is that it might be more useful for an options trader than a long-term investor like an AIM investor. Since the majority of puts or calls have a relatively short life of only a few months at most, (LEAPs are the exception), then market sentiment might play more into using an Index like this when placing an options trade than using it for a new AIM account.
Some of you might see other uses for it.
Best regards,
Ray
Hi Steve,
Here is a link to the Index where it is posted on a daily basis:
http://money.cnn.com/data/fear-and-greed/?iid=EL
I have just been posting the daily values on an Excel worksheet for my moving average.
Best regards,
Ray
Re: Fear & Greed Index--FYI:
I have been keeping a 21 day moving average of the Index. Its current value is 29. This puts it in the Fear category and almost at the Extreme Fear area of 25 or less.
Ray
Hi Adam,
Just took a look at a chart for FXI. It looks like a good entry point for a buy. Your timing looks good. It appears to be down about 13.6% year-to-date.
Best regards,
Ray
The 10 day moving average for the Fear and Greed index is 50.9 as of yesterday's market close.
Investor sentiment seems to be neutral at the present time.
Regards,
Ray
Hi Clive,
Thanks for your help and for the website. Looks like there is a lot of information on it and, as you say, it might be that I can get as much knowledge from different internet sites as I can get from reading a book on the subject.
I know you responded to Toofuzzy's response to me, but I went ahead and responded to you directly.
Best regards,
Ray
Hi Tf,
Thanks for your reply.
My thoughts were more along the lines of buying some overall downside portfolio "insurance".....something like S&P 500 Puts with some of my sideline cash.
Seems like the past few years whenever the market hits new highs or has been elevated for a period of time investors get nervous and a correction sets in. Just checked the Fear and Greed Index and it is now sitting on a reading of 29...nearing "Extreme Fear". Just a little over a week ago it was in the 80s in the "Extreme Greed" category.
As you know, Cash is earning next to nothing these days, and I don't want to go very far out in the duration aspect of bonds to earn a little interest. It seemed to me that Put options might be a productive use of some of my cash at the present time in case the market corrects.....which it now seems like it wants to do.
Since I know nothing about puts I have been reviewing books on the subject, however that can get confusing at best. And, I am not a math geek and I don't want to get involved in "straddles", "Greek" terminology, etc. That is why I thought I would post my question.
Again, thanks for your help.
Best regards,
Ray
Can someone recommend a good book about Options?
My interest in these trading vehicles has been growing for the past couple of years. In visiting Amazon I see there are numerous books on the subject. Reading the customer reviews on each book it seems that each book has its own pros and cons. Have any of you read a book on the subject which helped you trade Options?
Thanks for your help.
Best regards,
Ray
I was surprised to see how the leveraged ETFs had performed in relation to the unleveraged ETFs since the bear market low of March 9, 2009.
Went to PerfCharts over at StockCharts to check the results.
The 200% leveraged ETF (SSO) almost tripled the performance of SPY. The 300% leveraged ETF (SPXL) did almost 6 times better.
I guess this is all a function of compounding and the fact that there have only been a couple of meaningful corrections since the current bull market began.
I have no points here that I am trying to make...just that I did not expect these type results.
Ray
Thanks for the promotion (I think).
Stock Market Logic....once had a copy of that book. It had a lot of good information in it. Don't have a clue where it is now. Got lost in a past move.
Take care,
Ray
Hi Tom,
The first thought that occurred to me when I saw the Fear and Greed Index was that it shows the current market sentiment climate, whereas the V-Wave has more lag time involved. Therefore, one might adjust their initial cash positions accordingly. Of course, this would be just an individual discretionary WAG.
For instance, assume that the V-Wave was showing a 50% cash position for individual stocks, while the Fear and Greed Index was showing an Extreme Greed reading of around 90. In this case the investor might make an individual judgment to go with a 60% cash position instead of the 50% cash position.
As Bob Norman says, it is quite volatile in its daily movements. When I first posted my message this morning about the index it had a reading of 87. I just checked and it is now down to 79. I haven't yet looked at the markets today, but I will venture a guess that they are on the down side.
Maybe make a 10 day or 20 day weighted exponential moving average out of its daily closing readings to smooth out its volatility? I could do a simple moving average, but an exponential moving average is above my pay grade.
Best regards,
Ray
Someone once suggested to me an idea for spacing out Consecutive Buys and conserving cash. That is to use the same dollar amount decline to trigger Buys.
For example, if one bought a $10 stock and set up an AIM program with a 10% Buy SAFE and a 5% Minimum Transaction, then their first purchase would be made around the time the stock price dropped to $8.70, or a $1.30 decline.
If the stock continued to decline they would not make another consecutive purchase until the stock declined another $1.30 to $7.40.
Continuing that train of thought on a stock which continued to decline consecutive buys would be made whenever the price declined $1.30 to $6.10, then buy again at $4.80, then again at $3.50, etc.
Of course this is only for Consecutive Buys. Any intervening sales would stop this process and it would start all over again.
Also, the AIM formula algorithm would remain intact and be used for each Buy or Sale.
Hope I haven't muddied the water much with this post.
Regards,
Ray
I recently came across an indicator which some of you might already know. It is called the "Fear and Greed Index".
http://money.cnn.com/data/fear-and-greed/?iid=EL
It is composed of 7 indicators:
http://money.cnn.com/investing/about-fear-greed-tool/index.html
At the present time it is showing "Extreme Greed" with a reading of 86. Day before yesterday the index had a reading of 87. A reading of 50 is considered "neutral".
My thoughts are that someone might be able to use this indicator in conjunction with, or in addition to the V-Wave cash indicator, whenever they are setting up a new program and deciding how much cash they should use with a new AIM program. Since the V-Wave is a weekly reading, then a "confirming" daily indicator might also be useful.
Just my thoughts.
Regards,
Ray
Hello Everyone,
As Steve (Grabber) said yesterday, we and our neighbors are okay after the 13 tornados went through North Texas. However, just a few miles from us there is total devastation. Looks like a war zone. 6 people are dead, several more missing and there are numerous injuries. These were the deadliest tornados for North Texas since 1957.
The tornado which did the most destruction has been rated an EF-4 (winds from 165 to 200 mph). It occurred about 7 miles from our home. The tornado which touched down about 1-2 miles from our home was rated an EF-1 (about 100 mph). It took off some roofs and uprooted a lot of trees, but did not create any deaths or injuries.
The good thing is that there was plenty of warning from the authorities, or else the death and injuries toll would have been much greater.
Don’t know if you have this particular service in your area, but all of our phones are in the Sheriff’s hotline network. Whenever there is a Code Red in our area we received an automated call telling us what is going on and to take shelter immediately. If you do have this type of service available and if you have not taken advantage of it, then I would suggest you join up whenever possible. This was the second time we received Code Red calls from the Sheriff’s department. It is a valuable service which helps saves lives.
Best regards,
Ray
Was wondering what happened. Glad to see you are back.
Ray
Hi Tf,
I understand. That is my thinking in holding off on making any sort of indicated Buys until a moving average crossover occurs. At this particular moment AGQ hasn't declined into my next Buy area, so I am just watching to see where it goes from here. I am in the Hold Zone.
Regards,
Ray
Hi Tf,
Not sure about Silver. I have a small LD-AIM program in AGQ. So far, I have had one buy in this program. Next buy is scheduled at $36.54, about 5.5% below its current price of $38.68. Don't know if I will buy then or just wait for a moving average crossover to execute that trade. Right now AGQ is signicantly below its 20 day, 50 day and 200 day moving averages. Since my position on this ETF is so small I think I will just hang on.
Best regards,
Ray
I am curious about something.
Over the years I have read many investing books, including some books on trading....short term and long term trading. Many of the trading books advise using a daily diary or log. Several of them advise not only logging a person's trades and the reasons for the trade, but to also record their moods at the time of the trade. Their moods would be something along the order of whether they were exuberant at this particular time, or depressed, or angry, etc.
A couple of weeks ago I decided to use a log to record all this stuff whenever I thought about starting up a new AIM, LD-AIM, etc. account. I have a lot of cash now sitting on the sidelines because of the recent market run-up. What I found in recording my thoughts, etc., was that I was getting an itchy trigger in trying to find something in which to deploy some of that cash. I found that sitting down and writing all my thoughts that I needed to do further research. When I did more research....scanning charts, reading annual reports, analyst reports, etc. I found that I was being very implusive and I held off on setting up two new accounts because now is not the time to purchase those particular securities. I found I needed to sit on my hands more and not try to dictate which way the market should go. Just stick with the program and let everything play out.
I am curious whether anyone here uses logs to record all this stuff. So far, by writing down everything before acting it is keeping me from being too implusive. I use the Microsoft OneNote program for recording all of this as it lets me post copies of charts and is easy for me to use. I find that after recording everything about the security and my current mood that I become more objective when I go back and read everything that I wrote down.
Was wondering if anyone else does this?
Ray
Hello Daisy42,
I myself haven’t done any comparisons. Perhaps others have.
The following is only my own opinion.
It seems to me that AIM by the book works best in long trending markets. That is because of the rather large holding zones of 30% or more.
For example, if one began a new program with a security which had a price of $10, and they used settings of 10% SAFE and 5% Minimum Transaction amount, that would mean that the security would need to decline in price some 13% to $8.70 before triggering a purchase transaction. It would also need to increase in price to $11.77 before triggering a sale transaction. From $8.70 to $11.77 creates a holding zone of approximately 35%. Without a trending market in either direction a security could remain in that zone for a long, long time with triggering any transactions.
The system you describe or other systems very similar to it create many more transactions and can work even in range bound markets.
I have read in different locations that the overall market trends only 20% to 30% of the time. Otherwise, it swings back and forth in a range between support and resistance. It is my opinion that your system or similar ones works best in range bound markets.
In my copy of Mr. Lichello’s 4th edition book, I seem to recall he used the term “juice” when describing index funds versus actively managed mutual funds. He seemed to prefer index funds which seemed to have more volatility or “juice” in order to capture more transactions. That was because fund managers have to ability to accumulate cash inside the actively managed funds, thereby dampening the volatility of the fund.
Anyway, that is just my opinion after studying this for several years. Others might have different opinions. As I said, I have not done any comparisons.
One thing you might try is to do some ZigZag or some “channel” type charts over at StockCharts of a security you are considering purchasing and see how many transactions might have been triggered over a certain time period.
I personally prefer to use Keltner Channel charts with the Average True Range settings. The default setting for that type of chart is 2 ATR settings above and 2 ATR settings below the moving average. Depending on the Average True Range (ATR) amount or current “volatility” of the security that setting can be changed so that you can see how many times the security reached the upper or lower channel and triggered a transaction amount of your choosing.
For example, the current 14 day period ATR of the Direxion leveraged Small-Cap Bull Fund (TNA) is $1.95. Its closing price yesterday was $77.58, giving it a daily volatility of about 2.5%. Using the default settings of 2 ATRs above and 2 ATRs below the moving average would give it about a 10% range.
Looking at a one year Keltner Channel chart I can see about 11 transactions one could have generated from this security.
Using a 30% ZigZag chart for AIM by the book I can see about 3 transactions one could have generated over the same time period.
Of course, that is just eyeballing the charts and my “chart eye” is getting worse as I get older. As I said, these are just estimates. No actual backstudy was done.
One other thing.…because of the larger holding zone, the AIM by the book method would seem to generate more profits per transaction than the method you describe.
Guess it depends on whether one wants more transactions with smaller profit margins or larger profit margins on fewer transactions.
Just my opinion.
Ray
Was wondering if there have been many Sales recently with the current rally? I have had two this past week.
Ray
Hi Conrad,
Thank you. I understand. You have given me a lot to think about and I appreciate.
Best regards,
Ray
Hi HL99,
Thank you for your response. I was sure that was the case, but I thought I would check with you just in case to see if anything else might be involved.
Regards,
Ray
Heartland 99:
I have been without a computer for about a week so I haven’t been able to ask you any questions.
I really like your suggestion of using a Dollar Amount decline for Consecutive Buy Indicators instead of using Percentage Declines as a method to slow down the Cash Burn rate.
To make sure I am understanding this correctly, please let me know if this is correct:
An investor has a stock which he purchased for $10 a share. He decides to let it decline 15% before he makes his first purchase. When the price declines to $8.50 he makes his first Buy (a decline of $1.50).
Now then, he doesn’t make his second consecutive Buy until it drops an additional $1.50, or down to $7.00 a share ($8.50 minus $1.50).
His third consecutive Buy would be around $5.50 ($7.00 minus $1.50).
Etc., etc.
My questions are do you use this method with the AIM formula….Portfolio Controls, SAFEs, etc.?
Or, do you use some methodology other than AIM to determine how many shares to purchase whenever the stock drops the predetermined Dollar Amount?
Thanks for your help.
Best Regards,
Ray
That is a really good idea. Each incremental decline is a larger percentage decline than the previous purchased decline. In your example the first purchase was based upon a 17% decline, the second purchase would have been on a 20% decline, and the third purchase would have been on a 26% decline, etc.
This is something I had never thought about. Gives me something to serious consider.
Guess the first question that comes to mind is when do you sell after making a couple of consecutive purchases?
One thing comes to mind is that if you sold the shares bought on a decline when they recovered to the previous purchase price you would have a good LIFO profit. The shares bought at $4.15 would be sold when they reached $5.00 for a 20% profit; the shares bought at $3.30 would be sold when they reached $4.15 for a profit of 26% profit, etc.
Is that the way one would do their Sells? Or, do you have another method?
Thanks for sharing this idea with me.
Regards,
Ray
I had thought of that before I posted. That is a lot of data to research and besides, the past never repeats itself exactly. I thought if anyone had already done this and saw some flaws in the approach, or had started with that approach and made some adjustments to it, it would have been beneficial to the board.
Regards,
Ray
I guess the reason I think like this is because when I first began investing many years ago, (I'm 70), I learned the "Constant Value or Constant Dollar" method of investing. I am sure that you are aware of this money management method of buying and selling around a "constant" or set dollar investment. For instance, one might have $100,000 in a fund or stock. They decide that they will buy or sell anytime the stock gains or losses $5,000. So if the value increases to $105,000 they would sell $5,000 and bring the value back to its "constant" $100,000 value. Reverse that action if it should decline to $95,000.
The problem with investing that way is because it requires someone to keep a very large cash reserve in case of a large market decline.
Now then, when I read Lichello's book back in 2004 I like the idea of using a SAFE value to dampen down the buying as a stock declined. I never did like the idea of using a Portfolio Control and increasing it whenever a purchase is made. That is more or less market timing because that is telling an investor that the decline will be over soon and to make as many purchases as possible and make each purchase as large as possible. An investor can't predict how far the market will fall. Also, the idea of waiting 30 days between purchases might leave a lot of money on the table that might otherwise have been made if the investor had a better way of making his purchase.
I got burned in 2008-2009 and ran out of cash way too early before the market finally bottomed out. I then decided there had to be a better way.
One other thing I thought about this morning. That is, since every purchase is a more meaningful purchase doing it the way I suggested, then one does not need to keep such a large cash reserve on hand.
For instance, suppose one decides to use a 10% SAFE and a 10% Minimum Transaction for their settings. This means that their stock has to decline 17% to trigger the first purchase. It also means that the stock will need to decline 17% for each additional purchase after that if the Portfolio Control is reset to the Stock Value after each purchase. So, an investor might figure that he will keep a cash reserve on hand to handle a 50% decline in value. All he needs to do is figure out how much 3 Buys would cost (17% X 3 = 51%) and that is how much cash he would need to keep in reserve. I know those numbers aren't exact, but they are close enough.
In his book Lichello warns against spending money like a "drunken sailor", however it is my opinion that is exactly what happens by doing AIM by the book. The first purchase is usually meaningful, but subsequent purchases are not a prudent use of the cash reserve....they are actually a foolish use of one's money because of the Residual Buy problem.
Anyway, this is my opinion.
Regards,
Ray
Hi Conrad,
It will take me a few days to digest all of this. I am unfamiliar with the terminology you are using. Chances are that I will have some questions for you.
Regards,
Ray
Hi Clive,
Thanks for your thoughts on this subject.
What got me thinking about all of this is because a few days ago Daisy brought up the subject about using Volatility for the SAFE setting instead of just using a constant set SAFE percentage throughout the business cycle of a security.
To determine Volatility in my own instance it occurred to me that one way was to check on the Daily Average True Range (ATR) and then use a Multiple of that ATR for the SAFE percentage. Nearly all charting programs include ATR indicators, including the free charts over at Stockcharts. The default setting there is 14 days or weeks, but it is easy enough to change that to whatever time period one wants to use.
For instance, the current ATR for IWM (the small-cap Russell 2000 etf) is $1.071. One has to then convert the ATR from a dollar amount to a percentage amount, which is around 1.29%, based on a current price of $83.14 for IWM. Assuming that one were to use a Multiple of 5 times the daily ATR for their SAFE settings and round off to the nearest number, then a SAFE of 6% would be used.
Most of the time the volatility and ATR of a security increases with a decline in price. Using a 6% SAFE and a 5% Minimum Transaction amount for their settings, assume that IWM declined in price from $83.14 down to $75.08. This would trigger a Buy.
If one were using Volatility and a Multiple of that Volatility to adjust their SAFE they might find that now the ATR of IWM has increased to 1.7% because of the price decline. Volatility usually increases with price declines. The VIX usually does that. Assume that the investor made their AIM directed purchase of IWM and is now going to readjust their SAFE percentage. They now find that the daily ATR has increased to 1.7%, so they might use 9% for their new SAFE setting (5 times 1.7% = 8.5%, rounding up to 9%).
Now then, the Residual Buy amount and the problem of Cash Burnout has been sort of a thorn in my thinking side over the past few years since I first read about AIM and began using it. It occurred to me that since, because of their recent purchase, one would be changing their Portfolio Control anyway to reflect their recent purchase. Why not just readjust their new Portfolio Control amount to the amount of the new current Stock Value, which included the recent purchase, instead of increasing the Portfolio Control amount, which would increase the amount of the Residual Buy. By making the Portfolio Control the same as the Stock Value after each purchase this would probably eliminate any Residual Buy amount created by that new purchase. It would be almost like beginning a new AIM program with each consecutive new Buy. Regardless, the Portfolio Control amount will need to be changed in any event with any new purchase. Why not just change it to the same amount as the new Stock Value and eliminate the Residual Buy amount?
Anyway, that is why I initiated the new post. I was wondering if anyone had adjusted the Portfolio Control amount to the Stock Value amount after each new purchase and what their experience had been.
Best regards,
Ray
Hi Clive,
How have you been?
I have been doing some of the traditional AIM programs since 2004. The only problem I have with the traditional AIM method is that the second consecutive buy and sequential buys after that are at lower percentage declines than the first buy because of the Residual Buy effect.
For example, using a 10% SAFE and a 5% transaction amount the first buy would require an approximate 13% decline in Stock Value. However, the second consecutive buy and the next few ones require much less in the way of a percentage decline than the first one if done the traditional way.
Burning through the cash reserves can be a serious problem in a major market decline like what happened in 2008-2009.
Some techniques I have used in the past is increasing the SAFE percentage on consecutive buys with my LD-AIM programs. Even considered doing that with my traditonal AIM programs, but haven't done that yet.
In any event, I was just wondering if anyone had done what I first suggested and, if so, what was their experience?
Regards,
Ray
Re: Residual Buy
Was wondering if anyone in the past, after making an indicated Buy, has attempted to reset the Portfolio Control amount to be the same amount as the new Stock Value?
It seems to me that might be one method of reducing the Residual Buy amount, which is usually present after making a Buy and increasing the Portfolio Control value by adding 1/2 the amount of the Buy to the Portfolio Control.
Anyway, if anyone has tried this could you let me know how it worked for you and if it is worthwhile?
Thanks,
Ray
Hi Daisy,
Good idea you have to customize the SAFE settings to the individual security's volatility.
Thought I might give you another idea for determining a security's volatility and have it more attuned to the present market and secutity's actions. Have you considered using the security's daily Average True Range (ATR) and a multiple of that ATR?
For example, the S&P 500 index is currently 1,461.19 and its 100 day ATR is 16.01. If my calculator is working correctly this morning the 100 day ATR is approximately 1%.
Now then the Russell 2000 small-cap index is currently at 858.90 and its 100 day ATR is 12.59. If I am correct then its 100 day ATR is approximately 1.47%.
The default ATR setting on most charts is 14, which means it would change more quickly than the 100 day ATR. Changing it to a longer time period might prevent one from constantly changing one's SAFE. Guess it would depend on how much work one wanted to put into the system.
Anyway, I thought I would throw that out there for whatever it might be worth.
Regards,
Ray
Hi Tf,
Thanks. I have a PC, not an Apple. However, Clive had an excellent tip on how to save it to the desktop on a PC. So, problem solved.
Ray