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I've had two people ask me about buying Automatic Investor 3.0 at a discount recently. And although I haven't discounted AI before, I said yes in those two cases.
So if you're thinking of getting AI, I'm going to offer everyone the software for $100 off until December 3, 2010 at 11:59pm PST (I guess you can call it the Black Friday, Cyber Monday, Happy U.S. Thanksgiving, Christmas Sale).
Just order it here --> http://www.automaticinvestor.com/order.html
Then send me an email and I'll immediately refund $100 to your credit card.
If you have any questions, let me know by sending an email to mhing@automaticinvestor.com
Regards,
Mark.
Hello Larry,
I received your private message but can't respond because I have a free membership on this site. Please email me at mhing@automaticinvestor.com and I'll respond to you.
Hi Byculla,
"You mentioned that you were going to upgrade AI with VSS algorithms. I would have waited for that but the track history is not too good."
I take it you mean the delay in getting PI 3.0 done? If so, then you are correct. I have no scheduled release date for a new AI (other than I plan to do it) and I would think it will be done later rather than sooner (however when the upgrade is done, it will be far better than AI 3.0 -- which I believe is already the best AIM software available).
"At the same time I am reluctant to invest in partially overlapping tools"
I understand your point. If it will help, I'd be willing to give you $147 off VSS 4.0 if you purchase AI 3.0 before November 11, 2010. So you'd pay $50 for VSS 4.0 instead of the $197 price.
To take advantage of this, just purchase AI 3.0 and VSS 4.0 before November 11, 2010 and then email me. I'll immediately credit $147 back to your credit card for VSS.
And to be fair, I'll leave this offer open to anyone who wants to take advantage of it until Nov. 11, 2010.
"Buying put and call leaps could be a profitable strategy dependant upon % of correct stock forcasts"
I'm actually looking at a strategy that mainly involves selling puts for use with AI (but buying calls is also a possibility). BTW, there are LEAPS longer than 2 years (e.g. 30 months) for some stocks.
"When I finish my present stack of books (4) I intend to purchase your PI book to see what your PI software is all about."
After you read the book, you'll have enough information to implement the PI strategy on your own (without the software). So if you're inclined that way, you actually don't have to wait for the PI software.
Hello Byculla,
I used fundamentals to pick AIM stocks and used AI to manage them many years ago. However when I wrote the Pragmatic Investor, I switched all my AI portfolios over to PI.
Then in 2008, I started using the new PI algorithm and have not looked at another system since.
I still think AIM is an excellent investment strategy and it performed relatively well (compared to the S&P500) when I was using it. However the new PI has outperformed AIM by a wide margin and I plan to continue using it for the majority of my portfolios for the forseeable future.
However I don't rule out using AI again for a smaller percentage of my portfolio (probably 10%). One of the things I mention in the PI book is to diversify your investment strategies as well as your holdings. So I will most likely follow that advice, however right now I'm strictly PI 3.0.
I'm also looking to backtest some options strategies with PI and AI, but that is in the very early stages, so I don't expect I'll be using that with real money anytime soon.
If you are thinking along the lines of using VSS to find good stocks to AIM with AI, then I think that is an excellent way to go.
I would find the top rated VSS stocks, use VSS's asset allocation function to find a group of these stocks with low correlations between them, then enter each one in a separate AI portfolio.
Then run an optimization on each one and select a reasonable set of parameters for each portfolio. Finally I would use AI to manage them with those parameters and using the MACRO filter.
That's what I would do, but you have to decide what makes you most comfortable.
Of course if you don't want to optimize the parameters and you're only interested in using AIM BTB, then you actually don't even need AI.
Tom Veale's website has a free AIM spreadsheet and Don Carlson has posted his MACRO algorithm which you can incorporate into the spreadsheet (or someone on the AIM board might have already done it -- so just ask over there).
Without AI you'll lose alot of really good functionality and research potential, but at the end of the day you still get the AIM benefits for free.
Hello Byculla,
AI does do a value stock search but it uses a different, older, algorithm than VSS does. VSS's algorithm is far better and I plan to update the AI fundamentals algorithm to the VSS one in the next major upgrade.
If you have a choice between the two, VSS is the way to go for analyzing fundamentals.
I hope that helps. Let me know if you have any other questions.
I haven't looked at TA indicators for years now, so I'm not the person to ask about them.
I do have a good book called, "Trading Systems and Methods," by Perry Kaufmann which I read years ago and found some interesting concepts in there. I even tested a few of his algorithms, but those tests results have been lost in a disk crash.
As I mentioned previously, I had looked at TA and didn't find much I liked. However I believe some AIMers have melded TA concepts with AI in the past (post a message on the main AIM board and someone will probably answer).
I'd rate Buffettology as one of the best investment books available (right up there with Benjamin Graham's Intelligent Investor).
Hi Byculla,
Lots of people say they use Warren Buffett's Value Investing strategies, but not many do. VSS uses Buffett's formula taken directly from, "Buffettology," by Mary Buffett and David Clark.
They poured over Buffett's writings and explained what he does. I'd definitely put that book on your reading list if you're interesting in Value Investing.
VSS adds the accrual ratio from Richard Sloan's research and it uses Pat Dorsey's (Morningstar's Director of Stock Analysis) formula for economic moat strength (along with one Buffett's criterion).
I have not seen another software package come as close to pure Buffett as VSS does.
I'm not a big fan of TA, but there are certainly a few indicators that make sense. However I feel most of it is just multi-layered curve fitting.
I'm not sure what you mean by, "AAI." Do you mean Automatic Investor or AAII.com?
As always, feel free to post your questions here.
Her name is Debra Ball and if you've ever seen a George Foreman grill infomercial, she was the host who "interviewed" George.
I sent her the scripts for the PI pieces and a few days later she did them. Never even met her. Gotta love the Internet.
There is a new version of PI coming out in January 2011. The previous version is no longer for sale because it uses an older set of algorithms that I've greatly improved upon.
The first version of PI was released in 2004.
Hi Neko,
PI 3.0 should run fine on XP Pro and XP Home. It won't run on XP Media center or below since it uses the .NET Framework 4.0.
Your hardware should be okay, as long as it has the minimum recommended specs: 1GHz CPU, 512MB RAM, 600MB free disk space (if you don't have .NET 4.0). If you already have .NET Framework 4.0 on your machine then you'll need less than 10MB of free space.
Yes, many systems rely on reversion to the mean, but the implementations differ.
PI's Value Trading Algorithm actually uses a modified version of that concept by looking at groups of highly-correlated equities and trading based on their relative values -- rather than simply relying on a strict reversion to the mean. Therefore stocks may never actually revert to their individual means but you would end up trading around the group's (or a sub-group of that group's) mean.
Value investing and AIM loosely follow the reversion to the mean concept too, but, again, the implementations are different.
I hope that helps. Let me know if you have any other questions.
Hi Byculla,
Yes, the two are based on the same principles that Warren Buffett has written about endlessly. There are a few minor implementation differences however.
You can find the Value Stock Selector algorithm here --> http://valuestockselector.com/howtoinvest/
Hello Byculla,
Of course I have my views on where the markets will go (see http://pragmaticinvestor.com/economy/predicting-the-future/ ), however I don't use predictions when actually investing my money.
Although I'm confident the markets will go up in the long run, I don't know when. So I use strategies that react to what the market does rather than strategies that try to predict the markets.
Both AIM and the Pragmatic Investor's Value Trading Algorithm (http://pragmaticinvestor.com/book/ ) strategy react to markets, and that's why I believe they consistently do so well.
In AIM's case, in the short term, a bear market provides better and better entry conditions for purchasing stocks. The danger is that you can run out of cash before the market hits a bottom.
In that case, you should still do well (assuming you've invested in fundamentally strong stocks) but your purchasing won't be as efficient as it could have been. The best way to use AIM is to invest over time (e.g. if every month you add money to your cash reserve and wait until AIM directs you to use it, then even if you use up all of your cash reserves in any given month, the next month you will have additional funds available to AIM).
This fits nicely with the idea of investing the first 10% (or whatever amount you choose) of your paycheque each month.
In a flat market AIM will simply sit there -- just like buy and hold. If your stocks pay dividends, then the dividends will fatten your cash reserves until the markets start moving again.
Hi Byculla,
Thanks for the link. I'll check it out.
PI is progressing, but slowly. For the past two years I've made most of my money investing, but I'm also a GIS consultant and, of course, I run Aptus with its various software packages.
I don't have an exact return for the past decade off the top of my head, but I've outperformed the markets (S&P 500, Nasdaq and Dow) starting after the internet bubble burst. When the bubble burst, my portfolio value fell dramatically (and unfortunately I was invested in 3 not-so-stellar stocks, which I still own today at about a tenth of their book value. I keep them around as a reminder of what can happen when emotions get in the way).
However, I kept purchasing stocks and eventually moved to buying only fundamentally strong stocks starting in 2004.
When the sub-prime bubble burst in 2008, I was able to use the experience from the internet bubble to do very well. So now I'm waiting for the next bubble so I can, "swing for the fences."
What investment methods do you use and how did you make out these past few years?
Hi Byculla,
Yes, I'm familiar with X_Dev and Myst. You are correct in that the problem with X_Dev is one of Yahoo! changing its data format. The fix is actually quite easy, but, of course, you need the source code.
However this isn't an issue of licensing. If any software vendor decides not to support his product, then whether the software is tied to a license server or not, you will have problems.
Technology changes so quickly that any useful software needs to be supported in a timely manner or it will eventually break (moreso for investment software since this category relies heavily on data feeds).
Automatic Investor has been selling since 1999 and I've had my fair share of issues (including Yahoo! changing their data format a number of times), but I've always been able to fix these things quickly. If there's a problem with the license server, I will also fix that right away.
At the end of the day, however, if a vendor stops supporting the software, users will be out of luck. It doesn't have anything specifically to do with implementing a license server or not.
I've looked at various licensing schemes and the one I currently use is what I find to be best. As I've mentioned before, I'm always open to suggestions. If someone suggests what I think is a better way of licensing, then I'd be happy to implement it.
In the meantime, the current method appears to work well for me and current AI users.
Hello Byculla,
"Both AIM and VSS seem to be predisposed towards rising markets and operate accordingly."
I don't think that AIM and VSS are predisposed to rising markets. AIM does better in a volatile market (i.e. big swings both up and down) and VSS does better in a falling market (i.e. cheaper, undervalued stocks that will eventually recover over time). The Buy and Hold strategy is predisposed towards a rising market.
From VSS's perspective, at some point, strong, fundamentally solid stocks that have been undervalued by the markets will come back to their intrinsic values once people catch on. Of course this could take some time and nobody can predict when that will occur -- hence the fact Buffett underperformed during the tech bubble of the late 90s but laughed all the way to the bank during the tech crash and the subsequent sub-prime fiasco.
However Buffett has repeatedly stated that he doesn't care if it is a bear, bull or sideways market because he doesn't look at short-term stock prices. He purchases undervalued businesses and then holds them for long periods of time.
My investment philosophy is similar. I like to purchase strong undervalued businesses and hold them for a long time. The difference between my method and Buffett's is that I will hold any one of a group of stocks for long periods (not just one stock).
With the Canadian banks, for example, rather than simply purchasing, say, BMO and holding it for a long period, I am content to hold any one of the major 5 banks.
At any point in time I am always invested in a bank (thus satisfying Buffett's long-term requirement), but the bank might be any one of the 5 -- not necessarily always BMO.
There have been some VSS users who scan for highly rated companies and then base their investing decisions on the number of stocks returned. So, for example, if only 2 or 3 stocks were returned, they would consider the market overvalued. If 14 or 15 were returned, they might consider the market undervalued.
However I haven't run any tests on this strategy.
"Does VSS identify overvalued stocks using the same methodology?"
Yes, VSS does identify overvalued stocks using the same methodology.
"What percentage of stocks identified by VSS as undervalued then proceed to gain and in what time frame?"
There is no clear answer for this question. Purchasing strong, undervalued stocks is what value investing is about. When the rest of the market actually catches on and bids up the price to its intrinsic value, or beyond, is not predictable because it's based on what people think -- which itself is not consistently predictable.
At the end of the day, I think almost 100% of strong, fundamentally solid stocks will go up. The variable is when. The longer the time frame, the higher the probability for a price increase. And since the stocks are fundamentally solid, the chance they will go out of business within an investor's holding period is low (although not zero -- hence the recommended use of diversification).
I've had some stocks go up almost immediately after purchasing them and others not do anything for 2 years.
I think many people don't use value investing for this very reason. It is possible that they can be doing nothing, sitting on their hands, for long periods of time. Most people like action or like to feel as if they're doing something.
On the other hand, my backtests and many studies have shown that value investing is the best way to make money in the stock market. Once you've purchased great stocks, you should do nothing and sit on your hands. It's difficult to do, but it appears to work the best.
Hello Byculla,
For the past 2 years I have been using the methods described in the Pragmatic Investor book. It starts with highly rated (both fundamental rating and moat strength) stocks as calculated by the Value Stock Selector algorithm and then groups highly correlated stocks together.
It then manages these groups (buying and selling) as per the Value Trading Algorithm.
Since 2008 I have set up portfolios using Canadian banks (CM, TD, RY, BMO, BNS) and technology stocks. Returns from October 2008 to December 2009 in my personal accounts have been over 76% compared to a B&H return of 17.7% (note this high return was due to the extreme volatility in the markets even for fundamentally strong stocks such as the Canadian banks. I don't expect anything near these returns going forward and my backtesting simulations show returns of between 20 and 30% annualized over 15 year intervals -- which I'm convinced is the best anyone can do over a relatively long period).
This year returns have been about 8% (compared to B&H results of 11.71%), so I'm waiting to see what happens the rest of the year.
Hi Byculla,
1) Yes, a good deal of time should be spent thinking about the best way to solve the problem. Of course different problems have different requirements. Some complicated problems do indeed follow your 80/20 rule. On the other hand, many other problems are relatively simple to define but time consuming to implement.
I think it was Bill Gates who once said that if everytime he walked by a programmer's office, that programmer was always typing rather than many times sitting quietly thinking, he would think that programmer was not very good.
2) Regarding programmers, it's not so much the money part but the time spent getting the work done and then finding it's not very good. As for unsatisfactory programmers getting weeded out, that's relative. I think most people who hire programmers don't understand the correct way to construct programs. So as long as the program works without major bugs, they think the programmer is satisfactory. My requirements are far more stringent.
3) I've used Jing in the past and found that I can make far better videos with Sony Vegas. I can create the simple screen capture videos you describe, using CamStudio, in about 30 minutes. I've made quite a few videos, unfortunately they have not been about investing. When I mentioned that I have been "meaning to create videos," I meant investment videos as I've been using my video equipment for a few years now.
4) If you have any ideas on licensing I would be open to looking at it.
Regardless of all this, I do understand that I need to get a few more things out -- which I think is your main point. So I appreciate the reminder.
Hello Byculla,
I'm not aware of anyone using AIM for forex, but my guess is that someone out there has at least thought about it. Perhaps asking on the main AIM board will elicit a response.
I have considered outsourcing, but for my three programs, it doesn't make sense. I'm currently working on a unifying framework that will be used by all three programs (and possibly others in the future).
By the time I explain how I want things done, I might as well do it myself. For larger projects there is a definite value in outsourcing, but my investment software is relatively small.
I've worked on a number of very large projects and used to outsource the tedious pieces (mainly to India). Although there were some issues, it worked fairly well most of the time.
I also think that there are relatively few programmers out there who know how to program correctly and finding them is time consuming. So currently the best course is for me to do this part myself.
The new PI does not use AIM to trade. It uses what I call the "Value Trading Algorithm" to manage trades. The book explains it in detail, but at a high level it's a short-term rebalancing strategy.
For the PI book, I do need to get the prices in order. I started selling the e-book in 2004 for $47 and haven't changed that. Then I was able to publish the book and make it available on Amazon and set the price similar to other paperbacks (i.e. $19.99). Most recently I've started selling the book for the iPad through Apple's iBook store and set the price at Apple's recommended $9.99. So you are correct in that the price for the book is all over the place and I need to get the various formats priced closer together.
Regarding videos, I actually have Sony Vegas pro, lights, backdrops, microphones, a teleprompter and cameras (and have had them for quite some time) and have been meaning to create videos. So you are correct that I need to get some good videos out.
As for licensing, I've tried different methods in the past and the current method seems to work the best (especially with most people having high-speed constant internet connections). And since VSS and PI require an internet connection in order to work anyways, adding the license server isn't really that bad.
The issue is that I think you'd be surprised at how many people will like the software and if they are able to use it for free, they will do so. That's just a fact of life (similar to the music world). Since I spend alot of time researching investment methods and then writing programs to implement them, I'd like to ensure that everyone who uses the software pays for it.
To date, there haven't been too many issues and for the issues that arise, I'm able to fix it quickly. I would very much prefer to not have any licensing and rely on people paying of their own free will if they use the software. However that's not been the case in the past and I expect it won't be in the future.
With AI, you can use different data sources (including comma delimited files) in almost any format. VSS is a bit different and not really conducive to using other sources.
The new PI will be similar to AI. I have backtested end of day data for PI but don't have the intraday data for most stocks to backtest them for shorter periods. I would very much like to backtest on 1 minute bars to see if the volatility helps improve returns. If I can find the data, I will do the backtests.
Thanks for your comments and suggestions. I always appreciate the feedback.
Hi Neko,
I've found there are some serious issues with just using low PE to find undervalued stocks.
The criteria I used are detailed in the Pragmatic Investor book (http://www.amazon.com/exec/obidos/ASIN/B002ACXX64/automaticinvesto ). Basically it is a combination of VSS-like fundamentals, valuation, dividend yield and then managed by the Value Trading Algorithm with a 3% trigger).
On the fundamentals side, you can get a good idea of how I evaluated the CDN banks from here --> http://valuestockselector.com/HowToInvest.html
There were some times when I also ignored the Value Trading Algorithm recommendations if the price difference was close to the trigger value and I wanted to catch dividends in a target bank (so, for example, if I held CM and the price difference was, say, 2% wrt BNS, then there were times I'd make the switch to BNS from CM in order to capture the BNS dividend even if the target price difference of 3% wasn't hit).
This might not be a valid strategy right now, but during 2008/2009, some banks (BMO and CM) had dividend yields above 10% while BNS, RY and TD were into 8% territory -- so capturing those dividends was attractive. Furthermore, they didn't always seem to drop by the dividend amount on the ex-div date (which I found strange, but profitable)
Yes, PI 3.0 will have a trial version so you can run it through its paces to see if it's right for your investing style.
If you have any other questions, please feel free to let me know.
Hi Chrismac,
AIM won't beat B&H in a market that goes straight up. However there is no market that goes straight up over the long term. So it's best to think of AIM as a long-term investing strategy.
Some people use it with a shorter time horizion in mind, but I've found that you need at least 5 years (on average) to really start seeing AIM work for you.
If you're interested in a shorter-term strategy, I'd recommend something other than AIM.
I hope that helps. Please feel free to post any other questions.
Hello Chrismac,
ETFs are an excellent choice for AIM given 2 constraints.
1) The ETF should hold highly correlated underlying equities. This is because AIM thrives on volatility and if the ETF is holding uncorrelated equties, some volatility will be diversified away.
2) The fees associated with the ETF are relatively low (here I'm referring to the management fees, not the brokerage commissions -- although those should be low too).
If your portfolio is large enough, it is reasonable to hold some high-quality individual equities that you are very familiar with and have had the time to study in detail, and hold some other type of industries or sectors, that perhaps you are not familiar with or have not had the time to study in-depth, as ETFs.
For example, you might want exposure to gold stocks or Chinese technology stocks. You might not know much about gold stocks and might not know anything about individual Chinese tech stocks. In this situation, a good ETF holding gold stocks and another holding Chinese tech stocks would be less risky than actually trying to construct a portfolio of individual stocks.
In Automatic Investor, you would put each ETF into a separate portfolio and use the Asset Allocation function to tell you the proportions.
There's a blog post you can read here --> http://www.pragmaticinvestor.com/blog/2009/09/04/how-to-use-etfs-for-safer-more-secure-portfolios/
As Automatic Investor's developer, I can't really answer your second question in an unbiased manner. However I can say that since I developed the first version, over 10 years ago, I have updated it to include numerous actual user suggestions and am very confident that the majority of AIMers, who use AIM software, like it very much and place it at the top of the AIM software heap.
Hello 1step,
AI retrieves its data from Yahoo! Finance and therefore requires the tickers to be what Yahoo! recognizes.
For Berkshire, the ticker is BRK-A (for the A shares) and BRK-B (for the B shares).
Hi AIMster,
I have a similar setup (i7 9GB DDR3 RAM, 64 bit), with the difference being that I'm running Windows 7 Pro rather than Vista, and AI works with no issues.
However I have had a couple of Vista/Windows 7 users run into permission problems because Vista and Windows 7 are more strict on what folders normal users can access.
If you do run into a permission problem, just let me know and I'll walk you through the fix.
Otherwise enjoy the new machine. I love mine and it takes MUCH less time to do long analyses than on my old dual core AMD.
BTW, currently AI's performance improvement is simply because of the increased processor speed and faster memory. However now that multi-core/multi-threaded processors are becoming the norm, the next version of AI will take advantage of the multiple cores and actually allow you to do some things in parallel (such as running an optimization in one thread while running a historical analysis in another at the same time).
Hi FB,
I sent you an email about this.
Hello 1step,
Yes, some people do use the software to gauge market valuation and it makes sense to do so. When VSS shows that there are many undervalued stocks, the market is generally undervalued and vice versa.
Keep in mind, however, that the stocks selected by VSS using its default settings don't just check for value but also for fundamentals strength. This means that there could be cases where VSS results don't match what the overall market is doing.
Think of it this way: VSS filters stocks using 3 main filters. First it filters on Fundamental strength, second on moat strength and third on valuation. If the subset of strong fundamental stocks behave similarly to the broad market with respect to valuation, then VSS results are a good proxy for the overall market.
On the other hand, there could be situations where the fundamentally solid stocks don't behave like the market and thus VSS results would not act as a good proxy.
However I think that in the general case, you can use VSS's results to gauge the markets as you suggested. Just keep in mind the caveats I mentioned above.
You can also use it to confirm results from another tool (such as the vWave). In fact I believe the vWave is currently recommending holding more cash right now and that would confirm the VSS results.
Feel free to post your question over at the main AIM board. I'm sure there are people using VSS (or the built-in AI fundamentals analyzer) in similar ways.
I hope that helps. Let me know if you have any other questions.
Hi AIMster,
"And, Real Soon Now, should be a done deal, right?"
C'mon, it's only been 15 months or so since it was supposed to be released
New Pragmatic Investor 3.0 screenshots are now available here.
New Pragmatic Investor 3.0 screenshots...
PI 3.0 is currently in development with a target release date scheduled for later this year. Here are some screenshots from the Historical Analyzer...
You can see exactly how the PI portfolio performed relative to a Buy and Hold model over the tested time period.
This chart shows how stocks in the group contributed to the portfolio's net profit.
This shows a graphical representation of the portfolio's annualized returns relative to B&H's.
Various statistics are available so you can see at a glance how the portfolio would have performed over the selected time period.
Hello Neko,
The Value Stock Selector (VSS) is a stand-alone program that is different from the Pragmatic Investor. VSS is currently at version 4.0 and version 5.0 isn't scheduled for some time (as v4.0 was just released this past summer).
The Pragmatic Investor (PI) is currently being updated to version 4.0 and will include everything in VSS 4.0, plus much more. It will be completely different from VSS.
PI will add many new functions, including a portfolio manager (much like Automatic Investor's), backtesting tools, charts, reports and such.
A big addition will be the Value Trading Algorithm function that is described in the current edition of the Pragmatic Investor book.
With the new PI, you'll be able to find great stocks with strong moats, just as you do now with VSS, but then you'll be able to sort them into groups based on their correlations, diversify and allocate them automatically and then manage them using the Value Trading Algorithm with just a few mouse clicks.
It will also take care of tracking any stocks you own and issuing alerts on when to sell either because their fundamentals have deteriorated, their fair value prices have been reached or your current portfolio allocation has strayed significantly from the required policy and thus needs to be rebalanced.
My goal is to make PI a program that will completely automate every aspect of building and managing a strong portfolio.
To anticipate your next question, I do not know when the new PI will be released. It was scheduled for this month (December) but that date won't be met. I'll have a better idea of a realistic release date in January.
I hope that helps. Let me know if you have any other questions.
Hi Neko,
The hardcopy book has the same material as the digital version (both have the most up to date material).
The advantage to the digital version is it is in PDF format and therefore fully searchable.
Here's some additional information on the Vealie from the Automatic Investor user's guide...
Maximum Cash Value: Automatic Investor uses Maximum Cash to determine when to invoke the Vealie mechanism (i.e. pull a Vealie).
By default, Automatic Investor will allow all securities in your portfolio to be sold (i.e. resulting in a portfolio that is 100% in cash).
Some investors, however, might want to limit the cash in their account (i.e. they always want to be somewhat invested in securities). Maximum Cash allows you to specify how much cash your account can contain.
It is a percentage of the total portfolio value (i.e. cash and securities). For example, if your total portfolio value was $10,000 (i.e. $5,000 cash and $5,000 securities) and Maximum Cash was set to 50%, then the most cash Automatic Investor would allow in your account is $5,000. If a SELL recommendation will cause the maximum cash to be exceeded (e.g. a sale would cause the cash to rise to, say, $6,000), then the sale is ignored (i.e. no SELL recommendation will be given) and a Vealie is invoked.
Note that Maximum Cash only applies to cash generated by selling securities. Your portfolio might contain more cash than that specified by Maximum Cash if you deposited interest, dividends, or additional cash.
Vealie: The Vealie was invented by Tom Veale to limit selling securities when there was a sufficient amount of cash already available in a portfolio. It is usually used after an extended period where the markets have risen.
It provides a way of staying invested a little longer (which subsequently increases risk a little, but with the possibility of a greater payoff).
In general if Automatic Investor is throwing off cash, it means that the equities in the portfolio are rising in value (i.e. you're receiving more sell signals than buys).
At some point you might feel that you have enough cash to cover your future purchases so you want to stop collecting cash. In essence you want to leave your money invested in the stocks you currently own.
However as the stocks rise, you will receive additional sell signals. Automatic Investor will recommend that you sell shares in order to raise cash for the next buying spell.
However you might feel that you already have enough cash to cover the next buying spell -- and you might also feel that the share prices will continue to rise.
So you might be tempted to ignore Automatic Investor’s SELL recommendations. However as the security price rises, the SELL recommendations will continue to get larger and larger.
Furthermore, the next buy price will become further and further away (so your security will have to retrace a great deal before a buy is triggered).
Enter the Vealie... you simply increase your Portfolio Control by (traditionally) 50% of the new SELL recommendation. This has the effect of moving the next BUY price towards your increasing equity value as well as lowering (or eliminating) the subsequent SELL recommendations. So you stay invested with the number of shares you currently own AND you've moved your next BUY price up AND you've lowered your next SELL recommendation.
Of course as Newton's 3rd law states, "For every action, there is an equal and opposite reaction." How does this apply to the Vealie?
First, by ignoring Automatic Investor’s SELL recommendation (regardless of whether you choose to increment PC or not) you're opening yourself to a little more risk (e.g. if the stock suddenly lost 90% of its value you'd be holding more of it because you didn't sell as Automatic Investor suggested).
Secondly, you're introducing some subjectivity (e.g. you have to decide how much cash is enough) and you're performing some prediction whether you know it or not (e.g. predicting you have enough cash to cover price declines and/or predicting the current security's upward trend will continue).
However, as long as you realize the additional risks involved, using the Vealie can be a good strategy that complements Automatic Investor nicely.
By Default, pulling a Vealie entails ignoring Automatic Investor’s SELL recommendation and increasing the Portfolio Control by 50% of the SELL recommendation. For example, if Automatic Investor is recommending that you sell $1,000 worth of securities and you decide to pull a Vealie, rather than selling the $1,000 worth of shares, you’d add 500 (i.e. 50% of 1,000) to the Portfolio Control.
This usually eliminates the SELL recommendation and moves the next buy and sell prices upwards.
To see how the Automatic Vealie works, let’s look at an example. If Maximum Cash is set to 50%, total portfolio value is $10,000 and the Vealie parameter is 50%, then Automatic Investor will limit the amount of cash in this account to $5,000 (i.e. 50% of $10,000).
If the next SELL recommendation would result in cash being increased to $6,000 (i.e. Automatic Investor recommends you sell $1000 worth of securities), then the recommendation would be
ignored and you'd be asked if you wanted to "pull a Vealie." If you choose Yes, Portfolio Control would be increased by 500 (i.e. 50% of the sell recommendation of $1000). If you choose No, Portfolio Control will not be changed – however the SELL recommendation will be ignored.
Hi Steve,
Yes, that is the same as having the price cross the long EMA.
As to why, I can't remember since it was implemented so long ago.
I think it had to do with Don Carlson suggesting it, but I'm not 100% sure of that -- perhaps Don can comment if he remembers (in earlier versions of AI I recall having the short EMA as 20 days and by SP 7 I'd changed it to 1 day).
One thing that I do recall is that using the 1 day short significantly improved general results. So that's why it is in the latest version of AI.
Hi Neko,
Yes, the Value Stock Selector software (http://www.ValueStockSelector.com ) is based on the same methods and techniques for selecting and valuing stocks as described in the Pragmatic Investor book (http://www.PragmaticInvestor.com/book ).
The "new version" refers to the Pragmatic Investor software.
However a new version of the Value Stock Selector software (v4.0) was just released this summer (the PI software will contain all the functionality of VSS 4.0 but add many other functions). It is scheduled for release shortly (although no firm date has yet been established).
The latest version of the Pragmatic Investor book describes what will be in the Pragmatic Investor software (including the Value Trading Algorithm).
Currently there is no active forum available, but that will change once the software is released.
I hope that helps. Let me know if you have any other questions.
In AI v3.0 SP7, the Long EMA is 217 days and the short is 1 day (which technically isn't an average).
Hi Neko,
It will eventually stop on its own (usually you'll get more than 10 days to try it).
Hi Karw,
I just read a book on the PHP scripting language and have been playing around with it exploring if I should create some web-based software.
As a test project, I've put some of my Value Stock Selector's single stock analyzer functionality on the web. It's really just a proof-of-concept, but it can give you a sanity check if you're looking for value stocks.
Here's the link --> http://www.valuestockselector.com/online/index.php
BTW, I like Greenblatt's book too.
Hi Conrad,
Send me an email (mhing@automaticinvestor.com) and I'll send you Jeff's current email address.