Wednesday, September 03, 2014 4:52:56 PM
Hi Allen, Re: Cash Burn chart..................
Here are some things to think about:
1) Individual company stocks generally have far more total price range than do diversified holdings such as the S&P 500 Index ETFs.
2) Greater price percent decline means deeper buying with AIM.
3) SAFE in the cash burn diagram would be the sum of both buy and sell SAFE. So, 30% SAFE would mean 15% on both sides or some other combination.
4) 'by the book' AIM (first edition) used 20% SAFE as did all the other versions.
5) The various AIM Editions only changed the starting level of Cash (reductions) to capture more of what Buy/Hold would have received.
6) AIM-High used 20% SAFE but expanded the trade range to ~40% LIFO by increasing the Min. Order size to 10% of holding. It also used the lowest starting cash reserve.
In theory one could use a well established BETA on the investment in question applied to the diversified portfolio v-Wave. An example would be AAPL with a 1.2 BETA. If the v-Wave diversified cash reserve was showing 41% cash reserve, then AAPL should get along with 49% cash roughly at this time. Another example would be BZH with a 2.3 BETA. It should be started with a 94% cash reserve!
So, you can see where Theory and Practice aren't always compatible. It reminds me of a talk given by Burt Rutan (a famous aeronautical engineer). He said scientists work with theories and engineers work with facts. His question to the audience was, "On which plane would you like to fly; the one designed by a scientist or the one designed by an engineer?"
The point of the cash burn chart is to give you an idea of what you're opening yourself up to with the settings you might use with AIM. If you say to yourself, "I don't need no stinkin' cash! I'm gonna just use 20% as my starting cash position." Well, that's fine. However, how much of a downturn in the market can you participate with AIM if you use 20% SAFE total? You'll run out of cash with a 34% decline in your starting share price. However, if you really want to get a lot of trade activity and choose a total SAFE of just 10%, then you can only withstand a 26% down draft before your cash is all consumed.
If one were to go back to the 2007 high point and then look at the decline to the March, 2009 market low point for any individual stock or fund, that would tell you the decline you would have realized being fully invested. You can use that decline percentage to determine what SAFE and Cash settings would have been appropriate during that Panic. (note history doesn't always repeat itself exactly)
Ideally we want to be low in stock inventory near market peaks and out of cash when markets bottom out. AIM by itself does a pretty good job of this sort of thing, but everyone likes to attempt to fine tune AIM. Things like the cash burn chart help people know what they're getting into before a panic hits.
Some things to consider.....
a) If the Panic of '08-'09 turns out to be a 'once in a lifetime' buying opportunity, do we really want to saddle ourselves with too much defensive adjustment to AIM?
b) If the Panic turns out to be just the first bounce of the Dead Cat do we want to put our AIM settings on the "Agressive" side?
Our v-Wave helps us judge where the markets are now:
and where they were at different times in the past. I think pretty much everyone here on the AIM board was 100% invested at the bottom of the Panic. Unfortunately many were 100% invested before the markets actually bottomed. Almost everyone not using AIM was nearly 100% in CASH!!! The v-Wave held out about 10% cash for diversified accounts and about 15% for individual company stocks at the market bottom. So, it was a bit conservative.
Like a barometer, the v-Wave doesn't tell us the exact nature of the weather forcast, but does give us an idea of what to expect.
The cash burn chart gives us an idea of how deep a decline we can tolerate with various settings and cash levels. If the barometer shows a good chance of big storms coming, the cash burn chart tells us if we should stand outside, go inside or go to the storm cellar.
Here are some things to think about:
1) Individual company stocks generally have far more total price range than do diversified holdings such as the S&P 500 Index ETFs.
2) Greater price percent decline means deeper buying with AIM.
3) SAFE in the cash burn diagram would be the sum of both buy and sell SAFE. So, 30% SAFE would mean 15% on both sides or some other combination.
4) 'by the book' AIM (first edition) used 20% SAFE as did all the other versions.
5) The various AIM Editions only changed the starting level of Cash (reductions) to capture more of what Buy/Hold would have received.
6) AIM-High used 20% SAFE but expanded the trade range to ~40% LIFO by increasing the Min. Order size to 10% of holding. It also used the lowest starting cash reserve.
In theory one could use a well established BETA on the investment in question applied to the diversified portfolio v-Wave. An example would be AAPL with a 1.2 BETA. If the v-Wave diversified cash reserve was showing 41% cash reserve, then AAPL should get along with 49% cash roughly at this time. Another example would be BZH with a 2.3 BETA. It should be started with a 94% cash reserve!
So, you can see where Theory and Practice aren't always compatible. It reminds me of a talk given by Burt Rutan (a famous aeronautical engineer). He said scientists work with theories and engineers work with facts. His question to the audience was, "On which plane would you like to fly; the one designed by a scientist or the one designed by an engineer?"
The point of the cash burn chart is to give you an idea of what you're opening yourself up to with the settings you might use with AIM. If you say to yourself, "I don't need no stinkin' cash! I'm gonna just use 20% as my starting cash position." Well, that's fine. However, how much of a downturn in the market can you participate with AIM if you use 20% SAFE total? You'll run out of cash with a 34% decline in your starting share price. However, if you really want to get a lot of trade activity and choose a total SAFE of just 10%, then you can only withstand a 26% down draft before your cash is all consumed.
If one were to go back to the 2007 high point and then look at the decline to the March, 2009 market low point for any individual stock or fund, that would tell you the decline you would have realized being fully invested. You can use that decline percentage to determine what SAFE and Cash settings would have been appropriate during that Panic. (note history doesn't always repeat itself exactly)
Ideally we want to be low in stock inventory near market peaks and out of cash when markets bottom out. AIM by itself does a pretty good job of this sort of thing, but everyone likes to attempt to fine tune AIM. Things like the cash burn chart help people know what they're getting into before a panic hits.
Some things to consider.....
a) If the Panic of '08-'09 turns out to be a 'once in a lifetime' buying opportunity, do we really want to saddle ourselves with too much defensive adjustment to AIM?
b) If the Panic turns out to be just the first bounce of the Dead Cat do we want to put our AIM settings on the "Agressive" side?
Our v-Wave helps us judge where the markets are now:
and where they were at different times in the past. I think pretty much everyone here on the AIM board was 100% invested at the bottom of the Panic. Unfortunately many were 100% invested before the markets actually bottomed. Almost everyone not using AIM was nearly 100% in CASH!!! The v-Wave held out about 10% cash for diversified accounts and about 15% for individual company stocks at the market bottom. So, it was a bit conservative.
Like a barometer, the v-Wave doesn't tell us the exact nature of the weather forcast, but does give us an idea of what to expect.
The cash burn chart gives us an idea of how deep a decline we can tolerate with various settings and cash levels. If the barometer shows a good chance of big storms coming, the cash burn chart tells us if we should stand outside, go inside or go to the storm cellar.
Best regards,
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