Q.......
Hi Tom,
Some time back I think I recall you stating that you use zero percent safe on the sell side. Do mind explaining why you decided to go with zero as opposed to the standard AIM 10%?
Thanks, Alton
A........
Hi Alton, Re: Zero Sell SAFE..............................
Several things were happening during the time when I made the decision to shift the SAFE to the Buy side and away from the Selling. Initially, I used Mr. Lichello's 10/10 SAFE and that worked pretty well for most growth stocks. During the '90s with the bull market still racing along I experimented with the concept of Split SAFE to see if one could tilt AIM towards either accumulation or distribution.
Staging all the SAFE to the Sell side made AIM buy more aggressively in declines after the first buy. This is due to the feedback to Portfolio Control (PC). Switching the staging of SAFE to the Buy side had AIM buying and adding to PC in pretty much the regular way in sequential buys. Sell signals were generated any time the value of the equity rose above PC by at least the minimum order size.
Overall, there wasn't much difference as the total SAFE was still 20%. But if one dropped below 10% Buy SAFE, then there was a modest acceleration of the cash burn rate.
Enter the 'vealie' or the action of adding to PC by 50% of the value of a rejected Sell order.......
The idea of the vealie was to say "Enough" to selling when one had sold enough shares to build the cash reserve to a suitable level. Just not selling did nothing to raise the "next buy" price and only left the AIM model with unsatisfied Sell market orders every period. So, the vealie idea was to slowly advance Portfolio Control which in turn slowly lifted both the "next buy" and "next sell" prices even without selling. Let me state again, this was only done when the cash reserve had been built up to a suitable level relative to either a fixed maximum or a moving benchmark similar to the v-Wave.
In a sense, the 'vealie' added resistance to the Sell side and possibly substituted itself for the Sell side SAFE. If the vealie was going to function to resist selling too much too soon, then SAFE on the sell side became redundant.
Along came Exchange Traded Funds. They could be purchased for entire business sectors and today we can even subdivide those sectors into smaller sub sectors. These has more volatility than diversified mutual funds but less than individual company stocks in general. The Total SAFE range of 20% was a bit large for most business sectors. That level plus 5% minimum share orders on buying and selling tended to have AIM miss a number of "round trip" type events (profitable volatility capture events).
I'd already used reduced total SAFE on some dividend payers and other lower BETA stocks with success. So, I took the same idea to the ETF world. There I could have a smaller Hold Zone or Lichello Band between buying and selling so as to capture more of the round trip events. Reducing the SAFE to 10% on the Buy side and zero on the Sell side worked quite well for most sector ETFs. To inhibit accumulating too much cash, the 'veale' was added as a final measure for ETFs. This general formula has worked well on ETFs for well over a decade.
As a final note, along the way I decided that a 30 day wait period between sequential buys tended to work pretty well to conserve cash in a long decline and provided a reduction in trade expenses and many times a deeper discount on the next buy. Here the idea was that if you are going to limit the cash buildup on the Sell side with vealies, then you should do something to conserve that precious cash on the buy side. If one doesn't use vealies, then there probably isn't as valid a reason to limit frequency of buying sequentially.
Hope this helps.
Best regards,
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