A.I.M. Users Bulletin Board

[ls7550]

Hi Adam

Depends upon what/how you AIM. Setting GTC's and more frequent monitoring can yield similar results to being more laid back and just reviewing monthly.

My wallet (paper) figures that I carry around for the S&P500 and periodically update have recent values of :

Cash 1293433.234
Portfolio Control (PC) 385107.034
Number of Shares (#S) 152.494

They're not a actual AIM, just the figures for a very long term AIM of S&P500 (US stock) price only AIM (dividends and cash interest ignored).

You can calculate the next buy and sell prices from those values :

Divide PC by #S = 2525.391

For 10% SAFE and 5% minimum (15% combined) trade size divide that figure by 0.85 and 1.15

2525.391 / 0.85 = 2971 = price at/above which next selling resumes
2525.391 / 1.15 = 2196 = price at/below which next buying resumes

With recent 2600 type S&P500 price, the index AIM has some way to go in either direction before any trading resumes.

With AIM you have a guide as to what to hold (something that wont tend to go broke i.e. a major index), when to trade (AIM signals), and how much to trade. For how much you can just work out the %stock (or %cash) indicated after a AIM paper trade has occurred, and realign your actual combined stock + cash value to that percentage value at or around the time that AIM indicates it appropriate to do so.

Now the above is just the figures I use for a very conservative AIM, started in 1871 with 75% cash, 10% SAFE, 5% of number of shares minimum trade size, monthly reviews. That's been selling for the last couple of months and currently has 76.4% of cash indicated at recent S&P500 2620 price level (so 23.6% stock). As I prefer to use 2x leveraged holdings I half that %stock figure so 11.8% 2x stock being indicated as appropriate.

Historically that would never have risen above 50% in 2x (50% cash) as the standard AIM is limited to 100% stock maximum. On average it had 61% cash so 39% 1x stock, 19.5% in 2x stock. max cash was 84% (16% 1x stock, 8% 2x stock). The price only, no dividends or cash interest included provided a 2.3% annualised reward (compared to 4.5% for buy and hold 100% stock). Assuming dividend and cash interest broadly countered inflation that 2.3% might be considered as a real after inflation reward.

Given that it averaged 20% or so in (2x) stock, a 2.3% real reward from 20% = 11.5% return on average capital at risk, and that's a real reward (after inflation) figure, so with US inflation having annualised 2% over the same period = 13.5% nominal return on average capital at risk. Not great, but not bad either, especially as being the 'business owner' I'm mostly absent and just pay a visit once a month or so for a few minutes to quickly run over the figures (along with periodically making adjustments).

I opine that given the by the book AIM result, using 2x instead of 1x has the potential to dip less, rise more due to how 2x long stock funds daily rebalance. In effect they relatively reduce stock exposure as prices decline, increase exposure as prices rise, a form of momentum following play. Take October 2008 to end of February 2009 for instance, when SPY declined -65.4%, and SSO (2x) declined -92%. Half as much in the 2x as you would have had in the 1x and your decline was attenuated. Similarly when rising half in 2x as you would have in 1x can amplify the rewards. That characteristic has the potential to bolster overall rewards over time, especially when AIM's appropriate trading signals are factored in.

One of the greatest benefits of AIM however is that it has you behave more correctly, adding when low, reducing when high. More generally many private investors have the tendency to do the complete opposite, so much so that its typically opined that such investors on average give up around 1.5%/year of investment rewards due to such bad behaviour (and being a average, some do considerably worse to the extent that they'd probably have been better off just investing in T-Bills/cash deposits). I'm happy to take the opposite side of such actions.