When buying on a downtrend, it is best only to take a small position, until the downtrend bottom is confirmed. Then, load the boat if fundamentals and all other indicators provide for it. Properly evaluating market caps and clear knowledge of dilution helps considerably, in determining bottoms.
Hi, Lowman,
You've hit on part of the idea of AIM - Automatic Investment Management, buying on a downtrend, as discussed on the board you list under A.I.M. in your listing of 'satellite' boards which participants of this board may well find useful. I should like to give a general synopsis of what AIM is and how it works - as well as invite interested people over to that board if they'd like to discuss the ideas in more depth.
AIM was developed by the late Robert Lichello in the late 1970's after his investments were devastated by the 1973-1974 bear market. The "bible" is his book, still in print in the 4th edition, "How to Make $1,000,000 in the Stock Market - Automatically!" ISBN-13: 978-0451204417, which can be had new on Amazon.com for $6.99.
The basic theory is a contrarian one, and one that considers cash as integral a part of the investment as is the amount invested in stock(s).
If you consider a sine wave:
where the wave is the rising and falling price of stocks or a portfolio of same, over the x axis of time. As the price rises to the peak one sells off part of a position. Then, on the decline of the sine wave, one buys more at a cheaper price, to sell on the future rise of the stock price.
AIM provides a mathematical construct where such buying and selling is done at determined intervals, and in a determined amount. Thus, one can know in advance at what price to make the next purchase or sale and for how many shares. This gives the foremost benefit of removing the emotions from the trading process. You no longer have to sweat the ticker, nor get all bollixed up at whatever the market is doing - you now have an advance plan whether the market goes up, or down, or sideways. Indeed, once can place GTC orders and simply check on them to see if they've been filled.
A short version of how it works is this. Start with say $10,000 and a brokerage like Foliofn where you don't have to worry about commissions. The type of stock we're looking for is one that has a good up-and-down price movement- the closer to the sine wave in real performance, the better AIM will work with the stock.
So, for example, the Dow Jones Industrials index proxy DIA has been rising lately - it's not so good for AIM:
On the other hand, Brazilian steelmaker SID give a much more AIM-friendly chart:
So - what do do from here? As I mentioned - instead of putting down the whole $10000 into SID, for example - one realizes that the price could go down from where you're buying it - so it makes some sense to create a cash reserve - holding back some of the cash in an interest bearing money market fund to buy more shares later more cheaply. Now the amount suggested for the reserve has varied over the years, Lichello when he first started suggested a 50/50 split but later got to an 80/20 ratio - invest 80% keep 20% in cash. I'll use the latter in the example.
$8000 worth of SID, $2000 in cash.
How do we determine when to buy or sell - we first set up a comparison value, which Lichello calls "Portfolio Control". This does two things, first gives us our comparison value then acts as a recipient on a positive feedback loop - more on that in a few...
So, we set Portfolio Control "PC" to equal the amount of our stock value, in this case $8000. Next we want to determine when to make the next purchase or sale. The "suggested" values are 10% buy or sell resistance plus 5% of the value as a minimum transaction size (buy or sell). Taken together - the 10% resistance values plus the 5% minimum size gives us 10+10+5+5 or 30 - which approximates the zig-zag lines on the graphs. Say our $8000 got us 200 shares - or an initial value of $40 per share.
Using an AIM values calculator that can be found here:
http://www.aim-users.com/calculator.htm
We find that the next purchase amount is $348 at a price of $34.78 (or less) a share for 10 shares. The next sale will be for $471 at a price of $47.06 or higher, also for 10 shares. As long as the price sits between $34.79 and $47.05 the stock is considered to be in a "hold zone" where one does nothing until one end or the other is reached. As the time in the hold zone can be a while, I prefer to hold dividend paying stocks so that I get some time compensation for the time spent in between trades.
As for the positive feedback loop I mentioned - when one makes a purchase one adds one-half (50%) of the purchase to Portfolio control. Thus the next purchase will increase portfolio control to 8174. This then becomes the new comparison value, along with 210 shares from the 10 we just purchased. You'll note that the hold zone moves in reaction to this purchase - $355 is the new purchase amount, with 10.5 shares being requested for purchase and the sale price drops to $45.79.
Over time, as with the sine wave, the portfolio control continues to grow in size and the value of the portfolio grows accordingly. Trades will be fairly infrequent and sales will often be of the more long-term capital gain variety - it's not a get rich quickly process, but it is one that offers a steady, systematic and easy to manage system. Lots more info in the book and on the AIM board, I've just posted a most rudimentary overview.
Best,
AIMster
Hi, Lowman,
You've hit on part of the idea of AIM - Automatic Investment Management, buying on a downtrend, as discussed on the board you list under A.I.M. in your listing of 'satellite' boards which participants of this board may well find useful. I should like to give a general synopsis of what AIM is and how it works - as well as invite interested people over to that board if they'd like to discuss the ideas in more depth.
AIM was developed by the late Robert Lichello in the late 1970's after his investments were devastated by the 1973-1974 bear market. The "bible" is his book, still in print in the 4th edition, "How to Make $1,000,000 in the Stock Market - Automatically!" ISBN-13: 978-0451204417, which can be had new on Amazon.com for $6.99.
The basic theory is a contrarian one, and one that considers cash as integral a part of the investment as is the amount invested in stock(s).
If you consider a sine wave:
where the wave is the rising and falling price of stocks or a portfolio of same, over the x axis of time. As the price rises to the peak one sells off part of a position. Then, on the decline of the sine wave, one buys more at a cheaper price, to sell on the future rise of the stock price.
AIM provides a mathematical construct where such buying and selling is done at determined intervals, and in a determined amount. Thus, one can know in advance at what price to make the next purchase or sale and for how many shares. This gives the foremost benefit of removing the emotions from the trading process. You no longer have to sweat the ticker, nor get all bollixed up at whatever the market is doing - you now have an advance plan whether the market goes up, or down, or sideways. Indeed, once can place GTC orders and simply check on them to see if they've been filled.
A short version of how it works is this. Start with say $10,000 and a brokerage like Foliofn where you don't have to worry about commissions. The type of stock we're looking for is one that has a good up-and-down price movement- the closer to the sine wave in real performance, the better AIM will work with the stock.
So, for example, the Dow Jones Industrials index proxy DIA has been rising lately - it's not so good for AIM:
On the other hand, Brazilian steelmaker SID give a much more AIM-friendly chart:
So - what do do from here? As I mentioned - instead of putting down the whole $10000 into SID, for example - one realizes that the price could go down from where you're buying it - so it makes some sense to create a cash reserve - holding back some of the cash in an interest bearing money market fund to buy more shares later more cheaply. Now the amount suggested for the reserve has varied over the years, Lichello when he first started suggested a 50/50 split but later got to an 80/20 ratio - invest 80% keep 20% in cash. I'll use the latter in the example.
$8000 worth of SID, $2000 in cash.
How do we determine when to buy or sell - we first set up a comparison value, which Lichello calls "Portfolio Control". This does two things, first gives us our comparison value then acts as a recipient on a positive feedback loop - more on that in a few...
So, we set Portfolio Control "PC" to equal the amount of our stock value, in this case $8000. Next we want to determine when to make the next purchase or sale. The "suggested" values are 10% buy or sell resistance plus 5% of the value as a minimum transaction size (buy or sell). Taken together - the 10% resistance values plus the 5% minimum size gives us 10+10+5+5 or 30 - which approximates the zig-zag lines on the graphs. Say our $8000 got us 200 shares - or an initial value of $40 per share.
Using an AIM values calculator that can be found here:
http://www.aim-users.com/calculator.htm
We find that the next purchase amount is $348 at a price of $34.78 (or less) a share for 10 shares. The next sale will be for $471 at a price of $47.06 or higher, also for 10 shares. As long as the price sits between $34.79 and $47.05 the stock is considered to be in a "hold zone" where one does nothing until one end or the other is reached. As the time in the hold zone can be a while, I prefer to hold dividend paying stocks so that I get some time compensation for the time spent in between trades.
As for the positive feedback loop I mentioned - when one makes a purchase one adds one-half (50%) of the purchase to Portfolio control. Thus the next purchase will increase portfolio control to 8174. This then becomes the new comparison value, along with 210 shares from the 10 we just purchased. You'll note that the hold zone moves in reaction to this purchase - $355 is the new purchase amount, with 10.5 shares being requested for purchase and the sale price drops to $45.79.
Over time, as with the sine wave, the portfolio control continues to grow in size and the value of the portfolio grows accordingly. Trades will be fairly infrequent and sales will often be of the more long-term capital gain variety - it's not a get rich quickly process, but it is one that offers a steady, systematic and easy to manage system. Lots more info in the book and on the AIM board, I've just posted a most rudimentary overview.
Best,
AIMster
Join the InvestorsHub Community
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
