A.I.M. "In Depth" Q&A

[OldAIMGuy]

Q) Hi Tom!
Happy President's Day. :)
I've been backtesting AIM and learning a lot.

1) question for you:

During a severe bear market (2008 scenarios), what do you do when you're running out of cash to buy?
Do you get more cash from other accounts?
Or let it weather the storm and wait for months until it sells and generates cash again?

For example, if I run GOOGL from Nov 2007 to Jan 2010:
The cash portion gets drained quickly and is cash-negative for about 7-13 months.
(Depending on initial cash position of 30% to 50%)

What do you do in the months where AIM wants you to buy, but is out of Cash portion?

2) Also, related to my previous question about running out of cash during bear markets:

You wrote : "I now have a habit of adding 5% to the Buy SAFE each time I buy. That helps to slow the cash burn rate a bit. Then, when selling starts to occur, I reduce the SAFE back to 10% from wherever it was after the buy cycle."

Do you have a cap for Buy Safe %?
And how many sells does it take before you reduce Buy Safe back to 10%?

Thanks!

A:

Hi CCL,
1) Good question! It's painful to run out of cash for AIM users, but far less so than for Mr. Buynhold. Those less than enjoyable times can be improved slightly with a technique I've been able to use a couple of times. I call it the "Black Swan Method."

With the Black Swan method I take the last buy price and divide it by 0.80. That becomes my "next Sell price" for a minimum size trade. This can be quite a bit lower than what AIM would be suggesting as a Sell target price. Should the price rise to this new, lower target I'll sell the minimum shares designated by the percentage of Portfolio Control I've been using. This is even though the price/share is lower than AIM suggests. Once that sale has been made, I then won't sell again until AIM comes back into selling range. If the price/share continues to rise, eventually AIM will sell and start to accumulate cash again.

However, it's possible that the bottoming process of the market will bounce a few times. I use the last Buy Price that drained the cash to zero again as my buy target. If the price drops to that previous price, I'll buy the minimum amount once again. Once more I'll set that same non-AIM target in place for selling a minimum amount of shares. This way, if the bearish period before recovery continues for a long time, at least I'll be able to clip some coupons profitably while low on cash and awaiting the Market Pendulum to swing back toward its mean.

I've not had a lot of these black swan events occur, but this method has worked well when it has occurred.

There is another possibility that I've never used. It's the use of Margin Buying. While I've studied it I've never used it. Most investors are 100% invested at market tops where AIM users are not. Some are using Margin buying even near market tops and are 150% invested (100% stock + another 50% borrowed)! We AIM users buy into the market weakness until our cash is exhausted. By coincidence, many times that will be around the market bottom. If we were to continue buying by borrowing on margin but using AIM as our guide, it looks potentially successful as a way to continue buying. If the market is truly bottoming, then we won't have margin exposure for very long. AIM will get back to selling and back-fill the margin position and then continue selling and rebuilding our cash reserve. Like I said, I've never done this in all the years I've been using AIM even though theoretically it looks like a good plan. Most investors use Margin at the wrong time - near market tops. This theory says AIM's far smarter and would only consider using Margin at or near market bottoms.

You can back test this idea by letting your spreadsheet go to negative cash reserves as AIM continues to buy on Margin. It should shorten the overall recovery time. Proceed with CAUTION!!!

2) As soon as AIM reverts to selling, I reduce the Buy SAFE back to its standard 10% level. I've had a couple of individual stocks take the Buy SAFE as high as 40% with many sequential buys. At each level, I buy only the minimum amount at the suggested price indicated with the higher Buy SAFE.

AIM can and does run out of cash periodically. CASH is the Precious component and lubricant for the AIM engine. AIM CANNOT run out of shares, however. Since we're selling only a portion of the remaining shares, the shares are inexhaustible.

Best wishes,
OAG Tom