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

[extelecom]

Aim meetings & history-Mar 6, 1998
Q.....
Hi Tom,
My name is Paul and I am a fellow Wisconsin resident (Village of
Grafton). I learned about AIM during 1981 or so. An elderly co-worker of mine (Ralph) was into investing and I used to tease him. He was trying to get to $100,000.00 in savings before he retired. I on the other hand was a new "young adult" trying to save for my 1st house. I was putting much cash away in money market accounts that he told me about and making 15+ percent on my money. As you might recall, this was a time of high inflation and I thought if I don't buy a house soon I would never get one. He was the one who told me about money market accounts when I was a naive passbook saver. I figured this guy knew something.

I used to laugh how he read over the Wall Street Journal and Barrons
every night (3rd Shift). I did not think much of saving then but do now! I was told by him that if he could do it all over again, he would go by this this book he just read. He then handed me the AIM book to read (borrow and return). I read it and began to question the method. I used up a ream of paper, a whole bunch of pencils, and probably some
batteries for the calculator. I tried different methods/numbers but the system seemed to work no matter what I did. The only two problems I had with the system was: 1) With a market that goes up over time (a fact the market has done over any length of years), and 2) A 50/50 split would not yield returns I thought a larger investment in stocks could make.

I realized about 5 years ago how I probably should have used the system but never did. I started to look for the AIM book and couldn't find it anywhere. I wanted to find the book before I started using the AIM system. About a year ago I was able to locate it through somebody that had e-mailed a message to a newsgroup on the internet. I located this through a "Deja News" search. I ordered the book and found it had been updated with new information. One of the new ideas in the book was a larger ratio in the equity portion of the program. WOW, one problem down. Now what about my problem of the history of the "up market" over time?

About two weeks ago I did a search (Alta Vista) on "AIM" and Lichello" and hit your web site. Here was the answer to my second dilemma. Finally, an approach that would work for me!!!!

I see that you came up with a "Vealie" method that takes care of my
concern. Thanks! This is exactly what I needed to feel the system will
work under the conditions I believe the long term investor needs with
the AIM system.

I also found your different SAFE percentages an extra bonus. I had tried different percentages (0/0,5/5,10/10) with very little luck. It is embarrassing to say now that I see what you have come up with, but I never thought of trying different percentages for buy/sell. An extra
thanks again! (Actually after trying different methods I tried a 6-10%
expected growth rate I added to Portfolio Control - I was scared to
actually try it.)

I know this is a long message but I felt the frustrating hours I spent
trying to fine tune the program was going down the tubes. I wanted to
give you an idea of how happy I am that I found your web page. I look
forward to hopefully hearing from you as I have some questions.

1) How long have you been using this method?
2) Is there really an AIM user group?
3) Is there a Milwaukee area group that actually meets?

I am not sure from reading your web site if I fully understand "Idiot
Wave" yet. If, after I read it a little more carefully, I have questions would you be willing to take more questions? I am not a great "web user" as of yet and would feel uncomfortable using the bulletin board.

THANKS AGAIN!!! Hope to hear from you.

Paul

P.S. I would be interested in your Newport program but I have a
Macintosh computer. I know, but I like my Mac and still feel it is a
great investment.
----------

A.....

Hi Paul,

Thanks for the kind note and don't hesitate to ask any questions that might come up. It's good to hear about how Mr. L's book came into someone else's life. I started investing when I got out of college with the spare change that was left each month. The market was being particularly unkind at the time (1971 to 1974) so every time I bought a stock at what looked to be an incredible steal, the price would continue to drop. Unfortunately, I didn't have significant "buying power" as I was just starting to invest.

I stayed essentially fully invested through around 1980. I was continually saying to myself, "If I just had some spare cash, I'd buy more of this.", when my favorites would get hit by a market upset. Finally I started to listen to myself and sold a portion of my portfolio, just to raise cash. I then used that cash to buy into dips.

When I came across Mr. L's book in about 1985-6, I was already indoctrinated to the idea of using cash. Mr. L's book added structure to what I was doing "seat of the pants." It was like a warm pat on the back.

I actually didn't start using AIM right away. I was skeptical of some aspects of letting a mathematical algorithm rule my asset allocation. In January of 1987 I started a fresh spreadsheet using AIM to mirror my existing portfolio. As the year went by, I actually raised more cash than the AIM model did. However, I was already buying back shares in Sept and early Oct BEFORE the crash. AIM was quietly humming a happy money market tune and ignoring the small price discounts.

When the the crash did occur, I'd already spent down my cash reserve from about 65% cash to about 45% cash. AIM had managed to get to about 50% cash at the market peak, but then it just rested. I spent most of my cash in late Oct and early Nov. with the final dollars being spent in the first week of Dec. just as the market bottomed. AIM, on the other hand, barely spent anything in Oct., spent more heavily in Nov. but really emptied the pockets just as the market hit its low in early Dec. Both accounts were fully invested right at the bottom, but it was already clear that AIM had been the better purchasing agent.

Starting January 1st of 1988, I switched to AIM, pretty much "by the book." Since I was starting AIM 100% invested, it took a while to get to the point that the cash reserve was an anchor for the account. It was in 1989 that I came up with the idea of using the split SAFE. I was modeling long term histories of mutual funds with the idea of using a fund for a portion of my account. (by this time I owned my first computer - an 80086 XT) It became apparent that while using equal resistance to both buying and selling, eventually the AIM account was going to lose performance because of an ever-increasing cash reserve. I chose to use the split SAFE to build in a bias for accumulation. This helped things quite a bit.

In January of 1990 I switched all of my IRA's into one account at one mutual fund. My choice was an aggressive momentum fund called Ultra Fund from 20th Century. It was small - less than $500 million in assets but had been around for about 8 years and had a good track record in good markets. It had an equally bad record during bear periods! It sounded just right for AIM! It's been great, too. However, I already knew that my split SAFE wasn't going to be enough by about 1992 or '93. Market dips just barely touched the cash, and the reserve had grown from 33% to about 50%.

Making arbitrary adjustments to the equity/cash ratio seemed to be the only way to make AIM work long term. However, then one had to make a "market timing" decision, and that is, at best, a guess. The other idea was to ignore the Sell signals that come along once the cash is "fat." That only pent up the sell side and did nothing for the buy side.

I had read about people using "stop loss orders" at a certain percentage below current prices as a safety valve for their portfolios. This is contrary to AIM's basic plan. However, once I realized that the stop loss orders were a movable item, I took a second look. These folks were moving the stop loss order up as the price rose, always staying a certain percentage away. This gave me the idea for the "vealie (so named by Colorado AIMer, Bernie Goldberg)." It worked out to be sort of an inverted AIM Buy. Just like the Buy, it raised Portfolio Control by half the "order" amount. By doing so, it usually cancels the Sell order and also raises the next Buy order incrementally. It's simple and it works!

I'm delighted that the AIM site showed up in your search. It took a long time to get the listings to show up on a regular basis with the bigger engines. Infoseek has been the most reliable, but the others work well now, too. The AIM Users Group is a loose collection of AIMers that now spans the US, Canada and has a few "members" in other countries (Peru, New Zealand, India, Netherlands, and Germany). Some use their own spreadsheets and those with Windows based systems tend to use Bob Norman's "Newport". If you would like a Mac compatible AIM spreadsheet, I know there's some available and will get you an address. I also know of someone that runs the Newport software with a "windows emulator" program on a Mac.

If you read on the AIM bulletin board, you'll find that there's only a few of us that spend much time publicly tooting our horns. Most prefer to be "lurkers" that read but don't write. This is fine with me. Recently, Bob Norman and I have discussed having a "private" bulletin board, where more people would feel comfortable, but that's still off in the future. Most lurkers come to me with questions via email. Many of the more common questions I've put in digest form at the FAQ page and just recently have started a separate page at Silicon Investor for others.

The AIM group got started out of my frustration in not being able to find anyone that knew what AIM was. I joined Prodigy many years ago and started to ask on the Money Talk BB at Prodigy whether there were any AIMers around. After a few tries, I did find some folks that had heard of it or tried it for a while, only to get bored or, finding it more work than they wanted, gave it up. However, some folks noticed that I usually was selling shares when prices were up and buying when everyone else was in a panic! After a while they started to ask how I seemed to always be doing the right thing at the right time. The AIM discussion started there.

About a year ago it looked like Prodigy might just fail, so I went looking for a good home for our bulletin board activity. I found Silicon Investor. the good news is that one can browse there for free, but the bad news is that it costs a one time fee to be able to post notes. That's still better than a monthly charge, I guess.

The largest concentrations of AIMers are in California, Florida, Colorado, and Wisconsin. The entire east coast is a strong area for AIMers, too. We all "meet" on the web and by email. We've joked about getting together for an AIM seminar someplace warm and sandy sometime, but it's not happened yet. As the number of Newport users grows, the chances of an actual meeting gets better. I'd love to do it. I've given talks at the Port Washington Rotary Club, some investment clubs and at Concordia U. in the past. I could dust off my slide projector and put together a "dog and pony show" if we ever get that far. There's about a dozen AIMer's that have been using Mr. L's methods for a while here in Ozaukee county. It wouldn't be too big of a stretch to get them all together if we chose a place that served beer!!!

If you would like a copy of the Idiot Wave graphs, send me your mailing address and I'll pop one in the mail. It's really just my attempt to break away from the "one size fits all" mentality of a fixed cash reserve for starting. I also use it as the target for the cash reserve before I start "vealies." Right now it's indicating 47% cash reserve is appropriate for starting an account with an individual high BETA stock. 47% is also the value I use +or- about 5 points for the maximum cash reserve I'll allow in my accounts before 'vealies' occur. It's more a curiosity than anything else for most people. A market barometer.

Thanks again for the note and the complements. The pages get better with time, but I still have plenty to finish. Hope you keep at it! Please feel free to stop at the office sometime. Bob Norman is my landlord and he runs Gantner-Norman Insurance. The office is next to the Amoco gas station in Port on Grand Avenue. If you would like to see a bunch of real-live AIM examples in stocks and mutual funds, we have plenty for "show and tell!"

Best regards,
Tom Veale

PS: I find ironic humor in the fact that you searched the world (via the web) for info on AIM, and it turns out that the "hotbed" of activity is in the next town over!!



"If ifs and buts were nickels we'd all be millionaires"
P. 274, 4th. Aim Edition