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

[extelecom]

Vealies, Idiot Wave, Minimium Share-Apr 15, 1998
Hi Tom,
As I've worked more with my 123 spreadsheet for AIM, I've noticed some things and the following questions relate to those items.
Regards,
Mak

>Q1:

"At what precise moment do you call a Vealie?"
----

A1:
Let's say that after a long string of successful Sell events I now have 50% Cash Reserve in my individual stock account. The next Market Order that AIM gives me says to sell 110 shares at $20 per share. This equals $2200 dollars value.

Instead of actually selling shares, I bring up the Portfolio Control value (in your case, it's displayed in your 123 program) and add 1100 to it. This will eliminate the Sell Market Order.

I only pull a "vealie" when AIM/Newport has indicated that a Market Order is pending and Cash Reserve is fully funded. If it were a mutual fund, and my "fully funded" point is 33%, then any market orders I receive from AIM/Newport to sell after that point are turned into "vealies."

After a string of "vealies" the Cash Reserve will have been diluted as a percentage of the total value. The first "vealie" occurred with the Cash Reserve hit the 50% mark, but the second and third occurred when the Cash Reserve was at 48% and 46% respectively. When the Cash Reserve has been diluted by 10% (50% reduced to 45%) then I resume selling shares in conjunction with the Market Orders that AIM/Newport gives. This will usually close the gap to the upper Cash Reserve limit again and then I repeat the process.

Yes, I use the Idiot Wave value instead of a fixed %age for the upper limit of the Cash Reserve. So, I might perform my first "vealie" when the Idiot Wave shows 50% is appropriate. If the Idiot Wave risk indication falls, say to 45%, then I would perform "vealies" until the cash is diluted to 40%-41% before I resume selling.

Let's assume that I've performed 3 "vealies" in a row at around 40% Cash Reserve and then the Idiot Wave starts to rise. When it's risen to 45%, I'd start to follow AIM/Newport's advise and sell again to bring the Cash Reserve up to that point. As the IW continues to rise, I'd sell again and again to keep the cash level in concert with the IW's recommendations.

>Q2:

>"Which of course gets me to the next point. Do you regularly
>put up the Idiot Wave on the Silicon Investor?"
-----

A2: Yes. I update the Idiot Wave values weekly in my newsletter. It's posted not at Silicon Investor, but at the AIM web site:
http://www.execpc.com/~oldcat/3bbs.htm
and there's also the three or four previous week's reports stored at:
http://www.execpc.com/~oldcat/oldbbs.htm

So every week you will know if our Idiot Wave has given us a new target for our cash reserve. It's divided into a value for individual stock holdings (high volatility) and mutual funds (lower price volatility).

>Q3:

>"When AIM kicks in a Buy signal, and given existing share prices the
>Buy isn't enough to warrant 100 shares of purchase, what do you do?
>Pass on the opportunity, or purchase odd lots as Mr L apparently
>suggests?"
-----

A3:
If the AIM Market Order isn't large enough to be practical, I just ignore the signal.

I usually trade to the nearest 100 share lot rather than odd lots with my larger holdings. With today's very reasonable commissions, Mr. L's suggestion of using odd lots is much more usable than in the past. Full service brokers used to charge $100 for a 100 share trade or anything less than that. It was a flat $100 no matter if it was just 1 share!

Now, with discount brokers offering any trade up to 5000 shares for just $15 or so, we can rationally trade 10 or 50 or some other number of shares. Our attempt here is to keep commission costs (one of our only controllable costs in our "Equity Warehouse") to 5% or less of the transaction's value. If commissions are $15, then that would put the lower limit on the order size at $300.

In my larger holdings, I still use 100 shares or $1000 as my minimums for trading. This is for ease of accounting more than any other consideration.

>Q4:

>"By the Book, I thought a Buy order was a Buy order and a
>Sell a Sell regardless of whatever it was. You on the other hand
>have limit orders placed in your system. Why? And at what price do
>you set your limit orders?"

>Regards
>Mak
-----

A4: The Newport program calculates what one's next buy and sell prices are based upon what minimums for trade size one has used. In AIM "by the book" as soon as you have satisfied the range including the SAFE and Portfolio Control values, you get your first Market Order. However, it might be for just $1! Since this isn't a practical order size, I created the math necessary to calculate the Market Order points for predetermined order sizes. That same math has been included in the Newport program. Even with mutual funds, each fund family has a minimum order size (usually in dollars rather than shares) that must be used.

With Stocks, the beauty of knowing at what the next price orders will fulfill AIM's requirements plus one's personal preference for minimums for trading is:

- one can place "good until cancelled" orders for those minimum size trades in advance. Then the brokerage takes care of the orders when the price targets are achieved.

- at least the minimum order will be filled when the price, even just momentarily, reaches the next target.

- an arbitrary time of the week or month for updating one's AIM files may not coincide with the best price of the period.

- once the first order has been filled, one knows exactly what the next buy and sell minimum order prices are, and can place new orders to replace the old ones.

Only one mutual fund, to my knowledge, presently lets you place orders in advance (good for 90 days) at predetermined prices. That's American Century Funds (the old 20th Century).

Hope this helps. Please let me know if there's anything that I've missed. I can see by the depth of the questions that you are working your way through the pragmatic aspects of how to set up the "Mak's International Equity Warehouse" and what's required. I consider AIM to be the basics of my "business plan" for my investing. Taking that outline and creating a full, operational business requires the type of analysis you are doing. Considering the rather brief intro I gave you to my business, I'm glad to see that you are enjoying the exercise of analysis of Mr. L's ideas.

Best regards, Tom