A.I.M. Users Bulletin Board

[aptus]

Hello again Conrad,

"The central focus of my effort with the Vortex Method is to buy little as the stock begins to fall, and then increase the buy rate as the stock drops, and managing this so that at some reasonable drop-level most of the available cash is disbeursed. If the stock then keeps falling you simply wait and do nothing. The point of all this is that to the extend that you will increase the buy rate as the stock goes down that the cash is invested more effectively than spending it too early"

My thinking on this is that you will not invest the cash more effectively. Rather you'll run out of cash (possibly) sooner (This actually depends on how quickly you increase your buying and what your initial buy was. My understanding is that you'd start with a lower initial buy than standard AIM and increase on that. However at some point your buys will be more than AIM's and, when you reach that point, you'll probably run out of cash much more quickly. Everything I have to say from this point on is based on this thinking).

In theory what you really want to do is not buy anything at all on the way down. Instead you want to spend all of your cash at the absolute bottom. However that's not practical in reality because you're never sure when the absolute bottom will occur. So you use AIM to average down the cost of each share as the price declines. Hopefully your average share price will be better than if you just bought all the shares at once.

Using the Vortex method it looks like you'll be increasing the size of each subsequent purchase as the price continues to fall. This would mean that your average price will be higher than with standard AIM -- unless the stock price turns around BEFORE you run out of cash, but then you can't know that will happen in advance.

So assuming both methods run out of cash (and both started with the same amount of cash), AIM would most likely have the lower average price. Thus AIM would perform better when the stock price rose again.

Regards,
Mark.

http://www.automaticinvestor.com