A.I.M. Users Bulletin Board

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FWIW - I found this daytrader story in Tom's Q&A and thought it worth posting!
Hi Tom!

I am really enjoying your website. I was looking for information about AIM, and I found the discussion groups in Silicon Investor.

I bought Robert Lichello's book about 5-6 years ago, which is about the time I really got interesting in the market. I tested the system on paper, and it made a lot of sense, and worked, but unfortunately, I never implemented it. I got off on an impatient tangent, and started short term, and daytrading. That lead into options, and into futures.

In fact, for the last 2 years, I quit my job and have been trying to daytrade S&P futures full-time.

I have spent at least 60-80 hours a week, testing different forms of technical analysis and trading systems, and, over the last 5 years, I have been a net loser.

So, I feel pretty confident that, in my opinion, technical analysis and timing the markets do not work in the long run (or not-so-short run), at least for me.

I'm not upset about the time I spent. On the contrary, I am still relatively young enough (32) to rebuild my savings. I also enjoyed my time trading, and I am glad to learn about the futility of get-rich-quick trading now, rather than getting sucked into it when I'm older.

Anyway, I understand the reason why 90%+ of day-, options, and futures traders lose - 1. high leverage, 2. time limit/expiration, 3. "The trend is your friend".

My third reason is interesting, because I consider it to be one of the reasons that I have not succeeded at trading, and even now, the "brainwashing" is so strong, that it makes me nervous about AIM, even though logically, AIM is more safe, and makes more sense.

Every book on technical analysis, and my mentor, who gave me pointers on trading, stress, trade in the direction of the trend, cut losers quickly, let winners run, and never add to a losing position.

But, I have found this to be a losing strategy! If you buy on the rise, and sell on every dip, you will get some big winning trades, but the small, but steady losers will take all your money over time! Since traders take short trades, the bleeding is faster!

With the leverage and expiration dates, you can't do something like AIM with options or futures, but you can with stocks.

I have been reading some books on Warren Buffett, Peter Lynch, etc. and they all believe in picking sound stocks, and getting them at undervalued prices, and selling at overvalued prices. In fact, the real big players in commodities (like Buffett in silver), buy unleveraged, actual supplies (that don't expire) at undervalued prices and sell at overvalued prices.

So, I have decided to go back to work, save up my money, select the proper stocks, use AIM to manage my inventory properly, and accumulate my savings in a sane, steady business-like approach.

I re-ordered Mr. Lichello's book from your link to Amazon, since I lost my old copy.

By the way, I was trying out some examples on paper, and I think it might make more sense to add the 1/2 quantity to portfolio control during each sell, as opposed to each buy. The portfolio control will rise about the same over time, but it seems that your buys are lower and your sells are slightly higher.

Regards,

P.
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A........

Hi P.,

Thank you for the letter of introduction! That's a story worthy of telling. It reminds me of things I've read in BARRONS regarding trading salons and the whole short term mentality that's prevalent today. It seems that there's absolutely nobody that wants to admit that it's indeed very hard to beat Buy And Hold! Certainly on CNBC we don't see many advertisements encouraging B&H as a strategy! After all, the broker only makes half the commissions with that strategy!

Seriously, there are times that technical analysis has worked. However, as a pure strategy, it misses the main point of living in a capitalist society. Capital is raised to create an entity known as a corporation. It is capable of producing a product or providing a service, and if done correctly, should be profitable. Those who participate in the capital markets get to share those profits either as dividends or with appreciation of the original investment.

Going to the other extreme, Buy & Hold completely ignores the market action, psychology and all other "technical" measures and only concentrates on the very long term benefit of being involved in a growing population, society, economy and capital system. There are very serious arguements that conclude that we're better off just owning equities until we die! Then our offspring receive the equities (after Uncle Sam takes his cut) at a "stepped up" cost base to the date of our demise.

AIM takes a bit of the middle ground. It recognizes that there are, indeed, fluctuations in price/share of equities over time. It ignores the source of the fluctuations and only concentrates on how to benefit from them. It also is cognizant of the fact that we are involved in the capital markets for the single reason of hoping to have our total value grow over time. We don't buy stocks hoping they will go out of business!

I, too, am a "reformed" ST Trader. My M. O. was not exactly pure ST trading in that I studied the fundamentals of the companies which I traded before my initial investment. It was to be sure there was real value in the investment prior to making a commitment. I figured that if I was "wrong" about my timing, I was then only "stuck" with a surviving company for a while. I didn't subscribe to the "Cut Your Losses" portion of the TA methods.

Over time, I began to realize that my short term profits, although compounding nicely, were many times leaving significant profits "on the table." In other words, if I bought a stock for $10 and sold out of it for a short term gain at $15, I'd made nice money. But if that stock continued on to $50/share without a major opportunity for me to buy back the shares, I'd missed more profit than I'd made. It became clear to me that ST Trading wasn't paying me well for my time invested in fundamental analysis. Here I was picking great companies but not staying invested with them long enough to realize the majority of the potential that I was seeing. I "flirted" with them, but never took them on a "date!"

Another aspect of my ST trading days was the amount of time I was spending for the returns. During the "trading day" I was glued to the ticker service I had delivered to my office. Then the rest of my time was spent looking for new potential trading vehicles. As you mentioned in your own letter, this left very little time for living a real "life."

AIM has solved many of the above mentioned problems. It allowed me to invest and participate over the long term in the financial growth of the companies that I studied. It didn't require me to be actively watching the "ticker" all day, so it gave me hours a day to pursue other aspects of my work. It is relatively benign from a tax point of view in that it, after the first 12 months of an investment, almost always creates LONG TERM taxable events. This means a savings of nearly 1/3 on taxes and those savings go straight to the bottom line. Putting a rational upper limit on one's risk let me sleep well at night.

So, adopting AIM 1) got me over my "ticker addiction" - no more anxiety attacks if I had to be away from the market; 2) reduced my taxes; 3) gave me time for fundamental analysis, family, hobbies and friends; 4) let me participate in the long term potential of an investment; 5) gave me credit for recognizing that market conditions do fluctuate. Not bad for a simple strategy!

Please note that "The Trend Is Your Friend" is actually closer to the truth as an AIM investor than as a ST Trader. In an upward trend, AIM is converting equity value into profits while remaining at the upper limit of your risk tolerance. If that upward trend lasts 10 years, you still have just as many dollars at risk as in the beginning (and a mountain of cash). If the trend is downward, AIM will accumulate more and more shares as the price declines. AIM's a bargain shopper. Your reward for being a "good shopper" is to expand your risk envelope for the next time the price starts to rise. Statistically Bull markets are longer than Bear markets and long term gains have always beaten long term losses. Trading is likened to Musical Chairs where all investors are seeking the same chair. Many are left standing when the music stops, however. Since so many Traders are using essentially the same indicators, software and following the same "momentum stocks", their trade points are too similar for very many to "win".

Typical trading logic only fits with the inverse psychology prevalent with investors. It works in a counter-productive way. It says, "The risk is higher, therefore invest more" and "The risk has gone down, therefore reduce your risk by selling." We don't buy more toilet paper when the price goes up, we buy more when it's on sale. Why do ST Traders think it's a good idea to do the opposite with investments? It's this "Through the Looking Glass" mentality that benefits Uncle Sam, the Brokers and very few others.

AIM, on the other hand, asks us a very astute question. It asks us, "If you were only willing to risk $10,000 at the bottom of the price cycle, why would you be willing to risk $20,000 now that the price has doubled?" AIM limits our risk exposure to about 10% above our initial investment through the first market price cycle. After that it increases the risk envelope in accordance with how well we profited earlier and how well we performed as Purchasing Agents. It's not that AIMers make money faster than others, it just that given time, they rarely ever lose money. This makes it different from ST Trading as you identified. Your experience showed that one winner offset many small losses. In AIM's case, many small winners add up to gains that usually far exceed one's worst loss.

The underlying effect of AIM's management is that it is designed to compound the account's LIFO gains. Each time AIM buys shares, it doesn't sell them until a minimum of a 20% LIFO gain has been achieved. The more frequently those LIFO gains occur, the happier we are. The business model states that these LIFO gains are a MUST. No trading expenses are incurred if that LIFO goal isn't reached. Since the market volatility has been increasing in recent years, the ability to actually realize these LIFO gains is easier than in the past.

It will be hard for you to break some of your ST Trading habits as you adopt AIM. It is about as contrary an investment model as has ever been designed. Good reading on Contrary Investing can be found in any of David Dreman's books. If you can find a copy of the one that I recommend at my web site, it's well worth the read. Also look for and read Thomas Phelps' book from my site. ( http://www.aim-users.com/books.htm) These help set the stage for both long term investing and contrary management of those investments.

I recommend that you take some time to run some AIM simulations with a spreadsheet program like the one from StockSystem.com. This will be a very quick way to see just how AIM works in the real world. I have and still use the template with which I first simulated AIM on my computer. It's one of the fastest ways to get "up to speed" with AIM. Your idea of advancing the Portfolio Control value when selling is similar to my "vealie" idea. In my case, I advance the risk envelope slightly instead of selling once my Cash Reserve is fully funded. This has worked well with most stocks and almost all mutual funds. However, before getting out the tools and adjusting AIM, it's recommended that you first familiarize yourself with the basic method. There will be plenty of time later to tweak AIM to help maximize your returns. (there is a way to use Options to improve AIM's overall profits, but more on that at a later date)

Please feel free to contact me with any questions you have as you get further along with AIM. With your current level of experience the book should make even more sense than 5-6 years ago. Thanks again for the complements on the web site and also for the letter.

Best regards, Tom