AIM UK

[ls7550]

With conventional stock picking there are typically a few stocks that perform badly, a few that perform well and the rest are overall neutral.

If you discount time-value (inflation), typically you might see gain and loss distributions something like that as per the first chart in this next image



Generally after inflation is considered stock prices are a net zero sum gameplay (stock prices collectively rise with inflation).

Dividends might therefore be considered as the value-add benefit above inflation, or the risk-premium for taking on the downside risk of holding stocks.

AIM however sells out of risers, adds to losers and as such has a distribution more like that of the second chart (with classic AIM you never sell out of stock, so in that case the right hand edge would show more of an up than what is shown in that image).

As such it is more of a negative sum gameplay, however AIM has the additional benefit of volatility capture gains from trading stocks in a buy-low/sell-high like manner. Those gains are much more uniformly distributed across the whole range of stocks held and collectively will either counter, under-perform or out-perform the loss from the reduced right hand strong-gainer extremes.

With conventional stock picking you have a high probability of picking a mediocre stock and a low probability of picking a stock that either rises or declines significantly (although at times it would seem that picking large losers is alot more common that perhaps should be the case :)

In concept it's a needle in a haystack hunt. If you don't hold the few strong gainers within your overall stock set then you miss that benefit. Worse still if you hold the large losers but don't hold the best gainers then your results are significantly impacted.

Holdings funds or index trackers is one way to ensure you don't miss the strong gainers.

For AIM'ers however things are simpler as (volatility capture) benefits are distributed much more evenly. We're not playing the needle in a haystack game (although it does in part still hold) as small amounts of volatility capture across the whole compensates for AIM reducing holdings in strong gainers.

AIM's finite limit on how much additional stock is purchased when prices decline also helps the overall balance. And, unlike buy-and-holders, AIM is a part stock/part cash style, so that blend can be adjusted over time in reflection of perceptions as to the more likely future mid-term direction of stock prices (e.g. using vWave).

Typically with AIM you'll see less volatility overall which means both rising less during strong bull periods and declining less during bear periods. In turn that lower volatility adds some compound benefit value in a similar way to how a consistent 10% p.a. is better than alternations of 0% one year, 20% the next.

Classic AIM and AIM-LD (and Ladder) whilst very similar have the difference that LD typically captures more volatility (larger trading) benefits than classic AIM, at the cost of lower right hand type larger gains from a select few stocks.

All-told therefore, it's pretty difficult comparing the different styles as they are distinctly different and each will have its time in the forefront. In many respects therefore vWave serves as another form of AIM, that migrates you more away from the style that has more recently shown the stronger performance and towards the style that has shown the weaker performance. The dividend yield based Ladder shown in the iBox is somewhat similar to that of using the vWave.