Here's some additional information on the Vealie from the Automatic Investor user's guide...
Maximum Cash Value: Automatic Investor uses Maximum Cash to determine when to invoke the Vealie mechanism (i.e. pull a Vealie).
By default, Automatic Investor will allow all securities in your portfolio to be sold (i.e. resulting in a portfolio that is 100% in cash).
Some investors, however, might want to limit the cash in their account (i.e. they always want to be somewhat invested in securities). Maximum Cash allows you to specify how much cash your account can contain.
It is a percentage of the total portfolio value (i.e. cash and securities). For example, if your total portfolio value was $10,000 (i.e. $5,000 cash and $5,000 securities) and Maximum Cash was set to 50%, then the most cash Automatic Investor would allow in your account is $5,000. If a SELL recommendation will cause the maximum cash to be exceeded (e.g. a sale would cause the cash to rise to, say, $6,000), then the sale is ignored (i.e. no SELL recommendation will be given) and a Vealie is invoked.
Note that Maximum Cash only applies to cash generated by selling securities. Your portfolio might contain more cash than that specified by Maximum Cash if you deposited interest, dividends, or additional cash.
Vealie: The Vealie was invented by Tom Veale to limit selling securities when there was a sufficient amount of cash already available in a portfolio. It is usually used after an extended period where the markets have risen.
It provides a way of staying invested a little longer (which subsequently increases risk a little, but with the possibility of a greater payoff).
In general if Automatic Investor is throwing off cash, it means that the equities in the portfolio are rising in value (i.e. you're receiving more sell signals than buys).
At some point you might feel that you have enough cash to cover your future purchases so you want to stop collecting cash. In essence you want to leave your money invested in the stocks you currently own.
However as the stocks rise, you will receive additional sell signals. Automatic Investor will recommend that you sell shares in order to raise cash for the next buying spell.
However you might feel that you already have enough cash to cover the next buying spell -- and you might also feel that the share prices will continue to rise.
So you might be tempted to ignore Automatic Investor’s SELL recommendations. However as the security price rises, the SELL recommendations will continue to get larger and larger.
Furthermore, the next buy price will become further and further away (so your security will have to retrace a great deal before a buy is triggered).
Enter the Vealie... you simply increase your Portfolio Control by (traditionally) 50% of the new SELL recommendation. This has the effect of moving the next BUY price towards your increasing equity value as well as lowering (or eliminating) the subsequent SELL recommendations. So you stay invested with the number of shares you currently own AND you've moved your next BUY price up AND you've lowered your next SELL recommendation.
Of course as Newton's 3rd law states, "For every action, there is an equal and opposite reaction." How does this apply to the Vealie?
First, by ignoring Automatic Investor’s SELL recommendation (regardless of whether you choose to increment PC or not) you're opening yourself to a little more risk (e.g. if the stock suddenly lost 90% of its value you'd be holding more of it because you didn't sell as Automatic Investor suggested).
Secondly, you're introducing some subjectivity (e.g. you have to decide how much cash is enough) and you're performing some prediction whether you know it or not (e.g. predicting you have enough cash to cover price declines and/or predicting the current security's upward trend will continue).
However, as long as you realize the additional risks involved, using the Vealie can be a good strategy that complements Automatic Investor nicely.
By Default, pulling a Vealie entails ignoring Automatic Investor’s SELL recommendation and increasing the Portfolio Control by 50% of the SELL recommendation. For example, if Automatic Investor is recommending that you sell $1,000 worth of securities and you decide to pull a Vealie, rather than selling the $1,000 worth of shares, you’d add 500 (i.e. 50% of 1,000) to the Portfolio Control.
This usually eliminates the SELL recommendation and moves the next buy and sell prices upwards.
To see how the Automatic Vealie works, let’s look at an example. If Maximum Cash is set to 50%, total portfolio value is $10,000 and the Vealie parameter is 50%, then Automatic Investor will limit the amount of cash in this account to $5,000 (i.e. 50% of $10,000).
If the next SELL recommendation would result in cash being increased to $6,000 (i.e. Automatic Investor recommends you sell $1000 worth of securities), then the recommendation would be
ignored and you'd be asked if you wanted to "pull a Vealie." If you choose Yes, Portfolio Control would be increased by 500 (i.e. 50% of the sell recommendation of $1000). If you choose No, Portfolio Control will not be changed – however the SELL recommendation will be ignored.
