Hello Tom and Matt(2MC), Everyone,
First, I take a symbolic minute of silence in respect of the victims of the 9-11-01 Tragedy. Let's hope that the efforts to stop terrorism from spreading will bear fruit.
As to AIM Investing:
A question posed to me recently by Don Carlson on the Matt-Method was:
Have you ever wondered how 2MC compares to Std AIM?
Yes, I did. In the past I have "tested" the case in which I started out with PC1=(Cash1 + Equity1)=Value1 and then treated the system in the same way as if I had used PC1=Equity1. I have however not tested this exhaustively as I assumed that this method would be functionally identical. I did not dig into it far enough that time. The fact that VORTEX used no SAFE but used (PC-V)*F was reason for me not to analyse the Matt matter. Don's question got me curious however, as to why Matt's Method worked better. My initial answer to Don was not quite rigorously defined and I was not 100% clear. Here is my analysis on this Matt matter:
The difference between Lichello and 2MC would have to show from the numerical details of the buy/sell function. Functionally the two algorithms are identical with the Advice being (PC-V) and the moderator being S*V. My Analysis goes as follows:
Advise=(PC1-V2); SAFE = S
Mod=SV
Market Order=(PC-V) -SV= PC -V-SV
=PC-v2(1+S)…subject to Minimum Trade.
For rising prices this MO=PC-V2(1-S)
This is functionally the same for both cases.
OK, Normal AIM SAFE=0,1 and the 2MC SAFE= 0,5(Matt's specification). What happens Now?
Start-Up Case-Dropping Stock
1 Limiting Case dV=0:
Then: 5% of PC1(2MC)=(Equity1+Cash1)=0,05(2X)=10% of PC1(Lichello) =(Equity1)=0,1(X)-----> Equivalency applies(Both cases: Advise =0). If the drop/rise in value is very small the Advise is identical for both cases(trivial case) and means that the expected equivalency is true.
2 Equity value drops:
As stock price drops the case is no longer equivalent numerically: Let E----->~0(Big Drop), then 5% of (E+C)= 0,05C and 10% of E =0,1(~0)=0. Therefore as Equity Value drops (PC1-V1) remains smaller, relative to no cash being present in V2, because V2 retains its value better as share price drops due to the cash being present. Therefore the Advice increases less rapidly. At the same time, apart from this the Mod is larger: 5% of V=(E+C) is more than 10% of V=(E). This reduces the smaller Advice still more in order to get a smaller Market Order for the First Buy, or to allow the price to drop further before the First Buy is generated.
After updating the PC the same argument would apply: Each successive Buy would either be smaller for a certain drop in share price, or the Next Buy would be retarded and is executed on a lower stock price. This would continue to be applicable as the share price drops, allowing 2MC to continue to buy when Lichello has already exhausted its cash. This is an effective scheme for stretching the cash for am AIM as is discussed many times before.
On a stock price rise the reverse happens and the 2MC Method will allow the profits to run longer in Retarded Sells. Note however that the better performance of 2MC would only occur if the stock price sinks below the level at which the Lichello AIM stops buying while 2MC is able to continue buying as the price drops(or to let the profit ride longer for a price ride). For a case that Lichello is not without cash and the price starts rising again, then the Lichello AIM performs better, as it has converted more cash into low priced equity at that point.
It is important to compare apples with apples. The 2MC method should therefore, all other things being equal, not always beat an Lichello AIM, but only for the cases in which the Lichello AIM has run dry before the bottom of the Price Dip!
This conclusion is somewhat similar to the conclusions I can make about the VORTEX system: In the Agressive Mode, relative to a certain Resistance adjustment, VORTEX would run out of cash rapidly if the share prices would dip more than expected and go out of bounds of the Trading Range that was anticipated. For this case I have TurboVest to help me out(but that would raise the risk exposure as wel): I call this stretsching Resources. The point being that all the schemes for super performances will come at a cost that it will be necessary to be more involved with the method that one uses, and one should be be prepared to take action in response to the market moves in order to not let a weakness in the method erode the profits that may already have been accumulated.
Regards,
Conrad
AI
