A.I.M. Users Bulletin Board

[Conrad]

Something interesting happened

On my ERX Test Run I used the Cash Burn function in my Excel Cash Limiter spread at a value of 0,5 and noticed that its optimum value was 0,38.

I use the Excel PV Chart to see what happened when I started to use different Cash Burn rates. When I set the Burn Factor to 0 the PV exploded to a value of almost $ 45000 and the yield went trough the roof at 377% per year. The average invested capital dropped to about $ 3200 and that small investment produced a profit of $ + 24000.

I did not understand this so I analysed what happened: I had expected that with a Cash Burn Rate = 0 no Buys would be executed at all and that only Sells would Result, but examining the Trade Register I noticed that plenty of Buys were executed. In order to explain this I examined the Trade Execution Function. . .TEF

Thee TEF looks at the Trade Advice and the Cash Burn Factor and I discovered this TEF-thing was a lot smarter than I had expected. I had forgotten how I programmed it!

1. The TEF checks the Trade Advice and decides if it is a Buy or not;
2. If it is a Buy then it checks if the Cash is enough for the Buy and IF so it executes the Advised Buy for 100%.
3. If the Cash is less than the Advised Buy it is multiplied by the Cash Burn Factor to preserve cash level for buys at lower prices. . .

Brilliant!

If the Cash is beginning to run out the Buying is reduced as a fraction of the remaining cash.

With the cash Burn factor at 0 No Buy is executed if the Cash is Less than the Advised Buy. This means that as the cash runs out my AIM waits till the cash stack is rebuild after one or more Sells, and when the price drops again there is again enough cash to start buying. It seems then that setting the Cash Burn Factor =0 effectively reduces the number of buys and thereby increases the yield significantly.

It seems clear top me that this works well with high frequency volatility. Also when an equity price is diving there is no Buy Advise at the bottom unless the investor overrides it. That is a very good for not being advised to Buy. The savvy investor will know that the price has dived and he could override the this Cash Preserving function. . if he desired to do so.

The TEF is en effective filter to simply stop spending cash if cash is at a low level and forces the investor to examine the equity and its behaviour to decide what to do next.