<<Of course, this could workin reverse as well. Set Stop Loss Limits on the way down, converting 'Actual' to 'Virtual' along the way, but still continue to Buy at lower prices. >>
This has some visceral appeal -- after all, it you think a stock is going lower, selling it at that point and buying it back lower is still buy-low-sell-high.
But, aside from the visceral appeal, it also raises more questions. From a fundamental standpoint, if one thinks a stock price will continue to go meaningfully lower, then why was it bought long in the first place?
Absent irrational emotion, the new thought that the price could go meaningfully lower must have arisen either because of some event intervening between the time of the initial purchase decision (which, presumably, was made in the belief that it would go higher) and the point to which the price has declined to where you might stop it out. Material changes are usually good reasons to get out of an investment and limit a loss.
The only other reason (aside from intervening events) for there to be a material change in the assessment of likely price direction is a realization that we blew it on the initial assessment (in Tom's inventory management analytical comparison, bought a product that no one will buy and that will just sit on the shelf and deteriorate). Making that initial assessment on objective factors, rather than subjective or emotional factors, should significantly limit the pure big mistakes -- which again, are those divorced from a material change in the objective factors that should have advised the investment decision in the first place.
It also occurs to me that one of the core purposes for AIM's cash reserves is the realization that not all stocks will go straight up from the time of purchase. However, if one has chosen a stock that is fundamentally sound, the declines, absent major and sustained market direction shifts or other material intervening factors that changes the initial analysis, should not be overly significant That is, within the range of acceptable risk, and rather than presenting selling opportunities, the declines are buying opportunities. It goes without saying that no one should ever buy a stock that they are not comfortable (within their range of accepted risk) will rise from the buy point. However, by making an effort to balance investment with a cash reserve for risk, one has the ability within AIM to end up buying low and selling high, even if the initial buy decision, in hindsight, was made early and high. Assuming that the basic decision remains fundamentally sound, the cash reserve should roughly equate in most instances to the remaining risk of further declines.
AIM, as I understand it, is a controlled, mostly objective method to average down within reason and balance it to and with relative risk and to capture gains on the upside, within reason, and balance them and continued holdings with relative risk, without completely abandoning the investment on either end.
Of course, one of the hardest things for anyone to do is recognize fundamental or non-company specific changes in the validity of the investment decision or admit an error in the initial analysis. They both are counterintuitive to our normal mindsets. A stop-loss does provide protection from those changes and errors.
Some folks are just not able to sleep well holding stocks that have declined and sleep much better closing out a position for a loss (however large or small) rather than thinking it will rise from the point of lack of comfort. While there is nothing wrong with that, it is usually inconsistent with AIM's approach, as I understand it, of buying from the scared and selling to the greedy.
All of this said, I am the definition of an AIM novice and am still trying to get my arms around all of the conceptual nuances AIM presents -- not to mention Tom's variations. If I am off base or have missed something, I encourage someone and everyone to point it out. Just writing this out has helped me to conceptualize the goals and process.
Troy
Those who shoot from the hip usually end up just shooting themselves.
Plan the grub and grub the plan.
Where is the party tonight? Who is bringng the drinks?
