The first question he asked me, which sort of left me stumped was - AIM is asking you to buy when the stock is going down. This is exactly what leads to you loosing all the money when the stock is coming down from a high (like what happened in the market bust in 2000) - so why would you want to not get out of the position and take you profits or cut your losses, as the situation may be, instead of buying more ??
- Is AIM assuming that we are dealing with good quality stocks which never tank ?
- Does it have a mechanism to sense that a stock is really tanking and it's time to get out while you can ?
Hi, Satbir,
Your question is quite valid and a good one. Stocks like this are referred to as "Deep Divers," ones that go down and stay there. Certainly if one had been holding Enron or WorldCom one would have gotten into a lot of trouble.
That being said, the basic AIM theory is to "buy low and sell high". This is demonstrated in the chart where the stocks portfolio start at a value of 10, go down to 4 and never go above 10 again, still making one $1,000,000 in the stock market automatically. One must keep in mind that it is a long term, rather than short term or day-trading type of system. The point is to get stocks of some quality, yes, and it is over the long term of riding the ups-and-downs that AIM works the compounding "magic."
Lichello gets around this deep diver issue thus:
He AIM's a portfolio of stocks, rather than just one stock at a time. Thus, if the whole group is moving down, when AIM directs a BUY order, how you implement that is up to you. You can either buy a new security to add to the portfolio with the amount of the buy order. You may only want to add part of the buy order to the worst offender in the portfolio, spreading the amount of the buy order among all the holdings in the portfolio. He points out that the portfolio management isn't AIM's responsibility - all AIM is concerned with is shifting the balance between the cash and the equity sides based on the movement of the stocks relative to the parameters of the Hold Zone with which your AIM program is running. That would give you more control over how much more (or how little) you want to invest additionally into the "deep diver" stock.
Further, Lichello suggested a good portion in "blue chip" mainline securities which are less likely to become deep divers than more thinly capitalized companies.
Some AIM users get around this issue by not investing in stocks at all, but rather limiting their investments to funds of one sort or another, no-load mutuals, closed end (which can often be purchased at a discount relative to their Net Asset Value (NAV), giving further internal appreciation potential), or ETF's - exchange traded funds. The idea here being that a fund is far less likely to go 'belly-up' than an individual stock will. You trade volatility for potentially greater economic certainty with a fund, but if that helps you sleep better at night, so be it.
Personally I invest in both funds and stocks - and of stocks I've been limiting my choice to those that pay dividends - I figure I might as well have some income coming in whilst I'm waiting in between AIM directed buys-and-sells.
Hope this answers some of your questions. Keep 'em coming- we're all here to help each other out.
Best,
AIMster
AI
