Hi newbie.
I've already read the 3 prior responses (all excellent BTW) to your question, so won't repeat that advice (too much).
However, you bring up a very valid point with respect to 'cutting your losses' rather than buying more. I think the answer to your question depends on one's point of view and objectives.
Specifically:
- Cutting one's 'losses' is somewhat of a mistatement. The 'loss' isn't one until you sell. Until that time it is unrealized. Just as if the price went way up. You don't really have that 'gain' until you sell. It also is unrealized.
- There is a big difference between investing and trading. Investors have a much longer view than a trader. Most investors buy and hold. Traders Buy and Sell. AIM is somewhere in the middle. AIM's approach of investing in a core position, and then having cash reserve to take advantage of opportunities as they present themselves is really different than trading as well as Mr. Buy and Hold as Lichello points out in his book.
To your questions:
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 ??
See difference between Investing and Trading above.
Is AIM assuming that we are dealing with good quality stocks which never tank ?
Yes. Lichello says as much in all 4 editions of his book. Now not all of us follow that advice all the time, but good fundamentals are important in stock selection; and the first steps in selecting AIM-able stock See Tom's site for his normal approach using Value Line. It is very good. Also as was mentioned in one of those replies, there is some safety in Mutual Funds and/or Sector or Style ETF's.
Does it have a mechanism to sense that a stock is really tanking and it's time to get out while you can ?
No. Not in the slightest. However, the 'mechanism' (and maybe a little bit-o-magic) of AIM lies is it's response to changes in price (both up and down).
So, if you choose well, follow the AIM calcs, and take a long view, your first question with respect to 'cutting one's losses' becomes somewhat moot.
Hope this helps in some way. Feel free to expand on this thread.
Best Regards, Steve (The Grabber)
