Hi Praveen,
I actually have a copy of your book, though I will probably never trade your system. But it's interesting to see various viewpoints on the market. In my opinion, AIM is a horrible system, formulated by an interesting writer, who was no financial guru. The book is riddled with errors. For example, one of the case studies was a T Rowe Price mutual fund. I'm sure that Lichello, did not adjust for capital gains distributions. Thus, AIM bought shares cheap after such distributions, but the buy and hold investor was not credited with the shares. The other examples omit dividends as well. Hey, some studies show that dividends wind up accounting for over half of all long term gains.
But what makes such systems, nonetheless, popular. I think it twofold. I think one could simply invest half of their money in VTI, and half in VEU. They would beat the great majority of investors, and probably almost all of the various systems out there. What won't they get? Firstly, many of us enjoy the 'game'. I trade very frequently. Fortunately, I do have a trading edge with my technique that took many years to develop (maybe I will eventually write my own book!). But for many investors (using the word, investors, loosely), just holding the same two funds, year after year, is boring, and a lousy game.
Secondly, when investors actually pick stocks, and trade them, they feel they are in control. As you rightly note, none of us is in control. We cannot make the market go up or down, we can only respond to the market. I believe successful companies tend to stay successful. I recommend that, rather, a stop loss, that everyone review their holdings on an annual, if not quarterly basis. I'd look at Value Line financial strength ratings, or S&P rankings, to decide if a poorly performing stock was deserving of a sale.
By that token, I'm not a big fan of diversification. If one is overly worried about buying an Enron, invest in ETFs instead. But if you want to invest in individual stocks, I prefer a narrower focus. You cannot follow but so many stocks. If you have a portfolio of ten stocks, for example, you are unlikely to lose more than 1/2 of any of them, if you routinely analyze each holding. Thus, one stock is unlikely to cost you more than 5% of your overall portfolio. That seems a reasonable risk for me, given the historic returns that equities have provided.
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