Replies to post #5835 on A.I.M. Users Bulletin Board (AIMUSERS)

[OldAIMGuy]

Hi Rien, The first judgement is whether the deep diver has merit better than another investment.

After that determination has been made, if one wanted to re-start the AIM process of compounding LIFO gains by selling some portion of the portfolio and reducing Portfolio Control by that amount, it certainly would get some activity sooner.

I think it was Keith (Lemonhead) that talked about this back in 2000 initially. I poo-poo'd the idea saying that creating a situation where one sells a substantial portion of the portfolio at a loss makes it difficult to return to profitability. I suggested selling all or just patience. It would seem that patience is wearing quite thin these days!

One needs to determine if the investment is salvageable or "beyond salvage."

Best regards, Tom

[Conrad]

Hi Rien, V/2+PC/2 ????

I tested your idea out by using Option 1 = Standard(Doing nothing when cash = 0) and Option 2 = V/2 and PC/2(your idea). When I wanted to send the information I wiped it out!

Anyway, my general conclusions were:

1) Once you had sold 50% of the investment and halved the PC, after the investment had dived to a zero cash position, the move to do so would only pay off if the dive continued. Obviously if the dive had stopped and recovery occurred Option 1 would be better as there are more shares available;

2) When the process of selling 50% of the stock and halving the PC continued with a continually dropping stock price one would effectively preserve cash to be able to buy shares at a progressively lower price and getting more shares at the low price. I did this with a starting price of 100 and ending up at a price of 4 to illustrate it in the extreme case.

3) Finally you end up with a low PC and a low stock value. When the price recovers from 4 Option 2 starts to sell of shares at a price of say 10 and sells the shares rapidly as the price rises. At the same time Option 1 would sit tight doing nothing, waiting for the price to rise because of the high PC value. If the price continues to rise Option 2 would have sold most of its shares while the PC remained at the lowest value. Option 1 would retain the shares it had up to a much higher price and would be profitable again while Option 2 would have almost no shares left. Option 1 would win the race!

4) In the case the price would enter a horizontal trading range at a low level Option 2 would recover slowly because of volatility and frequent trading. It would take time before it would match Option 1 in potentiality and if enough time is considered it would overtake Option 1.

What in effect you are doing(I bet you know quite well)is an application of repetitive Stop Loss Bail-Outs in which you recover some cash and re-entering the market at a lower price. If Option 2, on the average, would be better than Option 1 would entirely depend on the specific behaviour of the stock. Necessarily you need a very volatile Trading Range after the Dive to recover the loss. But, of course, in Option 1 you lose the investment if it never returns to a high level. The whole exercise will be amount to the question of deciding WHEN to Bail Out and to using the recovered cash for a better investment rather than plugging it into a Deep Diver.

I do not believe that finding an optimised procedure for Deep Divers makes sense: It would require spending your capital and time on funds that generally do not perform well. The few times that the method would pay off will not likely make you happy about the other losses. It makes more sense to bail out early and only get back in if you are certain that the stock is healthy again.

The other approach is to consider the depreciation as gone with the wind and evaluate the stock at the low price: would you buy it as a New AIM Investment? If the answer is YES then it is sensible to KEEP it(or get back into it, and even buy more of it than before). If the answer is NO then you should Bail Out(or stay out).




Conrad