Replies to post #6688 on A.I.M. Users Bulletin Board (AIMUSERS)

[OldAIMGuy]

Happy New Year Bernie,
"IMO this will become even more important if Congress passes a tax reduction bill that includes dividends."

This is a very interesting point on corporate dividends. I'm going to be curious how they word the potential change. If it applies to dividends only from corporate profits or if it will also apply to distributions from debt securities. I guess 2003 will probably be taxed the same as 2002 unless they make the law retroactive.

This will be interesting to watch unfold.

Best regards, Tom

[Toofuzzy]

Bernie:RE: Low Down AIM

Bernie, You are right that in absolute terms that you are investing less in stock with LD AIM but there are a few parts of doing low down AIM that I think you may not realize.
1) It amplifies volitility (trading signal size)
2) It allows a smaller investment in any one stock for the same trading size which allows more diversification for the same amount of investment capital.

After writing what I wrote below, it probably does not make sense to use for high dividend payers but I will let you analize that.

If you were going to invest $3000 ($2000 stock, $1,000 cash) with low down AIM you would be investing closer to 50% stock and cash ($1500 each aprox) but getting the same size trading signals as if you were investing $9,000.

HERE IS THE EXPANATION (as I have come to understand it)

For every multiple of $3,000 that you would invest using NORMAL AIM (asuming $2,000 stock and $1,000 cash)

What you want to do is invest less money in total but to invest enough to allow three trades in either direction. (I think that works out to either a 50% rise or drop in price potential)

So using LOW DOWN AIM you would invest $420 in stock (14% of $3,000), $360 in cash (12% of $3,000) for a total of 26% of the $3,000

PORTFOLIO CONTROL is the same as if you were actually starting with $3,000 and investing $2,000 in stock (instead of $420). So your PC would be $2,000 to start.

Because of the above you would end up with the same size trading signals as if you were starting with $3,000 but only using $780.

Can you run out of stock to sell or money to buy with? Yes but the stock will have made a 50% move (and all in the same direction at once) so you would actually have less money at risk if you bought a deep diver.

OK now for some modifications or simplifications which can give the system a little more leeway.

Instead of investing $420 stock, $360 cash
1) Invest $420 stock, $580 cash for a total of $1,000 OR
2) Invest $500 stock, $500 cash for a total of $1,000

In all cases you use $2,000 as your PORTFOLIO CONTROL to start.

I am thinking of using the above if I buy individual stocks in the future to limit risk by investing less but also allowing a reasonable trade size.

Toofuzzy

Take the road less traveled. It will make all the difference.

[The Grabber]

Bernie: Hopefully my post earlier today helps you understand LD-AIM a little better. I apologize again for providing such a lousy explanation when I sent you the spreadsheet.

Now as for comparitive returns on fully invested versus Low Down, you are correct of course if you don't consider that I will be investing the 'leftover' $ in another AIM program. In all fairness, the assessment would need to be made on the total return from all 10,000 of those $ from any source.

If my focus was current income like yours, I'd throw all my $ at a number of relatively high yield instruments (REITS, Bonds, etc), set some very conservative AIM settings with relatively low cash reserves and let it rip.

But that is not my focus currently. What I am doing is spreading my risk via diversification amongst multiple issues in multiple sectors by only owning and holding enough shares and cash respectively to cover reasonable AIM activity at the settings I've selected. (Long sentence. I know).

Please play around with my spreadsheet. Once you begin to see the effect that the different settings have on the ROCAR $ and %; and the allocation between Capital @ Risk and Cash Reserve, you can 'get to' whatever starting position you desire quite easily. For you that may be 66/33. For me, depending on the investment, I might go with 50/50 (original AIM for sideways markets), or even 100/0 (on stocks I may want to be in, but in a hugely risk averse manner).

As for potential IRS treatment of dividends, just the rumour is already being priced into the market. That train is ready to leave the station IMHO. Imagine if MFST, CSCO or SUNW decide to open their cash coffers! Tax adjsuted PE's will need to be calculated for sure!

Finally, Since you would want to invest more to maximize current income, then move to the rightmost portion of the spreadsheet. I think using the PC multiplier factor to increase your effective Portfolio Control value is an ideal approach on slow moving stocks like REITS. Under those circumstances you could improve your return even more so than you are now.

Again, let me apologize if this is confusing to anyone.

Thanks, Steve