Q......
Hi Tom, Okay, what exactly do you mean when you're talking about LIFO gains? Why is it important?
Thanks,
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A.......
Hi,
LIFO, FIFO and Average Cost are accounting terms for calculation of gain/loss.
LIFO - "Last In, First Out" meaning the cost for any gain/loss calculation is the price paid for the most recent shares. This is then divided into the most recent sale price. So, if we last purchased at $20 and just sold at $30, that gives us a $10 gain. So, 10/20 = 50% gain on a LIFO basis.
FIFO - "First in, First Out" meaning the cost of any gain/lost calculation is based upon the "oldest" inventory of shares owned. The calculation is the same, but one must keep good historical records to show which shares are actually being sold.
Average Cost - The IRS allows us to also calculate gains and losses on an Average Cost basis, but really doesn't like it except under very unusual circumstances but allows it with Mutual Funds without hesitation. In this case one has to keep a running total of the costs involved in the purchase of all shares along the way as well as all distributions or dividends reinvested. Then when we sell some, we're only selling them with an average cost basis. This, for mutual funds, simplifies life tremendously.
Most accountants will tell you that the IRS prefers only FIFO accounting on stocks and Average cost for mutual funds. For tax purposes, this is what I use. For "traders" this is usually a moot point since they "buy all, sell all." For AIM, however and any other "scale" type trading method, then it becomes real. This is because we "buy all, and piece out" as time goes forward.
For the purpose of demonstration of AIM's abilities, I like to look at the LIFO gains. The reason is because AIM dictates positive LIFO gains EVERY time a sale is made. This makes AIM nearly unique compared to almost all other trading systems. The formula guarantees every time you sell that you will be selling profitably from your last buy.
It's AIM's compounding of LIFO gains that makes it work. As in Mr. Lichello's example of a stock that never exceeds its original purchase price but makes 10,000%, it's all the compound LIFO gains doing the work.
Hope this helps,
Tom
BTW, I have a collection of "terms" that the AIMers generally use at:
aim-users.com
which should help when we get a bit carried away! |
