Hi RFH, As Bernie mentioned, the 'vealies' are used once you've accumulated adequate cash reserves and feel selling is no longer practical. For instance, if you were to reach 50% Cash Reserve and your research, history with the stock or your best guess was that this was adequate, then you'd stop selling, use 'vealies' and shout "Let It Ride!" You're then willing to gamble that the next Sell trade that AIM would suggest isn't necessary or desirable since you are already just 50% at risk.
Assuming that the price per share continues upwards, the Equity/Cash ratio continues to shift towards the Equity side. Eventually you'd need to sell again to bring the Cash Reserve back to 50%. What happens if the price starts to fall? Your Equity/Cash ratio actually gets heavier on the Cash side until you eventually do some buying. It might be 55% or 60% Cash at the point AIM triggers your first buy! Your cash hasn't changed, just the ratio.
Now, assuming that you instead choose to use a "Stop Loss" order instead of a 'vealie'. You've generated the same 50% Cash as the above example. The price continues to rise and you initiate your stop loss order about 10% under the current price for the bare minimum order size you're willing to trade. As the price continues upwards, you shift that Stop Loss upwards as well to match the movement. The Equity/Cash ratio shifts as the price rises to something heavier on the equity side.
Now the price starts to decline. It declines enough to trigger the stop loss order. At that point, the account is showing 52% Equity and 48% Cash. You sell 5% of your equity position which equates to a shift in your Equity/Cash ratio to about 50%/50% again. The slide stops and the price/share starts to recover. You do no buying and find that you again are burdened with more cash reserve than you feel is healthy for the long term.
I don't think there's anything essentially wrong with using a stop loss. However there's things I don't like. First and foremost is that there's no guaranteed price at which it will fill. If your favorite stock opens with a gap down below your "order" price, you get that lower price. Look at the BioTechs last week. You could have been Stopped Out at a price 10%, 20% or even more below what you though you might get. That's reason enough for me not to use them.
Another reason is that they promote selling after a price peak rather than at a peak. This is similar to the problem that the 'vealie' has in that we may be pulling a 'vealie' right at a peak rather than selling. You have to remember that we wouldn't be doing either unless we already had adequate cash reserves. Also, if we're using Mr. Lichello's suggested 5% minimum order size, then we're only looking at about a 2.5% overall change in our Equity/Cash ratio, so it's not a big deal either way.
From a philosophic point of view, I think back to Mr. Lichello's statement that the happiest day in an AIMer's life is when the market has fallen to the point we're 100% invested! Each time we sell some shares we raise the next buy price. The whole "Lichello Band" moves upwards. The use of a "Stop Loss" order will accomplish this as stated above. So does the 'vealie' as it was designed to accomplish a similar shift. It's the influence on the Equity/Cash ratio that's troubling.
In a bull market, I feel that the only way to be "burned" with AIM is to miss buying opportunities as they come along. We don't want to piddle away our cash reserves on "pretend" discounts, but we do want to make sure we participate in Mr. Lichello's "happiest day" and buying cheap shares at a bottom of a "correction" or a real bear market.
I'm more concerned about being able to buy all the way to the bottom of a bad market than I am about selling a few shares at the ultimate top. The second is good for my ego, but the first is better for my wallet! With AIM, we're usually selling just a small amount of our holding near a market top, but when the price falls steeply, AIM's making huge buys.
We AIMers learn a perverse pleasure at the sight of a nasty Bear market. It's because we're smart shoppers. When I was no longer adding to my investments because I was "out of work" since 1986, I was originally concerned about accumulating adequate cash reserves. However, since I quit working for a living the market's been so good that I've actually have a bigger problem with the potential of raising too much cash. I've essentially run out of cash three times since. 1987, 1990 and 1998. That's three "happiest" Lichello periods!
I'm in favor of experimentation with different methods as long at they, in theory, cause no harm. The old saying is that there's no harm in taking a profit. So, the stop loss should work okay. I think it will take time to figure out if it optimizes results. I don't know how to "back test" it.
Best regards, Tom |
