Now to the philosophy...
At Bernie's implied suggestion, I just re-read my 1992 edition of the master text. One thing leapt off the pages but it appears to be getting short-shrift here: AIM is first and foremost a risk management tool, not a profit generation machine.
My proposition is this: with the rising tide of US equity markets over the last decade or so, too many investors have lost their fear, or they're too young to have ever seen a real bear market. Stocks only go up, right? And it they do go down, then buy the dips!
This produces demand, as reflected on the BB, for a super-charged AIM. The resulting bells and whistles include: upping the sell-side SAFE, "cheating" on the size of the cash reserve, use of margin, forcing up the Portfolio Control artificially, etc.
It all looks so good as the market tends higher and higher. I am sure the above tactics have produced superior returns for many, and that's great. Nothing here is intended to slight the excellent and hard work, selflessly shared with others, by the leaders on this board or in the broader AIM community.
But how many realise that these modifications increase the risk? And by how much? Lichello says clearly in introducing his programme that the idea is to protect principle, play with other people's money, and still reap respectable returns.
A brief personal anecdote: I recently downloaded the Automatic Investor software and began to play around with it. I had read the Lichello book and was intrigued, but this was my first hands-on experience.
So what happened? I balked when the 10% safe set what appeared to be absurdly low sell targets for my beloved but beaten down chip-equip stocks. Part with some of my AYST at 29? Or some KLIC in the mid-20s? No way. So I raised the SAFE target until a "more reasonable" sell target popped up. That meant going as high as 35%.
When I reviewed the programme the next morning, I realised I had fallen into a trap. Yes, my own sense of 40 dollars for ASYT and 35 for KLIC was now reflected in the sell points, but was it still AIM? During any run-up to those levels, I would have tens of thousands of my own money at risk, with that figure increasing with each upward tick. After all, I had just lost a bundle on paper when KLIC announced a few push-outs and all the techs tanked. By re-setting SAFE at or near the default 10%, I could reduce this risk and still have a statistical shot at good results.
I suspect the true value of by-the-book AIM, or something close, will only be clear to us when things turn seriously against us, as they must one day.
So, did I step on enough toes? ;)
jonathan |
