Hello Jack and Keith,
I've been following your discussion and thought of a few things along the way. So FWIW...
At a high level, AIM is meant to take us through the ups and downs of a stock's price. So if the stock is down but its fundamentals have not changed, then continuing to AIM it is not a bad idea. If the fundamental reason you purchased it in the first place has not changed, then a price decline is nothing to worry about, in fact it is a blessing because you're picking up shares at a better price. Of course if the stock is down because of changed fundamentals, you'll have to analyze the impact.
As a matter of fact, if the fundamentals of a stock change, irrespective of whether the stock's price is up, down or unchanged, it would be a good idea to re-analyze the stock. So for the rest of this note, I'm assuming the fundamental situation has not changed.
In that case, we can use AIM in a more subtle way. There is a saying that says, "never sell your stock unless you have a better stock to purchase with the proceeds." If we follow this line of thinking, then we would continually be on the lookout for a stock that is a better AIM candidate than the one we currently own.
So, regardless of the price, we could conceivably look for a better stock to AIM every day, week or month. If we find one, then we could swap it with the one we currently own (as long as the dollar value remained the same, AIM wouldn't care). If our assumption is correct that the one we just purchased has better AIM characteristics than the one we just sold, we should see better returns.
The reason this should work is because there are three main things that we can control that affect our AIM returns: (1) the stock that goes into the account, (2) the settings we use and (3) the frequency with which we update.
Assuming we've chosen the correct settings and update frequency (which in itself is another discussion) then the stock we choose is what influences our returns. However choosing stocks can open a new set of discussions not unlike the ones we've seen here regarding setting parameters. Are we choosing stocks based on emotion? Or are we choosing them based on some predefined rules that have been historically tested and confirmed? If the former, then we're not really AIMing because we are introducing emotion (e.g. "I'll AIM the hot stock my barber said is very volatile"). If the latter, however, then this would be an acceptable technique.
The question then becomes, not "should I exit a loser at the bottom or a winner at the top," but should I exit because a better AIM candidate has appeared?
In theory, I don't see too much wrong with this. However in reality finding stocks with better AIM characteristics could be a time consuming task. In fact, I'd guess that since people have already put alot of effort into determining their current AIM choices, the difference in returns from another AIM stock may not be worth the effort needed to find it. And since one of the reasons for using AIM is to spend less time on your investments, this technique probably wouldn't work for the majority of users.
However, if someone out there uses a set of screening parameters that can be automated, this technique could work quite well. A screen could be run every morning and the resulting stocks viewed. If something stuck out as an AIMable stock above and beyond what was currently held, a swap could be done.
regards,
mark. |
