Q........
Tom,
I downloaded a copy of an AIM software, which I realize is not your product. I am also new to AIM.
My real question is, using this software I run Historical data tests on AIM and Buy/Hold. It seemed like the numbers they came up with on the Buy/Hold were wrong or maybe I don't understand what Buy/Hold means. I understood it to be just that, I by a stock and wait for it to go up. If I by $1000 worth of a stock that costs $100/share and the price goes up to $200/share over five years, that is a 100% gain, in five years, isn't it?
I did some comparisons using their tool and "jbl", using a weekly buy from July 3, 1996 to July 3, 2001. It figured using standard AIM calculations a 535% return on $30000 which ended in a CP Value of $190,619.16 where as the same stock held as Buy/Hold yielded $570,519.77. The price started at $1.5312/share and ended $29.12/share. It grew went up to 19 times the original price.
This seems to be one of your favorite stocks, but why would you use AIM when this tool says Buy/Hold would have been a better investment?
What am I missing here Tom?
I understand if you can't respond, but I would appreciate it if you could. Especially since this makes using AIM seem the wrong way to go. I am extremely interested in using the technique, but this tool gives me some misgivings about using AIM! (or is it the tool?)
Regards and Thanks in advance!
Dennis
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A........
Hi Dennis,
Thanks for taking the time to pose the question. It's one that's the hardest to answer during bull markets and the easiest during bear times. It would appear that during the time frame you used Jabil would have been a wonderful Buy & Hold investment. Since Buy & Hold is 100% invested during bull markets it will always beat any system that has a risk reduction device in place - especially over the short term. It's also 100% at risk during bear cycles and therefore suffers fully during market declines. Each edge of the sword is equally sharp. I guess if I'd been certain of Jabil's success over the years, I'd not have bothered with AIM. That's the problem I can't see the future that clearly! :-)
AIM's an insurance policy. It has costs and rewards. Your AIM portfolio won't rise as fast as B&H because it's not fully invested and is dragging along the "cash anchor." However, should the market turn ugly, the cash is a useful tool for for the repurchase of shares sold profitably earlier during the market's rise. So, on the first half cycle, AIM falls behind because of fewer shares owned and shares sold along the way. The second half of the cycle it catches up a bit in that it will now own more shares than before. Each price cycle builds the portfolio's total holding in the stock while keeping a cash reserve. Once enough cycles have past, AIM will actually own more shares than B&H and then AIM usually will stay out front.
In Jabil's case, it's current quarterly revenues are equal to its 1998 entire annual revenue stream. It has grown very quickly. In 1996 JBL's annual sales were less than just one quarter of 1998's. I'm not capable of guessing just how great a company will be to that extent. I look for potential and invest accordingly, but didn't expect JBL to grow even as rapidly as it did. Along with high reward potential comes high risk of failure. AIM moderates the risk while allowing me to participate in investments that I might not otherwise use because of their own risk profile. For instance, which would have been the "better" investment in 1996 - IBM or JBL? Certainly IBM would have been safer, but didn't prove to have the same performance as tiny JBL.
siliconinvestor.com
Let's now fast forward to Year 2000 in August:
siliconinvestor.com
Here we see that to have started JBL a year ago as an investment would have been disaster while IBM was relatively safe with just a modest decline. So, it depends where in the business cycle one is.
There were very few times from 1996 to the present for AIM to have done effective buying in order to "catch up" with B&H. Therefore it's not necessarily a valid time frame. AIM takes many business cycles to get caught up and then several more to put on a substantial lead. Each cycle will close the gap. If you plan on owning a stock for a long time to realize its potential, then we have to think about the extension of risk during that time. It depends upon where in your "investment pyramid" the issue is placed. The higher the risk and reward potential usually the higher the volatility. Volatility feeds the AIM system. AIM's a volatility capture device.
There are two ways to think about this. 1) what's the risk of the lost potential in not being 100% invested? 2) how much volatility can I stand and still sleep at night?
I'm not sure the foundation of one's investment pyramid need be AIMed, but certainly candidates that only belong in the upper part of the structure (therefore more risky and less total value relative to the rest of the pyramid) can benefit from AIM's activity. AIM doesn't require the user to "time" the market, but just limits risk in a rising market. It then makes use of the dollars raised from selling to buy back shares when they are discounted from previous sell points. It has you selling small amounts of the issue when there's lots of buyers. It has you buying when there's lots of sellers. AIM asks:
"If you were just willing to risk $10,000 at the market bottom, why then would you be willing to risk twice that after the stock has doubled in price?"
I believe this to be a valid question. In your example, AIM looked at a $30,000 investment and capped risk (and reward) by participating in a massive 19 fold run. Another valid question might be, "Would you have stuck with a $1.53/share investment all the way to $60/share and back to $18/share and then back to $29/share without manipulation?"
In a talk at a Rotary meeting of about 100 members I asked how many members had purchased a stock and had it double in value. Many hands went up. I then asked how many had had a "ten bagger"; a 10X return on investment. Only a few hands went up. I then asked how many had owned a stock that had gone up 100X original cost. No hands went up.
The point of the Rotary story is that very few people will stick around for the real long term potential of an investment. I don't think I'd be any different if it weren't for AIM's risk moderating influence. However, as it is, I keep my average investments for well over 5 years and many longer than 10 years. So, it's not that AIM's necessarily given me better performance than when I was a Buy and Hold investor, but it has lengthened the "Hold" period significantly. I now select stocks for their long term potential not their short term. If I'd bought JBL in 1996 and sold after I doubled my money (typical of the Rotary group) I'd have been out years ago! I might never have gone back to that investment. If I did, I might have purchased and let it double again and then sold. I still might have missed more potential than I gained.
So, all things considered, AIM's a good method for long term investors to capture some of the volatility of the stocks they own while waiting for the long term potential to be realized. AIM runs like a warehouse, Buy & Hold runs like a museum if nothing is ever sold. AIM has liquidity almost all the time where B&H has only what the market will bear.
Please let me know if this has helped at all.
Best regards, Tom |
