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Strategies & Market Trends : AIM Questions and Answers

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To: fearghalmc who wrote (181)	7/24/2001 5:52:46 PM
From: OldAIMGuy	of 221

Hi F, Thanks for the interesting questions. The AIM algorithm is very like an industrial controller device. It senses the change in equity value relative to the "control" point and adjusts accordingly. However, the major difference between AIM and most control logic devices lies in the use of the "feedback loop" of additions to Portfolio Control. This positive feedback loop is much like the squeal one gets when a microphone is too close to a connected speaker. One can adjust the volume to eliminate squeal and still have good amplification. Mr. Lichello's 50% addition is just about right for most market conditions and keeps AIM performing well without too much squeal! :-) Since Portfolio Control is the benchmark for the entire portfolio's risk level and advance technique it should be treated with proper respect. Getting too far away from the normal 50% addition upon buys can dramatically change AIM's behavior and really makes it something besides AIM. Too large a number and the program exhausts the Cash Reserve too quickly in a prolonged downturn. Too small and AIM wants to sell and not buy as much. It's sort of a Goldilocks thing..... Too hot or Too cold with 50% being "just right" for most market conditions. If we are AIMing an entire portfolio of stock and funds under one account it will usually track in Cash Reserve more closely to what the Idiot Wave suggests for diversified mutual funds. This is an averaging effect with some stocks rising while others are falling. Vealies would become less frequent I would guess. When we AIM individual stocks AIM's going to follow each separate investment much more closely needing a larger total reserve as well as more restraints. Other than the 'vealie' I don't normally do much manipulation of individual cash reserve levels. The risk assessment is very difficult for the general market and becomes even more difficult for individual stocks. I have made serious cash reserve adjustments once in a great while on some of my stocks. Last year when my GENE holding soared from single digits to near the $75 mark it built up an incredible bundle of cash all on its own. I did use some of it to buy shares back as the price retreated to more normal levels, but then syphoned off the rest to repay "borrowed" cash in other holdings that had more than exhausted their own designated cash levels. This was arbitrary rebalancing on my part. I'll let you know in five years whether or not it was a good idea! :-) "Myst" has been working on a Portfolio Control adjustment that's "trend following" and makes small adjustments either up or down to PC depending upon a price trend. stockwerld.com His work is quite interesting. Others have done work on ideas similar to this. One program from the '80s was set up to reduce Portfolio control based upon an individual's guess at what the ultimate high price of the stock might be. That one would then have the investor actually sell all the way out of a stock at that predicted price. Again, the farther we get from the Portfolio Control back bone of AIM, the less it's AIM at all. The '80s program can't really be considered AIM because this liquidation feature is completely foreign to the AIM concept. However, it did use many of the other AIM design features. The program was called MyWay. Your MRF is a nice idea and actually shifts AIM more towards buy and hold. However please understand that it also will raise the Cash burn rate in a declining market. As with industrial control devices it's best to test each one individually to see what its effect is. Then adjust each in combination with the others to make sure they are compatible. Each will have an effect on "rate and reset" which then affect the tracking and over-shooting of the control point. The total effect has to be compatible with your overall risk tolerance and financial plan. Please feel free to ask questions as your development continues. I'll try to help as much as I can within my own frame of experience. Best regards, Tom

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