Q........
Hi Tom,
AIM looks attractive, it is not a get rich quick method, and there may be better ways to get rich moderately quick. But I am also interested in risk management, and AIM has that. Before I knew of AIM, I was already interested in asset allocation as advocated on yardeni.com. Yardeni has a valuation model for the stock market, and based on the over/under valuation he recommends one of five allocation themes(with 10%-15%-20%-30%-40% cash/bonds respectively). His 'neutral' position is 80/20. It might be fun to compare this with your Idiot Wave.
I seemed to have initially misunderstood the use of ROCAR. It's use is not, as I assumed, to 'pump up' return percentages, but to compare the relative merit of AIM tweaks. That makes sense.
It would seem logical that AIM allows you to withstand the vagaries of up- and downturns better than simple B&H. However, the extra confidence may work against the investor; see the 'deep divers'. Diligence seems required.
It is clear that AIM is not always better than B&H. A stock or fund that never triggers buys is the clearest example, but generally stocks that trigger more sells than buys run the risk of underperformance when AIMed. Vealies may make things worse, as it gives AIM less cash. (Perhaps un-vealies are called for? Your rule of only buying under the 6wk MA tries to do something like that, I suppose.) The best way to check this would be to compare the AIM account and B&H on the points were AIM reaches the original asset allocation. Then it will become clear whether AIM is gaining on or losing to B&H.
(unvealie: when a buy matches a sell (or nothing), buy, when it matches a vealie, don't buy, but undo the vealie. Not backtested.)
I have been amusing myself with reading the comments on Lichello's book on Amazon. Amazing, that people can't see
that a 2 year backtest is not enough, and that indiscriminately testing '100 small- and mid-cap stocks' just shows you are looking for an infallible get rich quick scheme. However, one reason the backtest would not have worked is the recent bull market of course. But that went by unnoticed too.
However, one claim attracted my notice. It is claimed that Lichello himself states that the method doesn't work (on p183-184 of his book). Is that true? It would seem strange.
Regards,
Karel
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A......
Hi Karel,
Thanks for the idea of "measuring" AIM's performance against Buy&Hold when the asset allocation (Equity/Cash Ratio) is the same as some point in the past or the same as the starting ratio. That makes a world of sense as a way to do rational comparisons.
Those poor folks writing on Amazon during the "bubble" period of the market about AIM and it's inability to keep up with other riskier investment models are probably dining on Humble Pie right about now! Yes, Mr. Lichello says quite clearly that he's the "inventor" of AIM and not necessarily a great practitioner of it! His book is the How To... where my Web site is more How Did I do.... He says that he's not yet made a million dollars with his method That particular section of the book was written in 1980, just three years after the book was first published. That wasn't enough time to even attempt a 10,000% gain even with his hypothetical stock. He does say in that interview that he had switched and tinkered with AIM a lot on his own which probably inhibited his performance. He also said that he'd never closed out an AIM account with a LOSS! This is significant! Gains are great, Losses are awful! Eliminating loss is important.
So, he doesn't state that AIM doesn't work, but that he's not yet in 1980 made $1,000,000 from a $10,000 investment.
On the subject of 'vealies' please remember that they are not a permanent fixture eliminating sales from AIM, but an occasional event that caps the Cash Reserve at a level we have determined (or guessed) to be a rational maximum percent of the total value. Using the Idiot Wave as a guide has worked pretty well for me so far. This last market down-turn has taxed my cash reserves to the fullest limit as of April 1st, but AIM has also been able to refund some of that reserve since then.
"Deep Divers" seem to be the current problem that many newer AIMers have. It's not that AIM failed them so much as that they failed to recognize the fact that the stocks they were trying to use with AIM had been hideously over-valued for an extensive period. This long time of being over-valued made the stocks look "attractive" when they'd fallen from $100/share to just $50/share. However they were still way over priced at $50. I tried to explain this on the Silicon Investor Bulletin Board several times. The example I used was a $30 shirt. If the price were to drop to $24/shirt, you might want to buy two. If the price was "On Sale" at $29.95, it's not much of a deal.
Now, let's assume that for some reason the $30 shirt has a shortage and the price rises to $70 per shirt. We're not much interested in that. The price then "falls" to $35/shirt which looks like one heck of a discount! However, it's still just a $30 shirt. this is where most AIMers went astray.
Poor initial analysis has caused investors and AIMers alike quite a bit of grief over the last 16 months. My own account which has been on-going for many years is still in the enviable position of being profitable - even at the recent lows. If I were to liquidate my account right now it would represent a capital gain of near 100%, and this is in a terrible market! Very few of my accounts can be sold at a loss. AIM's been profitable enough over time that there's nothing much left at a loss.
I hope this addresses the "risk management" topic in a way that helps you to understand AIM's methods. I'm behind where the account was last year in March, but I'm still way ahead of where the account was in Sept. of 1988! It all depends upon our time frame and reference point. Please let me know if I can be of further help.
Best regards, Tom |
