Q.
Dear Tom,
Here's 3 questions for you.
1. When using AIM with a given stock, is there a point in time that you should cash completely out, as there is no more room for this to work?
2. Also, since the Portfolio control never decreases, it makes it
harder and harder to sell stock. You seem to need greater increases in stock price to exceed the portfolio control number in order to sell. Has this ever presented a problem for you, and if it has, how have you compensated?
3. Wouldn't this system work a whole lot better if you were to start your aim account when a stock is depressed, like stocks that have just made new 52 week lows, than starting with a stock that has already been in an upswing?
Thanks, Jeff
A.
Hi Jeff,
Yes, there is a time to finally leave one investment and move those dollars to another. Unfortunately AIM won't tell you when. I review my holdings frequently to help assure myself that the stocks are still moving in the right direction. My basic guidelines are to see the potential of a double in sales and book value over a three to five year period. I use Value Line's estimates for this. If the stock falls out of this envelope, I start to look for a new home.
There are other clues about how companies screw up that are harder to pin down. Here's a few:
1) I don't like companies that send out fancy annual reports when they are losing money.
2) Companies that are spending money on a "new administration building" usually fall out of my grace. I want them to spend money on plants and equipment, not fluff. In the book "100 TO 1 IN THE STOCK MARKET" author Thomas Phelps refers to such spending as "EGOnomics, not economics" and waves a red flag.
3) Salaries out of line with the company size or the competition's executive compensation is a sign of a top-heavy company.
4) A company that is maturing and loosing its growth rate and/or volatility might also trigger a desire to change stocks.
An intrinsic part of the way AIM works is that as you deplete the number of shares owned in a rising market, the next sell price gets further and further away. AIM is saying that you can get greedier because you've already made a nice profit. This does cut down on the number of trades a bit, but the gains are correspondingly larger.
I've also found that stocks that are rising in price will periodically have stock dividends or splits. This helps the AIM user that has a minimum share requirement to fulfill to get the "next trade." I've had stocks split 2:1 more than once, each time has revitalized the AIM account by shrinking the trade range to more useable values.
As with any shopping, the better you manage to buy, the better the value for you. I try to be patient and wait for nice low prices, but it's still a bit of a guessing game. I bought into a gold fund a year ago at what was a two year low. OOPS! AIM's helped to contain the loss, but not to avoid it completely. Cyclical stocks are the easiest to capture for an AIM account by buying near their cyclical lows.
Some stocks of some truly great companies have rarely dropped enough to get what felt like a good price. I'm afraid I've missed lots of good stocks because of this. Some would never been great AIM stocks, as there wasn't much chance to buy shares, but still they would have been great investments. With the use of "vealies" to keep a lid on the cash reserve, even steady growers become pretty good AIM stocks.
I also look for walking wounded in the Worst Performers list in Value Line (page 33 of the index section) each week. One has to be a bit selective here since some stocks are on that list because they "deserve" to be!! More often, I use it to look for sectors of the market that have been abused by a rotation. If I see 5 to 10 stocks from the same sector on the list, it tells me that it's been through a recent rotation. I'll then go study that sector to look for the best stock in the group to buy. Chances are, even the best of the sector will be off its recent highs.
Please let me know if I can be of any further help.
Best regards,
Tom |
