Q............
Hi Tom. I've got a question on what to do if a stock goes down and keeps going down. I'm not talking about when its time to completely can it. No one can give the correct answer to that. Individually, we have to make that decision according to fundamentals, company news, ratios, gut feelings, etc.........
What I'm questioning here is, when a company is "on the way down". AIM will keep recommending "buys", but at some point you need to say enough is enough and question if your money is just going down the drain. Can you just stop and go into a wait and see mode, to see if the company starts to reverse ?
Since there is a tool to prevent over selling of a good company in the
"Vealie", is there a "reverse Vealie" that protects you from over buying a bad company ?
What do you do with AIM in a continuing downtrend ?
Thanks, Rob
A............
Hi Rob,
You've touched on the single biggest problem that most investors face - whether they are AIMers or not. It's difficult enough to determine what's going on from annual reports and maybe Value Line regarding a company, but then we have to throw in all the market psychobabble as well. Like Fred Sanford (Sanford and Son), we're never sure if this is "the big one!"
Let's assume that we've been able to determine that there's really no fundamental shift in the long term projections for the company. Other than quarterly fluctuations, they are still on target to advance the way we want, given a 3-5 year time horizon.
If AIM's been selling shares as the price rises, you probably have a pretty good feel for the stocks relative valuation. If you think that the stock is way overpriced at AIM's latest sell point, then you might want to increase the Buy Resistance (Buy SAFE) to the point that the FIRST buy is at a price with which you will feel comfortable. I usually try to keep the first buy point below the 26 week moving average of the price. This keeps me from buying back too soon after a speculative bubble. Once that first buy has occurred, AIM will continue to buy as usual.
The next thing I try to do when one of my stocks is falling in price is determine how long my cash will last (how far will the price fall before my cash reserve is exhausted) and how many shares I'll have at that end point. These are theoretical end points, but are usually close. From that information I make a judgement as to whether the stock will represent a proper proportion of my overall portfolio - even when 100% invested. If I feel that the size of the holding is appropriate for my overall account, I'm content to follow AIM's advice as long as the dive continues and the cash lasts.
So now I feel comfortable with the size of the holding, the long term potential of the stock, and where I'll start letting AIM do some buying. Now it's just a matter of letting the price guide AIM's actions.
There have been times when I've bought until the cash reserve for that individual stock has been exhausted. Then the price continued to decline. Now my Buying Power is gone but the price is "better" than ever! I have sometimes, under these circumstances, "borrowed" cash from other accounts and continued to buy. Remember that any homework done in the above analysis needs to be done again at this point. We want to be "SURE" that the money we're taking from our other stocks is going to be best utilized in this particular stock. Each stock has its own buying power requirements, so now we have to think about where it's best utilized.
Most often, I've just quit buying when the allocated cash is exhausted. It has been too difficult to determine if the stock justifies more cash. Or other times the rest of my stocks have been under duress as well, so there wasn't a big surplus from which to draw. Actually when the broad market is gloomy, it's sometimes easier for us AIMer's to buy. We can see the evidence of mass negative psychology in a down market. It's when one stock out of ten is getting killed that we begin to wonder if there's something we don't know about this individual stock that's gone wrong.
So, there's nothing as simple as the vealie for the buy side - other than just letting the end of the cash reserve determine how deep to go. I hope my rambling helps a little bit, however. It's been my experience that if I've done my homework well, I'm usually delighted with the prospect of running out of cash during a market decline!
Best regards,
Tom |
