Q......
ok experts :-). in AIM, if we buy a stock 1/2 of purchase price gets
added to PC. why not all of it? likewise, why do we not deduct from PC when we sell a portion of an aim stock/fund? i did read all the book (can't find it right now) but do not remember reading anything about the why's of these actions/non-actions.
i also admit to not yet reading all of FAQ on AIm homepage, are these
questions addressed there? the only thing i could come up with for the sell question is that not deducting cost from PC is a strategy to keep us conservative and not go hog-wild on the next sells. our value of stock is down after sell but PC controlling figure at same level prohibits a "too-soon" sell of more stock. since AIM is conservative, it would seem that adding all of a buy to Pc would also act as a brake.
yes? no? go jump in a lake? it's really too, too cold today to do
that. heehee!!
cheers. jj :-)
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A......
Hi Jan,
It's really simple math regarding the Portfolio Control. Adding the full amount of the Buy Market Order would push the next Sell order way up and maybe inhibit a nice LIFO return. It also would make the next Buy Order come way too soon. Remember, we determine all future orders from the PC value.
You could also look at PC value and say "why raise it at all? I was only willing to risk $10,000 to begin with, why should I be willing to risk more now?" Well, the answer is that AIM is rewarding you for being a good shopper. It nudges PC upward to allow you to grow your portfolio as time goes on. Each cycle of the stock's price has a profit taking and reinvestment portion. AIM likes you to take profits and also likes you to reinvest at the right time. Think of the addition to PC as being given a REAL "Adaboy!"
The reason we don't ever reduce PC is that we've made a commitment to the market of $X0,000 and that is what we were willing to risk at the beginning. That establishes PC at the start and AIM's selling keeps us at about that level of risk no matter how high the price rises. It's only when the price falls that we're allowed to risk more. If you have a spread sheet on your computer, you can try this. Start with $10,000 invested to begin with and then keep raising the price per share until it's 5 times the starting price - No price drops and buy-backs are allowed. How many dollars are at risk in
the market at the very end? I think you'll fine that there's not much more at risk at the end than at the beginning. This is AIM asking "If you were only willing to risk $10,000 when the price was $10/share, why with the price now at $50/share would you be willing to risk more?"
So, to summarize, AIM allows PC to rise as a "reward" for our good behavior of smart shopping. It only allows a small rise (1/2 the purchase price) because it wants to be able to sell again soon (LIFO gains) and it doesn't want to make another buy too soon. I believe Mr. Lichello calls Portfolio Control something like the "governor" of AIM. Take a look starting on Page 36 of the AIM book and read how Mr. L came up with the 1/2 addition. It makes better sense after reading.
Part of my own background was in the use of programmable controls for
industrial equipment. The AIM algorithm is actually similar to such devices. The main difference is this "positive feedback loop" of adding to PC. If this were included in your thermostat in your house or in the cruise control in your car, it would be disaster! Can you imagine that every time you went over a hill and down the other side that your Cruise Control added another 5 MPH? Pretty soon you'd be drawing LOTS of attention from the local police! Because we're dealing with money and not speed or temperature, it's okay to have this feedback loop. IT WORKS!!
Best regards, Tom |
