Q........
Tom:
Thanks, very much, for your response to my recent e:mail! I sincerely appreciate your insights.
I don't want to "bug" you and take up too much of your time. I know you have many other things to do! However, I'm still very much confused concerning the intricacies of the AIM system. I've checked your website and can't find the answers to several questions I have so I thought I'd give you another try if you're not too busy!
Among many other things, I don't completely understand how AIM adjusts the buy and sell prices with each activity. I know I'm probably missing something but for example: it seems to me that the more you buy during a market downturn (thereby raising the control value) the more you would be required to buy as the price goes down (the control value would keep getting higher while the amount invested in the stock would keep getting lower resulting in bigger and bigger buys). At this rate, all your cash would be invested in relatively cheap shares very quickly. If a Bear market stayed in place for a period of time your investment situation would end up in dire straits it seems to me! In a word, the whole system seems much riskier in practice than in theory. Maybe I'm wrong. Can you clarify this?
Why add only 1/2 of the value of a purchase to the control value when AIM tells you to buy??? It would seem to make more sense to add 100% of the purchase to control. After all, the initial control value when the account is opened is 100% of what is placed into the investment, not 50%. I don't understand.
As a general question: rather than using AIM, wouldn't it make more sense to try to "time the market" using technical analysis, cycle theory, Elliot Wave or whatever and try to sell at the highs and buy at the lows this way?? AIM sells gradually going up and buys gradually going down. Wouldn't timing be more efficient?? That way you could take your money out when the market started down, reinvest it when the market starts back up, and forget the intermediate AIM buys and sells along the way. Watching the market plummet while AIM sucks cash into ever declining share values is a very scary thing to contemplate. Knowing full well that timing is difficult (impossible?) to do consistently (I've tried several with little success!), wouldn't an attempt at this be the better way to go??
Since you say that more frequent trading results in greater profits, wouldn't trading once per day or, at least, once every couple of days, be the ideal time period rather than once a month or quarter (my front loaded mutual fund allows me to exchange funds between my capital appreciation and mutual funds as often as I like without penalty)???
You also say that a lower SAFE value uses up your cash reserve very quickly during a market decline. Wouldn't a lower (or non existent) SAFE also accumulate cash much more quickly during a market upturn?? Wouldn't the increased sells counterbalance the increased buys and vice versa???
Reducing risk by selling during a market upturn also reduces the number of shares in the account thereby reducing profit potential if the market continues to go higher, right?? Any way to get around this??
At any rate, you can tell by now that I'm really confused about this
investment method in its current form. Rather than ask a multitude of other questions, I'd really appreciate your comments and opinion concerning the following (very simple) method I'm contemplating:
I plan to place 2/3 of what I'm going to invest into my stock leaving the other 1/3 in a mutual fund. Once a week I'll compare my initial stock investment (control number) to its current value that week and buy or sell the difference (with no SAFE amount at all). If I buy stock that week, I'll increase my control number by that full amount.
Is this method workable?? If not, how can it be improved??
I'm VERY interested in arriving at an AIM method which will work for me with the smallest possible risk. I think a modified AIM rather than market timing is probably the best way to go, but, as you can see, I'm not very sure! I'd certainly appreciate any information you would be willing to provide to guide me in the best direction!
Thanks, in advance for whatever assistance you would be willing to provide. I look forward to hearing from you whenever you get the chance.
Best Regards,
John
A........
Hi John,
To fully understand how AIM functions it's best to "test" it using a spreadsheet like Excel. There you can play with the internals of it and see what the changes are. Several others have gone through the same machinations as you before deciding what to do. I have a freebee Excel spreadsheet that I could send you for testing purposes.
First you have to understand the differences between AIM and most other timing methods. Timing systems have to do with momentum, price patterns, etc. They have little or nothing to do with the fundamentals of the company. It's not even necessary to know what the investment's product is or whether it's any good. It is then necessary to guess about how the market is going to view the stock all the time. It's necessary, like a surfer, to catch the wave at precisely the right time and know how long to stay with it.
AIM is a contrarian model. It's mathematical algorithm is quite similar to closed loop proportional controllers for industrial controls. The closest controller that most people know about is Cruise Control on their cars. AIM's algorithm works much the same way. Little hills, almost no change; Big hills, big changes. The single feature that separates AIM from other control algorithms is the "Positive Feedback Loop" of adding to Portfolio Control with each purchase. This is a unique property.
How much is added to Portfolio Control was tested longhand by Lichello before he decided on the 50% addition that's included in his final model. Again, many have tested other levels of addition. Yes, there's the possibility of making more money at some times, but also of having the account die on the vine at others. The 50% level is a good compromise. Check Jack Park's site (link from my AIM pages) for more on this. His method is to use an "evolutionary" programming method to enhance AIM. It fiddles constantly with SAFE and Portfolio Control to attempt to maximize returns as the market conditions change.
It sounds like you have difficulty with the contrarian theory on which AIM is based. I'm very much a contrarian investor and always have been. My motto is "Buy from the Scared and Sell to the Greedy." AIM loves my motto. When everyone of the momentum players are dumping their shares as fast as possible, guess who's there buying up their shares? When the momentum players all herd into the buyers pen, guess who has an inventory of shares to sell them as the price rises?
I would like to suggest that you further subdivide your account into an AIM account and a Timing account. Let them run for a couple of years and see who wins. In the mean time, you'll learn quite a bit about both ends of the spectrum. So now, you'd have 1/3 committed to an AIM Stock account, 1/3 to a Timing Stock account, 1/6 to an AIM mutual fund account and 1/3 to an AIM Timing mutual fund account. Keep the same stock or mutual fund in both the AIM and timing models.
AIM's biggest drawback comes from having to put up with an extended bull market. That's why I've suggested for mutual fund users a more aggressive SAFE setting to keep AIM more fully invested. It's also why I created the "vealie" concept. This also helps AIM in long bull markets to stay more fully invested.
For most investors, they're 100% invested almost all the time. When a market turns against them, they sell off shares and raise cash. They have to be quite nimble to do this before everyone else places their own sell orders. Remember, if you can't get through to your broker on-line or on the phone, it's darned near impossible to sell your inventory. Also, please remember that "Stop Loss" orders will fill, but not a a limit price, but what the market price is when the order triggers. In 1987 and other times, people got quite a bit less than their trigger prices when the stop loss orders filled.
For AIM investors, Mr. Lichello suggests that the happiest days we have are when we've fully depleted our Cash Reserves. Now we're finally on a par with most other investors! If we've been either lucky or careful in filling our AIM orders, the last shares we've purchased should have been done near the market bottom. This means when AIM asks us to sell some inventory, it can't help but be profitable on a LIFO basis.
Cash Reserve represents latent buying power. AIM is an efficient purchasing agent for your equity warehouse. It buys shares at deep discounts to your previous sell order prices. It demands big LIFO returns on any shares purchased. AIM works by compounding LIFO gains in a turbulent market.
It's my opinion that all investors should study the fundamentals of the companies and industries that they use for investments. I look to buy stocks that have good growth potential for the future and then to manage the investment with AIM as that potential is realized. If I get to the party a year or two too early, AIM will trade a small portion of the account with price fluctuations until such time that the potential becomes realized by others. Then AIM parts out the inventory while keeping the risk level (in dollars) almost constant.
Think about the term "Fiduciary Responsibility" when you analyse AIM. Try to envision what system you would prefer to be responsible for your account through bull and bear markets. You may find that AIM doesn't suit your personality. I like its low key approach since I enjoy many other activities in my life. I like its cautious approach and risk management. I like its relative tax efficiency as compared to short term trading. I like its contrarian personality. Mostly, I like the consistency of performance over time.
Best regards, Tom |
