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Strategies & Market Trends : A.I.M Users Group Bulletin Board -- Ignore unavailable to you. Want to Upgrade?

To: Bernie Goldberg who wrote (7970)	7/16/1999 12:27:00 PM
From: OldAIMGuy	Read Replies (1) \| Respond to of 18928

Hi Bernie, At what point in percent Cash Reserve did you use "vealies" to control your equity/cash ratio? Maybe you used too low a reserve level in the first place? What SAFE levels were you using on both the buy and sell sides? All of these would have affected how quickly you spent down your reserves. It's also important to note how long this portfolio was in force. Since the changes that I recommend for stocks and mutual funds are based upon very long term holding periods, one business cycle may be too short a test for what I have in mind. (see execpc.com for reference) If we look at the tax implications of following AIM "by the book" and the additional commission costs to reinvest these funds on the basis of opinion that the cash reserve has grown too large, then I think that the relatively benign "vealie" representing about 1% to 3% of the portfolio value has merit. If one had continued selling those oil stocks to follow Mr. L's book, at what point does one decide to shift the equity/cash ratio? This seems to be as arbitrary as any other decision and also removes the simplicity from AIM. Also, by how much should one shift the Equity/Cash ratio? Again, arbitrary. One of the test beds that I ran with AIM in the past had to do with trying to start AIM with less cash reserve than either Mr. L or my Idiot Wave suggests. After all, if we started our accounts with 0.0% Cash Reserve, look how impressive the percent gains are in the first run-up! However, we're also compelled to start selling rather soon to build a cash reserve from the sale of equity value. If we've carefully chosen our equity and it does continue to rise for several years (albeit not straight up) then we've sold our cheapest shares much more hastily than would have been needed. If we had started fully funded with Cash Reserve, we then could have let AIM Sell orders and "vealies" control our risk level and conserve those precious early shares a longer period of time. This is why I started to calculate my returns differently than in the past. We can use total return and the usual methods, but a method I also use is "risk adjusted." I want to know what my total return is but I also take the average cash reserve for the time frame and then do a calculation based upon "Return On Capital At Risk" (ROCAR). It's the compounding of +20% LIFO gains on the invested side that makes the "ROCAR" very impressive. To make this calculation, I take the percent cash reserve for each period, sum them and divide by the number of periods. Let's assume that over a 5 year period the average cash reserve on a stock investment is 36%. That means that the average percentage of dollars at risk was 64%. Take the total growth of the portfolio as a percentage and divide by 0.64. This gives you "ROCAR" value. As an example, my IRA has grown from $38,107 initial value to a current value of $164,952 or a 333% total return. However, on average, only 62% of the money has been "at risk" (assuming the money market portion has essentially no risk). So, the ROCAR is 333%/0.62 or 537%. This has more than "feel good" value; it's similar to the ROI calculation for businesses. If we were 100% invested, then the Total Return and the ROCAR would be identical. Since AIM's return is accomplished with less total value at risk, then the ROCAR expands by this same ratio. Many times the ROCAR value is far beyond the Buy and Hold investor even when Total Return still lags. I hope this helps to explain some of the rationale behind my personal attempts to make AIM more productive than what "by the book" achieves. As with any increase in RISK there should be an increase in REWARD. As the examples show on the above link, risk and reward are joined at the hip, as always. Before people make changes to a good system (AIM "by the book") they should thoroughly understand the extended risks involved in attempting to gain greater rewards. It was only after 5 years of AIM (with Split Safe) on my IRA that I realized that it was way too conservative. Cash Reserve had built from a start of 33% to over 50% and wasn't getting used effectively (the IRA is invested in a mutual fund). For the last 4 years (of the nine total managed by AIM) I've used "vealies" and Split Safe and contained the Cash Reserve more closely. This has improved the productivity to the account and allowed it to perform better - if at somewhat higher risk. Split SAFE with mutual funds works well. I'm not so sure that people understand how much more rapidly the Cash Reserve is spent when SAFE is reduced from Mr. Lichello's 10% suggested value. With an individual stock that falls 50% in value periodically, it takes 50% Cash Reserve to be able to buy all the way to the bottom with SAFE at 10%. If we use 0.0% SAFE, we'll run out of cash with a 40% drop in price! So, if you start an investment at $20/share you can continue buying to $10 with 10% SAFE but only to $12 with 0.0% SAFE. Finally, using Jeff Weber's methods, he would suggest that we always sell as AIM says. If the Cash Reserve for one stock gets too large, then steal that surplus cash and when you have enough "fresh money" accumulated, start a new AIM investment. This is different than making a shift in the equity/cash ratio of a stock one already owns. It caps the total risk exposure in that first investment while letting one diversify one's portfolio with a new investment. My fingers are getting tired!! Best regards, Tom