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

To: Jack Jagernauth who wrote (14370)	1/15/2001 3:34:09 AM
From: aptus	Read Replies (1) \| Respond to of 18928

Hello Jack and Keith, I've been following your discussion and thought of a few things along the way. So FWIW... At a high level, AIM is meant to take us through the ups and downs of a stock's price. So if the stock is down but its fundamentals have not changed, then continuing to AIM it is not a bad idea. If the fundamental reason you purchased it in the first place has not changed, then a price decline is nothing to worry about, in fact it is a blessing because you're picking up shares at a better price. Of course if the stock is down because of changed fundamentals, you'll have to analyze the impact. As a matter of fact, if the fundamentals of a stock change, irrespective of whether the stock's price is up, down or unchanged, it would be a good idea to re-analyze the stock. So for the rest of this note, I'm assuming the fundamental situation has not changed. In that case, we can use AIM in a more subtle way. There is a saying that says, "never sell your stock unless you have a better stock to purchase with the proceeds." If we follow this line of thinking, then we would continually be on the lookout for a stock that is a better AIM candidate than the one we currently own. So, regardless of the price, we could conceivably look for a better stock to AIM every day, week or month. If we find one, then we could swap it with the one we currently own (as long as the dollar value remained the same, AIM wouldn't care). If our assumption is correct that the one we just purchased has better AIM characteristics than the one we just sold, we should see better returns. The reason this should work is because there are three main things that we can control that affect our AIM returns: (1) the stock that goes into the account, (2) the settings we use and (3) the frequency with which we update. Assuming we've chosen the correct settings and update frequency (which in itself is another discussion) then the stock we choose is what influences our returns. However choosing stocks can open a new set of discussions not unlike the ones we've seen here regarding setting parameters. Are we choosing stocks based on emotion? Or are we choosing them based on some predefined rules that have been historically tested and confirmed? If the former, then we're not really AIMing because we are introducing emotion (e.g. "I'll AIM the hot stock my barber said is very volatile"). If the latter, however, then this would be an acceptable technique. The question then becomes, not "should I exit a loser at the bottom or a winner at the top," but should I exit because a better AIM candidate has appeared? In theory, I don't see too much wrong with this. However in reality finding stocks with better AIM characteristics could be a time consuming task. In fact, I'd guess that since people have already put alot of effort into determining their current AIM choices, the difference in returns from another AIM stock may not be worth the effort needed to find it. And since one of the reasons for using AIM is to spend less time on your investments, this technique probably wouldn't work for the majority of users. However, if someone out there uses a set of screening parameters that can be automated, this technique could work quite well. A screen could be run every morning and the resulting stocks viewed. If something stuck out as an AIMable stock above and beyond what was currently held, a swap could be done. regards, mark.

To: Jack Jagernauth who wrote (14370)	1/18/2001 2:14:34 PM
From: Bernie Goldberg	Read Replies (1) \| Respond to of 18928

Hi Jack, This is a little slow as a response but I just found it this morning. The Basics 7 warning signs for when to sell a stock Knowing when to sell a stock is as important as knowing when to buy it. Savvy investors have a "sell discipline," or a set of conditions that will prompt them to sell stocks. By Mary Rowland Like most investment decisions, selling is part science, part art. Unfortunately, for many investors, however, it amounts to sheer panic. They sell when their stock goes down. They sell when the entire market goes down. They sell when they read that the ruble collapsed. In short, they sell for emotional reasons. Economists like Meir Statman of Santa Clara University and psychologists like Daniel Kahnemann of Princeton University study decisions like this in an emerging discipline called behavioral finance. What they've learned is that most investors are motivated by things such as fear of loss and fear of regret rather than by rational decisions designed to grow their money. These emotional, and irrational, decisions are just what successful investors must avoid. Instead, you want a "sell discipline." All that means is that you know which conditions will prompt you to sell. A little later, we’ll go through the seven signs that you may want to sell. What money managers do I've interviewed dozens of money managers over the years and I always ask them: What is your sell discipline? Their answers fall into two camps. Those who follow the value investing strategy give an answer like this: "I buy a company when it's selling for 50 cents on the dollar and I sell it once it is fully valued at a dollar." I think here of Mason Hawkins at Longleaf Partners (LLPFX), Bob Sanborn at Oakmark (OAKMX) and Michael Price, manager of the Mutual Financial Services fund family. The second answer comes from the growth school managers like Gary Pilgrim of PBHG Growth Fund (PBHGX) and Bill O'Neill, publisher of Investor's Business Daily. They buy on momentum and sell when that momentum slows down. "Sell too early," O'Neill suggests, so that you don't get caught in the downdraft. Well, these sell disciplines sound fine. But do they make sense for individual investors? Do they work for beginners and intermediates, or those who haven't built their own momentum models? Investors like me, for instance. And maybe like you. I don't think so. Buying a down-and-dirty value stock is intimidating enough. To do it, you must have the conviction that it's going to come back. Selling a value stock when it reaches full price means that you must know how to analyze the company so you can determine that price. If you're a growth investor, watching for a slowdown in trading volume might be more doable. But that's for traders. How then do the rest of us decide when to sell? Let's assume you’re a buy-and-hold investor rather than a trader. You've put together a group of stocks that you expect to hold for the long term because you think the companies have solid long-term prospects. Now you need a sell discipline. Consider Tom Marsico, formerly manager of Janus 20 who now oversees the Marsico Focus (MFOCX) and Marsico Growth & Income (MGRIX) funds. Marsico says that he buys a business with a good story to tell, "one in a good area with a management team that is innovative and creative." And he sells "when the story changes." Your job as a stock investor is to decide when the story changes. You have to avoid being trigger-happy. Seven warning signs Look for these events as reasonable times to reassess a stock: The company changes management. The company is acquired or merges with another company. A strong new competitor enters the market. Several top executives -- known as company insiders -- sell large blocks of stock. You need to rebalance your portfolio to maintain your long-term investment objective. It could offer a short-term tax advantage. The stock surpasses its target price. None of these reasons are grounds for selling simply because one or more of these factors occurred. It just means you need to examine the company to determine if it’s still a good investment. They’re the yellow caution flags of investing. Let’s use a real-life example: Suppose you bought Pfizer (PFE, news, msgs). The introduction of Viagra sent that stock soaring. Then perhaps you picked up the paper one day and read that a handful of people died since they began taking the drug. Do you sell? No. The story hasn't really changed. Many of the people who use Viagra are older folks. There may be no connection. What if you buy Intel (INTC, news, msgs) and the competition seems to be weakening its powerful position in the chip business? The need for rebalancing So you have to decide -- and if you’re a long-term investor you should err on the side of staying put -- when the story changes. You must also look at your own portfolio and make certain you still have the balance and diversity you want as your investments grow. Rebalancing offers a more interesting issue for long-term investors as they decide whether to sell a stock. What about a target price? Should you set a target price when you will sell? Many money managers do just that. They have a specific gain in mind when they buy the stock. When it hits that number, they sell. Others scoff at that. "The market tells you nothing," says Longleaf's Hawkins. "It's simply the current vote by the irrational investor." One spin you might put on the target price strategy is to look at the relationship of the stock's price-to-earnings ratio to the market P/E when you buy. Suppose your stock is selling at 60% of the P/E ratio of the market as measured by the Standard & Poor's Index of 500 stocks. Maybe you decide that if it gets to 90%, you will sell. Finally, if you’re investing in a taxable account, you should look at your entire portfolio when deciding when to sell. A loss can be valuable because it provides a tax benefit that you can use to offset a gain. If you want to sell a stock that's too high -- to rebalance your portfolio -- you might consider selling a loser when you sell the winner. You get the point. You need to have a strategy in mind, something to guide you when the market dips and swirls. Then you can tell yourself why you are staying put.

To: Jack Jagernauth who wrote (14370)	1/20/2001 10:47:47 AM
From: OldAIMGuy	Respond to of 18928

Hi Jack, Your questions are excellent and valid. However the necessary means for answering those questions still elude us most of the time. During times of high market stress, both market highs and lows, many times we lose whatever perspective we might have had under more normal circumstances. I personally believe that Year Two Thousand was an aberration, a market bubble and collapse. It has also been a "learning experience." Bubbles don't come along with every market cycle but do happen about once a generation. For most investors, sitting out the entire year and earning money market rates would have put them much further ahead than they ended up. If you Fly with the Bird, you Crash with the Bird. That was a saying we had in my youth when drinking too much Thunderbird wine! It left a nasty hang-over, just as Y2K did. Although it's difficult to gauge 3 to 5 years out, if one starts with a macro-economic view and works towards investments that will benefit during an extended period of time, then we can weed out all sorts of bad ideas. This needs to be done initially and repeatedly. It's best to have something in which we can have confidence in the first place, but we need to review it periodically to make sure the fit is still good. Best regards, Tom