Inflation Indexing of the AIM Portfolio Control

Introduction

Robert Lichello's AIM is an acronym for Automatic Investment Management. AIM and modifications are a very popular investment management technique. It makes little or no use of technical analysis (TA) or fundamental analysis (FA) and so usually requires less management time than TA of FA trading and management. Yet it frequently provide much better returns than buy and hope (buy and hold).

Portfolio Control (PoCo) Adjustment in a Non-Inflationary Environment

The AIM Portfolio Control (PoCo) is the main feature of the AIM algorithm for determining how much stock (or mutual fund or ETF) to buy or sell at various price levels.

In a non-inflationary environment, there would be no need to adjust (index) PoCo except in the happy circumstance that a stock price increased dramatically. In such a case, there would be many more Sell transactions than Buys, so the cash portion of an AIM account (one stock, mutual fund, or ETF plus the cash) would get to a level that you might consider excessive in relation to the value of the stock still held.

In such a case, you might do a "Vealie" on the PoCo. That means increasing the PoCo. A Vealie has the effect of moving the buy-sell hold zone up, so that it becomes a little harder to sell more (conserving stock), and easier to buy more (using up some of the excess cash).

Unfortunately, We Are in an Inflationary Environment

Because we are in an inflationary environment, I recommend indexing the Portfolio Control (PoCo). Why and how to do this is discussed on my website at
http://www.bean-d.com/cpt/inflation-cpi-adjust.php

My unequivocal position is that if you do NOT index your PoCo for the results of inflation -- the increase in the Cost of Living -- you will be Buying and Selling improper amounts at various prices.

This is serious, not trivial. If you do not index PoCo, what you may think are acceptable results may in actuality be a diminishment of your capital.

Discover the details at "Indexing the AIM Portfolio Control for Inflation".

Chances for Making Money Better with Core Position Trading

Ah, the lure of making millions in the stock market. I too have seen some of the late night television infomercials - red lights, green lights -- red arrows, green arrows -- whatever. I've even gone to some of the rah-rah hype and hope meetings at local hotels.

Oh, the messages are so wonderful. "See what we can do, and you can too." Just give us $2000, $5000, $10,000, and you too can join the elite ranks of "millionaires in pajamas".

All boil down to some sort of Technical Analysis (TA), though some downplay that and just promote the magic software that tells you to just buy or sell without showing you the workings.

Some popular technical indicators included in the programs offered include moving average crossovers, MACD, RSI, etc. There are hundreds, maybe even thousands of technical indicators, with more "invented" every day. Why do people feel the need to come up with new indicators? BECAUSE NONE OF THEM WORK CONSISTENTLY. So it is a search for the holy grail.

Naturally, on the infomercials and the "introductory seminars" you are going to see testimonials only from the successful (so they say) students/traders.

Technical Analysis (TA) MAYBE can work for some people. If it actually does so, it does so for only a VERY SMALL percentage of people. I think perhaps it takes a combination of TA knowledge, some sort of intuition, AND a LOT of (expensive) experience. This is beyond 90% to 99% of us -- including me. And, frankly, I am smarter than most. So what chance do you have? ;>)

So, I have succumbed to the lure and also have dinked around with Technical Analysis. But I have NEVER made any money using it. Fortunately, I haven't been hurt too bad, but that is because one of the first things I paid attention to was learning about stop losses (stop loss orders).

Now, I have made some money in the stock market. Not grand theft money, but not chump change either. The method I have used is variations of AIM -- Automatic Investment Management, popularized in a book by Robert Lichello, inexpensively available from Amazon. The title is rather hokey and overstated, but it does present a method of actually, consistently, buying low and selling high, over time.

I offer an inexpensive software program that implements the AIM algorithm. When you order, you will receive that and links to various resources pertaining to AIM. Here is the URL for the program: Core Position Trading AIM Program.

GTC Limit Orders with CPT / AIM

With AIM (Robert Lichello's Automatic Investment Management), we trade OPPOSITE the typical trader. When they buy, we are selling. When they sell, we are buying. As a stock price goes up, they are buying and we are eagerly selling to them. When the price goes down, we are eagerly buying from them.

So, when we are selling, we sell on a price RISE. If the price reaches a certain point, we are willing to SELL. The GTC LIMIT order to SELL does that for us.

Say a price is now at $10.00. A typical trader would perhaps have a BUY STOP order in for $10.50. We might have a LIMIT SELL order in for $10.50. At $10.50 (or slightly higher), he buys our shares from us.

When we are buying, we are buying on DECLINING prices. If the price goes down to a certain point, we are willing to BUY. The GTC LIMIT order to BUY does that for us.

Say a price is now at $10.00. A typical trader would perhaps have a SELL STOP order (aka "stop loss") in for $9.50. We might have a LIMIT BUY order in for $9.50. At $9.50 (or slightly lower) we willingly buy the shares from him that he is dumping in a panic.

Stop Orders and Limit Orders Clarified

Most people are familiar with the SELL STOP order (that is also know as the "stop loss order"). When the price DECLINES and hits your STOP price, the order then becomes a MARKET ORDER to SELL. (That is why you often get a worse sell price than you may have expected.)

You can also place a SELL STOP LIMIT order. That is where if the price hits the STOP, the order becomes a LIMIT order. You set that LIMIT price below the STOP price. So there is that range where the order will be executed -- if it is executed. If the price drops too far too fast, you will still have your stock. So if you were looking for a "stop loss" with a SELL STOP LIMIT, you could be S.O.L.

Conversely with the BUY STOP order. When the price RISES and hits your STOP price, the order becomes a MARKET ORDER to BUY.

Now, to prevent paying too much on a BUY (say you want in, but not at a ridiculously high price), you can put in a BUY STOP LIMIT order. You set the LIMIT part of the order at the maximum price you are willing to pay. So, if the price hits the STOP price, your order becomes a LIMIT order, where you may get a BUY fill price below your LIMIT price. If the price rises too far too fast, you may not get filled on your BUY order.

The BUY STOP LIMIT order is frequently placed the night before as a day order when you want in, but if the opening price is too high, fuggedaboudit.

Also note the SELL STOP order or SELL STOP LIMIT order can be used instead of a MARKET order to initiate a SHORT position. Then a BUY STOP order is a "stop loss" order if you are short and want/need to cover.

------ Limit

.10 typical

------ Buy Stop

.15 typical

------ Ask
------ Bid

.15 typical

------ Sell Stop ("stop loss")

.10 typical

------ Limit

AIM or Technical Analysis?

AIM or TA (Technical Analysis)

Some AIMers (users of Robert Lichello's Automatic Investment Management algorithm), while seeing the benefits of using Good Until Canceled (Good till Canceled - GTC) orders, often try to second guess what to do.

If you as a trader hold off on putting in a GTC order to see what the market will do; that means you are trying to outguess the market.

As I have mentioned before (sort of at least), frequently a GTC is just touched or exceeded by a few points, triggering the order.

Here is a BUY order example of what I mean.

If you didn't have the GTC BUY LIMIT order in, you would have to sit at the monitor, and when/if the price hit your target, you would then STILL have to decide at that point - do a market order (or a close limit), or wait and see if the price declines more. Now, if the price doesn't decline more, but turns around, you have missed the BUY.

And, how far would you wait for the price to decline PAST your actual target price before you decide to act?

Yes, I know, some have mentioned watching the price drop, then when it "shows signs" of turning around, then buy. At the hopefully, much lower price. But, remember, it could turn around at your target price, which would be missed, just as well as at some lower price. That is trying to play technical analysis (TA) which to me is WAG (wild ass guessing). (And believe me, I've tried that game.)

My TA is now limited to shaving a few cents every now and then, as mentioned in my post of 2007-02-26. If I come up with the TA holy grail - I'll let you know (for a price, of course ;>) )

So, which are you doing -- AIMing, or trying to outguess the market?

Good Until Cancelled Orders (GTC) are a Good Thing

An advantage of using Robert Lichello's Automatic Investment Management (AIM) algorithm is that, when using GTC LIMIT orders, we often get a much BETTER price when the market opens than what we specified in our limit orders. OTH, typical traders with STOP orders in place often get WORSE prices (often much worse) than they specified.

For example, I had a limit BUY order in for $26.53 for [a stock] since my last sell of it a week or so ago. This morning, at 09:30:33, I got filled for $26.18. Yesirree, that was a GOOD thing. Then the price was back up to $26.43 at the close of the day.

Now, don't you pity the fool this morning with a stop loss order sitting at $26.53?

Good Until Cancelled (GTC) Orders Psychological Price Points

It is important to set your AIM transaction GTC buy and sell points at psychological price points, whenever possible.

I use AIM (Automatic Investment Management) to "force" me to buy low and sell high. Someone "forced" me this afternoon to sell him some PAAS at $31.84, my GTC sell price. I had that order in for some time. The price was just touched this afternoon, then backed off substantially. But my order was filled.

If I had set the GTC at 31.85, a "nice round number", my order would not have been filled today. It might have not been filled until tomorrow, next week, next month, maybe never... Who knows?

For SELLS, I suggest setting the price a cent or two below nickle and dime prices. For BUYS, a cent or two ABOVE nickle and dime prices.

Frequently, the "even" nickle or dime price may be approached but not hit. The price you set a penny or two away may well be hit. Even on 100 shares, the penny you may "lose" by taking a price that is likely to be hit rather than waiting for the even nickel or dime or even a penny or two on the other side, amounts to only a buck or two.