AIM Dictionary........
Glossary of Frequently Used Terms ........

As a starting point for all of us using AIM, I thought it would be a good idea to have an AIM dictionary. This may help keep confusion to a minimum.

I have found that periodically I read Mr. Lichello's book from cover to cover. As I have become more experienced (and I hope, more proficient) at the use of AIM, the book's examples and writings take on more complete meaning. The AIM Dictionary and the FAQ pages are here on a permanent basis for just that reason. If everything isn't exactly clear today, maybe after further experience with AIM, these items will have deeper meaning for you.

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A.I.M. Glossary 1) A.I.M. 2) Portfolio Control 3) SAFE 4) Buy/Sell Resistance (Split SAFE tm) 5) Minimum Order Size 6) Hold Zone 7) VEALIE tm 8) Idiot Wave tm 9) LIFO Tax Base 10) FIFO Tax Base 11) Average Cost Tax Base 12) Asset Allocation 13) Newport Programs 14) Equity Warehouse 15) "Strewie" Investing Practices! 16) "LICHELLO BANDS 17) "Half Way To The Wall" 18) ROCAR-Return On Capital At Risk

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Portfolio Control

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Buy and Sell Resistance (Split SAFE tm)

Please look at the examples which show the performance improvements using this technique. There you will see the long term benefit of this strategy.

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Minimum Order Size

There is another area that affects what size we choose for our minimums for trading. If we have a $100,000 account, we certainly don't want to be going through the tax accounting on every $300 trade that comes along. It would make more sense to raise the minimum to a more practical level. I find that a minimum order size of about 5% of the Portfolio Control is just about right. Bruce Bowman suggested this as a way to determine a set minimum for both buying and selling. On some of my larger holdings I use as low as 3%. So, for our hypothetical account with $100,000 of stock in it, a $3000 order minimum should work well and probably pay for your time to calculate the capital gain.

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Hold Zone

The size of the Hold Zone is determined by the Buy and Sell SAFE values along with the size of the minimum order as a percent of the investment's value. So, if we were to assume 10% Buy and Sell SAFE and a 5% min. order size for both buying and selling, our Hold Zone ends up being approximately 30% between a buy and a sell (10% + 10% + 5% + 5% = 30%). So if we were to reduce the Sell SAFE to zero, we'd also be reducing the size of our Hold Zone. Please note, however, we're also reducing the size of our LIFO profit.

Since AIM is usually holding some cash in reserve, our account is still making some money for us while we are on HOLD. When that cash is put to work, it usually earns us at least 20% on a LIFO basis when it sells again. That 20+% added to the 5% that the cash makes when idle makes up for our lack of activity. Remember, we want to make more money than the Broker or the Tax Collector when we're all through, so it's important that we not "churn" our accounts for less than what AIM would suggest.

If we increase the number of "round trip" trading we do with AIM when we reduce the Hold Zone, we're also reducing the LIFO gain as well. With that in mind, we don't want too small a Hold Zone and lots of trading as it might, after all expenses, be less profitable than fewer, more profitable trades.

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"VEALIE tm"

The idea of the vealie came up some time ago when I first encountered the cash problem with a mutual fund I owned. I decided that it made sense to stop selling once the cash reserve got to a certain level. However, this leads to its own problems. Since you are no longer selling, your next buy price never advances. This means you are unlikely to do any meaningful buying any time in the future.

The solution was to increase the Portfolio Control value each time AIM said to SELL and I chose to IGNORE the order. Following Mr. Lichello's lead when buying extra shares, Bob Norman suggested that we only add 1/2 of the Sell order's value to Portfolio Control. This makes it like the mirror image of an AIM buy. It advances the next Buy Price, so meaningful buys will eventually take place. It also raises the next Sell price enough to usually eliminate the current Sell Market Order.

The final part of the puzzle to be solved was how to know when to start using vealies. In my case, I use the IDIOT WAVE as my guide for most stocks and funds. When the Cash Reserve rises to the value the IW is suggesting, I stop selling and pull a vealie. I might have to do this several times in a row as the price/share continues to rise. Once the Cash Reserve is diluted by 10% (say from 50% to 45% of the portfolio value) then I resume selling.

This process might have several cycles with no buys in between. It keeps your cash levels appropriate for the investment and lets the risk expand a small amount at a time during a long bull phase. Eventually some market gremlin will happen along and get you to use up some of your cash. Then you get to sell at a more regular pace.

Please look at the examples which show the performance improvements using this technique. There you will see the long term benefit of this strategy.

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Idiot Wave tm

I didn't feel comfortable with Mr. Lichello's "one size fits all" approach. Specifically, it didn't seem as though a mutual fund needed any where near as much cash as an individual stock. I've chosen to have the IW give indications of Cash Reserve for these two separate categories of investment. The IW suggestion for stocks is representative of what should be necessary for ones with highly volatile prices. Stocks that have low volatility can use less cash reserve; probably about the same as shown for mutual funds.

Similarly, the suggestion for mutual funds should work well for funds that stay fully invested and are categorized as either Diversified Growth or Aggressive Growth. Sector funds might need just a bit more cash reserve, while a Growth and Income type fund should need less than what the IW is suggesting.

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LIFO Tax Base

If we buy 1000 shares of XYZ at $10 per share, that is our base cost (plus commissions, etc.). If 5 years later we sell all of it, there's no need to differentiate between LIFO and FIFO. However, let's say that we own the full 1000 shares for two years without selling any. During that two years, we add an additional 300 shares (100 @ $8-1/2, 100 @ $7-1/2 and 100 @ $7), because the price becomes more favorable and AIM suggests we buy. Now, when AIM says to "Sell 100 shares @ $10-1/2", which shares are we selling? On a LIFO basis, here's what we do:

LIFO - We're selling the shares LAST purchased. The tax calculation is the proceeds of $1050 minus the cost of $700 or a $350 capital gain. (I'm keeping this simple and ignoring commissions.) Our taxes would be based upon the $350 capital gain.

Now you see why Uncle Sam wants us to be consistent year to year and in each class of security we use.

The benefit of any particular method over another could be debated in a fashion not dissimilar to the old "chicken and egg" story. However, in the long run, it seems to all come out in the wash. For the AIM user, it's interesting to note that sometimes AIM will have us buy deeply into a market price dip and then have us sell shares off BELOW our initial purchase price as it starts to recover. In this case, the shares are being sold at a LIFO profit, but a FIFO loss. Using LIFO for tax calculations, you pay some tax. Using FIFO, there's a loss!

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FIFO Tax Base

If we buy 1000 shares of XYZ at $10 per share, that is our base cost (plus commissions, etc.). If 5 years later we sell all of it, there's no need to differentiate between LIFO and FIFO. However, let's say that we own the full 1000 shares for two years without selling any. During that two years, we add an additional 300 shares (100 @ $8-1/2, 100 @ $7-1/2 and 100 @ $7), because the price becomes more favorable and AIM suggests we buy. Now, when AIM says to "Sell 100 shares @ $10-1/2", which shares are we selling? On a FIFO basis, here's what we do:

With FIFO, we're selling original shares. The calculation is the proceeds of $1050 minus the cost of $1000 or a $50 capital gain. (I'm keeping this simple without the added costs of commissions, etc.) So our tax is calculated on the $50 capital gain. Now you see why Uncle Sam wants us to be consistent year to year and in each class of security we use.

I have always used FIFO for my individual stocks. It's easy and keeps my stock inventory "fresh".

The benefit of any particular method over another could be debated in a fashion not dissimilar to the old "chicken and egg" story. However, in the long run, it seems to all come out in the wash. For the AIM user, it's interesting to note that sometimes AIM will have us buy deeply into a market price dip and then have us sell shares off BELOW our initial purchase price as it starts to recover. In this case, the shares are being sold at a LIFO profit, but a FIFO loss. Using LIFO for tax calculations, you pay some tax. Using FIFO, there's a loss!

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Average Cost Tax Base

If we buy 1000 shares of XYZ at $10 per share, that is our base cost (plus commissions, etc.). Let's say that we own the full 1000 shares for two years without selling any. During that two years, we add an additional 300 shares (100 @ $8-1/2, 100 @ $7-1/2 and 100 @ $7), because the price becomes more favorable and AIM suggests we buy. Now, when AIM says to "Sell 100 shares @ $10-1/2", which shares are we selling? This is how it's calculated on an Average Cost Basis: Here we add all purchases and divide by the total number of shares.

$10,000 + $850 + $750 + $700 = $12,300. Total shares is 1300. $12,300/1300 is $9.462 average. The calculation is the proceeds of $1050 minus the cost of $946.20 or a $103.80 capital gain. The tax is then calculated on the $103.80 capital gain. Now you see why Uncle Sam wants us to be consistent year to year and in each class of security we use.

For Mutual Funds, I have always used Average Cost Basis. Again, it's easier for me than the other alternatives. Also, remember that mutual funds hand out distributions frequently and if you are having these reinvested in more shares, there's a small change in the average cost with each of these purchases. This must be tracked to keep the accounting straight.

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Asset Allocation

STARTING POINT: Mr. Lichello, in his early AIM book suggested that a 50/50 split between our Cash Reserve and Equities was an appropriate ratio to start. Later, he suggested that 33% cash and 67% equity value was a better mix.

Experience shows that the initial Cash/Equity ratio can be dependent upon many factors and that no fixed ratio is perfect. I'll also state that the type of equity relates to the choice of initial Asset Allocation.

Diversified mutual funds usually don't require any where near as much cash reserve as do individual stocks. Utility Stocks and other income producing equities generally don't need much cash either. They are stable in share price and only fluctuate with interest rate changes.

On the other end of the spectrum are stocks that fall into the aggressive growth category. For mutual funds, ones that follow individual sectors of the market are much less stable in price than diversified funds. It is important to allocate a larger amount of cash reserve to this class of equities than the ones described in the previous paragraph.

ACTIVE AIM ACCOUNT: Once an AIM account is up and running, there's not much for us to do regarding Asset Allocation other that sit back and watch! AIM's biggest problem with Asset Allocation is generally the accumulation of too much cash over time. Given long term bull market trends and proper selection of equities, AIM's propensity will be to sell and sell and sell. After a while, with AIM "by the book", the Asset Allocation will be too heavy on cash. This slows overall performance of the portfolio.

Here's some general rules to follow that should help guide you in both initial and active Asset Allocation with your AIM accounts:
1) Research what the biggest price drop of your stock or fund, on a percentage basis, was during a bad market. It might be necessary to go back as far as 1990 to find a really big correction. Use that percent as the starting point for the Cash Reserve of a New AIM account and as the maximum Cash Reserve for an Active AIM account.

So, if your favorite stock has given back 50% of its share price when the Big Bad Bear has come along, then probably 50% is the proper starting point and upper limit of your Cash Reserve. If you find that your favorite mutual fund has never given up more that 25% of its share value during a market correction, then this is probably adequate for your account as cash.

2) Once your Asset Allocation has achieved the maximum Cash Reserve level described above, you have a delemma. If AIM tells you to sell more of your equity, but you have already fully satisfied your cash reserve allocation, what shall you do? Here you have choices as well.
--Jeff Weber suggests that the maximum cash reserve be left in place while we continue to sell off part of our equity positions at AIM's insistance. The extra Cash Reserve is then accumulated to start yet another AIM account. I refer to this method as the "cash cow" method. One continues to "milk" the most successful accounts of excess cash to establish new positions in other equities. This will help you build diversity into your portfolio.
--My VEALIE idea (described above) will also work to help you maintain proper Asset Allocation in a rising market. This method is different than Jeff Weber's in that we tend to concentrate our assets in a limited number of equities. Asset Allocation is achieved by letting the Cash Reserve and Equity portions of our AIM account grow "lockstep" with each other on a percentage basis.

3) It's good to review your overall Asset Allocation of all the AIM accounts combined periodically. True, some will be fully funded with Cash Reserve while others are a bit lean on greenbacks, but it can be useful to understand what AIM is up to overall. A well diversified portfolio will usually have a Cash Reserve maximum of around 33% while the minimum will approach 0.0% during bear markets.

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Newport Programs

Newport creates graphs and gives information on trade ranges that go way beyond what Mr. Lichello uses in his book. It also has flexibility that was not demonstrated in the AIM book. A variety of handy printouts condense a multi-stock portfolio into one of several useful reports.

NEWPORT is an AIM user's main tool for running a successful investment business. The reason it works so well is the experience the programmers already had in managing their own AIM accounts. They knew what we needed and packaged it in this concise, easy to use program.

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Equity Warehouse

First, we attempt to be good "purchasing agents" and buy our equities at prices that should allow us to later sell them profitably. Next, we manage our inventory by adding to our positions when prices are low and reducing our positions when prices are high. This is much like buying wholesale and selling at "dealer net" or "retail." Our business expands with the profitable management of our Equity Warehouse.

We can measure our activity by viewing inventory turns, cash flow, inventory value and asset allocation. Every way we view our activities in a business-like fashion gives us insight as to how we can improve our overall performance.

By treating our investing as a Warehouse operation, we further remove ourselves from the emotional burdens that plague most investors. Mr. Lichello wrote the outline for our business plan, all we have to do is implement it. I suggest you put on your Warehouse Manager's hat when you sit down to update your AIM programs. Let AIM be in charge of Inventory Control while you occupy your time with the "big decisions" of what items are best for your own Equity Warehouse.

Are you going to stock Auto Parts? Medical Supplies? Computers and their components? Telecommunications equipment and parts? Shares of financial stocks? Building supplies? It's also possible to run your Equity Warehouse without picking a sector or sectors of the market for your inventory. You can just as easily "hire" a "consultant" to do that selection and then just let AIM take care of asset allocation. This "consultant" would be a mutual fund. There are many good funds, diversified, national, global, and sector specific that will add to the diversity of your "inventory" and still provide plenty of profitable "inventory turns."

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"Strewie" Investing Practices!

Now, on to more important matters. We need another term. One that signifies utter stupidity. One that recognizes the lack of clear thinking, the lack of discipline. One that recognizes emotional, short sighted decisions that one regrets as soon as one has made them.

A term that will instantly identify an event in ones management of ones finances as being one to be held up to immediate and deserved ridicule. Something that may make any one of us stop and pause to consider the ramification of knee jerk reactions. A term that when applied to us individually will be reason enough to hang ones head in shame as we suffer the scorn of others who will just tsk-tsk as they acknowledge the errors of our ways. Something simple, something easy to remember but yet something that will remind us for the rest of our years of the foolishness of not removing our guns from their holsters before shooting from the hip.

How about a "kaufman?" Nah, too ethnic! I know---how about "strew?" As in combining "Steve" and "screwed-up." No, I got it---a STREWIE! Yep, that's it for me. If anyone else has any better ideas, you're welcome to submit them. But for now, it's a "STREWIE!"

Steve in SoCal"

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LICHELLO BANDS

If we track these buy and sell prices over time and plot them against the Price/Share, we begin to see how the Lichello Bands work. Each time there's a trade, the Lichello Bands shift to create a new Hold Zone. If it's a Sell trade, the Lichello Bands shift upwards in price and just the opposite if the trade is a Buy. An example of the Lichello Bands can be seen at the Brief Description of AIM page. This should add to your understanding of how AIM acts over time.

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"Half Way To The Wall"

If AIM is telling us to purchase more shares than half of the remaining cash reserve will buy, Bob suggests that we buy only as much as half the remaining cash will purchase. With each successive buy only half of the remaining cash would be spent as a maximum. Since there's always 1/2 of the remainder left, there would still be cash enough to do yet another, but smaller Buy.

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ROCAR - Return On Capital At Risk

This is where the idea of ROCAR started. It's similar to Return On Investment but looks at AIM's activity over time. Here's how it is calculated:

ROCAR = (((CV - IC)/IC)x 100) / (E/TV)
Where:
CV = Current Value (Equity plus Cash)
IC = Initial Commitment (Equity plus Cash)
E = Sum of Equity value at risk for each period
TV = Sum of Total value for each period (Equity plus Cash)

Let's say that (E/TV) works out to be 0.60 over a 5 year span. This means for the time period that an average of about 60% of the account's value has been in equity and about 40% in cash. Many market cycles may have occurred where cash was depleted and at other times much higher than the 40%. At any particular point there may have been more or less at risk. The deeper the database, the less this fraction will vary. However, on average that's what it calculates out to be.

Now, using this decimal as a divisor will expand the simple return. Let's say that the value doubled in that same five year span and that we started with $10,000.

IC = $10,000
CV = $20,000
(E/TV) = 0.60

100% Gain/0.60 = 166% ROCAR

As far as interpretation goes, if I saw a negative ROCAR, it would mean things weren't going so well!

:-)

In and of itself ROCAR might have limited value as it really doesn't relate to dollars and cents. However, if Mr. Buynhold commits 100% to his account and Mr. AIM commits only an average of 60% and they end up with the same total return, it means that Mr. AIM did it with considerably less risk.

ROCAR is also useful when deciding from which alternative settings of potential AIM variables one might choose. If we tweak for best Total Return alone, we may be expanding our total risk as well. There's lots of ways to increase risk, and lots of ways to increase total return. The trick is to attempt to come to an optimum total return value that doesn't just expand the risk envelope (expanded TR with shrinking ROCAR).

If we can improve Total Return (TR) and ROCAR simultaneously, that's ideal. So when doing simulations, maybe one could look at AIM BTB's ROCAR as a base line and then try to improve Total Return and ROCAR together to an optimum point.

Even a market timer can get some value out of a ROCAR-like calculation if there are periods where he is out of the market. Let's say the person is 100% invested 200 days a year and is 0.0% invested the remaining 60 days of trading. He knows his total return, his ROCAR would be TR divided by the number of days in the market divided by the total number of trade days.

ROCAR = TR/(200/260)

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