The market came down again before this month's review. I was able to put some more cash into it, but not enough to cover the amount AIM called for. Unless the market takes off, it will be made up for in subsequent adjustments.
I sold BAC because they said their dividend will go down to $.01 per share every quarter. I replaced it with AA, which goes ex-dividend on 2/5, and they have promised to pay .17 per share. Fundementally, it's probably not the best choice, and there is a chance that they might eventually suspend their dividend as well, but at least this next time they've promised to pay it. I also think that longe-term, it has the best chance of rising the most, percentage-wise, that is if they don't cut their dividend.
One additional thought - on my experiment with the history of the AIM Dogs, I only did an adjustment once a quarter, as I mentioned before. I realized, looking at a chart of the Dow, that in doing it that way probably would have missed out on some extreme volatility around the 2002-2003 years, when the Dow swung wildly between the 11,000s and under 8,000. Most likely, if we would have done monthly adjustments, there would have been some extra trading that would have increased profits, as all extreme volatility does with AIM. I will never again, however, trade whenever there is a signal in a real account, as I did with mine last fall. That is the reason I am now out of cash in the account. Always, at the very least, decide on either a day of the month or a particular date to do adjustments, and only trade on that day. The exception would be if you have to replace a stock.
Cheers until next time!
Wednesday, January 28, 2009
Monday, January 5, 2009
A test of the AIM for Dogs strategy
Well, I did it. I went back and did a test from the Dogs from '96. Basically, I started with a $20,000 account, put half of it into 5 stocks - GE, DD, MMM, IP, and EK. I only did quarterly updates, as monthly would have caused excessive brain damage and taken me another week or two of working constantly. The first run, I did it by the rules I set up. It did OK, but I found at the end of this year I had never got over 60% of cash in the account when the market was high and I would have had sell signals. Amazingly, I never avoided a sale, and wound up still holding an excessive amount of cash, assuming we are now at the bottom of the market (which I hope we are - I don't have much left in my real account to invest if we go much lower. I guess that's what happens when you start this when the market is going down!)
So, I went back and did it using a 50% model and it ended up coming out much better. We have to keep in mind, however, that the start of this test was in the middle of one of the biggest bull markets we've had. I still think using 50% cash as the rule to not make a scheduled sale will work, as long as we also put the buy Safe to 10% if the cash balance falls below 50% when things are in the bottom of the market. I know this sounds weird, but I found that the percentage is always lower when the market is high, and always higher when the market is low. The 50% percent point always indicates an extreme in market conditions. In the test, I never put the Buy Safe to 10% until the last entry I had, which was at the end of this last year. The good thing is, I still had over $10,000 to invest, should the market continue to go lower. In the case of my real account, I wouldn't expect the no-sell rule to kick in unless we have an amazing up-move.
The number came out as follows:
The high for the total account value (stock + cash) was $37,054 in Oct., 2007. $19,548 in stock and $17,505 in cash. I added $1,000 in dividend income to the cash every 10 quarters, which would seem conservative, considering my real account, which is now at $3,500 in stock yields about $50 a quarter. I did not figure any income that the cash account would produce, but if it is kept in any kind of liquid income-producing fund, such as a bond or treasury fund, should produce at least an additional 4% a year. That figure would go up, of course, depending on what kind of fund is found for the cash you aren't putting into the stock and what it's yield is. The final tally at the end of this last year was $28,381 total. $18,008 in stock and $10,373 in cash.
Not bad, considering most people lost over 50% of there savings in the post-2000 fall and in many cases up to 75% this last year. You also need to realize we are now poised to ride a bull market that will inevitably come, being heavily invested in stock at this time.
So, I went back and did it using a 50% model and it ended up coming out much better. We have to keep in mind, however, that the start of this test was in the middle of one of the biggest bull markets we've had. I still think using 50% cash as the rule to not make a scheduled sale will work, as long as we also put the buy Safe to 10% if the cash balance falls below 50% when things are in the bottom of the market. I know this sounds weird, but I found that the percentage is always lower when the market is high, and always higher when the market is low. The 50% percent point always indicates an extreme in market conditions. In the test, I never put the Buy Safe to 10% until the last entry I had, which was at the end of this last year. The good thing is, I still had over $10,000 to invest, should the market continue to go lower. In the case of my real account, I wouldn't expect the no-sell rule to kick in unless we have an amazing up-move.
The number came out as follows:
The high for the total account value (stock + cash) was $37,054 in Oct., 2007. $19,548 in stock and $17,505 in cash. I added $1,000 in dividend income to the cash every 10 quarters, which would seem conservative, considering my real account, which is now at $3,500 in stock yields about $50 a quarter. I did not figure any income that the cash account would produce, but if it is kept in any kind of liquid income-producing fund, such as a bond or treasury fund, should produce at least an additional 4% a year. That figure would go up, of course, depending on what kind of fund is found for the cash you aren't putting into the stock and what it's yield is. The final tally at the end of this last year was $28,381 total. $18,008 in stock and $10,373 in cash.
Not bad, considering most people lost over 50% of there savings in the post-2000 fall and in many cases up to 75% this last year. You also need to realize we are now poised to ride a bull market that will inevitably come, being heavily invested in stock at this time.
Friday, January 2, 2009
A different strategy from the norm
I just read a blog about the Dogs - the way people usually trade them. You can read it here. I also made a comment on that blog, which, of course, you can also read at that location. That comment was more for the benefit of readers of that blog than the readers of this one, but it explains how someone should not ignore the value of using the Dogs of the Dow - just realize their advantages and dangers, and use a proper system for trading with them.
I noticed that HD is no longer considered a Dog. However, I am keeping it simply because it hasn't actually changed. It is still a member of the Dow, and has maintained it's dividend. I won't switch a stock out of my originals unless one of the two above is no longer true.
By the way, something I never mentioned in my original post was the author of the book, How to Make $1,000,000 in the Stock Market, Automatically. His name is Robert Lichello.
I noticed that HD is no longer considered a Dog. However, I am keeping it simply because it hasn't actually changed. It is still a member of the Dow, and has maintained it's dividend. I won't switch a stock out of my originals unless one of the two above is no longer true.
By the way, something I never mentioned in my original post was the author of the book, How to Make $1,000,000 in the Stock Market, Automatically. His name is Robert Lichello.
Thursday, January 1, 2009
History behind this strategy
Because AIM is such an interesting and imagination-provoking system, I've decided to jot down thoughts I've had about my experience with my particular accounts and modifications that have come to mind. This first part will be some history behind my experience with AIM and many of the thoughts that I've had in the past (although not all, since many of them I've forgotten).
I first read the book How to Make $1,000,000 in the Stock Market in the 80's. I can't remember the exact year, but I remember it taking my imagination by storm. For anyone reading this, if you want to more understand what I am talking about, I would suggest you read it as well. I was convinced it was the perfect system for a long-term investing strategy. I longed to put it to the test with my own money. I always went by the Richest Man In Babylon strategy and put away 10% of what I made. Eventually, I had a tidy sum to invest. For some reason, I always went into an investing account with the intention of staying strictly with the AIM strategy, but then got impatient and would break the commitment in some way, always losing a bunch of money.
Fast forward to this year (2008). I noticed that the market was quite a ways down from it's highs of October of last year and got this great idea to take the $5000 that was left in my IRA and invest in the 5 small Dogs of the Dow with half of it. The prices seemed historically low to me. I would not assume that I could just imagine there was cash in the other half, as I had mistakenly in the past. This time there actually was. I was going to use the system as it was originally suggested by the author (so I intended.)
Shortly after I did the initial investment, everything took a pretty big surge upward. I was encouraged, to say the least. Then we saw the beginning of a large sinking through the rest of the summer. Ignoring the book and thinking it would be a short-lived drop in prices, I decided to make purchases of appropriate stock whenever it got to the point where it called for it in the spreadsheet (and I watched it every day), instead of doing one adjustment per month, which is the minimum suggestion from the book. I did my best to keep the dollar values of each of the stocks even.
About that time, I found the AIM website, where a guy figured out that in a long-term bull market, the system accumulates too much cash. He made two modifications to the system. One was a Dual Safe feature – one for buying and one for selling. The selling one he left as in the original suggestion, at 10% of the stock value. The buying one he either put to zero or put it to a different percentage. I still think that is a good idea when we approach the upper end of a market. I think a bit of extra investment can be done in a little smaller corrections instead of just the major ones. It could be adjusted depending on whether a purchase has been made or how many within a certain time frame have occurred. That way, it doesn't take a lifetime to get two or three cycles. We'll get into my specific thoughts on that later. The second modification was this: If the percentage of cash got above 50%, if he had a sell signal, the amount to be sold would be put on the Portfolio Control instead of being sold. Of course, I didn't have to think much about this since I knew it would be quite a while before we would be in that situation. I have since, however, had some thoughts on that part of the modification. Again, I'll discuss that later.
What ended up happening is I almost ran out of cash when the market tanked in the fall. After three purchases, I started bringing the Buy Safe up, but it almost broke me anyway. So, I went to the suggested strategy of only modifying once a month, unless a stock fell out of the criteria and had to be replaced. By the way, the criteria for the five stocks in this particular trading strategy, is: The original stocks are the 5 smallest Dogs of the Dow, meaning they are the lowest price that pay the highest dividend. If any of them fall out of the Dow or quit paying a dividend, they are no longer a candidate and are replaced. I don't worry about if they are actually a Dog or not, as long as they are one of the 30. My original stocks were GE, HD, MO, C, and GM. I bought about $500 of each. Since, MO dropped out of the Dow and I replaced it with PFE. Then GM quit paying a dividend – I replaced them with BAC. Then C quit paying a dividend. I replaced them with DD. They quit the dividend the same day I bought a bunch of shares. I didn't find out the dividend was gone until two weeks later, and by that time the stock went up. So, now DD has the highest value of any of the stocks, because of the rise in C, and then the rise in DD immediately after I bought it. And that's where I stand.
12/31/2008
The market has become much less volatile in the last couple weeks. It could be an indication that we're at a bottom. I hope so – I am still very low on cash, although it's starting to come up. I throw $40 in there every month, if I can, and get about $50 or so a quarter from the dividends.
My thought on the modification for the top of the market is that I would wait until the cash percentage got over 60% before I would start not selling when AIM told me to. Also, on the Split Safe, I would only put that into effect when the market is in the upper end (i.e., there are sell signals) and I would keep it until I had one purchase, then move it to 5% for the second purchase, then to 10% if there was a third purchase in a row, just to keep me from ever running out of cash again. I had some thoughts about setting up a model for the Dogs dating back to 1996 - actually I started it. I will post updates as this model progresses, as it takes quite a bit of time to go back and do it. I think it may be as interesting to you as it sounds to me :)
I first read the book How to Make $1,000,000 in the Stock Market in the 80's. I can't remember the exact year, but I remember it taking my imagination by storm. For anyone reading this, if you want to more understand what I am talking about, I would suggest you read it as well. I was convinced it was the perfect system for a long-term investing strategy. I longed to put it to the test with my own money. I always went by the Richest Man In Babylon strategy and put away 10% of what I made. Eventually, I had a tidy sum to invest. For some reason, I always went into an investing account with the intention of staying strictly with the AIM strategy, but then got impatient and would break the commitment in some way, always losing a bunch of money.
Fast forward to this year (2008). I noticed that the market was quite a ways down from it's highs of October of last year and got this great idea to take the $5000 that was left in my IRA and invest in the 5 small Dogs of the Dow with half of it. The prices seemed historically low to me. I would not assume that I could just imagine there was cash in the other half, as I had mistakenly in the past. This time there actually was. I was going to use the system as it was originally suggested by the author (so I intended.)
Shortly after I did the initial investment, everything took a pretty big surge upward. I was encouraged, to say the least. Then we saw the beginning of a large sinking through the rest of the summer. Ignoring the book and thinking it would be a short-lived drop in prices, I decided to make purchases of appropriate stock whenever it got to the point where it called for it in the spreadsheet (and I watched it every day), instead of doing one adjustment per month, which is the minimum suggestion from the book. I did my best to keep the dollar values of each of the stocks even.
About that time, I found the AIM website, where a guy figured out that in a long-term bull market, the system accumulates too much cash. He made two modifications to the system. One was a Dual Safe feature – one for buying and one for selling. The selling one he left as in the original suggestion, at 10% of the stock value. The buying one he either put to zero or put it to a different percentage. I still think that is a good idea when we approach the upper end of a market. I think a bit of extra investment can be done in a little smaller corrections instead of just the major ones. It could be adjusted depending on whether a purchase has been made or how many within a certain time frame have occurred. That way, it doesn't take a lifetime to get two or three cycles. We'll get into my specific thoughts on that later. The second modification was this: If the percentage of cash got above 50%, if he had a sell signal, the amount to be sold would be put on the Portfolio Control instead of being sold. Of course, I didn't have to think much about this since I knew it would be quite a while before we would be in that situation. I have since, however, had some thoughts on that part of the modification. Again, I'll discuss that later.
What ended up happening is I almost ran out of cash when the market tanked in the fall. After three purchases, I started bringing the Buy Safe up, but it almost broke me anyway. So, I went to the suggested strategy of only modifying once a month, unless a stock fell out of the criteria and had to be replaced. By the way, the criteria for the five stocks in this particular trading strategy, is: The original stocks are the 5 smallest Dogs of the Dow, meaning they are the lowest price that pay the highest dividend. If any of them fall out of the Dow or quit paying a dividend, they are no longer a candidate and are replaced. I don't worry about if they are actually a Dog or not, as long as they are one of the 30. My original stocks were GE, HD, MO, C, and GM. I bought about $500 of each. Since, MO dropped out of the Dow and I replaced it with PFE. Then GM quit paying a dividend – I replaced them with BAC. Then C quit paying a dividend. I replaced them with DD. They quit the dividend the same day I bought a bunch of shares. I didn't find out the dividend was gone until two weeks later, and by that time the stock went up. So, now DD has the highest value of any of the stocks, because of the rise in C, and then the rise in DD immediately after I bought it. And that's where I stand.
12/31/2008
The market has become much less volatile in the last couple weeks. It could be an indication that we're at a bottom. I hope so – I am still very low on cash, although it's starting to come up. I throw $40 in there every month, if I can, and get about $50 or so a quarter from the dividends.
My thought on the modification for the top of the market is that I would wait until the cash percentage got over 60% before I would start not selling when AIM told me to. Also, on the Split Safe, I would only put that into effect when the market is in the upper end (i.e., there are sell signals) and I would keep it until I had one purchase, then move it to 5% for the second purchase, then to 10% if there was a third purchase in a row, just to keep me from ever running out of cash again. I had some thoughts about setting up a model for the Dogs dating back to 1996 - actually I started it. I will post updates as this model progresses, as it takes quite a bit of time to go back and do it. I think it may be as interesting to you as it sounds to me :)
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