How AIM Works

How AIM Works

Now, I’m going to be brutally honest here and say that the best explanation of how AIM works was given by Lichello himself in his book. But I’ll do my best to briefly show how it works here using my modified AIM calculator.

For our example, we’re going to assume a position size – how much of your capital you want to allocate to a particular stock – of $1,000. We’re going to start by buying $500 worth of stock and holding the remaining $500 in cash. Why hold so much cash in reserve? Because, even if we think we’ve found a good entry point, the stock could still drop in price. If it drops enough, we want to buy more!

So, back to it: half to stock and hold half in cash. Let’s say the entry price of stock ABC is $5 per share, which means we’ll purchase 100 shares at $5, and the first line of our calculator looks like this:

Now, let me explain what each column is about:

  • Date: the transaction date (1/1/2017 in our example)
  • Stock Price: the actual price you paid for the stock you purchased (or sold)
  • Limit: This is a modification I made to show how much of a difference in percent there is between the current price of the stock and the previous transaction. I mainly use this to evaluate buys.
  • Shares Held: the number of shares you have.
  • Stock Value: the Stock Price x Shares Held
  • Cash Added: this shows any additional cash you add to your position in this stock.
  • Cash Value: a running total of how much cash you have allocated to this stock.
  • SAFE: this is a mechanism AIM uses to make sure a stock moves enough to make a buy or sell worthwhile.
  • Portfolio Control: This is a key element of AIM, which is originally set to 50% of the value of your initial stock purchase, and is incremented by half the purchase price of any stock buys you make, but not stock sells.
  • Buy/Sell Advice: This is equal to the Portfolio Control minus the current Stock Value, which is AIM’s “advice” on how much stock (in dollars) to buy or sell.
  • Market Order: This is the actual amount, in dollars, of stock you would purchase, assuming that the Buy/Sell Advice is greater than the value for SAFE; the difference is the actual market order.
  • Optimal Order: This is the optimal number of shares AIM recommends you buy or sell at the Stock Price.
  • Shares Bot/Sold: This shows the recommended number of shares, taking into account a “throttle” that limits AIM to burning no more than 50% of its current cash balance on any single stock buy. When you actually make a purchase, you overwrite the calculated number with the actual one.
  • Portfolio Value: This shows your current Cash Value + Stock Value (Shares x Stock Price).
  • P/L: Shows Profit/Loss in dollars.
  • P/L %: Shows Profit/Loss in percent.

I know that’s a lot to absorb, but the spreadsheet (which is based on Lichello’s system) takes care of all the leg work, and nothing is going on under the hood that a sixth grade math student couldn’t handle, trust me!

So, let’s say that at the end of the month you make your price check (more on how often to check prices later, but for now we’re going to go with once a month near the close of the market on the last day of the month) and ABC’s price has risen to $5.50. So you plug that into the second row of the calculator and get this:

If you look at the SIGNAL column (which is a modification I made that shows BUY, SELL, or HOLD), you can see that the calculator is saying to hold. Go back to sleep and come back in a month.

Now, let’s say you come back at the end of the next month and price has plummeted to $2.00! Actually, being new to AIM, you probably would have been pulling your hair out the entire month as price was spiraling down, thinking you were losing all your money. Nothing could be further from the truth! Also, take a look at something: even though the stock price has fallen by 60%, your portfolio value has only fallen by 30%.

So, here’s what we’re going to do: since the price has fallen a whopping 60%, AIM is telling you that the optimal order (which is the base calculation Lichello uses) is to buy 140 shares at $2.00. But the Shares Bot column, which incorporates my 50% of cash throttle, is saying to only buy 125. So that’s what we’re going to do: put in your purchase order for 125 shares, then enter your actual purchase price in the Stock Price column and overwrite the Stock Price of $2.00 with the actual price you paid (note: there’s almost always some slippage when you make an order, so this might in the real world be something like $2.02 or $1.98, etc. – but we’re just going to stick with $2.00 for the sake of clarity).

If your stock pays dividends, make sure to add them into the Cash Added column for the applicable month. You can also enter commissions as negative numbers to keep your cash balance properly updated.

Another month passes, and price has risen to $4.00:

Booyah, a sell order! AIM is telling us to sell 46 shares of stock, so go ahead and do that. Note that our Profit/Loss has gone from -30% to 15%.

But before we move on, take a look at Portfolio Control: after the previous buy order was placed, Portfolio Control was incremented upward by half the value of the stock you purchased. The reason for this is actually rather complicated, and I’m going to leave that for you to read in Lichello’s book. Just remember that this only happens for buys, not sells.

Back we go into hibernation until the next month!

Price goes to $6.00, and we have another sell signal! So we sell 56 shares at $6.00, and now the P/L is at 50.8%!

Things are going great, right? Look, you’ve increased your portfolio value by 50% in a few trades (note: this can actually happen with extremely volatile stocks) and you’re thinking that you’re in the money.

And then…the nightmare happens. ABC’s earnings are horrible (note: you do NOT sell your shares prior to earnings!) and price falls like a rock back to $2.00. Don’t panic – you want this sort of crazy volatility, because you know that AIM is going to have you buy a bunch of cheap shares while all of your friends on Stocktwits are throwing themselves out the nearest window. And so it does:

So, buy 177 shares at $2.00. And take a look at something else: even after this horrible plunge, your Profit/Loss is 1.6%, and you’re now in possession of 300 shares. Note also the changes in Cash Value and Portfolio Control (which shows its updated value in the next transaction line).

As you watch for ABC to recover…it doesn’t. Price continues to fall to a staggering $0.50 and you wonder what the heck you’ve done as your portfolio value falls to -43.4%.

Gritting your teeth, you buy 416 shares at $0.50 and wonder if you shouldn’t go jump out the window.

The next month, price has risen to $1.00, and AIM is telling you to buy 104 shares (the throttled amount):

But in this case…we won’t make a buy. Why? Because the Limit column isn’t showing at least a -20% difference from the previous transaction (the color of the box will change to red if the price difference is at least -20%), so we’re just going to hold.

Before we go back to sleep for a month, take a look at the number of shares you’re holding: 716. Seven times what you started with. Also, look at your P/L: it’s now only -7.6%. Hmm…

A month later, price has risen to $1.50, and look what AIM is saying:

We have another sell order, and our P/L, even after that mega-beating, is now 28%!

Let’s say that over the next two months the price rises to $2, then $3, then $5 – your initial entry price – and you sell 155, 166, and 138 shares, respectively. Look what AIM gives you:

At this point, your Profit/Loss is 185.1% with a portfolio value of $2,851, with $1,085 in 217 shares of stock and $1,766 in cash.

Not too bad, eh? Even after that gut-wrenching fall in price and coming back up just to your original entry value, you still made out like a bandit!

A Test Case

To give you an example of how this system works on a real stock, below is a monthly chart (i.e., each candle represents a month) of Sangamo Biosciences, Inc. (SGMO). I chose this one as a great example of a stock with high volatility over time, with big swings in price, which is what AIM really thrives on.

AIM will make money for you with a stock that is trending, but it does best with stocks that zoom up and down so it can repeatedly sell high and buy low: your gains will be amplified with every cycle.

In the chart below, the green arrows represent buy points as provided by my slightly modified AIM calculator, while the red arrows are sell points. All transactions were calculated using the closing price (note: the green price tag denotes my actual entry point in this stock in January 2017).

Buy low, sell high, right? Using my modified version of AIM and timing strategy, an initial stock purchase at the end of July 2005 of 110 shares at $4.55 – a mere $500 investment, along with another $500 held in cash as “dry powder” – grew to a portfolio value of $3,089, with $2,733 in stock and $356 in cash, with a profit/loss of 209% over 11 and a half years, or an average annual gain of 18%.

Now, that may not seem all that amazing, or maybe it does. Maybe tripling your investment over that period of time by making no more than a single trade per month and not worrying about stops, indicators, etc., seems pretty darn attractive. You could give up all those Tums you’ve been taking for your trading-induced ulcers, or get off your hypertension medication from the stress from worrying about your plummeting portfolio value.

Those things are reason enough. But let’s look a little deeper, because that 209% figure is very misleading. First, take a look at the initial buy price and the final price (which was current as I write this): your first buy was at $4.55, and the last closing price was $3.65. Or, looking at it another way, the last price is $0.90 – or almost 20% – lower than your entry price, and for that you’ve tripled your money! Let’s look at a chart of the prices for the buys and sells:

Again, you can easily see that the last bar indicating the price is markedly lower than your entry bar. Had you done the old buy and hold gig, you’d be sitting on a 20% loss after all this time. You could backtest various other strategies, many of which would show a profit, and some of which might show a larger profit than we’ve seen here, but then again – taking into account whipsaws, triggered stops, etc. – maybe they wouldn’t. Or maybe you wouldn’t have the iron gut or discipline to see them through.

Now let’s take a look at a chart of the portfolio value, comprising the stock value and cash holdings for each of the buy/sell bars from the first chart:

The portfolio value peaked at $5,923 in February 2015, which is the highest bar on the chart above (the tenth from the right), then went down as SGMO’s price again took a long-term plunge, but didn’t come anywhere close to your entry value. You’ve done pretty well, right?

You ain’t seen nothing yet. The really telling chart is the number of shares held:

You started off with 110 shares, if you’ll recall. The last bar in the chart represents 797 shares. What do you think will happen if/when SGMO’s price starts taking off again? Just for fun, I entered $20, which is the rough equivalent of the previous long term peaks,  into the AIM calculator. My AIM calculator would have me sell 516 shares, saving off $10,339 for future buys, while yielding a portfolio value of $16,118, or a profit of 1,511%. And we would still be holding 281 shares.

This is, of course, cheating, but I’m doing it to illustrate a point: each successive wave in a stock’s price greatly amplifies your share/cash gains. Even if you have a chart like RPRX, below, which has successively lower peaks, returns of several thousand percent (yes, you read that right) can be had over a span of ten or more years without adding a single penny to your initial position:

Buy and Sell Points for RPRX

Again, this is not a gimmick or crackpot scheme. AIM is an elegantly simple system founded on basic math that any elementary school student could do. You can backtest AIM on any stock you like, and as long as the stock has significant volatility and you don’t make your initial buy at a horrible entry point, you will make profits as long as the company doesn’t go out of business and the price doesn’t completely collapse.

Join The Smart Money

AIM helps you do what the smart money does: accumulate shares of stock at discount prices, and distribute (sell off for cash) shares as prices rise, while most retail traders are doing the exact opposite and losing their shirts.

It’s really hard to express how much of an impact AIM has had both on the effectiveness of and emotional outlook on my trading/investing. When the price of a stock plunges and traders on Stocktwits (sort of like Twitter for traders) are hurling themselves out of virtual windows over their losses (I’ve seen more than one message from a trader who lost everything on a single trade – sadly, that does indeed happen), I’m excited because I can start buying shares on the cheap as soon as AIM says to do so! Again, it’s exactly like going into a store and finding something you want at a huge discount. Then, when the price turns around and heads back up, I see all the traders talking about how they’re going to start taking a position when the price climbs to X dollars, which is precisely where I’ll start selling off portions of my holdings at a profit to build up my cash position for the next downswing.

And that cash position is key: when the stock price peaks and then tanks, most of your position will be safely in cash. That’s called capital preservation, my friend, and as I noted earlier, it’s a critically important concept that many people either overlook or don’t understand, to their peril. AIM does it for you.

What’s The Catch?

Okay, all that sounds great, but you knew there was a catch with Lichello’s AIM, right? There is, although it’s really more of a nuisance than a this-will-kill-your-portfolio problem. There are two nuisances, really: market timing and cash burn in an extended downtrend.

Market timing is an issue of particular importance when you’re starting a position in a stock. Lichello says to just enter a position any time you like with 50% of the money you’re allocating to the stock/portfolio, while keeping the other 50% in cash and letting AIM handle it from there on a monthly basis. That will work, but it’s sort of a pain to buy in at the top of a rally in a downtrend, or – worse – at the top of an extended uptrend, after which the price plunges again. So I had to figure out an easy way to start buying in at a major discount and avoid buying near the top.

The other issue, as I noted, is cash burn in extended downtrends. AIM has a remorseless appetite for cheap shares, but it has no way of telling when the market has finally hit bottom (no one does, actually). The result of this is that you can run out of cash before the bottom is reached. This isn’t a disaster in the long term, as if the company has a history of surviving punches in the face the price will most likely recover over time. But you’d rather start making a profit sooner than later, right?

I developed my own solutions to those two issues that we’ll talk about shortly. But first, let’s talk about something vitally important for AIM to work, and for your portfolio’s long term health: Choosing Stocks.