I am probably the only guy on internet who read the original, “How to Make $1,000,000 in the stock market automatically” by Robert Lichello, 1st Edition (published in 1977) and used it for nearly 6 years, between Oct 2001 and Oct 2007. Between this period we had a bear and a roaring bull market. And during that period I traded Reliance Ind Ltd using this system.
But I hadn’t come across anyone who used this system, with real money, till January this year. In 2017, people are beginning to realize that this is the Investment System, that could beat the market, hands down. So here is a time tested, fool proof Investment System for you, in case you are an investor interested in making the most of your money. Good Luck.
AIM is an investment method devised by the late Robert Lichello in his now classic book, “How to Make $1,000,000 in the stock market automatically” by Robert Lichello, 4th Edition. He coined the name and acronym AIM: Automatic Investment Management. This method is a proven way to take advantage of the inevitable Market swings to enable us to ‘Buy Low / Sell High’ – which is of course the Holy Grail of making money in the Stock Market.
Robert Lichello was a self-described ‘tinkerer’ who was convinced that he could come up with an: “Automatic Investment Management system to enable the investor with a lump sum of money, however small, to buy and sell – trade stocks as portfolio managers do – and multiply his portfolio many times without putting any new money into it” (Fourth Edition; 2001; pg. 6)
His book and his plan became quite a hit (although the title is quite cheesy.) The method is quite simple and intended to answer the dilemmas that investors discover in their analysis of the other investment methods.
Here’s a Summary of some of the Goals of the AIM Strategy:
- The system should demand minimal attention.
- Minimize losses, provide clear signals for buying and selling, and provide significant upside potential.
- Enable an investor to take profits as soon as they appeared rather than waiting for the pot of gold at the end of the rainbow.
- Use profits to multiply your investments (by using them to invest at lower prices.)
AIM Attempts to Answer Some of the Investors Hard Questions…
– When I’m beginning an investment program, how much should I begin with?
– How much should be kept in a cash reserve?
– When should profits be taken, and how much?
– When, and how much reinvestment should be implemented?
To Master the Market, we’ve got to understand the value of compounding and how to do this within the Market. Here is a timeless parable from Robert Lichello’s Automatic Investing Model:
“…You can’t really be rich in the stock market just by multiplying your own money…You get rich by multiplying your money and the market’s money. You buy two shares of a $5 stock for a total of $10 and the stock doubles. You’ve got $20. Now, instead of nodding in approval, relighting your pipe, and resuming you’re rocking on the front porch, if you sold a share and tucked that $10 in your shirt pocket, it shouldn’t matter to you the slightest if the market suddenly goes to hell and drags half of Wall Street with it. Because you can’t lose a penny of your original investment. It’s safely buttoned up in your pocket! However, you still own one share of a stock – a freebie – and that share of stock is worth something now and may be worth a great deal more in the months to come. In effect, the market is subsidizing your free ride.”
“Suppose the price of that stock is now $5, down from its high of $10. It has lost 50% of its value. But since you have a $10 in your shirt pocket, your total worth is $15. You’re still ahead 50%! Feeling magnanimous, you stop rocking long enough to take the $10 bill from your pocket and buy two more shares of the stock. You now own three shares of the stock, and lo and behold, it eventually doubles in price. Your total worth is now $30. The stock has doubled in price, but you have tripled your original investment! Those are the bones of the Automatic Investment Management system.” (pps 36-37)
Here’s some Groundrules of how the AIM Strategy works:
- When starting with a lump sum, only invest 50% from the start. If establishing a monthly investment plan, also split this allocation to 50% invested (after all, there’s a 50/50 chance the market will go up OR down tomorrow!)
- Utilize a cash account to maintain your investment reserves / gains, awaiting further investment (starting with the second 50% of your lump sum, and then including the proceeds from sales as well as 50% of any subsequent monthly investment.)
- Be prepared to sell a portion of the gains you have realized and deposit them into your cash account, per the AIM algorithm.
- Be prepared to buy some back with your reserved cash account when the stock declines.
- Set a routine period of time in which to analyze the markets direction, and take action.
- The algorithm is relatively simple. It involves several key points:
- Portfolio Control: Running total of your stock purchases (total initial purchase plus 1/2 of follow on purchases; however it is never deducted from in a sale) in order to keep a basis of where the portfolio should ‘aim’ to be. This is the ‘governor’ of the system – it drives the initial assessments about buy and sell decisions.
- Buy/Sell Advice: Based upon the current Stock Amount (currently owned shares times current price) compared to the Portfolio Control figure. When the Portfolio Control amount is larger than your current Stock Value, you will look to buying (the Market is down.) When your current Stock Value is higher than your Portfolio Control, you will look to selling (the Market is up.)
- SAFE (Stock Adjustment Factor Equalizer): 10% of the Stock Amount – After you do the analysis in [b] above, you compare the results to your SAFE amount – you only pull the trigger on a sale or purchase for the amount of Buy/Sell Advice less SAFE; this controls you from selling or buying too prematurely.
These seem a bit complicated at first, but they are in fact really simple for any spreadsheet. Indeed this system seems to have it all! It addresses all of the concerns, the investors have in their minds. Like,
Concern: I don’t want to have to do a lot of analysis of stocks in order to pick one – But I want to buy things that make sense and I can trust
THIS MODEL WORKS WITH ANYTHING – STOCKS, FUNDS, OR ETF’S!
Concern: I don’t want to have to do a lot of analysis of trends to know when to buy or sell – Market Timing is impossible!
THIS MODEL TELLS US WHEN TO BUY AND SELL, AND HOW MUCH!
Concern: I want to have coverage of the applicable markets to default to the market’s averages over the years
THIS MODEL, WHEN USED WITH A MARKET FUND, WILL PRACTICALLY BEAT THE MARKET AVERAGES!
Concern: I need a model that ASSUMES the Market will go up and will go down – not just hope it goes up! And it needs to be a PROVEN MODEL!
THIS MODEL NOT ONLY ACKNOWLEDGES MARKET VOLATILITY, IT REQUIRES IT!
Back-Testing the Robert Lichello Automatic Investment Management (AIM) System for Timing the Stock Market
Many have said the most important purpose for investing is to make money. In order to make money we face two key decisions, when to buy and when to sell. Simply put, we must buy when prices are low and sell when prices are higher than the buy price.
The difficulty is in the implementation, our emotions work against us, when markets are rising there’s a jubilation that makes it very easy to join in and buy when prices are high and moving higher. When markets are low, it can seem like there is no bottom, the market will never bounce back, which makes it easy to follow the herd and sell low. Ideally, what we need is a system that will reduce the emotion of investing by automatically telling you when to buy, sell, or do nothing. In the late 1970’s Robert Lichello published a book titled “How to Make $1,000,000 in the Stock Market – Automatically” which presents a stock market timing system that claims to do exactly that. In this article we will briefly explain this system then back-test it to see if there is any credence to these claims.
If you are already familiar with the basic AIM system but would like to see a more detailed analysis, go to this page: Sensitivity Analysis.
If you want to see how to use the AIM system in a multi-ETF portfolio go to this page: Multi-ETF Analysis.
What is AIM?
Robert Lichello named his market timing system Automatic Investment Management or AIM. AIM is an algorithm that provides a logical system for managing your investments. It can be used with a stock or mutual fund portfolio. This system will instruct you when and how much to buy or sell.
To calculate AIM’s buy and sell quantities you need to know two things: how much money you have invested in the portfolio and the current value of your portfolio. To illustrate, let’s run through a couple examples.
Example of a buy order:
Portfolio Control (Amount of initial investment) = 1000 shares @ $10 per share = $10,000
One month later the stock price falls to $8, Portfolio Value = $8000
Add 10% to the current portfolio value = $8800.
Subtract 8800 from 10,000
Which equals = $1,200
Note, a positive value indicates a buy signal. However, if this value were negative then AIM is telling us to hold.
Because the value of your investment has decreased AIM has signaled you to buy 150 shares, the equivalent of $1200.
One of the interesting features of AIM is each time that you buy more shares your portfolio control increases by half the purchase value. In this case, the portfolio control would increase to $10,600. This is a built in risk regulator that will stop you from exhausting your cash reserves when the market is going down or building too much of a cash reserve when the market is going higher.
Example of a sell order:
Portfolio Control (Amount of initial investment) = 1000 shares @ $10 per share = $10,000
One month later the stock price rises to $13, Portfolio Value = $13,000
Subtract 10% from the current portfolio value = $11,700
Subtract $11,700 from $10,000
Which equals = -$1,700
Note, the negative value indicates a sell signal. However, if this value were positive then AIM is telling us to hold.
Because the value of your investment has increased AIM is telling you to sell 130 shares, the equivalent of $1700.
In both cases AIM has you making the correct decision, buying when your portfolio value goes lower and selling when it goes higher. If AIM is strictly followed it can be used to take much of the emotion out of investing.
AIM in the Real World
So, does AIM work in the real world? To answer this question we will use historic stock prices and run the AIM algorithm through its paces. We will use historical prices of one of the most active exchange traded funds (ETF), The S & P Depository Receipts, stock symbol SPY. SPY is an ETF that tracks the Standard & Poors index of 500 stocks.
From January 2000 to July 2016 the SPY price history has ranged from $68.11 to $217.12. During this period there has been two downturns in the stock market, one 5-year period of increasing prices and of course the current price increases since March of 2009. So we can test AIM through a couple buying phases, at least one selling phase, and get a read on the current market.
Now, let’s look at the results of the back-testing which is summarized on the time series graph shown below. All buy and sell transactions are noted with yellow text boxes that show the month/year, quantity bought or sold and closing price at the end of that month. Additionally, buy transactions are denoted with red markers, sell transactions denoted with green markers.
Results of the Back-Testing
The first thing we notice is that the initial purchase of 68 shares on 1/3/2000 is very near where the market peaked in August of 2000. Then as the market fell for the next two years AIM had us accumulating a total of 79 shares over seven distinct buy signals in February, March, August and September of 2001, and June, July and September of 2002. During this buying phase, we used up a most of our cash reserves leaving us with $2,919 in cash “insurance” should the market continue to decline. Additionally, our number of shares has increased by 116% from 68 shares to 147 shares, more than doubling our “potential” increase in equity value when the market trend turns up. Assuming FIFO accounting our average price per share has been reduced from $143.80 to $121.21.
After the market bottomed in 2002, we experience a 5-year period of rising prices. During this period, AIM would have us selling a total of 42 shares at five distinct selling opportunities in January and December 2004, February and October 2006 and April 2007. At the end of this selling phase AIM has us building up cash reserves to $9,989 and we are holding 105 shares. Average price per share is $78.85.
From the market peak in October 2007 there is nearly a straight-line tumble until February 2009. During that freefall, AIM has us accumulating a total of 117 shares over six distinct buy signals from September 2008 to February 2009. At the end of this accumulation phase AIM has almost depleted the cash reserves to $809 and we are now holding 222 shares at an average price per share of $97.86.
Finally, the market picked up from March of 2009 through July 2016. During that period AIM issues 12 sell signals for a total of 124 shares. At the end of this selling phase AIM has us building up our cash reserves to $21,149 and holding 98 shares at an average price per share of $82.76.
In spite of the initial purchase being close to a market top, the overall portfolio performance is not bad. As of 7/31/16 the hypothetical portfolio consists of 98 shares of stock and $21,149 in cash reserves for a total of $44,164 or a gain of 120.8%. Employing a buy and hold strategy would have resulted in a total of $31,839 or a gain of 59.2%.
AIM appears to do a good job of inventory management and control as exhibited by our cash reserves increasing by 111.5%, our share ownership increasing by 44.1% and the average price per share of $82.76 which is a redution of 44.2%. However, one risk came out during the second accumulation phase, we very nearly ran out of cash in April 2009. We had only $809 (4% of the total portfolio value) to buy more shares, nearly exhausting our cash reserves.
During the two market downturns AIM caught both bottoms with buy signals, on the up side AIM missed selling at the 10/2007 peak.
Overall the AIM system appears to do a good job of identifying key buy/sell points. If you are disciplined enough to act only when AIM tells you to buy/sell much of the emotion of investing can be eliminated.
For a more detailed analysis of the AIM algorithm, go to this hubpage: Sensitivity Analysis.
For an analysis of using the AIM algorithm in a multi-ETF portfolio, go to this hubpage: Multi-ETF Poatfolio.
If you are interested in obtaining the source data for this analysis in spreadsheet form, send an email to email@example.com with the words “AIM Back-Test” in the subject line.
Assumptions for Back-Testing AIM
It is always necessary to make some basic assumptions when doing an empirical analysis, here is the list for this analysis:
1. Initial amount to invest in the stock is $10,000
2. Cash reserve of $10,000 for future purchases
3. AIM decisions are based on the closing price of the stock on the last trading day of each month
4. Buy or sell price is the open price of the stock on the 1st trading day of each month
5. Buy or sell order not executed unless the order is +/- 5% of the equity value
6. Stock trading commission is $10.95 per trade
7. Rate of return on Cash reserve is 2% APR
8. Dividends distributed into cash account, not reinvested