Chapter 7
The Good, the Better, the Best
This system will help you with all kinds of stocks. I picked three different types of stocks to show you how the system gives you the opportunity to make money while protecting your nest egg. (Note: the printed version of the book contains three colored graphs and several other spreadsheets that will be found in the Adobe Acrobat version but not in the e-book version.
The Good
Allis Chalmers is the classic example of a stock that goes down, down, down and never comes up above its original price for air. The price started at $10.37 a share in November 1984 and in March 1987 was wallowing at $3.12 a share for a 70% drop since it was charted. The stock has done so poorly that an additional $21,000 in cash had to be pumped in to buy when the system said to buy. You’re definitely taking a chance with a stock like this. No method of investing, even the AIM system can save you if the stock dies – ask the Enron stockholders.
If Allis Chalmers or any stock, or ETF bounces back at all, then you really stand to profit. Let me show you why. Since under the system you're always buying shares at lower and lower prices; if the stock really goes in the tank, you'll pick up lots of shares very cheap. As a result with Allis Chalmers, you have grown from 643 shares to 8,313 shares, almost a 1293% increase in shares owned.
All the shares were purchased at cheaper and cheaper prices and this cheaper stock averaged with your original shares has constantly lowered your breakeven point. Now with 8,313 shares, the stock only has to go to $3.65 a share for you to be even. Figured this way – $31,000 now invested, original $10,000 + an additional $21,000 in cash. So $31,000 minus $590 in cash = $30,410 divided by 8,313 shares now owned, gives you a breakeven point of $3.65 a share remember your originally purchased the stock at $10.37 a share. Under this system the stock can still drop 65% in value and you still breakeven. If the stock should go back to its original purchase price, your investment would be worth $86,837. It could happen. Maybe not with this stock but when a company stock is very low, the stock could become appealing to somebody.
Maybe some Japanese industrialists wants a way into the American market. Look what Japanese are paying for artwork and Hawaiian real estate (this was in the mid-90s). It's a remote chance that still gives you hope that even if the stock looks like a real dog, it might bark yet. Besides a stock like this will only be a small part, one of 10 stocks, and the other nine will keep you way ahead as you'll see later.
Thanks to the system you're still only down 40%. Your investment is still worth 60% of your total money invested. Now check the graph for Allis Chalmers at the end of this text in the Adobe Acrobat version and you'll see from the yellow highlighted area how the system is constantly trying to get you ahead. Compare the percentages for each month. The line in black at the bottom represents that month’s price as a percent of the original price. The line at the top represents the percent of your investment from the AIM system. This represents column 11, PORTFOLIO VALUE divided by the total amount of money invested.
Thus for March 1987 the stock percent is $3.12/$10.37 = 30% and the system is $18, 338/$25,000 = 73%.
Look carefully at the spreadsheet and the graph until you understand. See how much stock you’ve been buying and at what price and it'll make sense. At times this method of investing seems too good to be true. It is true and you proved that.
And when you look at the colored graph on Allis Chalmers in the Adobe Acrobat version, look towards the middle of the graph and you'll see a three month period when Allis Chalmers almost got to break even thanks to the system whereas the lump-sum investor was way down or at one point AIM got you to 95% of the value of Allis Chalmers when the lump-sum investor was only at 50% of his original investment. Just like a drowning man, AIM could let you get out of a really bad stock just due to a slight rally. I would've advised my investors to dump Allis Chalmers when I saw it go back up to around 90% – 95%. We made a mistake with that stock but AIM gave us a chance to bail out with very little loss.
Again you will find three excellent spreadsheets, two with the actual AIM calculations month by month and then a really neat colored in graph that I drew that really shows the power of the AIM system.