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Is that the Sound of Hooves I Hear?

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By Mark Hing (originally published in the March 2000 Issue of Computer|Sense Magazine)

The bulls are running in the streets. Not like they do in Pamplona, Spain, mind you, instead they represent a sustained rising stock market. Stocks have been advancing for over a decade, and show no sign of abating. I think Superman best summed up this technology-fueled run when he said, “Up, Up, and Away.” Some of the more optimistic among us cling to the words of another great hero, Buzz Lightyear, and join his shouts of, “To Infinity and Beyond.” Unfortunately the bulls won’t last forever, they’ll eventually tire. Then the bears will have some fun.

In the meantime, however, people from all walks of life are jumping on the stock market bandwagon. And why not? With a forgiving market and annual returns of over 100% within reach, what’s not to like? In a market where a trained monkey can make money, smiles abound. However it’s a wise person who plans ahead. Knowing what to do before jumping on the bull can mean the difference between investing and gambling – wealth and bankruptcy, or at least making a few bucks and having to meet a margin call. The trick is to know how to manage your risk.

Rather than trying to make a quick profit, you should be looking to minimize your downside risk. The key concept, that bears repeating again and again, is the preservation of capital. No capital. No investment. No profit.

Of course in heady times such as these, it can be difficult to remember such concepts. So far, all downturns (or corrections) have resulted in a buying spree that serves to send stock prices right back up again. It wasn’t always so in the past, and it won’t always be so in the future.

Therefore it makes sense to assess yourself. Your strengths, your weaknesses, and your tolerance for pain – or risk as they like to say in the financial world. If your stock portfolio dropped 70% next week, and stayed down for the foreseeable future, how would it affect you? Would your lifestyle be affected significantly? Would you have trouble sleeping at night? Would you sell at a loss and vow never to invest in stocks again?

These questions will help you determine whether you’re sufficiently diversified amongst the various asset classes (i.e. stocks, bonds, real estate, money market funds, etc.). Your answers will also tell you whether you should be in the stock market at all.

If you’re still game, the next step is to formulate an investment plan. If you’re in for the long haul, a “seat of the pants” strategy is not going to work. Granted, it may work in today’s investment climate. But long term? Forget it.

Once you have a well thought out strategy (and you’ve objectively assessed yourself), stick with the plan – day in, day out. Be consistent and logical. And watch out for the dynamic duo of killer emotions: greed and fear.

The Idiot Wave

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By Tom Veale

The Idiot Wave name actually started as a play on words. In the 1980s, Robert Prechter popularized the Elliot Wave Theory. I guess it was just too good a fit. Since I’m gauging market risk, it seemed natural to say “Well, I wonder what the idiots are doing to the market today?”

Value Line Investment Survey has been one of my most reliable sources of information since the early 1980s. It’s available at most public libraries in their “1700 Stock” version. The Index section contains some very good screens. My favorites are “The Best/Worst Performing Stocks (Last 13 weeks)” on page 33. Here, at a glance, you can see 82 different stocks and how they’ve performed over the last quarter. I noted that market speculation seemed to be nicely displayed by these two charts. If the “Best” were soaring while the “Worst” weren’t too bad, it usually meant the market was getting to be over-bought. The opposite is true when the “Worst” are just awful and the “Best” aren’t doing much exciting. This became the first piece of the Idiot Wave.

Elaine Garzarelli gave a talk once about the correlation of interest rates and price/earnings ratios. She claimed there was a sort of “magic number” equal to 20. It was the long-term average value. If P/E plus the interest rate was greater than 20, by very much, then the market was over-bought and visa versa. She felt that + or – one point was the neutral range. When I tried this with the 52 week U.S. Treasury rate and Value Line’s P/E, I was amazed by how well it worked. That was the second piece.

One of my favorite books on the market is Norman Fosback’s “Stock Market Logic.” Almost every market statistic is explained and in many cases improved upon. One of my favorites is his “NYSE Hi/Low Logic Index.” It states that if everyone is in general agreement about market direction, then the number of new highs or lows will be very small. If the market is confused about its next move, there will be large numbers of new highs and lows simultaneously. This has proved to be a good way to confirm other high and low risk market events. I applied his formula to the NASDAQ Composite to see how it would do and have been pleased with the results. My only problem with the data is that there’s a seasonality factor near the end of the year – during “Tax Selling Season.” Then it seems that the “bad” get worse and the “good” get better. However it was good enough to add to the Idiot Wave, and component three was born.

Finally, a peculiar market condition in 1993 brought about the addition of the forth and final component – Zeal. The Idiot Wave had been very good right up to 1993. However, in that year we had a massive IPO surge. The NASDAQ Composite Index added about 800 issues to its usual count of 4200 in just one year! My “Speculation” index went flat, even though I knew there was lots of speculating going on. My Idiot Wave was not measuring it.

The solution was there, all I had to do was apply the data I already had. I started to measure the percentage of change in the number of issues on the NASDAQ and NYSE over about a 10 to 13 week period. If the number was increasing rapidly, this showed speculation in a way missed by my other measures. If it was decreasing, money was then concentrating in the remaining issues and showed low speculation.

Decreases were bullish and increases were bearish. The range is very small. A percentage less than 0.0 is bullish while an increase of more than 2.0% is bearish. In 1993 Zeal peaked at 8.6% and the following year was a consolidation DOG.

Thinking back, I find it hard to believe that I’ve collected so much data! When the four components are united as either being bullish or bearish, the Idiot Wave is a great device for confirming what AIM is doing.

When it’s a mixed bag and the Idiot Wave is in its own Average Risk range, there’s not as much to be learned from it. I scaled the grand total by weighting each component so that the Idiot Wave would correlate to what a rational Cash Reserve might be for the market conditions.

The Virtues of Cold Hard Cash

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Everyone loves cash. The problem is that it’s the one thing that seems to slip away as soon as you have it.

Whether it’s a set of dining room chairs, a new car, or the weekly groceries, cash is usually in short supply and heavy demand. And it doesn’t stop with the consumer goods. Stock market investors face the same situation.

Indeed, many investors are quick to jump into the market with both feet (some even use margin, the equivalent of jumping in headfirst). If a stock they’ve been following looks particularly enticing after a recent drop, some find it hard to resist the sweet strains of, “buy me, I’m cheap! buy me, I’m cheap!” However is it really a good idea to plunge right in? Perhaps not.

No matter how good an opportunity seems, there’s usually a better one around the corner. If your hot stock just dropped 10%, who’s to say it won’t drop another 10. If you bought less, and kept some cash on hand, you may pick it up at a cheaper price tomorrow. Or another quality offering may be down the next day. If all of your money is tied up in hot stock 1, you may have to miss out on hot stock 2 – or sell hot stock 1 at a loss. How many times has that happened to you?

The trick is to do things in moderation. Rather than betting everything at once (that’s greed talking to you), it’s usually better to spread your investments around. That’s called diversification and it’s a cornerstone of good investing. And what better way to diversify than to keep some cold hard cash on hand. Of course in the heat of the moment, that can be difficult to understand (and that’s why you need a good investment system).

In addition, cash in an interest bearing account is pretty darn safe. So you’re not only earning guaranteed interest, but you’re also reducing your portfolio’s market risk.

You’ll sleep better and be able to jump on opportunities that your fully invested neighbor can only dream about.

Seven Bits of Wisdom from a Stock Operator

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Jesse L. Livermore was born in 1877 and began his career at the tender age of 15. Over the course of his life, he developed a set of trading rules that are just as relevant today as when they were first created.

Although Livermore was a trader, rather than an investor, his words certainly have significance in the investment realm. Indeed, the actions of some of today’s “investors” sometimes resemble trading more so than investing.

Regardless of where you fit in, however, the following rules should help you in your quest for higher returns.

1. Never act on tips.

2. There is only one side to the stock market; and it is not the bull side or the bear side but the right side.

3. If a stock doesn’t act right don’t touch it.

4. If a man didn’t make mistakes he’d own the world in a month. But if he didn’t profit by his mistakes he wouldn’t own a blessed thing.

5. A man will risk half his fortune in the stock market with less reflection than he devotes to the selection of a medium-priced automobile.

6. There is profit in studying the human factors–the ease with which human beings believe what it pleases them to believe; and how they allow themselves–indeed, urge themselves–to be influenced by their cupidity or by the dollar-cost of the average man’s carelessness. Fear and hope remain the same; therefore the study of psychology of speculators is as valuable as it ever was. Weapons change, but strategy remains strategy, on the New Exchange as on the battlefield. I think the clearest summing up of the whole thing was expressed by Thomas F. Woodlock when he declared: “The principles of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes that they have in the past.”

7. An investor looks for safety, for permanence of the interest return on the capital he invests. The speculator looks for a quick profit.

Tom Veale and the 800 Pound Gorilla

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Tom Veale has an interesting day job. He makes his living investing in the stock market — an 800-pound Gorilla at the best of times. That in and of itself is nothing unusual. After all, millions of people make a comfortable living doing just that. However not many are successful in leaving their “day jobs” to make a living managing their own money. Add to that the fact Tom Veale isn’t a licensed broker, trader, or financial analyst and it becomes even more incredible. In fact, he’s a regular guy who found an investment technique that works and isn’t afraid of doing his own research.

Since 1988 he has been using Robert Lichello’s Automatic Investment Management, or AIM, system (editor’s note: Automatic Investor is based on the AIM techniques) to manage his investments with stellar results. He’s also provided enhancements to Mr. Lichello’s basic system in order to improve performance. He’s the undisputed expert in the field and is always willing to talk about AIM.

We caught up with Mr. Veale and asked him to share some of his experiences.

AUTOMATIC INVESTOR: How did you get started investing with AIM?

TOM VEALE: In the 1970s my account was usually 100% invested. After watching my favorite stocks fall to very low prices, I’d always be saying, “If I just had some free cash available, I’d buy a bunch more of these stocks.” In the 1980s I started to listen to myself. I sold off a portion of my portfolio to raise a “rainy day fund.” This got my portfolio growing because of the volatility, where before it had been just riding the roller coaster. I liked having some control over the account.

Some time in the mid-1980s I happened upon Mr. Lichello’s book. It suggested a method not too different from what I was doing, but with much more structure. Both AIM and I were using a cash reserve to “buy the dips.” I contemplated AIM for a while, then built an imaginary AIM account using my true holdings.

Starting in January of 1987 I mirrored my own activity in the fictional AIM account to see who was winning. I was ahead all the way through the mid-summer peak in the market. See how much smarter I was than AIM? Then when the market started to unravel I began to realize how powerful AIM was in a bear market. I was buying much sooner than AIM. I exhausted my cash reserve faster than AIM.

In fact, I had used up almost half of my reserves by the time October 19th, 1987 arrived! AIM hadn’t yet spent its first nickel. I penny pinched my purchases all the way to the market bottom in December where AIM made bigger and bigger buys as the prices declined.

So, January 1st, 1988 I took my personal oath to use AIM. It was AIM’s superior purchasing activity that convinced me.

AI: You now support a family completely with your investments (managed by AIM). When did that happen? What made you decide to do this?

TV: Yes, I use AIM with essentially all my equity investments.

There came a point where my “day job” was taking all my time, but my investments were starting to make me more money. I’d spent about ten years selling capital equipment in the aluminum casting and metal treating markets as well as into the chemical and food processing industries. At that time factory utilization in the casting industry was very low and capital equipment sales were slow. High interest rates also didn’t help. It was time for me to shift gears. That was August of 1986.

This freed my daytime for doing better investing research as well as developing a strategy for keeping the money I was making in the market. I also didn’t have to travel with this new “job” which was nice as my family was very young.

AIM will always do the best it can with the material provided. It will always accumulate shares when prices are down and liberate some when prices are up.
AI: How has it worked out so far? Were there times when you thought you might have to return to the traditional work force?

TV: Generally I’m an optimist. However, there have been a couple of times that I thought I’d have to re-join the “Fifty and Two Club” (Work 50 weeks, get 2 off!). The 1987 “Crash” and the following recovery didn’t leave me with much time to think about going back to work. The 1990, “Interest Rate and Gulf War” correction again was so quick that I didn’t worry too much. It was actually heading into a rising interest rate period in 1994 that was the spookiest. It was slow and painful as the market churned about. The churning was using up my cash reserve faster than it was replenishing it. The NASDAQ Composite was up just 4.6% that year, my personal account was down nearly 12%, and my Retirement account lost money for the first time. In the meantime my Cash Reserves were sliding towards zero.

That was probably the most anxious time for me. AIM proved to be of greater patience and less troubled than I did. The following year my account was up 42% and my retirement account up 32%.

AI: With the exception of Robert Lichello, you’ve contributed the most to the AIM system (split SAFE, Vealie, IW, among others) and are generally viewed as an AIM expert. Do you think there are further improvements that will become accepted within the AIM community? Or are all the improvements already out there and anything else would serve to create a brand new system (i.e. something that’s not AIM).

TV: There are several people who have taken Mr. Lichello’s work to new heights. Jack Park has carried out experiments with having AIM “learn” from its own activity as well as the price patterns of the equity. His method then optimizes the AIM settings from this historical perspective. Santos Torres has explored using the general AIM strategy for very short term trading in a narrow range. Years ago there was a software package called “MyWay” which used AIM parameters but was unique. It had the ability to sell to 100% liquidity. An interesting concept, but it might leave money on the table.

The changes I made to AIM “By the book” were relatively simple and gave effective returns. I think it is important to look at Return On Capital At Risk when making changes to AIM. If we modify it to give better total returns without examining the extension of risk, then we might be shortsighted. After all, AIM’s basic goal is risk management. Since there’s always correlation between Risk and Reward, we have to see both parts.

Since AIM is essentially “Buy Low, Sell High,” it’s hard to imagine a method that will supersede such a basic concept.

Since AIM is essentially “Buy Low, Sell High,” it’s hard to imagine a method that will supersede such a basic concept.
AI: How important is choosing the right stock to AIM’s success?

TV: AIM will always do the best it can with the material provided. It will always accumulate shares when prices are down and liberate some when prices are up.

I guess I’d say that choosing the right Company in which to invest is a major part of overall portfolio success. This could be true for a mutual fund or an individual company. For AIM to succeed in beating Mr. Buy&Hold using the same investment, TIME is probably the most important aspect.

The ultimate AIM Stock is one that has a highly unstable price, but is secure in its business model, finances, and things like that. I’ve found that small, rapidly growing companies seem to work well with AIM. Since their earnings are inconsistent while growing rapidly, they tend to go through massive over-bought/over-sold cycles. AIM loves this.

AI: You were very involved in putting together the first annual AIM user’s convention in May of this year. It was a good turn out, but relatively small compared to other investment conventions. Do you think AIM is a viable system for the majority of people out there? Can you see it moving into the mainstream with thousands of people registering for, say, the 10th annual AIM user’s convention?

TV: My long term friend and broker tells me there are two basic types of clients – Buy and Hold and the Short Term Trader. Mr. Buy&Hold rarely turns over any of his portfolio. The Short Term Trader, on the other hand, will churn his account many times in a good year. I’m one of his most successful clients, but I’m unique. I turn about 25% to 30% of my “inventory” over in a year’s time, but rarely sell out of a stock or buy much in the way of new stocks. I guess you could say investors fit an “inverted bell curve” with Mr. Buy&Hold on one end, AIM in the middle and Short Term Trading on the other end.

Many AIM Users have been around investing for a very long time. Some have tried and tired of Short Term Trading’s demands. Some have found themselves faced with retirement sneaking up on them and didn’t want to trust their savings to traditional money managers. AIM might not have been desirable before the advent of the Personal Computer for many of these folks, but neither was Short Term Trading.

I believe the number of AIM users will continue to grow, from a very small core group, now that there’s the Internet for sharing ideas and good AIM software available for implementing it. After talking myself blue in the face for several years, I found that most folks would say “How Interesting!” and that was as far as they’d go. It’s nearly impossible to convince someone who is “illiterate” with computers to try AIM. The learning curve is just too steep. It will take our extroverted AIM users showing consistently great results through a series of bear markets to get a big following. The raging bull market we’ve had since 1982 has been wonderful for almost all investors, but very hard on AIM! AIM needs corrections and true bear markets to really show its strength. I note that my email increases dramatically during market corrections!

The ultimate AIM Stock is one that has a highly unstable price, but is secure in its business model and finances.
AI: Have you ever corresponded with Robert Lichello? What do you think he’d say about using his system in today’s stock market?

TV: Unfortunately I’ve never managed to get in touch with Mr. Lichello. I’ve written through the publisher and also to a “last known” address, but have never had a reply.

I believe he would be very pleased to see the level of activity picking up on his pet project. His book sales must have started to increase after I started blabbing about AIM on Prodigy and then Silicon Investor! I wish there were a good way to let him know just how pleased we all are with his invention.

Today’s market is showing greater volatility than in the past. Part of this is due to “Sector Rotation” and to many other factors in vogue now.

I think Mr. Lichello would cheer this new age as being well suited to AIM. Risk moderation is more important now than at any time since, perhaps, the 1960s. The need for a guide is greater than ever.

AI: Many people who hear the title, “How to make $1,000,000 in the Stock Market, Automatically” are immediately put off. They think it’s a scam. Do you think you’ll make $1,000,000 using AIM by the time you’re done?

TV: I don’t think I’ll change from using AIM as my main business plan. I’ve not yet turned in the 10,000% profit needed to turn $10,000 into a Million, but I’m on my way. One investment of mine is at the 2500% mark and several others are nearing the 1000% gain point. In the meantime I’ve had to content myself with doubling my portfolio’s value every four or five years!

Those who are put off by the title of Mr. Lichello’s book usually won’t take the time to understand the math. My background with industrial machinery taught me that closed loop controls are marvelous things. AIM emulates just this sort of thing. AIM’s genius is the “positive feedback loop” provided through small increases in the Portfolio Control variable after each buy.

AI: From reading some of your messages, it’s obvious you know about technical analysis and other investment techniques, but you choose to use AIM. Is that because you feel it’s the best system out there? Or is it because you feel it may not be the best, but it’s the easiest to maintain (so although you might squeeze a few more points out of an investment, the time required to do so is not worth the effort)?

TV: Technical analysis attempts to make efficient, profitable trades based upon an investment’s own price activity. This is fine. The type of trading tends to be “all or nothing” in that one either owns the investment or is in cash. This can work well – especially in a perpetually rising market. This method ignores the potential long-term benefits of investment ownership and concentrates only on shorter-term “trends.”

AIM acts as my Technical Analysis advisor once I’ve made Fundamental Analysis decisions and invested for the long term.
Fundamental analysis looks into the business of the investment for other information. It takes time and effort to do good analysis. Usually fundamental analysis will include decisions about whether there is good long-term viability in the investment.

I concentrate on the Fundamental Analysis portion first. To get “paid” for my effort takes more than a quick round trip at the brokerage, however. If I’m going to devote the time to Fundamental Analysis then short-term trading doesn’t usually pay. I’m trying to pick investments that I’ll own for 5 years or longer. Technical Analysis doesn’t think in those terms.

AIM acts as my Technical Analysis advisor once I’ve made Fundamental Analysis decisions and invested for the long term. I’ve owned most of my portfolio for more than 5 years. AIM manages the risk of being invested long term by efficient Technical Analysis trading around a core position.

It’s interesting that you mention the amount of time to manage an AIM account. Technical Analysis is very time intensive. Most short-term traders have a serious “Ticker Addiction,” and usually have serious anxiety problems when they are away from their computers, ticker source, or can’t get through to their brokers. It’s hard to “have a life” and be a successful short-term trader.

With AIM, many days I don’t even look at the market. AIM’s in control, so why bother. All I need to do is monitor my list of the “Good ‘Til Cancelled” orders I place with the brokerage to see what’s filled. AIM will tell me when to trade again. I have lots of hobbies, a young family and have time to enjoy all of it. It may be AIM’s single biggest gift to investors – TIME!

I act as a fiduciary for some friends’ money and have for some organizations as well. AIM is a responsible fiduciary method. It’s always doing the proper thing, so it’s pretty hard to go wrong. It’s pretty hard to imagine some conservative philanthropic organization entrusting its funds to a person in a short-term trading salon! AIM, on the other hand is so conservative as to be ideal for use by a fiduciary.

Is AIM “Better” than any other method? It’s always more responsible and given enough time will usually be better as well.

It’s hard to “have a life” and be a successful short-term Trader.
AI: Most people have just recently started investing in the stock market. So they’ve never really experienced a bear market. When the bear comes, do you think many of today’s investors will lose a great deal? What about the AIM investors, how will they fare in a real bear market?

TV: Many of the investment models that are in vogue right now almost guarantee losses by selling when the price drops to protect principle. Assuming the investor has been in the market for some period of time he should have a profitable account. So, he won’t lose “everything” but might give back some of his unrealized gains.

During the “crash” of 1987, an acquaintance called me. He was less than a year from retirement. His retirement account was very profitably invested in a good mutual fund. He wanted to know on October 19th if he should sell to protect what was left of his profits. I told him not to and to ride it out. He replied that “do nothing” was not an option, he had to do something.

I suggested that if he had to do something, then maybe he should just sell half and let the rest go. Then he’d only be half wrong no matter what happened next! Well, he ended up selling it all on the 19th, which just happened to be the lowest price for his fund that entire year! He didn’t “lose” anything but paper profits, but it sure felt like it for him, being just a year from retirement. A year later he would have been ahead too.

He never spoke to me much after that year. I never said “I told you so!” but I think his conscience did!

AI: Thank you.

Using Modern Portfolio Theory with Automatic Investor

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Most investors intuitively see the logic behind diversification. However many don’t practice this important technique or they don’t know how to implement an effectively diversified portfolio. Over the long term, this is a huge mistake.

Diversification is the primary tool investors can use to spread their risk between countries, currencies and markets. It allows us to take advantage of opportunities when they unexpectedly appear and protects us from unseen crises situations. In short, diversification reduces risk and, when properly applied, can increase returns.

How many investors do you know who wouldn’t want to decrease risk and increase returns? Probably none. It follows then, that if investors really sit down and think about it, they will diversify. Those who don’t most likely haven’t thought about it, are gambling rather than investing, or think they know something the rest of the world doesn’t. Experience and research shows that all of these reasons are extremely dangerous to investors’ portfolios.

But how do you diversify properly? What investments should you include? How many different investments should you have in your portfolio? What percentage should each contribute to your portfolio’s overall make up?

These questions must be answered accurately before a portfolio can be properly diversified.

Of course the investments you place into your portfolio must meet your criteria and nobody else’s. You need to accurately assess your risk tolerance, the time left before you will need the money from your investments and a number of other factors. Once you’ve completed your homework, you can then begin to diversify.

Diversification always involves a trade off between risk and return. Let’s say we have two investments: sunglasses and umbrellas. The sunglasses investment pays off for every day that is sunny. It pays nothing on days that aren’t sunny. The umbrella investment pays off for every day that is not sunny. It pays nothing on sunny days. It stands to reason that you would always choose to invest in sunglasses if you were absolutely sure that every day over the next year would be sunny. Similarly you would invest completely in umbrellas if you were certain that each day over the next year would not be sunny. Using this strategy you would realize the maximum possible return on these investments.

However, as we all know, predicting the weather is not 100% accurate. All we know is that at some point within the next year we will have sunny days and we’ll have days that aren’t sunny. Furthermore, we don’t know which days will be sunny and which ones won’t. However we could study the historical weather patterns for our area and come to a fairly accurate prediction on how many days (over the course of a typical year) will be sunny and how many won’t be. As it turns out, this is very similar to the stock market. Short-term, we can’t predict anything with great accuracy. However our accuracy improves over the long-term.

For example, if you were to try to predict IBM’s return over the next year, you might be well off the mark. However if you were to try to predict its return over the next 20 years, you’d probably be a lot closer. Therefore it isn’t unreasonable to use a stock’s history to try to predict its future – as long as you’re doing this over the long-term. (Keep in mind, however, that past performance does not guarantee similar performance in the future.)

And since diversifying correctly requires that you make some predictions, your outlook needs to be long-term.

The rest of this article assumes you’ve decided on the general type of investments that will go into your portfolio (e.g. bonds, mutual funds, small cap equities, large cap equities, and such) as well as the specific securities (e.g. IBM or UOPIX). It further assumes you’ll be investing in equities (and perhaps bonds) rather than other investments such as real estate or treasury bills (although you could use the same techniques to manage any investment). A final note is that a properly diversified portfolio won’t gain anything more by holding more than 40 or so equities. Usually 20 to 40 individual stocks is a good number – but you can get by with less when using mutual funds which are already somewhat diversified.

To begin, I’ll introduce a unique way of looking at investment portfolios.

In 1953, Harry Markowitz developed an ingenious approach to managing investment portfolios that has since been dubbed Modern Portfolio Theory (MPT). Rather than trying to predict individual stock price movements using fundamental or technical analysis, he concentrated on looking at the performance of a portfolio based on the combination of its components’ risk and return.

Unfortunately the underlying calculations required to implement his theory were onerous and not conducive to solving by hand. Therefore it wasn’t until the late 1970s, when computers started to show up everywhere, that MPT took off. Markowitz went on to win the Nobel Prize for Economics in 1990 for his contribution of MPT.

Attesting to its validity is the fact that a large number of professional money managers now use MPT to help them with their work.

While the technical details of MPT are very complex, the good news is that there are software packages currently available that allow you to bring the full power of MPT to bear on your portfolio without having to know how the calculations are performed. This means that you can use the same techniques used by some of the top financial minds on your own portfolio – and reap the rewards without having to pay the fees large financial minds usually demand.

Let’s look at how MPT works. Going back to our sunglasses and umbrellas example, we can see that each investment is fairly risky. On any given day you might not make any money. However a portfolio that contains both sunglasses and umbrellas will always pay off – whether the sun shines or not. By adding one risky investment to the other, you’ve effectively reduced the overall risk of your portfolio. (What’s more, if you vary the portion of your sunglasses and umbrellas investment according to the number of days you predict will be sunny or not sunny, your returns might be greater. In essence, you’ve reduced your overall risk and increased your returns.)

The important insight of MPT is that the risk of an individual asset is not too important. What is of prime importance is its contribution to the portfolio’s risk as a whole. And that’s why MPT uses diversification as its primary mechanism.

The first step in using MPT is to predict each investment’s expected return over the long-term (recall that we can generally come up with a good prediction if we’re dealing with long periods of time).

The next piece of information we need is the risk associated with our portfolio. Risk can be defined in a number of ways, however most investors use the standard deviation. For the purposes of this article, we’ll also define risk to be the standard deviation of our particular investment.

The final piece of information we’ll need is the correlation between each investment in our portfolio. Correlation information is usually given as a matrix of correlation coefficients.

All of this information can be obtained from an investment’s historical data. Once we have these data, we can begin our MPT calculations. Our goal is to diversify our investments, in very specific portions, in order to come up with a portfolio that provides a given return at the lowest risk level or the best return for a given level of risk.

MPT assumes that investors will always want the highest return at the lowest risk. In essence it asks, “why would an investor choose an asset that returns 4% a year with a 50% chance of losing some money over an investment that returns the same 4% a year with a 0.001% chance of losing some money?”

The answer, of course, is that a rational investor would not do this. Instead he would choose the investment that returns 4% with the 0.001% risk level. Of course some investors might choose an investment that returns 5% with a 50% risk of losing money over the 4% return, 0.001% risk level investment. And that’s okay with MPT. It doesn’t make assumptions in those cases. If investors are willing to accept greater risk, then they must be compensated with greater returns (no matter how little or how much greater).

In this article, we’ll only look at stocks because studies have consistently shown that they are the most profitable investments over the long-term (however you can use the techniques described with many other investment classes).

In the United States, between 1926 and 1994, small cap stocks have returned 12% annually with a standard deviation (i.e. risk) of 35%. Large cap stocks have returned 10% annually with a standard deviation of 20% over the same period.

Other investments have returned less, but have also been less risky. For example from 1926 to 1994, long-term government bonds returned 5% with a standard deviation of 9% and Treasury bills returned 4% with a standard deviation of 3%.

From these examples, we can see that the larger returns come at the expense of greater risk.

So how does diversifying reduce our risk and increase our returns? It does so by utilizing the way individual investments move with one another. If two investments both return 10% on a sunny day and nothing on a rainy day, then these investments are perfectly correlated (i.e. correlation coefficient is 1). In this case there would be no point in diversifying since owning both would provide exactly the same return as owning just one. (Note that it is a good idea to diversify within investment classes – i.e. investments that are highly correlated – so we eliminate specific, or non-market, risk. However we’ll ignore this in our examples.)

Instead we want to look for investments that aren’t perfectly (or even highly) correlated. Ideally we’d like to find two investments that are perfectly negatively correlated (i.e. correlation coefficient is -1, by the way, no such investments exist – but if they did, we’d be millionaires many times over in a short period of time), however in reality we usually have to settle for low, positive correlation coefficients.

Therefore many savvy investors diversify by investing in foreign markets as well as different industries and investment classes. The key point is to choose investments that aren’t highly correlated. This happens to be the case with domestic securities and foreign ones.

Once the data are fed into the MPT algorithm, a curve (called the efficient frontier) is plotted. The efficient frontier is the set of portfolios with expected return greater than any other with the same or lesser risk, and lesser risk than any other with the same or greater return.

The efficient frontier is usually plotted on a graph where the x-axis represents the risk level and the y-axis represents the expected return. Each point on the graph represents one particular portfolio that has a specific expected return and a specific level of risk.

This portfolio is composed of the individual investments put together in various portions (each individual investment can range from 0% to 100% of the portfolio).

For example, the point labeled Sample Portfolio (shown below) lies on the efficient frontier and might be composed of 0% T-Bills, 15% EK, 15% IBM, 25% MSFT, 30% AMZN and 15% ICGE. (Note that this is only an example and does not represent an actual portfolio.)

mpt

All portfolios that lie on the efficient frontier are called efficient portfolios.

Portfolios that lie below the curve are called inefficient portfolios (i.e. for a given risk level you can obtain a greater return using another portfolio – e.g. the one lying on the efficient frontier – and for a given return you can obtain a lower risk level by using another portfolio).

Portfolios that lie above the curve are not attainable (e.g. you cannot receive a 100% return with no risk).

MPT, therefore, quantifies risk relative to expected return and provides a mathematical model that shows you the best portfolio (i.e. how best to combine the individual investments in your portfolio) to use for a given level of risk or return.

The question naturally arises, “can we do better?” In this case the answer happens to be “Yes.” To see how, let’s introduce Automatic Investor into the equation. Automatic Investor uses an algorithm based on Robert Lichello’s AIM. It balances cash and equity in order to reduce risk and increase returns. This makes it a natural fit for use with MPT. After all, MPT is concerned with returns and risk – as we’ve seen.

By using Automatic Investor to manage each of the individual investments in your portfolio, you’re essentially reducing the risk and/or increasing the return for that investment compared to simply buying and holding that investment. So if the underlying investment has a high volatility (i.e. standard deviation), when Automatic Investor manages it, its volatility goes down significantly. Its return can also be expected to increase.

This causes that investment point to be shifted to the left (i.e. reduced risk) and/or up (i.e. increased return). If you plot the Automatic Investor managed point for each investment, and then calculate the efficient frontier, the curve will be shifted up and to the left.

In effect you’re now able to choose portfolios that were previously unattainable because for a given level of risk, your returns are higher and for a given return, your risk level is lower.

In essence, you are using MPT to manage your entire portfolio (the macroscopic view) and using Automatic Investor to manage each individual investment within your portfolio (the microscopic view). Automatic Investor filters the risk of the underlying investment so that it becomes less volatile at the macroscopic level.

Keep in mind that Automatic Investor thrives on volatility (or a relatively high standard deviation). Therefore using standard deviation as a risk measure at the microscopic level is counter-productive because Automatic Investor manages this risk to wring out higher returns.

However at the macroscopic level, standard deviation is an excellent measure of risk. While you don’t want your entire (macroscopic) portfolio to fluctuate wildly, you do want the individual (microscopic) investments within that portfolio to fluctuate (so that Automatic Investor can produce higher returns with less risk).

A side effect of this is that you can invest in equities that are slightly more risky than those with which you’d normally be comfortable. Since these “riskier” equities are being managed by Automatic Investor at the microscopic level and diversified according to MPT at the macroscopic level, your overall portfolio risk is within your tolerance – and your expected returns can be higher.

Therefore by using MPT in conjunction with Automatic Investor, your returns can be significantly increased and your risk significantly reduced compared with using either MPT or Automatic Investor by itself.

This article was first presented at the AIM 2001 conference in Las Vegas by Mark Hing.

Automatic Investor FAQs

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Frequently Asked Questions

If you don’t find your answer here, stop by our User’s Group. It’s jam packed with useful information and you can post your own questions.

Q: If I have more than one stock in my portfolio, which one should I sell when Automatic Investor recommends I sell some shares?

A:You can choose to sell whichever one you want. Automatic Investor will recommend you sell a specific dollar amount of equities. It will also calculate how many shares of a particular equity you must sell (at its current price) in order to meet this dollar amount. You can see this advice by selecting the equities in your portfolio one after the other. As long as you sell the correct dollar amount, it doesn’t matter whether you choose equity A or equity B. In fact, you can choose to sell a portion of equity A and a portion of equity B (as long as the sale results in the dollar amount Automatic Investor recommended). The same holds true if Automatic Investor recommends you buy equities.

Interestingly enough, this feature gives you the ability to diversify your portfolio and practice asset allocation techniques. If an equity in your portfolio has outperformed the others, you may want to rebalance by continuing to sell the outperformer (as Automatic Investor directs) until it makes up the desired percentage of your portfolio. Similarly you can rebalance by buying specific equities when Automatic Investor gives buy advice.

Automatic Investor also allows you to swap one equity for another, as long as the total value of the equity portion of your portfolio doesn’t change. So you could sell $5000 worth of Microsoft, for instance, and buy $5000 worth of IBM at anytime.

There are times when you might want to do this because the fundamentals of a stock (or the industry it’s in) has changed, there is trouble in the company, the stock has not fluctuated like you thought it would (recall that volatility is the key to superior returns), or you simply find a better company.

Q: Should I be in or out of the stock market?

A: You should be in the stock market if you are investing for retirement or other long-term goals and have at least 5 years to go. Historically, the stock market has beaten other investments, including bonds, during 10-year periods. If you will need your money in the near future (or aren’t comfortable with volatility), you should consider moving the bulk of your investments to less volatile, or guaranteed, financial instruments (such as T-Bills and guaranteed bonds).

Q: What stocks should I pick?

A: If you’re just starting out in the investment game, you may want to consider putting your money into an equity based mutual fund that is compatible with your goals and risk tolerance. A good mutual fund will diversify your investment and professionally manage it. Of course there are costs associated with this, typically for management fees and fund expenses. Automatic Investor will manage your mutual funds just as easily as it manages individual stocks. However, mutual funds may be more difficult to sell (and there may be additional charges if you sell within a specific time frame). Ensure you find out ALL the details.

As you learn more about investing in the stock market, you might want to try choosing a few stocks for your portfolio. Keep in mind that choosing good companies really does require knowledge and experience. So take it slow at first (don’t put all your money into one stock), take a few investment seminars, and read everything you can get your hands on. The Internet is a prime resource.

Remember to do your homework before you buy a company and ensure you understand the business and the industry it’s in. Read the annual reports and pay attention to analyst recommendations – but don’t take them as gospel. You may also want to look at the stock’s chart (perhaps even get into some technical analysis).

Automatic Investor will help you manage your portfolio, but you must choose high quality equities. The old adage, “garbage in, garbage out” definitely applies with investments.

Q: How many funds or stocks do I need to create a diversified portfolio?

A: The answer really depends on your overall personal portfolio. If you have other assets (such as a fully paid house, an art collection, or investment property), you might need as few as four stocks. If all of your assets are in the stock market, you might be better off with as many as fifteen or more. The important point to remember is to spread your risk over all of your assets. Within your equity portfolio, you should diversify by picking stocks from different kinds of companies across several industries. A diversified portfolio might contain stocks from small companies with unique products, some medium-size growth companies, and some large blue chip corporations.

Mutual funds, on the other hand, will automatically diversify your holdings. Even so, however, you should minimize your downside risk by investing in a number of different fund types. An investment in a growth fund, for example, might be balanced with smaller holdings in international and bond funds. Your overall portfolio should depend on your age, investment goals, and risk tolerance.

Q: What are the time-tested investment strategies that work?

A: In a nutshell, a slow, steady, consistent, disciplined strategy does the trick. Start as early as you can and invest a set amount of money every month in stocks or equity mutual funds. In essence, pay yourself first, persevere, and ignore emotion. Automatic Investor is specifically designed to help you implement these proven strategies. That’s why we think Automatic Investor will help you build wealth in an efficient manner.

Most investment problems arise because investors don’t have discipline, they invest inconsistently and they let their emotions make important decisions. That’s why the Buy & Hold strategy is so popular. It removes the buy and sell decisions entirely. However it comes at a price (you don’t profit from the market’s inherent volatility). Automatic Investor can do much better. It has all the advantages of the Buy & Hold strategy, and adds the ability to profit from price fluctuations.

Q: Should I use margin?

A: Automatic Investor is fully capable of handling margin. However use any debt, including margin, sparingly. When you do borrow, invest only in high quality equities and pay the loan off as soon as possible. Margin allows you take advantage of unique opportunities in the market and leverage your profits. But it is a double-edged sword that will just as quickly magnify your losses. Remember, when you use margin, you can incur losses in excess of your portfolio’s actual value.

Warren Buffet (one of the world’s best investors) says, “we will reject interesting opportunities rather than over-leverage our balance sheet.”

He goes onto say, “the financial calculus that [we] employ would never permit our trading a good night’s sleep for a shot at a few extra percentage points of return. I’ve never believed in risking what my family and friends have and need in order to pursue what they don’t have and don’t need.” We think that’s great advice.

Q: Will Automatic Investor manage any investment?

A: Almost. As long as the investment’s price fluctuates and has liquidity (i.e. you can buy and sell whenever you want), Automatic Investor will manage it. The most commonly managed investments are stocks and mutual funds. However you can manage bonds, options, or even a coin collection. Automatic Investor views your portfolio in two parts: the cash part and the fluctuating part. The fluctuating part can be anything that fits the bill. You can even manage different asset types in one portfolio (such as stocks, mutual funds, and bonds).

If you’re starting out, however, we recommend you use Automatic Investor to manage mutual funds and/or stocks.

Q: What makes Automatic Investor better than the other systems out there?

A: Of the hundreds of investing strategies available, study after study has shown the ones that promote discipline, consistency, and remove emotion from the decision making process are superior. In addition, we believe that a strategy has to be easy to use, or you won’t use it consistently. Automatic Investor incorporates all of these traits, and many more. Best of all it’s so simple and easy to use, you’ll find you have more time for the important things in life.

Q: Are there any additional fees?

A: No. There are no subscription fees or stock quote charges of any kind. We recommend you obtain an Internet connection, but one is not necessary. When you purchase Automatic Investor you receive everything you need to get started right away.

Q: Can I obtain help if I’m stuck?

A: Yes. There are many ways to receive help. First you should check the online help manual. If you still have a question, feel free to contact us. We’ll answer your question, usually within 24 hours. We are committed to helping you succeed. As such, you’ll find our customer service truly outstanding. In addition, there are a number of discussion groups available on the Internet. You can post questions, and even learn some things you didn’t think to ask about.

Q: Is Automatic Investor easy to learn and use?

A: Yes. It can be used immediately by the novice and has a very low learning curve. After setting up your portfolio (very easy to do), you simply update share prices whenever you want to and follow the recommendations. That’s it. You’ll also find the user interface intuitive and easy to use – it was designed that way from the outset.

Of course, as you progress in experience, you’ll find Automatic Investor includes a vast array of options you can set according to the characteristics of your portfolio, your investment goals, and your risk tolerance. In addition, you can incorporate many of the proven investment strategies such as diversification and asset allocation.

Automatic Investor is akin to playing the guitar. You can learn to play it quickly, but you can also spend the rest of your life learning advanced techniques to fine tune your performance.

Q: Will I make a million dollars?

A: We hope so, but there is no guarantee. As with any investment strategy, there is risk involved. We believe Automatic Investor minimizes your downside risk compared with other strategies. However, you must do your own due diligence and take responsibility for your investments (please read our disclaimer). No one knows or cares about your personal circumstances like you do; how much money you have to invest, your risk tolerance, your goals, and your most suitable and comfortable time frame. You should do everything in your power to learn about where your money is invested.

That said, there are many people around the world who are already using the strategies and methods contained in Automatic Investor (the basic theory was developed in the 1970s) to successfully build wealth.

How to Select Stocks

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Selecting Stocks

Stock Selection is THE MOST IMPORTANT part of the Automatic Investor strategy. If you are investing for the long term, you must choose a high-quality stock. While the Automatic Investor technique will work with any stock, the risk to your capital is dependent on the quality of your choice. The higher the stock’s quality, the lower the risk.

Of course if you are aware of the risks, you can use Automatic Investor to manage second tier stocks, or even speculative penny stocks. Automatic Investor is a portfolio management tool. What you put into it is entirely up to you.

We do, however, recommend you use high-quality selections – because we feel that capital preservation is paramount.

For an excellent overview on the fundamentals of selecting stocks, we highly recommend Benjamin Graham’s classic book, “The Intelligent Investor” (click on the book cover to purchase it directly from Amazon.com).

Now let’s look at some key points for selecting a good stock.

Two investment styles

When looking for solid stocks, investors tend to use one of two basic styles – value investing or growth investing.

Value investors look for stocks that are priced at less than what they are actually worth, whether it’s because they are out of favor, had a bad quarter, or whatever. The value investor will search for companies that have assets valued higher than the total value of the company’s stock, look at fundamentals that suggest the company’s stock price is temporarily under-valued, or buy companies whose stock price has been driven down by outside factors.

This style requires absolute logic and a willingness to go against the crowd. It also requires a fair amount of research and basic accounting skills. In general prices have already fallen, so value investors minimize their downside risk.

(Fortunately there are now computer programs that can do much of the tedious research for you. See our Value Stock Selector software that pops out a list of solid, undervalued stocks with just one mouse click.)

If you can’t stand the thought of paying a high premium for a company’s future growth potential, this is probably the route for you.

Growth investors, on the other hand, look for companies where earnings are growing, markets are expanding, and the stock has momentum. They like companies that have a faster growth rate than the market as a whole, a leading position in a fast growing sector, or a new technology that will provide a distinct advantage.

This style of investing usually carries a higher level of downside risk, because growth stocks tend to get all the media attention, be in “hot” sectors, and draw the speculators to them. They also tend to be more volatile, than value stocks, and are thus better suited for use with Automatic Investor.

However either style will work with Automatic Investor. The key point to remember is that there are good value stocks and bad value stocks. Similarly there are good growth stocks and bad growth stocks. Choose the good ones.

Once you’ve found some good stocks, what do you look for next?

Volatility

The key ingredient is volatility. A stock that fluctuates notably in a short time period will work extremely well with Automatic Investor. There are stock screening tools available on the Internet that can find volatile stocks for you. If you look at a chart, U and V patterns (and their upside down counterparts) visually signal volatile stocks. You can also look at the percentage gain or loss each day. High percentages indicate good candidates.

Cyclical stocks

A cyclical stock usually operates in an industry that runs on cycles. In good times, the price rises, in bad times, the price falls. If you can find a stock with a reasonable period, it should be a good choice for Automatic Investor. Be aware, however, that these stocks generally accumulate returns over a longer period of time – compared with their volatile cousins.

Rolling stocks

Some stocks trade in a very noticeable range. They rise until they meet a certain price, then fall until they reach a lower bound. Then they rise again. These stocks are ideal Automatic Investor candidates because they fluctuate in a very precise manner. This allows you to time your price updates accordingly.

Automatic Investor takes care of the rest

Automatic Investor will use these price fluctuations to generate a profit. The more fluctuations that occur, and the greater the price change, the larger the returns will be. And therein lies the beauty of the technique. You don’t have to choose a stock that will continually rise (such as in the buy and hold system), nor do you have to choose one that will go down (as with short selling strategies). Rather you choose a high quality stock and reap rewards whether it goes up or down.

Some additional tips

In addition to fluctuating share prices, here are some other points to consider.

Buy, don’t be sold. Do your own due diligence and don’t listen to others unless they can back up what they say with facts.

Be a realist. Let your priorities be the sole reason for an investment. If you know you will need your money in 2 months, put it in a guaranteed investment vehicle.

Use margin sparingly. Margin can help you take advantage of unique opportunities. But always remember you are taking out a loan. One that will have to be paid back. In addition, if your holdings go down, you may be required to deposit additional funds – or risk being forced to sell your stocks at a poor price. If you do decide to use margin, buy only high-quality stocks, and pay it off as soon as possible.

Use knowledge. Purchase stocks based on facts, not rumors or tips. Above all, don’t try to predict the future, rather concentrate on minimizing risk.

Don’t try to get-rich-quick. It doesn’t work. Over time, the disciplined investor wins the race every time. Use Automatic Investor and follow its recommendations unless you have a good reason not to. You’ll likely do much better and will definitely experience less stress.

Take action. Review your portfolio regularly. If the fundamentals change, and your stock choices need improving or upgrading, do it right away. Delayed action translates into delayed benefits.

Don’t doubt. Once you’re convinced Automatic Investor is the superior system (and you should convince yourself before using it to manage your money), stick with it through the ups and downs. Don’t second guess Automatic Investor’s recommendations.

How Automatic Investor Works

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The Analysis Engine

The heart of Automatic investor is the analysis engine. It’s based on a time-tested algorithm developed by Robert Lichello in the 1970s.

Of course Lichello had to perform all his calculations by hand – a tedious chore to be sure. Over the years, Lichello’s algorithm has been improved significantly.

Automatic Investor not only implements the very latest improvements, but also harnesses the power of your computer and the Internet to make managing your investments a breeze.

A Theory Ahead of its Time

Lichello came up with a simple, but brilliant, system based on stock market volatility.

Unfortunately, the theory was too far ahead of its time. When first developed, it was not feasible to perform the necessary calculations frequently enough.

The system still worked, but many buy and sell signals were missed. The proliferation of the computer, and the Internet, has changed that.

Hundreds of calculations can now be performed in a second. Furthermore stocks are much more volatile today, and the Internet brings an unprecedented amount of financial information right to your desktop.

These key developments have combined with Lichello’s algorithm to usher in a system that can significantly increase your investment returns.

Value Added Features

But that’s not all. Automatic Investor adds a host of features to the Analysis Engine. Features that not only makes it a snap to use, but also increases its power and effectiveness.

Features such as the most comprehensive set of tuning parameters currently available. These parameters will let you configure the system to your investment style, market conditions, and the characteristics of your portfolio.

Once you’ve gained some experience with Automatic Investor, you’ll definitely want to learn about them. For now ignore them. They default to values that work well with most portfolios.

A Look into the Past

Automatic Investor also allows you to back-test stocks based on historical prices.

You can update your entire portfolio from the Internet with one mouse click. You can “go back in time” to see what your portfolio looked like at any given point (using Automatic Investor’s unique check point feature).

And the list goes on and on.

The Information is in the Price

The analysis engine operates on the principle of letting the price (and optionally the Volume) dictate the response.

It doesn’t try to predict the future. In other words, all of the required information is in the price (and Volume). Combined with your portfolio’s history, crystal clear recommendations are instantaneously generated so you can quickly place your trading order.

Keeping some Cash on Hand

When starting your portfolio, Automatic Investor recommends you buy some stocks and keep some cash. The exact proportions depend on the Model you’ve chosen. You can change Models at anytime.

When you update prices, Automatic Investor calculates your new portfolio value and checks it against your portfolio’s history. If it has gone down, Automatic Investor will determine whether it’s time to buy additional shares at the lower price.

Conversely, if your portfolio’s value rises, Automatic Investor may advise you to sell a portion of your holdings to lock in a small profit.

In effect, you buy when prices are low and sell when they’re high. As stock prices fluctuate, Automatic Investor will efficiently buy and sell to purchase cheaper shares and lock in small profits. Your portfolio benefits to a small degree with each iteration (whether because of obtaining shares less expensively or locking in a profit).

Over time, these small benefits quickly add up, and your portfolio will experience a compounding effect. You automatically average into a stock at timely intervals and systematically take profits when it’s advantageous.

You can see that the more volatile a stock, the better Automatic Investor will perform.

But Automatic Investor can also do exceptionally well with some of the most widely held stocks too (see the detailed performance study).

A Delicate Balance

Another benefit is that Automatic Investor will balance your cash and equity positions based on the prevailing market conditions.

You’ll find that when the market is relatively high, you’ll be flush with cash – ready to buy when prices start to fall. When the market is relatively low, you’ll be fully invested – ready for the upswing.

And that’s exactly what you want. As prices fall, you want cash available to purchase shares at lower prices. As prices rise, you want to be fully invested to take advantage of the rising trend. Because of this, your risk is constantly minimized. Automatic Investor ensures that’s the case. Automatically.

Mr. Spock would be proud

You’ll notice that you don’t have to watch the market. In fact all you have to do is choose when to update your share prices.

Automatic Investor removes all the emotion from your decisions and replaces it with a mechanical logic that’s impervious to feelings of greed and fear.

As any professional investor will tell you, “emotions are deadly.”

Multiple Stocks

Automatic Investor works well with a single stock or a basket of stocks.

From its perspective, it sees cash and equities. Whether the equity portion is composed of one stock or many, doesn’t matter.

And that’s to your advantage because you’re free to swap an equal value of one stock for another, at anytime.

Let’s say you have two stocks, 100 shares of IBM and 200 shares of Microsoft. IBM is trading at $100 a share. Microsoft? $50 a share. The total equity value of your portfolio is $20,000.

If you then decided that you liked the fundamentals of IBM slightly better than Microsoft, you could sell, say, 100 Microsoft shares ($5000) and buy 50 IBM shares ($5000).

Note that you didn’t change the total equity value. It’s still $20,000. What you cannot do is sell 100 Microsoft shares and keep the proceeds in cash. In that case your equity value would be $15,000 and Automatic Investor would not work correctly from that point on.

A Detailed Explanation

For a complete explanation, we suggest you read Robert Lichello’s book, “How to Make $1,000,000 in the Stock Market Automatically.” You can purchase it in our bookstore.

The Benefits of Automatic Investor

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Benefits and Features

Based on a proven, time-tested algorithm combined with powerful cutting edge technology, Automatic Investor optimizes your portfolio by balancing cash and equity in a very efficient manner.

It takes the prevailing market conditions and your specific portfolio into account in order to minimize overall risk and maximize your returns.

Automatic Investor will not only tell you when to buy and sell, but exactly how many shares to trade. What’s more, you retain complete control over the equities that go into your portfolio.

Automatic Investor will manage one equity, or multiple equities. You decide. Diversify your holdings, use asset allocation techniques, even mix asset classes. Automatic Investor manages it all.

Automatic Investor eliminates uncertainty and conflicting advice and gives you crystal clear BUY, SELL, and HOLD recommendations. It truly is the easiest way to build your personal wealth.

Look at what Automatic Investor can do for You…

  • Set it and forget it. You no longer have to watch the ticker. No more seat-of-the-pants, gut-feeling investment strategies.
  • You can enjoy superior returns while minimizing your downside risk.
  • Spend less time managing your investments. Time you can use for something else.
  • Automatic Investor gives you the power to implement a rock-solid, disciplined, emotion-free investment plan.
  • Automatic Investor gives you precise, 100% objective recommendations on when to buy and sell shares.
  • Automatic Investor minimizes your risk.
  • Automatic Investor provides superior returns by taking advantage of the volatility found in many conservative, proven stocks.
  • Automatic Investor allows aggressive investors to achieve even greater returns, while still managing risk, by investing in more profitable and more volatile growth stocks.
  • Automatic Investor gives advanced users the ability to create their own investment models and tune the system according to their wishes.
  • Automatic Investor will let you manage your investments in just minutes a day.
  • Automatic Investor is easy to use.
  • Automatic Investor contains an advanced historical testing function and a built-in Optimizer that lets you easily create your own Models.
  • Automatic Investor is fully integrated with the Internet so your portfolio is always up to date. And you don’t have to manually enter stock and mutual fund prices.
  • Automatic Investor lets you define your own file formats for use with almost any historical quote source. You can run your historical analysis and optimizations using whatever data source you want.
  • Automatic Investor implements a fully researched algorithm designed to automatically profit from volatility.

Now look at some features…

  • A user-friendly Windows based program engineered for exceptional simplicity, functionality, and clarity. The user interface is designed to be intuitive, yet flexible.
  • Fully integrated with the Internet so you can import historic prices, current quotes, and view charts. Update your entire portfolio with one mouse click.
  • Use the powerful simulation function to determine performance based on historic Internet data. Quickly and without cost.
  • A unique check-point feature allows you to “go back in time.” View your portfolio exactly as it appeared on a particular day in the past. You can even “go forward” from that point to answer “What if?” questions.
  • Undo updates for any number of entries. The last entry, the last 2 entries, the last 100 entries, any number at all.
  • Customizable tuning parameters allow you to fine tune Automatic Investor to your particular investment style and the characteristics of the equities in your portfolio. No similar program gives you as much control.
  • Since it will manage any type of equity, you select only those equities that match your investment goals. You can use a variety of strategies to complement Automatic Investor.
  • Rebalance your portfolio at ANY TIME. Automatic Investor will continue to give you crystal clear advice without missing a beat.
  • Update prices when YOU want, monthly, weekly, daily, hourly, even in real-time. Automatic Investor will ensure your investments are working hard for you.
  • See exactly what your next BUY and SELL prices are at anytime. You can use this feature to place limit orders with your broker, then forget about updates until an order is filled.
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