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Tom Veale and the 800 Pound Gorilla

Posted by | March 2, 2014 | Articles | No Comments

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.

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