Core Position Trading Buy Low Sell High Stock Trading ETF Trading | AIM Portfolio Control Inflation Adjustment

There has been a series of posts on the AIM Investors Hub forum about adjusting (indexing) Portfolio Control (PoCo) for inflation, and how that affects Buy and Sell prices and quantities as calculated by the AIM algorithm.  My post starting the thread is number 25454.  See also post number 25466.

This article is to clarify the reasons for, and to illustrate an example of, adjusting the AIM Portfolio Control (PoCo) for the effects of inflation.

Some have questioned:  Why not just do an occasional Vealie?  The function of the Vealie is to adjust PoCo when you feel you have "too much cash" in an account, however you define "too much cash".  Adjusting PoCo has the same effects, regardless of the reason for doing it.  My position is that doing a Vealie is an arbitrary adjustment.  Adjusting for inflation has, I think, much less arbitrariness.  It is NOT exact, because there is a delay between the time the government/banking cabal pumps more money/credit into the economy and you see the results in the Cost of Living (COL) increases, the Consumber Price Index (CPI) increases, or stock market price increases.  And yes, getting a handle on that is complicated by the fact that your government politicians and bureaurats and the banksters are lying, power-hungry weasels.  They understate the results of their inflation by continual fiddling of the COL and CPI figures.

While you cannot determine inflation directly, you can observe the effects of inflation in the Consumer Price Index (CPI).  I suggest adding a "truth in government" factor.  If your rulers say the CPI has increased by 5% in a year, I suggest at least doubling that for use in your adjustments.  In addition to the material here, there is more general information about the effects of inflation on The Rule of 72 web page, towards the bottom of that web page.

I've done the example transaction calculations below with my AIM Stock/ETF Transaction Calculator software program.

Here is the data used in the examples below.  The examples use PoCos of $5000 and $5500.

Qty of Shares Held:             300 sh
SAFE (both Buy and Sell):        10%
Commission (Buy):               $7.00
Commission (Sell):              $7.02   (Note 1)
Minimum $ Transaction Allowed:  $140    (Note 2)

My calculations include the effect of commissions.  THEY MAKE A
DIFFERENCE.  You CANNOT ignore them unless you are trading a couple of
thousand dollars or more per transaction.

Note 1:  Includes approximate transaction tax.
Note 2:  Amount is chosen so that commission is arbitrarily 5% or less.
         Due to rounding effects, calculation results can be somewhat
         less.

Given the above figures, the next Buy and Sell transactions that AIM
would allow are:

Portfolio Control (PoCo): $5000
  Sell 8 sh @ $19.07  (net $145.54, net per share $18.19 received)
  Buy  9 sh @ $14.75  (net $139.75, net per share $15.53 paid)

Portfolio Control (PoCo): $5500
  Sell 7 sh @ $20.92  (net $139.42, net per share $19.92 received)
  Buy  8 sh @ $16.26  (net $137.08, net per share $17.14 paid)

Observation:  For a given quantity of stock held, a higher PoCo raises
both the buy and sell prices

Looking at a price of $20.92 (the next allowable Sell at PoCo = $5500),
if the PoCo were $5000, the quantity to Sell would be

  PoCo $5000:
  Sell 31 sh @ $20.92  (net $641.50, net per share $29.69 received)

Observation:  If PoCo is not adjusted from $5000 to $5500, you will
Sell WAY TOO MANY shares (31 vs 7) at a given price ($20.92 in this
example).
That is, indexing PoCo will have you sell less shares at a given price.

Looking at a price of $14.75 (the next allowable Buy at PoCo = $5000),
if the PoCo were $5500, the quantity to Buy would be

  PoCo $5500:
  Buy 43 sh @ 14.75  (net $641.25, net per share $14.91 per share paid)

Observation:  If PoCo is not adjusted from $5000 to $5500, you will
Buy WAY TOO FEW shares (9 vs 43) at a given price ($14.75 in this
example).  That is, indexing PoCo will have you buy more shares at a
given price.

YES, adjusting PoCo for inflation will lead to different recommendations for Buying and Selling than not adjusting PoCo.  But those recommendations will be more realistic.  Like it or not.

YES, since you will buy more at a given price because of indexing PoCo for inflation, that will lead to having less cash for buying in a downturn.  Keep in mind that a downturn in an inflationary environment is a big downturn as compared to a downturn in a constant money value environment.  What you may think is a modest downturn in an inflationary environment would be the equivalent of a "deep diver" in a non-inflationary environment.

We are entering a period of even higher inflation.  I want to emphasize AGAIN that inflation is a monetary/credit manipulation by the government/banking cabal.  The RESULTS of that inflation are seen in rising prices (e.g., 30 cent gasoline years ago compared with $3.00+ gasoline today.)  Don't give me crap that this or that price increase (e.g., gasoline) is due to shortages/demand.  Look at ALL prices.  Pick any item.  I'm talking basics like food, housing, clothing, infrastructure.  Yes, electronic toys are an exception.  Electronics companies, through outsourcing, offshoring, efficiences, and technology have managed to keep ahead of the inflation juggernaut.  Little else has.

Now, if you have a stock that does not increase -- on average -- over a period of a couple of years at a rate equal to or greater than the "truth-in-government" adjusted Consumer Price Index (CPI), you have to face the unpleasant fact that your stock is going into the dumpster in REALITY.  Its price is NOT maintaining REAL VALUE.  It is not maintaining purchasing power.

The result with a stock such as that is that you will not get as many Sells if you adjust your PoCo for REALITY.  The result is the same as if you are trying to AIM a stock that is declining in nominal terms and not even adjusting your PoCo.

If AIMing a declining stock, you may be able, if lucky, with your AIM Buys and Sells, to increase cash and shares.  But only if really lucky will the purchasing power of that cash and the cash-in value of the stock be maintained.  Real profit with such a stock?  Fuggedaboudit.

It may be that those apparent great returns you see while AIMing your portfolio without adjusting PoCo for inflation may diminish or even disappear if you do adjust your PoCo for inflation.

As John Maynard Keynes said:

"Lenin was certainly right.  There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.  The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

REMEMBER, CASH IN AN INFLATIONARY ENVIRONMENT IS A DEPRECIATING ASSET!  If you remain ignorant of -- or insist on ignoring -- how the government is f'ing with you and your finances, you continue to do so at your own financial (and personal) risk.  ADJUST YOUR PORFOLIO CONTROL FOR INFLATION!

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In this best-selling book, Lichello details his "Automatic Investment Management" (AIM) method.  AIM is perhaps the most popular and well-known Core Position Trading method with probably thousands of successful practitioners.  For the basics of Robert Lichello's AIM methodology, see AIM Basics.

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Because of actions by the increasingly out-of-control fascist U.S. Government, the AIM e-gold transaction software is no longer usable.  Regardless, you may be interested in some of the information about gold, money, and government fiat currency debasement that robs you of capital and purchasing power on those pages linked to from this section, especially in the User Document.

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