How to Make $1,000,000 in the Stock Market Automatically:
Product Description
Written in response to the stock market crash of the 1970’s-and completely updated for today’s equally volatile market-this bestselling classic reveals Robert Lichello’s revolutionary AIM formula for earning profits in stocks and mutual funds.
Buy How to Make $1,000,000 in the Stock Market Automatically: at Amazon
Buy How to Make $1,000,000 in the Stock Market Automatically: at Amazon
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January 24th, 2010 at 4:48 pm
I initially read the book in the library and then bought a copy. After wading thru the book, which is roughly 60% filler, I decided to keep an open mind and test out his ideas.
After I created my own Excel worksheet for using AIM (Automatic Investment Management), and did some back testing, I learned that AIM will NOT help you if your stock/mutual fund/ETF, over many months: (1) moves up [or down] in a straight line, (2) moves up exponentially, or (3) moves in a thin trading range. In order to get an excellent return, the ideal AIM stock/mutual fund/ETF movement seems to be like a high-frequency and, what I call, “violently cyclical” movement (i.e. up 150% or more [from the previous year, for example] on the up move and down 60% or more [from the previous year, for example] on the down move). While I’m not sure that any mutual fund has this kind of past movement, I don’t think any ETF currently available has consistently shown this kind of movement and fewer than 2% of the top 3,500 stocks have in the past 10 years. (While these stocks can exist in several industries, the semiconductor industry appears to be a relatively fertile hunting ground.)
I have not come across any high-frequency, violently cyclical stock (or ETF), in back testing so far, from the period January 1991 to August 2005, that would have taken $10,000 and turned it into $1,000,000 or more, even before all costs. So the title of Lichello’s book is misleading in that regard.
My back testing also showed that AIM didn’t beat the S&P 500 (not counting dividends, taxes, commissions and interest for both investments) from January 1982 to August 2005, or from January 1991 to August 2005. AIM, under the same conditions as mentioned above, also didn’t beat the NASDAQ Composite from January 1991 to August 2005. Having said that, I am willing to give it a shot using a small amount of money for a few months on some specific stocks to see how it goes.
Happy Investing!
January 24th, 2010 at 7:14 pm
Lichello starts out with an anecdotal review of efficient market theory, without mentioning the term, pointing out that “financial breakthrough books are obsolete by the time you read them” because when lots of people start using the system, it quits working. He then claims his book is different without saying why (but I will tell you).
That much is right on. A lot of the book is story telling, which would be harmless except that Lichello mixes in observations that are correct with some that are not. For example, he observes that individual stocks give more volatility than mutual funds. Actually, economists have been surprised to find fund volatility is nearly as high as stocks. Search for and download Cochrane’s readable paper “New Facts in Finance” for the antidote to Lichello’s mixed bag. Accuracy aside, it’s mildly entertaining reading.
Lichello doesn’t address how to pick the stocks in your portfolio, just how to manage a fixed sum of money invested in them. The catchy title has no particular basis. You can make a million with a savings account if you are patient, and also with AIM, including the patience.
Lichello’s AIM is a method of rebalancing a fixed portfolio (not necessary to add new funds) between an allocation to stock and a cash reserve. Instead of rebalancing all at once annually or semi-annually, AIM uses a differential formula – what amounts to a digital filter – to gradually rebalance when applied monthly. In theory, this should allow AIM to profit from moves other rebalance methods would miss, and to not be fooled by sudden moves that might skew an all at once rebalance method.
Any rebalance method reduces total returns in exchange for lower volatility, by means of the cash reserve. AIM and AIM-HI are no exception. Assuming investment in a stock or fund with an average annual gain of 10.2% with a standard deviation (risk/volatility) of 28.2%, and assuming no transaction costs and no interest on the cash balance (or assuming the interest just covers the transaction costs), AIM reduces the average gain to 5.1% and the risk/volatility to 15%. AIM-HI gets the gain back up to 8%, but risk/volatility also rises to 22.7%.
So it does about the same thing as ordinary asset allocation systems – which are already widely used, therefore the publication of Lichello’s book hasn’t changed their effectiveness. There are two reasons you might want to use Lichello’s method instead of all at once rebalancing. One is for the possible advantage of his clever filter. The other is because this system, by its very obscurity, will leave you less tempted to make manual deviations, which are often ruinous. The reasons you might NOT want to use AIM are high transaction costs, and the current low interest rates on the cash reserve. It works best in times of high interest (it was developed in the 1970’s) and with at least $10,000 per security, which limits risk reduction via diversification.
There are better methods of rebalancing which don’t require the cash reserve, and thus don’t give up returns for the reduced risk, but they are more complex, and for a description of them you’ll have to await my own book, currently in progress.
If you enjoyed this review, go to mc1soft.com and drop me a note and I’ll send you a copy of the spreadsheet I used to analyze AIM and AIM-HI. Happy investing!