Computer Programs for Constant Value Investing

On my unix blog, I posted a script for applying constant value investing to a text file of prices.

There is both an awk version and a perl version.

To run the awk version on windows, you will need to download a free copy of gawk.

These scripts are included in my book, Stock Trading Riches, which is available on Amazon.com, and explains my successful trading system.

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Example of Constant Value Investing

Here is an example of constant value investing, as applied to Amazon.com (AMZN) yearly prices. The prices were obtained from Barchart.com, which is on my list of links.

Constant value is the basic principle behind my successful stock trading system, which I describe in my book, Stock Trading Riches, which is available on Amazon.com.

To show an example of how constant value investing self-corrects a case of bad timing, we will start with January 2000, at the peak of the internet bubble.

Here, then, are the yearly January 31 closing prices:

2000	64.56
2001	17.31
2002	14.19
2003	21.85
2004	50.40
2005	43.22
2006	44.82

Now, let us pretend that we bought $2000 worth of AMZN at the end of January, 2000 (ouch!). Then, we rebalanced back to $2000 at the end of each January by dividing 2000 by the current share price, to find out how many shares we need to own. We added new cash for purchases when necessary.

Here is the table:

price	shares	cash pool	total value	amount invested
64.56	30	63.2	2000	2000
17.31	115	0	1990.65	3408.15
14.19	140	0	1986.6	3762.9
21.85	91	1070.65	3059	3762.9
50.40	39	3691.45	5657.05	3762.9
43.22	46	3388.91	5377.03	3762.9
44.82	44	3478.55	5450.63	3762.9

At the end of January 2006, we had invested $3762.90 and had a total value (stock plus cash) of $5450.63. This is +44.85%

Buy and hold, on the other hand, would be down 30.5% (44.82/64.56)

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Lichello's Aim System

 I previously mentioned how my trading system is build around constant value investing.  Another system that is based on this technique is Robert Lichello's AIM system.


Here, I will discuss how Robert Lichello's AIM system answers the "Questions to Build a Constant Value Trading System".

These questions need to be answered in order to develop a complete system around constant value investing. 

Here is how Lichello's AIM system answers the questions:

1. Lump Sum or Periodic Investment - AIM was meant to be a lump sum system where you would invest, for example $5,000 or $10,000. However, you could invest more money once in a while by adjusting the control.

2. cash - In the case of AIM, Lichello initially recommended a 50-50 split between stock and cash. Later, he increased it to 2/3 stock, 1/3 cash. In the latest edition of his book, he recommended 80% stock, 20% cash. Lichello did not propose a way of handling excess cash. The cash would just build up in your account.

3. Running Out of Cash - Lichello does not really deal with this, except that he mentioned that you can add more cash if you have it.

4. Investment Choices - Lichello did not give much guidance in this area.

5. Control Value(s) - Lichello advocated one control value for the portfolio. His control value would increase by half of any amount added if value dropped, and it would increase by the full amount of any new money added.

6. growth - AIM makes no provisions for growth. Excess cash simply accumulates and the control only increases on buys.

7. risk - AIM assumes risk is controlled because the portfolio is diversified. Also, between rebalancings, any stock can be replaced by another, as long the same dollar amount is bought.

8. Rebalance Frequency - A potential rebalance is done monthly or quarterly. However, a SAFE value is then calculated (equal to 10% of the stock value). Rebalancing only occurs if, and to the extent, that the difference exceeds SAFE. For example, assume the control is $10,000, and the stock value is $12,000. SAFE is then $1200. Since $2,000 is greater than $1200, a sale will take place, but only for $800.

If you are interested in learning further about Lichello's AIM system , you can buy it at Amazon.com.

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Constant Value Investing

The basic principle behind Lichello's AIM method (from his book) and my trading system is constant value investing.

The complete rules of my successful stock trading system, including variations and ideas on minimizing commissions and taxes, are described in my book, Stock Trading Riches, which is available on Amazon.com.

At its most basic, constant value investing is to buy a certain dollar's worth of a stock or fund, and then rebalance back to the same value on a periodic basis.

For example, let's assume that you buy $10,000 of mutual fund ABC. One year later, the fund is up 12% and your stake is worth $11,200. You would then sell $1,200 worth of the fund and would have $10,000 in the fund and $1,200 in cash.

Now let's assume that, after another year, the fund is down 8%, and you now have $9200 worth of ABC. You would now take $800 from your $1,200 pool of cash and invest it in ABC. Now, you have $10,000 in ABC and $400 cash, for a total of $10,400.

If you would have just held your initial $10,000 in ABC, it would now be worth $10,304 (all stock, no cash). In this case, the difference is only $96 but, over longer periods, and wider swings, the cash really starts to build.

If you are doing constant value investing with a stock or exchange traded fund, you cannot buy or sell in exact dollar amounts. Instead, you divide the constant amount by the latest share price and then round this result to find the number of shares you need to own. Then you buy or sell shares to reach this amount.

For example, let us say that you want to maintain $10,000 in stock XYZ. At first, it is trading at $20/share, so you buy 10000/20 = 500 shares. If it then trades at $35.46/share, you now want 10000/35.46 = 282 shares (rounded). You would then sell 218 shares (500 - 282).

Here is an example of constant value investing, as applied to Amazon.com (AMZN) yearly prices.



Remember that there will not be a western surety company there to insure you if the cops are questing you. So keep your 5th amendment in mind!

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