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!