PART I: A Winning System: CAN SLIM
Introduction:
Lessons learned:
·
Buy stocks when they are on the way up, not on
the way down. When buying more, buy after it has risen from your purchase
price, not after it has fallen.
·
Buy when they are nearer to the year’s highs,
not when they have sunk lower and look cheap.
·
Learn to always sell quickly when you have a
small 7 to 8% loss, rather than waiting and hoping to come back
·
Pay less attention to company’s book value,
dividends, or PE. And instead focus on vital factors like strong earnings,
sales growth, price & volume action.
·
Don’t subscribe to a bunch of newsletters,
advisory services or don’t be influenced by recommendations.
·
Acquaint yourself with daily, weekly, &
monthly price/volume charts
·
Use time-tested rules to sell a stock and take
worthwhile gains
Chapter 1: America’s greatest stock-picking secrets
·
100 annotated color charts
Chapter 2: How to read stocks like a pro and improve your selection and timing
·
Investors who trin themselves to decode price
movements have enormous advantage
·
In stock market, history repeats itself. This is
because human nature doesn’t change, neither does the law of supply &
demand
·
Most common chart pattern. Cup with Handle
·
Can last from 7 weeks to 65 weeks
·
The top of cup to the bottom be between 12% to
33%. The % decline depends on the general market decline and the stock’s price
run-up.
·
The shape should be rounded U rather than V
shaped
·
A price drop in a proper handle should be
contained within 8% to 12% of it’s peak, unless the stock forms a very large
cup.
·
There should also be some tight areas in the
price patterns of stocks under accumulation.
·
When a stock forms a proper cup-handle pattern
and then charges through an upside buy point, the day’s volume should increase
at least 40% to 50% above normal.
·
If you buy past 5% to 10% past the precise
buy-point, it may be late.
·
Pivot-point/line of least resistance: when a
chart forms a proper cup-and-handle pattern and then charges through an upside
buy point. At this point, the volume should break-out by at least 40-50%
·
Saucer-with-handle pattern: similar to
cup-and-handle except that the saucer part tends to stretch out over a longer
period, making the pattern shallower.
·
Double-bottom:
·
High-tight-flag: stock moving 100% to 120% in a
very short period, then moving sideways no more then 10-25%
Chapter 3: C=Current Big or Accelerating Quarterly Earning and Sales per Share
·
The stock you select should show a major
percentage increase in current quarterly EPS vs same quarter prior year.
·
EPS is the single most important element in
stock selection today.
·
Rule: Avoid the trap of one-time extraordinary
gains – non-recurring profits.
·
Rule: Set a minimum level for current earnings
increases. Consider only stocks with at least 18% grown Q/PY Q (many successful
investors use 25% to 30% minimum)
·
Rule: Avoid big older companies with “caretaker”
management who report dull earnings growth of 8% or 10%
·
Rule: Looks for accelerating Q earnings growth
·
Rule: Insist on sales growth as well as earnings
growth – look for analysts’ estimate raises
o To be sustainable, earnings growth should be supported by sales growth
·
Rule: check
for warnings deceleration. Although Q/PY Q increased by 15%, PYQ/PPYQ may have
to be 50%. That sounds trouble.
·
Rule: consult Log-scale weekly graphs. In
arithmetically scaled charts, $10 to $20 shows the same space change as $20 to
$30.
Chapter 4: A = Annual Earnings Increases: Look for Big Growth
·
Look for annual EPS that have increased in the
last 3 years.
·
Strong earnings in the last several Qs + solid
growth in recent years.
·
Annual growth rate should be at least 25%
·
Looks for big Return on Equity (ROE). Net Income
/ Shareholder’s equity
·
In the beginning of a bull market, growth stocks
are usually the first to lead and make new price highs.
·
IBD's proprietary Earnings Per Share Rating
allows you to quickly identify stocks with the strongest profit growth. The EPS
Rating takes into account the growth and stability of a company's earnings over
the past three years, with extra weighting put on the most recent two quarters.
The result is assigned a rating of 1 to 99, with 99 being best.
·
In a roaring bull market never overlook a stock
just because its P/E seems too high. It could be a great winner.
·
Never buy a stock just because the P/E is low
and seems like a bargain.
Chapter 5: N = Newer Companies, New Products, New Management, New highs of properly formed charts bases
·
What seems too high in price and risky to the
majority usually goes higher eventually, and what seems low and cheap usually
goes lower.
Chapter 6: S = Supply and Demand: Big Volume Demand at Key Points
·
Price movement of big companies with billions of
shares will be slow and small. Whereas, small companies with share in millions
may move faster. There is also high risk with small companies.
·
Excessive stick split may hurt
·
Look for stock buybacks. Buybacks are good for
the price and it will increase the EPS. It is also a sign of confidence of the
business
·
Companies buying back in open market and showing
stock ownership by management are preferred.
·
Debt-to-equity ratio. Lower D/E ratio is better.
Look for companies reducing its D/E ratio over time.
Chapter 7: Leader or Laggard: Which is your Stock?
·
Buy among the best two or three stocks in a
group
·
Avoid sympathy stocks. Buy new innovators.
Sympathy play is a stock in the same industry group that is brought in the hope
that the luster of the real leader will rub off on it.
·
How to separate leaders from laggards. Sell
worst performers first (sell your mistakes) and keep the best a little longer
·
In a correction during a bull market, the growth
stocks that decline the least are usually the best selection.
·
Buying stocks in the way down is dangerous. Stop
this risky bad habit.
Chapter 8: Institutional Sponsorship
·
A winning stock doesn’t need a huge number of
institutional owners. But it should have several at a minimum. 20 might be a reasonable
minimum.
·
Look for institutional ownership increase over
time and also performance of the institutions (funds)
·
Institutional buying/selling can account up to
70% of activity in a stock of leading companies.
·
Watchout if a stock is “overowned” by institutions.
Excessive sponsorship might translate into large potential selling if something
goes wrong.
·
First make of list of best fund performers. Then
check if a stock is owned by one or more of these funds.
Chapter 9: M=Market Direction
·
Before getting into a position, it’s important
to know if you are in bull or bear market and that if you are in early stage,
or later stage.
·
Follow S&P 500, Nasdaq Composite, Dow Jones
Industrial Avg (30 widely traded big-cap stocks), NYSE Composite (weighted avg
of all the stocks listed in NYSE).
·
The Bear market usually ends while business is
still in a downtrend.
·
The stock market is a leading economic
indicator. Not a coincident or lagging indicator.
·
Bull markets usually top out and turn down
before a recession sets in. Hence looking at economic indicators is a poor way
to determine when to buy and sell.
·
Study the general market indexes each day. In
bear markets, the stocks open strong and close week. In bull markets the stocks
open week and close strong.
·
Remember, a 33% drop requires a 50% rise to
breakeven.
·
Quibbling over decimals to buy or sell could
make you miss the opportunity.
·
How to identify market tops: look for 4 or 5
days of distribution (high volume with price down) in a span of 4 or 5 weeks.
·
The really big money is made in the first one or
two years of a normal new bull market cycle.
·
Ways to identify market turning points
o
Tracking call/put volumes ratio. If # Calls/#
puts > 1 then bullish
o
Advance/Decline line - # stocks advancing /#
stocks decline – secondary indicator of limited value
o
Interest Rates – provide best confirmation of
basic economic conditions. In the past, successive rate hikes have generally
marked the beginning of bear market an impending recessions.
·
Never fight the market
PART II: BE SMART FROM THE START
Chapter 10: When you must sell and cut every loss… without exception
·
“Loose small, win big”. Follow 3-to-1 ratio. If
you take 20-25% gain, cut your losses at 7-8%. If you take 10-15% gain, cut
your losses at 3%, with no exceptions.
·
The secret to winning big is not being right at
all the time, but to lose the least amount possible when you are wrong.
·
Only 1 or 2 out of 10 stocks will make you big
money.
·
When does a loss become a loss? The larger the
paper loss, the more real it will become.
·
Your average loss over time should not be more
than 5%. But 7-8% should be the absolute loss limit from the purchase price.
Don’t rush to sell a 7-8% drop from the price advance. There is a difference
between 7-8% loss from purchase price and 7-8% drop after the stock has advance
high from your purchase price.
·
Cutting losses is like buying an insurance
policy.
·
Take your losses quickly and your profits
slowly.
·
There are only two emotions in the market; hope
and fear. The only problem is we hope when we should fear and we fear when we
should hope.
·
Don’t let “price-paid bias” afflict you. Always
sell your worst performing stock first.
·
When you enter a position, always determine the
price at which you will take the loss or a profit. Say for example, I will see
if the P/E increases by 100%.
·
Diversification – wide diversification is a
substitution for lack of knowledge.
·
Don’t hold on to a stock that is going down just
because it gives you a good dividend.
·
Emotion: if you don’t cut your losses soon
enough, you will lose confidence and courage to make future decisions and you
will throw in the towel and get out of the market, never realizing what you did
wrong or correcting your faulty procedures.
Chapter 11: When to sell and take your worthwhile profits
·
Buy when the stock is making or about to make a
new high after emerging from a sound correction and price consolidation period.
This breakout should be accompanied by a volume increase of at lease 50% above
daily average.
·
The objective is not to be right all the time.
But to make big money when you were right.
·
Pyramiding – “averaging up” – buying additional
shares after the initial purchase, when the price moves up. Increase should be 2-3%, max 5%.
·
“Averaging down” could be dangerous. Why buy
more when the initial purchase isn’t working?
·
When you appear to be right, you should always follow-up.
·
Climax Tops:
o
Largest daily price run-up
o
Heaviest daily volume
o
Exhaustion gap – After a long run-up, the stock
gaps open higher in a day.
o
Climax top activity – rapid run for 2 or 3 weeks
or 7 out of 8 days, or 8 in a row of 10 days.
o
Signs of distribution – after a long advance,
heavy daily volume without further upside in the price.
o
Stock splits – sell if a stock runs up 25-50%
for 1 or 2 weeks after a stock split.
o
Increase in consecutive down-days – 4 or 5 down
days with 2 or 3 up days.
o
Upper channel line – sell if a stock goes
through its upper channel line after a huge run-up.
o
200-day moving average line – some stocks may be
sold when the price goes up by 70-100% above the 200-day MA line.
o
Selling on the way down from the top – if you
didn’t sell while on the way up, sell on the way down before it’s too late.
·
Low volume and other weak action
o
New highs on low volume – suggests big investors
have lost appetite on the stock
o
Closing at or near the day’s price low
o
Third or fourth-stage bases – sell when the
stock makes new high off a 3rd or 4th-stage base.
o
Signs of poor rally – initial heavy selling near
the top. The next recovery followed with weaker volume. If the price recovery
is poor.
o
Decline from the peak – after a stock declines
8% or so from the peak.
o
Poor relative strength
·
Breaking support
o
Long-term uptrend line is broken – sell if sock
closes below a major long-term trend line with a high volume.
o
Greatest one-day price drop – after already
making an extended advance, if it makes a large one-day price advance, sell.
o
Falling price on heavy volume
o
200-day moving average line turns down
o
Living below the 10-week moving average
·
Other pointers
o Sell
when there is a great deal of excitement in a stock.
o Be
careful on selling in bad news or rumors. They may be of temporary influence.
·
When to be patient and hold a stock?
o Don’t
take profits during first 8 weeks of a move unless the stock gets into some
trouble
o Stocks
advancing 20% or more in 1 to 4 weeks are keepers capable of doubling or
tripling.
Chapter 12: Money Management
·
Most people with $20K to $200K should limit to owning
4 or 5 carefully chosen stocks.
·
If you want to buy more, sell the existing and
stick to your limit.
·
Short selling
o
Short sell only during a bear market.
o
Two chart patterns to consider if short selling
§
Head and shoulders. The second shoulder should
be slightly lower then the first. The 2nd shoulder price should
break down through the moving average line.
§
Breakdown of the handle in a cup-and-handle
pattern. Price didn’t sustain above the handle.
·
Options
o
“All or nothing” bets. Very speculative and
substantial risk and price volatility than stocks.
o
Only after you are able to make money in stocks
should you dabble in options.
o
Limit your total options in your portfolio to
10-15%.
o
Buy options only in the outstanding stocks with
biggest earnings estimates.
o
Generally better to buy puts in a bear market.
o
Better off with longer time periods, say, six
months or so. Shorter period options like 30 to 90 days are cheaper but go up
in both directions.
·
IPOs
o
Better to leave it to experience institutional
investors who has in-depth information.
o
They don’t have trade history. Mostly
speculative.
Chapter 13: Twenty-one costly common mistakes investors make.
·
1. Stubbornly holding on to your losses when
they are very small and reasonable.
·
2. Buying on the way down in price
·
3. Averaging down in price rather then averaging
up when buying
·
4. Not learning to use charts and being afraid
to buy stocks going into new high ground off sound chart bases
·
5. Not knowing exactly what to look for in a
successful company
·
6. Not having specific general market rules;
like when the market is in correction; when it is in decline/uptrend
·
7. Not following your buy and sell rules
·
8. Concentrating on what to buy and not on when
to sell
·
9. Failing to understand importance of buying
high-quality companies
·
10. Buying more of low-priced stocks rather then
fewer of higher-priced stocks
·
11. Buying on tips, rumors, news events, market
“experts” on TV and media
·
12. Selecting second-rate stocks because of
dividends or low P/E rations
·
13. Wanting to make a quick and easy buck
·
14. Buying old names you are familiar with
·
15. Not being able to recognize good
information/advise
·
16. Cashing in small, easy-to-take profits,
while holding your losers
·
17. Worrying too much about taxes and
commissions
·
18. Speculating too heavily in options or
futures as a way to get rich quick
·
19. Rarely transacting “at the market”,
preferring instead to put price limits on buy and sell orders
·
20. Not being able to make up your mind when a
decision needs to be made
·
21. Not looking at stocks objectively
PART III: INVESTING LIKE A PROFESSIONAL
Chapter 14: More models of great stock market winners
·
Author gives an example where, in 1961, he
created a fund with his classmates with $10 each totaling $850.
·
After 25 years, the fund was worth $50,000.
·
The rest of the chapter shows numerous chart
patterns: Cup-with-handle, cup-without-handle, double bottom, flat base,
base-on-base pattern
Chapter 15: Picking the best market themes, sectors, & industry groups
·
IBD has divided all the stocks into 197 industry
groups.
·
IBS gives 21 vital facts on about 2,500 stocks
·
We have to pay attention of the demise of an industry
and growth of new industries as years pass by
·
A key stock’s weakness in an industry group can
spillover to the entire group.
·
Avoid buying a stock unless its strength is
confirmed by at least one other important stock in the group.
·
Follow-on effect: a major development in one
industry may impact a related industry.
o
E.g. 1960s, introduction of jet planes in
airplane industry boosted the hotel industry.
o
1970s oil shortage and increase in oil prices
boosted the exploration equipment and services industry.
o
1978-81 computer manufacturing bull market
created demand for software, peripherals and networking equipments.
·
The Cousin Stock theory – e.g. in 1960s, demand
for new Boeing jets created demand for chemical toilets.
Chapter 16: How I use IBS to find
potential winning stocks
·
Talks about the growth in IBS subscriber base
and how it is different from WSJ. How is IBS different from WSJ.
·
The unique IBS ratings are a way to spot
potential winners before they take off.
·
The “SmartSelect” rating is more powerful and
meaningful. Will help find better stocks.
·
The rest of the chapter is explains the tools
available in IBD website and how to use them.
Chapter 17: Watching the market
and reaction to the news
·
Watch for distortions around end of year and in January.
Some distortion may be due to tax-considerations
·
Avoid watching the tickers all the time. Stick
to your trade plan.
·
Be very cautions of news. Develop the skill to
separate fact from opinion. The new media has been taken over by propaganda and
manipulation.
·
Author quotes two editorials from Thomas Sowell
regarding major world events and housing boom and bust.
Chapter 18: How you could make millions owning Mutual funds
·
A stock may decline and never come back up. But
a mutual fund always comes back since it is diversified.
·
Mutual funds are long term beyond economic
cycles.
·
Reinvest your dividends and capital gain
distributions to benefit from compounding
·
Keep adding small amounts to your fund to
average out the market cycles.
·
The rest of the chapter talks about various
types of mutual funds, open-ended/close-ended, loaded/non-loaded, sector funds,
and ETFs.
Chapter 19: Institutional Portfolio Ideas
·
WONDA – William O’Neil Data Access – contains
more then 3000 technical and fundamental data items on more than 8000 stocks.
·
Firms with many analysts specialized in certain
sectors tend to have a narrow focus only in their industry and don’t see the
big picture. An institution should have a few general analysts.
·
Author talks about how IBD’s recommendations
fared better than the analyst recommendations.
·
Rest of the chapter focuses on some advice to
institutions and their analysts.
·
Talks about IBD’s “MarketSmith” tool
Chapter 20: Important time-tested proven rules and guidelines to remember
·
Don’t buy cheap stocks. Buy stocks between
$15-$300. Avoid stocks below $10.
·
Buy growth stocks that have been up 25% in last
3 years.
·
Last 2 to 3 quarter earning growth should be 25%
or more.
·
Sales should be accelerating in last 3 quarters
·
RoE should be 17% or more.
·
After-tax profits should be increasing
·
Most stocks should be in the top 6 in the
industry group
·
Don’t buy because of dividend or P/E ratio
·
Carefully average-up and not down. Cut losses at
7-8% below purchase price
·
Write out sell rules before entering a trade
·
Make sure at lease two best performing mutual
funds have bought the stock in the last reporting period
·
The company’s product/service should be superior
and increasing in demand.
·
General market should be in uptrend
·
Restrict options to 5-10% of your portfolio,
unless you are making good returns in stocks.
·
The stock should have ownership by top
management
·
Forget your pride and ego. The market is always
smarter.
·
Don’t buy on the bottom or on the way down.
·
Key reasons people miss buying great stocks
o
Disbelief, fear, lack of knowledge
o
P/E bias. Best stocks rarely sell at low P/E
o
Not understanding that real leaders start their
big moves by selling near or at new highs.
o
Selling too soon. Psychologically having a hard
time buying back at a higher price if necessary.
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