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Not some, not most, but every single stock had been bought when it went to a new high price.
So the first thing I learned about how to get superior performance is not to buy stocks that are near their lows, but to buy stocks that are coming out of broad bases and beginning to make new highs relative to the preceding price base.
You are trying to find the beginning of a major move so that you don’t waste six or nine months sitting in a stock that is going nowhere.
studied the stocks that were big winners in past years and tried to find the characteristics they had in common before they became major successes.
didn’t just limit myself to preconceived notions like P/E ratios; I examined a lot of variables to develop a model based on how the real world worked.
acronym CANSLIM.
during their early developing stages, just before they made huge advances.
current
annual
It is a unique combination of both strong current earnings and high average earnings growth that creates a superb stock.
something new. The
Yet, it is one of the great paradoxes of the stock market that what seems too high usually goes higher and what seems too low usually goes lower.
shares outstanding.
“L” in our formula stands for leader or laggard.
500 best-performing stocks during the 1953–1985 period had an average relative strength of 87 before their major price increase actually began. [The relative strength measures a stock’s price performance during the past twelve months compared to all other stocks. For example, a relative strength of 80 would mean that the given stock outperformed 80 percent of all other stocks during the past year.] So, another basic rule in stock selection is to pick the leading stocks—the ones with the high relative strength values—and avoid the laggard stocks. I tend to restrict purchases to companies with
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The “I” in the formula stands for institutional sponsorship. The institutional buyers are by far the largest source of demand for stocks. Leading stocks usually have institutional backing. However, although some institutional sponsorship is desired, excessive sponsorship is not, because it would be a source of large selling if anything went wrong with the company or the market in general. This is why the most widely owned institutional stocks can be poor performers. By the time a company’s performance is so obvious that almost all institutions own a stock, it is probably too late to buy.
That is why you need to learn how to interpret price and volume on a daily basis for signs that the market has topped.
good macro approach. plain charting can be a handicap. this and charting is dynamite
At any given time, less than 2 percent of the stocks in the entire market will fit the CANSLIM formula. The formula is deliberately restrictive because you want to pick only the very best. If
guess over the years, about two-thirds of my stock purchases were actually closed at a profit. However, I have found that only one or two stocks of every ten I have bought have turned out to be truly outstanding.
You don’t want to anticipate a breakout from a base because a stock may never break out. You can buy too soon as well as too late. The idea is to buy when there is the least probability of a loss. If you buy within the base, the stock will frequently fluctuate 10 or 15 percent in normal trading action, and it is very easy to get shaken out of the position. But if I buy at exactly the right time, the stock is usually not going to go down to my maximum 7 percent stop-loss point.
I would generally not buy a stock with a high relative strength that is already more than 10 percent beyond its prior price base.
Top formations in the market averages occur in only one of two ways. First, the average moves up to a new high, but does so on low volume. This tells you that the demand for stocks is poor at that point and that the rally is vulnerable. Second, volume surges for several days, but there is very little, if any, upside price progress as measured by market closes. In this latter case, there may not be a pickup in volume when the market initially tops, since the distribution has taken place on the way up. Another way to determine the direction of the general market is to focus on how the leading
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Frequently, the advance/decline line will lag behind the market averages and
high. The idea is not to sell short at the top, but at the right
The best chart pattern to short is one in which a stock breaks out on the upside of its third or fourth base and then fails.
The prior base will now provide an area of overhead supply, as all investors who bought in that zone will be losing money, and a number of them will be eager to get out near breakeven. Therefore, pullbacks to failed price bases also provide good timing for short sales.
The secret for winning in the stock market does not include being right all the time. In fact, you should be able to win even if you are right only half the time. The key is to lose the least amount of money possible when you are wrong. I make it a rule never to lose more than a maximum of 7 percent on any stock I buy. If a stock drops 7 percent below my purchase price, I will automatically sell it at the market—no second-guessing, no hesitation.
To reduce your stock market risk,
First, you should hold a stock as long as it is performing properly. Jesse Livermore said, “It is never your thinking that makes big money, it’s the sitting.” Second, you have to realize that you will never sell the exact top. Therefore, it is ridiculous to kick yourself when a stock goes higher after you sell. The goal is to make substantial profits on your stocks and not be upset if the price continues to advance after you get out.
Diversification is a hedge for ignorance. I think you are much better off owning a few stocks and knowing a great deal about them. By being very selective, you increase your chances of picking superior performers. You can also watch those stocks much more carefully, which is important in controlling risk.
that cannot be obtained easily any other way.
The volume in a stock is a measure of supply and demand. When a stock is beginning to move into new high ground, volume should increase by at least 50 percent over the average daily volume in recent months. High volume at a key point is an extraordinarily valuable tip-off that a stock is ready to move.
is the market price a weighted avg measure?
Actually, when a good, diversified growth fund is down sharply, you should buy more.
The following list of common mistakes is excerpted from O’Neil’s book How to Make Money in Stocks, published by McGraw-Hill
They incorrectly feel it’s wiser to buy more shares of stock in round lots of 100 or 1,000 shares, and this makes them feel better, perhaps more important. You would be better off buying 30 or 50 shares of higher-priced, sounder companies. You must think in terms of the number of dollars you are investing, not the number of shares you can buy. Buy the best merchandise available, not the
Outstanding stockbrokers or advisory services are no more frequent than are outstanding
One of the great advantages of owning stock over real estate is the substantially lower commission and instant marketability and liquidity.
article in Financial World found that top-rated analysts generally underperformed the S&P average.
The stock market is neither efficient nor random. It
trading success requires three basic components: an effective trade selection process, risk control, and discipline to adhere to the first two items. William
ingrain in my mind what a stock looked like before it made a major move.
NM,
books to read
Doing this helps cement in my mind the characteristics of a winning stock. Maybe even more important, it helps me learn from my mistakes.
The more you listen to tips and rumors,
also look at how the stock has done in the past. For example, has the stock doubled before? A lot of the stocks I buy have already doubled and tripled before I buy them.
I am looking for the strongest stocks in the market, in terms of both earnings and the technical picture.
Yes. If the stock moves to new high ground, but the volume is only up 10 percent, I would be wary.
Frequently, when a stock drops back into its base, it goes all the way back down to the lower end of the base.
Do you use the table in Investor’s Daily that lists the stocks with the greatest percentage increase in volume relative to the past fifty-day average volume levels? Yes, I use it to help spot stocks that are just about ready to take off.
I sometimes wait for the stock to hit that column as a timing signal.
