How to Make Money in Stocks
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Finished the first part of William J. O'Neil's book "How to Make Money in Stocks: A Winning System in Good Times or Bad." What I liked about his approach his how he combined both Fundamental and Technical analysis to pick the stocks to buy. I think his technique has a universal appeal, in the sense that it can be applied in any stock market in the world and in different times. Continue reading this article to learn more about William J. O'Neil's CANSLIM Method of picking the right stocks.
THE C-A-N-S-L-I-M METHOD
William J. O'Neil developed this method of picking the right stocks to buy by analyzing past stock market winners and examining what characteristics these stocks possessed that made them successful. Each letter in the name stands for a principle that you must considering in choosing the right stock. Let's go through them one by one
C = CURRENT QUARTERLY EARNINGS PER SHARE (EPS)
"The common Stocks you select for purchase should show a major percentage increase in the current quarterly earnings per share when compared to the prior years same quarter."
Choose stocks that have significant quarterly earnings increases. This can be at the 25% level or upwards. The basic rule is - the higher the better. And the author notes that in a market where there are a lot of stocks to choose from, we don't have to settle for those that are valued cheaply and promoted as companies that can rebound in the future. Chances are, this may never happen. So choose investments that are advancing strongly in terms of current earnings.
A = ANNUAL EARNINGS INCREASES
"Each year's annual earnings per share for the last five years should show an increase over the prior year's earnings. You might accept one year being down in the last five as long as the following year's earnings quickly recover and move back to new high ground."
Choose stocks that are consistent and stable. This will be reflected in the percentage of annual earnings increases and the acceleration or growth in earnings per share. This is said to be more indicative than the P/E ratio which is used by a lot of analysts to evaluate stocks.
N = NEW PRODUCTS, NEW MANAGEMENT, NEW HIGHS
"It takes something new to produce a startling advance in the price of a stock."
Watch out for stocks that are introducing a new product, changing into a new management, or if there are significant new changes in their industry conditions.
In terms of the stock's chart, look out for stocks that are making new highs. According to the author, the right time to buy is just when the stock is about to break out its price base. Our job is "to buy when a stock looks high to the majority of the investors and to sell after it moves substantially higher and finally begins to look attractive to some of those same investors."
Remember that in the stock market, "what seems to high and risky to the majority usually goes higher and what seems low and cheap usually goes lower."
S = SUPPLY AND DEMAND
"The law of supply and demand is more important than all the analyst opinions."
Stocks to pick:
- Stocks with lesser outstanding shares, they will usually outperform bigger firms if all other factors are made equal.
- Stocks that have a large percentage of ownership by top management.
- Look for companies buying their own stock in the open market.
- Stocks with lower corporate debt to equity ratio is usually better.
L = LEADERS AND LAGGARDS
"Avoid laggard stocks and avoid sympathy movements. Look for the genuine leaders." These are stocks with a Relative Price Strength greater than 70.
Learn to sell your worst-performing stocks first and keep your best-acting investments a little longer. True leaders are the first ones to bounce back to new price highs when a market decline is finally over.
I = INSTITUTIONAL SPONSORSHIP
Look for stocks with institutional sponsorships. This may take the form of mutual funds; corporate pension funds; insurance companies; large investment counselors; hedge funds; bank trust departments; or state, charitable, and educational institutions.
M = MARKET DIRECTION
Buy when the overall market direction is trending upwards. The best way to determine the direction of the market is to follow and understand everyday what the general market averages are doing. Knowing a little Technical analysis and being able to read charts and trends would help you in this department.
This completes the first part of the book where the author introduced the C-A-N-S-L-I-M method of choosing the right stocks. In the succeeding chapters, the author will show us when would be the right time to sell stocks! We can't wait to finish that section and share it with all of you. So please subscribe to the FREE mailing list so you won't miss any future articles. (Get your free email updates. Subscribe here.)
Keep on attracting wealth, Money Magnets!
N = NEW PRODUCTS, NEW MANAGEMENT, NEW HIGHS
"It takes something new to produce a startling advance in the price of a stock."
Watch out for stocks that are introducing a new product, changing into a new management, or if there are significant new changes in their industry conditions.
In terms of the stock's chart, look out for stocks that are making new highs. According to the author, the right time to buy is just when the stock is about to break out its price base. Our job is "to buy when a stock looks high to the majority of the investors and to sell after it moves substantially higher and finally begins to look attractive to some of those same investors."
Remember that in the stock market, "what seems to high and risky to the majority usually goes higher and what seems low and cheap usually goes lower."
S = SUPPLY AND DEMAND
"The law of supply and demand is more important than all the analyst opinions."
Stocks to pick:
- Stocks with lesser outstanding shares, they will usually outperform bigger firms if all other factors are made equal.
- Stocks that have a large percentage of ownership by top management.
- Look for companies buying their own stock in the open market.
- Stocks with lower corporate debt to equity ratio is usually better.
L = LEADERS AND LAGGARDS
"Avoid laggard stocks and avoid sympathy movements. Look for the genuine leaders." These are stocks with a Relative Price Strength greater than 70.
Learn to sell your worst-performing stocks first and keep your best-acting investments a little longer. True leaders are the first ones to bounce back to new price highs when a market decline is finally over.
I = INSTITUTIONAL SPONSORSHIP
Look for stocks with institutional sponsorships. This may take the form of mutual funds; corporate pension funds; insurance companies; large investment counselors; hedge funds; bank trust departments; or state, charitable, and educational institutions.
M = MARKET DIRECTION
Buy when the overall market direction is trending upwards. The best way to determine the direction of the market is to follow and understand everyday what the general market averages are doing. Knowing a little Technical analysis and being able to read charts and trends would help you in this department.
This completes the first part of the book where the author introduced the C-A-N-S-L-I-M method of choosing the right stocks. In the succeeding chapters, the author will show us when would be the right time to sell stocks! We can't wait to finish that section and share it with all of you. So please subscribe to the FREE mailing list so you won't miss any future articles. (Get your free email updates. Subscribe here.)
Keep on attracting wealth, Money Magnets!
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