Follow the market direction.
Select the best CAN SLIM stocks that you can find.
Start your positions small; add if you’re making gains.
“The successful warrior is an average human being with laser-like force.”
—BRUCE LEE
For a martial artist, breaking through wood boards and even cement blocks is less about brute strength and more about specific techniques. You must not break your form; if you do, fingers and wrists can be broken!
Investors can run into the same dangers if they try and create their own system or rules. The good news is that many traders have found success as a result of staying true to the CAN SLIM Investing System. The best part is that if you’ve had a successful trade once or twice, you can do it again using the same principles.
“Aloha Mike” is retired from the aerospace industry. He was able to achieve this by the age of 55 because of his success with the CAN SLIM strategy, which he began in 1987. He’s very encouraging to newer investors and mentors a group of retirees as a way of giving back to the community. “The average person can definitely learn to invest successfully if they are willing to put in some time and effort,” he says.
“Aloha Mike” says there are three key elements to investing:
1. Market Timing. Get in sync and stay in sync with the market direction.
2. Stock Selection. Find the great CAN SLIM stocks that are moving up.
3. Money Management. Start your positions small. Add if you’re making gains.
“What you want to do is force-feed stocks that are outpacing the market,” says Mike. “Never average down and add to stocks that are going against you.”
One of Mike’s best trades was with NVR Inc., the parent company of Ryan Homes, NVR Homes, and Fox Ridge Homes. Mike traded in and out of the home builder, capturing 300% of its 429% move.
“Aloha Mike” rewards himself with a new Hawaiian shirt every time he makes a 25% gain in a stock and says he has a closet full of them.
Follow the market direction.
Select the best CAN SLIM stocks that you can find.
Start your positions small; add if you’re making gains.
Gennady Kupershteyn’s years of investing experience have taught him that there are optimum periods of time for owning stocks.
“After the market issues a follow-through day,” says Gennady, “volatility usually quiets down, and it becomes much easier to hold stocks, particularly if you’re following the rules. The key is to be patient and extremely selective. Within four weeks of a successful follow-through day, new high quality names will begin to break out.
“A lot of people have said to me that investing in the stock market is like gambling, but to me, the market is only like a casino if you treat it like one,” says Gennady. “With investing, you’re trying to put the odds in your favor. Unlike gambling in a casino, you can walk away from a trade with a small loss if it begins to go against you, because you’re following a set of sell rules. But once you place your bet in the casino, try telling the dealer that you’d like a brand new hand because you don’t like the way he dealt the cards.”
Over the years, Gennady has taught and attended many IBD Meetup Groups. He found one great stock in 2007 by attending a New Jersey IBD Meetup. “For some reason, the energy stocks had escaped my radar,” says Gennady. “When I heard the Meetup group discuss the triple digit earnings in First Solar, I did more research and ended up profiting nicely from the stock.”
By being in the market at the right time and obeying his rules, Gennady has notched some nice gains over the years.
Dell. 1995–1997: 529% gain
First Solar. 2007: 66% gain
Fuqi International. 2009: 52% gain
Abercrombie and Fitch. 2010: 38%
Wait for a follow-through day.
Don’t gamble in the stock market; keep a set of rules.
Attend an IBD Meetup Group, and learn about stocks you may not be familiar with.
Ken Chin says, “I go through the print version of IBD with a cup of coffee in the evening, circling stocks in various features of the paper that may be approaching a potential buy point. I’m a dentist, so during the day I’m pretty busy, but in between treating patients, I go to Investors.com and quickly check Stocks on the Move to see which stocks are moving up in heavy volume, signaling that institutions might be buying shares of a stock that I’m interested in.
“On the weekends,” continues Ken, “I read through the Friday edition of the paper, paying special attention to Your Weekly Review, and the Monday version of the paper, which has the IBD 50. Both of these sections have mini charts with a description underneath them of the stock’s base pattern and the potential buy point. This provides me with a quick and easy watch list of stocks.
“I also study The New America articles. As creatures of habit, we return to stocks that have made us money in the past and shun those that haven’t. The New America articles have opened my mind to companies that I never would have considered because I didn’t know enough about them.”
Ken says, “‘A mind once expanded will never contract to its original dimension.’ I can’t take credit for those inspiring words—they belong to Oliver Wendell Holmes—but IBD often prints these inspiring quotes in its Wisdom to Live By column. These quotes help me maintain a winning attitude, which is just as important as finding a winning stock. Without a winning attitude, you’ll limit yourself on how far you can go.”
That winning attitude has helped Ken achieve some stellar gains:
Baidu. 2010: 212% in 18 months
Apple. 2011: 91% in 18 months
Check Stocks on the Move at Investors.com for stocks moving up on heavy volume, indicating institutional buying.
Develop a nightly and a weekend routine for reading the paper.
Study The New America articles to find potential big winners.
Randall Mauro is a portfolio manager for an investment firm in Colorado. He uses the CAN SLIM Investing strategy for his personal trading as well as for clients’ portfolios.
“When looking for positions to invest in,” he says, “I always start the process by gauging the strength of the overall market (the “M” in CAN SLIM), because as IBD research has shown, most stocks follow the direction of the general market and, as a result, investing in an uptrending market is the safest, easiest way to make money.
“Looking at a Nasdaq chart,” he continues, “if you compare the price movements in early December 2011 with the previous few months, one could very easily see that things were getting quieter and less volatile. This told me that we were getting closer to a new uptrend and that the last quarter decline was nearing its end. On December 20, the market produced a follow-through day, and this indicated it was time to put our money to work.”
Randall says, “Whole Foods Market moved strongly in step with the market. This stock had been a strong mover over the past year, but I felt it was ready to move again after a short consolidation. Whole Foods sells organic and natural foods to an educated consumer and has the “N” in CAN SLIM: the organic movement is something I believe to still be somewhat new to the mainstream consumer world. I had been watching it since September, when it made a new price high while the market was still near the bottom of its correction. And as I’ve learned from reading How to Make Money in Stocks, when a stock is making higher highs counter to the general market, it shows strength and could very well be a leader in the next market uptrend.
“Although it was too early to enter Whole Foods on December 20, since the stock was still completing its base pattern, I noticed that the price-volume relationship was starting to become much more tight and controlled compared to the previous few months. Volume was starting to dry up on the down days and subtly increasing on the up days. This is the type of action I like to see before a stock breaks out.
“On January 9, Whole Foods was within 1% of its high on the left side of the cup. Then the stock declined in low volume down to the 10-day moving average, which showed that institutional investors were holding onto their positions and not selling as the stock pulled back gently in price. Then, on January 17, Whole Foods broke out of its cup-with-handle base on volume that was 149% above average, and I bought the stock.
“The next week, the stock moved higher for a few days but then pulled back to the breakout price, which is common; 40% of stocks will pull back to the pivot (buy point). I wasn’t worried since I saw that the pullback was orderly and on low volume. The stock gained 30% over the next 5 months and largely ignored the correction that the general market experienced in April, May, and June 2012.
“Everyone has a home run story to tell, but in the investing world, it’s the singles and doubles that add up to real results consistently over time. To steadily make money in the market, you must stay focused on preserving capital and minimizing risk. Investing when the market tells you it wants to go up—and staying in cash when the market starts to give signs of a top—are the most important criteria to remain profitable over the long run.”
The most important part of investing is to determine the strength of the overall market. Read The Big Picture column daily.
Investing in an uptrend is the easiest way to make money.
Watch for stocks making new price highs counter to the general market; this shows strength.
Search for stocks breaking out of base patterns or areas of consolidation after a new uptrend begins.
Aim for singles and doubles for consistent results.
Kathleen Phillips likes Leaderboard, a streamlined list of IBD’s top performing stocks, “because it focuses on current market leaders that are ready to break out from their base patterns. The Leaderboard charts are annotated, showing the base pattern and the buy point. This saves me a lot of time by focusing on the very best stocks in the market with top fundamental ratings. I have done very well with stocks from the Leaderboard list, including Baidu, LinkedIn, Monster Beverage, Rackspace Hosting, and Tractor Supply. Leaderboard saves me a lot of time, and I have a lot of confidence in the product because I know the top editorial staff at IBD picks stocks for the list.”
Rackspace Hosting. 24% gain
Tractor Supply. 34% gain
Use Leaderboard to save time and find IBD’s best performing stocks.
Learn more about base patterns from Leaderboard’s annotated charts.
“Surfer Pat” Reardon started his investing adventure by picking up an IBD newspaper as an assignment for an Economics 101 class at a local community college. Pat said he had no idea how this assignment would impact and change his life.
His original goal was to take real estate and construction classes and begin a career “buying some fixer uppers, remodeling, and selling them.”
Pat’s curiosity about the stock market led him to read several books: How to Make Money in Stocks, by Bill O’Neil; How I Made $2 Million in the Stock Market, by Nicolas Darvas; and Reminiscences of a Stock Operator, by Edwin Lefevre. After reading these books, he completely changed his mind about wanting to go into construction. Pat decided he wanted to learn how to invest in stocks. And so he began investing.
“One of my early successes was with Skechers,” he says. “Their company headquarters was in my hometown of Manhattan Beach. I saw moms and kids wearing the fashionable athletic shoes, so I checked the IBD Research Tables and saw that Skechers had top ratings. Then I looked at their chart and waited until the stock broke out of an area of consolidation on big volume. At the time, I was trading a very small amount of money, but I made 20%, and that got my attention. From then on, I was very excited about the possibilities to make money in the stock market.
“Another stock I found by paying attention to fads was Hansen’s Natural, the makers of the Monster Energy Drink. The stock had big earnings and sales and was written about in several IBD articles. I saw institutional money with heavy volume on a chart going into the stock, and bought it.”
Pat says his learning curve has been steady and gradual: “Going through several market cycles and gaining a better understanding of bull markets and the winners that appear in each new cycle helped me make some great profits in leading stocks.
“My best trades were done when I bought correctly and sold because I did my homework and followed the rules.”
Hansen’s Natural. 156% + 33% gains (two separate buys)
NetEase. 100% + 60% gains (two separate buys)
Look for fashion trends. What’s new that everyone is wearing?
Read books by legendary stock traders.
Watch for food or drink fads.
Dave Whitmer is a U.S. Navy F/A-18 Fighter Pilot and TOPGUN graduate. He has been actively trading using the CAN SLIM System since 2000.
In March 2009, Dave was on the Aircraft Carrier USS John C. Stennis in the Western Pacific Ocean. “This allowed me to distance myself from all the news,” he says. And much like legendary stock trader Nicolas Darvas, who was out of contact and away from the news while he traveled the world as a dancer in the 1950s, this would prove beneficial. Bill O’Neil also advocates tuning out the news and paying attention to what the market and leading stocks are actually doing.
Because of the ship’s security network, Dave could not access Daily Graphs (now MarketSmith, a premium charting research tool and sister company to IBD) for research, so he had to rely on a good friend, John Mackel, to help him fill in the blanks when it came to chart analysis. Because he had such limited time and access to news, Dave wasn’t influenced by media pundits who were saying the market would never turn around. Dave was interested in stocks that were showing strength and resilience despite the difficult market. He read about Green Mountain Coffee Roasters in eIBD™ (the digital version of IBD) and saw the stock setting up in a cup-with-handle base. Dave realized that as soon as the market turned around, Green Mountain Coffee Roasters would be a stock that he wanted to own.
The company had double digit earnings and sales growth as well as an innovative product, the Keurig Brewer, which makes individual cups of gourmet coffee. Dave bought the stock as it broke out of a classic cup-with-handle base pattern in March 2009, just as a new bull market was beginning.
“This was a very easy position to hold,” he says. “Six weeks later, I was rewarded with a huge payoff. Along with a great earnings report, the company announced that their K-Cups would be available in Walmart prior to Mother’s Day. The stock rocketed 37% on the announcement. Volume was 832% above average, showing enormous buying from professional investors.
“I hadn’t faced a huge gap-up move when I already had an established position in a stock for a long time. I remember Charles Harris (portfolio manager for O’Neil Data Systems and instructor for IBD workshops) explaining in a seminar that one needs to hit the accelerator when you find a great stock.” Dave says he likes to refer to it as “lighting the cans,” which is fighter pilot terminology for igniting the afterburners. “So, due to the incredible gains made from the Walmart announcement to sell Green Mountain Coffee Roasters K-Cup products, I placed a market order to buy 25% more shares of the stock. By 11:30 p.m. that night, floating around on an aircraft carrier with a significant lag in the Internet, I realized that I had placed one of my best trades ever. Green Mountain Coffee Roasters closed that day 44% higher than the previous day.”
Dave sat with Green Mountain till mid July, eventually closing out a gain of 78%. “I decided to exit the position due to a breach of the 10-week moving average,” he says. “The stock recovered and went higher without me, but I was fine with locking in my gains.”
Tune out the news; pay attention to what the market and leading stocks are actually doing.
Look for stocks setting up in a base while the market is in a correction.
Lee Tanner said he had a moment of clarity that significantly improved his trading after attending IBD’s Level 4 workshop. The portfolio simulation showed that most winning stocks should be sold after they are up 20 to 25%, because at that point, many stocks will pull back and form another base or area of consolidation or even top.
Lee tended to hold onto his stocks too long and gave back much of his gains prior to following this simple sell rule. Lee learned the only time you would hold onto a stock longer is if it makes a 20% move in 2 to 3 weeks after breaking out, in which case the stock must be held for at least 8 weeks. That’s because market history shows that stocks like those tend to go on to make massive moves after moving higher so quickly.
One stock that evoked the 8-week hold rule for Lee was Crocs in 2007.
Lee says the market environment in recent years has not led to the “big trades” that previous markets offered, but he had a “barn burner” with Crocs in 2007, netting a gain of 140%.
Lee said he became aware of the stock because it appeared in an IBD New America article in October 2006. A few months after the stock made its IPO debut, it was mentioned in The Big Picture column and was a leader up in volume in the Market Pulse section of the paper.
“Before investing in the stock,” says Lee, “I visited a local Macy’s store and found that Crocs had its own special display section in the shoe department, so clearly the shoes were selling well.”
Sell most stocks for a 20 to 25% gain, unless they go up 20% in 2 to 3 weeks, in which case, hold for 8 weeks.
Read The New America article to find potential winning IPOs.
Visit a store and check out the merchandise a company is selling.
In 2004, Mike Scott considered himself a “newbie” when it came to investing. He wanted to own Google but at the time didn’t understand IPO bases, so he missed the September 2004 breakout. He bought the stock when it gapped up in April 2005. (A gap-up occurs when a stock makes a sharp move up in price. The heavy buying that causes the gap in price is usually the result of a strong earnings report or other positive news.) “Buying gap-ups at that time was scary to me,” says Mike. “Now I love them and often pay attention to stocks that gap up in price because I know that these stocks often end up going on to make big gains in the market.”
Mike was able to learn from that mistake and made some nice gains in another IPO, Michael Kors. “Having subsequently learned how to buy an IPO base correctly from my Google experience,” he says, “I didn’t falter when it came to the Michael Kors IPO. I bought the stock on January 17, 2012, at $27.11. I had done my homework before the stock made its move and was waiting. Michael Kors was sponsored by three quality underwriters and had triple digit earnings and sales growth. The company’s products were popular and widely sold in department stores such as Macy’s. On January 17, Michael Kors had a gap-up, and I bought the stock. I added to my shares on three different occasions as the stock exhibited strength and moved higher, finally selling my position as the stock slid below the 10-day line for the first time in 8 weeks. I have learned that a stock that respects the 10-day moving average for a long time can be sold when it breaks that line.” Mike had an overall gain of 74% in Kors.
Watch for quality IPOs as they break out of their first base.
Consider selling if a stock has stayed above the 10-day line during its run, then falls below it.
Anindo Majumdar was a software engineer for Cisco Systems in the mid-1990s. He said the company used to give employees stock options, so he became interested in seeing how the stock was performing. This was his first introduction to the stock market, and he viewed it as an exciting way to make some extra money.
Every 6 months or so, Cisco would give employees options, and since tech stocks were booming at the time, Anindo says it was pretty exciting to watch Cisco rocket higher.
Anindo’s wife saw the enormous gains in his account and urged him to take some money out of the market and buy a house. Fortunately, he listened.
In 2000, because Anindo had not yet really learned anything about investing or the CAN SLIM strategy, he says, “I lost the rest of my gains in Cisco because I did not have any sell rules as the market collapsed.”
But because he was able to buy a house using the profits he made in Cisco, Anindo was interested in learning more about growth stock investing.
In 2003 and 2004, he attended several of IBD’s advanced workshops and ended up making a lot of money in the market. “It cemented in my mind that this system works very well in a bull market and to always pay attention to the overall market trend,” he says.
As a result of his studies, Anindo notched gains of:
Taser. 90%
Taser. 72%
Google. 31%
Intuitive Surgical. 27%
Hansen’s Natural. 38%
Lock in big gains if the market direction changes.
Tom Ellis says the only investing publication he reads is Investor’s Business Daily. He doesn’t subscribe to any other newsletter or service and isn’t interested in what stocks other people own. “I also made a rule not to share with other investors what stocks I am invested in or how much,” he says. “I have learned this lesson the hard way. When I listen to the news or other people’s opinions, it causes me to make mistakes and not follow my plan. I begin to second guess my decisions.”
Because of this intensity of focus, Tom is able to consistently make 20 to 25% gains in the market using only IBD and MarketSmith to find stocks.
On January 4, 2012, Tom noticed Continental Resources in IBD’s Stock Spotlight. It was also featured in the paper’s Industry Themes article.
That same day, the stock was added to Leaderboard, with a chart annotation showing a cup-with-handle base and a potential buy point of $73.08.
On January 5, Continental Resources broke out of its base pattern on volume that was 78% above average. Tom bought the stock and sold it 7 weeks later with a 25% gain.
Some of Tom’s other successful trades in 2012 were
Select Comfort. 25% gain in 7 weeks
Herbalife. 25% gain in 11 weeks
Priceline. 25% gain in 5 weeks
Don’t get confused by reading too many different investing publications.
Use IBD and MarketSmith to find winning stocks.
Townsend Baldwin began reading IBD in 2004 and was successful using the CAN SLIM Investing System to trade in and out of Nutrisystem, the maker of prepackaged diet products.
He first purchased Nutrisystem in July 2005 when he saw the stock hitting new price highs and sold when the stock made a 20% gain. Later that same year, after the stock came out of a cup-shaped base, Townsend bought Nutrisystem again, netting a 25% gain. He had enough capital invested in the stock to buy an apartment in New York City with the profits, so these two trades were very exciting and rewarding. But as Townsend looks back on the trades, he says he realizes that he missed out on even bigger gains. From his first purchase in July until the end of the year in 2005, Nutrisystem produced a 214% gain. Townsend had not yet learned how to handle a big winner.
From October 2004 through December 2005, Nutrisystem made a 2,100% move.
The company came public in 2000, but what was new about the company in 2004 and 2005, the “N” in CAN SLIM, was that Nutrisystem had new management and had found a new way to sell more of their products through heavy marketing, such as selling on the cable-shopping network QVC.
This led to massive earnings acceleration and grabbed the attention of institutional investors, who bought shares of Nutrisystem, sending its stock price soaring.
In 2009, Townsend traded in and out of another stock, Baidu, which is the Google of China, netting gains of 40%, 15%, and 20%. Townsend said that reviewing his past trades gives him a chance to look at how he might have handled a stock differently. “Every trader makes mistakes,” says Townsend, “but the most important thing I learned from my experience with Baidu was that I did not exercise the patience needed to pull out the 1,000% gain that the stock made. A CAN SLIM trader could have made those enormous gains with Baidu if one bought at the beginning of the new bull market in March 2009 and held onto the stock as it made its tenfold move. My plan is to find the super stocks of the future and capture the truly big moves that these stocks make, using the CAN SLIM strategy.
“If an investor embraces keeping losses small, lets winners run, and follows clear investing rules, then one can’t help but be successful. Yet investing success takes hard work, understanding market psychology, and a willingness to study the overall market trend, but that’s the easy part after one makes the commitment.”
Congratulate yourself on profitable trades.
Review how you could have realized larger gains.
K. Basu was a “late bloomer to the dot.com rage” while he was in college. But he eventually started dabbling in the market and bought a stock that ran up 100% in a very short period of time. So he did what many young men would do: he took the profits and bought himself a car.
But when the tech bubble burst, he lost a lot of money in his account. At the time, he owned WorldCom, which eventually went bankrupt. He was very green and new to investing, so he didn’t have sell rules in place when the stock began to collapse.
In 2002, a colleague at work introduced him to IBD and Bill O’Neil’s book How to Make Money in Stocks. In 2003, he bought Sina Corp, a Chinese Internet gaming company, and made a 100% gain. K. Basu thought this was great; the only problem was, he didn’t have a large enough position, so his actualized gains were relatively small.
Then he attended several advanced IBD workshops as well as the New York City IBD Meetup Group and met other like-minded investors who helped him learn how to follow the market every day, and how to be active rather than passive in the market. He considers this a turning point in his investing, and he is grateful for meeting some terrific people from that IBD Meetup Group that would become his mentors. They really helped change his thinking about his overall investing strategy.
From then on, K. Basu would treat investing more like a job than a hobby. He took investing more seriously and started doing better in the market as a result.
His advice to other investors is simple: wait for a follow-through day, and scale in slowly to see if the market is working or not. Then take most profits at 20 to 25%. “If you do those two simple things,” he says, “your yearly returns will probably be 25 to 50% in a decent market.”
In terms of follow-through days, K. Basu learned to see how stocks are working a week or two into the new uptrend. “If stocks are acting well and moving higher,” he says, “then the follow-through day will probably work. But if stocks are faltering and not holding onto their breakout moves, the follow-through day will probably fail.”
If the market is in a correction, he keeps it simple and looks at the IBD 50 to see what the top 10 stocks are doing. Are they setting up in bases, preparing to break out, or stalling? It’s a quick and easy way to gauge the health of the overall market.
K. Basu encourages other people who have a full-time job and says, “You can invest even if you’re busy. Do your homework on the weekend, find stocks that are setting up, then put in your buy-stop orders on Sunday night with your brokerage firm.
“That way, your trades can be executed or sold when you’re busy at work and you don’t have to worry during the day.”
“If you do the numbers and understand the value of compounding the gains that you make in the market, and you keep your losses small and follow the CAN SLIM rules, you can do extremely well over the long term.”
Treat investing like a business.
Wait for a follow-through day, and then scale in slowly.
Look at the IBD 50’s top 10 stocks during a correction to see if any are setting up in base patterns.
Do homework over the weekend. Set trade triggers Sunday night through a brokerage account.
“I was living in England in the 1980s when Margaret Thatcher was the Prime Minister. At that time, a lot of the utility companies were being deregulated, and I did well investing with several of those companies as they began to become profitable. This was exciting and set a lifelong goal for me: I was going to become really good at investing no matter how long it took.
“In May 1999, I came to the U.S. but was busy getting settled and working a regular job, so I didn’t become actively engaged in the markets until 2006. With my MBA background, I tried value investing, diversifying with 20 or more different stocks, bought some dividend stocks, and even tried to imitate some of the traders I saw on TV. I also tried options and swing trading. No matter which system I dabbled in, I watched my capital diminish.”
“Through all of this, I realized you cannot rely on someone else’s opinions; you must make your own decisions and be in control with a specific plan.”
Paramjit became an IBD subscriber in July 2008, but this would prove to be a difficult time in the overall market.
He had a pivotal moment in 2011 when he saw Bill O’Neil speak to an IBD Meetup Group in Santa Monica, California. Bill mentioned Richard Wyckoff, a trader from the early 1900s who advocated controlling risks in any particular trade.
This changed Paramjit’s outlook forever. He saw that trading needed to be treated like a business. From there, with his MBA background, he set forth a business plan with a set of rules that would include a monthly review of how he was doing.
He notes that sell rules are the most important and why it’s critical not to get tied to a particular stock. “As the IBD saying goes, date the stock, don’t marry it. If you don’t think you can get something out of the transaction, you have no business going in.”
Paramjit encourages other investors: “Don’t feel embarrassed if the trade goes against you. It could be a lack of experience or problems in the overall market. Everyone makes mistakes. Keep losses small; if you’re determined, you’ll work through it. And remember to take most gains between 20 to 25%.”
Create an investing business plan and review trades on a monthly basis.
Everyone makes mistakes. Keep losses small.
Steve Power has been an IBD subscriber since 2005. Although he understood the system and made money over the years, he’s had ups and downs as a trader. The main thing Steve struggled with is that he felt the need to always be in the market. Now he realizes that there are windows of opportunity to capitalize on winning stocks, and there are periods of time when it is best to step to the sidelines.
Steve didn’t really have a strong plan of action until his friend Tom Ellis, an experienced CAN SLIM investor, suggested that he write down a specific trading plan and stick to a regular routine. Steve is a Senior Representative for a multinational company, so most of his research is done on the weekends.
1. Watch list. This list includes approximately 10 to 30 leading stocks that have the best fundamentals, such as double- or triple-digit earnings growth, a high return on equity, and increasing revenue growth. If this stock list becomes unmanageable because there are too many stocks on it, create a second list for stocks that don’t quite meet the top fundamental criteria.
2. Buy list. This is a list of 1 to 5 possible actionable stocks for the week. In some cases, buy triggers can be placed in advance of a breakout. In other cases, the buy may be dependent on further base development. Try to keep at least one stock on this list. The most difficult thing is to keep this list small when a bull market is raging. Remember to streamline the list down to the very best stocks that you can find.
3. Breakout list. Keep track of stocks that break out from your watch list whether you bought them or not, and keep track of how they perform. This is a good indicator of overall market health.
4. Stops. Update stops (the price at which a stock would be sold if the trade doesn’t work out, no more than 7 to 8% below the purchase price) on the spreadsheet weekly.
5. New additions to watch list. Download and review the IBD 50 for new ideas twice a week. Run 1 to 2 MarketSmith screens looking for stocks with top earnings and sales.
6. Maintain records. Write in a market journal at least once a week and every time a trade is made. Record trades in a portfolio performance spreadsheet, and keep this updated to determine market exposure, risk, profits, and so on.
1. Read The Big Picture column, and check the overall market trend.
2. Check stock lists (watch list, buy list, breakout list).
3. Record trades, and update portfolio of positions currently held.
4. Reprioritize the list with potential buy points if watch list stocks are preparing to break out.
5. Set buy or sell triggers with your broker if a new stock appears that you want to buy or if a stock that you own flashes a sell signal.
6. Read IBD articles for new ideas.
7. Write in a market journal every time a trade is made.
Steve says the system “works well when applied correctly. I try to make trading as mechanical as possible to take the emotions out of it.”
In the 1960s, Kent Damon worked as a security analyst for First City National Bank of New York, now known as City Bank. After that, Kent was an oil analyst for six years before moving to Atlantic Richfield, where he was in charge of Investor Relations. In 1995, he joined Arco and was appointed senior vice president responsible for overseeing its pension fund and all of the fund’s investments.
Kent had a team of 30 analysts working for him, each of whom was designated a different amount of money as portfolio managers depending on their level of experience and performance.
The fund bought mostly growth stocks and was guided by instructional lessons on chart reading by Bill O’Neil, who would talk to Kent’s team from time to time and help them learn what traits to look for in the market’s biggest leaders.
For five years in a row, from 1985 to 1990, Arco performed in the top 10% of all U.S. pension funds while following many of the CAN SLIM Investing strategies.
In 1993, Kent was named president of Arco Asia Pacific and relocated to Hong Kong, where he lived for many years.
He retired and returned to the United States in 2001 and began subscribing to IBD. Kent feels he has come full circle from being a young investor in the 1960s who bought big name growth stocks, to overseeing Arco’s pension fund, back to individual investing using the CAN SLIM strategies.
Kent says he “relies very heavily on IBD’s Big Picture column to stay in step with the overall market direction. IBD puts all of the market and stock information in an easy, useful form with all the fundamental data listed.”
He tends to hold big winners if he has a cushion and the fundamentals are still strong. Kent is willing to hold a stock through a normal pullback provided that the chart doesn’t show heavy institutional selling. He bought Apple in late 2010 and owned it through September 2012.
Kent helps other investors as the IBD Meetup leader in Montecito, California, and says going through the lessons “is helpful and reminds me to stick to the rules also.”
Hold big winners if you have a cushion as long as the stock is going through a normal correction and isn’t showing signs of heavy institutional selling.
In 1995, Jahandar Kakvand was doing some engineering research in the library and ran across How to Make Money In Stocks by accident. He became an avid IBD reader after reading the book and, as a result of his success in the market, quit his engineering job and became a full-time investor in 1999.
He dispels some of the myths that surround investing, one myth being that it’s just like gambling. “Individual investors have a tremendous advantage,” he says. “They can move in and out of the market much faster than institutional investors, and if you take the right precautions and follow some simple rules, you can do very well.
“Accept the fact that you’re going to make a lot of mistakes, particularly if you’re new to investing. In the beginning, it’s like a baby learning to walk. You have to try and try again, no matter how many times you fall down. Be patient with yourself. If you are making progress with your positions, hang in there.
“Some of the key things to remember are not to try and fight the market. You must respect the market trend above everything else.”
Jahandar had success with Baidu in 2007. “Back in 2007, IBD had been writing about the stock many times, which brought it to my attention. I bought the stock at $132 in June 2007 and sold it in October 2007 at $320, when the stock had a big reversal day on high volume, netting a 142% gain.”
Accept the fact that you’re going to make a lot of mistakes.
Be patient with yourself.
Don’t try and fight the market trend.
Read IBD articles to find winning stocks.
Jerry Powell heard Bill O’Neil speak at an IBD Meetup event in Anaheim in 2011 and said it made a significant impact on his trading. “Bill laid everything out in a very logical way that made sense to me.”
The CAN SLIM rules are something that appealed to Jerry, and he learned the importance of going to cash if the market was in a downtrend. Jerry says he also learned why “the buy and hold strategy will kill you.”
Jerry had been successful trading options but was concerned about his 401(k). When investing in his “nest egg for the future,” he uses the paper and Investors.com to locate potential big winners and invests in CAN SLIM stocks.
Jerry has learned to keep his losses small and sticks to the 7 to 8% sell rule without fail.
He bought Apple shortly after the follow-though day on December 21, 2011, knowing the importance of buying stocks after a follow-through day in order to capture the moves of the best performing stocks. He bought Apple at $396 and sold April 11, 2012, at $624, logging in a gain of 57%.
His strategy is simple: follow the overall trend of the market by reading The Big Picture column in IBD daily, look for the market’s biggest leaders through the many features found in IBD, and buy them as they break out of price consolidations. Take most profits at 20 to 25%, and stay in touch with other investors to help discuss the general market as well as leading stocks.
Jerry started a Facebook trading group as a way of sharing information with other like-minded investors. He says that trading is a very isolating thing. “It’s easy to get too elated or down on yourself with your trades. You need to communicate with other people to stay balanced.”
Jerry is also a member of the IBD Diamond Bar Meetup Group and says the quality of teaching and intelligent participation within the group has helped him solidify many of the CAN SLIM principles.
Follow the overall market trend by reading The Big Picture column.
Look for the market’s biggest leaders through the many features in IBD.
Join an IBD Meetup Group.
John is a lawyer and the leader of the Pasadena IBD Meetup Group, one of the most active IBD Meetups in the country. In order to keep the conversation going between monthly meetings, John formed a Google Group, which is basically a way for members to communicate with one another via e-mail through threaded conversations.
Meetup members can simultaneously e-mail everyone in the group and discuss the market or stocks. These e-mails get sent out to everyone in the group who opts to participate. John finds this a terrific way to update members about stocks that are breaking out or perhaps breaking down as well as answer questions from the group about stocks or the overall market. Other seasoned traders regularly contribute to the conversation to help newer investors engage and learn.
John also e-mails annotated charts of stocks that are setting up with comments concerning the stock’s fundamentals or technical action. John says that teaching and helping other investors on a daily basis keeps him in touch with the market’s current action as well as how the leaders are performing.
Before leading the IBD Pasadena Meetup group, John says he was “excited to find knowledgeable CAN SLIM traders at the Santa Monica IBD Meetup. During two years of attending these Meetups, I not only developed some great friendships but also honed my skills and increased confidence in my trading.”
As a busy attorney, John says he sometimes misses a stock that is breaking out of a base pattern, but he realizes that a good stock will usually offer other entry points, like a pullback to the 10-week line. He also notes that in a good rally, there will usually be several quality stocks to buy, so if he misses one stock, there will be others breaking out. John usually owns no more than six stocks at a time and tries to narrow that down to the few that are performing the best.
“I find most of the stocks that I trade by reading IBD,” he says. “As I’m reading through the paper, I keep MarketSmith open so I can study the chart of a stock that looks interesting.”
John looks back fondly at the trade that got him excited about investing. “EMC, the computer data storage company, was my first big trade. When I look back, I realize how lucky I was to capture a 400% gain and yet how much I still had to learn.
“I first learned about the stock from an article in IBD and then met one of EMC’s executives at a trade show who got me really excited about the company’s growth potential.
“Not knowing much about sell rules, I didn’t sell the stock as it topped in late 2000, but I had read in IBD that leaders were breaking down and distribution days were increasing, so when EMC dove below the 200-day moving average, I sold my entire position.”
Consider forming a Google group for e-mail discussions with other investors.
Big winners will offer several entry points.
Debra Kloote’s father first got her interested in the stock market in the 1990s. She started out investing in mutual funds but by 1999 was investing in individual stocks. Although Debra had some success, she wasn’t really following the market or stocks closely enough.
All of that changed when she found the Clearwater, Florida, IBD Meetup Group. She began attending the free monthly meetings and understood more about the paper and Investors.com. By this time, she was really ready to focus and learn.
In March 2011, an IBD Meetup leader from Naperville visited the Clearwater group and talked about switching careers. For years, Debra had been an accountant working in the corporate world, but she really wanted to spend more time trading and turn investing into a full-time job. This Meetup discussion made her realize that was a real possibility.
Later that year, Scott O’Neil, Bill O’Neil’s son and president of MarketSmith, spoke to the Clearwater IBD Meetup Group and said something that really resonated with Debra: “Don’t give the market your money unless it deserves it.”
Debra attended some of IBD’s advanced level workshops and began to do a post analysis of every trade she had made for the past three years. Doing this analysis really helped her learn where she needed to make improvements in her trading.
She wasn’t upset with her past trades but looked at them as valuable learning experiences. She says, “Mistakes equal learning. Reviewing what I did wrong keeps me from making the same mistakes again.”
Debra saw the market changing quickly in January 2012, and recognized the “window of opportunity was there with the beginning of a new uptrend. You must be ready to take advantage of leading stocks as they are breaking out, and the overall market is acting strong.” Debra started her journey of being a full-time investor.
Tractor Supply. 23% in 11 weeks
Apple. 33% in 13 weeks
MasterCard. 21% in 11 weeks
Do a post analysis of trades, and find ways to improve.
Always be ready for a new uptrend so you can capitalize on stocks that break out as a result.
Jeff Heimstaedt was in his senior year at Pepperdine University in Malibu when a fraternity brother invited him to his parent’s home for dinner. Jeff met a successful stock broker at the dinner who described the stock market as a great place for someone young to make money, if they were willing to work hard. The financial possibilities and the intellectual challenge appealed to Jeff, so shortly after college, he got a job with Merrill Lynch.
He became aware of IBD through a co-worker and read How to Make Money in Stocks, which introduced him to a fact-based investing system that made sense. Jeff said as well as reading the paper on a regular basis, he started subscribing to Daily Graphs (now MarketSmith) and would pick the chart book up at noon every Saturday as a way to find companies that were setting up in base patterns. “At the time,” he said, “there was no Internet, and very few charting services were around, so Daily Graphs was extraordinary.”
From 1998 to 1999, Jeff was buying a lot of the “hot” tech stocks like Yahoo as they broke out of price consolidations. His overall strategy was to buy stocks at the pivot, but if the trade went against him more than a point or two, he would sell them.
From January 1998 until February 2000, a period of 26 months, Jeff’s account increased over 750%.
Jeff’s daily routine starts the night before, when he reads through eIBD, the digital version of the paper. He looks for ideas and focuses on companies that are different and stand out. He is very focused on the “N” in CAN SLIM and prefers newer companies with products or services that are in big demand by consumers.
During the trading session, Jeff uses a MarketSmith screen to track stocks that are up on volume and determines whether any of these stocks warrant immediate attention if they are breaking out of bases. On days when the market is in an uptrend but opens lower, he likes to see which stocks can buck the trend and turn up first. This has helped Jeff find several winners over the years.
As Jeff reflects on his learning curve as an investor, he mentions the first IBD workshop that he attended in 1990, and what an impact it made on him as well as how much it helped his trading. Through the years, Jeff has attended all of IBD’s advanced workshops and says, “There have been so many important things that I have learned. Each workshop has its gems—the take home lessons—and I continue to learn.”
“One of the biggest things I know now is that I did not exploit the big winners that came out of the 1980s and 1990s, such as Cisco Systems, Microsoft, Intel, Dell, and Home Depot. These were the change-your-life type of stocks, and although I netted some nice gains in the tech boom of the 1990s, I was too inexperienced as an investor to understand how to hold these stocks and capture their massive gains.
“But I am excited, because I believe that we are on the cusp of another secular bull market. Bill O’Neil and Chris Gessel discussed this possibility during a webinar in August 2012. I’m trying to adapt my trading style so that I can truly exploit the big stocks that will make enormous gains when this new era happens.
“I have been able to handle Apple reasonably well over the past three years, pyramiding my original position to over five times my initial purchase.”
Some of Jeff’s biggest winners over the years:
Crocs. 2007: 223% gain
Baidu. 2007: 61% gain
Apple. 2009–2012 (still holding the position mid-September): 444% gain
During the trading session, look for stocks moving up on unusual volume using a MarketSmith screen or by checking Stocks on the Move at Investors.com.
Focus on the “N” in CAN SLIM, newer companies with products or services that are in big demand by consumers.
Friday, June 29, 2007, Dave was standing in line for an iPhone. He purchased one of the last ones in a mall on the outskirts of Pittsburgh. “It was the first Apple product that I had ever bought,” Dave says. “I spent the entire weekend playing with it and could not believe how much better it was than the hype. I had the luxury of having Navy friends all over the country, and they told me that there were lines around the block at every Apple store. Because of my understanding of the ‘N’ in CAN SLIM, I knew that high demand for the iPhone would drive Apple’s earnings and sales higher and create institutional demand for the stock. So I decided to buy Apple July call options at the open on Monday for $1.20 a share on its pullback to the 21-day moving average. I closed out the option position at $9.00 per share as the stock went over $140 in price. This was a 750% gain in just two and a half weeks. Conviction in the product gave me the confidence to execute this trade.”
Jeannie reads IBD’s Big Picture column every day to make sure she stays in sync with the overall market trend. In December 2011, when the market began a new uptrend, Jeannie waited to see if the follow-through day would work and leading stocks were breaking out of sound base patterns. In January 2012, when she observed that the overall trend was acting strong and leading stocks were holding onto their gains, she bought SPY calls. Jeannie started off with $300,000 in her account and increased it to $410,000 in less than three months for a 36% gain. She says, “The most important thing is to manage your risks and keep your losses small.”
The Big Picture column is a great way of understanding the market’s current trend.
Use Stocks on the Move at Investors.com and in IBD to find stocks that are rising or falling on unusual volume for various options strategies.
