Currently the following books are on my reading shelf:
- How To Make Money In Stocks: A Winning System in Good Times or Bad is written by William J. O'Neil, who is the founder of Investor's Business Daily. In addition to pitching IBD (which is good BTW), he outlines his method of picking the winning stocks to the acronym CAN-SLIM.
C = Current Quarterly Earnings per Share. (The absoulute number not the growth percentage) The more the better. The earnings should be consistently increasing on log scale year-over-year and they should increase with the sales growth.
Current quarterly earnings per share should be up a major percentage-at least 25% to 50% or more-over the same quarter the previous year. The best companies might show earnings up 100% to 500% or more!
A=Annual Earnings Increases 25-50% or more growth rate. Check earning stability in past three years. Ignore P/E ratio.
Concentrate on stocks with proven records of significant earnings growth in each of the last three years plus strong recent quarterly improvements.
Search for companies that have developed important new products/services, or benefited from new management or new industry conditions. Then buy their stcks when they are emerging from price consolidation patterns and are close to, or actually making, new price highs.
S=Supply and Demand. Look for companies with less number of outstanding shares, enterpreneurial management rather than caretakers, no excessive stock splits, companies buying back shares in open market, low corporate debt/equity ratio.
Any size capitalization stock can be bought under the CANSLIM method, but small-cap stocks will be substantially more volatile, both on upside and downside. From time to time, the market will shift its emphasis from small to large caps and vice versa. Companies buying back their stock in the open market and companies showing stock ownership by management are preferred.
L=Leader or Laggard. Buy among top two or three stocks in a group. Use relative strength to seperate leaders (>80) from laggards.
It seldom pays to invest in laggard stocks, even if they look tantalizing cheap. Look for, and confine your purchase to, market leaders.
I=Institutional Sponsorship: Follow the leaders. Look for >10 quality institutional owners. (IBD sponsorship rating A). Avoid "overowned by institutions" stocks.
Only buy stocks that have at least a few institutional sponsors with better-than-average recent performance records, and invest in stocks showing an increasing total number of institutional owners in recent quarters.
M=Market Direction. Even good quality stocks will go down when overall market direction is downwards. Look for movement in S&P 500, DJIA, Nasdaq Composite indices. Don't be blinded by the myth surrounding "Long-Term Investing".
The key to staying on top of the stock market is not predicting or knowing what the market is going to do, but knowing what the market has actually done recently and what it is currently doing.
- Collapse: How Societies Choose to Fail or Succeed
- Using Your Brain--For a Change