Investor's Business Daily presents Maximizing Your Success, a video companion to Investor's
Business Daily, featuring William J. O'Neill.
The reason that I think IBD is absolutely fabulous is because a person who doesn't
know a thing about investing in stocks can pick it up and start learning.
Mr. O'Neill's system, Investor's Business Daily, are solely responsible for my portfolio
performance.
You're not getting any information you can act upon in the Wall Street Journal, whereas
you're getting lots of information from IBD that you can act upon and benefit from immediately.
We needed something for investing and one of our brokers told us about the Business
Daily, so we decided to get that and I love it.
As a matter of fact, Dr. O'Neill is an embarrassment to me because what she does is she reads a
thing practically cover to cover.
I would say that as a result of all the reading she's done, we made some fairly good investments.
I really feel that whether someone is using a broker or not, they need to be constantly
educating themselves and try to get as much knowledge as possible.
I'm not threatened by having clients who are knowledgeable.
I think in fact it helps the equation.
Education is the key to a successful investor and that's why I think IBD is one of the
keys that I hold to building my portfolio.
Hello and welcome.
First I'd like to thank you for subscribing to Investor's Business Daily.
With IBD you have the tremendous advantage of subscribing to America's most powerful
information tool.
As you'll see from this video and from your daily reading of IBD, we're here to help
you capitalize on that advantage.
Do you realize that you're extremely fortunate to be living in a country where big opportunities
occur every week?
Today's America offers you enormous new investment prospects.
However, you have to know how to identify and take full advantage of the unending flow
of new opportunities.
Did you know that 98% of all investors miss the signals that a stock is ready to make
a big price move?
Most investors don't know when to buy stocks at the right time, plus most don't know when
to sell stocks to prevent large losses or nail down significant gains.
Investing successfully requires a sound, proven method with a strict set of rules to guide
you in your decision making.
Today we're going to talk about how to use the unique information in IBD to identify
the best stocks before they make a major price move.
I'm going to tell you about the can-slim method and show you why IBD is the only newspaper
that gives you the information you need to make profitable investment decisions.
We'll talk about the key characteristics of winning stocks, locating stocks with the greatest
potential for big gains, why buying stocks coming out of bases and trading at new price
highs makes sense, how to read a stock chart to better time your buying and selling, and
how to identify current market conditions and recognize major market turns.
Let me start by telling you how I developed the can-slim method.
When I was just starting out as a stockbroker, I decided to study the best performing mutual
funds.
The number one fund at that time purchased more than 100 new stocks over a two year period.
The astounding discovery I made was that every single one of those stocks were purchased
only after they made a new high in price.
If a stock fluctuated between 40 and 50 for three to six months, they only bought the
stock when it traded at 51.
Next I did an intensive study of the very best performing stocks every year since 1953.
What I discovered was that virtually all top performing stocks had the same seven characteristics
before they made their greatest price moves.
These characteristics became the basis for the can-slim investing method and we designed
IBD to highlight companies showing these fundamental winning characteristics.
My philosophy is that anybody who's going to get into the stock market, you should get
into the stock market with some sort of discipline, something that's going to take you outside
of your own head and outside of your own emotions.
And that's the importance of having something like can-slim.
Can-slim deals with reality.
What do the biggest winning stocks look like when they start their move?
And nothing more than that, just what has happened in the stock market and what you
should be looking for because history repeats itself.
So I think anybody who's starting should have some sort of discipline and I think can-slim
for me is the best discipline.
And when you use it with the paper, it's a home run.
When looking for stocks, I want nothing less than the best.
And by using the can-slim method, it really narrows the field to the top 20%.
Each letter in the acronym can-slim represents one of the seven key characteristics present
in the greatest winning stocks just before they made their huge price gains.
I'm talking about the really outstanding stocks, stocks that averaged over a 200% increase
in only 12 months.
The letter C represents the first common characteristic we found in the greatest market winners.
It stands for a significant percentage increase in the current quarterly earnings per share
when compared to the same quarter the prior year.
You should see a minimum 25% increase in each of the most recent two quarters versus the
same quarter as the previous year.
The very best companies usually have at least five quarters of increasing earnings up 50
to 100% or more.
Our market studies showed that three-fourths of the top performing stocks averaged more
than a 70% increase in the current quarterly earnings growth just before they made their
biggest price gains.
The other 25% that failed to show a substantial earnings increase did so in the following
quarter, and that quarter's increase averaged 90%.
So you see, big current earnings results almost always precede giant price moves.
You should also look for acceleration in the quarterly rate of increase at some point in
recent quarters.
Furthermore, it's a positive confirmation if the stock's quarterly sales are up either
at least 25% or the last three quarters show an acceleration in their percentage rate of
increase.
The next letter in CanSlim, A, represents a company's annual earnings growth rate.
Our study proved that more than three-fourths of the greatest market winners showed a strong
annual earnings growth rate in each of the last three years before they made their biggest
price increase.
The annual compounded earnings growth rate in the stock you purchase should generally
be 25 to 50% or higher over the last three years.
As a confirming factor, it also helps to see either the annual pre-tax margins or the return
on equity increase from the prior year.
A return on equity of 17% or more is generally considered a good return.
To help you locate companies with strong current and annual earnings records, IBD gives you
a proprietary earnings per share rank, or EPS rank.
The EPS rank measures a company's most recent two quarters of earnings growth compared
to the same two quarters a year ago, as well as the three- to five-year annual earnings
growth rate.
The company's earnings performance is then compared to all other publicly traded companies.
The rankings are shown on a scale from 1 to 99, with 99 being the strongest.
For example, if your company has an EPS rank of 95, it has outperformed 95% of all the
other companies in terms of current and annual earnings growth.
EPS rank allows you to concentrate on companies with the best earnings records.
When you're trying to isolate stocks with the greatest potential for becoming big market
winners, you want to normally select stocks with an 80 or higher EPS rank.
A very unique and profitable feature of Investor's Business Daily is the earnings per share.
You want to invest in strong companies.
You could call every company and do it yourself, or you can let Investor's Business Daily
do it for you.
Let me emphasize here that EPS rank is a feature you can only find in Investor's Business
Daily.
You won't find this data in the Wall Street Journal, Barron's, the New York Times, or
any other publication.
Our sister organization, William O'Neill & Company, an institutional research firm founded
in 1964, maintains one of the largest computerized stock databases in the country.
By exclusive contract, IBD is able to provide proprietary rankings other new services just
cannot give you.
Along with EPS rank, the NASDAQ stock tables have a column that shows you the most recent
quarterly earnings percentage change versus the same quarter one year ago.
This allows you to see exactly how much of an increase or decrease in earnings performance
the company has experienced for that quarter.
Another place you can find earnings information is the earnings news section of IBD.
When companies release their quarterly earnings reports, IBD publishes them and separates
the best ups from the most downs, allowing you to quickly see which companies are performing
well and which companies aren't.
We also highlight companies with earnings growth rates of 30% or more and whose sales
and earnings gains have accelerated from the prior quarter.
These features make it easy for you to locate the companies with the best earnings records.
Finding the information you need in a fast, efficient way is one of the greatest benefits
you have as an IBD subscriber.
The next finding from our research study of great market winners was that these leading
companies had something new happening right before they made their biggest price moves.
This is the end in CanSlim.
These companies had a new product or service and their stock was emerging from a chart
based pattern and about to make a new high in price.
Let me ask you a question, do you buy most of your stocks when they're breaking out
of bases and moving into new high prices?
Only about 2% of investors do this.
Our market study showed us that the greatest market winners were trading at new price highs
just before they made their biggest price moves.
But of course, you probably missed most of these greatest winners because they always
seem too high to you.
IBD makes it easy for you to locate companies trading at new highs with our innovative new
high list.
This daily feature shows you the companies making new highs organized in order of industry
groups with the greatest number of stocks hitting new highs.
This also makes it easy for you to locate the 4 or 5 industries leading the entire market.
Stocks on the new high list tend to go higher while stocks on the new low list tend to go lower.
IBD's new high list can be a great source of new investment ideas.
I think we've learned, and it was a process of learning, certainly in the beginning we
would have never bought a stock that was on the new high because as a novice investor
you do want to bargain, you want to buy it at the right price.
We learned through IBD that there's a reason that a stock sells for a certain price and
basically it applies to all marketing.
You get what you pay for.
It was not something that came easy in the beginning, but we've learned now that that
is one of the key signals when a stock hits a new high.
I have a lot of friends who love buying stocks when they're way, way down and stocks that
are very, very cheap and I simply explain to them that the stock is cheap for a reason.
Somebody out there doesn't like that stock and the stock has gone down for a reason.
People don't have faith in that company anymore.
You want to buy a stock when it's breaking out into new high because that shows that
there are a lot of people who like that security.
But when you think about it, it makes sense because if it's meeting new highs then for
the most part it's for good reasons because it's got a great product, it's got great
management, it's got great sales and earnings increases and so when you start to digest
that and really read the material, it does start to make sense but it's hard to accept
in the beginning.
In addition to the new high list, investors' business daily stock tables have a column
that lists each company's 52-week price high.
If a company has hit a new price high during the trading day, the column will show a bold
faced NH.
If the stock is trading within 10% of its 52-week high or is up one point or more, part
or all of the column will be bold faced.
Another unique feature of IBD is the stocks in the news section.
Each day these mini graphs profile stocks trading at or near a new 52-week high.
These graphs are valuable because they show you many key fundamental and technical characteristics
that allow you to objectively evaluate a stock's performance.
But new price highs were just one of the new characteristics we found in all the greatest
market winners.
Most always the company had a hot new product or service, sometimes it even had new management.
These entrepreneurial companies create most of the growth in what we call the new America
and can represent tremendous opportunities for you.
The new America page in IBD profiles three of these not so well known, fast growing young
companies each day.
Companies that are marketing new products, new services, and applying new management
concepts that could cause the price of their stock to advance.
The new America page is an excellent feature that can help you locate future market leaders.
Many subscribers cut this page out and start their own library of newer companies that
could become big market leaders.
The new America section is extremely valuable and I think a lot of people miss the value
there because one of the tenets of the canceling system is you want to find out what's new,
what's hot about a particular company, what are they doing that's different that's going
to set them ahead of the pack, set them apart.
And I think the new America tries to focus on emerging opportunities, emerging companies,
growth companies.
This is how you get the heartbeat of America.
The next letter in CanSlim is S which stands for supply and demand or the number of shares
outstanding.
Supply and demand applies to all goods and services including stocks.
When a stock supply is small and there's a significant demand for that stock, its price
will increase.
The number of shares outstanding is an indication of the possible supply of stock.
Companies with a large number of shares outstanding require huge buying to significantly move
their price higher.
But companies with a small to moderate number of shares outstanding can advance in price
more easily.
So it follows that you should primarily be looking for companies with a small to moderate
number of shares outstanding.
Our study showed that more than 95% of the greatest past market winners had fewer than
25 million shares outstanding just prior to making their biggest price gains.
And as a general guideline, you may want to mainly look for stocks with between five and
50 million shares of stock outstanding.
IPD has several sections where you can find data on both the supply and demand of stocks.
The stocks in the news section shows you the total number of shares outstanding in the
upper left corner of each mini graph.
The NASDAQ stock tables feature each company's float.
The float is the total number of shares outstanding minus the number of shares closely held.
A small to moderate float means a stock's available supply is limited.
If that stock is also experiencing strong buying demand, its price could rise rapidly.
But how do you identify big professional buying demand in a stock?
IPD stock tables list each company's volume percent change.
This vital information, which only IPD calculates for you, instantly tells you what stocks are
experiencing unusual buying or selling activity.
This column shows each company's trading volume in terms of the percentage above or below
the stock's average daily trading volume for the latest 50 trading days.
For example, if a stock's average daily trading volume over the last 50 days is 100,000 shares
and the stock traded 200,000 shares for the day, it would have a volume percent change
of plus 100%.
Stocks with a volume percent change of 50% or more are bold-faced, so you can quickly
spot issues with increased activity.
Without IPD's volume percent change figure, you aren't going to know whether a stock's
trading volume is higher or lower than usual.
This is absolutely vital information you need that you will not find in any other newspaper's
stock tables.
Another great way to identify stocks showing heavy buying demand is the stocks with the
greatest percent rise in volume table.
This special screen lists the company showing the largest volume percent change, so you
can quickly scan the stocks with the most unusual activity.
This is another valuable and exclusive part of IPD you should check out daily.
I credit my returns to the confidence that I've gained from the Investors Business Daily.
For example, I purchased a company called Converse Technology, which I found, I think
it was on the Computers and Technology page in the paper, and I had a 100% gain on that
stock in a little over a year.
Initially there were some losses while I was learning, but I've now recouped all those
losses and my account is breaking into new high ground.
My first success using the CanSlim approach was Stratocomp.
I had read about it in the New America section of the IPD.
One of my biggest winners in 1995 was a company called C-Cube Microsystems, and I made literally
a King's Ransom on that stock, and I first saw the chart in the paper.
It was right there, and it was a cup and a handle pattern, it was right there, and I
was recommending to my clients, one of my clients said, well I'm not going to buy that
stock, that's too high, it's at 25.
Well it then went from there to 140, and of course I'm sure it was way too high at 140.
Now let's move on to the next letter in CanSlim, the L, which stands for leaders or laggards.
Some investors are reluctant to buy stocks that are outperforming the market.
They hope to buy low and sell high.
But let me ask you, is a bargain stock really a bargain if its price performance continues
to lag behind the rest of the market?
What you should be doing is avoiding these so-called bargain stocks and buying stocks
with proven performance records that are leading the rest of the market.
The reason these stocks are leaders is because professional investors place a high degree
of value on them in the open market.
But how do you locate stocks whose price performance is leading the rest of the market?
IBD's relative price strength rank tells you how each company's stock performance has been
for the past 12 months compared to all other publicly traded companies.
Relative strength rank is shown on a scale from 1 to 99, with 99 being the strongest.
So a company with a relative strength rank of 95 has outperformed 95% of all other publicly
traded companies in terms of price performance of the past 12 months.
Our special market study proved that the average relative strength rank of the 500 greatest
market winners was 87 just before they made their biggest price gains.
So why would you ever want to buy or hold stocks with a poor relative strength number
in IBD?
When you're looking for stocks with the best potential for big market gains, you should
pick stocks with an 80 or higher relative strength rank.
You should also generally avoid small to medium sized companies with relative strength ranks
of less than 70.
Another factor when separating leaders from laggards is identifying the industry groups
that are currently outperforming the market.
IBD's industry price section shows you a list of 197 industry groups and ranks the
list by 6 month price performance.
This list makes it easy to identify the best and worst performing industries, so you can
concentrate on the top and avoid the bottom quartile groups.
Our new high list, which is organized by industries with the greatest number of stocks making
new highs, is another outstanding way of zeroing in on the 5 or 6 best industry groups for
possible current investment.
Another great feature which screens many of the best stocks is your weekend review and
it appears every Friday.
The next letter, I, stands for institutional sponsorship.
Institutions exert a tremendous influence on the market because of their size and buying
power.
Institutional investors, including mutual funds, banks, pension funds, and insurance
companies buy large blocks of stock and their purchases can move a stock's price up rapidly.
Institutions behave just like an elephant climbing into a bathtub.
They're so big, the water splashes all over the place.
They simply can't hide their activity.
IBD has several other ways of helping you keep track of a stock's institutional sponsorship.
The first is IBD's exclusive accumulation distribution ratings.
Located in the third column of the stock tables, accumulation distribution measures a stock's
price and volume changes over the latest 3 months.
It tells you if a stock is under accumulation, which means professionals have been buying
the stock or distribution, which means professionals have been selling the stock.
The rating scale is from A to E, with A and B indicating heavy to moderate buying, C representing
a neutral degree of buying and selling, and D and E indicating moderate to heavy selling
of a stock.
When you're looking for winning stocks, you'll probably want to look at stocks with an A
or B accumulation distribution rate and temporarily avoid D and E rated stocks.
In addition to the accumulation distribution ratings, the NASDAQ stock tables include the
number of mutual funds that own a particular stock.
This column appears once a week and it will tell you if there is at least some institutional
sponsorship in a particular stock.
The arrow up or down indicates whether the number of funds has increased or decreased
from the prior quarter.
A recent increase in the number of funds owning a stock may indicate a more favorable view
of the company by institutions.
Our mutual funds section daily lists eight different better performing funds and shows
their top ten holdings plus their largest new purchases and largest sells in the most
recently reported quarter.
The final letter in CanSlim, M, stands for the general market direction.
You can be right on all the other factors we've discussed, but if you're not right
on the general market, your chances of being successful go down.
Three out of four stocks usually follow the trend of the general market averages.
The general market page gets me into the market when the market's heading up and keeps
me out of the market when it's heading down.
I think you get a much better picture of where the market's going, what it's doing, what
you should be doing in reaction to that than you're going to get on any TV show by far.
You have to learn how to understand that page because even if the market isn't any good,
if you understand the CanSlim system and Bill's methods of timing the market and knowing when
the market's going into an uptrend and you're using the paper, you're not going to miss
the next bull market if you understand how to read the paper.
You'll want to learn how to interpret the major market indexes to recognize how the
market is behaving currently.
It's not necessary to try to predict the future.
You only need to understand exactly what the market is actually doing now.
Is the general market strong and under accumulation or is it under distribution and starting to
turn down?
Many of the greatest winners of the last 40 years began their biggest price moves at
the very beginning of the new bull market when most investors were uncertain, fearful
and afraid to invest.
Other winners began their super price moves as the general market quickly emerged from
a short or intermediate term downtrend.
That's why it's absolutely critical for you to quickly check our general market indicators
page every day, even if you're not currently invested.
Typical bear market corrections last only 6 to 9 months and you positively want to always
be there when the market finally turns to take full advantage of all the new emerging
market leaders.
To do this properly, you should learn to use the follow through day concept described in
my book, How to Make Money in Stocks, because it rarely ever misses the early beginning
stage of each new bull market.
To help you decipher the general market trend, IBD provides large scale charts of the three
most widely followed major market indexes, the NASDAQ Composite, S&P 500 and the Dow
Jones Industrial Average.
These graphs are shown one above the other so you can detect price divergences at key
turning points.
A top on the daily Dow, S&P 500 or NASDAQ usually occurs when the index goes into new
high ground and on several different days shows an increase in volume from the day before,
but price action stalls or shows either much less progress than the prior day or actually
closes down.
We refer to this as heavy volume without further price progress up.
This signifies distribution in the market index.
Once the particular market average turns into a downtrend, at some level it will finally
rally.
You don't buy on the first or second day of the attempted rally because you can't be sure
if the rally will follow through or not.
Therefore, you watch each attempted rally closely to see if it can follow through by
showing real power and strength on any day, usually between the fourth and twelfth day
of the attempted rally.
The power and strength on a true volume follow through day will show one of the indexes being
up 1% or more and the volume increasing from the prior day.
Now that you know the characteristics to look for in winning stocks, you need to have a
method of interpreting a stock's price and volume pattern.
That means you need to learn how to read a stock chart.
Stock charts are invaluable tools that let you determine if a stock is under accumulation
and acting right or if it is under distribution and behaving in a questionable manner.
This can give you a big advantage, especially if you limit your selections to securities
with great earnings and good institutional sponsorship.
If you think chart patterns are not valuable, tell that to your doctor the next time you're
in for a checkup and he or she wants to give you an EKG.
Tell them that you just don't believe anyone can look at wiggly lines on a chart and tell
anything of real meaning.
Our research study analyzed the price patterns of all the top performing stocks and we determined
that there were specific price patterns that existed in these stocks prior to making their
biggest price moves.
We found several winning price patterns.
The first pattern is known as a cup with a handle.
It's called that because the shape of the price pattern resembles the outline of a cup
when viewed from the side.
Chart patterns usually last from 7 to as many as 65 weeks, but most last 3 to 6 months.
The percentage correction from the peak in the price pattern to the bottom of the cup
is generally 12 to 33 percent.
The handle area can cover a period of one or two weeks, but it is usually somewhat longer
and has a downward drift along the low price areas of the handle.
The trading volume along the low points of the handle usually dries up or declines, which
means there is not much stock around for sale.
Another winning price pattern is called a flat base.
The flat base usually occurs after a stock is advanced off a cup with a handle pattern.
In a flat base pattern, the price of the stock moves sideways in a tight trading range for
about 5 to 7 or 8 weeks and does not decline more than 10 or 15 percent.
The double bottom price pattern is the last winning pattern you should learn to identify.
This pattern resembles the letter W. It's important to note that the second bottom of
the W usually goes below the first bottom to shake out the stock's more timid owners.
The correct time to buy a stock in all of these patterns is called the pivot point or
the point at which the stock breaks out of its base.
This usually occurs at or near its 52 week high.
The pivot is usually the peak price in the handle part of the cup with handle pattern.
The trading volume for the day should increase at least 50 percent when the stock breaks
out and goes through the pivot point.
Until now, we've been discussing how to locate winning stocks with IBD, but once you purchase
a stock, how do you know when to sell it?
There's a story I always tell about how you should manage your portfolio.
Suppose you owned a dress shop and you bought an even number of red dresses, yellow dresses,
and green dresses.
After a month or so, say you find out that you sold all the red dresses, half the green
dresses, and none of the yellow dresses.
Do you say to yourself, yellow is my favorite color and I just know they're going to sell,
so let's buy some more of those?
No.
You say, let's have a sale and get those dogs out of the store.
Let me put my money back into the red dresses that are in big demand.
Is this the way you manage your own portfolio?
You cut back on stocks when they're not working and follow up and add to the better acting
investments.
When do you cut losses and when do you lock in profits?
By using CanSlim to select your stocks, you're trying to buy the right stocks at just the
right time.
But what happens when you may be wrong?
You should have a way of protecting yourself when you may have made a mistake.
You need a rule that limits your losses in any one stock.
There's a story that illustrates how rapidly losses can build.
There was this little kid walking down a country road and he comes upon a farmer.
This farmer is hiding behind a bush and he has a box propped up on one side by a stick
with a string tied around it.
A trail of corn leads into the box.
Little kid asks the farmer, what are you doing?
I'm catching turkeys.
I've got 11 turkeys in the box and as soon as the 12th one goes in, I'm going to pull
the string and capture all these turkeys.
Well, while they were talking, three turkeys walked out.
The farmer said, I can't pull the string now.
I had 11 and I've only got 8.
As soon as some of the turkeys go back in, I'll pull the string.
As they continued talking, two more turkeys walked out.
Well, the farmer couldn't accept 6 when he had 11 and then another two walked out.
Well, I'll wait until one more turkey walks back in and you know what happened.
The last few turkeys walked out and the farmer went home empty handed.
In managing your portfolio, do you ever count turkeys?
This rule about cutting losses in stocks should be strictly applied or you could eventually
suffer some serious losses because all stocks are speculative and involve risk.
Remember, there are no good stocks.
They're all bad.
All stocks are bad unless they go up in price.
The rule I suggest is to always sell a stock if its price drops 8% below your initial purchase
price.
You're not going to be right every time and you don't have to be right all the time to
make money investing.
By setting a strict 8% sell rule and never making exceptions, you have a much better
chance of keeping your losses within reason.
The 8% rule applies only to cutting actual losses where a stock drops 8% below the price
you paid when you bought the stock.
For example, if you were up 30%, you wouldn't necessarily sell just because you dropped 8%.
You're ahead and you have leeway for the price to fluctuate as a normal correction typically
exceeds 8%.
We learned through our study that if you buy your stock at the right time, it should not
go down 8%.
You may have tried a method similar to this where you've cut losses at 8 or 10%.
What's typically happened to you?
At least half the time the stock goes back up in price and you're upset.
But were you really wrong because you cut your loss at 8% just because the stock went
back up in price?
Did you buy fire insurance on your house last year?
Did your house burn down?
If it didn't, were you upset because you wasted your money?
Why did you buy fire insurance in the first place?
Because you knew your house was going to burn down?
No.
It was to protect yourself against the remote possibility that you might suffer a catastrophic
loss you couldn't recover from.
It's the same with cutting losses on your investments.
You're merely taking out small insurance policies to protect yourself against significant losses.
This 8% loss cutting rule does not apply to stock mutual funds, which are widely diversified
and are much better able to recover when the market averages finally turn up.
In addition to a strict rule for cutting losses, you need to know when to sell a stock when
you're right and have a worthwhile profit.
One simple rule is to consider selling just a few, but certainly not all of your stocks
if they go up 25% from your original buy point.
The exception to this rule would be a powerful stock that increases 25% or more in only two,
three, or four weeks.
You may want to hold that stock longer if it's a quality growth situation with good
sponsorship to take advantage of a possible further price increase.
You also want to hold for more than 25% the selection you believe is your very best stock.
You could also consider moving your sell point up from 8% below your purchase price to the
buy price if your stock has increased 10% or 15%, but it's not necessary to continue
to follow a stock up by raising stop loss points.
Once you're really ahead, you don't want to be sold out on some short-term correction.
You should consult Chapter 10 in my book, How to Make Money in Stocks.
It outlines many of the different rules and guidelines for selling a stock on the way
up while you still have a good profit.
I'd like to provide a word of caution at this point and tell you that the process of selecting
stocks using the canceling method is not something that can be learned overnight.
Like any skill, it requires practice to become really proficient.
It's really no different than playing the piano or playing golf.
The more you practice, the more skillful you'll become.
You won't always be right in your stock selections and you shouldn't get discouraged.
Let me talk a bit now about mutual fund investing.
Mutual fund investing has become very popular, but believe it or not, many people investing
in some of the best performing funds can lose money by selling and switching out of the
fund during general market corrections.
Mutual funds should be at long-term holding to let you benefit from compounding over many
years.
With as little as $250, you can get into mutual funds and start from there and add on to that
each year.
If you don't have the time to devote to stocks, there are mutual funds and they double maybe
every five years and so $20,000 in five years can be $40,000 and $40,000 will turn to $80,000
and $160,000 about every five years.
So mutual funds is another way to go if you don't have time to invest in stocks.
IBD makes it easy to identify top performing funds.
Our fund tables show you the 36-month performance rank, which calculates a fund's total return
performance and compares it to all other funds.
A letter grade is assigned to each fund based on its percentile ranking.
Funds in the top 5% receive an A-plus ranking.
Top 10% funds are ranked A, all the way down to the poorest performing funds, which are
in the bottom 70% and are given an E-ranking.
Generally speaking, funds with a B-plus or higher ranking are your better funds.
I turn to section B of the Investor's Business Daily.
It's the first thing I look at in the morning with my coffee just to kind of keep track
of where mutual funds are going and what the managers are doing.
Time after time, these same funds keep showing up in the top 5% and that's where my research
begins.
Basically I look at the A-plus and then I start making my decisions from there.
In addition to these fund rankings, IBD's mutual funds section provides graphic displays
of eight top performing funds.
You'll see what some of the best funds in the business have bought and sold.
It can be a solid source of new ideas.
We also provide lists of the best performing funds in the past 3, 6, 12, and 36 months.
I'd like to now show you how I go through the newspaper to find new investment ideas.
Along with stocks in the news, the volume percent change tables, and the new high list
which we've discussed earlier, I also look at the following IBD exclusives.
I skim the front page headlines and check the day's major news stories.
National Issue.
This feature looks at some of today's most talked about issues from a perspective that's
difficult to find in other mainstream media.
To make a long story short, this is one of the better features in the paper for the busy
person who has limited reading time.
Each day we provide you with over 150 stories presented in a brief, no-nonsense manner.
This page will give you all the important business news you need to know without all
the fluff found in other papers.
The New America.
Here you'll find profiles of three fast-growing newer companies.
Many of these companies are creating growth and opportunity for investors.
Computers and Technology.
We write about the trends, people, equipment, and software that are revolutionizing the
way we all do business.
The Economy.
The economy provides all of the national economic news that could potentially affect the markets
and your business.
You'll find articles on the Fed, labor reports, GDP data, and many other crucial topics concerning
the economy.
Now I'd like to answer some of the most widely asked questions from our readers.
For a person who is very busy, how much time per week should I devote to doing research
and keeping up on the market, as well as all the business news?
How good do you want to be?
An hour on the weekend and 30 minutes each day reading IBD should be enough to locate
new ideas and keep track of the general market.
I'm a new investor just getting started.
What can I do to jump start the process?
Get my book and read it a couple of times.
Take notes in it.
We have a number of audio cassettes you also could listen to.
You don't need a lot of money to get started.
Just get in, get your feet wet, and make some decisions.
This will help you gain valuable experience.
What is more important when determining what stocks to purchase, a stock's earnings or
price action?
The best situation is to always have both strong price performance and strong earnings.
What you want to see is at least an 80 EPS and an 80 Relative Strength Ranking.
You talk a lot about the importance of looking at charts for price patterns.
Where can I find stock charts?
There are several good sources for stock charts.
First, I take a look at the stocks in the news section in IBD each day.
It's a great place to find stocks emerging out of bases.
Our sister publication, Daily Graphs, offers a weekly chart service of over 2,800 stocks.
Each Daily Graph provides almost 70 pieces of valuable fundamental and technical information.
What should I look at in IBD during a correction or bear market?
During a correction or down market, it is critical to look at Investors Business Daily's
general market page every day.
By analyzing price and volume changes in the major market indexes, you can be much more
certain you won't miss the eventual big market upturns.
You should never cancel your IBD subscription during a down market, even if you're out of
the market, because IBD's general market page will tell you when to get back in, and
really big money is always made at the beginning stage of each new bull market.
Other features I look at in this type of market are stocks in the news, the new high list,
and stocks with the greatest percentage change in volume.
When the next big winners make their moves, this is where you'll spot them first before
it's too late to act.
You'll also need to look at the industry price page every day.
Once the market begins a new uptrend, you should know what industries are outperforming
the rest.
Remember, during a down market, the next round of big market winners are building new base
patterns and important leadership.
You don't want to miss out when the market turns, and these stocks begin to break out
and run up rapidly.
Not being disciplined and failing to cut losses, buying low priced, low quality stocks, averaging
down in price when buying, and fighting the trend of the market.
The ideal number of stocks depends on how much money you have to invest.
You don't need a lot of money to start, you can actually begin with as little as $500.
If you have under $10,000 to invest, two or three stocks would be about right.
If you have $500,000 or more, you might want to own six or seven stocks.
Overdiversifying and owning a large number of stocks is time consuming and it prevents
you from focusing on the absolute best stocks.
Most individual investors simply cannot keep track of a large number of stocks.
It's usually better to concentrate on a more limited number and watch them very carefully.
Although many investors feel price earnings ratios are important, our 40 year study of
the greatest market winners revealed no important correlation between price earnings ratios
and stock performance.
PEs were not a cause of stock advances.
Let's talk about this concept of valuation.
Let's say you are the owner of your local baseball team.
You're an off season and you want to improve your team.
You can spend your money on 100 or 300 hitters.
You don't want to buy all those 300 hitters, they cost millions of dollars a year.
Their PEs are way too high.
You wouldn't pay those ridiculous prices for those 300 hitters, would you?
Nobody's worth that kind of money.
Let's instead load up on a whole bunch of 100 hitters.
They aren't so expensive and their prices and PEs are more reasonable.
They're real bargains.
How many games are you going to win?
When the bases are loaded in the bottom of the ninth inning and the game's tied, who
do you want to send up to the plate?
Your 100 hitter or your 300 hitter?
Why do 300 hitters make the money they do?
Because they're proven producers with a proven record.
It's the same with stocks.
It's all in auction marketplace and everything sells for what it's worth at the time.
Is it important for a stock to pay dividends?
Many of the best growth companies do not pay dividends.
They reinvest their earnings back into the company.
Investors looking for strong growth companies should not be concerned with dividends.
The greatest gains will come from capital appreciation rather than dividend payouts.
I've seen many investors chase high dividend stocks only to see them come down 30 or 40%
or more.
People sometimes rationalize that they're okay because they believe they're long-term
investors and they're still receiving their dividends.
But if you receive a 3% dividend and your stock has gone down 30%, that's a big fat
27% loss.
Dividends won't make up for big losses you could experience because you perched the wrong
stock.
I hope that by now you're all convinced that Investor's Business Daily is a powerful information
tool you simply can't do without.
But we don't plan on just stopping there.
We're continually making improvements to the content of IBD and we're committed to providing
our subscribers the very best educational support in the industry.
Our investment library offers a wide variety of books, tapes, and charts designed to help
you better understand the CanSlim method, buying and selling stocks, mutual fund investing,
and the general market.
It also carries my book, How to Make Money in Stocks, which you may have received with
your subscription of one year or more.
Be sure to read it.
Don't let it sit on the shelf because it could help you save or make thousands of dollars.
We also have an educational hotline with staff trained to answer any questions you may have
about the newspaper and CanSlim.
And on the internet, we provide an investor education course that could help you learn
how to locate winning stocks using IBD.
We're here to help, so if you have comments or suggestions on how to improve IBD, please
write our call.
If you have a success story you'd like to share, we want to hear about that too.
And if you have friends and relatives who could benefit from IBD, we'd like to send
them two weeks on us with no obligation.
Just fill out the referral card enclosed in this package and drop it in the mail.
We'll handle the rest.
Remember, successful investing is not the easiest thing to accomplish, but with persistence,
practice and hard work, it can become one of the most rewarding.
Now it's up to you.
It's my money.
I can hire as many mutual fund managers or stockbrokers as I want to, but they're not
as interested in my money as I am, and I have to have the knowledge to take care of
my money and our portfolio, and I feel like I can do that with more confidence with the
information that IBD provides to me daily.
I think the most important things that I would say to somebody new is to just stick with
it, be patient, cut your losses so that you have money once you do get it all figured
out.
Investors Business Daily is helping me ensure my children's future.
I don't see how in the world you can get a confident start, have a chance of getting
the courage you need to make investments unless you start reading Investors Business Daily
every day and learn how to use all of the information in that.
I would have to say if you were going to pick one thing that changed my life, it would have
to be that paper.