Reap the Rewards of Time-Tested Tactics

Physician's Money Digest, March15 2004, Volume 11, Issue 5

Are you a doctor who is skittish about investing?If you're among the 80-millioninvestors in the United States who lost 50%to 80% of their savings since 2000, youprobably are skittish. With the recent market upturn,things are looking brighter, but gone is the investorconfidence of the 1990s. Most physicians are wonderinghow they can participate in the market's emergingrecovery without getting burned again.

Investor's Business Daily

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TheSuccessful Investor

To address these issues, William J. O'Neil, thefounder of (; www.investors.com), has just released a new book (McGraw-Hill; 2003). O'Neil's latestbook examines why the market unraveled, thepotential consequences, and what investors should doto succeed in future markets.

Investor Alphabet Soup

The Successful Investor

draws on a strategy forinvesting that O'Neil first conceived back in 1962. Bystudying performance records of great stocks, he wasable to create a checklist of common characteristicsthat stocks exhibit just before they make their biggestgains. O'Neil dubbed this strategy CAN SLIM, whichis an acronym for:

Current earnings per share—Current earningsshould be up at least 25% or more (the higher the better)and in many cases accelerating in recent quarters.Quarterly sales should also be up 25% or more or acceleratingover previous quarters.

Annual earnings increases—Annual earningsshould be up 25% or more in each of the past 3 years.Annual return on equity should be 17% or more.

New products, new service, or new management—One of these factors should be fueling a company'searnings growth. The stock should be able tomake a new high in price after a period of price consolidationand base building.

Supply and demand—Shares outstanding can belarge or small, but trading volume should be big as thestock price increases.

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Leading stock in a leading industry—A stock'sRelative Price Strength Rating (an scale) should be80 or higher. In other words, a stock with an 80 relativestrength is outperforming 80% of all stocks in terms ofits relative price strength.

Institutional sponsorship—Invest in stocks showingincreasing ownership by mutual funds in recent quarters.

Market indexes—The Dow, S&P 500, or Nasdaqshould be in a confirmed uptrend, since 75% of stocksfollow the market trend.

Over 40 years later, CAN SLIM continues to be analyzedand refined. According to an independent, realtimestudy by the American Association of IndividualInvestors (AAII), the CAN SLIM strategy produced a350.3% compounded 5-year return between 1998 and2003. "CAN SLIM has been one of the most consistentand strongest performing stock selection systems duringboth bull and bear markets," AAII wrote. Visitwww.investors.com/canslim for more information onthis investment strategy.

Sturdy Building Blocks

TheSuccessful Investor

With CAN SLIM principles as its foundation, delves into today's market and thelessons learned since March 2000. The author providesthe following pointers:

  • Avoid the buy low, sell high trap. Everyonewants a bargain, O'Neil admits, but he cautions thathistory doesn't agree with buy low, sell high. Yearafter year, studies show that stocks making new pricehighs actually tend to go higher, and stocks makingnew price lows tend to go lower. O'Neil says cheapstocks are cheap for a reason.
  • Establish sell rules. Just as important as knowingwhat and when to buy is knowing when to sell. O'Neilsays you should consider selling a few of your stockswhen they are up 20% to 25% from your purchase priceand should cut all losses at no more than 7% or 8%. Hecalls this the "3-to-1 profit vs loss ratio," since the sellprice profit target is roughly 3 times the mandatory lossrecognition point. Your best performing stocks could beheld longer. By sticking to this ratio, "you can be righton only 30% of your stock purchases and wrong on70% and still not get into serious trouble."
  • Stay in cash during bear markets. O'Neil'smoney management group had only 10% invested instocks from March 2000 to 2003. The rest was inmoney market funds.
  • Limit the number of stocks you own. If you buya new stock, force yourself to sell a stock. O'Neilcompares managing a portfolio to tending a garden.The more stocks you own, the greater chance forweeds to grow if you don't stay on top of them all.O'Neil says he currently owns only four or fivestocks.