Investors Business Daily, a well respected paper, occasionally publishes their 20 rules for investment success. Following many of these rules seems to me like it would make the investor pretty unsuccessful.
Rule #2: Recent quarterly earnings and sales should be up 25% or more.
- So when a company has a good quarter and the stock shoots up, pull the trigger baby and buy at the overinflated price.
Rule #3: Avoid cheap stocks. Buy stocks selling for $15 to $100 or more.
- If a company trades below net cash but is at $10 a share it should be avoided at all costs. Cheap stocks are bad (Clyde Milton Listen Up) — buy expensive stocks.
Rule #4: Learn how to use charts to see exact sound bases and exact buy points. Confine buys to these points as stocks break out on big volume increases.
- Find a company, no matter the valuation where you can see an EXACT buy point on the chart. Then when it gets really popular and everyone wants to jump in that’s your time to buy. Don’t buy when it is undiscovered and cheap otherwise you may have to wait more than a few days for price appreciation.
Rule #5: Cut every loss when it’s 8% below your cost
- When a cheap stock gets cheaper get rid of it.
Rule #7: Buy when market indexes are in an uptrend
- Buy when the market is getting expensive
Rule #8: Read IBD’s Investor’s Corner and Big Picture
- Learn how to time the market and read Investor’s Business Daily
Rule #9: Buy stocks with a composite rating of 90 or more and a relative price strength of 85 or higher.
- Buy stocks that are popular among your peers
Rule #14: Don’t buy stocks because of dividends or P/E ratios. Read a story on the company.
- Buy a good story, valuation is meaningless.
Rule #16: Invest mainly in entrepeneruial New America companies
- Buy high tech stock with no proven track record. Buy a good story, Let’s face it Coca-Cola is just boring.
Rule #18: Don’t try to bottom guess or buy on the way down.
- Buy on the way up as the stock gets more expensive.
Rule #19: Find out if the market currently favors big-cap or small-cap stocks.
- Buy what the market favors
Rule #20 Do a post-analysis of all your buys and sells. Post on charts where you bought and sold. Evaluate and develop rules to correct your major mistakes. It’s what you learn after you think you know what you’re doing that’s vital. That’s how you improve your results.
- It doesn’t matter where the stock goes when you own it but what happens after you sell.
Eric Schleien
zachary
teenmoney
josh4580
Carlton
IBD’s rules generally are rules to loose your money. But there are still some value, especially for momentum traders.
IBD is for the momo crowd. Momentum works, sometimes. I’ve known value investors that would use a momentum overlay to improve the timing of their buys and sells. That has some validity, if only because investors react slowly to new information.
It does not work for me. I like to buy things near their lows, and when relative strength is pretty poor, but where valuation puts the net fairly close below the current price. I also like buying strong companies in out-of-favor industries.
Keep up the good work. Value investing is very rewarding
David
RealMoney.com
Alephblog.com
Not to say that the newspaper isn’t worth reading, but I had only mixed success trying to trade this stuff.
It works great when small-cap growth stocks are the asset class of choice. It works horribly when nearly any other asset class is in favor.
From about ‘95 – ‘98, I devoted a quarter of my trading account to CANSLIM. I indexed the rest.
Let me say first, it was a very labor-intensive method of stock selection. To do the necessary homework, I found myself devoting 20 – 35 hours per week because, at the time, there were no online tools.
I got about 55% winners, 45% losers and very little rest.
First, it appears to me there is a cottage industry in fading those very breakouts which IBD urges you to buy.
Second, it’s very time and attention-intensive. The stocks it wants you in are incredibly volatile. You may have a perfect plan, but if you aren’t near a computer at that exact pivot point, the stock is gone.
Third, you get stopped out of a lot of trades. More times than I care to remember, I’d go long something, set my stop-loss only to have it hit within the hour.
Fourth, generally speaking, I’ve found that a pure chartist approach is often a panacea for people who are too lazy to do the homework. Charts can be valuable tools, but also, they can work just often enough to be self-reinforcing.
Indexing performed far better during the period I tested.
I would also point to the failure of the CANSLIM mutual fund.
Bottom line, I’d read the paper, but I’d never trade a live account with these methods again. They’re a waste of time and effort for the retail investor.
My approach is simple.
A stock comes on my radar from a variety of sources: CNBC, Fox, Barron’s, M*, IBD, WSJ, whatever.
1. I check it with M* to see how it’s rated, whether it’s rated, and its financials.
2. I check it’s story, history with wsj.com.
3. I do a stock checkup on investors.com.
4. I do a options check on investors.com and on my broker’s systems.
5. I check charts on stockcharts.com, where I look at RS, MACD and PnF charts as well as daily, weekly and monthly charts. Then I decide.
IBD influences, but doesn’t dictate how I trade, but I do try to cut my losses at 7% or 8%, which works for me.
Your comments are just biased. Numbers talk themselves. I have met many people who followed CANSLIM and increased their portfolio many folds.
Eric,
Are you making money in the market? If yes, have you been so on a consistant basis? The book you are referring to is actually a really good book. It’s not just his methodology, but a methodology used by many successful investors before him. I’ve been trading on wall st for over 1o years. Eric, and I mean this in the nicest way, I don’t think you have a clue what you’re talking about. Please do some research on a topic before making an opinion. Best of luck with your trading.