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Financial Literacy

Can This Newspaper Make You Rich?

Investor’s Business Daily (IBD) recently celebrated its 30th anniversary. And if you subscribe to this unusual journal – as much a computer printout as a business paper – you likely have much to celebrate too.
Investor’s Business Daily has a total audience of 333,000. The average reader is a 51-year-old college graduate with a household income of $244,615 and a net worth of $1.44 million. That’s pretty rarified company. So you might be interested in learning how to join them.
I’ve personally been hooked on IBD since I began reading it nearly three decades ago. The paper’s founder, William O’Neil – along with Warren Buffett, Peter Lynch, John Templeton, Van Tharp and William Bernstein – had a tremendous influence on the formation of my own investment approach. I can still remember how excited I got reading his book whose title said it all: How to Make Money in Stocks.
O’Neil’s story is an unusual one…
Born in Oklahoma City during the depths of the Depression in 1933, he studied business at Southern Methodist University and served in the U.S. Air Force before starting a career as a stockbroker at Hayden, Stone & Company. He later enrolled in Harvard Business School and, from his research, devised his well-regarded CAN SLIM strategy for analyzing stocks.

A Star’s Formula

It didn’t just make him the top-performing broker at his firm. It made him a multimillionaire. And he became passionate about sharing what he learned with others through a database and high-speed printing service that eventually evolved into Investor’s Business Daily.
What is CAN SLIM, exactly? It’s the acronym for his seven-step method for identifying promising growth stocks. Here is a brief summary:
C is current earnings. O’Neil recommends they be up 25% or more in the most recent quarter. As he rightly puts it, “There is absolutely no reason for a stock to go anywhere if the current earnings are poor.”
A is annual earnings. To ensure against buying a flash in the pan, he recommends that earnings also be up 25% or more for each of the last three years.
N is for new. Ordinarily, highly successful companies tend to be innovators. Apple, one of the best-performing stocks of the last 15 years, is a prime example. First it came out with the iMac, then the iPod, then the iTunes music store, then the iPhone, then the iPad. And, of course, several new iterations of all these products. Innovations drive sales. And robust top-line growth leads to heady bottom-line growth.
S stands for supply and demand. All other things being equal, it is easier for a smaller firm with fewer shares outstanding to show outsized gains. O’Neil’s research demonstrates that 95% of the companies displaying the largest gains in share price had fewer than 25 million shares outstanding.
L is for leader. If you’re trading for short-term gains, forget about the laggards. The best performers tend to hit new highs, over and over again.
I is for institutional sponsorship. Never forget that the vast majority of trading volume on the Nasdaq and NYSE is not individual investors like you and me but mutual funds, hedge funds, public and private pensions, endowments, and other institutions. You want to be buying the same stocks they’re buying. Otherwise you’ll be swimming against the tide.
M is for market direction. Although he insists he is not a market timer, O’Neil believes you should only buy stocks in a confirmed bull market since three out of four stocks follow the broad trend. I don’t fully agree with this philosophy, as some of the best buying opportunities come in corrections and bear markets. But history shows that your short-term risk is less in a rising market.
I also disagree with some of O’Neil’s other strategies, especially his insistence that you cut any loss at 7% to 8%. (Practical experience shows this is too tight a stop.) But his no-nonsense approach is sensible and battle-tested.
So congratulations, IBD, on your first 30 years. This subscriber wishes you many more…
Good investing,
Alex


About

An expert on momentum investing, value investing and investing based on insider activity, Alex worked as an investment advisor, research analyst and portfolio manager on Wall Street for 16 years. He now runs the wildly successful Oxford Communiqué, ranked as one of the top investment newsletters by Hulbert Digest for more than a decade. He is also the author of four national best-sellers: The Gone Fishin’ Portfolio, The Secret of Shelter Island, Beyond Wealth and An Embarrassment of Riches. He shares his wisdom in his free daily e-letter, Liberty Through Wealth.

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