INTRODUCTION

CANSLIM METHODS BY WILLIAM J. ‘O’ NEIL

The CANSLIM methods look into fundamental, technical as well as the general market directions when making investment decisions. William J ‘O’ Neil came up with this investment modelling system based on an exhaustive study of the greatest stock market winners dating back to 1953. He found out that the greatest stock winners have these 7 common features which served as the basis for the CANSLIM methods. Each alphabet represents the criteria you need to look for in a stock. C for Current earnings per share(EPS), A for Annual EPS, N for New products, S for Supply and demand, L for Leader, I for Institutional sponsorship and M for Market.

Generally, the best part of this strategy is the letter ‘M’ which teaches you how to exit stock before the market crash. It teaches you chart reading on signs of institutions liquidating stock. Market crashes are caused by institutional investor selling of stocks, therefore it is important to know when they are accumulating or unloading stocks. This strategy is leading signal which provide clues that the market is going to crash (for example, the 2000 tech bubble, the 2008 housing bubble and after testing, can even detect the great depression during 1929) when there’s plenty of good news and everyone is so bullish about the market. No matter how good your stock analysis is, when the market crash explodes, it will sweep away profit from you if you bought stocks and holding. If you sell away stocks for no profit, still a minor loss but if you hold on even when the market crashes so hard, you end up losing all your capital. The worst-case scenario will be for those who trade derivatives like futures, naked options or CFDs. If you keep holding on to the bought stock during market crashes, you lose more than what you invested and could end up bankrupt. Therefore, this is the most important criteria that you should know before you even attempt to trade.

Like all strategies, there are no 100% sure win methods. Therefore this strategy also teaches you risk management on how to cut loss when you are wrong. It also teaches you when to take profits.

It also teaches you short selling using derivatives financial products. This means that you profit if the stock moves down in price instead of up.

CANSLIM methods are used in intermediate term investments, but not in short or long-term investments. Below shows you some example of the profitable trades using CANSLIM methods:

FIRST SOLAR INCREASED 807% IN 47 WEEKS

APPLE INCREASED 1418% IN 199 WEEKS

Both pictures are copy from WILLIAM J ‘O’ NEIL book “HOW TO MAKE MONEY IN STOCKS” deluxe edition. If you want to do a self study, please do visit this website  or read more from the book “HOW TO MAKE MONEY IN STOCKS” from WILLIAM J ‘O’ NEIL. Please note that the website does not teach you on the various chart patterns.Thus,it is advisable to purchase the book which has all the details. There’s also a book title “HOW TO MAKE MONEY SELLING STOCK SHORT”, this strategy is for use when the market is bearish and can only be done with derivatives financial instruments like CFD, options or futures etc.

IS IT A GOOD STRATEGY?

I started out using CANSLIM methods. My first buy was Potash Corp. Indeed I win money from this stock but sell off because I want to use derivatives options to trade in order to realise my get-rich- fast scheme. I continued using this strategy for almost a decade with options trading but it didn’t work out. I even deployed options spread trading. Options trading is a leveraged product in which you pay for the contract price. It is a very sophisticated derivative financial instrument. There’s also time expiry, therefore before my stock price made the move, the options has already expired. It was a very difficult strategy and to make things worst, I actually used up all capital in buying premiums for options. The risks I had was the capital I invested because I don’t short naked stock.  Neither do I exercise the options to buy the stock at full price. This means that either I win or lose, no cut loss. I was naive enough to think that I will be able to implement a strategy with 100% win. I did win over USD$2000 in a trade within 2 days using options trading but well you guess it, I loss back to the market and ultimately loss all my capital. I started to lose faith but with determination, to put it in a nice way, I continued to experiment on this 100% sure win method. This is actually going against the 8% sell rules in CANSLIM method. But because I was trading options and I purchase out of the money call options, highly leveraged which means even less than 8% drop could wipe out all my capital. This is an important lesson to learn and that’s to always have a cut loss plan when you are wrong.

Let’s talk about the CANSLIM methods. Indeed it is quite a good strategy to use if you learn and follow the rules especially cut loss. It is good because it is a combination of fundamental and technical analyses. William has found out that the greatest winning stocks have the following:

C – current earnings of 2 quarters of 25% increase,

A – at least 3 years of 25% increase in earnings annually, and

N – new products which can replace old products like Apple and Nokia.

S – supply and demand means heavy volume accumulations.

L – leaders means their RS rating of more than 75.

I – institutional sponsorship which means that there must be at least a few institutional funds that invest in this stocks.

M – for market, which helps you to detect whether the market is bullish or bearish. The last rule is about cutting loss at 8% below pivot buy points.

These are the criteria that you need to learn to use this strategy and also you must learn how to look at charts and buy point when it breaks above the resistance in heavy volume.

Resistance breakouts in heavy volume was actually developed by Jesse Livermore. William J ‘O’ Neil also has a book on how to short stocks. This means how to profit when there’s a bearish market by short selling derivatives. If you are someone who can hold stock for a few months, then this strategy is for you. It is quite a good strategy in my opinion. The only thing I feel that this strategy is not best is the fundamental analysis. Value investing, discounted cash flows, used by Warren Buffett among others, is a better option in fundamental analysis as compared to the CANSLIM method. Nevertheless, the letter M which represents market analysis is a good way of uncovering market corrections or market crisis which has been proven to determine market crisis when unsuspecting investors continues to trade. No bullish or bearish market has ever started without this signal in the letter M. But as usual, it’s not 100% accurate because there are many times where this signals shows bearish but market only down for a few days and resume it bullish market. Therefore, I incorporated another signal which is Beneish M score, Altman Z score and Piotroski F score to combine with CANSLIM letter M to determine directions of market.

If you want to go into this strategy, you would need to subscribe to IBD, as there are many types of subscription which gives you different information, the best to subscribe is IBD Leaderboard. This is because it screens out all the criteria in CANSLIM, the stock listed also has stock chart which shows you the buy entry point. It also shows you the directions of the market letter M. Other subscriptions might only show you few criteria in CANSLIM. Thus, the price of Leaderboard it is definitely well worth the price.

Although IBD is more established and sounds more effective, read up my website first before you decide. I deployed different methods of fundamental analysis because Warren Buffett’s discounted cash flows model is better than IBD fundamental analysis. And I don’t simply follow blindly just because Warren Buffett is considered as the world’s greatest investor, but because it indeed makes more sense to follow Warren Buffett after reading up a textbook entitled “INVESTMENT VALUATIONS” by Aswath Damodaran who is a Professor at NYU. Indeed, we should look out for good earnings in fundamentals but the problem with CANSLIM is that earnings per share are accruals accountings which means that part of the earnings are not realised yet meaning on credit terms from customer. Depreciations are also a non cash item which makes the earnings not what it may seems to be. Cash flows are cash realised and do not include credit terms which makes Warren Buffett valuations more realistic than earnings per share. Though cash flow can be manipulated by accountants but it is not as easy as the manipulation of earnings per share.