Invest to Grow Your Money Using Time-Tested Rules
Backed by time-tested rules for when to buy, sell and hold, this three-step approach can help you navigate whatever the market indexes do. Depending on current market conditions, you'll see how these rules and this routine apply to stocks like NVDA, TSLA, META, AMZN, MSFT and GOOGL.
The same guidelines outlined in this routine can teach you how to invest in IPOs to buy and watch. So, while tracking household names like Microsoft stock and Apple, use this same approach to monitor IPO Leaders.
The routine below walks investors through three basic steps to help you grow and protect your money. And you'll find the screening tools and stock lists you need to quickly and confidently follow those steps.
Investing in stocks based on sound rules and stock ratings will help you stay profitable, protected and prepared in any market environment.
Find And Track the Best Stocks to Buy and Watch
This three-step process also helps you track and handle strong market uptrends(rising), as well as bear markets (falling), choppy periods and times of sector rotation. This is vital in learning how to invest successfully. During bullish (up) as well as bearish (down) cycles, growth stocks, tech stocks, energy plays, retailers, industrials and other sectors will come in and out of favor on Wall Street.
How To Invest: 3-Step Investing Routine
1. Check Current Market Trends with The Big Picture and Market Pulse
The first step in how to invest successfully is to know what kind of market we're in right now. Is it time to buy stocks, or is it time to play defense and protect your profits?
Find out by checking the Market Pulse. Find the recommended market exposure level to help manage your risk based on the current market environment.
This five-tiered approach to market exposure ranges from 0%-20% in bear markets or corrections, all the way up to 80%-100% in robust bull (growth) markets.
2. Find The Best Stocks to Buy and Watch
The best-performing stocks typically display seven common traits in the early stages of their big moves.
CAN SLIM is an investment strategy designed by William O'Neil, the founder of Investor's Business Daily, which aims to identify high-growth stocks with strong momentum. It stands for seven key characteristics that O'Neil identified as common among the best-performing stocks in the market
The seven traits relate to CAN SLIM stocks. What is CAN SLIM stocks?
The seven letters represent the most important elements that go into the success of a stock. That's been determined from decades of studies of the biggest stock market winners in past bull cycles.
How To Identify CAN SLIM Stocks
Here's how CAN SLIM stocks are characterized, letter by letter:
C — Current earnings. One of O'Neil's most important findings was the power of high earnings growth. Every winning stock has it, and research specifically found that at least a 25% quarterly increase in earnings per share separated the winners. So, look for such a gain in EPS in the company's most recent one or two quarters. Sales growth also should be at least 25% in the most recent quarter.
A — Annual earnings. A fast increase in earnings can be short-lived. So, choose those with at least a 25% rise in the past three years. Strong sales increases are also preferred.
N — New products, new trends, new highs. It's no coincidence that history's winning stocks shared a breakthrough product or service. Or, they were part of an industry wave. For example, homebuilders soared during the housing bubble of 2001-2005. New highs relate to buying stocks when they rise to new highs from proper chart patterns, such as the cup with handle, saucer, double bottom or flat base.
S — Supply and demand. This also relates to stock charts, and specifically the importance of volume. The number of shares traded should be at least 40% above average when a stock clears a proper buy point. Volume also should be higher on up weeks while the base forms.
CAN SLIM Stocks: Leadership, Sponsorship, Market Direction.
L — Leadership. If you're aiming for the most successful stocks, be picky. Choose the No. 1 or No. 2 stock in its industry group in terms of fundamentals and share-price performance. With IBD Stock Checkup, finding the leaders is a breeze. They'll be the stocks with highest Composite Ratings, a tool devised to measure stocks by the main elements of CAN SLIM.
I -Institutional sponsorship. Stocks will increase in value when institutional investors accumulate shares. So, look for stocks with rising numbers of funds owning it, especially top-rated funds.
M — Market direction. A stock can have all the above traits, but if the general market is weak, it won't be able to rally. Most stocks, good or bad, will follow the market's direction. It's best to buy stocks when the market is in a confirmed uptrend, and don't buy when the market is under pressure or in a correction.
3. Evaluate Your Stocks and Plan Your Trades with Stock Checkup and Charts
What's the most effective way to maximize your profits and minimize risk? Always check both the company's "fundamentals" (e.g. sales, earnings, products and industry trends) and "technicals" (e.g. price and volume action, support and resistance in the chart).
That combination gives you a major advantage over investors who only look at one or the other.
Advantages and Disadvantages of CANSLIM
Let's delve into each aspect along with its advantages and disadvantages:
- Current Quarterly Earnings per Share (EPS):
- Advantages:
- Provides a snapshot of a company's recent financial performance.
- Strong EPS growth indicates profitability and potential for future growth.
- Disadvantages:
- Quarterly earnings can be volatile and subject to manipulation.
- Overemphasis on short-term earnings may lead to overlooking long-term prospects.
- Advantages:
- Annual Earnings Growth:
- Advantages:
- Highlights consistent growth in profitability over time.
- Demonstrates the company's ability to sustainably increase earnings.
- Disadvantages:
- Past performance may not accurately predict future results.
- High growth rates may be unsustainable in the long term.
- Advantages:
- New Product, Service, Management, or Highs:
- Advantages:
- Identifies companies with innovative strategies or offerings.
- New highs can signal market recognition and demand for the stock.
- Disadvantages:
- Innovation doesn't always translate into success.
- New highs may also indicate overvaluation or speculative trading.
- Advantages:
- Supply and Demand:
- Advantages:
- High trading volume on price increases indicates strong investor interest.
- Reflects market dynamics and potential for further price appreciation.
- Disadvantages:
- Volume can be driven by speculative trading rather than fundamental strength.
- High demand can lead to overbought conditions and eventual price corrections.
- Advantages:
- Leader or Laggard:
- Advantages:
- Investing in market leaders provides exposure to industry dominance.
- Leaders are better positioned to withstand market downturns.
- Disadvantages:
- Leading stocks may already be overvalued and subject to correction.
- Market leadership can change rapidly, leading to losses if not monitored closely.
- Advantages:
- Institutional Sponsorship:
- Advantages:
- Increasing institutional ownership validates the investment thesis.
- Institutional support provides liquidity and stability to the stock.
- Disadvantages:
- High institutional ownership can limit upside potential as institutions may exit positions.
- Relying too heavily on institutional activity may overlook retail investor sentiment.
- Advantages:
- Market Direction:
- Advantages:
- Investing in line with overall market trends reduces portfolio risk.
- Bull markets provide a conducive environment for stock appreciation.
- Disadvantages:
- Market timing is difficult, and false signals can lead to losses.
- Strong market conditions may inflate stock prices, leading to overvaluation.
- Advantages:
CANSLIM is a bullish strategy for fast markets, so it is not for everyone. The idea is to get into high-growth stocks before the institutional funds are fully invested.
The elements of CANSLIM can be read like a wish list for fund managers seeking growth, so it is a matter of time until the buying demand increases. The catch is that stocks that fit the CANSLIM strategy can be among the fastest to drop if the market direction shifts and those big-spending institutional investors begin switching to safe-havens.
CANSLIM can be a good fit for an experienced investor with high risk tolerance. These stocks cannot be bought and simply held as much of the value is being priced in for future growth. Any slowing in the growth trajectory, or the market as a whole, may result in the stock being punished. In summary, CAN SLIM offers a systematic approach to identifying high-potential stocks, leveraging both fundamental and technical analysis. Its advantages lie in its focus on earnings growth, innovation, market leadership, and market trends, which are key drivers of stock performance. However, the strategy is not without its limitations, including the potential for short-term volatility, overreliance on historical data, and the inherent difficulty of market timing. Investors utilizing CAN SLIM must exercise discipline, conduct thorough research, and remain vigilant to adapt to changing market conditions.