Tuesday, March 17, 2009

David Ryan: Market Wizard

Let's just get one thing on the table to start... the subtitle of the David Ryan interview is "Stock Investment as a Treasure Hunt."

Anyway, I didn't realize this at first, but it was a good plan to profile O'Neil and Ryan in quick succession because Ryan works for O'Neil and is a disciple of the CANSLIM method. In fact, there seems to be absolutely no daylight between O'Neil and Ryan when it comes to trading style. Still, this is a great interview and it avoids being repetitious because Ryan fleshes out the stock selection process under CANSLIM quite nicely.

Ryan also offered a whole list of good books to read. I am going to list them here but not link them, as I plan on signing up for the Amazon Associates program and I ask that you buy them through the widget I'll have up by the end of the week. Of course, you should already be reading Market Wizards...

So, here goes, David Ryan's reading list...

William O'Neil, "How to Make Money in Stocks"
Nicholas Darvas, "How I Made Two Million Dollars..."
Edwin Lefevre, "Reminiscences of a Stock Operator"
Jessse Livermore, "How to Trade in Stocks"
Richard Love, "Super Performance Stocks"
Kermit Zieg, "Profile of a Growth Stock"
Marty Zweig, "Winning on Wall Street"
Stan Weinstein, "Secrets for Profiting in Bull and Bear Markets"
Frost & Prechter, "Elliot Wave Principle"
Beckman, "Super Timing"

Again, since Ryan is using the CANSLIM method, timing the entry is of utmost importance. He states that if the trade is going to work, it most often begins to work immediately. If the trade starts to fail, meaning the stock re-enters the base from which it was breaking out at all, Ryan sells half his position.

Because he is so quick to take a loss, Ryan only has a gain on a trade about 50% of the time. But as he explains, he is still able to turn a pretty good profit...
The maximum loss I allow is 7 percent, and usually I am out of a losing stock a lot quicker. I make my money on the few stocks a year that double and triple in price. The profits in those trades easily make up for all the small losers.
Ryan is a proponent of keeping a trading journal and says that the most important advice he has for new traders is to learn from their mistakes. Only by understanding why you entered and exited a trade can you pinpoint trading errors and learn from them.

I'm not going to outline the CANSLIM method since it is well-known and detailed elsewhere, but Ryan does walk Schwager through his stock selection process and I found it very interesting.

For Ryan, the most important aspect of CANSLIM is the relative strength reading. That's what he starts with and he says he often buys stocks with a 99 relative strength rating which means at the time of his purchase, they are outperforming 99% of all other stocks trading on either the NYSE or NASDAQ. This is why CANSLIM is sometimes coupled with the phrase, "Buy high, sell higher." They are not interested in "beaten-down" stocks or in issues trading below $10 a share.

After relative strength, Ryan is most interested in the EPS rating. For this, he compares the near term earnings performance of a stock with its 5-year average earnings performance.
I look at the five-year earnings growth record and the last two quarters of earnings relative to the previous year's levels. The quarterly comparisons show you if there is any deceleration in the earnings growth rate. For example, a 30 percent growth rate over the last five years may look very impressive, but if in the last two quarters earnings were only up 10 percent and 15 percent, it warns you that the strong growth period may be over.
All throughout the stock blogosphere, you'll find gay dudes and possibly women posing as men, drawing fib lines and coming up with price targets for their trades. That's great, but I like Ryan's "fast and loose" method instead... witness the following exchange between Schwager and Ryan. I wish I could say it was a "heated exchange" but alas, it is quite dull.

Schwager: Do you pick an objective on the stocks you buy?

Ryan: No. I usually wait until the stock runs up, builds another base, and then breaks down. That is when I liquidate.

Schwager: Do you have a pumpin' sex life?

Ryan: Yes. I go to bars, meet women and get them drunk. That is when I take them home to introduce them to my "pet snake."
And let me mention one last time that if there is a criticism to be made about the CANSLIM method, it's that you'll often get stopped out of positions. So if you don't let your winners run, you will ultimately have a difficult time. Ryan offers the following clue to help investors avoid getting "whipsawed."
You can tell a lot by volume. If the volume doubles one day and the stock moves to a new high, it is telling you a lot of people are interested in the stock and buying it... [Conversely,] if the stock moves to new high ground, but the volume is only up 10 percent, I would be wary.
Altogether, I really enjoyed re-reading the O'Neil and Ryan interviews. It got me thinking about CANSLIM again, and how it will be nice to swing trade again once the market settles down a bit. Perhaps I'll resubscribe to the IBD afterall...


mdawsz said...

I'm impressed how David Ryan doesn't even skip a beat when Schwager suddenly changes the topic of conversation. Schwager is a master of the interview. Both are true professionals.

Anonymous said...

It feels like the market has been such a brutal place to be for so long. The canslim method will work again - it's just a matter of finishing this bear market.