Here is an interview with Market Wizard and William J. O’Neil disciple David Ryan when he spoke with YTE’s Ben Power on Christmas Eve at the end of a tough, emotional and volatile 2011. He discussed how he has modified CANSLIM, his views on changing markets, his belief in the need for more regulation of computerized trading. This was an excellent and very informative interview for those struggling with CAN SLIM in this modern era of computerized automated trading.
Can you tell us what you’ve been up do since Market Wizards came out?
I was at William O’Neil & Co until 1998. When Market Wizards came out I had been at Willaim O’Neil and Company for 6 years and I ended up staying for another ten. So I was there from 1982 to 1998 – 16 years. O’Neil & Co decided to start a mutual fund in 1992 to help fund IBD (Investor’s Business Daily, a newspaper O’Neil launched) which was continuing to lose money. I managed that (the fund) for five years and after they decided to sell the mutual fund I started my own management company in 1998 and I’ve been doing that since that time.
Tell us about the fund.
It’s a small hedge fund with about 70 investors; friends, family, people who have seen me lecture. I don’t do any marketing and don’t do any cold calling. It’s really people finding me, and I just try to take the approach that I look at it as my own money in the market. I’m not trying to build some management empire. I’m keeping it low key and quiet.
How has the fund performed?
The partnership is up close to 300 per cent since inception versus 41 per cent for the S&P 500.
You’ve survived in the markets for three decades, while others have blown up or drifted away. What do you think explains your longevity?
My longevity stems from the fact that I try to control risk as much as possible. When the market starts down I sell quickly and don’t let the losses get out of hand. That might have hurt my returns and I might err on side of being too cautious but I have to remember I am managing people’s retirement money and their family wealth and the fund is not a place to be fully margined and taking all sorts of risk. You can do that in an individual account where it is only your money at risk, but not other individuals.
Did appearing in Market Wizards change your life at all?
I got some good notoriety from it. One of the things it’s helped with, maybe, is bringing in a few more clients. But there has really been no huge repercussions in terms of anything.
I talked with Jack Schwager (the author of Market Wizards) about a year ago. He said there was going to be a follow-up book, but I’m not sure what’s happened to that.
You famously offered to work for William O’Neil for free to get a foot in the door, why were you so keen to work for him?
I had seen him lecture before. That was before the newspaper. I had heard he’d done very well in the market. I started taking trial products to his Daily Graphs when I was about 16 years old, maybe even before that. I was fascinated with the market.
After being a runner on the Pacific Stock Exchange I thought ‘why not just work for someone who has done really well in the market?’ I walked up the front stairs and asked about a part-time job and an internship. I knew a little bit about the company and about their products and what he had done. I really wanted to learn. That was right out of college.
What was O’Neil like to work for?
He was nice. He was a workaholic. While I was there for 16 years I saw him take a vacation once. He was also very ethical and moral. He always wanted to do the right thing, and never wanted to do anything that could look like something wrong. He taught me a lot and showed me a lot. It was a really good experience.
What do you think makes O’Neil such a stand out as a trader?
He’s the best at taking the entire market, focusing it and bringing it down to one stock. Taking the whole market, 7000 stocks, and finding out which one was going to be the absolute winner and then putting all his money into it and being hugely margined. He was always borrowing more money on a position; he bought more when his equity went up. He would really focus down on to that one stock and do very well off it. I’ve never seen anyone better able to put everything into just one stock.
I don’t know if he was as good at running other people’s money and managing 20 stocks and having a balanced portfolio. Really, really concentrating is something you can do personally, but not if you’re managing money for others.
Are you still in touch with him?
Every once in a while we talk. We live, somewhat, in the same general area and once in a while I bump into him. He is very nice and was a great mentor. I owe him a great deal of thanks for giving me the opportunity to learn from him.
In Wizards you described finding stocks as a “Treasure Hunt”, does the game still fascinate you to the same degree?
It still does. But it’s changed dramatically in the last three to four years with the ascent of computerized trading, the elimination of the up-tick rule and growth of high-frequency trading. It’s created a lot of noise and a lot of volatility. It’s made it much, much harder than in the past.
Also, the correlation of individual stocks to what the market’s doing: right now, at least, you have to be on the right side of the market. You can’t really stock pick yourself to outperform the market because everything is so correlated. Hopefully that volatility will drop off in time. But as long as we have a lot of debt problems in many developed countries and slow growth inEurope, it’s probably going to be hard to break out of the trading range we have been in the past few years.
Have you stuck with the CANSLIM system? Or have you evolved it?
I’m looking for much different entry points. You could probably change the name to ‘CANTSLIM’ – a lot of stocks break out, go a few days, and the stocks turn and go right back down.
I’m looking to buy much, much more on pullbacks – pullbacks of 10, 15, 20, 25 per cent. The risk is a lot lower down there than it is buying breakouts; with breakouts you’re just going to get whipsawed and take loss after loss after loss. There are few breakouts this year that have worked. There will be a time when breakouts will work again for many stocks but this is not that type of market.
The market has also really discounted the growth sector in the last three to five months. There are not too many outstanding growth leaders you can point to; very few that are holding up.
Given the sheer number of people trading CANSLIM has that dented its edge?
I think so. With the book out, teaching seminar after seminar, there are so many people with computers programmed to look for breakout points.
Yes, those stocks can still work, but it’s not as hidden as it was in the past. That’s why you have to look for different entry points. There are thousands of computers with alarms set to go off when a stock is moving that has the CANSLIM characteristics.
Are you primarily trading stocks?
Can we take a look at fundamentals. Are you still primarily looking for companies with accelerating earnings and sales, and with innovative new products?
I’m still looking primarily for growth stocks. But also turnaround situations: companies that had good products but got into trouble for a few quarters and are now starting to turn themselves around. Also cyclical stocks – there are some opportunities there. I’m trying to get a mix. But it’s primarily growth stocks. Right now there are very few growth stocks working out there in the marketplace.
In addition to pullbacks, are you still buying stocks hitting new highs and with strong relative strength?
In markets when you have got an economy growing, CANSLIM works extremely well. It’s the fastest way to make money in the market. You get stocks that break out and they just start running.
In a market like this where you don’t have a whole lot of growth and don’t have that many names, a trading range type of market, only one out of every five breakouts continue and get a good gain for you. But you buy the other four and you lose on those, so it almost doesn’t pay to buy stocks when they’re breaking out in this type of environment.
Is the problem with CANSLIM structural or cyclical? Would O’Neil just say this is a bear market so don’t expect CANSLIM to perform?
In a market like this it’s very hard for almost any system to work. It (CANSLIM) is still one of the best systems out there in a good market. For a value buyer, when the market’s in a nice big uptrend, the values will be too rich to buy. But in those markets growth stocks keep making sensational moves. There’s nothing really wrong with CANSLIM. There are just times when you really have to hold back and be very, very careful in how you’re using it.
You mentioned that you’re looking for different entry points. Do the classic CANSLIM (cup-with-handle, etc) chart patterns still work?
They still work but now it seems only when a strong move is occurring in the market itself. It has been rare for a stock to breakout without the general market helping it along. You have to be careful these days because so many people are looking at the same stocks at the same spots.
What type of entry points are you looking at?
There are a number of things. I have incorporated a number of different approaches. I don’t really want to describe them or that edge will disappear when everybody starts looking at the same thing.
How are you screening for stocks?
I do screens for CANSLIM stocks and those for an earnings per share rank and relative strength greater than 85. That finds you growth stocks. But I also use different screens to find companies that have come down – more turnaround type situations.
What chart patterns are you looking at in these fallen growth stocks before buying?
I look for support points that have held in the past or previous highs the stock has pulled back down on to.
In the past few years, what have been some of your standout trades?
In terms of recent winners: Chipotle Mexican Grill, Apple Computer, Google, Caterpillar. They’re some of the bigger ones.
One thing we saw in the dot com boom were huge winners with no earnings. Do you still insist that stocks generate a profit? Or are you prepared to overlook that if its prospects are big enough?
A lot of rules were broken back in 1999/2000. It’s a period that comes about once every 40 years. But when it comes down to it, the best stocks, the companies you can rely on, are the ones that are generating earnings, along with price action. You want both. If the stock’s going up with no earnings, it only lasts for so long.
A lot of CANSLIM traders made killings during that dot com bubble. How did you go?
I did well. You never make as much as you think you should. But I had some very, very good returns during that period. I tend to be more conservative than I would with just my own money. With the Partnership, I rarely ever borrow money on margin. Ninety nine per cent of the time I’ve had some cash.
I don’t want to take as big of a risk as I can take in my own account. In my IRA (individual retirement account) I could get hold of a couple of stocks and if they blow up it hurts me but not people I’m managing money for.
The key was that in 2000/2001 we had a positive year when many people lost a lot of money. We did the same thing in 2008 when the market dramatically sold off. We didn’t lose much. The key is to make money in good markets and not give much back in bad markets.
How did you handle the two bear markets we’ve had since 2000?
When things start rolling over and coming off I just tend to start selling stocks.
Did you short sell?
I did some. It wasn’t in a huge way. I was 15 to 20 per cent short at certain times. But I didn’t short in a dramatic way. My goal in a bad market is to lose as little as possible. Most people round trip: they make money in a bull market and lose in a bear market and they never make net progress.
Are you still relying on individual stock performance to time the market?
That gets you a good feel for how much you should be investing. If you can’t find that many stocks to be invested in that dictates your investment position. Right now there are very few growths stocks, so you’re really not going to be positioned too strongly in a market like this.
I’ve also been relying on a few things for a long time that give me a general sense of where the market is: McClellan Oscillator, overbought/oversold. Different types of technical indicators to give you an idea of where we are.
The current market is confusing. Some believe we’re in a secular bear market, others that we’re in a new bull. How do you see it?
We had a great bull market from 1982 to 2000. Now we’re in a giant bear market that started in 2000 and I would think would go out to 2015. I hope it doesn’t go too much further than that.
We have just been in this giant trading range of 10 or 11 years now. With all the debt that’s got to be written off and the housing problems in the US, that’s going to take a few more years to really sort out and is going to keep a lid on growth. That should keep us locked into a trading range for at least a couple of years if not longer.
You said the market has become harder, what has changed?
In the last three to four years the speed and movement has been incredible. I never remember 400 point moves in a half an hour, which happened on October 4, 2011 or the flash crash in May of 2010. It’s just the speed of things that happen: things that happened in months and months now happen in days. That’s been the hardest thing: to be able to move that quickly.
There is also influence of other markets, and the extreme gap downs and gap ups we have on an almost daily basis. You almost have to be trading 24 hours a day because a lot of the moves are occurring when I’m asleep. Someone recently worked out that the average point movement during market hours was a lot less than that movements that happened on the gaps from the close to the open.
That all makes for an extremely tough environment. So many people are really disgusted with the markets and the way they’re behaving and the leadership in our country. People are saying ‘I really just don’t want to do anything. I want to sit in cash’. And that’s fine. A lot of professionals are saying the same thing: this is the hardest environment they have experienced to make any headway.
But does this all throw up opportunities?
Eventually. But it might be a few years out. That’s why in this type of environment you almost have to flip CANSLIM and sell strength and buy weakness. If things have a decent run you’ve got to take it and then hold back. When the market’s sold off 10 per cent, that’s when you have got to be looking for buys.
In terms of risk management, do you still cut your losses at 7 per cent?
I always try to keep losses very small. 7 per cent is a great percentage to use. In a lot of cases I do it earlier. When the market gaps (down), like it does, you sometimes can’t get out at 7 per cent.
In this market you often buy strength, but then the market turns down for three days and you sell out for a 7 per cent loss. But if you buy stocks when they pull back down 15 per cent off highs, I’ve found the risk is lower there than trying to buy stocks when they’re breaking out.
I’ve always found CANSLIM profit-taking quite confusing. When do you lock in profits?
Usually in a good market you can wait for the stock to start topping, move up stops, and use moving averages. You learn a lot by looking at how a stocks is performing: looking at price and volume action.
O’Neil had a general rule that when a stock takes six to eight weeks to make 20 per cent move you take profits. But if a stock makes a 20 to 25 per cent move in a short period of time you probably keep that one for a longer move.
It’s really looking at lot at how the stock is acting technically. It is like studying the movement of an animal, if you have been watching it for a long time you get to know how it moves. It is the same in the market, if you study it long enough you will know the signs of when it is bottoming or topping or somewhere in between.
Do you do any work on trading psychology, or are you just focused on finding winning stocks?
Looking back I might have been a psychology major rather than a history major when I went to UCLA. Figuring yourself out and developing a discipline are probably the most important things. And figuring out where everybody else is. I think that’s extremely important.
Do you still keep a trading diary?
I might record examples of stocks I’ve bought and sold; successful and unsuccessful. I mark them and put them into a notebook for later review. But I’m not writing on a daily basis.
Who are other traders and fund managers you admire now?
The mathematicians writing all the algorithms and messing up the markets are the ones I dislike the most; they’re probably the ones making the most money in this type of environment, but I wouldn’t say I admire them.
Do you think that we need new regulations to tame things like high-frequency, computerized trading?
Yes, because they have undone a lot of regulations. They eliminated the up-tick rule which has unleashed some unbelievable forces that creates a lot of this volatility. They should bring back the up-tick rule. I also wouldn’t mind them bringing back market makers and paying a quarter spread; just to have some actual humans out there to keep the balance in the market place.
Instead, now there’s just a bunch of computers running wild. That’s really what’s happened for the last few years. There’s no human contact in terms of slowing the whole process down.
How does a trader adapt to the new market environment?
You just have to step back and not even look at intraday action and look at a longer-term time frame. I’ve thought I’d probably do better if I just didn’t even look at the market during the market hours, do all my work over night and place orders (out of hours).
Are there any recent books you’d recommend?
I would probably just keep on going back to the classics I mentioned in Market Wizards.
Finally, what’s one thing that traders can start doing now to improve?
I think in this market environment, learn to buy weakness and sell strength, and not buy strength and sell weakness; because you’re just going to continue to get whipsawed.
I found this interview at GlobalGrowthInvestor.com over a decade ago.