INVESTMENT AND PORTFOLIO MANAGEMENT

DRAFT NOTE
CANSLIM APPROACH (WILLIAM J. ONEIL)
Abhinav Sharma : 111303 Alka Jain : 111307 Ankur Supehia : 111309 Arpit Mundra : 111314 Shantanu Nilosey : 111345 Umesh Raut : 111354

21st July, 2012

INVESTMENT GURU: WILLIAM O'NEIL

Investment style
Growth stock trader with medium-term horizon (2-5 years).

Profile
O'Neil started out in 1958 as a stockbroker. During his three years in the job, he made a careful study of the top-performing mutual funds - the US equivalent of our unit and investment trusts. He discovered their success was entirely due to buying stocks that were setting new highs in price. In the language of chartists, they were 'breaking out' of previous holding patterns or 'consolidations'. Many of them would then go on to make advances of many tens or even hundreds of percent. He decided to copy this method. Within a year or so, he had turned $5,000 into $200,000. In 1963, he bought a member's seat on the New York Stock Exchange and founded the firm he still runs today. He was one of the famous 'performance' fund managers of the Sixties, and a pioneer of database-driven stock selection. His company still supplies a wide variety of statistics and data to professional investors. In 1983, he launched a financial newspaper to rival the Wall Street Journal, called Investor's Daily. Against the odds, this has become a widely-read and well-respected alternative to its

venerable competitor. Part of its appeal rests on its unique data tables, which also underpin his own investment approach and his advice to clients.

Long-term returns
O'Neil's track record has had its ups and downs, particularly during and just after the 'go-go' years of the Sixties. But he is thought to have averaged an annual return of over 40% on his personal account in the ten years up to 1989.

Biggest success
One of O'Neil's earliest coups was in the drug stock Syntex. The company was the first mass manufacturer of the birth control pill at the start of the 'sexual revolution'. It had just announced quarterly earnings growth of 300% when he bought the stock in 1963. As the market woke up to the potential, the price rocketed from $100 to $550 in 6 months, making him enough money to set up his own business.

Method and guidelines

O'Neil relies on a mixture of quantitative and qualitative criteria to pick stocks. The key idea is to seek out only those growth stocks that have the greatest potential for swift price rises from the moment you buy them. In essence, buy the strong, sell the weak. He suggests you remember the seven criteria listed below by the acronym C-A-N-S-L-I-M, adding that investment is like dieting: anyone can manage it with a little effort and discipline.

C = Current quarterly earnings Look for companies that have just announced quarterly earnings increases of 40-500%. A = Annual earnings increases Look for companies with at least 5 years of prior growth, at a compound rate of no less than 25%. Prefer those with the most consistent growth. The P/E ratio is relatively unimportant. On average, it may range from 20 to about 45.

N = New products, new management, new highs The best stocks have a new story behind them, such as new and exciting products or new directors. They are also breaking out to new highs. On a chart, they typically form a shape that looks like 'a cup with a handle'. S = Supply and demand The less stock there is to buy, the more any buying will drive up the price. Look for companies with around 10-25 million shares in issue. Watch for a rise in the amount of shares traded ('volume') of at least 50% above average. L = Leaders and laggards Stick to the 2 or 3 stocks showing the highest relative strength in their sector. They should have outperformed 80-90% of all other stocks in the last 12 months. Stay away from those that have underperformed for more than 7 months. I = Institutional sponsorship Identify the 3-10 best performing institutional investors. Check out the stocks they are buying as candidates for your own portfolio. Favour companies which are 'underowned' by the professionals (i.e. 10% or less of the shares belong to institutions). M = Market direction Check the market daily for early signs of any major downturn. (O'Neil discusses various indicators of this in his book How to Make Money in Stocks. But it needs to be said these can be unreliable in practice). Consider trying to avoid making new purchases once a decline of 10% or more gets underway. Follow a strict stoploss policy. O'Neil suggests selling any stock that has dropped 7-8% below the price you paid. Consider looking at doing this automatically. Consider selling stocks that have not risen 20% or more after 13 weeks. And consider holding those that have risen 20% in 4-5 weeks. These may go on to be the biggest winners of all.

In the case of stocks you have held for some time, sell after any sudden and rapid climb of 25% or more in 1-2 weeks. This generally happens when good news or rosy publicity causes investors to become too enthusiastic about the stock. Take advantage by taking your profits. (In all, O'Neil lists 35 rules for profit-taking. Most of them are variants on the basic theme: 'Sell into strength'.) Consider looking to avoid low-priced penny shares, options and new issues. These are mostly gambling chips, with only occasional potential for really big profits.

We intend to use all above mentioned criterion for selection and sorting of stocks in the Indian Stock Market.

"The whole secret to winning and losing in the stock market is to lose the least amount possible when you're not right." "Always sell your worst stock first." "What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower." "History will repeat itself." by William ONeil