CANSLIM INVESTING -Is it right for you?
*CANSLIM INVESTING – IS IT RIGHT FOR YOU?
Readers of Investor’s Business Daily are familiar with the C-A-N-S-L-I-M method of investing recommended by William J O’Neil, the founder of the IBD.
For most of us, the best thing to do is to skip the CANSLI and concentrate on the M which stands for Market Direction.
The "CANSLI " part relates to stock picking. It is probably a valid approach to stock picking. But most of us are not equipped to pick individual stocks effectively. My stock picking successes have mostly been dumb luck. The same considerations I used in picking winners were also the ones I applied when I picked losers. My brilliant thinking was only brilliant when it worked. Some people DO know how to pick stocks, but most of us are not good stock pickers and don’t have the time and resources to do the job even if we had the skills required.
MOST OF US SHOULD AVOID STOCK PICKING AS AN INVESTMENT TOOL
Recently I have almost entirely abandoned investing in individual stocks. I only own one stock and I picked it because the CEO is a former collegue of mine and I have high expectations from his leadership. That is not really a very good reason, however, to make an investment. Despite the skills and intelligence of the CEO, there are all sorts of things that could counteract the effect of those abilities. I only have 100 shares in this buy-and-hold investment.
THE ALTERNATIVE TO INDIVIDUAL STOCKS
My current approach is to invest only in Exchange Traded Funds (ETFs) or Closed End Funds (CEFs). I invest more dollars in Fixed Income securities (also available in ETFs) than in Stock-related funds, so I look for more bang for the buck in the stock-related funds. Using EFFs and CEFs enable me to limit my investments to about five or six ETFs with hundreds of component stocks which provide diversification and protection from a poor performance by one stock in the group.
HERE ARE A FEW ETF SYMBOLS and HOW THEY PERFORM:
PERFORMING WELL:
FXI, PGJ, EWS, EPP, EWG, EFA, EWH, EEM
PERFORMING POORLY:
PBE, IBB, PBW, HHH, TIP, IGW, PXE, LQD
Note: TIP and LQD are bond funds and should not be acquired or sold based on price performance. Also their total performance includes both price and yield.
SEE FOR YOURSELF:
You can view charts of these ETFs if you go to http://finance.yahoo.com and type in the symbol in the ‘get quote’ box, go to next screen, click on charts (on left side of screen). Get the beta version of the chart and click on technical indicators at the top of the chart screen and enter Exponential Moving averages for 20 days and 100 days. AFTER all that you can get the same chart information by just entering other symbols.
WHAT DO YOU CALL “THE MARKET?”
Most people think of “the market” as the 30 stocks in the Dow Jones Averages or the 500 stocks in the S and P averages. As I see it, these are the “old” markets. The big money is made in successfully investing in rising markets around the world. Currently the Chinese market is leading the pack. Most of the Emerging Markets have been rising faster than the U.S. markets. It is a lot like the small cap stocks which often outperform the large cap stocks. If you are starting from a lower point, you can increase at a faster pace, but eventually it becomes a lot like the law of diminishing returns you may have heard of in Economics 101. An emerging economy has a long way to go before reaching the point of diminishing returns, and a long way to grow to come close to our economy.
DANGERS IN MOMEMTUM INVESTING
A danger in investing in rapidly growing market areas can be illustrated by the dramatic rise in the Nasdaq a few years ago. An ETF for the Nasdaq (symbol QQQ) rose dramatically. While many people argued that it was overpriced and would collapse, others were laughing all the way to the bank. But eventually the party did come to an end. QQQ dropped from over $ 100 per share to about $ 20 per share. Now it is in the $ 40 range—not bad if you got it at $20, but pretty bad if you got in at $ 100. If you check the charts for PBE—currently an underperformer, you will see that it performed well not long ago, but is now below its 100 day EMA.
MOMENTUM INVESTING WORKS IF YOU HAVE A GOOD EXIT STRATEGY
The thing I’m leading up to is that momentum investing can pay off, but you must have an exit stategy. If you had invested in QQQ at $ 60 and watched it go to $ 100, then fall back to $ 90, you could cut and run or you could hang in hoping it wouldn’t go any lower. If you had taken your profits instead of waiting for it to get back to $ 100 you would be a lot happier than the guy that hung in there until it bottomed out and came part of the way back up. Even if you had got in at $99 or $100 you would have still been better off taking a small loss. Bull markets always come to an end.
HOW DO YOU KNOW WHEN A BULL MARKET ENDS?
The biggest problem is that you never know when a bull market has ended. A drop in price may be a temporary setback in a bull market. If you sell at a loss you may miss the next big leg up. If you get out, then jump back in then out again when the market goes up or down a few points you are getting “whipsawed,” missing some of the action and paying commissions for churning your account. The thing to do is set some reasonable exit strategies, pay the price when you are wrong, but avoid the big losses you could incur when the signal is correct.
SELL SIGNALS TO WATCH.
Here are a few tools. Watch the moving averages. If your ETFs to dip below the 100 day moving aveage, consider selling. I prefer the Exponential Moving average (EMA) since it places more weight on recent prices. After an extended bull market, it may be best to shorten your moving average to 50 days. After all, you know it can’t go up forever—but if it does keep rising, it won’t dip below the EMA. A good confirming signal is to use a short term moving average and wait for the smaller EMA to drop below the longer EMA. This tends to keep you in a little longer than just using the ETF price and a single moving average. The use of two EMAs will reduce the number of whipsaws. When most stocks are still performing well, staying above their 20 day EMA, consider dumping those which show early indications that their best days are behind them. You don't have to calculate the EMAs. Let Yahoo do it.
ANOTHER SELL SIGNAL:
If an ETF is uptrending it keeps making new highs. If it drops a point or two that is nothing to worry about, but if it drops 10%, then discretion is the better part of valor—even if it is still above your EMA sell-signal. It may be better to bail out and wait for a sign that the decline was not just a temporary dip.
WELCOME TO HARD TIMES:
What can you do in a bear market. I’m pretty cautious about investing in bear market funds. I’m not afraid to invest $15,000 or $ 20,000 increments in a bull market, but in a bear market I would prefer to invest in very small increments. Bear Market mutual funds often have $ 15,000 minimums plus fees for early redemptions. A few months ago a group of bear market ETFs were created (SH, MYY, DOG, QLD). They have no minimum other than the price to buy a single share. I hope to put a few dollars in these when a bear market arrives. You can use the same moving average approach in investing in these since they will also stay above the moving average as long as they are ascending and they will rise while the underlying indexes are declining. Exit strategies are equally if not more valid in playing bear markets.
DOING NOTHING IS SOMETIMES THE BEST THING:
As John Milton wrote, “They also serve who only stand and wait.” Your money may sometimes serve best if it only stands and waits when there is no clear direction in the market.
THIS IS NOT INVESTMENT ADVICE:
I am not recommending that anyone invest based on the above considerations alone. I do not blindly follow any single method in my own investing. I sometimes invest in lower performers to achieve other objectives such as high dividend yields, asset allocation and other considerations. Warren Buffet follows a totally different approach and his portfolio is a few dollars higher than mine ( a few million, that is).
WHAT’S THIS GOT TO DO WITH TAXES:
You may have to pay some tax on your capital gains—or take up to a $3,000 deduction for capital losses. But remember, you can carry over unused capital losses to next year.
REFERENCES –KEY ITEMS FOR TAXES::
WHERE TO FILE: http://www.irs.gov/file/index.html
RESTORED DEDUCIONS for Sales Tax
http://www.irs.gov//pub/irs-pdf/p600.pdf
OTHER FORMS AND PUBLICATIONS:
Car Expense-- Pub 334,463,535 (See link below)
Sale of Principal Residence-- Pubs 523 and IRC § 121
Sec 179 write-offs for SUVs and other equipment-- Form 4562, Pub 946, IRC §167
Office in Home--- Form 8829, Pub 587
Mutual Fund -- phantom profits, reinvested dividends:-- Pub 550 and 564
Alternative Minimum Tax --- Pub 929 (individuals) Pub 542 (corporations)
Link to IRS forms and publications:http://www.irs.gov/formspubs/index.html
Link to IRS Section No. http://www.taxalmanac.org/index.php/Internal_Revenue_Code
To subscribe to IRS Newswire http://www.irs.gov/newsroom/content/0,,id=103381,00.html
=>SEE ARCHIVES FOR December (81 blogs) ==>
Link to IRS forms and publications:
http://www.irs.gov/formspubs/index.html
TO CONTACT ME OR SUBSCRIBE TO THIS BLOG:
Email me at taxxcpa2007@hotmail.com
TO SUBSCRIBE:
RSS:
This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.
Readers of Investor’s Business Daily are familiar with the C-A-N-S-L-I-M method of investing recommended by William J O’Neil, the founder of the IBD.
For most of us, the best thing to do is to skip the CANSLI and concentrate on the M which stands for Market Direction.
The "CANSLI " part relates to stock picking. It is probably a valid approach to stock picking. But most of us are not equipped to pick individual stocks effectively. My stock picking successes have mostly been dumb luck. The same considerations I used in picking winners were also the ones I applied when I picked losers. My brilliant thinking was only brilliant when it worked. Some people DO know how to pick stocks, but most of us are not good stock pickers and don’t have the time and resources to do the job even if we had the skills required.
MOST OF US SHOULD AVOID STOCK PICKING AS AN INVESTMENT TOOL
Recently I have almost entirely abandoned investing in individual stocks. I only own one stock and I picked it because the CEO is a former collegue of mine and I have high expectations from his leadership. That is not really a very good reason, however, to make an investment. Despite the skills and intelligence of the CEO, there are all sorts of things that could counteract the effect of those abilities. I only have 100 shares in this buy-and-hold investment.
THE ALTERNATIVE TO INDIVIDUAL STOCKS
My current approach is to invest only in Exchange Traded Funds (ETFs) or Closed End Funds (CEFs). I invest more dollars in Fixed Income securities (also available in ETFs) than in Stock-related funds, so I look for more bang for the buck in the stock-related funds. Using EFFs and CEFs enable me to limit my investments to about five or six ETFs with hundreds of component stocks which provide diversification and protection from a poor performance by one stock in the group.
HERE ARE A FEW ETF SYMBOLS and HOW THEY PERFORM:
PERFORMING WELL:
FXI, PGJ, EWS, EPP, EWG, EFA, EWH, EEM
PERFORMING POORLY:
PBE, IBB, PBW, HHH, TIP, IGW, PXE, LQD
Note: TIP and LQD are bond funds and should not be acquired or sold based on price performance. Also their total performance includes both price and yield.
SEE FOR YOURSELF:
You can view charts of these ETFs if you go to http://finance.yahoo.com and type in the symbol in the ‘get quote’ box, go to next screen, click on charts (on left side of screen). Get the beta version of the chart and click on technical indicators at the top of the chart screen and enter Exponential Moving averages for 20 days and 100 days. AFTER all that you can get the same chart information by just entering other symbols.
WHAT DO YOU CALL “THE MARKET?”
Most people think of “the market” as the 30 stocks in the Dow Jones Averages or the 500 stocks in the S and P averages. As I see it, these are the “old” markets. The big money is made in successfully investing in rising markets around the world. Currently the Chinese market is leading the pack. Most of the Emerging Markets have been rising faster than the U.S. markets. It is a lot like the small cap stocks which often outperform the large cap stocks. If you are starting from a lower point, you can increase at a faster pace, but eventually it becomes a lot like the law of diminishing returns you may have heard of in Economics 101. An emerging economy has a long way to go before reaching the point of diminishing returns, and a long way to grow to come close to our economy.
DANGERS IN MOMEMTUM INVESTING
A danger in investing in rapidly growing market areas can be illustrated by the dramatic rise in the Nasdaq a few years ago. An ETF for the Nasdaq (symbol QQQ) rose dramatically. While many people argued that it was overpriced and would collapse, others were laughing all the way to the bank. But eventually the party did come to an end. QQQ dropped from over $ 100 per share to about $ 20 per share. Now it is in the $ 40 range—not bad if you got it at $20, but pretty bad if you got in at $ 100. If you check the charts for PBE—currently an underperformer, you will see that it performed well not long ago, but is now below its 100 day EMA.
MOMENTUM INVESTING WORKS IF YOU HAVE A GOOD EXIT STRATEGY
The thing I’m leading up to is that momentum investing can pay off, but you must have an exit stategy. If you had invested in QQQ at $ 60 and watched it go to $ 100, then fall back to $ 90, you could cut and run or you could hang in hoping it wouldn’t go any lower. If you had taken your profits instead of waiting for it to get back to $ 100 you would be a lot happier than the guy that hung in there until it bottomed out and came part of the way back up. Even if you had got in at $99 or $100 you would have still been better off taking a small loss. Bull markets always come to an end.
HOW DO YOU KNOW WHEN A BULL MARKET ENDS?
The biggest problem is that you never know when a bull market has ended. A drop in price may be a temporary setback in a bull market. If you sell at a loss you may miss the next big leg up. If you get out, then jump back in then out again when the market goes up or down a few points you are getting “whipsawed,” missing some of the action and paying commissions for churning your account. The thing to do is set some reasonable exit strategies, pay the price when you are wrong, but avoid the big losses you could incur when the signal is correct.
SELL SIGNALS TO WATCH.
Here are a few tools. Watch the moving averages. If your ETFs to dip below the 100 day moving aveage, consider selling. I prefer the Exponential Moving average (EMA) since it places more weight on recent prices. After an extended bull market, it may be best to shorten your moving average to 50 days. After all, you know it can’t go up forever—but if it does keep rising, it won’t dip below the EMA. A good confirming signal is to use a short term moving average and wait for the smaller EMA to drop below the longer EMA. This tends to keep you in a little longer than just using the ETF price and a single moving average. The use of two EMAs will reduce the number of whipsaws. When most stocks are still performing well, staying above their 20 day EMA, consider dumping those which show early indications that their best days are behind them. You don't have to calculate the EMAs. Let Yahoo do it.
ANOTHER SELL SIGNAL:
If an ETF is uptrending it keeps making new highs. If it drops a point or two that is nothing to worry about, but if it drops 10%, then discretion is the better part of valor—even if it is still above your EMA sell-signal. It may be better to bail out and wait for a sign that the decline was not just a temporary dip.
WELCOME TO HARD TIMES:
What can you do in a bear market. I’m pretty cautious about investing in bear market funds. I’m not afraid to invest $15,000 or $ 20,000 increments in a bull market, but in a bear market I would prefer to invest in very small increments. Bear Market mutual funds often have $ 15,000 minimums plus fees for early redemptions. A few months ago a group of bear market ETFs were created (SH, MYY, DOG, QLD). They have no minimum other than the price to buy a single share. I hope to put a few dollars in these when a bear market arrives. You can use the same moving average approach in investing in these since they will also stay above the moving average as long as they are ascending and they will rise while the underlying indexes are declining. Exit strategies are equally if not more valid in playing bear markets.
DOING NOTHING IS SOMETIMES THE BEST THING:
As John Milton wrote, “They also serve who only stand and wait.” Your money may sometimes serve best if it only stands and waits when there is no clear direction in the market.
THIS IS NOT INVESTMENT ADVICE:
I am not recommending that anyone invest based on the above considerations alone. I do not blindly follow any single method in my own investing. I sometimes invest in lower performers to achieve other objectives such as high dividend yields, asset allocation and other considerations. Warren Buffet follows a totally different approach and his portfolio is a few dollars higher than mine ( a few million, that is).
WHAT’S THIS GOT TO DO WITH TAXES:
You may have to pay some tax on your capital gains—or take up to a $3,000 deduction for capital losses. But remember, you can carry over unused capital losses to next year.
REFERENCES –KEY ITEMS FOR TAXES::
WHERE TO FILE: http://www.irs.gov/file/index.html
RESTORED DEDUCIONS for Sales Tax
http://www.irs.gov//pub/irs-pdf/p600.pdf
OTHER FORMS AND PUBLICATIONS:
Car Expense-- Pub 334,463,535 (See link below)
Sale of Principal Residence-- Pubs 523 and IRC § 121
Sec 179 write-offs for SUVs and other equipment-- Form 4562, Pub 946, IRC §167
Office in Home--- Form 8829, Pub 587
Mutual Fund -- phantom profits, reinvested dividends:-- Pub 550 and 564
Alternative Minimum Tax --- Pub 929 (individuals) Pub 542 (corporations)
Link to IRS forms and publications:http://www.irs.gov/formspubs/index.html
Link to IRS Section No. http://www.taxalmanac.org/index.php/Internal_Revenue_Code
To subscribe to IRS Newswire http://www.irs.gov/newsroom/content/0,,id=103381,00.html
=>SEE ARCHIVES FOR December (81 blogs) ==>
Link to IRS forms and publications:
http://www.irs.gov/formspubs/index.html
TO CONTACT ME OR SUBSCRIBE TO THIS BLOG:
Email me at taxxcpa2007@hotmail.com
TO SUBSCRIBE:
RSS:
This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.
1 comment:
I agree with you on your analysis especially about stock investing. I believe most investors are better served using no load funds, index funds or ETFs and follow the trends as opposed to trying to hit a home run with one stick pick.
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