08 September 2006
IBD's 20 rules on Stock Investment
From Investor’s Business Daily
Modified for S'pore context
There's no way to predict which stocks will go up, but it is possible to know what conditions lead to their advance. That's the aim of the 20 Rules For Investment Success developed by Investor's Business Daily and its chairman and founder, William O'Neil. Using computer analysis going back several decades, it was possible to single out the characteristics of the most successful stocks before their major price runs.
IBD's 20 rules are a synthesis of those findings. The characteristics, in fact, have changed remarkably little over the years despite one of the longest bull markets in history, the worst bear market since the Great Depression and lots of changes on Wall Street.
In many ways, these rules confirm some tenets of stock investing, such as the power of earnings growth and blockbuster products. But in other ways, the rules defy long-held beliefs. For example, price/earnings ratios and dividends are written off as predictors of future performance.
To be sure, most winning stocks stop short of possessing every trait outlined. But the better a stock matches up to the criteria, the stronger is its potential.
There's no certain way to predict which stocks will go up, but it's possible to identify what conditions lead to their advance. These rules are based on the characteristics of the most successful stocks before they delivered major price runs.
1. Annual earnings should be up > 25% each of the past 3 years.
Return on equity should be at least 17%. It's also good if recent earnings and sales growth are accelerating.
2. Recent quarterly earnings and sales should be up > 25%. Earnings are the primary driver of stock growth.
3. Avoid cheap stocks. Buy higher-quality stocks selling for >= $0.20 a share.
4. Learn how to use charts to spot sound buy points. Confine your buys to these points as stocks break out on big volume increases.
5. Cut every loss when it's 8% below your cost.
Never average down in price.
6. Have rules on when to sell and take a profit. It doesn't do investors much good if their stocks go up but they don't know when to take a profit.
7. Buy when market indexes are in an uptrend. Reduce investments and raise cash when market indexes show five or more days of selling on heavy volume.
8. Learn and understand investing strategies. Educational articles and market analysis help investors stay on top of the market.
9. Buy stocks with a strong Relative Price Strength Rating. Stocks are more likely to go up after they've been among the highest-moving stocks the past year.
10. Pick companies with management ownership of stock. You've heard the expression: "Put your money where your mouth is." It holds true in the market.
11. Buy mostly in the top six broad industry sectors. In a healthy market, stocks in strong sectors tend to follow leaders into new high ground.
12. Select stocks with increasing institutional sponsorship in recent quarters. Trading volume is a great way to measure how potent a stock's rise or fall is.
13. Current quarterly after-tax profit margins should be improving and near their peak. Robust margins mean a company is earning money efficiently.
14. Don’t buy because of dividends or PERs. Buy the industry leader in earnings and sales growth, return on equity, profit margins and product quality.
15. Pick companies with a new product or service. It takes something new to produce a startling advance in the price of a stock.
16. Invest mainly in entrepreneurial companies. Pay close attention to those that went public in the past eight years.
17. Check into companies buying back 5% to 10% of their stock and those with new management. It's a promising sign if a firm is willing to reinvest in its own business.
18. Don't try to bottom-guess or buy on the way down. Never argue with the market. Forget your pride and ego.
19. Find out if the market is currently favoring big cap or small cap stocks. The market sports its own trends when it comes to market-cap size.
20. Do a post-analysis of all your buys and sells. Evaluate and develop rules to correct your major mistakes.
From Investor’s Business Daily
Modified for S'pore context
There's no way to predict which stocks will go up, but it is possible to know what conditions lead to their advance. That's the aim of the 20 Rules For Investment Success developed by Investor's Business Daily and its chairman and founder, William O'Neil. Using computer analysis going back several decades, it was possible to single out the characteristics of the most successful stocks before their major price runs.
IBD's 20 rules are a synthesis of those findings. The characteristics, in fact, have changed remarkably little over the years despite one of the longest bull markets in history, the worst bear market since the Great Depression and lots of changes on Wall Street.
In many ways, these rules confirm some tenets of stock investing, such as the power of earnings growth and blockbuster products. But in other ways, the rules defy long-held beliefs. For example, price/earnings ratios and dividends are written off as predictors of future performance.
To be sure, most winning stocks stop short of possessing every trait outlined. But the better a stock matches up to the criteria, the stronger is its potential.
There's no certain way to predict which stocks will go up, but it's possible to identify what conditions lead to their advance. These rules are based on the characteristics of the most successful stocks before they delivered major price runs.
1. Annual earnings should be up > 25% each of the past 3 years.
Return on equity should be at least 17%. It's also good if recent earnings and sales growth are accelerating.
2. Recent quarterly earnings and sales should be up > 25%. Earnings are the primary driver of stock growth.
3. Avoid cheap stocks. Buy higher-quality stocks selling for >= $0.20 a share.
4. Learn how to use charts to spot sound buy points. Confine your buys to these points as stocks break out on big volume increases.
5. Cut every loss when it's 8% below your cost.
Never average down in price.
6. Have rules on when to sell and take a profit. It doesn't do investors much good if their stocks go up but they don't know when to take a profit.
7. Buy when market indexes are in an uptrend. Reduce investments and raise cash when market indexes show five or more days of selling on heavy volume.
8. Learn and understand investing strategies. Educational articles and market analysis help investors stay on top of the market.
9. Buy stocks with a strong Relative Price Strength Rating. Stocks are more likely to go up after they've been among the highest-moving stocks the past year.
10. Pick companies with management ownership of stock. You've heard the expression: "Put your money where your mouth is." It holds true in the market.
11. Buy mostly in the top six broad industry sectors. In a healthy market, stocks in strong sectors tend to follow leaders into new high ground.
12. Select stocks with increasing institutional sponsorship in recent quarters. Trading volume is a great way to measure how potent a stock's rise or fall is.
13. Current quarterly after-tax profit margins should be improving and near their peak. Robust margins mean a company is earning money efficiently.
14. Don’t buy because of dividends or PERs. Buy the industry leader in earnings and sales growth, return on equity, profit margins and product quality.
15. Pick companies with a new product or service. It takes something new to produce a startling advance in the price of a stock.
16. Invest mainly in entrepreneurial companies. Pay close attention to those that went public in the past eight years.
17. Check into companies buying back 5% to 10% of their stock and those with new management. It's a promising sign if a firm is willing to reinvest in its own business.
18. Don't try to bottom-guess or buy on the way down. Never argue with the market. Forget your pride and ego.
19. Find out if the market is currently favoring big cap or small cap stocks. The market sports its own trends when it comes to market-cap size.
20. Do a post-analysis of all your buys and sells. Evaluate and develop rules to correct your major mistakes.
Labels: Stock Trading System
