‘Go for active investing based on fundamentals’

Wait patiently for the right opportunity and time your investments







William J O’Neil is considered a master stock picker and investor based in the US and is a proponent of what is called the ‘CAN SLIM’ investment methodology. He is the author of the bestseller ‘How to Make Money in Stocks’. BusinessLine caught up with Steven L Birch, President of William O’Neil + Company, at the launch of the company’s ‘MarketSmith’ app for Indian investors. Excerpts:

What does the acronym CAN SLIM stand for?

‘C’ stands for current earnings — the latest quarterly earnings of a company need to grow at least 25 per cent over the comparative period in the prior year. ‘A’ stands for annual earnings. We look for stocks that have grown their earnings by at least 25 per cent for the past three years. ‘N’ refers to anything new with the stock/company that arouses investor interest — new products/services, new management, new regulations, etc. ‘S’ relates to supply and demand for the stock. As more investors demand a limited supply of shares, a stock’s price goes up. ‘L’ is the leadership qualities exhibited by a stock. We look at owning the best stocks within the industry group — the ones that show superior revenue and earnings growth. ‘I’ stands for institutional ownership. Looking into this aspect will tell us how to follow the big money. Finally, ‘M’ refers to market direction — you need to be able to evaluate the direction of the market as three out of four stocks tend to follow the market’s trend. Overall, we call ourselves growth investors.

How different is this investment strategy from Warren Buffet’s?

There are similarities and differences. Warren Buffet is very consistent year after year and eliminates all temptations that don’t match his criteria. William O’Neil is the same way. Warren Buffet talks about a competitive moat. We look at a competitive moat in terms of new products and innovations and how strong the market is for the products.

Warren buffet has a long-term view. William O’Neil says if you are long on long-term investments alone, you can become passive. So he calls for timing the investment in these stocks using technical analysis. Thus, the approach we advocate is being active. What’s interesting about Warren Buffet and William O’Neil is that they both advocate very concentrated portfolios. Warren buffet waits patiently till he finds the right opportunity. Many times we too sit on cash and wait on the sidelines till we get clarity.

How much of fundamental vs. technical analysis do you use? What patterns do you watch out for on the technical side?

Fundamentals are not about reading the financial statements or the ratios alone. Computers can do that. If you have 25-30 good growth companies according to database, the real challenge is the qualitative element. What is new about their business model? What is the quality of the management? How deep is their competitive moat? Our goal is to figure out how sustainable the fundamentals are. William O’Neil would advocate a 75 per cent focus on the fundamentals and rest on technicals.

To answer your second question, one pattern which we note on the technical side is the cup and handle pattern, which is the most common pattern seen in stock charts. Another is the double bottom which looks like “W”. A third one is flat base. Among the most powerful is what is called high tight flag pattern. This pattern happens following a strong rally. The stock trades in a narrow box or rectangular shape like a flag pole for a while and then shoots up again. Fundamentals can support this and this can lead convergence fundamentals and technicals.

The MarketSmith app for India looks a bit sophisticated for a retail investor looking to learn the ropes….

There are always some novice investors. But most of our customer base typically have some experience. These customers have had a previous bad experience and then come across our app or website and decide to try investing on their own. Investors in the US are familiar with William O’Neil’s strategy and have read his book. So there, MarketSmith has more and more tools which can be used. Here in India, we have created a model portfolio based on our investment strategy to make it easier for investors. We give a score to each stock for easy understanding. The language is also conversational. A glossary for technical terms is provided. We also give a market outlook everyday.

After the Trump victory, the US markets are touching new highs. Do you think it is a bubble?

No, I don’t think it is a bubble. I would say we received a definitive signal in January that we have moved into a confirmed uptrend. I think that the market is underestimating the change that is underway in the US, because there is lot of negativity towards his Presidency. His style is so different. He is pro-business. It is 180 degrees different from the previous administration. That’s why I am extremely bullish.

Can you share your experience of working with William?

He is about 84 now and until the age of 80, he was quite active. I used to frequently discuss with him about the markets until then. He loved the stock markets and was a very hard worker because of this passion. He used to be very regimented and was also a team person. He taught me to be disciplined and stay focused.

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