CANSLIM’s Market Wizard: A Conversation with David Ryan
One afternoon years ago, stock trader David Ryan was looking down on a Xerox machine as it copied stock chart after stock chart. No names, no stock symbols–and certainly no balance sheets. Just picture after picture of stocks–stories, really–of prices surging, stalling, reversing, and surging again.
There were a lot of things that attracted David Ryan, who started trading stocks with legendary investor, William O’Neil decades ago, to the world of stock trading. And plenty more that keep him at it so many years after his very first stock–a $1 stock in a candy company as a child. But in the end, it may boil down to an appreciation of the patterns that stocks make as buyers and sellers push them higher and lower, a love for the stories stocks tell.
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“You must have a love for the market in order to be successful in this game,” Ryan said in a phone interview earlier this year. “Really, a huge interest.”
And its not just romantic or sentimental, in Ryan’s opinion. He’s convinced that it takes a real desire to trade because when the markets get tough–as they have been for traders since October 2007–it is what he calls “the love for the market” or “the game of it” that will get you through.
Ryan knows something about tough times. As investment strategist and portfolio manager for his own Ryan Capital Management, he traded well through the second half of the 1990s–along with much of the trading public–and did well in 2000. But it was in 2000 that he noticed that the patterns he relied on were “starting to roll over.”
2001 and 2002 were rough years, and there were times when Ryan was down by “single digits.” But later in the correction, as the bear market matured, many of those “rolling over patterns” also matured, bearing the fruits of his well-timed short trades. “At one point I was up 20% when the market was down 20%” he recalls.
More recently, Ryan’s performance has continued to be superlative. Checking quickly a few figures, Ryan reports back that he was up about 47% in 2007, up 15% in the last three months of the year. He calls 2007 a “tough market,” but credits growth and cyclical stocks’ ability to create the sort of patterns he likes to see as being key to his success that year.
The Making of a CANSLIM Man
Ryan was attracted to William O’Neil’s CANSLIM approach to trading and investing in stocks for some pretty straightforward and level-headed reasons. O’Neil’s success as a trader and investor (“he had made a lot of money” Ryan emphasizes) spoke for itself. But in addition, Ryan was struck by how commonsensical O’Neil’s path to learning how to find great stocks was.
“The idea of studying the greatest stocks of all time to see what made them great made a lot of sense to me,” Ryan explains.
Ryan’s life as a stock owner began early, when his father bought him stock in a candy company as an early investment toward Ryan’s college education. Watching the stock’s price move up and down in the newspaper as a youth, Ryan became fascinated with trying to figure out why some stocks went up and some stocks went down. This led to Ryan seeking out information on the stock market on his own, as he began reading books and continued watching stocks in the newspaper.
His candy investment, alas, did not turn out to be a huge winner. But Ryan made it to UCLA nonetheless, where his interest in stocks and the stock market never ebbed for long. Shortly after leaving UCLA, Ryan managed to land a part-time job with William O’Neil, becoming a full time trader in 1982.
Admits Ryan, “it took a few years to become automatic” in terms of learning, adopting and effectively executing O’Neil’s famous CANSLIM strategy. “I made a lot of mistakes and kept making mistakes,” he says, telling a story about how he took an account from $25,000 all the way up to $50,000–then back down into the teens. His challenge then was to avoid buying overextended stocks–a problem that still challenges traders who buy breakouts. But slowly over time–and with a great deal of discipline–Ryan managed to change his thinking and, eventually, become a profitable trader for O’Neil’s firm.
“Looking at the biggest winners in history, you get a visual picture of what successful stocks look like,” he says. “What I needed to do was to focus on stocks that strictly fit the criteria.”
Since then, Ryan has himself become a big winner. Ryan’s ability as a trader came to national attention when he won the U.S. Investing Championship–a contest sponsored by a Stanford University professor–for three years between 1985 and 1990, shortly after joining William O’Neil & Company.
During the latter half of his time spent working with William O’Neil’s 500 individual clients on stock selection–as well as a variety of investment portfolio–Ryan was the principal portfolio manager for New USA Growth Fund. The New USA Growth Fund was an aggressive growth oriented mutual fund with $200 million in assets. The Fund was sold in 1997 to Massachusetts Financial Services and Ryan Capital Management has been David Ryan’s chief focus ever since.
All About the Acronym: CANSLIM
As a trader today, much of Ryan’s method is still based around the CANSLIM principles, principles that are enshrined in the CANSLIM acronym:
C is for Current Earnings per Share. Up 25% or more and accelerating.
A is for Annual Earnings. Up 25% or more in each of the past three years.
N is for New Product or Service. Two things here: (1) the company should be offering a new product or service that is driving earnings and (2) the stock should be emerging from a consolidation range or chart pattern en route to a potential new high
S is for Supply and Demand. Trading volumes should be big or at least increasing as the stock’s price moves higher.
L is for Leader or Laggard? Buy the leading stock in the top industries. Avoid the lagging stocks.
I is for Institutional Sponsorship. Should be increasing. Watch mutual funds.
M is for Market Indicies. The Dow, Nasdaq and S&P 500 should be in uptrends when buying stocks.
In fact, Ryan says that the CANSLIM approach to investing and trading remains the “core” of his trading, representing between 80-85% of its style. But to the basic CANSLIM recipe, Ryan has added a number of elements, perhaps most central among them, buying pullbacks.
Stocks that are “about 20% off their highs” according to Ryan, often make for good pullback buys. He doesn’t want stocks to move too far back, he says, because the risk starts to increase dramatically. But he sees that 20% area as a level where stocks can often be bought at very attractive prices.
That said, he remains largely a breakout trader. “Most (breakout) trades succeed quickly when they work, following-through,” Ryan says. “(With) the best stocks, you are up almost immediately.”
As such trading and investing in such stocks takes discipline, both to know when to get in on a breakout (and not buying overextended stocks at the same time) and when to get out. As fits his CANSLIM background, Ryan uses a combination of fundamental and technical analysis to decide which stocks to take positions in and when. But when it comes to exiting stocks, he is pretty much 100% technician.
Ryan’s Pro Tips for Stock Traders
Maybe it is because David Ryan has been interested in stocks for so long that he has a clear sense of what those new–or relatively new–to active investing and longer term stock trading need to do in order to succeed.
The market, he says, “is the greatest humbling device in the world.” As such, Ryan recommends that traders start out small. “Try to hit singles, at first,” he suggests, using a baseball metaphor. “The money is not made in the super home run.”
Rather, Ryan urges, traders should take their time, become used to and comfortable with whatever trading method they have decided to use. “Try to hit singles, maybe over time turn those singles into doubles, triples–with home runs coming later.”
David Ryan recommends that traders only trade with money they can afford to lose. While it is critical for trader to learn how to admit mistakes (“every day you have to throw your ego in the trash”), he still recommends that people keep 90% of their cash in yield-bearing instruments, and only trade with the remaining 10%. This way, as the trading maxim goes, you are never “trading your lifestyle.”
Other ideas … For one, he’s a big fan of trading journals. Ryan keeps one himself and makes sure to take notes on the market action every day. He includes a daily chart of the S&P 500, three to five lines of market commentary and examples of stocks that worked–as well as a few examples of stocks that didn’t work.
Keeping a journal, according to Ryan, is an integral part of developing the kind of discipline that traders need to have in order to be both consistent and consistently successful in the stock market. “Otherwise,” says Ryan, “we are just swayed by emotions.”
Developing this discipline is one of the things that Ryan says was the most difficult thing to do when he began trading stocks. One of the best ways to develop discipline, he says, it not necessarily to force yourself into a particular mode, but to find an approach to trading that fits with your personality, outlook on the market, and–sometimes–even one’s outlook on the most eternal of issues: spirituality.
Ryan points to his strong Christian faith as an example of the sort of influence that has both helped him find an approach to trading that works for him, as well as helping him put his success as a trader in a larger, perhaps more important context.
“If you believe in a God that created the world in a non-random fashion, in a thought-out fashion,” Ryan suggests, “then you start to respect the patterns you see.”
This appreciation of the “patterns you see” has extended beyond the cup with handle and double bottom patterns made popular by William O’Neil to include some of the mathematical and geometric analysis of price movement done by legendary–and somewhat mysterious–trader and analyst William Gann of the first half of the 20th century.
With regard to putting his trading in a larger context, Ryan’s faith also serves as a significant influence he says. “If you make a lot, then you have a responsibility to help others.”
A breakout trader who also plays pullbacks… a chartist (“I go through a few thousand stocks on the weekends”) who reads research reports… a reader of at least four newspapers a day who nonetheless insists that “you can know too much about a stock”… David Ryan the trader is as much a synthesis of styles as is the CANSLIM approach to trading that still forms the foundation of his work as a money manager. “It’s amazing how the patterns don’t change,” he says. “If you miss a great stock there is always another opportunity,” he says. “Stock ideas can come from anywhere.”
David Penn is Senior Editor at TradingMarkets.com.