HOW TO MAKE MONEY IN STOCKS

CANSLIM

C – Current quarter earnings per share

A – Annual earnings increases: look for meaningful long term growth

N – New products, new management, new highs: buying at the right time

S – Supply and demand: small cap + volume demand

L – Leader or laggard

I – Institutional sponsorship

M – Market direction: how to determine it?

1. C

The stock should show increase in the current quarterly earnings per share when compared with y-o-y same quarter
rather than q-o-q to better reflect seasonal earnings figures.

You should be concerned with the company’s total net income. You don’t own the whole organization. You own shares of
stock in the corporation. Perhaps the company issued additional shares or there was other dilution of the common stock.

One time, nonrecurring earnings are not representative of the true, ongoing profitability of corporate operations and
hence must be omitted from the quarter earnings.

As a general guide for investors not to buy any stock that doesn’t show earnings per share up at least 18 – 20% in the most
recent quarter vs the same quarter the year before.

At least two quarters of major earnings slowdown may mean trouble before turning negative on a company’s earnings
since the best of organizations can periodically have one slow quarter.

2. A

Each year’s annual earnings per share for the last five years should show an increase over the prior year’s earnings. You
might accept one year being down in the last five years as long as the following year’s earnings quickly recover and move
back to new high ground.

The annual compounded growth rate of earnings should be from 25 – 50% or even 100% or more, per year over the last
4 or 5 years.

Companies with outstanding five year growth records of 30% per year but whose current earnings in the last two quarters
have slowed significantly to 15% and 10% should be avoided in most instances.

Factual analysis of each cycle’s winning stocks shows that PE ratios have very little to do with whether a stock should be
bought or not. A stock’s PE ratio is not an important cause of the most successful stock moves.

High PEs were found to occur because of bull markets. With the exception of cyclical stocks, low PEs generally occurred
because of bear markets. Don’t buy a stock solely because the PE looks cheap, there are usually good reasons why it is
cheap.

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The simple truth is that stocks at any one time usually sell near their current value. The price of a high PE stock can also
get temporarily ahead of itself, but so can the price of low PE stocks.

3. N

The great paradox in the stock market is that what seems too high and risky to the majority usually goes higher and what
seems low and cheap usually goes lower.

A stock should be close to or actually making a new high in price after undergoing a price correction and consolidation.
The consolidation in price could normally last anywhere from 7 – 8 weeks up to 15 months.

Avoid buying once the stock is extended more than 5% or 10% from the exact buy point off the base.

Search for corporations that have a key new product or service, new management, or change in conditions in their industry.

4. S

In comparison between two stocks, other factors being equal, one with smaller share outstanding will usually be the better
choice as a reasonable amount of buying can push the stock up rapidly because of the small available supply.

Stocks that have a large percentage of ownership by top management are generally your best prospects.

Pick entrepreneurial managements rather than conservative caretaker managements, as the latter are usually less willing
to innovate, take risks and keep up with the times.

It is better to own 200 of the most outstanding, small to medium sized growth companies than 50 to 100 old, overgrown,
large cap stocks that appear on everyone’s list.

After picking a stock with a small with reasonable number of shares in its cap, check the percentage of the company’s total
capitalization represented by long term debt or bonds. (debt ratio)

Lower priced stocks with small capitalization and no institutional sponsorship or ownership should be avoided, since they
have poor liquidity and a lower grade following.

5. L

Buy among the best two or three stocks in a strong industry group, which are the leaders, and avoid sympathy moves,
which look much cheaper in price and have similar products, which are the laggards.

Sell your worst performing stocks first and keep your best acting investments a little longer. For example, when overall
market suffers falloff, the ones down the least are likely to be your best investments after they recover.

It seldom pays to invest in laggard performing stocks even if they look tantalizingly cheap. Look for the market leader.

6. I

A stock certainly doesn’t need a large number of institutional owners, but it should have at least a few such sponsors.
Certain institutional sponsors are more savvy, have a stronger performance record, and are better at choosing stocks than
others are.

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A stock can also become overowned whose institutional ownership has become excessive which may represents large
potential selling if anything goes wrong in the company or the general market.

7. M

If you are wrong about the direction of the broad general market, three out of four of your stocks will slump with the
market averages and you will lose money. The best way to determine the direction of the market is to follow and
understand every day what the general market averages are doing.

Markets tend to go up when people are skeptical and disbelieving. Learn to interpret a daily price and volume chart of the
general market averages.

General market top reversals are usually late signals – the last straw before a cave-in. in most cases, distribution or selling
in individual market leaders has, for days or even weeks, preceded the approaching market break. After the top, poor
market rallies and rally failures in the averages will occur. Further selling is advisable when these weak rallies or rally
failures are recognized.

Recognizing when the market has hit a top or bottomed out is 50% of the whole complicated ball game.

Most of the top reversals in the past occurred after the averages moved into new high ground and during their third to
ninth day of rally.

Sign to detect a market top: during uptrend the total market volume will be higher than the preceding day’s high volume,
but the Dow’s closing average will show stalling action or less upward movement than on the prior few days.

After first selling near the top, volume may subside and the market averages will sell off for perhaps few days. The first
stock rally during the beginning downtrend will fail abruptly. After the first day resurgence, the second day will open
strongly. But towards the end of the day, the market will suddenly close down.

The initial market decline can be on lower volume. This is a normal occurrence after heavy distribution has occurred on
the way up around the top. Volume only begins to pick up on the downside, days or weeks later, when it becomes obvious
to more investors.

It is essential to preserve as much f the profit you have built up as possible rather than to ride most investments up and
down through difficult cycles like many people do.

In the past, it frequently marked the beginning of bear markets and impending recessions when the interest rate was
increased and signaled the end of a bear market when the discount rate was lowered.

You don’t need to know what the market is going to do! All you need to know is what the market has actually done! This
is the key! Think about it for a minute. There is fortune in this paragraph.

After the daily general market averages, the second most important indicator of primary changes in stock market direction
is simply the way leading stocks act. If the majority of the price leaders top after an advance for a couple of years or more,
you can be fairly sure the overall market is going to get into trouble.

Another sure sign of the beginning of a bear market is when the original bull market leaders falter and lower quality, low-
priced speculative stocks begin to move up.

The whole idea is to be completely objective and recognize what the marketplace is telling you, rather than try to prove
that you are right and the market is wrong.

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The stock market normally bottoms out while business is still on a downtrend, anticipating economic events months in
advance. In like manner, bull markets frequently top out and turn down before economic recession begins. Therefore,
using economic indicator to tell you when to buy or sell is generally an exceedingly poor procedure.

You should check earlier cycles to learn the sequence of industry group moves at various stages of the market. (early
movers, late movers)

The really big money is made in the first one or two years of a normal new bull market’s upward movement. The remainder
of the up cycle usually consists of back and forth movement in the market averages, followed by a bear market.

What is CANSLIM?

Buying companies with strong fundamentals, large sales and earnings increases resulting from unique new products/
services and trying to time the purchases at a correct point a the company emerges from consolidation periods and before
the stock runs up dramatically in price.

Learn to interpret the daily general market indexes (price and volume changes) and action of the individual market
leader to determine the overall market’s current direction.

The secret to winning in the stock market is to lose the least amount possible when you’re not right. This is similar to
George Soros’ famous quote – it is not whether you’re right or wrong, but how much money you make when you’re right
and how much you lose when you’re wrong.

Cut loss when it is 7-8% below cost price. Once you are ahead and have a good profit, you can afford to, and should, allow
the stock more room for normal fluctuations in price. Do not sell a stock just because it’s off 7-8% from its peak price.

Because of position size problems and broad diversification which lessen risk, most institutional investors don’t usually
follow such a quick loss cutting plan. This is in turn an advantage for individual investor have over the institution.

The bigger problem is knowing how to select leading stocks but has no selling plan. Individual investors must have rules,
plans, and idea about when to sell and take a profit before the stocks top and wipe out the profits.

Take 20% profits when you have them and cut losses at 8%. If the stock was so strong that it vaulted 20% in less than 8
weeks, the stock had to be held at least 8 weeks and be analyzed to see if it should be held for a possible 6 months.

Do not average up at more than 5% past the buy point or when it is extended in price too far past a buy point.

Selling movers

The ultimate top may occur on the heaviest volume day since the beginning of the advance.

Sell if a stock advance gets so active that it has a rapid price runup for two or three weeks. This is called climax top activity.

Sell if a stock runs up on a stock split for one or two weeks.

Big investors must sell when they have buyers to absorb their stock. Consider selling if a stock runs up and then good news
or major publicity is released.

New highs on decreased or poor volume/ heavy volume without further upside price progress

Sell when there is an overabundance of optimism and everyone is fully invested.

Be careful of selling on bad news or rumors; they are usually of temporary influence.
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When there is initial heavy selling near the top, the next recovery will follow through weaker in volume, show poor price
recovery, or last a shorter number of day. Sell on the second or third day of poor rally.

If after a stock's price is extended from a proper base, its price closes for a larger increase than on any previous up days,
watch out! This move usually occurs at or very close to a stock's peak.

Some stocks can be sold when they are 70% to 100% above their 200 day moving average price line.

Give securities 13 weeks after first purchase week before conclude that a stock that hasn’t moved is a dull, faulty selection.

Major advances require time to complete. Don’t take profits during the first eight weeks of a move unless the stock gets
into serious trouble or rapid runup on a stock split. Dramatic stocks advancing 20% or more in only four or five weeks are
the most powerful stocks of all, capable of increases of 100%, 200%, or more.

It takes time for a stock to make a large gain. The first two years of a new bull market typically provide your best and safest
period for courage, patience, and profitable sitting. Achieving giant profits in a stock usually takes one to three years time
and patience.

Most people with $20,000 to $100,000 to invest should consider limiting themselves to four or five carefully chosen stocks.

No well-run portfolio should ever have losses that have been carried for six months or more. Keep your portfolio clean
and in touch with the times.

After a person has proven he or she is able to make money in common stocks and has sufficient investment understanding
and actual experience, then the limited use of options might be intelligently considered.

When and if you do consider options, you should positively limit the percentage of your total investable money committed
to options; 10%to 15% is a prudent limit. If you buy options, you are better off buying longer time period options—six
months.

Big daily and weekly volume provides extraordinarily valuable tip-off to an investor looking for potentially large winners.

Analysis of volume or the number of shares of stock being traded can help investors to recognize if a stock is under
accumulation or distribution.

Reading the daily financial news pages

Be alert to stocks with the greatest % change in volume? Imagine if your largest stock holding was down two points
yesterday and the volume % change column showed your stock traded 500% greater volume than normal. Wouldn't you
want to be aware of that fact?

Pay attention to corporate earnings reports. Are more corporate earnings coming in below estimates?

Always check stocks making new highs daily.

Study the general market indicators page. This will enable investors to correctly interpret the direction of the daily general
market averages to determine bad market conditions as well as the eventual beginning of the next bull market. To do this
properly, you can’t just look at one market average. Look at the strongest and weakest sector indexes.

Review companies in a leading industry.

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Tape reading – price and volume

Whenever you see tape activity that impresses you, refer to the stock’s chart to see if the stock is in a base-building period
or if it is extended from a base. If it is extended in price, leave it alone; it's too late. Chasing stocks, like crime, doesn't pay.
If the stock is in a base, then check and apply the CANSLIM formula.

After a short-term rally, or near a market top, a tape reader can frequently discern a shift in the quality of the tape. The
top-notch leading stocks no longer lead the market up. Lower quality laggards and cheaper stocks now move to the front
line of battle. This is a warning sign that all is not right in the market, and a sharp correction might be just around the next
corner.

Avoid buying securities as they approach former overhead supply price areas and wait to see if a stock is able to break
through its recent overhead supply zone before considering purchase.

People are sometimes less concern with whether the news is good or bad than they are in analyzing the news effect on
the market.

When a news item has become widely known or anticipated, it is usually discounted by experienced individuals in the
marketplace, blunting the effect of its release.

The winning formula is to buy a stock when it is not completely obvious to everyone. In fact, you’ll find few or no research
reports available on the very best stock ideas. When several reports show up, it’s time to sell.

Modern portfolio theory, a strictly theoretical approach that emanated from statisticians in the academic world, has
proven to be almost complete waste of time, since its theories were built on assumptions that were not true.

Mistakes to avoid

1. Don’t buy on the way down in price, and never ever average down in your buying. If you average down you are
following up your losers and mistakes by putting good money after bad.
2. Don’t buy cheap stocks selling at low prices. You can’t buy the best quality at the cheapest price.
3. Don’t buy on tips, rumors, stories and advisory service recommendations. Most of them don’t know for sure what
they are doing.
4. Don’t stubbornly hold onto losses even when losses are small and reasonable. Don’t wait till loss gets much bigger
and costlier to get out.
5. Don’t speculates too much in options (concentrate in shorter-term, lower priced options with greater volatility and
risk). The limited time period works against short term option holders.
6. Novice investors like to put price limits on their buy-and-sell orders. They rarely place market orders. This is poor
because limit orders result in your completely missing the market and not getting out of stocks that should be sold to
avoid substantial losses.
7. Look at stocks objectively. Don’t hope and don’t rely on personal opinions, but pay attention to the opinion of the
marketplace, which is frequently right.

My parting advice to you is: Have courage, be positive, and don't ever give up. Great opportunities occur every year in
America. Get yourself prepared and go for it. You'll find that little acorns can grow into giant oaks. Anything is possible
with persistence and hard work. It can be done, and your own determination to succeed is the most important element.

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