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Thoughts on CANSLIM

Last week I received an inquiry from a fellow member at Trade2Win.

I have your book and I think its great, im about half way through. I have read some of your posts here and think you give excellent consistent answers. I read that you are a canslim follower with a small deviation. Im not by any means looking for easy answers but the way I see it is surely canslim is too abvious and prone to manipulation to work in its pure form? I was wondering what your interpretation of canslim is, as I have much respect for your work.

First of all, let me clarify what we’re talking about here. CANSLIM is the acronym for a stock trading system developed by William O’Neil, creator of Investors Business Daily (IBD). It can be found in the book How to Make Money in Stocks, which is now in its 4th edition. The original edition is one of the first books I read about when I was getting my start in trading and I still consider it to be perhaps the single most influential of all the one’s I’ve read.

To put it most simply, the CANSLIM approach combines technical analysis and fundamental analysis into one full long-only individual stock trading system. On the technical analysis side the focus is really only on chart pattern analysis. It doesn”t employ or even discuss indicators. As for the fundamental analysis, it is has both top down and bottom up elements to it, but is mostly the latter – focusing primarily on the companies.

Gaming the system
Here’s where the cynicism of the modern trader come in to play. The trader asking me about CANSLIM has suggested that it’s “too obvious” and “prone to manipulation”. I personally don’t see it that way.

To be sure, there is definitely some CANSLIM gaming that goes on, but it’s more about the lists the folks at IBD publish than the core strategy. There is a list of 100 stocks the IBD folks put out each week (I think) which lists the stocks they consider the best bets based on the CANSLIM criteria. Because inclusion in that list can generate a great deal of investor action in a stock, there are those who try to anticipate stocks joining the list and trying to profit from the bump new entrants can see. This, however, is a minor thing in the grand scheme.

Richard Dennis, creator of the Turtles, was reported to have said that he could publish his trading system rules in the paper and not have to worry about it hampering his performance. I’m with Dennis on that. There are millions of traders and investors using a vast array of methods for deciding what and how to take positions in the markets. Even the ones using the same system have variations in how they are doing so in terms of timeframe and instrument and such. On top of that, there are always those who simply can’t stick to the rules. We know this to be true. That’s one reason why I don’t see the CANSLIM methodology as being “too obvious” or anything like that.

Further more, CANSLIM is based mainly on intermediate and longer-term trends. These are not readily manipulated because they are generally founded in core fundamentals, like the trend in earnings.

Laying it all out
Those who have read The Essentials of Trading know that in the appendix I have posted the full stock trading methodology that I have used for many years and continue to use at present. As noted in the book, it has CANSLIM as the foundation. I’m not saying the CANSLIM methodology is for everyone. It isn’t. From the first time I read How to Make Money in Stocks, though, it made intuitive sense to me, and still does.