How to Make Money in Stocks — Chapter 1: The CAN SLIM Model
阅读中文版 (with Audio)Chapter 1: The seven CAN SLIM factors, and why 'cheap' is the most expensive bias in retail investing.
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How to Make Money in Stocks — Chapter 1: The CAN SLIM Model
"The most dangerous illusion in the market is buying cheap junk. The real winners are always leaders with superior earnings growth." — William O'Neil
Financial Context
William O'Neil founded Investor's Business Daily. He studied thousands of the biggest US stock winners from 1880 onward, identifying what they had in common immediately before their major advances, and distilled it into the CAN SLIM model.
The methodology is what matters: this is not theory but reverse engineering of historical winners — find every stock that made a huge move, then look back at what they shared beforehand.
Wall Street Application
The Seven CAN SLIM Factors
- C (Current earnings): Quarterly EPS growth of at least 25% year over year; higher is better.
- A (Annual earnings): Three-to-five year compound growth above 25%, return on equity above 17%.
- N (New): New products, new management, new industry conditions, or a new price high.
- S (Supply and demand): Reasonable float, high insider ownership, volume expanding 40%–100% on the breakout.
- L (Leader, not laggard): Buy only relative strength ratings above 80; never buy the laggard.
- I (Institutional sponsorship): Quality funds accumulating shares.
- M (Market direction): The general market must be in a confirmed uptrend.
Why "Cheap" Is the Most Expensive Bias
The most counterintuitive finding in O'Neil's research: the biggest winners were almost never cheap at the start.
| Retail intuition | What the data shows |
|---|---|
| Buy low P/E stocks | Big winners typically started at above-average P/E |
| Buy what has fallen a lot | Big winners started while making new highs |
| Avoid what has already run | Stocks at new highs more often make further highs |
The reason is straightforward: a low price usually reflects genuine deterioration rather than mispricing. A stock that fell from $100 to $20 most commonly goes to $5 next — not back to $100.
Why M Comes Last but Matters Most
O'Neil stressed repeatedly that even when the first six factors align, roughly three of four stocks fall anyway if the general market is declining. Stock selection cannot overcome market direction.
Trading Execution Rules
- Build a mechanical screen: Run it weekly, discarding anything with earnings growth under 25% or relative strength under 80.
- Overcome fear of new highs: Accept the counterintuitive statistic that stocks making new highs more often continue higher.
- Check the market before the stock: When the general market weakens, cut exposure regardless of how well a name screens.
Relevance to a Retirement Portfolio
CAN SLIM is an active selection method and is not appropriate for managing core retirement assets — it demands continuous monitoring, fast execution, and runs concentrated.
One principle does transfer: never let "it's cheap" be the primary reason to buy. A falling price is not itself value, and the most dangerous holdings in a retirement portfolio are often precisely those bought because they had "fallen so far they must bounce."