Editor's Outlook

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Portfolio Management Systems

I am a strong believer in the theory that if something works you don’t fix it. So it was with great apprehension that we re-examined the CAN SLIM approach. We have been testing the performance of a wide range of screening systems for over five years now and our interpretation of the CAN SLIM approach has proven to be one the most consistent and strongest-performing screens during both bull and bear markets. Our implementation of the CAN SLIM approach was based upon the second edition of William O’Neil’s book “How to Make Money in Stocks: A Winning System in Good Times or Bad.”

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That edition of “How to Make Money in Stocks” presented a stock selection approach developed by studying 500 of the biggest stock market winners from 1953 to 1993. The CAN SLIM approach presented in the book was based upon the characteristics that these winning stocks possessed prior to their big price run-ups. The approach focused on strong current quarterly earnings growth, strong and consistent annual earnings growth, new highs, limited stock supply, leading companies, institutional sponsorship, and overall market direction.

O’Neil extended his analysis of past market winners to 600 companies that performed strongly from 1953 to 2001 and subsequently revised a number of CAN SLIM criteria. The third edition of “How to Make Money in Stocks” was published last year and presents the revised CAN SLIM rules. The feature article of this issue as well as the April 2003 issue of the AAII Journal detail the revised criteria. One of the significant changes is the decreased emphasis on selecting stocks with a limited supply of shares. While the CAN SLIM approach previously focused more on smaller companies, O’Neil now explicitly states that the CAN SLIM system is suited for the analysis of companies of all sizes. There are many other changes, which are discussed in our feature article.

The chart here provides a quick view of our initial testing of the revised CAN SLIM approach. The revised approach has proven to be a bit more volatile—rising higher and faster in the bull market of late 1990s, but then giving up its lead in the recent bear market. We plan to track both strategies for some time and report on their performance in the Stock Screens area of AAII.com as well as in the AAII Journal.