The book recommend buying stock following the “CAN SLIM” methodology. CAN SLIM is a formula Mr. O’Neil found after many years studying the markets and which he credits with his success in trading. What I liked about it is the hands-on of / no BS of his formula. Here are are my notes.

C- Current Quarterly Earnings per Share

• Only buy stocks which QEPS  have risen by a minimum of 20% year on year
• Make sure the last two quarters are positive
• If two successive quarters are in the red, the stock may be trouble

A – Annual Earning Increase

• Only buy stocks that have a compounded growth rate of earning superior by at least 25% year on year
• It is imperative that this is coupled with the +20% QEPS
• P/E ratios should be ignored

N- New Management, Products, Highs

• 95% of stunning successes have a new product or management
• Look for companies emerging from price consolidation patterns
• Forget cheap stocks, they are usually cheap for a reason

S – Supply and Demand

• Small supply = better performance
• Stocks with a large percentage of ownership from Management are good bet
• Regular share buy-back may lead to higher earning per shares
• Lower debt ratios are better
• Look for volume increase when stocks are going up

L – Leader or Laggard

• Buy the best two or three stocks in a group
• Stocks’ relative price strength need to be superior to 80
• Overall strength line should not be going down (ex. 85, then 80, then 78)
• Sell the worst performing stocks first

I – Institutional Sponsorship

• Winning stocks need 3 to 10 institutional owners (funds, pensions, insurances etc.)
• Shy away from over owned stocks by institutional
• Try to find the intelligent, highly informed institutional to follow their actions

M – Market Directions

• Track and interpret the daily price & volume chart of the general market
• Follow the leading stocks evolutions
• The big money is in the first two years of a Bull Market

I found the rest of the book to be less interesting. Still a few gems to extract, but otherwise, the author was mainly sharing his experience and going into more details about his past 35 years as an investor. Here are the few gems I extracted

• Sell if your stock take a dive.
• Ask yourself regularly “Do I want to buy this stock now ?”
• Limit your lossed to 7% or 8% for each stock
• Get out while the stock is up and has a chance to break
• Only buy 6 to 7 stocks at one
• No well run portfolio should have losses carried over 6 months
• Never short sell in a bull market
• Never short sell thinly capitalized stocks
• If you like mutual funds, big money is made long term – i.e. 10 to 15 years or more, and increase your investment when in a bear market as a fund always recover
• Keep things simple !!

Here it is folks !
All in all, a highly recommended read.

How To Make Money In Stocks: A Winning System in Good Times or Bad

Yet, a smart investors have a few techniques and strategies in their arsenal to protect themselves against market-timing and enjoy a more aggressive investment strategy with relatively low-risk: Dollar Cost Averaging and Crystallization.

Dollar Cost Averaging (DCA)

DCA is a strategy where you buy a fixed amount of the same share on a regular basis, usually monthly. It enables you to not be subject to bad market timing, helping you reduce your risk exposure. After all, you are sure to not buy a market at the wrong time as you will balance your investment the following period with the same amount of dollar. When your share’s price is going down, your dollars will buy you more shares. Of course, the contrary is also true. You buy less share when their value goes up. You end up with a slightly lower average cost, assuming the fund fluctuates up and down.

It is a very sensible approach, especially when you are starting to build up your wealth. As an example, it work great when you want to prepare yourself for retirement and decide to commit yourself to investing a fixed amount of your salary every month. It shouldn’t come as a surprise that it is a very popular strategy among investors, brokerage firms and mutual funds.

Yet, as with every strategy, it does not work every time. Some studies and analysis (here and here) have proved it to be no better than single investment when considering a single fund or investment. True enough enough, this strategy is not a panacea. But if you counter-balance its draw back with a Diversification / Crystallization Strategy, it can work wonders.

Diversification / Crystallization

The Diversification / Crystallization Strategy is pretty simple in its concept and work in two steps.

The first is to diversify your investment across a few companies, markets and sectors. You need to consider multiple companies in multiple sections across multiple markets so as to manage your risk along the way. The old fashioned “don’t have all your eggs in the same basket” advice.

The second is to review your portfolio on a regular basis and make adjustments. After a few months, you will realize that some of your position will be reaching for the sky, other have stagnated (or gone up slightly), when others started digging themselves nice little holes. The Crystallization part kicks in when you realize your profit on the ones you think have peaked. You then can re-invest this money in a new position or strengthen an existing promising one. Most of your other positions will remain the same, waiting for their time. You somtimes will have to cut your losses on a bad position. But thanks to cost averaging, your losses would not be as bad as they could have This help you optimize your profit as you sell when the market is up and minimize your bad luck thanks to cost averaging.

Pretty straight forward concept isn’t it? And the great part is that once nicely set-up, it work on its own. Select the right platform to invest with. Choose a few markets / funds that you like. Arrange for a direct transfer to buy your shares / funds once you receive your monthly income. Sit back in your chair, and simply wait a few months before reviewing your positions. No magical tricks, simply a nicely set up strategy which you stick to.

N.B. 1 – These strategies will bail you out of a declining market, you will still lose money. Nor will it get you fully invested in the earliest stage of a rising market. But you don’t have to ask yourself when to start. Tomorrow is as good a time as ever. It even is better than the day after as you can rip the benefits of your commitment earlier!

N.B. 2 – My crystallization strategy is quite different from the common one. To read more on the common meaning of crystallization in finance I invite you to check the following Investopedia article.

The Vanguard 500 index fund (code:VFINX) is, as its name indicates, an Index Funds tracking the Standard & Poor’s 500 index. It was launched in 1976 and has since been a portfolio’s favorite of many investors. Its success boils down to its investment philosophies – and some say its very good customer services.

Vanguard 500 Philosophy

John Bogle, Vanguard founder, built his company and index fund based on his Princeton undergraduate thesis findings. Mr. Bogle used the Standard & Poor’s 500 index to compare the performance of mutual funds in the past. He soon realized that three out of four of the managers were not performing better than a passive investor holding a basket of the 500 largest public companies in America. Their performance were eventually below par as investors still needed to pay their expenses, and active trading incurred taxes.

Mr. Bogle then decided to create a fund following the S&P’s 500 index with extremely low expenses. They achieved those low expenses thanks to a no-load strategy – the buyer do not pays sales commission (also called “load”) when buying or selling fund shares. All this no-load explanation may sound a little complicated. It simply translates into an incredibly low 0.18% expense ratio. Thanks to this sane and sound strategy, the Vanguard 500 Index Fund has grown to become one of the largest mutual funds of any kind. It now has more than $100 billion in assets – and growing!

What does this means to you?

It simply means that the Vanguard 500 is to be present in your portfolio. It is a very safe, cheap, and rewarding fund to hold – for Americans and non-Americans alike. Some may be afraid to invest in American funds right now. They may be right should you consider a lump sum investment. But for those considering cost-averaging, then now is the time to start building your position. What are you waiting for?

Vanguard 500 Market Data
Yahoo Finance
MSN Money
Google Finance

Index fund with stock flexibility

ETFs work like stocks; you can buy and sell them through a brokerage account; they will also be issued detailed information on their security. Like index funds there are many different ETF tracking all sorts of indices. Famous ones are the iShares S&P 500 or the SPDR – based also on the S&P 500.

What does this means for you?

Like index funds, they are considered passive vehicles; for you this means that your expense fees will be relatively low. On average, they will not beat the normal index funds, as they are traded through the day, but should be quite close. Turnover also is quite low as they track indices. This means the fund manager will enjoy lower trade expenses, yours dropping too thanks to the domino effect.

Sounds great – but what are the caveats?

As with normal index funds, you may encounter potential hiccups. What could they be?

Firstly your expense ratio will be slightly higher than with normal index fund. As with every financial product you will need to do your background work and select the ETFs which match your criterias. Unless you are looking for something very specific, you usually can find ETFs with low costs.

Secondly you will need to pay a commission to the brokerage when you buy or sell shares in the ETF. It can quickly add up if you trade on a regular basis or if your buyings are in small number.

Thirdly, the fact that ETFs are working as stocks, you may not enjoy dividends or capital gains reinvested. Some ETFs may be the exception here, so once again, doing your homework can be interesting.

Finally, some ETFs may not be based on good indices. Because of an ill-constructed index you may end up paying more in trading fees as the index keep changing. It may also mean that your ETF end up with low trading and you could end up with a significant bid-offer spread.

At the end of the day…

ETFs are a sound alternative to index funds. They enjoy an interesting trading advantage, while not having too much of a draw-back in term of cost should you go for a good provider. A safe one to start with would be Barclays Global Investors with their isharess products.

How do they work?

Most of them work like your usual mutual funds; each fund has a price – Net Asset Value – and is traded on a daily basis. They also charge for management fees, trading costs, and may distribute dividends and/or capital gains.

How are they different?

They are considered passive as their manager simply follow the index as closely as possible; they do not try to cherry pick the stocks they hold like usual mutual funds. They do not need to have battalions of analyst to uncover potential hidden gem on the stock markets. Many index funds have little or no human input in the decision thanks to the index they are tracking and the use of computer model to follow them.

What does this means for you?

Firstly, this means that you exactly know what you are investing in when chosing such funds. They are very diversified, and are a very good base to build a portfolio upon as their diversification is very good.

Secondly, your trading costs should be much reduced thanks to low stocks turnover – Indexes do not change on a regular basis, and their components are stable. Striking two birds with one stone, this will also helps avoid capital gains taxes. Their low turnover means that the fund will less frequently need to sell stock to accommodate index changes, saving you the trouble of dealing with these tax liabilities.

Thirdly, thanks to their little human input, the management fees are much reduced – the manager’s job being much simplified. As an example, the Vanguard S&P 500 has a very expensive ratio of 0.1%. You can’t really beat that.

These cost savings can be quite substantial. You can sometimes saves as much as 3 to 5 percent in return per year when comparing with some actively managed funds. Of course you may not have the pleasure to brag about how your portfolio beat the indexes. But you are sure not to have to see your nice double digit returns being eaten up by expensive fees.

Sounds great – but what are the caveats?

Of course, you guessed from the hereabove that I quite like index funds. While I think they are great, you may encounter potential hiccups. What could they be?

First, you will certainly not outperform the market as the funds try to match them. Some discrepancies may happen, but they usually are because of errors in tracking – our second point.

Secondly, some funds don’t track their index as perfectly as you would wish they do. They may take a little time to match changes in their index, or their cash position is sufficient to tamper their performance.

Thirdly, even though indexes are pretty stable, their composition changes over time. As an example a company like Google was not indexed only a few years back. The S&P 500 index has a typical turnover of between 1% and 9% per year. In effect, the fund manager will have to sell its position in markets that fell out of the index and buy the replacing ones so as match the new index.

Finally, following indexes means that you will also enjoy the ups and downs of the tracked index. You will therefore not be fully protected when global market go south. But your diversified investment is a great way to dilute your risks.

At the end of the day…

As said earlier, index funds are great tools to build a portfolio upon. The success of the Vanguard S&P 500 index fund is an example of the investors love for such product. This fund is present in so many investor’s portfolio that it has even more assets under management than Fidelity’s massive Magellan Fund. Quite a statement !