Hi Joseph,


> Is there a simpler way to select stocks that
> will rebound. I've been struggling with
> William O'Neil system The founder of
> investors business daily.


I haven't read his book, but I found some info on his CANSLIM system.... Here's a page which summarizes it http://www.equis.com/free/taaz/canslim.html


The main thing I can relate to is the "A" part - Annual earnings growth. I also look for companies which grow their profits by a substantial amount every year....


As you may know though, I'm a "buy and hold" type of person, whereas the CANSLIM system seems to be designed for those who want to buy and sell all the time....


I think the danger with always buying and selling (which he might not tell you) is that you're going to pay a lot more in commissions if you're always buying and selling compared to a buy and hold approach.


Buying and selling all the time also means you pay tax on your profits every year, rather than at the end (as you would with a buy and hold strategy). That also means more money if you buy and hold.... Let me show this by example.


Let's say you have $10,000 to invest, and every year you make a 30% return. Let's say that your profits are taxed at 30% too. Let's look at the constant buy and sell approach.... That means you pay your tax every year (since tax is due when you sell)....


Year Your Wealth
0 $10,000
1 $12,100
2 $14,641
3 $17,716
4 $21,436
5 $25,937
6 $31,384
7 $37,975
8 $45,950
9 $55,599
10 $67,275


You've done well, in 10 years you've increased your money more than six-fold with these figures, constantly buying and selling, and paying your tax every year on the profits.


Now, let's take the same figures, of making a 30% annual return, and with a 30% tax rate. However, now let's say you're using a buy and hold approach, where you happen to hold the stock for ten years, paying the tax on your profits only after 10 years when you sell it....


Year Your Wealth (pre-tax)
0 $10,000
1 $13,000
2 $16,900
3 $21,970
4 $28,561
5 $37,129
6 $48,268
7 $62,749
8 $81,573
9 $106,045
10 $137,859


In year 10, you sell, which means the tax on your profit is due.... Say that tax comes to 30% too, then your total wealth is


Year Your Wealth (after tax)
10 $99,501


As you can see, you've made almost 48% more money (or more than $30,000 better in the above example) by using a buy-and-hold strategy, just because you can pay your tax at the end, rather than all the time you're buying and selling....


Also, by constantly buying and selling, you're always working, whereas with a "buy and hold" approach, you only have to work when you pick the stock.... Then you can forget about it for a while and get on to other things, you don't have to check how it's doing every day....


I try to follow Warren Buffett's approach.... I always like to see people's record to see how they've really done. I don't know precisely how rich O'Neil is, however, I think nowadays (since the tech crash) Buffett is the second richest person in the USA, with a net worth of more than $30 billion.


- Dien Rice


P.S. If after the above, you still want to be a "daytrader" type, O'Neil could be good.... I also noticed he recommends an 8% stop-loss -- that is, sell the stock if it drops by 8% or more. I have a good friend who's a daytrader, and he's one of the few daytraders I know personally who's ended up with a profit even after the recent market downturn.... This friend of mine uses a strict 10% stop-loss, so making sure you "cut your losses" this way I think is very important if you are going to take the day trading approach....