Monday, October 2nd, 2006
Interview: The Growth Stock Report’s Dan Beighley
Our second interview is with Dan Beighley who runs The Growth Stock Report, which is available to subscribers for $9.95 a month. Dan, who uses William O’Neil’s CANSLIM strategy, also runs a blog, which is free.The subscription site gives a rundown on the ‘growth stock landscape’, then a series of potential CANSLIM trades and positions Dan holds in the sections ‘Set-ups’ and ‘What we like – what we have.’
One of the things that caught my eye about Dan’s blog was his use of flags to indicate the state of the market (green flags indicate buyers have an edge). I’ve also found colour-coding market stages as extremely helpful.
Below we discuss how he became a CANSLIM user and he talks us through how he nailed a massive 200% gain.
You work on the blog, the subscription site and at The Church & Dodge Group. How do they all fit together and what services do you offer?
The site and blog started a couple years ago as a way to keep my analysis honest. For whatever reason having the discipline to write out my thoughts every week brings clarity. Church & Dodge is a research and money management outfit. We don’t put any energy toward recruiting money, but that could change in the future. Subscribers to the site are sophisticated enough to manage their own accounts.
You describe your strategies as being similar to William O’Neil’s CANSLIM. Why do you like this strategy and how have you modified it to suit your needs? Are there any ways investors can improve on CANSLIM?
I began learning about CANSLIM following the 2000 bear. Having made money in the prior bull market without a solid strategy, then losing when things fell apart, I became a determined student of various strategies. William O’Neil’s interview in Market Wizards, as well as the work of several contributors at TradingMarkets.com, inspired me. Though the buying opportunities were none in the bear market, I was impressed that it kept people out of trouble. I know of no ways of improving on the general principles of CANSLIM. But when it comes to reading charts I’m convinced there are certain (somewhat subjective) traits that traders can use to identify the stocks before they breakout. In any given market there are only so many stocks that are truly worth going for. I find more often than not I’m in a successful breakout stock before it breaks out.
CANSLIM-style systems seem to have bursts of outperformance. What do you do during the long periods when it’s not optimal to implement them? For example, how did you handle the long bear market after the tech crash?
I’ve spent most of this year doing very little. The trading I’ve done has been on a very small scale as far as position size and frequency. This isn’t easy for a lot of people, but I’ve learned it’s the only way to handle a suspect market. During the bear market I spent a lot of time learning other strategies. Some turned out to be successful, some not. The experience made me a much better trader. My number one rule is to expect nothing. Because I expect nothing it frees me to make the best decisions rather than trying to prove something in a dodgy market. Last year I had one of my best ever, so I feel confident that if I do my part to stay out of trouble I’ll come out ahead.
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Apart from William O’Neil, who are the other major influences on your investing?
I’ve read scores of investment and trading books and have learned something from every one of them. Books on technical analysis such as Murphy’s Technical Analysis of the Financial Markets and Intermarket Analysis, as well as Robert Miner’s Dynamic Trading, have given me a great knowledge base for understanding price action. But ultimately TA is worthless for me without the insight of business fundamentals. People like Peter Lynch and Warren Buffett are great teachers for identifying good businesses. And of course Edwin LeFevre’s Reminiscences of a Stock Operator is a classic for understanding how to think like a trader. Others that have expanded my perception have been Larry Connors and Linda Raschke’s Street Smarts and The Nature of Risk by Justin Mamis. I could go on.
How did you get interested in investing? What was your Chicago Board of Trade experience like?
I was a clerk at the CBOT while in college. Action in the pit left a huge impression on me as I’d watch daily battles between PhDs and guys who were driving a cab a week before. The market doesn’t care how smart you are. Trading is like war. Nothing is a given. I wanted to be successful in that arena. I never traded commodities, but years later I started trading my own account.
The market flags (green etc) are interesting. You probably don’t want to reveal your market-timing system, but can you tell us about the basics in term of sentiment, indicators, etc?
The flags are general market indications based on price and volume. I simply look for price trends and monitor accumulation and distribution days across the indexes. But predicting the major indexes is a hell of a lot harder for me than speculating in growth stocks. The flags are like my thermometer telling me if I should go swimming or not.
When the market turns bad, do you go to cash, go short, or implement any other bear-market strategies?
When the market turns bad I’ll take small short positions, but only if they’re set up properly. High volume climaxes are my favorite to short, especially if they coincide with multiple distribution days in the major indexes. HANS is an example of one this past summer. I don’t like to short much and I am very, very selective about it. Last summer I employed O’Neil’s shorting strategy from his new book and got burned on a few trades. Nothing works all the time, but undoubtedly there will come a time when those strategies will be useful.
What are some of the big winners or losers you’ve had, and how did you play them right or wrong?
My biggest winner was a few years ago with Golden Star Resources for a 200% gain. At its height I was sitting on a about a 300% profit wave that crashed in a climax top. The feeling those runs will go on forever grips you with moves like that. The entry was in ’03 at about $2.00. Golden Star Resources being a commodity stock under $15 didn’t have the most ideal characteristics, but it popped up on my scan for strong fundamentals – and I was bullish on gold. I was in before it broke out of its base, and recall being more confident on that trade than usual. Of course I had no idea it would turn into as big a winner as it was, and I guess my only regret is that I didn’t buy more. I’ve yet to see a set-up as attractive, but undoubtedly it’s always harder to exit a stock than it is to enter. I usually avoid stocks under $15, but this one was more of play on gold than anything.
With CANSLIM I’ve never taken more than a 20% accumulated loss. That’s from trading successive failed breakouts on a single stock. As I’ve matured, I never let it go down more than 8%, usually it’s 5%, or sometimes 2%. In non-CANSLIM trading, I once lost 50% overnight on a stock I can’t even remember the name of. The company issued an earnings warning and it gapped lower the next day. I considered throwing my computer out the window but came to my senses. Through years of doing this I’ve learned not to be emotional about trading. This also falls back on my number one rule of expecting nothing.
From my perspective, O’Neil is a bit light on in terms of risk/money management (apart from cutting losses). He basically leaves it up to people to work out how much to risk on each trade. Are you taking significant risks in the market or do you have strategies to limit and control your risk?
Good point. I think risk tolerance is a personal decision. When all the market lights are green as far as accumulation, leaders and solid candidates to trade – I go for it. I set my first profit targets at 20% where I’ll take off half and let the second half ride with a breakeven stop. Hopefully market conditions will persist and I’ll nab 50% and 100% targets. Having already netted 20% makes it easy, but I always keep it in perspective that it’s unlikely I’ll time a top perfectly. In suspect markets I’ll take HALF positions, and with relatively weaker stocks (in terms of fundamentals) I’ll use 10% as a first target. I’ll be in no more than 7 stocks at once for a fully loaded portfolio.
If you could give CANSLIM investors one piece of advice what would it be?
Never bet your lifestyle. It’s just a game.
Finally, how do you see the current market and where are the best opportunities?
Buyers have really turned it on in the past couple of weeks. I’ve seen the most attractive opportunities in Healthcare/Biotech issues
This entry was posted on Monday, October 2nd, 2006 at 7:25 pm and is filed under Breakout trading, People. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
