Occasionally I make a point of reading books or articles whose messages are at odds with my own thinking. Every once in a while this leads me to change my thinking, such as when I decided to stop picking stocks and focus on low-cost index investing. It was in this spirit that I read How to Make Money in Stocks: Getting Started.
Author Matthew Galgani, co-host of the How to Make Money in Stocks radio show, seeks to show new investors how to use a particular system of short-term trading. This system, called CAN SLIM, primarily involves chart reading in an attempt to make money riding the momentum of stocks on the rise.
A positive for the system described in this book is that it is quite specific in a number of ways. In many cases is gives precise rules on when to buy or sell stocks. For example, the author says “if a stock drops 7% to 8% below what you paid for it, sell.” The author also gives some precise buy and sell prices based on stock chart patterns.
Unfortunately, there are enough competing trading rules in this book that when you try to apply them to real stock charts, you usually end up with ambiguous signals. The author acknowledges this saying “investing, after all, is not an exact science. Few stocks ... are picture perfect in every single respect.”
These ambiguous signals make it difficult to evaluate the trading system. For example, suppose I buy a stock that then tanks. My tendency would then be to focus in on the signals pointing to weakness and decide that I made a mistake. But the reality is that there were positive signals as well. If I always look back at the system’s signals that pointed in the correct direction and ignore the ones that got it wrong, then I will tend to blame myself for poor trades instead of blaming the system.
So, after reading the entire book and attempting to apply all the rules to real stock charts, I’m left with no evidence one way or the other whether CAN SLIM works or not. So, I decided to follow Larry Swedroe’s lead and look at CAN SLIM Select Growth Fund (CANGX) which was launched in 2005.
If the CAN SLIM system has any value for new investors, presumably CAN SLIM experts can make it work. According to Yahoo Finance, CANGX is a mid-cap growth stock. From 2005 Oct. 5 to 2013 July 19, the MCSI mid-cap growth index grew by 84%. During the same period, CANGX grew by only 53%. On average, CANGX trailed its benchmark by 2.3% per year.
If CANGX is run by CAN SLIM experts who can’t beat their index, what hope do new investors have? Galgani says “you do not have to be at the mercy of the market. You can see the right time to get in—and out.” However, the evidence suggests that CAN SLIM can’t help you to do this. The author derides “buy and hold investing,” but CANGX lost to a buy and hold strategy.
Despite giving this book a fair shake, in the end I find it to be mostly an extended ad for Investor’s Business Daily. The book offers advice steering new investors to a strategy filled with uncompensated risk.