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Market Wizards - Interviews with Top Traders

David Ryan: Stock Investment As A Treasure Hunt

David Ryan has been the U.S. Investing Champion for 3 times and also worked for William O’Neil. He admits that whenever he buys a stock, he writes the reason for doing so because it helps him to identify the characteristics of a winning stock. It also helps him to learn from his mistakes. He believes that being disciplined will help one do better in the market.

 

While selecting stocks, he avoids stocks under $10. He goes through about 4000 charts every week and lists down the stocks with strong technical action.

 

He then evaluates the five-year earnings growth record and the last two quarters of earnings with the previous year’s levels. The quarterly comparisons show whether there is any decline in the earnings growth rate. For example, a 30% growth rate over the last 5 years may look very impressive, but if in the last two quarters earnings were up by only 10% and 15%, it warns you that the strong growth period may be over.

 

He suggests that the relative strength of a stock is very important and it must be at least 80, preferably above 90. He prefers not to pick stocks that are over-extended from their base because many times stocks with highest relative strength continue to outperform the market for a long time. He prefers going with relative strength of 99 rather than 95. When the relative strength starts falling, he gets out of the stock.

 

He looks for stocks with less than 30 million shares and preferably only 5 to 10 million shares. Stocks with more than 30 million shares have already split a few times. It is a demand supply case: because you have more supply, it takes a lot more money to move those stocks.

 

For cutting down from 70 stocks to 7, he picks those stocks that have all the characteristics plus a great-looking base pattern. In short, he looks for stocks that are strong both in terms of earnings and technicality.

 

He prefers the parameter of relative strength over EPS because many times the relative strength takes off before the earnings report comes out.

 

He believes in cutting losses very quickly. He usually holds the big winners for about 6 to 12 months, stocks that aren’t that strong about 3 months, and the losers less than 2 weeks.

 

When explaining about the volume he says, if the volume of a stock doubles one day and the stock moves to a new high, it is indicating that a lot of people are interested in the stock and buying it. If the stock moves to a new high, but the volume is only up by 10%, one must be wary. When a stock starts consolidating, you want to see volume dry up. You should see a decrease in volume. Then when volume starts increasing again, it means the stock is ready to blast off.

 

So, during the consolidation phase, decreasing volume is good. If you continue to see very high volume, it is a potential top because it shows that a lot of people are getting out of the stock.

 

David Ryan has a rule to cut the position by at least 50%, if the stock re-enters its base. He believes stocks should be at a profit the first day you buy them and it is one of the best indicators that the trade will be successful.

 

He advises traders to learn from their mistakes and that's the only way to become successful. If you love what you are doing then you’ll be a lot more successful.

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