Today’s post is a profile of Guru investor David Ryan, who appears in Jack Schwager’s original Market Wizards. His chapter is called Treasure Hunt.
David Ryan began to invest at the age of thirteen, when his dad bought him 10 shares of a firm that made candy bars.
By the time he was sixteen, he was subscribing to a weekly chart service and attending investment seminars by William O’Neil.
O’Neil appears in Jack Schwager’s original Market Wizards.
- His chapter is called Treasure Hunt.
In college, he read every book on the stock market he could find.
Ryan recommends quite a list:
On top of the list is O’Neil’s book, How to Make Money in Stocks.
- How I Made Two Million Dollars in the Stock Market by Nicholas Darvas
- Reminiscences of a Stock Operator by Edwin Lefevre
- How to Trade in Stocks by Jesse Livermore
- Super Performance Stocks by Richard Love
- Profile of a Growth Stock by Kermit Zieg and Susannah H. Zieg
- Winning on Wall Street by Marty Zweig
- Secrets for Profiting in Bull and Bear Markets by Stan Weinstein (which we’ve covered here).
I’ve ignored a couple of books on Elliott Wave analysis.
All those books are good, but you learn the most from the market itself. Every time I buy a stock, I write down the reasons why I bought it.
Ryan idolised O’Neil and managed to get a job at his firm after college in 1982.
- It wasn’t an analyst job, but Ryan studied hard at night and at weekend.
I studied historical models of great winning stocks to ingrain in my mind what a stock looked like before it made a major move.
His first account at running his own account went well for a while, but he played a bear market too aggressively and gave all the winnings back.
I also made the mistake of buying stocks that were overextended. I was buying stocks that had already moved 15 to 20% above their price bases. You should only buy stocks that are within a few percent of their base.
The single most important advice I can give anybody is: Learn from your mistakes. That is the only way to become a successful trader.
After four years he as a VP and O’Neil’s assistant.
in 1985 he won the U.S. Stock Investing Championship, with a return of 161%.
- The next year he came second with 160%.
- In 1987 he won again with more than 100% for the third year in a row.
Ryan sees investment as a game – a treasure hunt.
I start out by going through the stock charts and writing down the stocks with strong technical action.
In a week I probably go through about 4,000 charts. Avoid stocks under $10 – they are usually down there for a reason.
I look at the five-year earnings growth record and the last two quarters of earnings relative to the previous year’s levels. The quarterly comparisons show you if there is any deceleration in the earnings growth rate.
He uses O’Neil’s EPS (earnings per share rank).
I want it as high as possible – at least above 80, and preferably above 90. A lot of stocks I buy have an EPS rank of 99. In my experience, markets usually anticipate.
People think that the price of the stock would run up well before the earnings growth starts to be extremely positive. Looking at the biggest winners, we found that in many cases, the earnings had been on the table for a while.
The relative strength is very important. Again, I look for at least above 80, and preferably above 90.
Schwager wonders how Ryan avoids stocks that are about to top out (which would have good relative strength).
I am usually able to avoid that because I generally rule out stocks that are overextended from their base. The higher the relative strength the better. Once the relative strength starts falling off, I usually get out of the stock.
I would probably place relative strength first, then EPS. Many times the relative strength takes off before that big earnings report comes out. I also want the industry group to be in the top 50 [of 200, for relative strength].
I am looking for stocks with less than thirty million shares outstanding and preferably only five to ten million shares. Stocks with more than thirty million shares have more supply, so it takes a lot more money to move them.
You want some institutional ownership, because they really power a stock higher, but you don’t want too much sponsorship. I would say 1% to 20% is the ideal range. There should also be something new that attracts people to that stock.
On average, there are probably only about seventy stocks that meet the criteria. Then I cut those seventy down to about seven. I pick those stocks that have all the characteristics plus a great-looking base pattern.
I also look at how the stock has done in the past. A lot of the stocks I buy have already doubled and tripled before I buy them. That shows me there is something very unusual going on, and if the situation is that good, a doubling may just be the beginning.
Schwager notes that Ryan’s approach is basically the O’Niel CANSLIM methodology.
- To this Ryan has added a a
O’Neil says the P/E ratio is not important. I think it is, in that your success ratio is a lot higher on lower P/E ratio stocks.
Ryan likes stocks with a Trades
Ryan only has around 50% winners.
I cut the losers very quickly. The maximum loss I allow is 7%. I make my money on the few stocks a year that double and triple in price.
I usually hold my big winners for about six to twelve months, stocks that aren’t that strong about three months, and my losers less than two weeks.
I usually wait until the stock runs up, builds another base, and then breaks down. That is when I liquidate.
He doesn’t believe in limit orders, other than in “dull markets”.
If you really think the stock is going to make a big move then there is no reason to haggle over an eighth of a point. Just buy the stock.
He often buys at new highs:
I am trying to buy a stock when you have the most chance of making money. When a stock is coming off the low end of a base back to the high end, there will be a lot of people who bought it near the highs and sat with a loss for months.
Some of those people are going to be happy to get out at even, and that creates a lot of overhead resistance.
You can tell a lot by the volume. If the volume doubles one day and the stock moves to a new high, it is telling you a lot of people are interested in the stock and buying it. If the stock moves to new high ground, but the volume is only up 10%, I would be wary.
If it re-enters its base, I have a rule to cut at least 50% of the position.
Stocks should be at a profit the first day you buy them. In fact, having a profit on the first day is one of the best indicators that you are going to make money on the trade.
Ryan uses an increase in volume relative to the 50-day average volume as a timing indicator.
To pick a short, I think you need to flip all these characteristics. You should look for a poor five-year growth record and quarterly earnings that are decelerating. The stock should be losing relative strength, breaking uptrends, and starting to hit new lows.
But Bill O’Neil will tell you that shorting is about three times as hard as buying stocks. He thinks the best thing you can do in a bear market is just sit it out.
If, during the bull phase, the leaders start losing, it indicates that a bear market is developing. If I have five or six stocks in a row that get stopped out, a caution flag goes up.
Divergence between the Dow and the daily advance/decline line [is another signal].
This is another good interview, with a very open interviewee.
- That said, there’s obviously a lot of overlap with O’Neil himself.
And both O’Neil and Ryan have a lot in common with Weinstein and Minervini.
Ryan’s success is basically due to using a precise methodology and applying great discipline to follow it. As Ryan has clearly demonstrated, a trading methodology doesn’t have to be original to be extremely successful.
Maintaining a trader’s diary is an essential element of Ryan’s approach. Every time he buys a stock, Ryan annotates the chart with his reasons for buying the stock.
Whenever he liquidates or adds to an existing position, a new chart is included with updated comments. This approach has helped Ryan reinforce in his mind the key characteristics of winning stocks.
Perhaps, more important, reviewing his past entries has helped him avoid repeating trading mistakes.
Until next time.
Article credit to: https://the7circles.uk/david-ryan-treasure-hunt/