David Ryan is an extremely successful investor profiled in Market Wizards. He worked closely with famed investor William O’Neil, and eventually became a professional money manager. In addition, Ryan won the stock division of the U.S. Investment Championships in 1995 and 1995, posting 161% and 160% returns respectively. Ryan has a detailed stock selection process that he outlines in Market Wizards.

Stock Selection Process
1. Ryan only buys stocks within a few percent of their base to control downside risk.

2. Another early step Ryan initially takes is to \examine charts and identify stocks of interest from a technical analysis perspective.

3. After narrowing his universe of stocks, Ryan employs an earnings per share screen. Ryan compares the previous five year earnings growth record and the last two quarters earnings relative to the previous year’s earnings.

This comparison allows Ryan to evaluate the earnings growth trend. For example, if the previous two quarters of earnings growth were lower than the five year average, that would signal a warning about future stock performance.

The strong relative earnings growth that Ryan seeks is not always discounted into stock prices. For example, if the general market is weak, an individual stock with strong earnings growth may be held down in price. When the general market conditions improve, these stocks that have been held down but have strong earnings fundamentals generally outperform.

4. A degree of institutional ownership is also an important factor in Ryan’s stock selection process. He seeks stocks with 1-20% institutional ownership. Like William O’Neil, Ryan wants a small degree of institutional ownership, so that once Ryan buys the stock and it eventually becomes more attractive to the general market, the demand caused by further institutional buying will increase the stock price.

5. Ryan also selects stocks that have a growth catalyst, such as a innovative new product or service. Having a growth catalyst reduces the risk of investing in a value trap.

6. Volume is also an important part of Ryan’s screening process. For example, if a stock moves to a new high on low volume, that is a negative signal. This volume indicator is used by many of the star traders in Market Wizards.

Also, if volume remains very high for an extended period, that may indicate a top caused by increased selling. “You want an increase in volume when a stock breaks out, but you want a decrease as the stock consolidates.” Increased volume combined with no further price decreases may signal support from buyers, and thus a bottom.

7. Even with this rigoruous stock selection process, Ryan still states that only about 50% of his stocks are winners. The key to his profitability is risk control. He sells individual stocks if the stocks fall more than 7%.

8. Ryan generally advises to buy growth stocks without the premium valuation.“The most profitable trades are when you find a stock with a strong trend that is trading at a P/E ratio in line with the broad market ratio.”

9. Every time Ryan buys a stock he lists the reasons for his purchase.

Listing the buy rationale is an important step that provides guidance for when to sell the stock. If the reasons for the initial purchase are not present after buying and holding the stock for a certain time period, that may indicate a wise time to sell. Also, listing purchase reasons provides a way to learn from mistakes, by comparing results to the initial rationale.

“The single most important advice I can give anybody is to learn from your mistakes. That is the only way to become a successful trader.”

Related Sites:
CANSLIM’s Market Wizard: A Conversation with David Ryan

William O’Neil Art of Stock Selection - Market Wizards

Irrational Exuberance

Introduction to Financial Derivatives

Disclaimer

Marty Schwartz Champion Trader - Market Wizards