The screens you have described in selecting stocks are essentially O'Neil's CANSLIM methodology. [See the O'Neil chapter for definition.] Did you add any of your own elements to his approach? Yes, I learned that most of our greatest winning recommendations started off with prices under thirty times
earnings. О'Nell says the P/E [price/earnings] ratio is not important. I think it is, in that your success ratio is a lot
higher on lower P/E ratio stocks.
But I guess not too low P/E ratios?
When I'm talking about lower P/E ratio stocks, I mean stocks that have a P/E ratio that is between even and
up to two times the S&P 500 P/E ratio. So if the S&P 500 is at fifteen times earnings, you should try to buy stocks
with P/E ratios between 15 and 30. Once you start going much beyond double the S&P 500 P/E ratio level, your
timing has to be more exact. You are bound to make a few more mistakes on higher P/E ratio stocks.
Do you therefore avoid high P/E ratio stocks?
Yes, in many cases I do. The most profitable situation is when you find a stock with a strong earnings trend
that is trading at a P/E ratio in line with the broad market ratio.
If you avoid high P/E ratio stocks, wouldn't that have prevented you from catching the whole biomedical
group move?
That was a little different because of the fact that the whole group was trading at high P/E ratios.
Does that imply that there should be an exception made for a new industry? Yes, you don't want to be absolutely rigid with these rules.
Has the basic market behavior stayed the same in the 1980s versus the 1970s and the 1960s? Yes, the same types of stocks work time after time. It hasn't changed at all. We can take one of the greatest
winning stocks from 1960 and line it up with one of the best stocks in 1980 and they are going to have exactly the
same characteristics.
