Monday, August 7th, 2006
This book will make you money
“This book helped me make money” is perhaps the best tribute an investment book could get. It’s a common feature of reviews of William O’Neil’s 
‘How to Make Money in Stocks’:
“Beware: personally I didn’t earn a dime in stock market until now and it’s my first book on finance ever read,” zadigue on Amazon.com
“If you read, mark, study and learn the material in this book you will make money in the stock market,” George C Anderheggen on Amazon.com
“This stuff works. As many have noted, the bulk of my long strategy is a straight steal from O’Neil. He also publishes Investor’s Business Daily — a fact you’ll be aware of about every five pages. Still, O’Neil has made me a lot of money,” Gary B. Smith, hedge fund manager and former TheStreet.com columnist
Most of us on the journey to investment success begin with fundamental analysis. The cults of Warren Buffett and Peter Lynch are strong and it’s hard for beginners to avoid them. But then the newbie investor buys a ‘value’ stock and it’s hammered in a market downturn, or the bargain stock doesn’t move … for years. It’s then they get an inkling that something is wrong or that perhaps there’s a better way.
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Some of those disillusioned value investors will throw in the towel, but the lucky ones will stumble on the writings of Bill O’Neil. He preaches a different way: cutting losses, using charts, buying breakouts, ignoring PE ratios and taking into account what’s happening to the broader market.
‘How to Make Money in Stocks’ outlines O’Neil’s philosophy, which has been popularized in his newspaper Investors Business Daily. His method is summarized by the weird-sounding acronym CAN SLIM. Basically O’Neil advocates buying shares in fast-growing companies breaking out of sideways price movements (or bases) and hitting new 52-week highs. The method should only be used in bull markets.
The book challenges conventional investment notions such as: stocks should be bought at low PE ratios; that charting is nothing more than witchcraft; and that market timing is impossible. CAN SLIM was developed after O’Neil studied the performance of the stock market’s past big winners and found their most common and important characteristics.
His method also derives from his own practical experiences of investing. “Many years ago when I first began to study the market, I bought Northrop at 4 times earnings and watched in disbelief as the stock declined to a PE ratio of 2,” he writes, in part explaining his aversion to cheap stocks.
Perhaps the most difficult concept for new investors to grasp is O’Neil’s argument that stocks should be bought when they hit 52-week highs. He discovered that this was the optimal buy point by studying the purchases of legendary fund manager Jack Dreyfus. All through life we’re taught to look for bargains. O’Neil calls it the stock market’s ‘great paradox’ that “what seems too high in price and risky to the majority usually goes higher, and what seems low and cheap usually goes lower.”
O’Neil also learnt from bitter experience that changes in the broader market can wipe out hard won profits in a flash. In 1961 he had huge winners such as Brunswick and Certain-teed. But “when the stocks finally topped I held on too long and watched my profits vanish.” He introduced a ‘general market system’ to determine when the market is likely to turn down. The basis is ‘distribution days’, when the market sells off or stalls on volume heavier than the day before. While distribution days should form the basis of a market-timing system, there are other indicators that can be added and O’Neil takes a look some of them.
O’Neil’s experiences in the early 1960s when he gave up huge profits also inspired him introduce a profit-taking system. He cuts losses at 8 per cent and took profits when a stock rose 20 per cent to 25 per cent. The exception is for especially strong stocks that should be held on to. This profit taking aspect of O’Neil’s system is the one that can be improved the most, as there are far too many confusing rules that can lead to indecision.
There are other aspects of How to Make Money in Stocks that are not perfect. The chart examples are difficult to read and are perhaps not the best examples. As hedge fund manager Tim Truebenbach has noted, it is light on detailed analysis of risk management, such as how much to invest in each individual stock. O’Neil’s methodology could also be criticized for not being as concise as it needs to be. But it is up to the investor to study and adapt his system to suit their personality and objectives. That can be achieved without debauching the true principles of CAN SLIM.
But when it boils down to it, the book will form the basis of an investment system that will make you money. There can be no greater compliment for a book.
Word Count: 812. This entry was posted on Monday, August 7th, 2006 at 7:07 pm and is filed under Books, Breakout trading, Growth investing, Other growth gurus. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
