Lessons Learned from How to Make Money in Stocks by William J O'Neil

How successful investors beat the market

A Complete Investing System

This book gives timeless advice on finding stocks ready to surge. Some naysayers will tell you this book is outdated, but I disagree. Technical analysis, in many ways, is a

n exercise in human psychology. And human psychology doesn't change. 

There are several editions of this book, I recommend the latest, fourth edition here. 

In this book, author William J. O'Neil tells us everything from how to invest in the stock market to what sector to invest in. It tells you exactly when to buy and when to hold onto your investments. It even tells you how much money you need to start investing.

This book is perfect for beginners because it doesn't require any prior knowledge. If you are looking for a complete investing system, this book is for you.

But don't let that dissuade you from reading this if you're an advanced trader. I go back and reread this book every now and then as it has a unique investing strategy to follow. And one that is complex. And I pick up something new with every read.

The CAN SLIM Method

CAN SLIM is an acronym for how to pick stock with explosive profit potential. At first, the CAN tells us the qualities that make up quality companies worth investing in. The SLIM part tells us what to look for in a quality stock to help us make money immediately. 

For any of us looking for a little shortcut, William O'Neil is also known as the founder of the Investor's Business Daily. This publication helps individual investors take control of their investing. And its main purpose (in my opinion) is the list of the top 50 stocks according to this system. 

That's the overview. Now on to what each letter in William O'Neil's CAN SLIM stands for.

C: Currently Accelerating Quarterly Earnings and Sales per Share

We want to invest in profitable companies... And companies that are growing their earnings quickly and consistently. 

The important number, according to O'Neil is earnings per share (EPS). We can find these numbers at any stock investment website. The calculation is total quarterly income divided by the number of shares. 

We want to see this growing... A retraction in EPS can result in a stock pulling back. 

We want to see 

In his book "Beating Wall Street," Jim O'Neil says that current Big or Accelerated Quarterly earnings and sales per share are the best indicators of future stock performance. He explains that the reason why he believes this is because explosive quarters are the most predictive of stock price movement.

A: Annual Earnings Increase

Accelerating growth is important for both long term and short term investors. Long term investors want to see accelerating growth because it indicates that management is doing what it takes to grow the business. Short term investors look for acceleration because it indicates that the company is growing faster than the competition. In addition, short term investors like to see big increases in sales because it gives them confidence that the company is expanding into new markets.

Short term investors should focus on sales acceleration. If you find yourself investing in a company that is experiencing slow growth, consider buying shares of another company that is experiencing accelerated growth.

N: Newish Company, New Products, New Management, New Highs

Some of the largest gains in recent bull markets have come from newer companies... Or companies that have reinvented themselves. 

And we're not saying to hold onto these all the time. These aren't buy them and forget them kind of stocks.

But when these explosive new companies continue higher, hang on. We can see massive gains. I could show you hundreds of charts of new companies that had big runs. And these runs generally occurred when sales and likely earnings were moving higher.

Most of the chapter O'Neil spends on stocks making new highs. He talks about how stocks should form a proper base before breaking higher. There is a lot of nuance here. But generally you want to see a decent period of consolidation... Not a V-shaped recovery. Especially as the uptrend continues and matures. 

These are the quality characteristics we look for to improve our stock selection. Now onto the qualities we look for in these quality stocks. 

S: Supply and Demand

We want to see stocks with high volume and few outstanding shares (a low float). That combination of high demand and low supply can find explosive stock market winners. 

If you're looking for stocks than squeeze higher, you can't find any better indicator in all of stock literature. 

L: Leader or Laggard

Ideally we're investing in a company that's a leader in its industry. And O'Neil said he doesn't mean the company with the largest market cap. They're not necessarily the leader. He said the leader is

"The one with the best quarterly and annual earnings growth, the highest return on equity, the widest profit margins, the strongest sales growth, and the most dynamic stock-price action."

We want to avoid laggards because their stocks tend to underperform. And if we see a boost because the leader hit a small snag, it could just a be a sympathy gain in the stock. Not something that has any kind of staying power. 

I: Institutional Sponsorship

Institutional investors are responsible for over half of the market capitalization of the S&P 500 Index. They make up about $2 trillion worth of shares, according to the latest data from the Securities Industry and Financial Markets Association (SIFMA). This makes them one of the most influential groups in the financial world. 

The proper stock should have at least some institutional ownership. That gives does a couple major things. 1. it provides a floor on the stock in the event of a pullback, 2. provides a liquid market. 

But O'Neill says we should be wary of oversubscribed stocks - those with too much institutional ownership. There may be no one else to purchase the stock. Ideally institutions will be increasing their position in any stock selected.

M: Market Direction

It's easier to make money in stocks when the market is going up. The CAN SLIM Strategy is no exception. Buy when stocks are trending up. O'Neil and his Investor's Business Daily will tell us if they believe the market is in an uptrend. And if the uptrend looks a little long in the tooth, they'll say it's an "uptrend under pressure."

When To Sell Your Stock

O'Neill says we should sell a stock if it retreats more than 7% - 8%. That seems a little tight for a stop loss. But if the stock pulls back 8% AND breaks below a major support level, then fails a retest... It's time to get out.

Before implementing any trading strategy, please figure out the exit strategy. This is probably the most important part of the system.

The Cup And Handle Pattern

This chart pattern is called the "cup and handle." It is a bullish reversal chart pattern that occurs when prices move above resistance levels. Prices then fall back down to support levels. A bearish version of the cup and handle occurs when prices move below support levels.

There are different ways to trade the cup-and-handle pattern. One way is to buy the breakout. Another way is to sell the breakdown. You can use technical analysis tools like trendlines and moving averages to help determine where the price action is likely to go next.

These stock charts will look like a little cup - the bottom - and then a period of consolidation after that first move which makes a handle. And it's one any chartist should be able to spot quickly. 

This Book Is Worth Reading Every Couple Years

I come back to this gem frequently. And hopefully you will too. William J. O'Neil's technical analysis teachings can help us an any type of market. Even in bear markets there are opportunities... But these teaching can also get us out of the market... Which is just as important. 

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