How to Make Money in Stocks by William J. O’Neil (Investing Book Review)

Andrew -
"The hard-to-believe Great Paradox in the stock market is: what seems too high in price and risky to the majority usually goes higher eventually, and what seems low and cheap usually goes lower."

The CAN SLIM investing system taught in How to Make Money in Stocks is based on William J. O’Neil’s study of the greatest stock market winners for over 100 years (see the Book Highlights section below to learn what this acronym stands for).

Mr. O’Neil is also the founder and chairman of Investor’s Business Daily, a financial newspaper which focuses on companies identified as attractive by the CAN SLIM system. It’s a helpful companion for investors who want to follow this system, but you’ll have to pay to subscribe to use this and other tools IBD provides.

CAN SLIM defies easy classification but it’s a blend of growth and quality investing using charts and technical analysis. The system aims to identify leading stocks before they make major price advances. The American Association of Individual Investors named it the top-performing investment strategy out of 50+ over the 12 year period from 1998 to 2009, with a return of 2,763.3% vs. 14.9% for the S&P 500.

Key Takeaways

  1. Do not buy a stock because of its dividend or PE ratio. Buy a stock with high earnings and sales growth, ROEs, profit margins, and which is the leader in its sector with new exciting products.
  2. Buy a stock when it is moving up and making new highs after emerging from a proper base or consolidation.
  3. Average up, not down. Buy leaders, not laggards.
  4. Stay on the sidelines during a bear market.
  5. Cut your losses quickly. The secret to winning big is to lose the least possible amount when you’re wrong.

Book Highlights

"CAN SLIM stands for:
Current Quarterly Earnings and Sales: The Higher, the Better
Annual Earnings Increases: Look for Significant Growth
New Products, New Management, New Highs: Buying at the Right Time
Supply and Demand: Shares Outstanding Plus Big Volume Demand
Leader or Laggard: Which Is Your Stock?
Institutional Sponsorship: Follow the Leaders
Market Direction: How You Can Learn to Determine It"
"You absolutely do not buy breakouts during a bear market. Most of them will fail."
"The hard-to-believe Great Paradox in the stock market is: what seems too high in price and risky to the majority usually goes higher eventually, and what seems low and cheap usually goes lower."
"Search for companies that have developed important new products or services, or that have benefited from new management or materially improved industry conditions. Then buy their stocks when they are emerging from sound, correctly analyzed price consolidation patterns and are close to, or actually making, new price highs on increased volume."
"It seldom pays to invest in laggard stocks, even if they look tantalizingly cheap. Look for, and confine your purchases to, market leaders. Get out of your laggard losers if you’re down 8% below the price you paid so that you won’t risk getting badly hurt."
"The typical bear market (and some aren’t typical) usually has three separate phases, or legs, of decline interrupted by a couple of rallies that last just long enough to convince investors to begin buying…you’re better off staying on the sidelines in cash until a new bull market really starts."
"The key to staying on top of the stock market is not predicting or knowing what the market is going to do. It’s knowing and understanding what the market has actually done in the past few weeks and what it is currently doing now."
"The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you’re wrong."
"Remember: there are no good stocks; they’re all bad…unless they go up in price."
"Investors who can be right and sit tight are rare. It takes time for a stock to make a large gain."
"Don’t buy a stock because of its dividend or its P/E ratio. Buy it because it’s the number one company in its particular field in terms of earnings and sales growth, ROE, profit margins, and product superiority."
"Don’t try to buy a stock at the bottom or on the way down in price, and don’t average down."
"Investors like to buy stocks that look cheap because the stocks are lower than they were a few months ago, so they buy stocks on the way down. They think they are getting bargains. They should be buying stocks that are on the way up, just making new price highs as they emerge from a proper base or price consolidation area."