I picked up William J. O’Neil’s How to Make Money in Stocks after another author stated that, after reading thousand s of other books in the stock trading genre, it was among the top 5. Reading it for myself, I can see why. Honed by decades of experience presenting information to diverse audiences, O’Neil presents a method of stock selection called CAN SLIM in a way that’s both short, logical, and easy to understand.
In brief, his method relies upon analyzing the quarterly and annual earnings of a company over the last few years for those select few with accelerating gains. Combined with other contextual factors like the presence of new products or management; whether it is in a leading industry; the level of institutional involvement; and the general market direction, this helps you determine whether a stock is poised for explosive growth. The security analysis presented in other books is a convoluted mess by comparison, and most of them forget the role that market psychology and business cycles play in price. One can say that a stock is wonderful a dozen different ways, but if you’re buying it at the end of a bull market it’s still going to head south.
But there is much more to the book than that. O’Neil describes how industry group trends shape individual stock performance and dispenses decades of wisdom on various investment vehicles after having watched their performance through a dozen business cycles, e.g. gold, silver, options trading, IPOs, etc. He also explores the wide variety of mutual funds and what you should look for in management and performance when investing with them.
The sections I found most informative after his description of the CAN SLIM method were on identifying the most common and effective bullish price patterns and, in particular, how to detect when those patterns are working properly or are likely to fail. This is not covered in anywhere near enough detail elsewhere. He also describes the various issues confronting the big institutional investors and why they so rarely beat the market. I had known that there was a size issue – that its way harder to invest a billion dollars effectively than a million – but it turns out that there are many other internal practices and philosophies that prevent them from seizing opportunities. If you require every security to be approved by an internal committee first before you can trade, and be supported by extensive and time consuming analytical research, you’re going to miss your window of opportunity. If you are only allowed to buy stocks that are cheap or have a low EPS ratio, or are forbidden to sell stocks short, then a large number of opportunities are foreclosed from the start. It’s amazing the big players make any money at all.
My one grip with the book is O’Neil’s warnings about shorting stocks. While certainly supported by decades more experience and research than I have, it’s odd that he finds it an unreliable method when every bullish situation and pattern he describes is qualified with a warning that they’ll collapse unless the situation is perfect. To put it another way, if you can count on lousy companies in lagging industries to keep failing, or if you watch for failed bullish consolidation patterns, then finding stocks to short is like shooting fish in a barrel. Timing is critical, but it doesn’t seem to be as rare or difficult as O’Neil makes it out to be.
Otherwise, if you are looking for a reliable addition to your stock trading library I would highly recommend buying this one.